<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
GLOBALCENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 4813 86-0647072
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
GLOBALCENTER, INC.
1154 EAST ARQUES AVENUE
SUNNYVALE, CA 94086
(408) 328-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DOUGLAS T. HICKEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GLOBALCENTER, INC.
1154 EAST ARQUES AVENUE
SUNNYVALE, CA 94086
(408) 328-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
Copies to:
ALAN K. AUSTIN ANDREI M. MANOLIU
MARK L. REINSTRA KARYN R. SMITH
CRAIG A. SHELBURNE MITCHELL R. TRUELOCK
MICHAEL W. HAUPTMAN COOLEY GODWARD LLP
WILSON SONSINI GOODRICH & ROSATI ONE MARITIME PLAZA, 20TH FLOOR
PROFESSIONAL CORPORATION SAN FRANCISCO, CA 94111-3580
650 PAGE MILL ROAD (415) 693-2000
PALO ALTO, CA 94304-1050
(650) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE (1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, $.001 par value................... $34,500,000 $10,455
===========================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 16, 1997
PROSPECTUS
SHARES
[LOGO OF GLOBALCENTER APPEARS HERE]
COMMON STOCK
Of the shares of Common Stock offered hereby, shares are
being sold by GlobalCenter, Inc. ("GlobalCenter" or the "Company") and
shares are being sold by the Selling Stockholders. The Company will
not receive any of the proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for Common Stock of
the Company. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol GCTR.
--------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 6.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
- --------------------------------------------------------------------------------
Total........................... $ $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company and certain Selling Stockholders have granted the Underwriters
a 30-day option to purchase up to additional shares of Common
Stock solely to cover over-allotments, if any. If all such shares are
purchased, the total Price to Public, Underwriting Discount, Proceeds to
Company and Proceeds to Selling Stockholders will be $ ,
$ , $ and $ , respectively. See "Underwriting".
--------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of Hambrecht &
Quist LLC in New York, New York.
HAMBRECHT & QUIST VOLPE BROWN WHELAN & COMPANY
, 1997
<PAGE>
[ARTWORK TO COME]
GlobalCenter is a trademark of the Company. This Prospectus also includes
tradenames and trademarks of companies other than GlobalCenter.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND
THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. The Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
THE COMPANY
GlobalCenter, Inc. ("GlobalCenter" or the "Company") is a leading provider of
digital distribution services to organizations conducting business over the
Internet, including some of the world's premier content providers.
GlobalCenter's scalable, comprehensive Digital Distribution solution is a
combination of proprietary software technology, content management services,
multiple Media Distribution Centers and public and private peering
arrangements. According to Zona Research, the number of Internet users
worldwide is expected to increase from an estimated 38 million in 1996 to 206
million by the year 2000. GlobalCenter currently manages over one billion page
views per month, over 100 million content requests per day and up to 250,000
software package downloads per day. GlobalCenter's customers include Yahoo!,
Inc., Netscape Communications Corp., Playboy Enterprises, Inc., Cox Interactive
and SOFTBANK Interactive Marketing.
A primary component of the Company's Digital Distribution solution is its
proprietary software, which enables the intelligent and reliable distribution
of Internet content, circumvents bottlenecks and expedites delivery to end
users. The Company offers a comprehensive suite of products and services for
businesses of all sizes, ranging from Express Lane, a maximum performance,
multiple-server Digital Distribution service for rapid delivery of robust
content, to PrimeWeb, an entry-level, shared server Digital Distribution
service. In addition, the Company has developed Software Express and Event
Express, services designed for customers with occasional requirements for high
bandwidth distributions to a large number of end users, such as software
downloads or live media coverage of public events.
GlobalCenter coordinates content delivery via the Company's network platform,
consisting of five Media Distribution Centers linked to a fully meshed ATM
backbone connecting ten major metropolitan area hubs. Customers of the Company
can place dedicated servers with replicated content at multiple Media
Distribution Centers, increasing routing efficiencies and protecting against
delivery delays and the loss of data. In addition to its Media Distribution
Centers and ATM backbone, the Company maintains public peering arrangements
with key service providers and has established private peering relationships
with major carriers, including UUNET Technologies, Inc., MCI Communications
Corp., Sprint Corporation, AT&T Corporation and @Home Corporation, to minimize
dependence on public exchange points.
GlobalCenter manages content delivery for some of the world's most trafficked
web sites, providing state-of-the-art services and facilities and efficient,
high-speed distribution of content to end users. For businesses with mission-
critical applications, GlobalCenter enables continual high-speed content
management via dedicated servers while providing substantial additional
bandwidth capacity on short notice. Finally, for those companies just
establishing an Internet presence, GlobalCenter offers access to shared or
individual servers, providing reliable, high-performance content delivery in a
cost-effective manner.
The Company's objective is to become the leading provider of Digital
Distribution services to the world's premier content providers, businesses
utilizing the Internet for mission-critical functions and small to medium-sized
businesses. The Company's strategies to accomplish this objective include
providing comprehensive Digital Distribution solutions to its customers,
expanding its service and product offerings, increasing its customer base,
leveraging relationships with current and future channel partners, pursuing
strategic acquisitions and partnerships and expanding internationally.
3
<PAGE>
Upon completion of the acquisition of Voyager Networks, Inc., the Company
will add two Media Distribution Centers in New York to its content distribution
network and intends to continue to provide services to Voyager's existing
customers, including Sony Corporation and Wit Capital. The Company has also
recently established co-marketing relationships with leading corporations,
including Pitney Bowes Inc. and AccountingNet/Automatic Data Processing, to
provide coordinated Internet business services to these corporations'
customers.
The Company was incorporated in October 1993. The Company's executive offices
are located at 1154 East Arques Avenue, Sunnyvale, California 94086. The
Company's telephone number is (408) 328-6000. The Company's World Wide Web site
is located at www.globalcenter.net. Information contained in the Company's web
site shall not be deemed to be a part of this Prospectus.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. shares
Common Stock offered by the Selling
Stockholders................................... shares
Common Stock to be outstanding after the
offering....................................... shares (1)(2)
Use of proceeds................................. For general corporate purposes,
including future acquisitions,
facilities expansion, repayment of debt,
working capital and capital
expenditures. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.......... GCTR
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS SIX MONTHS
YEAR ENDED DECEMBER ENDED ENDED
31, JUNE 30, JUNE 30, (2)
----------------------- -------------- ------------
1994 1995 1996 1996 1997 1997
------ ------ -------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue................. $3,872 $6,702 $ 12,950 $5,477 $ 9,967 $11,396
Operating income (loss). 5 564 (19,661) 220 (5,798) (7,259)
Net income (loss)....... (3) 319 (19,739) 94 (5,914) (7,401)
Net income (loss) per
share..................
Shares used to compute
net income (loss) per
share (3)..............
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED (2)(4)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 527
Working capital (deficit)......................... (5,607)
Total assets...................................... 14,276
Long-term debt.................................... 2,949
Total stockholders' equity........................ 1,531
</TABLE>
- --------
(1) Based on shares outstanding as of June 30, 1997. Excludes an aggregate of
shares of Common Stock reserved for future issuance pursuant to the
Company's employee benefit plans, of which options to purchase shares
were outstanding as of June 30, 1997. See "Management--Stock Plans,"
"Description of Capital Stock" and Note 7 of Notes to Consolidated
Financial Statements of GlobalCenter, Inc.
(2) Pro forma to give effect to the acquisition of Voyager Networks, Inc. to
be completed by the end of October 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) See Notes and of Notes to Consolidated Financial Statements of
GlobalCenter, Inc. for an explanation of shares used to compute net income
(loss) per share.
(4) As adjusted to give effect to the sale of the shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $ per share and the receipt of the estimated net proceeds therefrom.
See "Use of Proceeds" and "Capitalization."
----------------
Except as otherwise noted herein, all information in this Prospectus (i)
assumes consummation of the acquisition of Voyager Networks, Inc. and (ii)
assumes no exercise of the Underwriters' over-allotment option. See
"Description of Capital Stock" and "Underwriting."
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully in addition to the other information in this
Prospectus before purchasing the shares of Common Stock offered hereby.
Limited Operating History; Expectation of Future Losses. The Company has a
limited history operating as a consolidated business upon which to base an
investment decision. The Company experienced operating losses for the year
ended 1996 and for the six months ended June 30, 1997. As of June 30, 1997,
the Company had an accumulated deficit of $25.3 million. The Company and its
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the new and rapidly evolving market for
Internet products and services. To address these risks, the Company must,
among other things, continue to respond to competitive developments; attract,
retain and motivate qualified personnel; implement and successfully execute
its business strategy; develop and successfully market additional products;
continue to upgrade its technologies; and commercialize products and services
incorporating such technologies. There can be no assurance that the Company
will be successful in addressing such risks. Although the Company has
experienced revenue growth in recent periods, there can be no assurance that
the Company's revenues will continue to increase or will be sustained at
current levels. The limited operating history of the Company makes the
prediction of future results of operations difficult or impossible and,
therefore, the recent revenue growth experienced by the Company should not be
taken as indicative of the rate of revenue growth, if any, that can be
expected in the future. The Company believes that period to period comparisons
of its operating results are not meaningful and that the results for any
period should not be relied upon as an indication of future performance. The
Company currently expects to significantly increase its operating expenses to
expand its network architecture, to increase its sales and marketing
operations, to fund greater levels of product development and to develop and
commercialize additional products. In addition, the Company anticipates
increased operating expenses as a result of future acquisitions, if any such
acquisitions are completed. As a result of the foregoing factors, the Company
expects to continue to incur significant losses on a quarterly and annual
basis for the foreseeable future. See "--Competition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Risks Associated with Acquisitions; Impact on Financial Statements. The
Company has completed two acquisitions within the past 12 months and expects
to complete the acquisition of Voyager Networks, Inc. ("Voyager") in October
1997. As a result of the consummation of these acquisitions, the Company's
operating expenses have increased significantly. The combination of these
entities has presented and will continue to present numerous risks and
uncertainties, including difficulties related to the assimilation of acquired
operations, realization of operational synergies, integration of distinct
corporate cultures, diversion of management's attention from other business
concerns, customer retention, risks of entering markets in which the Company
has no or limited prior experience and potential loss of key employees of
acquired companies. No assurance can be given as to the ability of the Company
to integrate successfully any operations, personnel or products that have been
acquired or that might be acquired in the future in a timely fashion, or at
all. Any failure to successfully complete the integration of acquired
businesses in a timely fashion or to generate sufficient revenues from any
such acquired business could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company regularly evaluates acquisition opportunities and is likely to
make acquisitions in the future, which could result in potentially dilutive
issuances of equity securities and the incurrence of debt and contingent
liabilities. In addition, any such acquisition could be accounted for using
the purchase method of accounting, which could require the Company to record
substantial amounts of goodwill with respect to such acquisition. Any goodwill
recorded by the Company would be required to be amortized over its useful
life. For example, the Company anticipates that it will record approximately
$8.2 million in goodwill in connection with the Voyager acquisition, which
will be amortized over five years. The dilutive issuances of equity
securities, the incurrence
6
<PAGE>
of debt and contingent liabilities and the amortization of goodwill could
materially adversely affect the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Potential Fluctuations in Quarterly Results; Factors Affecting Operating
Results. The Company's operating results have fluctuated significantly in the
past and will likely continue to fluctuate significantly in the future as a
result of a variety of factors, many of which are beyond the Company's
control. These factors include the timing and costs associated with new
customer acquisitions, customer retention, fluctuations in bandwidth used by
customers, the timing of software distributions, the timing of marketing
efforts and service rollouts by channel partners, capital expenditures and
other costs relating to the expansion of operations, the costs associated with
and other effects of acquisitions, increased competition in the Company's
markets, the timing of new service and product announcements, changes in the
pricing policies of the Company and its competitors, market acceptance of new
and enhanced versions of the Company's services and products, increases in
operating expenses (including telecommunication costs), changes in the
Company's strategy, personnel changes, economic conditions specific to the
Internet industry and other general economic factors. For example, the Company
realized greater than expected revenues during the second quarter of 1997 due
in part to the distribution of a new software release by one of its customers.
In addition, a relatively large portion of the Company's expenses are fixed,
and therefore the Company's operating margins are particularly sensitive to
fluctuations in revenues. For these and other reasons, in some future
quarters, the Company's operating results may fall below the expectations of
securities analysts or investors, which could have a material adverse effect
on the market price of the Company's Common Stock.
The Company has established Media Distribution Centers in five locations and
plans to increase the number of such centers in the near future. The
establishment of a Media Distribution Center typically requires the Company to
expend substantial resources for leases or acquisitions of real estate,
improvements to such facilities, purchase of equipment, implementation of
multiple telecommunications capabilities, and the hiring of network,
administrative, customer service and sales and marketing personnel. Many of
these costs are fixed in the short term and as a new center begins operations
it typically is, and could remain, underutilized until the Company is able to
add sufficient customers at that Media Distribution Center. There can be no
assurance that the Company will be able to anticipate accurately the customer
demand for such additional Media Distribution Centers or that the Company will
be able to attract sufficient customers to such facilities. The Company's
inability to attract a sufficient number of customers to a new Media
Distribution Center in a timely manner, or at all, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Continued Growth of Internet Usage; Dependence on New
Market. The Company's future success will be substantially dependent on the
continued growth of the Internet, particularly with respect to its
commercialization. Rapid growth in the use of and interest in the Internet is
a recent phenomenon, and there can be no assurance that such growth will
continue at the same rate or at all, or that commerce over the Internet will
become widespread. The Internet may not prove to be a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary infrastructure, such as a reliable network, or
timely development of performance improvements, including the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity. In addition, issues concerning the commercial use of these
technologies (including security, cost, ease of use and quality of service)
remain largely unresolved and may have a negative impact on the growth of
Internet activities or commercial organizations that use these technologies.
Changes in or insufficient availability of telecommunications services to
support the Internet also could result in slower response times and adversely
affect usage of the Internet. Demand and market acceptance for recently
introduced Internet products and services are subject to a high level of
uncertainty and are dependent on a number of factors, including the growth in
consumer access to and acceptance of new interactive technologies and the
development of technologies that facilitate interactive communication between
organizations and targeted audiences. If use of the Internet does not continue
to grow, or if the Internet infrastructure does not effectively support the
growth that may occur, the Company's business, financial condition and results
of operations could be materially and adversely affected.
7
<PAGE>
The market for comprehensive web hosting and Internet content distribution
services has only recently begun to develop, is evolving rapidly and likely
will be characterized by an increasing number of market entrants. There is
significant uncertainty as to whether this market will ultimately prove to be
viable or, if it becomes viable, that it will grow. The Company's future
growth, if any, will be dependent on its ability to market its digital
distribution solutions in a cost-effective manner to a sufficiently large
number of customers. There can be no assurance that the market for the
Company's products and services will develop, that the Company's products and
services will be adopted or that businesses or end users will use the Internet
or other interactive media for commerce and communication. If this market
fails to develop, or develops more slowly than expected, or if the Company's
products do not achieve market acceptance, the Company's business, financial
condition and results of operations would be materially and adversely
affected. See "Business--Industry Background."
Unproven Network Scalability; Risk of Systems Failure. If the Company is
required to expand its network due to increased usage, additional stress will
be placed upon the Company's network hardware and traffic management systems.
Due to the limited deployment of the Company's services to date, the ability
of the Company's network to connect and manage a substantially larger number
of customers at high transmission speeds is as yet unknown, and the Company
faces risks related to the network's ability to be scaled up to its expected
customer levels while maintaining superior performance. If the number of
customers increases, the Company will need to make additional investments in
its infrastructure to maintain adequate downstream data transmission speeds,
the cost of which may be significant. There can be no assurance that the
Company's network will be able to achieve or maintain a sufficiently high
speed of data transmission, especially if the number and size of the Company's
customers increases, and the Company's failure to achieve or maintain high-
speed data transmission could significantly reduce consumer demand for its
services and have a material adverse effect on its business, financial
condition and results of operations.
The Company's network infrastructure is susceptible to damage from fire,
earthquakes, floods, power loss, telecommunications failures and similar
events. Despite precautions taken by the Company, the occurrence of a natural
disaster or other unanticipated problems at one or more of the Company's Media
Distribution Centers could result in interruptions in the Company's services.
In addition, failure of any of the Company's telecommunications providers to
provide sufficient data communications when required by the Company could
result in interruptions in the Company's services. Any damage to or failure of
the Company's systems could result in reductions in, or terminations of,
services requested by the Company's customers, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--GlobalCenter Digital Distribution Technology."
Risks Relating to Operation of Network. The Company relies on a number of
public and private networks to distribute content to end users. In particular,
the Company leases its ATM backbone from WorldCom, Inc. ("WorldCom") and is
dependent on WorldCom to maintain the operational integrity of that backbone
and provide sufficient bandwidth for the Company's operations. In addition,
the Company receives a substantial portion of inbound information requests via
public networks. The public networks require the Company to utilize Peering
Points such as the Metropolitan Area Ethernets or Network Access Points to
exchange Internet traffic. These Peering Points are operated by several
carriers, including WorldCom, PacificBell, Inc. ("PacBell") and Sprint
Corporation ("Sprint"). If these carriers were to discontinue their support of
the Peering Points and no alternative providers emerged or such alternative
providers increased the costs of utilizing the public network, the
distribution of content over the public networks, including content
distributed by the Company, would be significantly constrained. Furthermore,
as traffic over the public networks increases, the Company's ability to
deliver content rapidly and reliably over these networks will be adversely
affected if commensurate increases in bandwidth are not added. In addition to
the public networks, the Company relies on a number of private networks to
distribute its content. Many of the operators of such networks are competitors
of the Company. If these organizations were to increase the pricing associated
with utilizing these networks, or if these organizations increased their
utilization of these private networks, the Company may be required to identify
alternative networks through which it could distribute its content. If the
Company were unable to access alternative networks to distribute its
customers' content or pass through any additional costs of utilizing these
networks to its
8
<PAGE>
customers, the Company's business, financial condition and results of
operations could be materially adversely affected. See "Business--
Competition," "--GlobalCenter Digital Distribution Technology."
Dependence on Channel Partners. An important element of the Company's
marketing and distribution strategy is to develop and leverage its
relationships with current and future channel partners, if any. The Company
does not have the sales and marketing resources to effectively reach the small
and medium-sized businesses targeted in its channel distribution strategy
without the assistance of these channel partners. The Company has recently
implemented its channel distribution strategy and has no experience in
coordinating such efforts. There can be no assurance that the Company's
efforts will be successful, that the Company will be able to attract
additional small and medium-sized businesses or that the costs associated with
attracting and retaining such customers will not exceed the revenue the
Company receives from these customers. Furthermore, there can be no assurance
that the Company's current channel partners will continue their relationships
with the Company or that the Company will be successful establishing
additional channel partner relationships. If any of the Company's channel
partners were to discontinue their relationships with the Company or the
efforts of the Company and its channel partners are unsuccessful in attracting
new small and medium-sized businesses, the Company's business, financial
condition and results of operations could be materially adversely affected.
See "Business--Sales and Marketing; Channel Partners."
Competition. The market for Internet content distribution and connectivity
is extremely competitive. There are no substantial barriers to entry and the
Company expects that competition will intensify in the future. The Company's
ability to compete successfully will depend on a number of factors, including
market presence, reliability, performance, technical expertise and
functionality, pricing policies of competitors, the timing of introductions of
new products and services, customer support, the variety of services offered,
sales and marketing activities and industry and general economic trends.
Many companies provide products or services that compete, directly or
indirectly, with the Company's products and services, including: (i) web
hosting and data warehousing companies; (ii) in-house MIS departments; (iii)
connectivity providers, including Internet service providers ("ISPs") such as
BBN Corporation, Earthlink Network, Inc., MindSpring Enterprises, Inc., Netcom
On-Line Communications Services, Inc. and PSInet Inc.; Regional Bell Operating
Companies ("RBOCs"); and long distance inter-exchange carriers, including AT&T
Corporation ("AT&T"), MCI Communications Corporation ("MCI"), Sprint and
WorldCom; and (iv) content management companies, including on-line service
providers such as America Online, Inc. ("AOL"), CompuServe Corporation
("Compuserve"), Microsoft's Microsoft Network and Prodigy, Inc. ("Prodigy").
Many of the Company's competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than the Company. As a result, certain of these competitors may be
able to develop and expand their network infrastructures more quickly, adapt
to new or emerging technologies and changes in customer requirements more
quickly, take advantage of acquisition and other opportunities more readily,
devote greater resources to the marketing and sale of their products and adopt
more aggressive pricing policies than can the Company. In addition, these
competitors have entered and will likely continue to enter into joint ventures
or consortiums to provide additional services competitive with those provided
by the Company.
Certain of the Company's competitors may be able to provide customers with
reduced communications costs in connection with their Internet access
services, reducing the overall cost of their services relative to the
Company's. There can be no assurance that the Company will be able to offset
the effects of any such price reductions. In addition, the Company believes
that the businesses in which the Company competes are likely to encounter
consolidation in the near future, which could result in increased price and
other competition, which could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will have the financial resources, technical
expertise or marketing and support capabilities to continue to compete
successfully.
9
<PAGE>
Delays in Introduction of New Services; Rapid Technological Change. The
Company's future success will depend, in part, on its ability to develop
leading technology, enhance its existing products and services, develop and
introduce new services that address the increasingly sophisticated and varied
needs of its current and prospective customers and respond to technological
advances and emerging industry standards and practices on a timely and cost-
effective basis. The markets for the Company's products and services are
characterized by rapidly changing technology, evolving industry standards,
changes in customer needs, emerging competition and frequent new product and
service introductions. There can be no assurance that future advances in
technology will be beneficial to, or compatible with, the Company's business
or that the Company will be able to economically incorporate such advances
into its business. Moreover, technological advances may have the effect of
encouraging certain of the Company's current or future customers to rely on
in-house personnel and equipment to furnish the services currently provided by
the Company. In addition, keeping pace with technological advances in the
Company's business may require substantial expenditures and lead time. There
can be no assurance that the Company will be successful in effectively using
new technologies, adapting its services to emerging industry standards or
developing, introducing and marketing service enhancements or new services, or
that it will not experience difficulties that could delay or prevent the
successful development, introduction or marketing of these services. If the
Company incurs increased costs or is unable, for technical or other reasons,
to develop and introduce new services or enhancements of existing services in
a timely manner in response to changing market conditions or customer
requirements, or if new services do not achieve market acceptance in a timely
manner or at all, the Company's business, financial condition and results of
operations could be materially adversely affected. See "Business --Product
Development and Engineering."
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its
products and services with products and architectures offered by various
vendors. Although the Company intends to support emerging standards, there can
be no assurance that industry standards will be established or, if they become
established, that the Company will be able to conform to these new standards
in a timely fashion and maintain a competitive position in the market. The
failure of the Company to anticipate the prevailing standard, or the failure
of a common standard to emerge could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, there can be no assurance that products, services or technologies
developed by others will not render the Company's products, services or
technology uncompetitive or obsolete.
System Security Risks. Despite the implementation of network security
measures, the core of the Company's content distribution infrastructure is
vulnerable to computer viruses, break-ins and similar disruptive problems
caused by its customers or Internet users, which could lead to interruptions,
delays or cessation in service to the Company's customers. Furthermore, such
inappropriate use of the network by third parties could potentially jeopardize
the security of confidential information, such as credit card and bank account
numbers, stored in the computer systems of the Company and its customers,
which could result in liability to the Company, result in loss of existing
customers or deter potential customers. Although the Company intends to
continue to implement industry-standard security measures, such measures have
been circumvented in the past, and there can be no assurance that any such
measures implemented by the Company will not be circumvented in the future.
The costs required to eliminate computer viruses and alleviate other security
problems could be prohibitively expensive and the efforts to address such
problems could result in interruptions, delays or cessation of service to the
Company's customers, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Management of Growth; Dependence on Key Personnel. The Company has recently
experienced rapid expansion of its operations through acquisitions of other
businesses, which has placed, and is expected to continue to place,
significant demands on the Company's administrative, operational and financial
personnel and systems. The Company's future operating results will depend
substantially on the ability of its officers and key employees to manage
changing business conditions and to implement and improve operational,
financial control and reporting systems. If the Company is unable to respond
to and manage changing business conditions, its business, financial condition
and results of operations could be materially adversely affected.
10
<PAGE>
The Company's success also will depend to a significant degree on the
continuing contributions of its key management and technical personnel, as
well as its ability to attract and retain highly skilled personnel in all job
categories. Competition for qualified personnel is intense, particularly with
respect to qualified technical personnel. The Company has at times
experienced, and continues to experience, difficulty in recruiting sufficient
numbers of qualified personnel. Although certain members of the Company's
senior management have entered into employment agreements with the Company,
there can be no assurance that any one of these officers will not voluntarily
terminate their employment with the Company. The loss of the services of any
senior management or other key employee or the inability to attract and retain
additional personnel as required could materially adversely affect the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business--Competition," "--Employees" and "Management."
Dependence on Key Customers. An important element of the Company's sales and
marketing activities is the ability to reference certain of the Company's key
customers who are leading Internet content providers. None of the Company's
customers accounted for more than five percent of revenue during fiscal 1996
or the six months ended June 30, 1997. If any of these customers were to
choose an alternative content distribution provider for any reason, the
Company would be unable to reference these companies when seeking new
customers. In addition, a widely publicized disruption of content distribution
to end users of any of these customers could have an adverse impact on the
Company's reputation. The loss of any of these key customers or any negative
impact on the Company's reputation could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Case Studies."
Liability for Information Retrieved and Replicated; Government Regulation
and Legal Uncertainties. Based on the Company's activities in distributing
content for its customers, it is possible that claims may be made against the
Company under both United States and foreign law for defamation, negligence,
copyright or trademark infringement, or other theories based on the nature and
content of such materials. In particular, copyright and trademark laws are
evolving both domestically and internationally, and there is uncertainty
regarding how broadly the rights afforded under these laws will be applied to
the Internet environment.
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and laws or
regulations directly applicable to access to or commerce on the Internet.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. Furthermore, the growth
and development of the market for Internet commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business over the Internet. The adoption of any
additional laws or regulations may decrease the growth of the Internet, which,
in turn, could decrease the demand for the Company's products and services,
increase the Company's cost of doing business or otherwise have an adverse
effect on the Company's business, financial condition and results of
operations. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales tax,
libel and personal privacy is uncertain and may take years to resolve. In
addition, as the Company's products and services are available over the
Internet in multiple states and foreign countries, and as the Company
facilitates sales by its customers to end users located in such states and
foreign countries, such jurisdictions may claim that the Company is required
to qualify to do business as a foreign corporation in each such state and
foreign country. The Company is qualified to do business in only a limited
number of states, and failure by the Company to qualify as a foreign
corporation in a jurisdiction where it is required to do so could subject the
Company to taxes and penalties for the failure to qualify. Any such new
legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to the Company's business,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Proprietary Rights; Litigation. The Company's success and
ability to compete is dependent in part upon its proprietary technology. The
Company relies on trademark, trade secret and copyright
11
<PAGE>
law to protect its technology. The Company presently has no patents. Despite
the Company's efforts to control access to its proprietary information, it may
be possible for a third party to copy or otherwise obtain and use the
Company's products or technologies without authorization, or to develop
similar or superior technologies independently. In addition, effective
copyright, trade secret and patent protection may be unavailable or limited in
certain foreign countries.
Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. In addition, although the
Company does not believe that it infringes the proprietary rights of any third
parties, there can be no assurance that third parties will not assert such
claims against the Company in the future or that any such claims will not be
successful. Furthermore, parties making claims against the Company could
secure a judgment awarding substantial damages, as well as injunctive or other
equitable relief that could effectively block the Company's ability to market
or license its products in the United States or elsewhere. Any litigation,
regardless of the outcome, could result in substantial costs to the Company
and diversion of managerial resources and could have a material adverse effect
on the Company's business, financial condition and results of operations.
Risks Associated with International Operations. The Company currently has an
international office in London, England, and plans to open offices in Tokyo,
Japan; Melbourne, Australia; and Stockholm, Sweden in the near future. In
addition, a component of the Company's long-term strategy is to expand into
other international markets. If revenue generated by any current or future
international operations is not adequate to offset the expense of establishing
and maintaining any such international operations, the Company's business,
financial condition and results of operations could be materially adversely
affected. To date, the Company has provided limited services in international
locations to certain of its customers headquartered in North America, but has
only minimal direct international experience. There can be no assurance that
the Company will be able to successfully market, sell and deliver its services
outside the United States. In addition to the uncertainty as to the Company's
ability to expand into international markets, there are certain risks inherent
in conducting business on an international level, such as unexpected changes
in regulatory requirements, export restrictions, tariffs and other trade
barriers, challenges in staffing and managing foreign operations, employment
laws and practices in foreign countries, longer payment cycles, problems in
collecting accounts receivable, political instability, fluctuations in
currency exchange rates, imposition of currency exchange controls, seasonal
reductions in business activity, and potentially adverse tax consequences, any
of which could adversely impact the Company's international operations. There
can be no assurance that one or more of these factors will not have a material
adverse effect on the Company's current or future international operations
and, consequently, on the Company's business, financial condition and results
of operations. In addition, there can be no assurance that the Company will be
able to compete effectively in international markets.
Use of Proceeds for General Corporate Purposes. The Company will have broad
discretion in the use of the net proceeds of this offering. The Company
currently expects to use the net proceeds for general corporate purposes,
including future acquisitions, facilities and network expansion, repayment of
debt, investments in working capital and capital expenditures. The Company's
management will have the discretion to allocate the net proceeds to uses that
stockholders may not deem desirable. There can be no assurance that the net
proceeds can or will be invested to yield a significant return. See "Use of
Proceeds."
Requirements for Additional Capital. The Company is investing significantly
in the development of its digital distribution architecture and hiring new
personnel in anticipation of potential growth in its business, which is still
at a very early stage. The Company believes that the net proceeds from this
offering, together with existing cash, cash equivalents, short-term cash
investments and capital lease financing, will be sufficient to meet its
working capital and capital expenditure requirements for at least the next 12
months. However, the Company may need to raise additional funds prior to this
time. Moreover, the Company will likely require substantial additional funds
to continue to fund its Digital Distribution architecture investment,
including the establishment of additional Media Distribution Centers, as well
as product development, marketing, sales and customer support needs. There can
be no assurance that any such funds will be available as needed or on terms
acceptable to the
12
<PAGE>
Company. If adequate funds are not available, or are not available on
acceptable terms, the Company may not be able to continue to invest in its
Digital Distribution architecture, to develop new products and services or
otherwise respond to competitive pressures. Such inability could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
No Prior Trading Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock of the Company,
and there can be no assurance that an active trading market will develop or,
if one does develop, that it will be maintained. The initial public offering
price of the Common Stock will be determined by negotiations among the
Company, the Selling Stockholders and the Representatives and may not be
indicative of the market price of the Common Stock after the offering. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The market price for the Common Stock may be significantly affected by
factors such as the announcement of new products or services by the Company or
its competitors, technological innovation by the Company or its competitors,
quarterly variations in the Company's operating results or the operating
results of the Company's competitors, changes in earnings estimates by
analysts or reported results that vary materially from such estimates. In
addition, the stock market has experienced significant price fluctuations that
have particularly affected the market prices of equity securities of many high
technology and emerging growth companies and that often have been unrelated to
the operating performance of such companies. These broad market fluctuations
may materially and adversely affect the market price of the Company's Common
Stock. Following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against such a company and its officers and directors. Any such litigation
against the Company could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Shares Eligible for Future Sale. Sales of substantial numbers of shares of
Common Stock in the public market following this offering could adversely
affect the market price of the Common Stock. Upon completion of this offering,
the Company will have outstanding an aggregate of shares of Common Stock,
based upon the number of shares outstanding as of June 30, 1997. Of these
shares, all of the shares sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act of 1933,
as amended (the "Securities Act"), unless such shares are purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Affiliates"). The remaining shares of Common Stock held
by existing stockholders (the "Restricted Shares") are "restricted
securities," as that term is defined in Rule 144 under the Securities Act.
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701
promulgated under the Securities Act. As a result of contractual restrictions
and the provisions of Rule 144 and Rule 701, additional shares will be
available for sale in the public market as follows: (i) Restricted
Shares will be eligible for immediate sale on the date of this Prospectus;
(ii) Restricted Shares will be eligible for sale 90 days after the date
of this Prospectus; (iii) Restricted Shares will be eligible for sale
upon expiration of lock-up agreements effective until 180 days after the date
of this Prospectus; and (iv) the remainder of the Restricted Shares will be
eligible for sale from time to time thereafter upon expiration of applicable
holding periods under Rule 144. In addition, certain of the Restricted Shares
are subject to vesting.
As of September 30, 1997, options to purchase 1,814,151 shares of Common
Stock were outstanding, of which options to purchase shares were then
exercisable. The Company intends to file a Form S-8 registration statement
under the Securities Act shortly after the date of this Prospectus to register
3,602,768 shares of Common Stock reserved for issuance under the Company's
1995 Stock Option Plan, the Amended and Restated 1997 Stock Plan and the 1997
Employee Stock Purchase Plan. In addition, as of September 30, 1997, warrants
to purchase 75,300 shares of Common Stock were outstanding, all of which will
be eligible for sale 180 days after the date of this Prospectus.
13
<PAGE>
Pursuant to agreements between the Company and certain stockholders,
approximately shares of Common Stock are entitled to certain
registration rights under the Securities Act. See "Description of Capital
Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
Immediate and Substantial Dilution to New Investors. The initial public
offering price will be substantially higher than the pro forma net tangible
book value per share of the Common Stock immediately after the offering.
Investors purchasing Common Stock in the offering will, therefore, incur
immediate and substantial dilution of approximately $ per share of Common
Stock, assuming a public offering price of $ . See "Dilution."
Anti-Takeover Effects of Certificate of Incorporation and Delaware Law. Upon
completion of this offering, the Company's Board of Directors will have the
authority to issue up to 5,000,000 shares of preferred stock and to determine
the price, rights, preferences and privileges of those shares without any
further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. While the Company has no present intention to issue shares of
preferred stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. In addition, upon completion
of this offering, the Company will become subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of
control of the Company. The Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") will not permit cumulative voting.
These provisions, and other provisions of the Restated Certificate, the
Company's bylaws and Delaware corporate law, may have the effect of deterring
hostile takeovers or delaying or preventing changes in control or management
of the Company, including transactions in which stockholders might otherwise
receive a premium for their shares over then current market prices.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock being offered by the Company hereby are estimated to be approximately $
million (approximately $ million if the Underwriters' over-allotment option
is exercised in full) at an assumed initial public offering price of $ per
share and after deducting estimated underwriting discounts and commissions and
offering expenses. The Company will not receive any of the proceeds from the
sale of shares of Common Stock by the Selling Stockholders. See "Principal and
Selling Stockholders." The principal purposes of this offering are to obtain
additional capital, to create a public market for the Company's Common Stock
and to facilitate future access by the Company to public equity markets. The
Company expects to use approximately $2.8 million of the net proceeds from
this offering to repay certain indebtedness, which consists of (i)
approximately $2.4 million pursuant to a term loan, which is due and payable
upon the closing of this offering and has an interest rate equal to the prime
rate, plus 2% ( % as of September 30, 1997) and (ii) approximately $450,000
of the $2,450,000 outstanding on its line of credit as of September 30, 1997,
which expires December 1998 and bears interest at the prime rate, plus .75%.
The balance of the net proceeds will be used for general corporate purposes,
including future acquisitions, facilities expansion, working capital and
capital expenditures. Other than the Voyager acquisition, the Company has no
present plans, agreements or commitments and is not currently engaged in any
negotiations with respect to any acquisitions. Pending use of the net proceeds
for the above purposes, the Company intends to invest such funds in short-
term, interest-bearing, investment grade obligations.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock or other
securities. The Company currently anticipates that it will retain all of its
future earnings, if any, for use in the expansion and operation of its
business, and the Company does not anticipate paying any cash dividends in the
foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 (i) on an actual basis, (ii) on a pro forma basis to reflect the
Company's sale of preferred stock in July 1997, the Company's issuance of
shares in connection with the Voyager acquisition and the conversion of all
outstanding shares of preferred stock into shares of Common Stock upon
closing of this offering and (iii) as adjusted to reflect the sale of the
shares of Common Stock offered by the Company hereby and the application of
the estimated net proceeds therefrom as described under "Use of Proceeds."
This table should be read in conjunction with the Consolidated Financial
Statements of GlobalCenter, Inc. and the Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARES)
<S> <C> <C> <C>
Long term indebtedness, less current portion
(1)........................................... $ 2,949 $ 3,212 $
-------- -------- ----
Stockholders' equity:
Preferred Stock: $0.001 par value;
shares authorized,
shares issued and outstanding on an
actual basis;
shares issued and outstanding on a
pro forma basis;
5,000,000 authorized, no shares issued and
outstanding on an as adjusted basis.......... 4 6
Common Stock, $0.001 par value; 20,000,000
shares authorized, 7,978,415 shares issued
and outstanding, on an actual basis;
shares issued and outstanding on a pro forma
basis; 50,000,000 shares authorized,
shares issued and outstanding, on an as
adjusted basis (2)........................... 8 10
Additional paid-in capital.................... 28,942 46,701
Notes receivable for common shares purchased.. (15) (15)
Deferred compensation......................... (2,062) (2,062)
Deficit....................................... (25,346) (25,346)
-------- -------- ----
Total stockholders' equity................... 1,531 19,294
-------- -------- ----
Total capitalization........................ $ 4,480 $ 22,506 $
======== ======== ====
</TABLE>
- --------
(1) See Note 4 of Notes to Consolidated Financial Statements of GlobalCenter,
Inc.
(2) Excludes shares of Common Stock reserved for issuance under the
Company's stock option plans, of which shares were subject to
outstanding options as of June 30, 1997 at a weighted average exercise
price of $ per share. See "Management--Stock Option Plans" and Note 7
of Notes to Consolidated Financial Statements of GlobalCenter, Inc.
16
<PAGE>
DILUTION
As of June 30, 1997, the Company had a net tangible book value of
approximately $ or $ per share of Common Stock on a pro forma
basis, after giving effect to the Voyager acquisition and the issuance of
shares of preferred stock to entities affiliated with SOFTBANK Corporation.
Pro forma net tangible book value per share is determined by dividing the net
tangible book value (tangible assets less liabilities) of the Company by the
number of shares of Common Stock outstanding on a pro forma basis, after
giving effect to the conversion of all outstanding shares of preferred stock
into shares of Common Stock. After giving effect to the issuance and sale of
the shares of Common Stock offered by the Company hereby (at an assumed
initial public offering price of $ per share), the Company's adjusted net
tangible book value at June 30, 1997 would have been approximately $ or
$ per share. This represents an immediate increase in pro forma net tangible
book value of $ per share to existing stockholders and an immediate
dilution of $ per share to new investors. The following table illustrates
the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
Pro forma net tangible book value per share as of June 30,
1997.......................................................... $
Increase per share attributable to new investors...............
-----
Adjusted net tangible book value per share after the offering...
-----
Dilution per share to new investors............................. $
=====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the differences between existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)........ % $ % $
New investors(1)........ $
------- -------- --------- ---------
Total.................. 100.0% $ 100.0%
======= ======== ========= =========
</TABLE>
The foregoing computations assume no exercise of outstanding stock options
or warrants after June 30, 1997. As of June 30, 1997, options to purchase
shares of Common Stock were outstanding, with a weighted average exercise
price of $ per share. To the extent these options are exercised, there will
be further dilution to new investors. See "Management--Stock Option Plans" and
Note 7 of Notes to Consolidated Financial Statements of GlobalCenter, Inc.
- --------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to shares, or approximately % of
the total shares of Common Stock outstanding after this offering
( shares, or approximately % if the Underwriters' over-allotment option
is exercised in full), and will increase the number of shares held by new
investors to shares, or approximately % of the total shares of Common
Stock outstanding after this offering ( shares or approximately % if
the Underwriters' over-allotment option is exercised in full). See
"Principal and Selling Stockholders."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of the four
years ended December 31, 1996 and for the period from inception (October 10,
1993) to December 31, 1993 and for the three years ended December 31, 1996 are
derived from the Consolidated Financial Statements of GlobalCenter, Inc.,
which have been audited by Arthur Andersen LLP, independent public
accountants. The selected consolidated financial data presented below as of
and for the six months ended June 30, 1996 and 1997 are derived from
GlobalCenter's unaudited consolidated financial statements. The selected
consolidated financial data for the six months ended June 30, 1996 and 1997,
in the opinion of management, include all adjustments, consisting solely of
normal recurring adjustments, necessary for a fair presentation for such
periods. The historical results of operations for the six months ended June
30, 1997 are not necessarily indicative of results to be expected for the
entire year. The pro forma consolidated statement of operations data for the
six months ended June 30, 1997 give effect to the acquisition of Voyager as if
it had occurred on January 1, 1997. The pro forma consolidated balance sheet
data give effect to the acquisition of Voyager and the Company's sale of
preferred stock in July 1997 as if each had occurred on June 30, 1997. The pro
forma financial data do not purport to be indicative of the financial position
or results of operations of the Company had the above transactions actually
occured on the dates indicated, nor are they indicative of the Company's
future financial position or results of operations. These selected
consolidated financial data should be read in conjunction with the
Consolidated Financial Statements of GlobalCenter, Inc. and the Notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Pro Forma Combined Financial Statements and the Notes
thereto, included elsewhere herein.
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA
OCTOBER 10, 1993 SIX MONTHS SIX MONTHS
(INCEPTION) ENDED ENDED
TO DECEMBER 31, YEARS ENDED DECEMBER 31, JUNE 30, JUNE 30,
---------------- --------------------------- --------------- ----------
1993 1994 1995 1996 1996 1997 1997
---------------- -------- -------- --------- ------ ------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue:
Service................ $ -- $ 205 $ 4,399 $ 11,484 $4,644 $ 9,127 $10,555
Customer premise
equipment............. 370 3,667 2,303 1,466 833 840 841
---- ------- ------- --------- ------ ------- -------
Total revenue........ 370 3,872 6,702 12,950 5,477 9,967 11,396
Costs and expenses:
Cost of revenue:
Service................ -- 78 1,930 5,547 2,147 6,496 7,398
Customer premise
equipment............. 322 3,174 2,069 1,176 706 685 686
Sales and marketing.... 56 116 162 640 240 2,584 2,744
Research and
development........... -- -- -- -- -- 1,632 1,632
General and
administrative........ 26 455 1,793 5,301 1,755 2,569 3,574
Noncash compensation... -- -- -- -- -- 466 466
Depreciation........... -- 44 184 1,014 409 1,101 1,101
Amortization of
goodwill.............. -- -- -- -- -- 232 1,054
Write-off of in-process
research and
development........... -- -- -- 18,933 -- -- --
---- ------- ------- --------- ------ ------- -------
Total costs and
expenses............ 404 3,867 6,138 32,611 5,257 15,765 18,655
---- ------- ------- --------- ------ ------- -------
Income (loss) from
operations............. (34) 5 564 (19,661) 220 (5,798) (7,259)
Other expense........... (2) (5) (15) (118) (46) (169) (194)
---- ------- ------- --------- ------ ------- -------
Income (loss) before
income taxes........... (36) -- 549 (19,779) 174 (5,967) (7,453)
Provision (benefit) for
income taxes........... (18) 3 230 (40) 80 (53) (53)
---- ------- ------- --------- ------ ------- -------
Net income (loss)....... $(18) $ (3) $ 319 $ (19,739) $ 94 $(5,914) $(7,400)
==== ======= ======= ========= ====== ======= =======
<CAPTION>
PRO FORMA
DECEMBER 31, JUNE 30, JUNE 30,
-------------------------------------------- --------------- ----------
1993 1994 1995 1996 1996 1997 1997
---------------- -------- -------- --------- ------ ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 54 $ 16 $ 37 $ 6,463 $ 153 $ 527 $10,070
Working capital
(deficit).............. 32 (165) (928) 12,233 (745) (5,607) 2,281
Total assets............ 187 502 2,823 15,778 5,285 14,276 35,297
Long-term debt.......... 65 51 -- 2,527 725 2,949 3,212
Total stockholders'
equity (deficit)....... (8) 11 831 6,957 2,113 1,531 19,293
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements of Global Center, Inc. and Notes thereto included elsewhere in this
Prospectus. Except for the historical information contained herein, the
discussion in this Prospectus contains certain forward-looking statements that
involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in
this Prospectus should be read as being applicable to all related forward-
looking statements wherever they appear in this Prospectus. The Company's
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include those discussed in "Risk
Factors," as well as those discussed elsewhere herein.
OVERVIEW
GCIS, Inc. ("GCIS") was founded in January 1996 as a wholly owned subsidiary
of Global Village Communication, Inc. ("Global Village") to provide value-
added Internet services to small and medium-sized businesses. Prior to its
incorporation, GCIS operated as a division of Global Village. In July 1996,
Douglas Hickey joined GCIS as its President and Chief Executive Officer and
began to assemble the Company's executive management team. In January 1997,
GCIS merged with Primenet Services for the Internet, Inc. ("Primenet"), a
Phoenix, Arizona-based provider of Internet access and web hosting services.
Primenet was the surviving entity in the merger and subsequently changed its
name to "GlobalCenter, Inc." Primenet was founded in October 1993 to assemble
and sell personal computers and computer peripherals and to provide network
engineering services. In response to increasing demand for Internet access
from its customers, Primenet began to offer Internet access and other value-
added Internet services in June 1994. The merger with GCIS was accounted for
under the purchase accounting method, and therefore results of operations of
GCIS are not included in the historical financial statements of the Company
for periods prior to January 1, 1997.
As a combined entity, the Company focused on providing a full suite of easy-
to-implement, scalable Internet solutions to growing businesses. In May 1997,
the Company acquired I-Systems, Inc. ("ISI"), a Sunnyvale, California-based
provider of high-end content management and distribution services, to
capitalize on the emerging market for highly reliable, high-speed, content
management and distribution services. The ISI acquisition was accounted for
under the pooling of interests method of accounting.
With the acquisition of ISI, the Company began to focus on providing Digital
Distribution services, consisting of a full suite of web content management
and distribution, web hosting, design and development and various connectivity
services. The Company currently manages over one billion page views per month,
over 40 million content requests per day and up to 250,000 software package
downloads per day.
In September 1997, the Company agreed to acquire Voyager, a New York City-
based provider of content management and distribution services. Upon
completion of the acquisition of Voyager, the Company will add two Media
Distribution Centers in New York to its content distribution network and
intends to continue to provide services to Voyager's existing customers,
including Sony and Wit Capital.
The Company has completed two acquisitions within the past 12 months and
expects to complete the acquisition of Voyager by the end of October 1997. The
Company regularly evaluates acquisition opportunities and is likely to make
acquisitions in the future, which could result in potentially dilutive
issuances of equity securities and the incurrence of debt and contingent
liabilities. In addition, any such acquisition could be accounted for using
the purchase method of accounting, which could require the Company to record
substantial amounts of goodwill with respect to such acquisition. The goodwill
recorded by the Company would be required to be amortized over its useful
life. For example, the Company anticipates that it will record approximately
$8.2 million in goodwill in connection with the Voyager acquisition, which
will be amortized over five years. The dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities and the
amortization
19
<PAGE>
of goodwill could materially adversely affect the Company's business,
financial condition and results of operations. See "Risk Factors--Risks
Associated with Acquisitions; Impact on Financial Statements."
The Company has established Media Distribution Centers in five locations and
plans to increase the number of such centers in the near future. The
establishment of a Media Distribution Center typically requires the Company to
expend substantial resources for leases or acquisitions of real estate,
improvements to such facilities, purchase of equipment, implementation of
multiple telecommunications capabilities, and the hiring of network,
administrative, customer service and sales and marketing personnel. Many of
these costs are fixed in the short term, and as a new center begins
operations, it typically is, and could remain, underutilized until the Company
is able to add sufficient customers at that Media Distribution Center. There
can be no assurance that the Company will be able to anticipate accurately the
customer demand for such additional Media Distribution Centers or that the
Company will be able to attract sufficient customers to such facilities. The
Company's inability to attract a sufficient number of customers to a new Media
Distribution Center in a timely manner, or at all, would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Potential Fluctuations in Quarterly Results;
Factors Affecting Operating Results."
The Company currently has a Media Distribution Center in London, England,
and plans to establish operations in Tokyo, Japan; Melbourne, Australia; and
Stockholm, Sweden in the near future. In addition, a component of the
Company's long-term strategy is to expand into other international markets. If
revenue generated by any current or future international operations is not
adequate to offset the expense of establishing and maintaining any such
international operations, the Company's business, financial condition and
results of operations could be materially adversely affected. To date, the
Company has provided limited services in international locations to certain of
its customers headquartered in North America, but has only minimal direct
international experience. There can be no assurance that the Company will be
able to successfully market, sell and deliver its services outside the United
States. In addition to the uncertainty as to the Company's ability to expand
into international markets, there are certain risks inherent in conducting
business on an international level. See "Risk Factors--Risks Associated with
Internet Operations."
The Company has recorded unearned compensation and compensation expense for
the difference between the exercise price and the deemed fair value of the
Company's Common Stock with respect to shares issuable upon exercise of
certain stock options granted in 1997. These amounts have been initially
recorded as unearned compensation and will be amortized to expense over the
vesting periods of the options, generally four years. Unearned compensation
amortized to expense in the six months ended June 30, 1997 was $466,000.
Amortization of unearned compensation will adversely affect the Company's
reported operating results through the year 2002. See Note 7 of Notes to
Consolidated Financial Statements of GlobalCenter, Inc.
The Company incurred net operating losses for the year ended December 31,
1996 and for the six month period ended June 30, 1997. Accordingly, the
Company recorded no provision for federal or state income taxes during those
periods. As of December 31, 1996, the Company had net operating loss
carryforwards totaling $2.9 million that expire in various years beginning in
2011. Portions of the net operating loss carryforwards are restricted as to
the amount available for use in any given year due to change of control
limitations imposed by Section 382 of the Internal Revenue Code of 1986.
The Company has a limited history operating as a consolidated business upon
which to base an investment decision. As of June 30, 1997, the Company had an
accumulated deficit of $25.3 million. Although the Company has experienced
revenue growth in recent periods, there can be no assurance that the Company's
revenues will continue to increase or will be sustained at current levels. The
limited operating history of the Company makes the prediction of future
results of operations difficult or impossible and, therefore, the recent
revenue growth experienced by the Company should not be taken as indicative of
the rate of revenue growth, if any, that can be expected in the future. The
Company believes that period to period comparisons of its operating results
are not meaningful and that the results for any period should not be relied
upon as an indication of future performance. The Company currently expects to
significantly increase its operating expenses to expand its network
architecture, to increase its sales and marketing operations, to fund greater
levels of product development and to
20
<PAGE>
develop and commercialize additional products. In addition, the Company
anticipates increased operating expenses as a result of future acquisitions,
if any such acquisitions are completed. As a result of the foregoing factors,
the Company expects to continue to incur significant losses on a quarterly and
annual basis for the foreseeable future. See "Risk Factors--Limited Operating
History; Expectation of Future Losses."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statement of operations to
total revenue, except as noted:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Service................... 5.3% 65.6% 88.7% 84.8% 91.6 %
Customer premise
equipment................ 94.7 34.4 11.3 15.2 8.4
------- ------- -------- -------- --------
Total revenue......... 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of revenue:
Service (as a percentage
of service revenue).... 37.6 43.9 48.3 46.2 71.2
Customer premise
equipment (as a
percentage of customer
premise equipment
revenue)............... 86.6 89.8 80.2 84.8 81.5
Total cost of revenue
(as a percentage of
total revenue)....... 84.0 59.7 51.9 52.1 72.0
Sales and marketing....... 3.0 2.4 5.0 4.4 25.9
Research and development.. -- -- -- -- 16.4
General and
administrative........... 11.8 26.8 40.9 32.0 25.8
Noncash compensation...... -- -- -- -- 4.7
Depreciation.............. 1.1 2.7 7.8 7.5 11.1
Amortization of goodwill.. -- -- -- -- 2.3
Write-off of in-process
research and development. -- -- 146.2 -- --
------- ------- -------- -------- --------
Total costs and
expenses............. 99.9 91.6 251.8 96.0 158.2
------- ------- -------- -------- --------
Income (loss) from
operations................. 0.1 8.4 (151.8) 4.0 (58.2)
Other expense............... (0.1) (0.2) (0.9) (0.8) (1.7)
------- ------- -------- -------- --------
Income (loss) before income
taxes...................... -- 8.2 (152.7) 3.2 (59.9)
Provision (benefit) for
income taxes............... 0.1 3.4 (0.3) 1.5 (0.5)
------- ------- -------- -------- --------
Net income (loss)........... (0.1)% 4.8% (152.4)% 1.7% (59.3)%
======= ======= ======== ======== ========
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenue. Service revenue includes one-time set-up fees and monthly fees
charged to customers for content distribution and web hosting services as well
as fees for connectivity services. Service revenue is recognized as the
service is provided. Customer premise equipment revenue consists of revenue
derived from the sale of computers, computer peripherals and networking
equipment. Customer premise revenue is recognized when installation of the
equipment is completed. A significant majority of service revenue is recurring
revenue, while customer premise equipment revenue is nonrecurring.
Fees charged to customers for content distribution services are based on
monthly contracted bandwidth consumption with additional charges for peak
bandwidth usage. Web hosting fees are based on predetermined monthly disk
space and bandwidth consumption with additional charges for excess usage.
Monthly connectivity fees are based on the speed of the connection provided to
the customer.
21
<PAGE>
Total revenue increased 82% to $10.0 million for the six months ended June
30, 1997 from $5.5 million for the six months ended June 30, 1996, primarily
as a result of an increase in service revenue. Service revenue increased 98%
to $9.1 million for the six months ended June 30, 1997 from $4.6 million for
the six months ended June 30, 1996. The change in revenue mix was primarily
the result of an increase in the number of customers, as well as an increase
in services offered by the Company.
Content distribution and web hosting revenue increased 352% to $2.8 million
for the six months ended June 30, 1997 from $620,000 for the six months ended
June 30, 1996, primarily as a result of an increase in the Company's customer
base and a significant increase in traffic at the web sites of the Company's
content distribution customers. Content distribution and web hosting revenue
increased as a percentage of service revenue to 31% for the six months ended
June 30, 1997 from 13% for the six months ended June 30, 1996, primarily as a
result of the Company's expansion of its content distribution and web hosting
activities.
Internet connectivity revenue increased 58% to $6.3 million for the six
months ended June 30, 1997 from $4.0 million for the six months ended June 30,
1996. The increase was attributable to the Company's network expansion that
occurred during 1996, as well as the Company's increased focus on the
commercial segment of the Internet market. Internet connectivity revenue
decreased as a percentage of service revenue to 69% for the six months ended
June 30, 1997 from 87% for the six months ended June 30, 1996, primarily as a
result of the Company's expansion of its content distribution and web hosting
activities.
Cost of Revenue. Cost of service revenue includes telecommunication costs,
depreciation of Media Distribution Centers, related leasehold improvements and
network equipment, and personnel costs associated with network administration
and customer support. Cost of customer premise equipment revenue consists of
the cost of equipment sold to customers.
Cost of service revenue increased 206% to $6.5 million for the six months
ended June 30, 1997 from $2.1 million for the comparable period in 1996, and
increased as a percentage of service revenue to 71% from 46% during these
periods. This increase was due primarily increased telecommunications costs
associated with the increase in the size of the Company's network and the
number of its Media Distribution Centers, as well as the increase in the
number of network administration and customer support personnel.
Cost of customer premise equipment revenue decreased 3% to $685,000 for the
six months ended June 30, 1997 from $706,000 for the six months ended June 30,
1996, and remained relatively stable as a percentage of customer premise
equipment revenue, decreasing to 82% from 85% for such periods.
Sales and Marketing Expense. Sales and marketing expense consists of
personnel costs associated with the direct sales force, the internal telesales
group and product marketing employees, as well as costs associated with
marketing programs, collateral material, external telemarketing costs and
corporate marketing activities, including public relations. Prior to the
merger with GCIS in January 1997, the Company did not have a direct sales
force or a marketing program or department. Sales and marketing expense
increased 983% to $2.6 million for the six months ended June 30, 1997 from
$240,000 for the comparable period in 1996, primarily as a result of increased
personnel costs associated with the expansion of the direct sales force,
marketing efforts dedicated towards building the Company's channel marketing
strategy, and to a lesser extent, increased spending on public relations and
marketing programs and materials. The Company expects that sales and marketing
expense will increase in absolute dollars as it continues to grow its direct
sales force and increase its marketing efforts.
Research and Development Expense. Research and development expense consists
primarily of personnel costs associated with the Company's software
engineering group. Prior to the merger with GCIS in January 1997, the Company
did not engage in research and development activities. Research and
development expense totaled $1.6 million for the six months ended June 30,
1997. The Company did not incur any research and development expense during
the six months ended June 30, 1996.
General and Administrative Expense. General and administrative expense
consists primarily of personnel costs associated with corporate management,
finance and accounting, facilities-related costs and professional
22
<PAGE>
fees. General and administrative expense increased 44% to $2.6 million for the
six months ended June 30, 1997 from $1.8 million for the same period in 1996,
primarily as a result of increased personnel costs due to the hiring of
additional management, administrative and accounting personnel and enhanced
benefits programs, and to a lesser extent, higher costs for facilities and
acquisition related costs. General and administrative expense decreased as a
percentage of total revenue to 26% for the six months ended June 30, 1997 from
32% for the six months ended June 30, 1996. The Company expects that general
and administrative expense will continue to grow in absolute dollars. If the
Company continues to implement its acquisition strategy, general and
administrative expense may fluctuate as a percentage of total revenue from
quarter to quarter due to merger related expenses and increased expenses
associated with duplicate facilities and personnel until the operations of the
merged companies can be effectively integrated.
Noncash Compensation Expense. During the six months ended June 30, 1997, the
Company recorded noncash compensation expense totalling $466,000 related to
certain stock options granted with option prices below fair market value on
the date of grant. No such charge was recorded during the six months ended
June 30, 1996. See Note 7 of Notes to Consolidated Financial Statements of
GlobalCenter, Inc.
Depreciation Expense. Depreciation expense consists of depreciation of Media
Distribution Centers, related leasehold improvements, network equipment and
other fixed assets. Depreciation expense increased 169% to $1.1 million for
the six months ended June 30, 1997 from $409,000 for the same period of 1996,
primarily as a result of the Company's expansion of existing Media
Distribution Centers, opening of two new Media Distribution Centers and
increased investment in network equipment.
Amortization of Goodwill. The Company's merger with GCIS in January 1997 was
accounted for as a purchase business combination. The Company recorded
goodwill totaling $2.3 million in connection with the merger, which is being
amortized over a five-year period using the straight-line method. If the
Company continues to implement its acquisition strategy, it may record
substantial amounts of goodwill that would be required to be amortized over
its useful life.
Interest Income and Interest Expense. Interest income increased to $62,000
for the six months ended June 30, 1997 from $7,000 for the six months ended
June 30, 1996, due to increased cash balances available for investing.
Interest expense increased to $231,000 from $53,000 for the same periods due
to increased equipment lease financing in 1997 related to the expansion of the
Company's network, borrowings under the Company's line of credit and
borrowings from related parties. See "Certain Transactions."
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenue. Total revenue increased 94% to $13.0 million for the year ended
December 31, 1996 from $6.7 million for the year ended December 31, 1995,
primarily as a result of an increase in service revenue, partially offset by a
decrease in customer premise equipment revenue. Service revenue increased as a
percentage of total revenue to 89% in 1996 from 66% in 1995 as a result of the
Company's continued focus during 1996 on providing content distribution, web
hosting and connectivity services.
Content distribution and web hosting revenue increased to $2.5 million for
the year ended December 31, 1996 from $224,000 for the year ended December 31,
1995, primarily as a result of growth in the customer base and increased
traffic at the web sites of the Company's content distribution customers.
Content distribution and web hosting revenue increased as a percentage of
service revenue to 22% in 1996 from 5% in 1995, primarily as a result of the
Company's expansion of its content distribution and web hosting activities.
Internet connectivity revenue increased 125% to $9.0 million for the year
ended December 31, 1996 from $4.0 million for the year ended December 31,
1995, primarily as a result of the expansion of the Company's network.
Cost of Revenue. Cost of service revenue increased 189% to $5.5 million for
the year ended December 31, 1996 from $1.9 million for the year ended December
31, 1995, and increased as a percentage of service revenue
23
<PAGE>
to 48% from 44% for the same periods. This increase was due primarily to
increased telecommunications expenses associated with the expansion of the
Company's network, as well as an increase in the number of network
administration and customer support personnel.
Cost of customer premise equipment revenue decreased 43% to $1.2 million for
the year ended December 31, 1996 from $2.1 million for the year ended December
31, 1995, and remained relatively stable as a percentage of customer premise
equipment revenue, decreasing to 66% from 90% for such periods.
Sales and Marketing Expense. Sales and marketing expense increased 296% to
$641,000 for the year ended December 31, 1996 from $162,000 for the year ended
December 31, 1995, primarily due to increased print advertising.
General and Administrative Expense. General and administrative expense
increased 194% to $5.3 million for the year ended December 31, 1996 from $1.8
million for the year ended December 31, 1995, primarily due to increased
personnel costs associated with the hiring of additional management,
administrative and accounting personnel and costs related to the opening of
the Company's Phoenix, Arizona facility in the first quarter of 1996. General
and administrative expense increased as a percentage of total revenue to 43%
for the year ended December 31, 1996 from 27% for the year ended December 31,
1995.
Depreciation Expense. Depreciation expense increased 434% to $1.0 million
for the year ended December 31, 1996 from $184,000 for the year ended December
31, 1995, primarily due to increased investment in network equipment in 1996.
Write-off of In-Process Research and Development. In connection with the
Company's merger with GCIS, the Company recorded a write-off of in-process
research and development of $18.9 million. If the Company continues to
implement its acquisition strategy, it may record similar write-offs in future
periods.
Interest Income and Interest Expense. Interest income increased to $23,000
for the year ended December 31, 1996 from $1,000 for the year ended December
31, 1995, due to increased cash balances resulting from the sale of preferred
stock in January 1996. Interest expense increased to $142,000 for the year
ended December 31, 1996 from $16,000 for the year ended December 31, 1995,
primarily due to borrowings related to the Company's purchase of its Phoenix,
Arizona facility.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenue. Service revenue increased to $4.4 million for the year ended
December 31, 1995 from $205,000 for the year ended December 31, 1994, and
customer premise equipment revenue decreased to $2.3 million from $3.7 million
for the same periods. The change in revenue mix was a result of the Company's
increased focus on providing connectivity solutions.
Cost of Revenue. Cost of service revenue increased to $1.9 million for the
year ended December 31, 1995 from $78,000 for the year ended December 31,
1994, primarily due to increased telecommunications and network equipment
depreciation costs associated with providing connectivity services to a larger
customer base. Cost of customer premise equipment revenue decreased to $2.1
million for the year ended December 31, 1995 from $3.2 million for the year
ended December 31, 1994, primarily due to decreased sales of computers and
computer peripherals.
General and Administrative Expense. General and administrative expense
increased to $1.8 million for the year ended December 31, 1995 from $455,000
for the year ended December 31, 1994, primarily due to increased personnel
costs and costs associated with larger facilities.
Depreciation Expense. Depreciation expense increased 309% to $184,000 for
the year ended December 31, 1995 from $45,000 for the year ended December 31,
1994, primarily due to increased investment in network equipment in 1995.
24
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly results of
operations data for each of the most recent six quarters ended June 30, 1997,
as well as such data expressed as a percentage of the Company's total revenue,
except as noted, for the periods indicated. This data has been derived from
the Company's unaudited financial statements that, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information for the periods
presented when read in conjunction with the Consolidated Financial Statements
of GlobalCenter, Inc., and the Notes thereto included elsewhere herein. The
operating results for any quarter are not necessarily indicative of the
results of the full year or any future quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Service................ $2,185 $2,459 $3,401 $ 3,439 $ 4,069 $ 5,057
Customer premise equip-
ment.................. 426 406 272 362 494 347
------ ------ ------ -------- ------- -------
Total revenue......... 2,611 2,865 3,673 3,801 4,563 5,404
Costs and expenses:
Cost of revenue:
Service................ 909 1,179 1,730 1,729 2,863 3,633
Customer premise equip-
ment.................. 381 325 212 258 388 297
Sales and marketing.... 69 170 218 183 959 1,624
Research and develop-
ment.................. -- -- -- -- 786 847
General and administra-
tive.................. 828 1,081 1,436 1,956 1,222 1,347
Noncash compensation .. -- -- -- -- 313 153
Depreciation .......... 203 274 233 304 495 606
Amortization of good-
will.................. -- -- -- -- 116 116
Write-off of in-process
research and develop-
ment.................. -- -- -- 18,933 -- --
------ ------ ------ -------- ------- -------
Total costs and ex-
penses............... 2,390 3,029 3,829 23,363 7,142 8,623
------ ------ ------ -------- ------- -------
Income (loss) from oper-
ations................. 221 (164) (156) (19,562) (2,579) (3,219)
Other expense........... (23) (23) (35) (37) (65) (104)
------ ------ ------ -------- ------- -------
Income (loss) before in-
come taxes............. 198 (187) (191) (19,599) (2,644) (3,323)
Provision (benefit) for
income taxes........... 90 (40) (90) (1) 10 (63)
------ ------ ------ -------- ------- -------
Net income (loss)....... $ 108 $ (147) $ (101) $(19,600) $(2,654) $(3,260)
====== ====== ====== ======== ======= =======
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Service................ 83.7% 85.8% 92.6% 90.5% 89.2% 93.6%
Customer premise equip-
ment.................. 16.3 14.2 7.4 9.5 10.8 6.4
------ ------ ------ -------- ------- -------
Total revenue......... 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of revenue:
Service (as a percent-
age of service reve-
nue).................. 41.6 47.9 50.9 50.3 70.4 71.8
Customer premise equip-
ment (as a percentage
of customer premise
equipment revenue).... 89.5 80.0 77.9 71.3 78.5 85.6
Total cost of revenue
(as a percentage of
total revenue)....... 49.4 52.5 52.9 52.3 71.2 72.7
Sales and marketing.... 2.6 6.0 5.9 4.8 21.0 30.1
Research and develop-
ment.................. -- -- -- -- 17.2 15.7
General and administra-
tive.................. 31.7 37.7 38.9 50.9 26.8 24.9
Noncash compensation .. 0.2 0.6 6.9 2.8
Depreciation .......... 7.8 9.5 6.3 8.0 10.9 11.2
Amortization of good-
will.................. -- -- -- -- 2.5 2.2
Write-off of in-process
research and develop-
ment.................. -- -- -- 498.1 -- --
------ ------ ------ -------- ------- -------
Total costs and ex-
penses............... 91.5 105.7 104.2 614.7 156.5 159.6
------ ------ ------ -------- ------- -------
Income (loss) from oper-
ations................. 8.5 (5.7) 4.2 (514.7) (56.5) (59.6)
Other expense........... (0.9) (0.8) (0.9) (1.0) (1.4) (1.9)
------ ------ ------ -------- ------- -------
Income (loss) before in-
come taxes............. 7.6 (6.5) (5.1) (515.7) (57.9) (61.5)
Provision (benefit) for
income taxes........... 3.4 (1.4) (2.4) -- 0.2 (1.2)
------ ------ ------ -------- ------- -------
Net income (loss)....... 4.2% (5.1)% (2.7)% (515.7)% (58.2)% (60.3)%
====== ====== ====== ======== ======= =======
</TABLE>
25
<PAGE>
Beginning January 1, 1997, the results of operations of GCIS were included
with those of the Company. This had a significant effect on the Company's
results of operations for the quarters ended March 31 and June 30, 1997,
including the cost of service revenue, sales and marketing expense and
research and development expense components.
The Company principally measures revenue performance with reference to the
increase in service revenue. The Company expects that customer premise
equipment revenue may fluctuate on a quarterly basis depending on the mix of
customers initiating or expanding service during the quarter. Quarterly
results may also be effected by future acquisitions, if any, accounted for
using the purchase method of accounting, which could require the Company to
record substantial amounts of goodwill or record a substantial write-off of
in-process research and development, or both, in connection with any such
acquisitions. Any goodwill recorded by the Company would be required to be
amortized over its useful life and could adversely affect quarterly results of
operations.
The Company's operating results have fluctuated significantly in the past
and will likely continue to fluctuate significantly in the future as a result
of a variety of factors, many of which are beyond the Company's control. These
factors include the timing and costs associated with new customer
acquisitions, customer retention, fluctuations in bandwidth used by customers,
the timing of software distributions, the timing of marketing efforts and
service rollouts by channel partners, capital expenditures and other costs
relating to the expansion of operations, the costs associated with, and the
other effects of, potential acquisitions, increased competition in the
Company's markets, the timing of new service and product announcements,
changes in the pricing policies of the Company and its competitors, market
acceptance of new and enhanced versions of the Company's services and
products, increases in operating expenses (including telecommunication costs),
changes in the Company's strategy, personnel changes and other general
economic factors. For example, the Company realized greater than expected
revenues during the second quarter of 1997 due in part to the distribution of
a new software release by one of its customers. In addition, a relatively
large portion of the Company's expenses are fixed, and therefore the Company's
operating margins are particularly sensitive to fluctuations in revenues. For
these and other reasons, in some future quarters, the Company's operating
results may fall below the expectations of securities analysts or investors,
which could have a material adverse effect on the market price of the
Company's Common Stock. See "Risk Factors--Potential Fluctuations in Quarterly
Results; Factors Affecting Operating Results."
26
<PAGE>
PRO FORMA QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited pro forma quarterly results
of operations data for each of the two quarters in the period ended June 30,
1997, as well as such data expressed as a percentage of the Company's total
revenues for the periods indicated, as if the acquisition of Voyager had
occurred on January 1, 1997. This data has been derived from the Company's
unaudited financial statements that, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information for the periods presented when read in
conjunction with the Consolidated Financial Statements of GlobalCenter, Inc.
and the Notes thereto included elsewhere herein. The operating results for any
quarter are not necessarily indicative of results to be expected for any
subsequent period. The pro forma adjustments include an adjustment to remove
revenue and costs directly associated with Voyager's voice services business,
which was discontinued in the third quarter of 1997, and to include
amortization expense associated with the goodwill expected to be recorded as a
result of the acquisition. The results of operations reflected below are not
necessarily indicative of the results of operations of the Company had the
acquisition actually occurred on January 1, 1997.
<TABLE>
<CAPTION>
PRO FORMA QUARTER ENDED
(AS A PERCENTAGE OF
PRO FORMA QUARTER ENDED TOTAL REVENUE)
------------------------- ---------------------------
MAR. 31, JUNE 30, MAR. 31, JUNE 30,
1997 1997 1997 1997
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE
DATA)
<S> <C> <C> <C> <C>
Revenue:
Service................ $ 4,734 $ 5,821 90.6 % 94.4 %
Customer premise
equipment.............. 494 347 9.4 5.6
----------- ----------- ----------- -----------
Total revenue........ 5,228 6,168 100.0 100.0
Costs and expenses:
Cost of revenue:
Service............... 3,308 4,090 63.3 66.3
Customer premise
equipment............. 388 298 7.4 4.8
Sales and marketing.... 1,046 1,698 20.0 27.5
Research and
development............ 786 846 15.0 13.7
General and
administrative......... 1,567 1,993 30.0 32.3
Noncash compensation .. 313 1,053 6.0 17.1
Depreciation .......... 495 606 9.5 9.8
Amortization of
goodwill............... 527 527 10.1 8.5
----------- ----------- ----------- -----------
Total costs and
expenses............. 8,430 11,111 1.62 1.80
----------- ----------- ----------- -----------
Loss from operations.... (3,202) (4,943) (61.2) (80.1)
Other expense........... (76) (118) (1.5) (1.9)
----------- ----------- ----------- -----------
Loss before income
taxes.................. (3,278) (5,061) (62.7) (82.0)
Provision (benefit) for
income taxes........... 21 (60) (.4) 1.0
----------- ----------- ----------- -----------
Net loss................ $ (3,299) $ (5,001) (63.1)% (81.0)%
=========== =========== =========== ===========
</TABLE>
27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations and expansion through a
combination of private sales of securities, cash acquired in business
combinations, debt and lease financing. Most recently, the Company completed a
$9.0 million equity financing in July 1997. Net cash used in operating
activities totaled $5.0 million for the six months ended June 30, 1997, as
compared to cash provided by operating activities of $1.3 million for the same
period of 1996. The significant use of cash in operating activities for the
first six months of 1997 was due primarily to a net loss for the period of
$5.4 million. Increases in noncash expenses such as depreciation and
amortization, provision for doubtful accounts and deferred income taxes and an
increase in accounts payable were offset by increases in accounts receivable
and inventories and a decrease in accrued liabilities. For the year ended
December 31, 1996, cash provided by operating activities totaled $1.7 million
as compared to $353,000 for the year ended December 31, 1995. Cash provided by
operating activities during 1996 was primarily the result of increases in
accounts payable and accrued liabilities, partially offset by an increase in
accounts receivable and a decrease in income taxes payable.
The Company's investing activities have consisted primarily of equipment
purchases and facilities improvements for new and expanded Media Distribution
Centers and network expansion as well as the purchase of the Phoenix, Arizona
facility for approximately $1.1 million in December 1995. Purchases of
property and equipment totaled $2.9 million and $2.3 million for the six
months ended June 30, 1997 and 1996, respectively, and $2.7 million and $1.7
million for the years ended December 31, 1996 and 1995, respectively. Cash
provided by financing activities totaled $3.0 million and $7.5 million for the
six months ended June 30, 1997 and 1996, respectively, and $7.5 million and
$1.4 million for the years ended December 31, 1996 and 1995, respectively. For
the six months ended June 30, 1997, cash provided by financing activities
consisted of proceeds of $4.2 million from notes payable, primarily borrowings
under the bank line of credit and capital lease financing, partially offset by
repayments of notes payable of $1.2 million. Cash provided by financing
activities for the year ended December 31, 1996 included the sale of preferred
stock by the Company for $1.2 million, the sale of preferred stock by ISI for
$3.1 million, and cash received in the merger of the Company and GCIS of $3.3
million. Cash provided by financing activities for the year ended December 31,
1995 included the issuance of preferred stock for $492,000 and proceeds of
$832,000 from notes payable, primarily to finance the purchase of the Phoenix,
Arizona facility.
As of June 30, 1997, the Company's cash balances totaled $527,000 and the
Company had a working capital deficit of $3.9 million. In July 1997, the
Company sold preferred stock for $9.0 million in a private offering. As of
September 30, 1997, the Company had $5.0 million in cash, cash equivalents and
short-term investments. The Company believes that the net proceeds from this
offering, together with existing cash, cash equivalents, short-term cash
investments and capital lease financing, will be sufficient to meet its
working capital and capital expenditure requirements for at least the next 12
months. However, the Company may need to raise additional funds prior to this
time. Moreover, the Company will likely require substantial additional funds
to continue to fund its Digital Distribution architecture investment,
including the establishment of additional Media Distribution Centers, as well
as product development, marketing, sales and customer support needs. There can
be no assurance that any such funds will be available as needed or on terms
acceptable to the Company. If adequate funds are not available, or are not
available on acceptable terms, the Company may not be able to continue to
invest in its Digital Distribution architecture, to develop new products and
services or otherwise respond to competitive pressures. Such inability could
have a material adverse effect on the Company's business, financial condition
and results of operations.
28
<PAGE>
BUSINESS
The following Business section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
GlobalCenter is a leading provider of Digital Distribution services to
organizations conducting commercial activities over the Internet, including
some of the world's premier content providers. The Company currently manages
over one billion page views per month, over 100 million content requests per
day and up to 250,000 software package downloads per day. These content
requests and downloads are distributed to end users through the Company's high
volume content distribution network, consisting of an ATM backbone linked to
five geographically disbursed Media Distribution Centers and multiple private
networks and public Peering Points. The network is designed to route content
directly from multiple Media Distribution Centers, thereby locating content
closer to the requesting end user and circumventing bottlenecks in the public
networks.
GlobalCenter's scalable, comprehensive Digital Distribution solutions
combines its proprietary software technology and content management services
with its network architecture to deliver a full range of services to its
customers, large and small. The Company's customers include Yahoo!, Netscape,
Playboy, Cox Interactive and SOFTBANK Interactive Marketing. Upon completion
of the acquisition of Voyager, the Company will add two Media Distribution
Centers in New York and intends to continue to provide services to Voyager's
existing customers, including Sony and Wit Capital. The Company has also
recently established co-marketing relationships with leading corporations,
including Pitney Bowes Inc. ("Pitney Bowes") and Accounting Net/Automatic Data
Processing ("AccountingNet/ADP"), to provide coordinated Internet business
services to these corporations' customers.
INDUSTRY BACKGROUND
The Internet, a network of thousands of interconnected, separately-
administered public and commercial networks, has emerged as a global
communications medium enabling millions of people to share information and
conduct business electronically. According to Zona Research, the number of
Internet users worldwide is expected to increase from an estimated 38 million
in 1996 to 206 million by the year 2000. The emergence of the Internet has
created significant opportunities for organizations to interact with their
customers as well as engage in commercial activities over the Internet. Many
new businesses have emerged that rely on the Internet as an exclusive medium
to conduct business, such as companies that provide Internet search functions,
browsers, advertising, electronic commerce and electronic securities trading.
Other organizations have incorporated the Internet into their mission-critical
functions, such as sales, distribution and customer service. Still other
companies have recognized the need for an Internet presence to communicate
with prospective customers but have yet to incorporate the Internet as a
critical part of their business models.
Internet-centric organizations and businesses that rely on the Internet for
mission-critical applications are increasingly facing problems delivering
their content to end users quickly and reliably. The dramatic increase in the
number and complexity of Internet information requests has created congestion
in the content delivery network, resulting in delivery delays or loss of data.
In addition to network congestion, the increased complexity of content places
additional strains on servers, potentially resulting in the unavailability of
content. A further constraint to the effective integration of Internet
operations is the inability of national organizations to deliver regionalized
content to end users. Current technology does not allow organizations to
identify the physical location of an end user requesting information,
effectively prohibiting large organizations from customizing their content and
advertisements to specific end users. Similarly, local or regional businesses
have been constrained in their ability to reach their target audiences via the
Internet because it is not cost effective to pay for national advertisements
that are directed at specific, local audiences.
29
<PAGE>
Few organizations have the industry expertise, technology or personnel
necessary to design and manage a complete content distribution solution that
efficiently routes Internet traffic, to select and configure multiple servers
with replicated content or to scale operations as Internet activities expand.
In addition, the pace of technological innovations in the Internet industry
has created a need to continually invest in leading technologies, which may
prove to be prohibitive to organizations seeking to expand their Internet
activities. As competition intensifies and organizations increasingly focus on
their core competencies, companies have sought the assistance of third parties
to perform their non-core functions, including their Internet operations.
Forrester Research estimates that by the year 2000, approximately 42% of
Internet and intranet sites will be outsourced, and estimates that revenues
associated with the growth in outsourcing are expected to increase from
approximately $200 million in 1996 to approximately $5.4 billion by the year
2000.
Traditionally, Internet-centric businesses and those businesses that rely on
the Internet for mission-critical functions have chosen from data warehousing
companies, web-hosting companies and ISPs when electing to outsource their
Internet operations. Data warehousing companies typically provide a physical
space in which to place servers with high-speed Internet bandwidth but lack
multiple host locations necessary for the efficient distribution of replicated
content. Smaller organizations and those whose web sites are not intended to
draw a large number of viewers may choose to have their web sites hosted by
web hosting companies or ISPs. These organizations typically provide a shared-
server hosting environment where the web sites of many customers are hosted on
one server. Although they provide inexpensive hosting services, web hosting
companies and ISPs often fail to deliver the quality of service necessary to
conduct business over the Internet, to allow for the delivery of feature rich
content to end users in an efficient manner and are limited in their ability
to scale operations as a customer's Internet needs increase.
Data warehousing companies, web hosting companies and ISPs typically route
the Internet traffic from their facilities over one or a limited number of
connections to the Internet and through the public Peering Points. The Peering
Points are connections between different networks and are operated by a number
of different private organizations. With the dramatic increase in Internet
traffic, these Peering Points have become congested, increasing the likelihood
of transmission delays or data unavailability as the popularity or
functionality of a web site increases. Additionally, these providers typically
distribute the customers' content from a single geographic point to the end
user, regardless of location, resulting in inefficient traffic routing and
potential downtime as well as an inability to regionalize distribution of
content. The Company believes that a significant opportunity exists for
providers of comprehensive Internet solutions who can accommodate the
migration from the initial shared-server environment to a multiple,
geographically dispersed, dedicated-server environment that delivers complex
content reliably and cost-effectively.
THE GLOBALCENTER SOLUTION
GlobalCenter's scalable, comprehensive Digital Distribution solution
combines its proprietary software technology, content management services,
multiple Media Distribution Centers and public and private peering
arrangements to deliver a full range of services to its customers, large and
small. GlobalCenter manages content delivery and web sites for some of the
world's largest Internet content providers, providing state-of-the-art
services and facilities and efficient, high-speed distribution of content to
end users. For businesses with mission-critical applications, GlobalCenter
enables continual high-speed content management via dedicated servers while
providing substantial additional bandwidth capacity on short notice. Finally,
for those companies just establishing an Internet presence, GlobalCenter
offers access to shared or individual servers, providing reliable and high-
performance content management in a cost-effective manner.
A primary component of the Company's Digital Distribution solution is its
proprietary software which enables the intelligent and reliable distribution
of Internet content, circumvents bottlenecks and expedites delivery to the end
user. The Company offers a comprehensive suite of services for businesses of
all sizes, ranging from Express Lane, a maximum performance, multiple server
Digital Distribution service for rapid delivery of robust content, to
PrimeWeb, an entry-level, shared server Digital Distribution service. In
addition, the Company has developed Software Express and Event Express,
services designed for customers with
30
<PAGE>
occasional requirements for high bandwidth distributions to a large number of
end users, such as software downloads or live media coverage of public events.
GlobalCenter's proprietary software coordinates content delivery via the
Company's network platform, consisting of five Company-owned Media
Distribution Centers linked to a fully meshed ATM backbone connecting ten
major metropolitan area hubs. Customers of the Company can place dedicated
servers with replicated content at multiple Media Distribution Centers,
increasing routing efficiencies and protecting against delivery delays and
loss of data. In addition to its Media Distribution Centers and ATM backbone,
the Company maintains public peering arrangements with key service providers
and has established private peering relationships with major carriers,
including UUNET, MCI, Sprint, AT&T and At Home Corporation ("@Home"), to
minimize dependence on public exchange points.
In addition to its connectivity and distribution capabilities, GlobalCenter
is dedicated to providing high quality and timely support to its customers, 24
hours a day, seven days a week. The Company's technical support personnel,
Network Operations Center personnel and Technical Account Managers work
closely with customers, monitoring system performance and recommending changes
to keep pace with a customer's developing Internet operations and strategy.
BUSINESS STRATEGY
The Company's objective is to become the leading provider of Digital
Distribution services to the world's premier content providers, businesses
utilizing the Internet for mission-critical applications and small to medium-
sized businesses. To achieve this goal, the Company has implemented a business
strategy focused on the following key principles.
Provide Comprehensive Digital Distribution Solutions. The Company is
committed to delivering a fully- integrated suite of content distribution
products and services to provide a comprehensive Digital Distribution solution
to its customers. The Company provides its customers with high-performance
solutions by leveraging the knowledge base of its engineers and Technical
Account Managers, who have developed Digital Distribution solutions for some
of the world's premier content providers.
Increase Services to Existing Customers. The Company believes there is
significant opportunity to market additional products and services to its
existing customers. As the Company's customers increase their usage of and
dependence on the Internet, the Company anticipates that these customers will
migrate towards more comprehensive Digital Distribution solutions. The Company
believes that an increase in the level of services and products provided to a
customer strengthens the relationship and facilitates customer retention.
Expand Customer Base. The Company intends to continue adding to its customer
base by expanding its direct sales and technical account teams. The increase
in the sales force will take place concurrently with the Company's development
of Media Distribution Centers domestically and internationally. The Company
believes that the expansion of its sales force combined with its past
experience, including its major Internet customers, will enhance its ability
to attract new customers. The Company also believes that by attracting a large
number of the world's most trafficked web sites, it will be able to
effectively provide additional performance enhancements by linking content
directly between content providers located in the same Media Distribution
Centers.
Leverage Relationships with Channel Partners. The Company has recently
established co-marketing relationships with leading providers of business
services, including Pitney Bowes and AccountingNet/ADP. These corporations
have extensive sales, marketing and support organizations and provide an
opportunity for the Company to co-brand its products and services with its
partners' products and services. The Company believes these relationships will
provide a cost-effective vehicle to reach a larger market for its full range
of products and services that scale with the customers' growth.
Pursue Strategic Acquisitions and Partnerships. The Company intends to
pursue strategic acquisitions and partnerships to expand the range of services
it offers, to increase its customer base, to add industry and technical
31
<PAGE>
expertise and to acquire complementary facilities and technologies. Since its
inception, the Company has acquired both GCIS and ISI and plans to complete
the Voyager acquisition by the end of October 1997. In addition, the Company
has established strategic alliances with SOFTBANK Corporation and @Home to
further strengthen its products and services and increase its customer base.
Continue to Develop Products for Efficient Distribution of Content. The
Company believes that it will become increasingly important to deliver content
to end users quickly and reliably. The Company is developing next generation
products that will enable the Company's customers to better identify the
location of end users requesting content. The Company believes that this will
enable it to deliver content from its Media Distribution Centers in the
shortest possible time while enabling the Company's customers to localize the
information delivered, including advertising to specific audiences.
Expand Internationally. The Company believes that there is a significant
opportunity to attract new customers and increase services to existing
customers through its strategy of establishing Media Distribution Centers
internationally as well as domestically. With a broad geographic presence, the
Company will be able to offer Company's customers the ability to build country
or region specific content and have it distributed in an efficient manner. To
date, the Company has opened a Media Distribution Center in London, England
and has plans to open facilities in Tokyo, Japan; Melbourne, Australia; and
Stockholm, Sweden.
The Company's ability to execute its business strategy is subject to
numerous risks and uncertainties. There can be no assurance that the Company
will be successful in implementing its strategy or that its strategy, even if
implemented, will lead to successful achievement of the Company's objectives.
If the Company is unable to implement its strategy effectively, the Company's
business, financial condition and results of operations would be materially
adversely affected. See "Risk Factors."
32
<PAGE>
PRODUCTS AND SERVICES
The Company's products and services are designed to provide customers with a
complete Digital Distribution solution, ranging from comprehensive,
customized, content delivery services to simple connectivity. The following
chart summarizes the Company's current products and services, with a brief
description of the principal features and benefits, pricing policies and
representative users:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION PRICING BENEFITS CUSTOMERS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Site Express Distribution Priced on a Premium, Internet-centric
product designed monthly basis multiple server and mission
to efficiently for committed solution critical
deliver media- bandwidth with distributing Internet users;
rich content to incremental content from Yahoo!, Playboy,
end users increases for Media USAToday, Net
peak usage Distribution Gravity, Cox,
Centers PacBell,
Quote.com
- -----------------------------------------------------------------------------------------------
Software Express Software Priced on per Reduces delivery Software
distribution download basis costs distributors;
product allowing Netscape,
rapid BackWeb, Sausage
downloading of Software
software by end
users worldwide
- -----------------------------------------------------------------------------------------------
Event Express Designed for Priced on a per Permits massive Users with
high-bandwidth, use or per hour bandwidth occasional
short-term basis distribution mission-critical
events lasting services for applications;
from a day to a periodic, short Silicon
week or more term events Graphics' Mars
Pathfinder
Landing; NBC's
"ER" Live
- -----------------------------------------------------------------------------------------------
Site Express Solo Content Priced based on Cost-effective Medium-sized
distribution a fixed monthly service for businesses;
product designed rate for rack single server, TravelVision,
for single space, higher volume Digital Think,
server connectivity and applications; Vital Signs
environment bandwidth step-up from
virtual hosting
services
- -----------------------------------------------------------------------------------------------
PrimeWeb Entry level, Priced as a one Entry point for Small and
shared server time set-up fee, digital medium-sized
package designed with monthly distribution; businesses
for entities billing and low pricing for
just incremental businesses
establishing an charges for sharing a server
Internet performance
presence enhancements
- -----------------------------------------------------------------------------------------------
Express Lane Intelligent Priced as value- Intelligently Site Express
routing software added option on determines most customers;
that analyzes top of monthly efficient path Playboy,
network fees for Site for content to Keynote, Motley
structure for Express end user Fool
most efficient customers
content
distribution
- -----------------------------------------------------------------------------------------------
Express Mirror Allows for Priced as value- High Site Express
review of server added option on availability and customers;
operations and top of monthly redundancy among Playboy
content fees for Site multiple local
integrity within Express servers
multiple servers customers
- -----------------------------------------------------------------------------------------------
Express Control Provides real Bundled with Provides the All Express
time traffic and Site Express, ability to product line
monitoring Site Express monitor customers
statistics Solo and Event bandwidth and
Express performance; and
reboot the
system remotely
- -----------------------------------------------------------------------------------------------
Internet Connectivity Internet access Priced on Provides Over 50,000
via modem or monthly basis connectivity customers
dedicated high- for bandwidth ranging from
speed line used 28.8 kbps to
multiple T1
lines
- -----------------------------------------------------------------------------------------------
Consulting Services Content Priced on an Leverages the Playboy, Yahoo!,
distribution and hourly basis expertise of Motley Fool
web design and distributing
development content from
consulting some of the
world's largest
web sites
</TABLE>
33
<PAGE>
Digital Distribution Services
The Company's Digital Distribution services are fully scalable to allow
customers maximum flexibility as their needs progress and are comprised of the
following products and services:
Site Express. Site Express is the Company's premium Digital Distribution
service designed for companies that rely on the Internet as a distribution
channel to deliver media-rich content and products to their customers. Site
Express customers can leverage the Company's network capabilities by placing
their dedicated servers at one or more of the Company's Media Distribution
Centers. The placement of multiple servers ensures the Company's customers
that their content, software or information is available and will be
intelligently routed to their end users. In addition, Site Express customers
are offered the Company's Express Lane, Express Control and Express Mirror
software to maximize performance and monitor the status of the network. Site
Express is priced on a monthly basis with incremental increases for a
customer's maximum bandwidth utilization during the monthly billing cycle.
Software Express. Software Express is a transaction-based content Digital
Distribution service targeted specifically to software companies. Software
Express provides bandwidth-on-demand to enable software companies to deliver
their products efficiently and cost-effectively. These organizations may have
sufficient capacity for their day to day operations but lack the incremental
capacity to roll out updates or new programs timely and cost-effectively to a
large number of end users. Software Express simplifies the software
distribution process by establishing a single, "virtual" download link,
minimizing confusion among end users often encountered during product
downloads. Software Express, when coupled with Express Lane, decreases
download time by routing content to end users from the closest Media
Distribution Center. In addition to Software Express, which is priced on a per
download basis, the Company provides these customers with additional value
added services, including file delivery confirmation and support for online
transactions.
Event Express. Event Express is designed for customers who need to deliver
high bandwidth, high-quality content to end users for short-term events. These
organizations typically lack the massive bandwidth necessary to serve the
requests of end users during critical events, such as product launches, press
conferences and live event coverage. Alternatively, some organizations require
connectivity during emergency relocations of Internet servers. Event Express
allows a customer to bring an Internet site online to handle enormous
bandwidth requirements with little or no advance planning. Event Express is
sold to customers based on bandwidth utilized and the number of days the
services are required, providing customers with a cost-effective solution
without requiring the purchase of unnecessary or underutilized hardware.
Site Express Solo. The Company's single server product, Site Express Solo,
is designed as an entry-level Digital Distribution service for businesses that
are beginning to leverage the Internet for commercial activities. Customers
choosing the Company's Site Express Solo service are often sensitive to
variable costs associated with excessive bandwidth utilization. Site Express
Solo offers customers a fixed monthly rate for rack space, connectivity and
desired bandwidth at one of the Company's five Media Distribution Centers.
Site Express Solo offers a connection shared with no more than 12 servers
while providing up to 10 Mbps burst capabilities.
PrimeWeb. PrimeWeb is designed for organizations that are in the initial
stage of developing an Internet presence. PrimeWeb provides access to a shared
server and easy-to-use tools to create, publish, maintain and expand a basic
business web site. PrimeWeb also offers services for lower-volume electronic
commerce hosting, and has established a relationship with iCat Corporation to
integrate and deliver electronic cataloging services. As their Internet needs
progress, PrimeWeb customers may utilize additional disk space, tools and
domain name services or may migrate to Site Express Solo or Site Express as
their Internet needs progress.
Digital Distribution Software
The Company offers its customers several software products designed to
optimize content distribution to the end user.
34
<PAGE>
Express Lane. Express Lane is an intelligent routing software package that
decreases download time by dynamically interpreting throughput to determine
the most expedient path between the Company's Media Distribution Centers and
the end user. This service allows customers with highly viewed, content-rich
sites to deliver content to end users more efficiently and reliably. This
service is provided to customers who have chosen the Company's Site Express
service and elected to place their servers at more than one of the Company's
Media Distribution Centers.
Express Mirror. Express Mirror enables a customer to monitor the integrity
of content on servers at the Company's Media Distribution Centers, as well as
the operation of the server itself. With Express Mirror, a customer can
continuously monitor applications and services, detect problems with the
integrity of content and update the data on multiple servers from a single
server. Express Mirror is offered as a value-added option for Site Express
customers.
Express Control. Express Control provides real-time, web-based monitoring of
a customer's utilization from a remote site. In addition, Express Control can
report on bandwidth availability and allow a customer to reboot their system
via a web-based link. Express Control is provided to all Site Express,
Software Express and Site Express Solo customers.
Internet Connectivity Services
The Company's connectivity services, PrimeConnect, PrimeLAN and PrimeDirect,
provide Internet connectivity with a range of speeds from dial-up 28.8 Kbps
via a modem to dedicated T1 (1.445 Mbps) leased lines. The Company provides
its Internet connectivity services over a network that serves more than 200
local calling areas. PrimeConnect is designed for individual professionals,
companies and channel partners with multiple end-user connectivity
requirements and provides an easy-to-use interface for Internet access,
browsing, e-mail and FTP transfer. PrimeLAN and PrimeDirect are designed for
businesses ranging from five users to hundreds of users and provide
connectivity for office local area networks either through dial-up connections
or dedicated leased lines. These Internet connectivity services do not require
significant up-front capital costs for customers and are easy to use and
install, combining connectivity, software and hardware in a single package.
Consulting Services
The Company offers customers consulting services from its staff of in-house
consultants and Technical Account Managers. The Company provides consulting
services to customers seeking advice on expanding their Internet operations or
considering one-time Internet events or distributions. In addition, a portion
of these consulting services are designed for customers who choose not to
implement a basic web design with standard templates and graphics, and do not
possess the internal skills to design and develop a web site. All of the
Company's consulting services are priced on an hourly basis.
CASE STUDIES
Yahoo!
The Company began its relationship with Yahoo! in 1995, at which time Yahoo!
received less than a million page views per day from its servers at the
Company's Sunnyvale Media Distribution Center. Yahoo! is now one of the
world's largest content providers and the number one search site on the
Internet, receiving on average more than 50 million page views per day. The
Company handles all of Yahoo!'s domestic traffic, which represents
approximately 92% of Yahoo!'s total traffic. Yahoo! uses the Company's Site
Express solution on its dedicated servers located at the Company's Sunnyvale,
California; Mountain View, California; and Washington, D.C. Media Distribution
Centers.
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<PAGE>
Playboy
In 1994, Playboy selected GlobalCenter's Site Express Solo service to
support the high volume of content Playboy was distributing. As its customer
traffic increased by 200% on an annual basis, Playboy converted to Site
Express, augmented by the Company's Express Lane software. The Company has
provided extensive consulting services to assist Playboy in developing a
Digital Distribution solution as its Internet operations have increased. All
of Playboy's Internet content is currently distributed through the Company's
multiple Media Distribution Centers, including its Washington, D.C., London
and Sunnyvale locations.
LiveWorld
LiveWorld Productions, Inc., a customer of the Company since 1996, provides
on-line chat services. To host these online conversations, chat servers must
handle high volumes of data, and send and receive messages instantaneously. In
less than a year, LiveWorld has migrated from Site Express Solo to Site
Express. The Company's technical support personnel monitor LiveWorld's servers
24 hours per day.
Netscape
In 1995, Netscape selected GlobalCenter's Software Express to distribute
Netscape's software products over the Internet. GlobalCenter provided a
majority of the download services for Netscape's release of three versions of
its Internet browser, as well as other Netscape beta software releases. In
addition to Software Express, Netscape uses the Company's Site Express service
as a back-up for its in-house home page servers, with dedicated servers
located at the Company's Sunnyvale and Washington, D.C. Media Distribution
Centers.
An important element of the Company's sales and marketing activities is the
ability to reference certain of the Company's key customers who are leading
Internet content providers. If any of these customers were to choose an
alternative content distribution provider for any reason, the Company would be
unable to reference these companies when seeking new customers. In addition, a
widely publicized disruption of content distribution to end users of any of
these customers could have an adverse impact on the Company's reputation. The
loss of any of these key customers or any negative impact on the Company's
reputation could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Dependence
on Key Customers."
GLOBALCENTER DIGITAL DISTRIBUTION TECHNOLOGY
The GlobalCenter Digital Distribution network is comprised of a high-speed,
fully meshed ATM backbone connecting the Company's own geographically
dispersed Media Distribution Centers and ATM hubs to both public and private
networks. Combined with proprietary intelligent routing software, this
redundant network architecture allows for the logical and reliable
distribution of traffic over the network, circumventing bottlenecks,
expediting delivery by locating data closer to the end user and minimizing the
impact of any single point of failure on the network.
Media Distribution Centers
The Company currently operates Media Distribution Centers in Sunnyvale,
California; Mountain View, California; Phoenix, Arizona; Washington, D.C.; and
London, England, and intends to add additional Media Distribution Centers in
New York, New York; Tokyo, Japan; Melbourne, Australia; and Stockholm, Sweden
in the near future. Each Media Distribution Center has a minimum of two
external network connections and one or more connections to public Peering
Points, in addition to a connection to the GlobalCenter ATM backbone. At the
Sunnyvale, Mountain View, and Washington, D.C. Media Distribution Centers,
these connections are DS-3 level or faster private exchanges with major
backbone providers, including AT&T, MCI, Sprint and UUNET. These redundant
private peering arrangements allow GlobalCenter to increase network
reliability and reduce latency by bypassing the congested public Peering
Points and ensure that in the event of a complete circuit failure of one
carrier, circuits from a second carrier will remain functional.
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The internal Media Distribution Center architecture is centered around a
combination of full-duplex FastEthernet, full-duplex FDDI rings and SONET
interconnections. Each facility has multiple interconnecting Cisco Catalyst
5000-series switches and 7500-series routers. Each Media Distribution Center
environment is secured by fault tolerant systems, which include
uninterruptible power supplies, temperature control systems, raised floors and
advanced fire suppression equipment.
To enable the reliable replication of content at multiple Media Distribution
Centers, the Company has developed technology that enables a customer to
originate content from a single source, regardless of the number of servers or
Media Distribution Centers used by that customer. The Company's proprietary
software then simultaneously distributes the content to each of the customer's
servers at the various Media Distribution Centers. Finally, the Company
verifies the integrity of content delivered to the customer's servers by
testing the data when received at each server. The Company believes that
delivering content updates in this manner allows it to more easily monitor the
integrity of transmitted data and rectify discrepancies, ensuring that end
users receive the most recent content available.
Backbone Architecture
The GlobalCenter Digital Distribution network platform employs a high-speed,
fully meshed ATM backbone directly linking its Media Distribution Centers with
ten geographically dispersed ATM hubs. The network platform supports a daily
average of 350 Mbps with an available Internet capacity of up to 2.0 Gbps.
Total network capacity is approximately 8.0 Gbps. The Company's ATM backbone,
leased from WorldCom, is augmented by direct 45 Mbps connections to both
private and public networks. Currently, the Company peers with approximately
100 ISPs and telco carriers at ten public exchanges (domestic and
international), and has private peering arrangements with six providers. This
"Tier-One" public peering status permits the Company to exchange internal
traffic with nationwide ISPs. If any of these carriers were to discontinue
their support of the Peering Points and no alternative providers emerged, or
such alternative providers increased the costs of utilizing the public
network, the distribution of content over the public networks, including
content distributed by the Company, would be significantly constrained.
Furthermore, as traffic over the public networks increases, the Company's
ability to deliver content rapidly and reliably over these networks will be
adversely affected if bandwidth is not increased commensurately. See "Risk
Factors--Risks Relating to Operation of Network."
WorldCom provides the Company with data communication facilities and fiber
capacity for its ATM backbone. Under co-location arrangements with the
Company, WorldCom leases to GlobalCenter physical space for the Company to
install Company-owned switches, routers, modems and other equipment at
WorldCom's locations throughout the United States. Similarly, the Company has
entered into co-location and leased line agreements with other fiber carriers,
such as Bell Atlantic, ICG, PacificBell, Sprint, WorldCom and Qwest, in order
to reduce the Company's dependency on any one carrier.
If the Company is required to expand its network due to increased usage,
additional stress will be placed upon the Company's network hardware and
traffic management systems. Due to the limited deployment of the Company's
services to date, the ability of the Company's network to connect and manage a
substantially larger number of customers at high transmission speeds is as yet
unknown, and the Company faces risks related to the network's ability to be
scaled up to its expected customer levels while maintaining superior
performance. If the number of customers increases, the Company will need to
make additional investments in its infrastructure to maintain adequate
downstream data transmission speeds, the cost of which may be significant.
There can be no assurance that the Company's network will be able to achieve
or maintain a sufficiently high speed of data transmission, especially if the
number and size of the Company's customers increases, and the Company's
failure to achieve or maintain high-speed data transmission could
significantly reduce consumer demand for its services and have a material
adverse effect on its business, financial condition and results of operations.
See "Risk Factors--Unproven Network Scalability; Risk of System Failure."
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SALES AND MARKETING
Direct Sales Force
The Company markets its Digital Distribution services primarily through its
direct sales force, comprised of 27 salespeople located in cities where the
Company maintains Media Distribution Centers. This direct sales force targets
major content providers, software companies and channel partners. The direct
sales force is comprised of individuals with substantial experience and
relationships in the Internet market and focuses on solution sales, web
channel strategies, consulting, design and development, as well as web
marketing program assistance. In addition to its direct sales force, the
Company augments its marketing strategy through telesales and direct mail
selling efforts.
The Company believes that attracting and retaining customers with the most
trafficked web sites will result in a significant marketing advantage as it
approaches companies that aspire to develop a successful Internet presence.
The Company also believes that by attracting these customers, it will be able
to effectively provide additional performance enhancements by linking content
directly between content providers located in the same Media Distribution
Centers. For example, companies that provide advertising banners or hyper-text
links to content providers located within the same Media Distribution Centers
can realize significant performance improvements.
The Company's Technical Account Managers work closely with the direct sales
force from the inception of the customer relationship. The TAMs have broad
industry expertise, having worked on the development of some of the world's
most trafficked web sites. TAMs proactively monitor customer's systems and
recommend changes that will keep those systems running at maximum performance.
The Company believes that the integration of its TAMs with its sales force
assists in both the establishment of customer relationships as well as the
migration of customers to more advanced products and services.
Channel Partners
In addition to its sales efforts, the Company's direct sales force seeks to
identify, establish and maintain distribution channel partners. The Company
has targeted as potential channel partners organizations with a large customer
base of growing businesses as well as a large sales force. Current channel
partners include Pitney Bowes and AccountingNet/ADP. The Company believes that
by leveraging the sales forces of its channel partners, it can attract and
retain customers for its services in a cost-effective manner, as well as
provide co-branded Internet service offerings for its channel partners. By
providing a full range of products and services that scale with a customer's
growth, the Company believes that it has the opportunity to market additional
services to a broad customer base. The Company believes that its channel
partner relationships may also turn into opportunities to provide services to
its channel partners.
Pitney Bowes. GlobalCenter established its relationship with Pitney Bowes in
September 1997. Pitney Bowes is a multi-national company providing businesses
of all sizes with a variety of messaging solutions, including postage systems,
direct mail and shipping systems, as well as faxes, copiers and mail room
outsourcing services. GlobalCenter is partnering with Pitney Bowes to
establish the Internet as a strategic distribution channel for a new suite of
Internet products. Initially, the Company is working with Pitney Bowes' Small
Office/Home Office unit to co-market a Personal Mailing Solutions Internet CD
that is targeted for initial release by the end of 1997. It is anticipated
that the Personal Mailing Solutions Internet CD will contain a number of
products designed to provide the Small Office/Home Office business customer
with a complete suite of mailing and Internet solutions, including the
Company's PrimeWeb product.
AccountingNet/ADP. GlobalCenter established a relationship with
AccountingNet in April 1997. AccountingNet is an Internet content provider for
the accounting industry with over 200,000 pages of content for certified
public accountants ("CPAs"). ADP is working with AccountingNet and
GlobalCenter, through its agreement with AccountingNet, to provide turnkey web
solutions for the estimated 400,000 CPAs in the U.S.
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market. The agreement between ADP and AccountingNet provides for ADP's
telemarketers and field sales force to begin contacting CPAs beginning in
November 1997.
The Company also utilizes the services of internal and contracted third
party telesales groups to augment the efforts of its channel partners' direct
sales forces. The internal telesales group focuses primarily on closing sales
leads that have been qualified by the sales forces of channel partners. In
addition to providing assistance to the Company's efforts with its channel
partners, the contracted third party telesales group contacts new customers to
make these customers aware of other services provided by the Company.
The Company does not have the sales and marketing resources to effectively
reach the small and medium-sized businesses targeted in its channel
distribution strategy without the assistance of these channel partners. The
Company has recently implemented its channel distribution strategy and has no
experience in coordinating such efforts. There can be no assurance that the
Company's efforts will be successful, that the Company will be able to attract
additional small and medium-sized businesses or that the costs associated with
attracting and retaining such customers will not exceed the revenue the
Company receives from these customers. Furthermore, there can be no assurance
that the Company's current channel partners will continue their relationships
with the Company or that the Company will be successful establishing
additional channel partner relationships. If any of the Company's channel
partners were to discontinue their relationships with the Company or the
efforts of the Company and its channel partners are unsuccessful in attracting
new small and medium-sized businesses, the Company's business, financial
condition and results of operations could be materially adversely affected.
See "Risk Factors-- Dependence on Channel Partners."
STRATEGIC RELATIONSHIPS
SOFTBANK Corporation
The Company's relationship with SOFTBANK Corporation began in July 1997 when
SOFTBANK Corporation agreed to make a private equity investment in the
Company. In connection with that investment, and as part of a continuing
relationship, SOFTBANK Corporation agreed to use its best efforts to encourage
each entity in which SOFTBANK Corporation has an investment, including Ziff
Davis and SOFTBANK Interactive Marketing, to use GlobalCenter products and
services. In addition, SOFTBANK Corporation has agreed to assist in the
establishment of the Company's planned Media Distribution Center in Tokyo. The
Company believes that this relationship will significantly enhance its ability
to expand in Asia.
@Home
The Company's relationship with @Home, established in 1997, includes a
private peering connection and marketing agreement. The @Media division of
@Home has selected GlobalCenter to provide hosting and distribution services
for content distributors currently operating on the @Home network. Through the
private peering relationship, @Home users are afforded direct access to the
content located at the Company's Media Distribution Centers.
CUSTOMER SERVICE
The Company believes that expert, effective and prompt customer support is
critical to retaining its customers. The Company employs over 65 customer
support professionals dedicated to providing high quality and timely support
to the Company's customers, 24 hours a day, seven days a week. The Company's
customer service includes technical support, the Network Operations Center
("NOC") and Technical Account Managers. The Company's technical support
personnel provide continuous support to customers, primarily regarding
connectivity and shared server issues.
The NOC offers a broad range of services to ensure the reliable, high-
performance operation of servers managed by GlobalCenter. The NOC staff
operates 24 hours a day, seven days a week to provide maximum
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responsiveness to customer concerns. Using a combination of internally
developed management tools and industry standard packages, the NOC staff
monitors servers, web sites, backbone paths, routers, power systems, weather,
world news and other events or conditions that could affect the delivery of
customers' content.
In addition to handling problems that cannot be rectified by NOC personnel,
TAMs proactively monitor customer's systems and recommend changes to keep
those systems running at maximum performance. The TAMs leverage their
experiences gained in managing some of the world's most trafficked web sites
in attracting new customers and enhancing services. Customers are offered the
option of assigning a dedicated TAM solely to their account to provide
additional support, especially during mission-critical events. For
particularly complicated problems or during mission-critical operations, the
Company relies upon its engineering group consisting of top technical experts
who have developed specialized software for internal and customer use.
The Company plans to increase customer service personnel in line with
customer base growth. However, there can be no assurance that the Company's
customer service resources will be sufficient to manage the expansion, if any,
of the Company's customer base. A failure to adequately meet customer service
needs could adversely affect the Company.
COMPETITION
The market for Internet content distribution and connectivity is extremely
competitive. There are no substantial barriers to entry and the Company
expects that competition will intensify in the future. The Company's ability
to compete successfully will depend on a number of factors, including market
presence, reliability, performance, technical expertise and functionality,
pricing policies of competitors, the timing of introductions of new products
and services, customer support, the variety of services offered, sales and
marketing activities and industry and general economic trends.
Many companies provide products or services that compete, directly or
indirectly, with the Company's products and services, including: (i) web
hosting and data warehousing companies; (ii) in-house MIS departments; (iii)
connectivity providers, including ISPs such as BBN Corporation, Earthlink
Network, Inc., MindSpring Enterprises, Inc., Netcom On-Line Communications
Services, Inc. and PSInet Inc.; RBOCs; long distance inter-exchange carriers,
including AT&T, MCI, Sprint and WorldCom; and (iv) content management
companies, including on-line service providers such as AOL, CompuServe,
Microsoft's Microsoft Network and Prodigy.
Many of the Company's competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than the Company. As a result, certain of these competitors may be
able to develop and expand their network infrastructures more quickly, adapt
to new or emerging technologies and changes in customer requirements more
quickly, take advantage of acquisition and other opportunities more readily,
devote greater resources to the marketing and sale of their products and adopt
more aggressive pricing policies than can the Company. In addition, these
competitors have entered and will likely continue to enter into joint ventures
or consortiums to provide additional services competitive with those provided
by the Company.
Certain of the Company's competitors may be able to provide customers with
reduced communications costs in connection with their Internet access
services, reducing the overall cost of their services relative to the
Company's. There can be no assurance that the Company will be able to offset
the effects of any such price reductions. In addition, the Company believes
that the businesses in which the Company competes are likely to encounter
consolidation in the near future, which could result in increased price and
other competition, which could have a material, adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will have the financial resources, technical
expertise or marketing and support capabilities to continue to compete
successfully.
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PRODUCT DEVELOPMENT AND ENGINEERING
The Company's product development and engineering efforts focus on the
design and development of new technologies and products to effectively
distribute content and increase performance for customers and other Internet
end users. In addition, the Company is modifying services and integrating
third-party technology to support products for its channel partners.
The Company believes that localization of content, a concept similar to
local television programming, is becoming an increasingly important for
commercialization of the Internet. GlobalCenter believes that delivering
localized content to consumers will be a valuable service for its customers,
particularly with respect to advertisers. The Company's product development
team is currently evaluating techniques to associate Internet Protocol
addresses with specified geographic regions. Through enhancements to Express
Lane, GlobalCenter anticipates working with partners who maintain geographical
information to deliver localized content to end users.
Technical Advisory Board
The Company's Technical Advisory Board ("TAB") was established to create a
forum to discuss future technological developments, new potential service
offerings and marketing strategies for new customers. The TAB consists of
technical leaders from GlobalCenter's strategic partners and customers,
including Silicon Graphics, Inc., Netscape, Yahoo! and Web Monsters, a user
group comprised of several of the world's most trafficked web sites.
Additionally, TAB members provide support to GlobalCenter's engineers and TAMs
regarding specific products.
The Company's future success will depend, in part, on its ability to develop
leading technology, enhance its existing products and services, develop and
introduce new services that address the increasingly sophisticated and varied
needs of its current and prospective customers and respond to technological
advances and emerging industry standards and practices on a timely and cost-
effective basis. The markets for the Company's products and services are
characterized by rapidly changing technology, evolving industry standards,
changes in customer needs, emerging competition and frequent new product and
service introductions. There can be no assurance that future advances in
technology will be beneficial to, or compatible with, the Company's business
or that the Company will be able to economically incorporate such advances
into its business. See "Risk Factors--Delays in Introduction of New Services;
Rapid Technological Change."
INTELLECTUAL PROPERTY
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company relies on trademark, trade secret and
copyright law to protect its technology. The Company presently has no patents.
Despite the Company's efforts to control access to its proprietary
information, it may be possible for a third party to copy or otherwise obtain
and use the Company's products or technologies without authorization, or to
develop similar or superior technologies independently. In addition, effective
copyright, trade secret and patent protection may be unavailable or limited in
certain foreign countries.
Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. In addition, although the
Company does not believe that it infringes the proprietary rights of any third
parties, there can be no assurance that third parties will not assert such
claims against the Company in the future or that any such claims will not be
successful. Furthermore, parties making claims against the Company could
secure a judgment awarding substantial damages, as well as injunctive or other
equitable relief that could effectively block the Company's ability to market
or license its products in the United States or elsewhere. Any litigation,
regardless of the outcome, could result in substantial costs to the Company
and diversion of managerial resources and could have a material adverse effect
on the Company's business, financial condition and results of operations.
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GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and laws or
regulations directly applicable to access to or commerce on the Internet.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. Furthermore, the growth
and development of the market for Internet commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business over the Internet. The adoption of any
additional laws or regulations may decrease the growth of the Internet, which,
in turn, could decrease the demand for the Company's products and services,
increase the Company's cost of doing business or otherwise have an adverse
effect on the Company's business, financial condition and results of
operations. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales tax,
libel and personal privacy is uncertain and may take years to resolve. In
addition, as the Company's products and services are available over the
Internet in multiple states and foreign countries, and as the Company
facilitates sales by its customers to end users located in such states and
foreign countries, such jurisdictions may claim that the Company is required
to qualify to do business as a foreign corporation in each such state and
foreign country. The Company is qualified to do business in only a limited
number of states, and failure by the Company to qualify as a foreign
corporation in a jurisdiction where it is required to do so could subject the
Company to taxes and penalties for the failure to qualify. Any such new
legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to the Company's business,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
EMPLOYEES
As of September 30, 1997, GlobalCenter had 216 employees including 51 people
in sales and marketing, 23 in product development 67 in customer support and
41 in finance and administrative functions. The Company believes that its
future success will depend in part on its continued ability to attract, hire
and retain qualified personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be able to identify, attract
and retain such personnel in the future. None of the Company's employees is
represented by a labor union, and management believes its employee relations
are good.
FACILITIES
The Company's executive offices are located in Sunnyvale, California, and
leased pursuant to an agreement that expires in May 1999. The Company also
owns a facility in Phoenix, Arizona consisting of approximately 27,000 square
feet for office space and a Media Distribution Center. The Company leases the
facilities for its Media Distribution Centers located in Sunnyvale,
California; Washington, D.C.; and London, England pursuant to lease agreements
expiring in November 2001, December 2000 and February 2000, respectively. The
Company is currently negotiating a lease renewal for its Media Distribution
Center located in Mountain View, California. The Company believes that its
current facilities are sufficient to support its operational needs for the
foreseeable future.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Executive officers, directors and other key employees of the Company, and
their ages as of October 15, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Douglas T. Hickey (3).... 42 President, Chief Executive Officer and Director
Wayne A. Pratt........... 36 Senior Vice President, Finance and
Administration, Chief Financial Officer and
Secretary
William H. Rinehart...... 33 Senior Vice President and General Manager,
Content Distribution
Joel A. Davis, Sr........ 35 Senior Vice President and General Manager,
Channel Management
Dan M. Rasmussen......... 35 Senior Vice President, International Operations
Nathan F. Raciborski..... 30 President, GlobalCenter Telecom Services
Jonathan G. Heiliger..... 21 Senior Vice President and Chief Technology
Officer
John Hummer (1)(2)(3).... 49 Director
Michael Moritz (1)(2)(3). 43 Director
Eric Hippeau............. 46 Director
Timothy Koogle........... 45 Director
</TABLE>
- --------
(1) Member of the Compensation Committee of the Board of Directors of the
Company.
(2) Member of the Audit Committee of the Board of Directors of the Company.
(3)Member of the Executive Committee of the Board of Directors of the Company.
Douglas T. Hickey has been Chief Executive Officer and a director of the
Company since the acquisition of GCIS in January 1997 and President of the
Company since August 1997. Prior to that time, Mr. Hickey was President and
Chief Executive Officer of GCIS from July 1996 to January 1997. From December
1994 to July 1996, Mr. Hickey was President of MFS Datanet, Inc., a subsidiary
of MFS Communications Company, Inc. ("MFS"). From September 1990 to November
1994, Mr. Hickey held various positions with Ardis Company, a subsidiary of
Motorola, Inc. ("Ardis"), including General Manager of North American Sales
and Field Operations from October 1992 to November 1994.
Wayne A. Pratt has been Senior Vice President, Finance and Administration,
Chief Financial Officer and Secretary of the Company since September 1997 and
was Vice President, Finance and Administration, Chief Financial Officer and
Secretary of the Company from December 1995 to September 1997. Mr. Pratt was
also Treasurer of the Company from December 1995 to December 1996. From August
1994 to December 1995, Mr. Pratt was Director of Financial Reporting and
Compliance at Swift Transportation Co. Inc., a publicly held transportation
company. From July 1986 to July 1994, Mr. Pratt held various positions with
KPMG Peat Marwick, LLP, including Senior Manager, from July 1992 to July 1994.
William H. Rinehart has been Senior Vice President and General Manager,
Content Distribution since October 1997. Prior to that time, Mr. Rinehart was
Senior Vice President, Sales for the Company from June 1997 to October 1997.
From July 1996 to June 1997, Mr. Rinehart held various positions at Genuity,
Inc., an Internet Services Company most recently as Vice President of Sales.
From February 1995 to July 1996, Mr. Rinehart was Vice President and General
Manager of the Internet Division of MFS. From December 1992 to February 1995,
Mr. Rinehart was a Senior Account Executive at Ardis.
Joel A. Davis has been Senior Vice President and General Manager, Channel
Management of the Company since August 1997. Prior to that time, Mr. Davis was
Senior Vice President, Sales and Marketing of the Company from January 1997 to
August 1997. From November 1996 to January 1997, Mr. Davis was Senior Vice
President, Sales and Marketing of GCIS. From September 1995 to October 1996,
Mr. Davis was Vice President, Sales and Support for Netmanage Inc., a network
management company. From January 1994 to June 1995, Mr. Davis was Vice
President of Sales and Marketing at Artisoft, Inc., a software publishing
company. From August 1989 to January 1994, Mr. Davis held various positions
with Ingram Micro Inc., a computer product distribution company, including
Vice President, Sales and Service from October 1992 to January 1994.
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Dan M. Rasmussen has been Senior Vice President, International Operations
since October 1997. Prior to that time, Mr. Rasmussen was Senior Vice
President and General Manager, Content Distribution, and a director of the
Company from the acquisition of ISI in May 1997 to October 1997. Mr. Rasmussen
was President of ISI from April 1995 to May 1997 and President and a co-
founder of Internet Connection, an Internet services company, from July 1994
to April 1995.
Nathan F. Raciborski, a co-founder of the Company, has been President,
GlobalCenter Telecom Services of the Company since August 1997. Mr. Raciborski
was President of the Company from October 1993 to August 1997, Chief Executive
Officer of the Company from October 1993 to January 1997 and a director of the
Company from October 1993 to October 1997.
Jonathan G. Heiliger has been Senior Vice President and Chief Technology
Officer of the Company since May 1997. Prior to that time, Mr. Heiliger was
Vice President, Engineering and Operations for ISI from July 1996 to May 1997.
From July 1996 to October 1996, Mr. Heiliger was Website Network Architect for
Netscape. From May 1995 to July 1996, Mr. Heiliger was a member of National
Technical Support and Senior Technical Staff for MFS. From July 1994 to May
1995, Mr. Heiliger was a Principal of Aimnet Corp., an ISP. From January 1994
to July 1994, Mr. Heiliger was a Network Engineer for BARRNet, an ISP. From
September 1992 to September 1993, Mr. Heiliger was Senior Visualization
Engineer for the Electric Power Research Institute.
John Hummer has been a director of the Company since January 1997. Since
September 1989, Mr. Hummer has been a general partner of Hummer Winblad Equity
Partners, a venture capital firm. Mr. Hummer is a director of numerous private
companies.
Michael Moritz has been a director of the Company since January 1997. Since
1988, Mr. Moritz has been a general partner of Sequoia Capital, a venture
capital firm. Mr. Moritz is a director of Flextronics International Ltd.,
Visigenic Software, Inc., Neomagic Corporation and Yahoo!, as well as numerous
private companies.
Eric Hippeau has been a director of the Company since October 1997. Mr.
Hippeau has been the Chairman and Chief Executive Officer of Ziff-Davis, Inc.,
a leading provider of content about computers and the Internet, since November
1991. Mr. Hippeau is a director of Yahoo!, Geocities and SOFTBANK Interactive
Marketing.
Timothy Koogle has been a director of the Company since October 1997. Since
August 1995, Mr. Koogle has been President and Chief Executive Officer and a
director of Yahoo!. Prior to that time, Mr. Koogle was President of Intermec
Corporation, a manufacturer of data collection and data communication
products, from 1992 to 1995.
DIRECTOR COMPENSATION
The Company's directors will not receive any cash compensation in connection
with their service as directors. Upon election or appointment to the Board of
Directors, and pursuant to the Amended and Restated 1997 Stock Plan, non-
employee directors will receive an initial grant of options to purchase 35,000
shares of Common Stock, and will be eligible for automatic grants of options
to purchase 5,000 shares of Common Stock for each subsequent year of service.
See "Stock Plans--1997 Stock Plan."
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COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has standing Audit, Compensation and Executive
Committees, which assist the Board in the discharge of its responsibilities.
Members of each such committee are elected by the Board and serve for one-year
terms.
The Audit Committee reports to the Board regarding the appointment of the
independent public accountants of the Company, the scope and fees of
prospective annual audits and the results thereof, compliance with the
Company's accounting and financial policies and management's procedures and
policies relative to the adequacy of the Company's internal accounting
controls. The members of the Audit Committee will consist of two outside
directors, neither of whom will be an officer or employee of the Company.
The Compensation Committee reviews and approves the annual salary and bonus
for each executive officer (consistent with the terms of any applicable
employment agreement), reviews, approves and recommends terms and conditions
for all employee benefit plans (and changes thereto) and administers the
Company's Amended and Restated 1997 Stock Plan and 1997 Employee Stock
Purchase Plan and such other employee benefit plans as may be adopted by the
Company from time to time. The members of the Compensation Committee will
consist of two outside directors, neither of whom will be an officer or
employee of the Company.
The Executive Committee acts in place of the Board between meetings of the
Board, except with respect to actions that require stockholder approval,
filling Board vacancies, fixing compensation of directors, altering bylaws, or
amending or repealing certain resolutions of the entire Board. The Executive
Committee currently consists of Messrs. Hickey, Hummer and Moritz.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was formed in May 1996. No interlocking
relationship exists between the Company's Board of Directors and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of Directors
to the maximum extent permitted by Delaware law. Delaware law provides that a
corporation's certificate of incorporation may contain a provision eliminating
or limiting the personal liability of directors for monetary damages for
breach of their fiduciary duties as directors, except for liability (i) for
any breach of their duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation Law or (iv) for any transaction from
which the director derived an improper personal benefit. See "Description of
Capital Stock--Limitation of Liability; Indemnification."
The Company's Amended and Restated Bylaws provide that the Company shall
indemnify its directors and officers and may indemnify its employees and
agents to the fullest extent permitted by Delaware law. See "Description of
Capital Stock--Limitation of Liability; Indemnification."
The Company has entered into agreements to indemnify certain of its
executive officers and directors in addition to the indemnification provided
for in the Company's Amended and Restated Bylaws and intends to enter into
such agreements with all of its executive officers and directors. These
agreements, among other things, indemnify the Company's directors and officers
for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by or in the right of the Company, arising out of such
person's services as a director or officer of the Company, any subsidiary of
the Company or any other company or enterprise to which the person provides
services at the request of the Company. The Company believes that these
provisions and agreements are necessary to attract and retain qualified
individuals to serve as directors and officers.
45
<PAGE>
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during the fiscal
year ended December 31, 1996 for (i) the Company's Chief Executive Officer and
(ii) the Company's other executive officers whose salary and bonus for such
fiscal year exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ ------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- ------------------ --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Douglas T. Hickey ...... 79,698 -- 20,000(3) 138,220(4) --
President and Chief
Executive Officer(2)
Wayne A. Pratt.......... 100,000 -- -- -- --
Senior Vice President
and Chief Financial
Officer
Nathan F. Raciborski.... 120,149 -- -- -- --
President, GlobalCenter
Telecom Services
Allan M. Kaplan......... 179,949(5) -- -- -- --
Senior Vice President,
Operations
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), the compensation described in this table does not
include medical, group life insurance or other benefits received by the
Named Executive Officers that are available generally to all salaried
employees of the Company, and certain perquisites and other personal
benefits received by the Named Executive Officers that do not exceed the
lesser of $50,000 or 10% of any such officer's salary and bonus disclosed
in the table.
(2) Mr. Hickey became the Chief Executive Officer of GCIS in July 1996 and
Chief Executive Officer of the Company upon the completion of the
acquisition of GCIS by the Company in January 1997. Mr. Hickey's
compensation represents that earned from the inception of his employment
to December 31, 1996.
(3) Reflects payments for relocation expenses.
(4) Mr. Hickey was granted an option to purchase 138,220 shares of Common
Stock under the GCIS 1996 Stock Option Plan, which options were assumed
under the Company's 1995 Stock Option Plan in connection with the
acquisition of GCIS by the Company.
(5) Includes $59,949 in income from 1995 paid in 1996.
Option Grants During 1996. No options were granted to any of the Named
Executive Officers by the Company during 1996. In 1996, while employed at
GCIS, Mr. Hickey was granted an option to purchase 138,220 shares of Common
Stock at a per share exercise price of $0.36 pursuant to GCIS' stock option
plan, which option vests 25% upon the first anniversary of the date of grant
and 1/48th vesting in each successive month, such that the option becomes
fully vested on the fourth anniversary of the date of grant. Prior to the
acquisition of GCIS by the Company, Mr. Hickey elected to early exercise his
entire option to purchase 138,220 shares of Common Stock, a portion of which
shares are subject to a repurchase right held by the Company. The fair market
value of Mr. Hickey's shares of Common Stock on the date of exercise was equal
to the exercise price of the option on such date. In connection with the
acquisition of GCIS by the Company, the Company assumed all of the options
under the GCIS stock option plan.
46
<PAGE>
In January and February 1997, Mr. Hickey was granted options to purchase
155,071 and 263,962 shares of Common Stock, respectively, at a per share
exercise price of $0.50 pursuant to the Company's 1995 Stock Option Plan. The
vesting commencement date of such options was retroactive to the inception of
Mr. Hickey's employment with GCIS in July 1996. In addition, in September
1997, Mr. Hickey was granted options to purchase 190,000 and 475,000 shares of
Common Stock at per share prices of $2.00 and $6.00, respectively. The option
to purchase 190,000 shares is fully vested, and the option to purchase 475,000
shares vests on the fifth anniversary of the date of grant, subject to
acceleration upon the Company's achievement of certain performance milestones.
Aggregate Option Exercises in 1996 and Year-End Option Values. The following
table sets forth, for each of the Named Executive Officers, certain
information concerning the exercise of stock options during the last fiscal
year and the value of unexercised stock options at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/96(#) OPTIONS AT 12/31/96($)(1)
SHARES ACQUIRED VALUE -------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Douglas T. Hickey....... 138,220(2) 0 -- -- -- --
Wayne A. Pratt.......... -- -- 20,000(3) -- 0 --
Nathan F. Raciborski.... -- -- -- -- -- --
Allan M. Kaplan......... -- -- -- -- -- --
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the options as of December 31, 1996 ($0.36 per
share) and the exercise price of such option.
(2) Prior to the GCIS acquisition, Mr. Hickey elected to exercise his option
to purchase 138,220 shares of Common Stock, subject to a repurchase right
held by the Company. The exercise price as of the date of exercise of the
option was equal to the fair market value of the Common Stock as of such
date.
(3) Granted on December 4, 1995.
EMPLOYMENT AGREEMENTS
In January 1997, the Company entered into an employment agreement with Mr.
Raciborski, pursuant to which he receives an annual base salary and is
eligible to participate in all standard benefit plans accorded to other
executives. Mr. Raciborski is entitled to receive options to purchase shares
of the Company's Common Stock on the first two occurrences of a dilutive
preferred stock issuance (as defined in the agreement), which right expires
upon the effectiveness of this Registration Statement. In the event that Mr.
Raciborski is terminated other than for cause within three years of the date
of the employment agreement, he is entitled to receive severance of an amount
equal to the difference between the aggregate salary that Mr. Raciborski would
have earned but for the termination and the aggregate salary Mr. Raciborski
actually earned. In no event does the severance extend beyond the third
anniversary of the date of the employment agreement.
In January 1997, the Company entered into an employment agreement with Mr.
Kaplan, pursuant to which he receives an annual base salary and is eligible to
participate in all standard benefit plans accorded to other executives. Mr.
Kaplan also is entitled to receive options to purchase shares of the Company's
Common Stock on the first two occurrences of a dilutive preferred stock
issuance (as defined in the agreement), which right expires upon the
effectiveness of this Registration Statement. In the event that Mr. Kaplan is
terminated other than for cause within three years of the date of the
employment agreement, he is entitled to receive severance of an amount equal
to the difference between the aggregate salary that Mr. Kaplan would have
earned but for the termination and the aggregate salary Mr. Kaplan actually
earned. In no event does the severance extend beyond the third anniversary of
the date of the employment agreement.
In April 1997, the Company entered into an employment agreement with Mr.
Rasmussen, pursuant to which he receives an annual base salary and is eligible
to participate in all standard benefit plans accorded to other
47
<PAGE>
executives. Mr. Rasmussen is also eligible to participate in any management
bonus plans adopted by the Company on the same terms as other senior officers.
Under the employment agreement, the Company was obligated to loan
Mr. Rasmussen certain amounts stated therein. In the event that Mr. Rasmussen
is terminated other than for cause within three years of the date of the
employment agreement, he is entitled to receive severance of an amount equal
to the difference between the aggregate salary that Mr. Rasmussen would have
earned but for the termination and the aggregate salary Mr. Rasmussen actually
earned. In addition, Mr. Rasmussen is entitled to participate in medical and
health benefit programs of the Company for the remainder of the employment
term. In no event does the severance or the right to participate in medical
and health benefit programs of the Company extend beyond the third anniversary
of the date of the employment agreement. In the event of termination other
than for cause, any outstanding shares owned by Mr. Rasmussen subject to a
right of repurchase by the Company shall automatically vest.
In April 1997, the Company entered into an employment agreement with Mr.
Heiliger, pursuant to which he receives an annual salary and is eligible to
participate in all standard benefit plans accorded to other executives. Mr.
Heiliger is also eligible to participate in any management bonus plans adopted
by the Company on the same terms as other senior officers. Under the
employment agreement, the Company was obligated to loan Mr. Heiliger certain
amounts stated therein. In the event that Mr. Heiliger is terminated other
than for cause within one year of the employment agreement, he is entitled to
receive severance of an amount equal to the difference between the aggregate
salary that Mr. Heiliger would have earned but for the termination and the
aggregate salary Mr. Heiliger actually earned. In addition, Mr. Heiliger is
entitled to participate in medical and health benefit programs of the Company
for the remainder of the employment term. In no event does the severance or
the right to participate in medical and health benefit programs of the Company
extend beyond the first anniversary of the date of the employment agreement.
In the event of termination other than for cause, any unvested stock options
held by Mr. Heiliger will continue to vest in accordance with his option
agreement(s).
See "Certain Transactions."
EMPLOYEE BENEFIT PLANS
1995 Stock Option Plan
The Company's 1995 Stock Option Plan (the "1995 Plan") provides for the
granting to employees (including officers and employee directors) of
"incentive stock options" within the meaning of the Internal Revenue Code of
1986, as amended (the "Code"), and for the granting to employees, directors
and consultants of nonstatutory stock options. As of September 30, 1997,
options to purchase an aggregate of 1,131,504 shares of Common Stock were
outstanding under the 1995 Plan. In January 1997, the Board of Directors of
the Company increased the number of shares available for future grants under
the 1995 Plan from 400,000 to 1,600,000. Options granted under the 1995 Plan
will remain outstanding in accordance with their terms, but no further options
have been granted since July 1997, nor will any options be granted under the
1995 Plan in the future.
In connection with the GCIS and ISI acquisitions, the Company assumed the
outstanding options previously issued under option plans administered by each
of GCIS and ISI, and as of September 30, 1997 were exercisable for an
aggregate of 394,947 shares of Common Stock.
Amended and Restated 1997 Stock Plan
In July 1997, the Board of Directors adopted the 1997 Stock Plan. The
Amended and Restated 1997 Stock Plan (the "1997 Plan") was approved by the
Board of Directors in October 1997, subject to stockholder approval. As of
September 30, 1997, options covering 287,700 shares of Common Stock have been
granted under the 1997 Plan.
48
<PAGE>
The 1997 Plan provides for the grant of incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, (the
"Code") to employees (including officers and employee directors) and for the
grant of nonstatutory stock options and stock purchase rights ("SPRs") to
employees, directors and consultants. A total of 1,676,277 shares of Common
Stock are currently reserved for issuance pursuant to the 1997 Plan. Unless
terminated sooner, the 1997 Plan will terminate automatically in July 2007.
The 1997 Plan may be administered by the Board of Directors or a committee
of the Board (as applicable, the "Administrator"). The Administrator has the
power to determine the terms of the options or SPRs granted, including the
exercise price of the option or SPR, the number of shares subject to each
option or SPR, the exercisability thereof and the form of consideration
payable upon such exercise. In addition, the Administrator has the authority
to amend, suspend or terminate the 1997 Plan, provided that no such action may
affect any share of Common Stock previously issued and sold or any option
previously granted under the 1997 Plan.
Options and SPRs granted under the 1997 Plan are generally not transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1997 Plan must
generally be exercised within three months after the end of optionee's status
as an employee, director or consultant of the Company, or within twelve months
after such optionee's termination by death or disability, but in no event
later than the expiration of the option's ten-year term.
In the case of SPRs, unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement provides that the Company shall have a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
The exercise price of all incentive stock options granted under the 1997
Plan must be at least equal to the fair market value of the Common Stock on
the date of grant. The exercise price of nonstatutory stock options and SPRs
granted under the 1997 Plan is determined by the Administrator, but with
respect to nonstatutory stock options intended to qualify as "performance-
based compensation" within the meaning of Section 162(m) of the Code, the
exercise price must at least be equal to the fair market value of the Common
Stock on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of the Company's
outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the date of
grant, and the term of such incentive stock option must not exceed five years.
The term of all other options granted under the 1997 Plan may not exceed ten
years.
The 1997 Plan provides that each non-employee director shall automatically
be granted an option to purchase 35,000 shares of Common Stock on the date
that such person first becomes a non-employee director, unless immediately
prior to becoming a non-employee director, such person was an employee
director of the Company. In addition, each non-employee director shall
automatically be granted an option to purchase 5,000 shares on the date of the
Company's annual meeting of stockholders, if on such date he or she shall have
served on the Board for at least six months. Each option granted to a non-
employee director shall have a term of ten years, shall vest as to 25% of the
optioned stock one year from the date of grant, and 1/48th of the optioned
stock shall vest each month thereafter, provided the person continues to serve
as a director on such dates. The exercise price of each such option shall be
100% of the fair market value per share of the Common Stock on the date of
grant.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option shall be assumed or an equivalent option substituted for
by the successor corporation. If the outstanding options are not assumed or
substituted for by the successor corporation, the Administrator shall provide
for the optionee to have the right to exercise the option or SPR as to all of
the optioned stock, including shares as to which it would not otherwise be
exercisable. If the Administrator makes an option or SPR exercisable in full
in the event of a merger or sale of assets, the Administrator shall
49
<PAGE>
notify the optionee that the option or SPR shall be fully exercisable for a
period of 15 days from the date of such notice, and the option or SPR will
terminate upon the expiration of such period.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors on October 15, 1997. A total of 400,000
shares of Common Stock has been reserved for issuance under the 1997 Purchase
Plan.
The 1997 Purchase Plan, which is intended to qualify under Section 423 of
the Code, contains consecutive, overlapping, 24-month offering periods. Each
offering period includes four six-month purchase periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first such offering period, which commences on the
first trading day on or after the effective date of this offering and ends on
the last trading day on or before April 30, 1999.
Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, any employee who (i)
immediately after grant owns stock possessing 5% or more of the total combined
voting power or value of all classes of the capital stock of the Company, or
(ii) whose rights to purchase stock under all employee stock purchase plans of
the Company accrues at a rate which exceeds $25,000 worth of stock for each
calendar year, may not be granted an option to purchase stock under the 1997
Purchase Plan. The 1997 Purchase Plan permits participants to purchase Common
Stock through payroll deductions of up to % of the participant's
"compensation." Compensation is defined as the participant's base straight
time gross earnings and commissions but excludes overtime, payments for shift
premium, incentive compensation, incentive payments, bonuses and other
compensation.
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the 1997 Purchase Plan is 85% of the lower of the fair market
value of the Common Stock at the beginning of the offering period or at the
end of the purchase period. In the event the fair market value at the end of a
purchase period is less than the fair market value at the beginning of the
offering period, the participants will be withdrawn from the current offering
period following exercise and automatically re-enrolled in a new offering
period. The new offering period will use the lower fair market value as of the
first date of the new offering period to determine the purchase price for
future purchase periods. Participants may end their participation at any time
during an offering period, and they will be paid their payroll deductions to
date. Participation ends automatically upon termination of employment with the
Company.
Rights granted under the 1997 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution or as
otherwise provided under the 1997 Purchase Plan. The 1997 Purchase Plan
provides that, in the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each
outstanding option may be assumed or substituted for by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding options, the offering period then in progress will be
shortened and a new exercise date will be set. The 1997 Purchase Plan will
terminate in October 2007. The Board of Directors has the authority to amend
or terminate the 1997 Purchase Plan, except that no such action may adversely
affect any outstanding rights to purchase stock under the 1997 Purchase Plan.
401(k) Plan
In March 1997, the Company adopted a tax qualified employee savings and
retirement plan (the "401(k) Plan") under which eligible employees may elect
to defer, in the form of contributions to the 401(k) Plan, up to certain
statutorily prescribed annual limits ($9,500 in 1997). Upon completion of one
year of service, the 401(k) Plan provides for employer contributions to the
401(k) Plan of an amount equal to 25% of the amount contributed
50
<PAGE>
by all eligible employees, up to 6% of individual employee's total
compensation. The 401(k) Plan is intended to qualify under Section 401 of the
Code, so that contributions by employees or by the Company to the 401(k) Plan,
and income earned on the 401(k) Plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan, and so that contributions by
the Company, if any, will be deductible by the Company when made. The 401(k)
Plan permits employees to direct investment of their accounts in the 401(k)
Plan in selected investment options.
51
<PAGE>
CERTAIN TRANSACTIONS
The Company has licensed local Internet connectivity points from certain
employees and other related parties, including Cindy Groves, the sister of
Nathan Raciborski. Amounts owed to Ms. Groves exceeded $60,000 at December 31,
1996 and at September 30, 1997. The Company and Ms. Groves entered into a
license agreement pursuant to which Ms. Groves paid an initial license fee as
well as a percentage of the income from subscriptions in those areas to the
Company, in exchange for the exclusive right to provide Internet access in
that area across the Company's network. The terms of its relationship with Ms.
Groves are substantially similar to its relationship with other licensees.
In October 1996, the Company entered into a lease agreement with Bill and
Karen Foss with respect to real property located at 1111 Karlstad Drive,
Sunnyvale, California (the "Karlstad Property"). The lease expires in November
2001. The Company maintains a Media Distribution Center and general office
space at the Karlstad Property. Mr. Foss owns in excess of 5% of the
outstanding Common Stock of the Company.
In 1995, the Company established a commercial relationship with Yahoo!. Mr.
Koogle, a director of the Company, is President and Chief Executive Officer of
Yahoo!. Revenue from Yahoo! for the year ended December 31, 1996 was
approximately $290,000. Mr. Koogle joined the Board of Directors of the
Company in October 1997. The terms of the Company's relationship with Yahoo!
are based on an arm's-length negotiation that occurred prior to Mr. Koogle's
joining the Company's Board of Directors.
Loans to Officers
The Company's executive officers listed below have been indebted to the
Company in an amount in excess of $60,000 at such times since January 1, 1996
as set forth below:
In connection with employment agreements between the Company and Allan
Kaplan and between the Company and Nathan Raciborski, the Company made
loans to each of Messrs. Kaplan and Raciborski in the aggregate principal
amount of $500,000 and bearing interest at a rate of 6% per annum. Each of
the loans is evidenced by a non-recourse promissory note dated March 21,
1997, which notes mature on March 31, 2002 (unless extended pursuant to the
terms of such promissory notes). Each of the promissory notes is secured by
a pledge of 200,000 shares of the Company's Common Stock owned by Messrs.
Kaplan and Raciborski, respectively. The entire principal amount of each
loan plus interest accrued thereon remains outstanding on each loan as of
the date of this Prospectus.
In connection with the employment agreement between the Company and Dan
Rasmussen, the Company loaned Mr. Rasmussen an aggregate principal amount
of $100,000 bearing interest at a rate of 8.25% per annum. The loan is
evidenced by a non-recourse promissory note dated June 12, 1997, which note
matures on June 12, 1999. The entire principal amount of the loan plus
interest accrued thereon remains outstanding as of the date of this
Prospectus.
The Company loaned Joel Davis, an officer of the Company, an aggregate
principal amount of $85,000 pursuant to two promissory notes dated December
16, 1996 and October 7, 1997, respectively. The former note evidences a
loan of $60,000 bearing interest at a rate of 8% per annum. The latter note
evidences a loan of $25,000 bearing interest at a rate of 8.25% per annum.
For each note, the principal amount and all accrued interest thereon will
be forgiven at a rate of 50% on each of the first two anniversaries of the
note, provided that Mr. Davis remains an employee of the Company on such
dates.
In April 1997 the Company borrowed $700,000 from Cocoon Capital Corporation
pursuant to a secured promissory note. The note had a original maturity date
of July 1998 and bore interest at a annual rate of 14%. Nathan F. Raciborski
and Allan M. Kaplan, co-founders and employees of the Company, are the
principals of Cocoon Capital Corporation. The Company repaid the promissory
note in October 1997.
In December 1996, the Company borrowed $74,516 from Nathan F. Raciborski, an
officer of the Company. The note bears interest at 8% and is payable upon
demand. As of September 30, 1997, the outstanding principal balance was
$26,117.
52
<PAGE>
In January 1997, the Company entered into a Stockholders' Agreement (the
"Stockholders' Agreement") with certain holders of the Company's Common Stock,
including entities affiliated with Sequoia Capital and entities affiliated
with Hummer Winblad Equity Partners. Subsequently, the parties have amended
the Stockholders' Agreement to include the holders of additional shares of the
Company's Common Stock, including entities affiliated with SOFTBANK
Corporation and certain individuals holding in excess of 5% of the Company's
outstanding Common Stock. Pursuant to the Stockholders' Agreement,
stockholders who are a party thereto are entitled to certain registration
rights with respect to their shares of the Company's Common Stock. See
"Description of Capital Stock--Registration Rights."
Preferred Stock Issuances
Since January 1996, the Company sold shares of its preferred stock in
private financings as follows (all share amounts set forth herein do not
reflect the conversion of outstanding shares of Preferred Stock into shares of
Common Stock that will occur immediately prior to the closing of this
offering):
In connection with the acquisition of GCIS in January 1997, the Company
sold an aggregate of 1,451,327 shares of Series B Preferred Stock to each
of (i) entities affiliated with Sequoia Capital and (ii) entities
affiliated with Hummer Winblad Equity Partners.
In connection with the acquisition of ISI in May 1997, the Company sold
1,468,339 shares of Common Stock to William C. Foss and 1,434,032 shares of
Common Stock to Dan M. Rasmussen.
In July 1997, the Company issued and sold 2,022,472 shares of Series C
Preferred Stock to entities affiliated with SOFTBANK Corporation.
Certain holders of Preferred Stock are entitled to registration rights with
respect to the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock--Registration Rights."
The Company has entered into employment agreements with certain of its
senior executive officers. See "Management--Employment Agreements."
The Company has entered into agreements to indemnify certain of its
executive officers and directors in addition to the indemnification provided
for in the Company's Restated Bylaws and intends to enter into such agreements
with all of its executive officers and directors. These agreements, among
other things, indemnify the Company's directors and officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by any such person in any action or proceeding, including any action
by or in the right of the Company, arising out of such person's services as a
director or officer of the Company, any subsidiary of the Company or any other
company or enterprise to which the person provides services at the request of
the Company and otherwise to the full extent permitted under Delaware law and
the Company's Bylaws.
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1997,
and as adjusted to reflect the sale of shares of Common Stock by the Company
and the Selling Stockholders offered hereby, by (i) each person or entity who
is known by the Company to be the beneficial owner of more than five percent
of the outstanding shares of Common Stock of the Company, (ii) each director,
(iii) each of the Named Executive Officers, (iv) each of the Selling
Stockholders and (v) all directors and executive officers of the Company as a
group. Except as otherwise noted below, officers and directors can be
contacted at the principal office of the Company.
<TABLE>
<CAPTION>
NUMBER
SHARES OF
BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED PRIOR BEING OWNED AFTER
TO OFFERING(1) OFFERED OFFERING(1)
----------------- FOR --------------------
NAME NUMBER PERCENT SALE NUMBER PERCENT
- ---- --------- ------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Entities Affiliated with 3,370,785 23.4%
SOFTBANK......................
10 Langley Road, Suite 403
Newton Circle, MA 02159
Entities Affiliated with 2,480,536 17.2
Sequoia Capital (2)...........
3000 Sand Hill Road, Suite 280
Menlo Park, CA 94025
William C. Foss ............... 1,468,339 10.2
Netscape Communication
501 E. Middlefield Road
Mountain View, CA 94043
Entities Affiliated with Hummer 1,451,327 10.1
Winblad Equity Partners (3)...
No. 2 South Park Street
San Francisco, CA 94107
Joel A. Davis, Sr. (4)......... 60,744 *
Jonathan G. Heiliger........... 68,614 *
Douglas T. Hickey (5).......... 450,437 3.1
John Hummer (2)................ 1,451,327 10.1
Allan M. Kaplan................ 1,360,510 9.5
Michael Moritz (3)............. 2,480,536 17.2
Wayne A. Pratt (6)............. 58,333 *
Nathan F. Raciborski........... 1,720,510 12.0
Dan M. Rasmussen (7)........... 1,434,032 10.0
William H. Rinehart............ -- --
Eric Hippeau................... -- --
Timothy Koogle................. -- --
Directors and executive 7,724,533 52.3
officers as a group (11
persons)......................
Other Selling Stockholders as a
group ( persons).............
</TABLE>
- --------
* Less than one percent.
(1) Percentage of beneficial ownership is based on 14,384,751 shares of
Common Stock outstanding as of September 30, 1997 (after giving effect to
the conversion of all outstanding shares of preferred stock), and
shares of Common Stock outstanding after completion of this
offering. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and generally includes voting
or investment power with respect to securities. Shares of Common Stock
subject to options that are currently exercisable or exercisable within
sixty (60) days of September 30, 1997 are deemed outstanding for
computing the beneficial ownership of the person holding such options,
but are not deemed outstanding for computing the beneficial ownership of
any other person. Except as indicated in the footnotes to this table and
subject to any applicable community property laws, the Company believes
that each stockholder named in the table has sole voting and investment
power with respect to the shares set forth opposite such stockholder's
name.
54
<PAGE>
(2) Consists of 2,294,498 shares held by Sequoia Capital VII, 111,623 shares
held by Sequoia Technology Partners VII and 74,415 shares held by Sequoia
1995, LLC. Mr. Moritz disclaims beneficial ownership of the shares held by
the above-listed entities, except to the extent of his pecuniary interest
therein.
(3) Consists of 1,393,276 shares held by Hummer Winblad Venture Partners II,
49,344 shares held by Hummer Winblad Technology Fund II and 8,707 shares
held by Hummer Winblad Technology Fund IIA. Mr. Hummer disclaims
beneficial ownership of the shares held by the above-listed entities,
except to the extent of his pecuniary interest therein.
(4) Includes 34,555 shares subject to a repurchase right held by the Company,
which right lapses over time, and 26,189 shares subject to options
exercisable within 60 days of September 30, 1997.
(5) Includes 138,220 shares subject to a repurchase right held by the Company,
which right lapses over time, and 312,217 shares subject to options
exercisable within 60 days of September 30, 1997.
(6) Includes 58,333 shares subject to options exercisable within 60 days of
September 30, 1997.
(7) Does not include 17,153 shares held by Max Rasmussen and 17,153 shares
held by Mark and Christeen Rasmussen, Mr. Rasmussen's brother, and brother
and sister-in-law, respectively. Mr. Rasmussen disclaims beneficial
ownership of the shares held by Max Rasmussen and the shares held by Mark
and Christeen Rasmussen.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will be 55 million shares of capital stock, consisting of 50 million
shares of Common Stock, par value $0.001 per share, and 5 million shares of
Preferred Stock, par value $0.001 per share.
The following description of the capital stock of the Company and certain
provisions of the Company's Restated Certificate of Incorporation (the
"Restated Certificate") and Amended and Restated Bylaws (the "Restated
Bylaws") is a summary and is qualified in its entirety by the provisions of
the Restated Certificate and Restated Bylaws, which have been filed as
exhibits to the Company's Registration Statement of which this Prospectus is a
part. Except as otherwise noted, the following description gives effect to the
conversion of all outstanding shares of preferred stock and assumes the
adoption of the Restated Certificate and Restated Bylaws upon the closing of
this offering.
COMMON STOCK
As of September 30, 1997, there were 14,384,751 shares of Common Stock
outstanding (after giving effect to the conversion of all Preferred Stock)
held of record by approximately 100 stockholders. Holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior liquidation rights of preferred
stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and non-assessable, and the shares of Common
Stock to be outstanding upon consummation of the offering will be fully paid
and non-assessable.
PREFERRED STOCK
Upon consummation of this offering, 5,000,000 shares of undesignated
preferred stock will be authorized, and no shares will be outstanding. The
Company's Board of Directors will have the authority to issue preferred stock
in one or more series and to establish the rights, preferences, privileges and
restrictions granted to or imposed on any unissued shares of preferred stock
and to fix the number of shares constituting any series and the designations
of such series, without any further vote or action by the stockholders. The
Company's Board of Directors will have authority, without approval of the
stockholders, to issue Preferred Stock that has voting and conversion rights
superior to the Common Stock and that may affect the voting power of the
holders of Common Stock and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company currently has no
plans to issue any shares of preferred stock.
WARRANTS
In connection with the private placement of Series A preferred stock in
December 1995 and January 1996, the Company issued to the placement agent a
warrant to purchase 40,000 shares of its Common Stock at an exercise price of
$6.00 per share, exercisable at any time until January 11, 2001. In connection
with the extension of a credit facility with Silicon Valley Bank ("SVB") in
June 1997, the Company issued a warrant to SVB to purchase 10,000 shares of
its Common Stock at an exercise price of $4.45 per share (subject to
adjustment for stock splits, stock dividends and the like), exercisable until
June 26, 2002. In connection with an equipment financing facility established
with Phoenix Leasing Incorporated ("Phoenix Leasing"), the Company issued two
warrants to Phoenix Leasing in May 1997 and June 1997, respectively. These
warrants entitle Phoenix Leasing to purchase an aggregate of 13,300 shares of
its Common Stock at an exercise price of $6.00 per share (subject to
adjustment for stock splits, stock dividends and the like). The warrants are
exercisable until May 15, 2007 and
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<PAGE>
June 20, 2007, respectively. In connection with an equipment lease agreement
entered into in September 1997 with Comdisco, Inc. ("Comdisco"), the Company
issued a warrant to Comdisco to purchase 12,000 shares of its Common Stock at
an exercise price of $5.00 per share (subject to adjustment for stock splits,
stock dividends and the like), exercisable until three years from the effective
date of this offering.
REGISTRATION RIGHTS
The Company has granted holders of Common Stock issuable upon conversion of
the 400,000 shares of Series A preferred stock certain registration rights. If
the Company proposes to register any Common Stock under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, such holders are entitled to include shares of
such Common Stock in such registration ("Piggyback Registration Rights").
Additionally, such holders are also entitled to certain demand registration
rights pursuant to which they may require the Company to file a registration
statement under the Securities Act at the Company's expense with respect to
their shares of Common Stock ("Demand Registration Rights") if 50% of such
holders so request. The Company is required to use its best efforts to effect
one such demand registration. These registration rights are subject to certain
conditions and limitations.
In addition, the Company and certain securityholders of the Company have
entered into a Stockholders' Agreement, as amended, pursuant to which the
Company has granted certain Demand and Piggyback Registration Rights to certain
holders of Common Stock, Common Stock issuable upon conversion of Series B and
Series C preferred stock and Common Stock issuable upon exercise of certain
warrants. Holders of 10,655,667 of such shares of Common Stock are entitled to
Piggyback Registration Rights. Holders of 6,521,690 of such shares of Common
Stock are entitled to Demand Registration Rights. To exercise their Demand
Registration Rights, the Company must receive a notice by holders of at least
30% of the Registrable Securities (as defined in the Stockholders' Agreement)
requesting such registration. The Company may be required to effect up to two
demand registrations. In addition, the holders of these Demand Registration
Rights have the right to require the Company to file an unlimited number of
registration statements on Form S-3, upon the Company being eligible to utilize
such registration statements. The registration rights described above terminate
upon the earlier to occur of (i) as to any holder at such time as such holder
may sell, under Rule 144 in any single three-month period, all Registrable
Securities then held by such holder and (ii) upon the fifth anniversary of the
closing of this offering. These registration rights are subject to certain
conditions and limitations.
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE RESTATED CERTIFICATE OF
INCORPORATION, RESTATED BY-LAWS AND DELAWARE LAW
General
Certain provisions of the Delaware General Corporation Law and the Company's
Restated Certificate and Restated Bylaws could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
to acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. These provisions of Delaware law and the Company's
Restated Certificate and Restated Bylaws may also have the effect of
discouraging or preventing certain types of transactions involving an actual or
threatened change of control of the Company (including unsolicited takeover
attempts), even though such a transaction may offer the Company's stockholders
the opportunity to sell their stock at a price above the prevailing market
price. The Restated Certificate allows the Company to issue Preferred Stock
with rights senior to those of the Common Stock and other rights that could
adversely affect the interests of holders of Common Stock, which could decrease
the amount of earnings or assets available for distribution to the holders of
Common Stock. In certain circumstances, such issuance could have the effect of
decreasing the market price of the Common Stock, as well as having the anti-
takeover effect discussed above. See "Risk Factors--Antitakeover Effects of
Certificate of Incorporation and Delaware Law."
Upon completion of this offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law (the "DGCL"),
an anti-takeover law. In general, the statute prohibits a
57
<PAGE>
publicly held Delaware corporation from engaging in business combinations with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the stockholder. For purposes of Section 203, an
"interested stockholder" is defined to include any person that is (i) the
owner of 15% or more of the outstanding voting stock of the corporation, (ii)
an affiliate or associate of that corporation and was the owner of 15% or more
of the outstanding voting stock of the corporation, at any time within three
years immediately prior to the relevant date and (iii) an affiliate or
associate of the persons described in the foregoing clauses (i) or (ii). Under
certain circumstances, Section 203 of the DGCL makes it more difficult for an
"interested stockholder" to effect various business combinations with a
corporation for a three-year period, although the stockholders may, by
adopting an amendment to the corporation's certificate of incorporation or
bylaws, elect for the corporation not to be governed by Section 203, effective
12 months after adoption. It is anticipated that the provisions of Section 203
of the DGCL may encourage companies interested in acquiring the Company to
negotiate in advance with the Board of Directors of the Company because the
stockholder approval requirement would be avoided if a majority of the
directors then in office approve either the business combination or the
transaction that results in the stockholder becoming an interested
stockholder.
Restated Certificate of Incorporation and Bylaws
The Company's Restated Bylaws require that special meetings of the
stockholders of the Company may be called only by the Board of Directors, the
Chief Executive Officer of the Company or by any person or persons holding
shares representing at least % of the outstanding capital stock. The
Company's Restated Bylaws also require advance written notice, which must be
received by the Secretary of the Company not less than 90 days prior to the
meeting, by a stockholder of a proposal or directors' nomination which such
stockholder desires to present at an annual or special meeting of
stockholders. Action by written consent of the stockholders is prohibited by
the Restated Bylaws. The Company's Restated Certificate does not include a
provision for cumulative voting in the election of directors. Under cumulative
voting, a minority stockholder holding a sufficient number of shares may be
able to ensure the election of one or more directors. The absence of
cumulative voting may have the effect of limiting the ability of minority
stockholders to effect changes in the Board of Directors and, as a result, may
have the effect of deterring hostile takeover or delaying or preventing
changes in control or management of the Company.
The Company's Restated Bylaws provide that the authorized number of
directors may be changed by an amendment to the bylaws adopted by the Board of
Directors or by the stockholders. Vacancies in the Board of Directors may be
filled either by holders of a majority of the Company's voting stock or a
majority of directors in office, although less than a quorum. See "Risk
Factors--Antitakeover Effects of Certificate of Incorporation and Delaware
Law."
The number of directors which shall constitute the whole Board of Directors
shall be fixed by resolution of the Board of Directors. The size of the
initial Board is fixed at five members, subject to amendment by the Board. The
Directors shall be elected at the annual meeting of the stockholders, except
for filling vacancies. Directors may be removed with the approval of the
holders of a majority of the Company's voting power present and entitled to
vote at a meeting of stockholders. Vacancies and newly created directorships
on the Board of Directors resulting from any increase in the number of
directors may be filled by a majority of the Directors then in office,
although less than a quorum, a sole remaining Director, or the holders of a
majority of the voting power present and entitled to vote at a meeting of
stockholders.
The presence, in person or by proxy, of the holders of a majority of the
votes entitled to be cast by the stockholders entitled to vote generally shall
constitute a quorum for stockholder action at any meeting.
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<PAGE>
LIMITATION OF LIABILITY; INDEMNIFICATION
The Company's Restated Certificate of Incorporation contains certain
provisions permitted under the DGCL relating to the liability of directors.
These provisions eliminate a director's personal liability for monetary
damages resulting from a breach of fiduciary duty, except in certain
circumstances involving certain wrongful acts, including (i) for any breach of
the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for
any transaction from which the director derives an improper personal benefit.
These provisions do not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief, such as an injunction or rescission,
in the event of a breach of a director's fiduciary duty. These provisions will
not alter a director's liability under federal securities laws. The Company's
Restated Bylaws also contain provisions indemnifying the directors and
officers of the Company to the fullest extent permitted by DGCL. The Company
believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as directors and officers. See
"Management--Limitation of Liability and Indemnification Matters."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Securities
Transfer & Trust, Inc.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol GCTR.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Sales of substantial numbers of shares of Common Stock into
the public market after this offering, or the perception that such sales could
occur, could materially and adversely affect the market price of the Common
Stock prevailing from time to time or could impair the Company's future
ability to obtain capital through an offering of equity securities. The
Company cannot predict the effect, if any, that sales of shares of Common
Stock, or the availability of such shares for future sales, will have on
future market prices of the Common Stock. Such sales also may make it more
difficult for the Company to sell equity securities or equity-related
securities in the future at the time and price it deems appropriate.
Upon completion of this offering there will be shares of Common Stock
Outstanding, or up to shares if the underwriters over-allotment option is
exercised in full. The shares sold in this offering will be freely
tradeable without restriction or further registration under the Securities
Act, unless such shares are held by "affiliates" of the Company ("Affiliates")
or persons deemed to be acting as "underwriters" (as such terms are defined in
Rule 144 under the Securities Act). The remaining shares of Common Stock
held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 ("Restricted Shares"). Restricted Shares may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which rules are summarized below. As a result of the contractual
restrictions described below and the provisions of Rules 144, 144(k) and 701,
shares of Common Stock will be available for sale in the public market
prior to expiration of the lock-up agreements 180 days after the date of this
Prospectus.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are required to
be aggregated) who has beneficially owned Restricted Shares for at least one
year (including the holding period of any prior owner except an Affiliate)
would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of (i) one percent of the number of shares of
Common Stock then outstanding (which will equal approximately shares
immediately after this offering) or (ii) the average weekly trading volume of
the Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to such sale. Sales
under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been
an Affiliate of the Company at any time during the 90 days preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years (including the holding period of any prior owner except an Affiliate),
is entitled to sell such shares without complying with the manner of sale,
public information, volume limitation or notice provisions of Rule 144. In
general, under Rule 701 of the Securities Act as currently in effect, any
employee, consultant or advisor of the Company who purchased shares from the
Company in connection with a compensatory stock or option plan or other
written agreement is eligible to resell such shares 90 days after the
effective date of this offering in reliance on Rule 144, but without
compliance with certain restrictions, including the holding period, contained
in Rule 144.
The holders of substantially all of the shares of Common Stock, options and
warrants currently outstanding and all executive officers and directors of the
Company have agreed that for a period of 180 days after the date of this
Prospectus they will not offer, sell or otherwise dispose of, any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into Common Stock. However,
Hambrecht & Quist LLC, in its sole discretion, may release such persons from
these lock-up agreements, in whole or in part, at any time without notice.
Following the 180-day lock-up period, of the Restricted Securities will
become eligible for sale, subject to the manner of sale, volume, notice and
information requirements of Rule 144 of the Securities Act. After the 180-day
lock-up period, shares of Common Stock will become immediately saleable.
After this offering, the Company intends to file a registration statement
under the Securities Act covering shares of Common Stock reserved for issuance
under the Company's 1995 Plan, the 1997 Plan and the 1997
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<PAGE>
Purchase Plan. Based on the number of shares reserved for issuance at
September 30, 1997 under such plans, such registration statement would
register approximately 3,602,728 shares. See "Management--Stock Plans." Such
registration statement is expected to be filed and become effective as soon as
practicable after the consummation of this offering. Accordingly, shares
registered under such registration statement will be available for sale in the
open market, unless such shares are subject to vesting restrictions with the
Company or the above-described lock-up agreements. As of September 30, 1997,
1,814,151 options were outstanding under the Company's option plans. See
"Management--Stock Plans."
After the closing of this offering, the holders of shares of Common
Stock, including shares of Common Stock issuable upon exercise of
outstanding warrants, will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. See "Description of
Capital Stock--Registration Rights."
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC
and Volpe Brown Whelan & Company, LLC, have severally agreed to purchase from
the Company and the Selling Stockholders the following respective number of
shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
OF
NAME SHARES
---- ------
<S> <C>
Hambrecht & Quist LLC.................................................
Volpe Brown Whelan & Company, LLC.....................................
-----
Total...............................................................
=====
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to certain conditions precedent, including the
absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions and letters from the Company, its
counsel and independent auditors. The nature of the Underwriters' obligation
is such that they are committed to purchase all shares of Common Stock offered
hereby if any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives of the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend
to confirm sales to accounts over which they exercise discretionary authority.
The Company and certain Selling Stockholders have granted to the
Underwriters an option, exercisable no later than 30 days after the date of
this Prospectus, to purchase up to additional shares of Common Stock at
the initial public offering price, less the underwriting discount, set forth
on the cover page of this Prospectus. To the extent that the Underwriters
exercise this option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of shares
of Common Stock to be purchased by it shown in the above table bears to the
total number of shares of Common Stock offered hereby. The Company and the
Selling Stockholders will be obligated, pursuant to the option, to sell shares
to the Underwriters to the extent the option is exercised. The Underwriters
may exercise such option only to cover over-allotments made in connection with
the sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Selling Stockholders and certain other stockholders of the Company,
including the executive officers and directors, who will own in the aggregate
shares of Common Stock after the offering, have agreed that they will not,
without the prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock owned by them during the 180-day period
62
<PAGE>
following the date of this Prospectus. The Company has agreed that it will
not, without the prior written consent of Hambrecht & Quist LLC, offer, sell
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock during the 180-day period following the date of
this Prospectus, except that the Company may issue shares upon the exercise of
options granted prior to the rate hereof and may grant additional options
under its stock option plans, provided that, without the prior written consent
of Hambrecht & Quist LLC, such additional options shall not be exercisable
during such period.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation among the Company, the Selling Stockholders and the
Representatives. Among the factors to be considered in determining the initial
public offering price are prevailing market and economic conditions, revenues
and earnings of the Company, market valuations of other companies engaged in
activities similar to the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant. The
estimated initial public offering price set forth on the cover of this
preliminary Prospectus is subject to change as a result of market conditions
and other factors, the history of and the prospects for the industry in which
the Company competes, the ability of the Company's management, the past and
present operations of the Company, the historical results of operations of the
Company, the prospects for future earnings of the Company, the general
condition of the securities markets at the time of this offering and the
recent market prices of securities of generally comparable companies.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock of the Company at levels above those which might otherwise
prevail in the open market, including by entering stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid or effecting of any purchase, for the purpose of
pegging, fixing or maintaining the price of the Common Stock. A syndicate
covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits the Underwriters to reclaim a selling concession from
a syndicate member in connection with the offering when shares of Common Stock
sold by the syndicate member are purchased in syndicate covering transactions.
Such transactions may be effected on the Nasdaq National Market, in the over-
the-counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company and
the Selling Stockholders by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Alan K. Austin, a partner of Wilson
Sonsini Goodrich & Rosati, and WS Investment Company 97A, an investment
vehicle for partners of Wilson Sonsini Goodrich & Rosati, together own an
aggregate of 6,179 shares of Common Stock. Certain legal matters in connection
with this offering will be passed upon for the Underwriters by Cooley Godward
LLP, San Francisco, California.
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<PAGE>
EXPERTS
The consolidated financial statements included in this Prospectus and
elsewhere in the Registration Statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The audited financial statements of Voyager Networks, Inc. included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Marcum & Kliegman LLP, independent certified public accountants, as indicated
in their report with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. Certain
items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or any other document referred
to are not necessarily complete, and, in each instance, reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement, and the exhibits and
schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and
copies of all or any part of the Registration Statement may be obtained from
such offices upon the payment of the fees prescribed by the Commission. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
I. CONSOLIDATED FINANCIAL STATEMENTS OF GLOBALCENTER, INC.
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets--December 31, 1995, 1996 and June 30, 1997
(unaudited)............................................................ F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1995, 1996 and the six months ended June 30, 1996 and 1997 (unau-
dited)................................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended De-
cember 31, 1994, 1995, 1996 and the six months ended June 30, 1997 (un-
audited)............................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995, 1996 and the six months ended June 30, 1996 and 1997 (unau-
dited)................................................................. F-6
Notes to Consolidated Financial Statements.............................. F-7
II. PRO FORMA COMBINED FINANCIAL STATEMENTS OF GLOBALCENTER, INC.
Introduction............................................................ F-20
Pro Forma Balance Sheet--June 30, 1997 (unaudited)...................... F-21
Pro Forma Statement of Operations for the six months ended June 30, 1997
(unaudited)............................................................ F-22
Pro Forma Statement of Operations for the year ended December 31, 1996
(unaudited)............................................................ F-23
Notes to Pro Forma Combined Financial Statements........................ F-24
III. FINANCIAL STATEMENTS OF VOYAGER NETWORKS, INC.
Independent Auditors' Report............................................ F-25
Balance Sheets--December 31, 1995, 1996 and June 30, 1997 (unaudited)... F-26
Statements of Operations for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)............ F-27
Statements of Stockholders' Equity for the years ended December 31, 1995
and 1996 and the six months ended June 30, 1997 (unaudited)............ F-28
Statements of Cash Flows for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)............ F-29
Notes to Financial Statements........................................... F-30
IV. FINANCIAL STATEMENTS OF GCIS
Report of Independent Public Accountants ............................... F-36
Balance Sheet--December 31, 1996 ....................................... F-37
Statement of Operations for the eleven months ended December 31, 1996... F-38
Statement of Stockholders' Equity for the eleven months ended December
31, 1996............................................................... F-39
Statement of Cash Flows for the eleven months ended December 31, 1996... F-40
Notes to Financial Statements........................................... F-41
V. FINANCIAL STATEMENTS OF GCIS--A DIVISION OF GLOBAL VILLAGE COMMUNICA-
TION, INC.
Report of Independent Public Accountants................................ F-46
Statement of Net Assets to be Sold--January 31, 1996.................... F-47
Statement of Revenues and Expenses for the ten months ended January 31,
1996................................................................... F-48
Notes to Financial Statements........................................... F-49
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GlobalCenter, Inc.:
We have audited the accompanying consolidated balance sheets of
GlobalCenter, Inc. (a Delaware corporation), and its subsidiaries as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December
31, 1994, 1995 and 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
GlobalCenter, Inc. and its subsidiaries as of December 31, 1995 and 1996, and
the results of their operations and their cash flows (after restatement for
the May 6, 1997 pooling-of-interests) for the years ended December 31, 1994,
1995 and 1996, in conformity with generally accepted accounting principles.
Phoenix, Arizona,
March 28, 1997 (except
with respect to the
matter discussed in Note
2, as to which the date
is May 6, 1997).
F-2
<PAGE>
GLOBALCENTER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................. $ 36,992 $ 6,462,823 $ 526,877
Accounts receivable, net of allowance
for doubtful accounts of $207,000,
$608,000 and $660,400, respectively. 615,709 1,230,475 2,356,415
Inventory............................ 89,884 223,482 578,656
Deferred tax asset................... 131,850 267,650 251,620
Prepaid expenses and other current
assets.............................. 190,408 343,077 475,544
---------- ------------ ------------
Total current assets................ 1,064,843 8,527,507 4,189,112
PROPERTY AND EQUIPMENT, net........... 1,737,410 4,723,072 6,687,722
NOTES RECEIVABLE AND OTHER ASSETS..... 21,195 211,268 1,314,599
GOODWILL.............................. -- 2,316,586 2,084,926
---------- ------------ ------------
Total assets........................ $2,823,448 $ 15,778,433 $ 14,276,359
========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft....................... $ 119,270 $ -- $ --
Accounts payable..................... 325,285 2,385,192 4,266,260
Income taxes payable................. 323,800 5,124 --
Accrued liabilities.................. 342,168 2,228,548 1,238,928
Current portion of notes payable..... 881,485 1,675,878 2,291,294
Revolving credit line................ -- -- 2,000,000
---------- ------------ ------------
Total current liabilities........... 1,992,008 6,294,742 9,796,482
NOTES PAYABLE, net of current portion. -- 2,526,813 2,949,132
---------- ------------ ------------
Total liabilities................... 1,992,008 8,821,555 12,745,614
---------- ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $.001 par
value; $5.00 liquidation preference;
1,000,000 shares authorized; 121,900
issued and outstanding at December
31, 1995; and 400,000 issued and
outstanding at December 31, 1996 and
June 30,1997........................ 122 400 400
Preferred stock, Series B, $.001 par
value; $3.77 liquidation preference;
10,000,000 shares authorized,
3,939,310 shares issued and
outstanding at December 31, 1996 and
June 30, 1997....................... -- 3,939 3,939
Common stock, $.001 par value;
20,000,000 shares authorized;
6,584,698, 7,912,162 and 7,978,415
shares issued and outstanding at
December 31, 1995, 1996 and June 30,
1997, respectively.................. 6,585 7,912 7,978
Additional paid-in capital........... 517,664 26,391,976 28,941,649
Notes receivable for common shares
purchased........................... -- (15,000) (15,000)
Deferred compensation................ -- -- (2,061,890)
Retained earnings (deficit).......... 307,069 (19,432,349) (25,346,331)
---------- ------------ ------------
Total stockholders' equity........ 831,440 6,956,878 1,530,745
---------- ------------ ------------
Total liabilities and
stockholders' equity........... $2,823,448 $ 15,778,433 $ 14,276,359
========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
GLOBALCENTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------ ------------------------
1994 1995 1996 1996 1997
---------- ---------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Service................ $ 204,932 $4,399,151 $ 11,484,595 $4,643,981 $ 9,126,611
Customer premise
equipment............. 3,667,001 2,303,050 1,465,765 832,556 840,662
---------- ---------- ------------ ---------- -----------
Total revenue........ 3,871,933 6,702,201 12,950,360 5,476,537 9,967,273
---------- ---------- ------------ ---------- -----------
COSTS AND EXPENSES:
Cost of revenue--
Service............... 77,053 1,929,586 5,546,761 2,147,400 6,495,823
Customer premise
equipment............ 3,174,196 2,068,538 1,176,189 706,303 684,797
Sales and marketing.... 116,488 162,023 640,593 239,536 2,583,968
Research and
development........... -- -- -- -- 1,632,346
General and
administrative........ 455,151 1,793,407 5,300,662 1,754,832 2,569,162
Noncash compensation... -- -- -- -- 466,110
Depreciation........... 44,506 184,363 1,014,029 408,900 1,101,056
Amortization of
goodwill.............. -- -- -- -- 231,660
Write-off of in-process
research and
development........... -- -- 18,933,115 -- --
---------- ---------- ------------ ---------- -----------
Total costs and
expenses............ 3,867,394 6,137,917 32,611,349 5,256,971 15,764,922
---------- ---------- ------------ ---------- -----------
INCOME (LOSS) FROM
OPERATIONS............. 4,539 564,284 (19,660,989) 219,566 (5,797,649)
---------- ---------- ------------ ---------- -----------
OTHER INCOME (EXPENSE):
Interest income........ 907 1,236 22,739 6,624 62,094
Interest expense....... (5,539) (15,795) (142,433) (52,613) (231,000)
Other.................. -- -- 1,790 -- --
---------- ---------- ------------ ---------- -----------
Total other expense.. (4,632) (14,559) (117,904) (45,989) (168,906)
---------- ---------- ------------ ---------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES........... (93) 549,725 (19,778,893) 173,577 (5,966,555)
PROVISION (BENEFIT) FOR
INCOME TAXES........... 3,000 230,300 (39,475) 80,000 (52,573)
---------- ---------- ------------ ---------- -----------
Net income (loss)....... $ (3,093) $ 319,425 $(19,739,418) $ 93,577 $(5,913,982)
========== ========== ============ ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
GLOBALCENTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
RECEIVABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL FOR RETAINED TOTAL
---------------- ---------------- PAID-IN COMMON DEFERRED EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK COMPENSATION (DEFICIT) EQUITY
--------- ------ --------- ------ ----------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1993................. -- $ -- 3,600,000 $3,600 $ 6,400 $ -- $ -- $ (18,267) $ (8,267)
Equity transaction of
pooled company...... -- -- -- -- -- -- -- 12,960 12,960
Net income........... -- -- -- -- -- -- -- 5,911 5,911
--------- ------ --------- ------ ----------- -------- ----------- ------------ ------------
BALANCE, December 31,
1994................. -- -- 3,600,000 3,600 6,400 -- -- 604 10,604
Sale of Series A
preferred stock, net
of issuance costs of
$117,551............ 121,900 122 -- -- 491,827 -- -- -- 491,949
Equity transactions
of pooled Company... -- -- 2,984,698 2,985 19,437 -- -- (12,960) 9,462
Net income........... -- -- -- -- -- -- -- 319,425 319,425
--------- ------ --------- ------ ----------- -------- ----------- ------------ ------------
BALANCE, December 31,
1995................. 121,900 122 6,584,698 6,585 517,664 -- -- 307,069 831,440
Sale of Series A
preferred stock, net
of issuance costs of
$232,588............ 278,100 278 -- -- 1,157,634 -- -- -- 1,157,912
Issuance of common
and Series B
preferred stock in
connection with GCIS
Merger.............. 3,939,310 3,939 178,179 178 21,625,827 -- -- -- 21,629,944
Note receivable for
common stock
purchased........... -- -- -- -- -- (15,000) -- -- (15,000)
Equity transaction of
pooled company...... -- -- 1,149,285 1,149 3,090,851 -- -- -- 3,092,000
Net loss............. -- -- -- -- -- -- -- (19,739,418) (19,739,418)
--------- ------ --------- ------ ----------- -------- ----------- ------------ ------------
BALANCE, December 31,
1996................. 4,339,310 4,339 7,912,162 7,912 26,391,976 (15,000) -- (19,432,349) 6,956,878
Sale of common stock. -- -- 66,253 66 21,673 -- -- -- 21,739
Deferred
compensation........ -- -- -- -- 2,528,000 -- (2,061,890) -- 466,110
Net loss (unaudited). -- -- -- -- -- -- -- (5,913,982) (5,913,982)
--------- ------ --------- ------ ----------- -------- ----------- ------------ ------------
BALANCE, June 30, 1997
(unaudited).......... 4,339,310 $4,339 7,978,415 $7,978 $28,941,649 $(15,000) $(2,061,890) $(25,346,331) $ 1,530,745
========= ====== ========= ====== =========== ======== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
GLOBALCENTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------ ------------------------
1994 1995 1996 1996 1997
--------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ (3,093) $ 319,425 $(19,739,418) $ 93,577 $(5,913,982)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities
Depreciation and
amortization.......... 44,506 181,363 1,014,029 408,900 1,332,716
Deferred income taxes.. (20,000) (92,850) (135,800) (227,150) 16,030
Bad debt expense....... 18,085 492,590 561,413 221,434 371,495
Write-off of in-process
research and
development........... -- -- 18,933,115 -- --
Noncash compensation... -- -- 27,000 -- 466,110
Changes in assets and
liabilities, net of
effect of GCIS Merger
(Note 2)
Increase in accounts
receivable............ (106,526) (922,102) (973,802) (409,072) (1,497,436)
(Increase) decrease in
note receivable....... (31,400) 31,400 -- -- --
Increase in inventory.. (7,680) (62,143) (75,763) (9,983) (355,174)
Increase in prepaid
expenses and other
current assets........ (2,680) (220,834) (218,402) (18,401) (132,467)
(Increase) decrease in
other assets.......... (7,216) (11,529) -- (28,820) 15,643
Increase in accounts
payable............... 219,520 50,190 1,720,016 1,068,312 1,881,068
Increase (decrease) in
accrued liabilities... 60,982 587,324 539,897 296,596 (994,744)
--------- ----------- ------------ ----------- -----------
Net cash provided by
(used in) operating
activities........... 164,498 352,834 1,652,285 1,395,383 (4,810,741)
--------- ----------- ------------ ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment, net of
effect of GCIS Merger
(Note 2).............. (239,557) (1,696,212) (2,698,298) (2,266,057) (1,534,680)
Funding of notes
receivable............ -- -- -- -- (1,150,000)
--------- ----------- ------------ ----------- -----------
Net cash used in
investing activities. (239,557) (1,696,212) (2,698,298) (2,266,057) (2,684,680)
--------- ----------- ------------ ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Increase (decrease) in
bank overdraft........ 39,398 54,953 (119,270) (119,270) --
Borrowings on revolving
line of credit........ -- -- -- -- 2,000,000
Proceeds from notes
payable............... 36,500 832,000 297,860 104,860 700,040
Repayment of notes
payable............... (60,147) (24,314) (241,654) (156,485) (1,162,305)
Capital contribution
(distribution)........ 21,964 (12,961) -- -- --
Sale of preferred
stock................. -- 491,949 4,207,912 1,157,912 --
Sale of common stock... -- 22,422 -- -- 21,740
Cash received in GCIS
Merger (Note 2)....... -- -- 3,326,996 -- --
--------- ----------- ------------ ----------- -----------
Net cash provided by
financing activities. 37,715 1,364,049 7,471,844 987,017 1,559,475
--------- ----------- ------------ ----------- -----------
NET INCREASE (DECREASE)
IN CASH................ (37,344) 20,671 6,425,831 116,343 (5,935,946)
CASH, beginning of
period................. 53,665 16,321 36,992 36,992 6,462,823
CASH, end of period..... $ 16,321 $ 36,992 $ 6,462,823 $ 153,335 $ 526,877
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for interest. $ 5,200 $ 4,300 $ 110,000 $ 49,700 $ 299,700
Cash paid for income
taxes................. $ 600 $ 5,600 $ 327,800 $ 202,300 $ 0
SUPPLEMENTAL DISCLOSURE
OF NONCASH INVESTING
AND FINANCING
ACTIVITIES:
Capital leases......... $ -- $ -- $ 665,000 $ -- $ 1,500,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations
GlobalCenter, Inc. ("GlobalCenter" or the "Company") is a provider of high-
speed content management and distribution services over the Internet. In
addition, the Company provides web hosting, design and development services
and various connectivity solutions to small and medium-sized businesses and
end users. GlobalCenter's scalable, comprehensive Digital Distribution
solution combines its proprietary software technology, content management
services, multiple Media Distribution Centers and public and private peering
arrangements. The Company has also recently established co-marketing
relationships with leading corporations to provide complementary coordinated
services to these partners' customers.
A primary component of the Company's Digital Distribution solution is its
proprietary software, which enables the intelligent and reliable distribution
of Internet content, circumvents bottlenecks and expedites delivery to end
users. The Company offers a comprehensive suite of services for businesses of
all sizes, ranging from Express Lane, a maximum performance, multiple-server
Digital Distribution service for rapid delivery of robust content, to
PrimeWeb, an entry-level, shared server Digital Distribution service. In
addition, the Company has developed Software Express and Event Express,
services designed for customers with occasional requirements for high
bandwidth distributions to a large number of end users, such as software
downloads or live media coverage of public events.
GlobalCenter coordinates content delivery via the Company's network
platform, consisting of five Media Distribution Centers linked to a fully
meshed ATM backbone connecting ten major metropolitan area hubs. Customers of
the Company can place dedicated servers with replicated content at multiple
Media Distribution Centers, increasing routing efficiencies and protecting
against delivery delays and the loss of data. In addition to its Media
Distribution Centers and ATM backbone, the Company maintains public peering
arrangements with key service providers and has established private peering
relationships with certain major carriers.
GlobalCenter manages content delivery for some of the world's most
trafficked web sites, providing state-of-the-art services and facilities and
efficient, high-speed distribution of content to end users. For businesses
with mission-critical applications, GlobalCenter enables continual high-speed
content management via dedicated servers while providing substantial
additional bandwidth capacity on short notice. Finally, for those companies
just establishing an Internet presence, GlobalCenter offers access to shared
or individual servers, providing reliable, high-performance content delivery
in a cost-effective manner.
The Company was incorporated in October 1993 as Impact Technology, Inc.
("Impact") to assemble and distribute personal computers and computer
peripherals to commercial and individual consumers. Impact began providing
full-service Internet access in June 1994, offering a wide range of Internet
access services to individuals and businesses in various areas of the western
United States.
In October 1995, Impact formed a wholly owned subsidiary, Primenet Services
for the Internet, Inc., a Delaware corporation ("Primenet"), and immediately
thereafter Impact was merged with and into Primenet (the "Primenet Merger")
with Primenet being the surviving corporation. Stockholders of Impact each
received shares of Primenet at an exchange rate of 36,000-for-1. The merger
did not change total stockholders' equity and had no effect on the carrying
value of assets or liabilities of Impact. Accordingly, all references in the
financial statements to the number of shares of common stock have been
restated to reflect this exchange.
On December 31, 1996, Primenet formed a wholly owned subsidiary that merged
with and into GCIS, Inc. ("GCIS") (the "GCIS Merger"). In connection with the
GCIS Merger, Primenet changed its name to GlobalCenter, Inc. As used herein,
the term "Company" refers to Impact prior to the Primenet Merger, Primenet
prior to the GCIS Merger, and to GlobalCenter, Inc. thereafter.
F-7
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Management Plans
In May 1997, the Company acquired I-Systems, Inc. ("ISI"). During the second
and third quarters of 1997, the Company was involved in combining the
operations of ISI with those of the Company, eliminating duplicate costs and
activities, productizing and developing marketing programs for ISI's services,
and significantly increasing the Company's direct sales force. Additionally,
during this time, the Company opened new Media Distribution Centers in London,
England and Washington, D.C. The Company recently agreed to acquire Voyager
Networks, Inc., a New York-based provider of content management solutions and
as a result of the acquisition, will add two Media Distribution Centers in New
York City upon completion of the acquisition.
In July 1997, Company completed a private offering of Series C preferred
stock through which it raised approximately $9.0 million. The Company also has
a $2.0 million lease financing facility available and is planning an initial
public offering of its common stock. Although there can be no assurance that
such debt, lease or equity financing will be available to the Company on
commercially favorable terms, or at all, the Company believes that current
cash available, and debt, lease or equity financing believed to be available
to the Company will be sufficient to fund operations over the next year.
If the Company does not complete the initial public offering or other
financing is not available, the Company would be forced to curtail its growth
and, possibly to implement cost reduction measures. Such cost reduction
measures might include closing under-utilized Media Distribution Centers,
reducing personnel costs and eliminating certain marketing activities.
Implementation of such cost reduction measures could have a material adverse
effect on the Company's ability to provide competitive service to its existing
customers and to attract new customers.
Successful future operations are subject to certain risks and uncertainties
including, among others, actual and potential competition by entities with
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, greater name recognition and more established
relationships in the industry than the Company. As a result, certain of these
competitors may be able to develop and expand their network infrastructures
more quickly, adapt to new or emerging technologies and changes in customer
requirements more quickly, take advantage of acquisition and other
opportunities more readily, devote greater resources to the marketing and sale
of their products and adopt more aggressive pricing policies than can the
Company. Additionally, the Company's future success will be substantially
dependent on the continued growth of the Internet, particularly with respect
to its commercialization. Rapid growth in the use of and interest in the
Internet is a recent phenomenon, and there can be no assurance that such
growth will continue at the same rate or at all, or that commerce over the
Internet will become widespread. The Company has recently experienced rapid
expansion of its operations through acquisitions of other businesses, which
has placed, and is expected to continue to place, significant demands on the
Company's administrative, operational and financial personnel and systems. The
Company's future operating results will depend substantially on the ability of
its officers and key employees to manage changing business conditions and to
implement and improve operational, financial control and reporting systems.
Further risks and uncertainties relate to technological advancements. The
regulatory environment and the ability of the Company to generate sufficient
revenue and obtain additional financing.
Principles of Consolidation
The financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts have been eliminated in
consolidation.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade receivables. The concentration of
credit risk is limited due to the large number of customers comprising the
Company's customer base.
Inventory
Inventory consists of computer hardware and components for resale, which are
stated at the lower of cost (first-in, first-out method) or market.
F-8
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives and consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL ----------------------- JUNE 30,
LIFE 1995 1996 1997
--------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land........................ -- $ 85,000 $ 85,000 $ 98,958
Building.................... 40 years 994,765 1,144,170 1,160,188
Network and computer
equipment.................. 2-5 years 839,634 4,021,174 6,589,714
Customer premise equipment.. 3 years -- 464,659 588,645
Furniture and fixtures...... 4 years 17,609 122,307 280,145
Leasehold improvements...... 2 years 19,628 162,105 314,033
Automobile.................. 5 years 4,000 13,659 16,071
---------- ----------- -----------
1,960,636 6,013,074 9,047,754
Less: Accumulated
depreciation............... (223,226) (1,290,002) (2,360,032)
---------- ----------- -----------
Property and equipment, net. $1,737,410 $ 4,723,072 $ 6,687,722
========== =========== ===========
</TABLE>
Customer premise equipment represents network routers which are leased to
customers under agreements with month-to month terms.
In the event that facts and circumstances indicate that the cost of property
and equipment may be impaired, an evaluation of recoverability would be
performed. This evaluation would include the comparison of the future
estimated undiscounted cash flows associated with the assets to the carrying
amount of these assets to determine if a writedown to market value of
discounted cash value is required.
Notes Receivable and Other Assets (unaudited)
Included in notes receivable and other assets at June 30, 1997 are the
following notes receivable:
<TABLE>
<S> <C>
Notes receivable from officers and stockholders, interest at
6.7%, due in March 2002 collateralized by 400,000 shares of the
Company's common stock held by the stockholders................. $1,000,000
Notes receivable from employees, interest at rates ranging from
8% to 8.25%, due through June 1999 ............................. $ 210,000
</TABLE>
Goodwill
Goodwill represents costs in excess of fair value of net assets of an
acquired business. These costs are amortized over a five-year period using the
straight-line method. The Company has evaluated whether events and
circumstances have occurred subsequent to its acquisition that indicate the
remaining estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. When factors indicate
that goodwill should be evaluated for possible impairment, the Company uses an
estimate of the related business segment's discounted future cash flows over
the remaining life of the goodwill in measuring whether the goodwill is
recoverable (See Note 9).
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------- SIX MONTHS ENDED
1995 1996 JUNE 30, 1997
------------------------- ----------------
<S> <C> <C> <C>
Accrued professional
fees................... $ 95,000 $ 549,000 $ 0
Accrued bonuses......... 15,000 296,000 271,000
Accrued payroll related
benefits............... 19,000 279,000 473,000
Accrued concession fees. 159,000 200,000 136,000
Accrued
telecommunication line
fees................... -- 226,000 --
Other accrued
liabilities............ 54,000 679,000 359,000
----------- ------------- ----------
$ 342,000 $ 2,229,000 $1,239,000
=========== ============= ==========
</TABLE>
F-9
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Service revenue includes one-time setup fees and monthly fees charged to
customers for content distribution and web hosting services as well as fees
for Internet connectivity services provided to customers. This revenue is
recognized as the service is provided.
Customer premise equipment revenue consists of revenue derived from the sale
of Company's computer peripherals and networking equipment. This is recognized
when installation of the equipment is completed.
Cost of Revenue
Cost of service revenue consists primarily of telecommunications costs,
depreciation of Media Distribution Center and network equipment, and personnel
costs related to network operations, technical and customer support.
Cost of customer premise equipment revenue consists primarily of the cost of
equipment sold to customers.
Software Development Costs
Costs for the internal development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs directly associated with the development would be capitalized. To date,
the Company has essentially completed its software development concurrently
with the establishment of technological feasibility and, accordingly, no such
costs have been capitalized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Periods
The results of operations for the six months ended June 30, 1997, are not
necessarily indicative of the results to be expected for the full year. All
information as of and for the six month periods ended June 30, 1996 and 1997,
is unaudited and, in the opinion of management, contains all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such information for the respective periods.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and valuation methodologies.
Considerable judgment is required in estimating fair values. Accordingly, the
estimates may not be indicative of the amounts the Company could realize in a
current market exchange. The carrying amounts of cash, accounts receivable,
accounts payable and notes payable approximate fair values.
(2) BUSINESS COMBINATIONS:
I-Systems, Inc. Merger
On May 6, 1997, the Company merged with ISI (the "ISI Merger"), a Sunnyvale,
California-based provider of web hosting and digital distribution services,
and in connection therewith issued 4,133,977 shares of common stock for all of
ISI's issued and outstanding voting stock. Additionally, all outstanding
options for common stock of ISI were assumed by the Company in connection with
the ISI Merger.
The ISI Merger was accounted for as a pooling-of-interests and, accordingly,
the Company's consolidated financial statements have been restated to include
the results of ISI for all periods presented.
F-10
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Separate revenue, net income (loss), and stockholders' equity of the merged
entities are presented in the following table:
<TABLE>
<CAPTION>
FOR THE
FOR THE SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
Revenue
GlobalCenter..................................... $ 11,241,343 $ 7,714,055
ISI.............................................. 1,709,017 2,253,218
------------ -----------
Combined........................................ $ 12,950,360 $ 9,967,273
============ ===========
Net income (loss)
GlobalCenter..................................... $(19,792,637) $(5,286,592)
ISI.............................................. 53,219 (627,390)
------------ -----------
Combined........................................ $(19,739,418) $(5,913,982)
============ ===========
Stockholders' Equity
GlobalCenter..................................... $ 3,760,129 $(1,038,609)
ISI.............................................. 3,196,749 2,569,354
------------ -----------
Combined........................................ $ 6,956,878 $ 1,530,745
============ ===========
</TABLE>
GCIS Merger
On December 31, 1996, the Company formed a wholly owned subsidiary that
merged with and into GCIS, a Sunnyvale, California-based provider of business
Internet management services. In connection with the GCIS Merger, the Company
issued 178,179 shares of common stock and 3,939,310 shares of Series B
preferred stock in exchange for all of the issued and outstanding voting stock
of GCIS. Additionally, all outstanding options for common stock of GCIS were
assumed by the Company in connection with the GCIS Merger.
The GCIS Merger has been accounted for as a purchase in accordance with
Accounting Principles Board No. 16 and, accordingly, the purchase price was
allocated to the assets of GCIS based on their relative fair market values.
The value of the common and preferred stock issued in this transaction was
based on an analysis using financing proposals issued to the Company as well
as comparisons to similar companies that are publicly traded. In connection
with the purchase price allocation, the Company determined that $18,933,000 of
the acquired assets consisted of in-process research and development. Since
there could be no assurance that the Company would be able to successfully
complete the development and integration of certain GCIS products or that the
acquired technology had any alternative future use, the acquired in-process
research and development was charged to expense by the Company in its quarter
ended December 31, 1996. The results of operations of GCIS are included in the
consolidated financial statements beginning on January 1, 1997.
The fair value of assets purchased and liabilities assumed have been
allocated net of write-off of $18,933,000 of in-process research and product
development, as follows:
<TABLE>
<S> <C>
Cash............................................................ $3,327,000
Property and equipment.......................................... 536,000
Goodwill........................................................ 2,317,000
Other assets.................................................... 488,000
Current liabilities............................................. 1,371,000
Notes payable................................................... 2,600,000
</TABLE>
F-11
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following unaudited pro forma combined results of operations data is
presented as though the GCIS Merger had occurred on January 1, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------
<S> <C>
Operating revenue....................................... $12,460,000
===========
Net loss................................................ $25,807,000
===========
</TABLE>
These pro forma combined results of operations are presented for comparative
purposes only and do not purport to be indicative of the actual results that
would have occurred had the GCIS Merger been consummated on January 1, 1996,
or of future operations of the combined Company.
(3) INCOME TAXES:
The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109").
SFAS No. 109 requires the use of an asset and liability approach in accounting
for income taxes. Deferred tax assets and liabilities are recorded based on
the differences between the financial statement and tax basis of assets and
liabilities and the tax rates in effect when these differences are expected to
reverse.
The components of the provision (benefit) for income taxes consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Current income taxes.......................... $ 23,000 $323,000 $ 100,000
Deferred income taxes......................... (20,000) (93,000) (140,000)
-------- -------- ---------
Total provision (benefit) for income taxes.. $ 3,000 $230,000 $ (40,000)
======== ======== =========
</TABLE>
The effective income tax rate is different than the amount that would be
computed by applying the United States corporate income tax rate to the income
(loss) before income taxes. The differences are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995 1996
------- -------- -----------
<S> <C> <C> <C>
Income tax at the statutory rate (34%)...... $ 3,030 $187,000 $(6,716,000)
Expenses not deductible for income tax
purposes, predominantly the write-off of
in-process research and product
development................................ -- 16,000 6,450,000
State income taxes, net of federal benefit.. 1,100 27,000 (44,000)
Deferred tax asset valuation allowance...... (1,130) -- 270,000
------- -------- -----------
Income tax expense (benefit)............... $ 3,000 $230,000 $ (40,000)
======= ======== ===========
</TABLE>
F-12
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax assets (liabilities) as
of December 31, 1995 and 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- -----------
<S> <C> <C>
Inventory............................................. $ -- $ 43,000
Depreciable and amortizable property and equipment.... -- 156,000
Accruals not deductible for tax purposes.............. 73,000 238,000
Prepaid expenses...................................... (29,000) (3,000)
Allowance for doubtful accounts....................... 88,000 262,000
Net operating loss carryforward....................... -- 1,160,000
Charitable contributions.............................. -- 20,000
Other................................................. -- (3,000)
Less: valuation allowance............................. -- (1,605,000)
-------- -----------
$132,000 $ 268,000
======== ===========
</TABLE>
Management believes that there is sufficient uncertainty regarding the
realization of deferred tax assets such that a full valuation allowance has
been provided. As a result of the GCIS Merger, the Company had approximately
$2,900,000 of unused net operating loss carryforwards for both federal and
state purposes at December 31, 1996. The utilization of these carryforwards is
limited under various tax law provisions as a result of the change of
ownership of GCIS.
(4) REVOLVING CREDIT AND TERM LOAN FACILITY
The Company has available a Revolving Credit and Term Loan Facility
("Facility Agreement"). The Facility Agreement was entered into by
GlobalCenter in November 1996, prior to the GCIS Merger. The maximum amount
available to the Company under the committed revolving credit line is
$3,000,000 less the aggregate of all term loans outstanding. The committed
term loan provides for a maximum of $2,000,000, less the revolving credit line
advances in excess of $1,000,000. Amounts outstanding under this agreement
bear interest at the prime rate plus .75%. Amounts borrowed under the
revolving line may be repaid and reborrowed any time until November 1997, at
which time all advances are due. Unpaid principal balances under the term loan
are payable in thirty-six equal installments, plus interest, beginning in
December 1997.
The Company is required to meet certain financial covenants as described in
the Facility Agreement. The Facility Agreement is collateralized by cash,
accounts receivable, property and other assets of the Company. There was no
outstanding balance on this Facility Agreement at December 31, 1996. The
balance outstanding at June 30, 1997 was $2,000,000.
F-13
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- -----------
1995 1996 1997
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable consist of the following:
Term loan to stockholder, interest at
prime (8.25% at December 31, 1996),
$125,000 payable per quarter with the
first payment due March 31, 1997.
Principal is due upon the successful
completion of an initial public
offering................................. $ -- $ 2,600,000 $ 2,475,000
Note payable to a finance company bearing
interest at the greater of 13% or the
prime rate plus 4.25%, secured by a first
deed of trust on the Company's Phoenix,
Arizona facility, furniture and fixtures
and inventory, guaranteed by the
principal stockholders, due in February
1997. This note was repaid in March 1997. 725,000 700,000 --
Note payable to stockholders, bearing
interest at 14.5% secured by a first deed
of trust on the Company's Phoenix,
Arizona facility, furniture and fixtures
and inventory, due in July 1998.......... -- -- 700,000
Note payable to stockholder, bearing
interest at the prime rate (8.25% at
December 31, 1996), $70,000 paid in
January 1997 with balance due in equal
installments of $6,900 including interest
through December 1997.................... 91,293 149,032 46,202
Note payable to related party, bearing
interest at 9%, due on demand. This note
was repaid in January 1997............... 65,192 42,195 --
Capital lease obligations, interest
ranging from 2.8% to 14.2%, principal and
interest due in monthly installments
ranging from $5,600 to $14,800 through
November 2000............................ -- 606,604 2,019,224
Note payable to stockholder, bearing
interest at 10%. This note was repaid in
January 1997............................. -- 104,860 --
--------- ----------- -----------
881,485 4,202,691 5,240,426
Less: Current portion..................... (881,485) (1,675,878) (2,291,294)
--------- ----------- -----------
Long-term notes payable................... $ -- $ 2,526,813 $ 2,949,132
========= =========== ===========
</TABLE>
Aggregate debt maturities for each of the years ending December 31, are as
follows:
<TABLE>
<CAPTION>
NOTES CAPITAL
PAYABLE LEASES
---------- ---------
<S> <C> <C>
1997................................................... $1,496,087 $ 248,369
1998................................................... 500,000 248,360
1999................................................... 500,000 236,507
2000................................................... 500,000 --
2001................................................... 500,000 --
Thereafter............................................. 100,000 --
---------- ---------
3,596,087 733,236
Less: Amounts representing interest.................... -- (126,632)
---------- ---------
$3,596,087 $ 606,604
========== =========
</TABLE>
F-14
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES
Licensing Agreements
The Company has granted licenses for Points of Presence ("POPs") to third
parties in specified geographical areas to utilize the Company's network and
access the Internet through the Company's network in exchange for a licensing
fee. Each licensee is responsible for the costs of the equipment, hardware and
software, as well as for the line charges for telephone lines connecting the
local node to the Company's network. The Company provides technical support to
all subscribers, and maintains responsibility for all billings and collections
of accounts for the licensee. The Company typically receives an initial fee
for connection and access to the Company's network and retains a percentage of
the gross income from subscriptions in that area. Continuing license fees are
recognized as revenue as the fees are earned. Accrued concession fees are
included in accrued liabilities the accompanying financial statements (See
Note 1) and represent amounts to be paid to licensees upon collection of
outstanding accounts receivable related to subscriber revenues from the
licensed POPs.
The Company has licensed POPs to certain employees and other related
parties. These related parties earned approximately $350,000, $662,000 and
$315,000 during the years ended December 31, 1995 and 1996 and the six months
ended June 30, 1997, respectively. Amounts owed to these related parties were
approximately $64,000, $107,000 and $68,000 at December 31, 1995 and 1996 and
June 30, 1997, respectively.
The Company has not granted any new licenses since January 1996.
Telecommunication Lines
The Company has guaranteed monthly usage levels with its communication
vendors. The commitments require minimum monthly payments exclusive of usage
discounts. Total payments under these agreements aggregated $17,900, $975,000
and $2,879,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. The service terms of the telecommunication line agreements are
in effect through October 2005.
Facilities
The Company has entered into various lease agreements for office space and
for unmanned telecommunication suites. Rent expense was $41,400, $105,300 and
$81,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
In October 1996, the Company entered into an agreement with a related party
to lease office space. The lease expires in November 2001. Monthly lease
payments required under this lease are $21,000.
Future minimum lease payments under the telecommunication lines and
noncancelable facility lease agreements as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1997......................................................... $ 3,310,000
1998......................................................... 3,180,000
1999......................................................... 2,450,000
2000......................................................... 1,655,000
2001......................................................... 1,557,000
Thereafter................................................... 567,000
-----------
$12,719,000
===========
</TABLE>
F-15
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other
The Company is a party to various lawsuits arising in the ordinary course of
business. Management believes, based on discussions with legal counsel, that
the resolution of such lawsuits will not have a material effect on the
financial statements taken as a whole.
(7) STOCK OPTION PLANS:
In 1995, the Company adopted a stock option plan (the "Plan") with 400,000
shares of common stock reserved for issuance thereunder. The Plan provides for
discretionary grants of stock options, stock awards, stock appreciation right,
and other cash awards to employees, officers and independent contractors, and
automatic grants of stock options to independent directors. The Board of
Directors has the discretion to determine who will receive discretionary
awards, the type of awards to be granted and the term, vesting, and exercise
prices. At December 31, 1996, 150,000 shares of stock were exercisable. The
Plan allows for immediate exercise of unvested options, however, any such
shares so purchased will be subject to repurchase by the Company upon the
cessation of employment of the optionholder prior to the vesting of such
shares. The Company's repurchase rights lapse with respect to option shares in
accordance with the vesting periods determined by the Company's Board of
Directors. Any shares repurchased by the Company will be purchased at the
original per share exercise price of such shares. In January 1997, the number
of shares of common stock reserved for issuance under the Company's Plan was
increased to 1,600,000 from 400,000.
In connection with the ISI Merger on May 6, 1997, all outstanding options to
purchase ISI common stock were converted into options to purchase common stock
of the Company on terms economically identical to the terms of the ISI options
(see Note 2). Options granted under the ISI stock option plan (the "ISI Plan")
vest as determined by the ISI Plan administrator, provided that options must
vest at the rate of at least 20% per year over five years from the date of
grant. The ISI Plan terminates in November 2006. The term of each option
granted under the ISI Plan shall not exceed ten years. No options had been
granted under the ISI Plan as of December 31, 1996. Subsequent to year end,
but prior to the ISI Merger, pursuant to the ISI Plan, options to purchase
372,230 shares were issued at exercise prices of $.29 per share. These options
may be immediately exercised pursuant to an early exercise provision, however,
any such shares so purchased will be subject to repurchase by the Company upon
the cessation of employment of the optionholder prior to the vesting of such
shares. The Company's repurchase rights lapse with respect to the option
shares, and the optionees shall vest in their respective option shares at a
rate of 25% upon completion of one year of service, with the balance vesting
in equal monthly installments over 36 months. Any shares repurchased by the
Company will be purchased at the original per share exercise price of such
shares.
In connection with the GCIS Merger on December 31, 1996, all outstanding
options to purchase GCIS common stock were converted into options to purchase
common stock of the Company on terms economically identical to the terms of
the GCIS options (see Note 1).
The Company accounts for the Plan pursuant to the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. ("SFAS No. 123"). As permitted under SFAS No. 123, the Company
has elected to continue to account for stock transactions with its employees
pursuant to the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock-Issued to Employees, under which no compensation cost has
been recognized as the exercise price of the issued options was equal to the
fair market value at the time of issuance. Had compensation cost for the plan
been recorded consistent with SFAS No. 123, the Company's net income would
have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996
-------- ------------
<S> <C> <C>
Net income (loss): As reported....................... $275,000 $(19,793,000)
Pro forma............................................ $248,000 $(19,848,000)
</TABLE>
F-16
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1995 and 1996: risk-free interest rates of 5.09% to
5.75% expected life of 1.5 to 2.1 years.
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Balance at January 1, 1995.......................... -- $ --
Granted............................................ 187,000 5.00
Exercised.......................................... -- --
Forfeited.......................................... (1,000) 5.00
-------
Balance at December 31, 1995........................ 186,000 5.00
Granted............................................ 4,000 6.50
Exercised.......................................... -- --
Forfeited.......................................... (40,000) 5.00
-------
Balance at December 31, 1996........................ 150,000 $5.04
=======
Weighted average fair value of options granted...... $ .55
</TABLE>
In connection with the repurchase of one of the licensed POPs in 1995, the
Company granted an option to purchase 750 shares of the Company's common stock
at an exercise price of $20.00 per share. This option became exercisable on
December 2, 1996 and expires December 31, 2000.
In connection with the GCIS Merger, the Company assumed 241,332 of
outstanding options of GCIS' employees and converted the GCIS options to
options in the Company. The fair market value of these options were valued
using the Black Scholes option pricing model and included in the purchase
price. These options have an exercise price of $.30 per share. The vesting
terms of these options is four years from the original date of grant. None of
these options were exercisable at December 31, 1996.
Subsequent to year end, the Company modified the Plan and the exercise
prices of all options outstanding on December 31, 1996 were changed to $.50
per share.
During the six months ended June 30, 1997, the Company granted approximately
2.0 million options to employees with grant prices ranging from $.50 per share
to $2.00 per share. In connection with these option grants, the Company has
recorded deferred compensation and non cash compensation expense of $2,062,000
and $466,000, respectively, was recorded in the accompanying financial
statements as of June 30, 1997. The deferred compensation will be expensed
over the four year vesting term of the options.
(8) ISSUANCE OF PREFERRED STOCK:
On January 12, 1996, the Company completed a private offering of 400,000
shares of Series A preferred stock at a per share price of $5.00. This
offering was completed in two closings. The first closing occurred on December
15, 1995, when the Company issued 121,900 shares and received proceeds of
$491,949, net of placement agent commissions and other offering costs of
$117,000. On January 12, 1996, the Company issued the remaining 278,100 shares
and received proceeds of $1.2 million, net of placement agent commissions and
offering costs of $232,588. In connection with the Series A preferred stock
offering, the Company issued warrants to the placement agent to purchase up to
40,000 shares of the Company's common stock at a price of $6.00 per share.
F-17
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the GCIS Merger, the Company issued 3,939,310 shares of
Series B preferred stock.
The shares of Series A and B preferred stock are convertible, at the option
of the holders, into shares of common stock. The 400,000 shares of Series A
preferred stock are convertible into 406,504 shares of Common Stock; and the
3,939,307 shares of Series B preferred stock are convertible into 3,939,307
shares of Common Stock. The shares of preferred stock will be converted
automatically into shares of common stock at the then effective conversion
price upon an initial public offering of common stock.
The shares of preferred stock have a liquidation preference equal to $5.00
and $3.78 per share plus accrued but unpaid dividends, for Series A preferred
stock and Series B preferred stock, respectively, and have voting rights
equivalent to the same proportion of common stock to be owned after
conversion. The preferred stockholders have the right to receive dividends
equal to the dividends per share declared on the common stock into which the
preferred shares are convertible. As a class, the holders of the preferred
stock have the right, until such time as the preferred stock have been
converted to common stock, to elect one member of the Company's Board of
Directors in the case of Series A preferred stock and two members in the case
of Series B preferred stock. The preferred stockholders also have certain
registration rights for offerings more than 180 days after an initial public
offering.
(9) SUBSEQUENT EVENTS (UNAUDITED):
Equity Offering
In July 1997, the Company completed a private offering of approximately 2.0
million shares of Series C preferred stock at a per share price of $4.45. Each
share of Series C is convertible, at the option of the holder, into common
stock at an initial conversion price of $4.45 per share. The shares of Series
C preferred stock will be converted automatically into shares of common stock
at the then effective conversion price upon an initial public offering of the
Company's common stock.
The shares of Series C preferred stock have a liquidation preference equal
to $4.45 and have voting rights equivalent to the same proportion of common
stock to be owned after conversion. The holders of the Series C preferred
stock have the right to receive dividends equal to the dividends per share
declared on the common stock into which the shares are convertible. As a
class, the holders of the Series C preferred stock have the right, until such
time as the shares have been converted to common stock, to elect one member of
the Company's Board of Directors. The holders of the Series C preferred stock
also have certain registration rights for offerings more than 180 days after
an initial public offering.
Revolving Credit and Term Loan Facility
Subsequent to year end, the Facility Agreement (see Note 5) was amended to
increase the maximum amount available to the Company under the committed
revolving credit line to $5,000,000 and to change the maturity date to
September 1998.
Initial Public Offering
Subsequent to December 31, 1996, the Company is planning an initial public
offering of its common stock. There can be, however, no assurance that the
offering will be completed.
Acquisition
In October 1997, the Company signed a definitive agreement to acquire
Voyager Networks, Inc. ("Voyager Merger") for approximately 1.5 million shares
of common stock.
F-18
<PAGE>
GLOBALCENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Option Plans
In October 1997, the Company's Board of Directors approved the Amended and
Restated 1997 Stock Option Plan providing for the grant of incentive stock
options to employees and for the grant of nonstatutory stock options and stock
purchase rights to employees, directors and consultants. Additionally, the
Company's Board of Directors adopted the 1997 Employee Stock Purchase Plan
whereby eligible employees may purchase shares of common stock through payroll
deductions, subject to certain restrictions.
Impairment of Long Lived Assets
During the third quarter of 1997, the Company discontinued further product
development efforts associated with the products acquired in the GCIS Merger.
In connection with this action, the Company evaluated the recoverability of
certain assets acquired from GCIS, including inventory, property and equipment
and certain intangible assets including goodwill. The sum of undiscounted
future cash flows was less than the carrying amount of assets and accordingly,
the Company expects to record an impairment loss of approximately $2.0 million
in the third quarter of 1997.
NonCash Compensation
Subsequent to June 30, 1997 the Company granted approximately 959,200
options to employees with a grant prices ranging from $2.00 per share to $6.00
per share. Additionally, the Company granted approximately 139,900 options to
certain management employees with an exercise price of $.50 during 1997. The
options vest over a period of four years beginning when the market
capitalization of the Company exceeds a specific threshold. This market
capitalization threshold was exceeded in the third quarter of 1997. In
connection with these option grants, the Company has recorded deferred
compensation and noncash compensation expense of $2,023,500 and $925,300,
respectively, as of and for the three months ended September 30, 1997. The
deferred compensation will be amortized over the four year vesting term of
these options.
The total noncash compensation expense recognized in the third quarter of
1997 was $1,083,000.
F-19
<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined balance sheet as of June 30, 1997 gives
effect to the acquisition of Voyager Networks, Inc. and the Series C preferred
stock offering as if they had occurred on June 30, 1997. The unaudited pro
forma combined statement of operations for the six months ended June 30, 1997
gives effect to the acquisition of Voyager Networks, Inc. as if it had
occurred on January 1, 1996. The unaudited pro forma combined statement of
operations for the year ended December 31, 1996 gives effect to the
acquisition of Voyager Networks, Inc. and GCIS as if each had occurred on
January 1, 1996.
These statements do not purport to be indicative of the financial position
or results of operations of GlobalCenter that might have occurred, nor are
they indicative of future financial position or results of operations.
The pro forma combined financial data should be read in conjunction with the
Pro Forma Combined Financial Statements and the notes thereto, included
elsewhere herein, and GlobalCenter's Consolidated Financial Statements and the
notes thereto, included herein. See "Disclosure Regarding Forward Looking
Statements."
F-20
<PAGE>
GLOBALCENTER, INC.
PRO FORMA BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------------
GLOBALCENTER VOYAGER
HISTORICAL MERGER
(NOTE 1) (NOTE 2) ADJUSTMENTS PRO FORMA
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................. $ 526,877 $ 543,210 $ 9,000,000 (a) $ 10,070,087
Accounts receivable... 2,356,415 1,103,193 -- 3,459,608
Inventory............. 578,656 -- -- 578,656
Deferred income Taxes. 251,620 131,377 -- 382,997
Intercompany.......... -- -- -- --
Prepaids/other Assets. 475,544 101,549 -- 577,093
------------ ---------- ----------- ------------
Total............... 4,189,112 1,879,329 9,000,000 15,068,441
NON-CURRENT ASSETS:
Property, plant &
Equipment............ 6,687,722 1,713,692 -- 8,401,414
Notes receivable and
other assets......... 1,314,599 199,525 -- 1,514,124
Intangible assets..... 2,084,926 -- 8,228,425 (e) 10,313,351
------------ ---------- ----------- ------------
Total Assets........ $ 14,276,359 $3,792,546 $17,228,425 $ 35,297,330
============ ========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...... $ 4,266,260 $2,492,396 $ -- $ 6,758,656
Accrued liabilities... 1,238,928 397,246 -- 1,636,174
Current portion of
long-term debt....... 2,291,294 100,950 -- 2,392,244
Revolving credit line. 2,000,000 -- -- 2,000,000
------------ ---------- ----------- ------------
Total............... 9,796,482 2,990,592 -- 12,787,074
NON-CURRENT LIABILITIES:
Long Term Debt........ 2,949,132 263,109 -- 3,212,241
Deferred Tax
Liability............ -- 4,364 -- 4,364
------------ ---------- ----------- ------------
Total non-current
liabilities ......... 2,949,132 267,473 -- 3,216,605
------------ ---------- ----------- ------------
Total liabilities..... 12,745,614 3,258,065 -- 16,003,679
------------ ---------- ----------- ------------
COMMITMENTS AND
CONTINGENCIES .........
STOCKHOLDERS' EQUITY:
Preferred stock....... 4,339 -- 2,022 (d) 6,361
Common Stock.......... 7,978 248 (248)(e) 9,515
-- -- 1,537 (e) --
Additional Paid-in
Capital.............. 28,941,649 1,522,100 (1,522,100)(e) 46,700,996
-- -- 8,997,978 (a) --
-- -- 8,761,369 (e) --
Notes receivable for
common shares
purchased............ (15,000) -- -- (15,000)
Deferred Compensation. (2,061,890) -- -- (2,061,890)
Retained Earnings..... (25,346,331) (987,867) 987,867 (e) (25,346,331)
------------ ---------- ----------- ------------
Total Stockholders'
Equity............. 1,530,745 534,481 17,228,425 19,293,651
------------ ---------- ----------- ------------
Total Liabilities
and Stockholders'
Equity............. $ 14,276,359 $3,792,546 17,228,425 $ 35,297,330
============ ========== =========== ============
</TABLE>
F-21
<PAGE>
GLOBALCENTER, INC.
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------
GLOBALCENTER VOYAGER
HISTORICAL MERGER ADJUSTMENTS
(NOTE 1) (NOTE 2) (NOTE 3) PRO FORMA
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Service................ $ 9,126,611 $3,491,875 $(2,062,898)(b) $10,555,588
Customer premise
equipment............. 840,662 -- -- 840,662
----------- ---------- ----------- -----------
Total................ 9,967,273 3,491,875 (2,062,898) 11,396,250
----------- ---------- ----------- -----------
Cost of Revenue
Service................ 6,495,823 2,875,090 (1,972,318)(b) 7,398,595
Customer premise
equipment............. 684,797 -- -- 684,797
Sales and Marketing...... 2,583,968 159,676 -- 2,743,644
Research & Development... 1,632,346 -- -- 1,632,346
General and
Administrative.......... 2,569,162 1,004,954 -- 3,574,116
Noncash compensation
expense................. 466,110 -- -- 466,110
Depreciation............. 1,101,056 -- -- 1,101,056
Amortization of Goodwill. 231,660 -- 822,842 (c) 1,054,502
----------- ---------- ----------- -----------
Total................ 15,764,922 4,039,720 (1,149,476) 18,655,166
----------- ---------- ----------- -----------
Loss from Operations..... (5,797,649) (547,845) (913,422) (7,258,916)
----------- ---------- ----------- -----------
Other Income & Expense
Interest Income........ 62,094 4,398 -- 66,492
Interest Expense....... (231,000) (29,737) -- (260,737)
----------- ---------- ----------- -----------
Total................ (168,906) (25,339) -- (194,245)
----------- ---------- ----------- -----------
Income Before Income
Taxes................... (5,966,555) (573,184) (913,422) (7,453,161)
Income Tax Benefit....... (52,573) -- -- (52,573)
----------- ---------- ----------- -----------
Net Loss................. $(5,913,982) $ (573,184) $ (913,422) $(7,400,588)
=========== ========== =========== ===========
</TABLE>
F-22
<PAGE>
GLOBALCENTER, INC.
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------
GLOBALCENTER GCIS- VOYAGER
HISTORICAL MERGER MERGER ADJUSTMENTS
(NOTE 1) (NOTE 2) (NOTE 2) (NOTE 3) PRO FORMA
------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue
Service............... $ 11,484,595 $ 1,218,055 $8,139,557 $(6,090,557)(b) $ 14,751,650
Customer premise
equipment............ 1,465,765 -- 1,465,765
------------ ----------- ---------- ----------- ------------
Total............... 12,950,360 1,218,055 8,139,557 (6,090,557) 16,217,415
Cost of Service....... 5,546,761 1,384,161 6,444,804 (5,011,606)(b) 8,364,120
Customer premise
equipment............ 1,176,189 -- -- -- 1,176,189
Sales and Marketing..... 640,593 1,687,105 100,330 -- 2,428,028
Research & Development.. -- 2,648,463 -- -- 2,648,463
General and
Administrative......... 5,300,662 1,056,319 1,335,070 -- 7,692,051
Depreciation............ 1,014,029 143,590 207,718 -- 1,365,337
Amortization of
Goodwill............... -- -- -- 463,317 (c) 2,109,001
1,645,684 (d)
Write-off of inventory
and property........... -- 453,500 -- -- 453,500
Write-off of in-process
research and
development............ 18,933,115 -- -- -- 18,933,115
------------ ----------- ---------- ----------- ------------
Total............... 32,611,349 7,373,138 8,087,922 (2,902,605) 45,169,804
------------ ----------- ---------- ----------- ------------
Loss from Operations.... (19,660,989) (6,155,083) 51,635 (3,187,952) (28,952,389)
------------ ----------- ---------- ----------- ------------
Other Income & Expense
Interest Income....... 22,739 -- 3,987 -- 26,726
Interest Expense...... (142,433) (115,196) (39,696) -- (297,325)
Other................. 1,790 -- -- -- 1,790
------------ ----------- ---------- ----------- ------------
Total............... (117,904) (115,196) (35,709) -- (268,809)
------------ ----------- ---------- ----------- ------------
Loss Before Income
Taxes.................. (19,778,893) (6,270,279) 15,926 (3,187,952) (29,221,198)
Income Taxes Benefit.... (39,475) -- (133,611) -- (173,086)
------------ ----------- ---------- ----------- ------------
Net Loss................ $(19,739,418) $(6,270,279) $ 149,537 $(3,187,952) $(29,048,112)
============ =========== ========== =========== ============
</TABLE>
F-23
<PAGE>
GLOBALCENTER, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. GLOBALCENTER HISTORICAL
The historical balances represent the financial position and results of
operations of GlobalCenter for each of the indicated dates and periods as
reported in the Company's historical consolidated financial statements.
2. VOYAGER MERGER AND GCIS MERGER
The Voyager and GCIS balances represent the financial position and results
of operations of Voyager and GCIS for each of the indicated dates and periods
as reported in the respective financial statements.
3. ADJUSTMENTS
The pro forma adjustments reflected in the pro forma combined financial
statements give effect to the following:
(a) To reflect the issuance of approximately 2.0 million shares of Series
C preferred stock at $4.45 per share.
(b) To reflect the removal of revenue and costs directly related to
Voyager's voice services business, which was discontinued in the third
quarter of 1997.
(c) To reflect amortization of approximately $2.3 million of goodwill
over 5 years, recorded in connection with the GCIS Merger.
(d) To reflect amortization of approximately $8.2 million of goodwill
over 5 years, recorded in connection with the Voyager Merger.
(e) To reflect the allocation of the purchase price consideration issued
in connection with the Voyager Merger.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Voyager Networks, Inc.
We have audited the accompanying balance sheets of Voyager Networks, Inc. as
of December 31, 1995 and 1996 and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Voyager Networks, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Marcum & Kliegman LLP
May 5, 1997
F-25
<PAGE>
VOYAGER NETWORKS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................... $ 30,958 $ 424,200 $ 543,210
Accounts receivable, net of allowance of
doubtful accounts of $150,000 and
$435,835 in 1995 and 1996, respectively
and $597,296 as of June 30, 1997......... 966,609 1,502,663 627,007
Other receivables......................... -- 758 476,186
Stock subscription receivable............. -- -- --
Prepaid expenses.......................... 2,284 41,536 26,378
Deferred commissions...................... -- -- 75,171
Deferred income tax....................... -- 131,377 117,927
---------- ---------- ----------
Total Current Assets..................... 999,851 2,100,534 1,865,879
---------- ---------- ----------
PROPERTY AND EQUIPMENT, Net................ 391,963 1,197,353 1,713,692
---------- ---------- ----------
OTHER ASSETS
Security deposits......................... 28,582 107,285 133,027
Other assets.............................. -- 675 1,937
Intangible assets, net.................... 58,201 67,258 64,561
---------- ---------- ----------
Total Other Assets....................... 86,783 175,218 199,525
---------- ---------- ----------
TOTAL ASSETS............................. $1,478,597 $3,473,105 $3,779,096
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..... $1,221,181 $2,044,142 $2,778,812
Income taxes payable...................... 1,425 6,079 0
Note payable, bank........................ 27,000 -- 0
Current maturities, long-term debt........ 18,453 130,542 100,949
---------- ---------- ----------
Total Current Liabilities................ 1,268,059 2,180,763 2,879,761
---------- ---------- ----------
OTHER LIABILITIES
Long-term debt, less current maturities... 67,495 132,326 263,109
Customer deposits payable................. 44,150 52,349 101,743
---------- ---------- ----------
Total Other Liabilities.................. 111,645 184,675 364,852
---------- ---------- ----------
TOTAL LIABILITIES........................ 1,379,704 2,365,438 3,244,613
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 100,000
shares authorized, 10,511 issued and
outstanding for 1995 and 24,796 issued
and outstanding for 1996................. 106 248 248
Additional paid-in capital................ 727,054 1,522,100 1,522,100
Accumulated deficit....................... (628,267) (414,681) (987,865)
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY............... 98,893 1,107,667 534,483
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. $1,478,597 $3,473,105 $3,779,096
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
VOYAGER NETWORKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
---------------------- ------------------------
1996 1995 1997 1996
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES...................... $8,139,557 $3,731,973 $3,490,360 $4,037,093
COST OF SALES.................. 6,444,804 2,849,185 2,875,090 3,190,039
---------- ---------- ---------- ----------
GROSS PROFIT.................. 1,694,753 882,788 615,270 847,054
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES....... 1,643,118 1,137,835 1,164,630 597,278
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS)...... 51,635 (255,047) (549,360) 249,776
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income............... 3,041 132 4,398 35
Interest expense.............. (39,696) (13,853) (29,737) (19,049)
Other income.................. 946 -- 1,515 --
---------- ---------- ---------- ----------
TOTAL OTHER EXPENSE.......... (35,709) (13,721) (23,824) (19,014)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING
PRINCIPLES.................. 15,926 (268,768) (573,184) 230,762
INCOME TAX (BENEFIT) EXPENSE... (133,611) 704 -- (56,942)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING
PRINCIPLES.................. 149,537 (269,472) (573,184) 287,704
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLES, Net
of taxes of $15,192........... 64,049 -- -- 64,049
---------- ---------- ---------- ----------
NET INCOME (LOSS)............ $ 213,586 $ (269,472) $ (573,184) $ 351,753
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
VOYAGER NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE December 31, 1994. 10,571 $106 $ 727,054 $ (358,795) $ 368,365
Net loss................. -- -- -- (269,472) (269,472)
------ ---- ---------- ----------- ----------
BALANCE December 31, 1995. 10,571 106 727,054 (628,267) 98,893
------ ---- ---------- ----------- ----------
Issuance of 2,480 shares
of restricted common
stock for services
rendered ............... 2,480 25 50,542 -- 50,567
Unearned compensation on
restricted common stock
issued.................. -- -- (35,379) -- (35,379)
Issuance of 11,745 shares
of common stock......... 11,745 117 779,883 -- 780,000
Net income............... -- -- -- 213,586 213,586
------ ---- ---------- ----------- ----------
BALANCE, December 31,
1996..................... 24,796 $248 $1,522,100 $ (414,681) $1,107,667
------ ---- ---------- ----------- ----------
Net loss.................. -- -- -- (613,184) (613,184)
------ ---- ---------- ----------- ----------
BALANCE, June 30, 1997.... 24,796 $248 $1,522,100 $(1,027,865) $ 494,483
====== ==== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE>
VOYAGER NETWORKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------- -----------------------
1996 1995 1997 1996
--------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss)............. $ 213,586 $(269,472) $(573,184) $ 351,753
--------- --------- --------- ---------
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization................ 207,718 141,041 164,842 74,499
Increase in allowance of
doubtful accounts........... 285,835 150,000 161,325 --
Increase in accounts
receivable.................. (821,889) (711,815) 711,633 (527,825)
(Increase) decrease in other
receivables................. (758) 4,483 (475,428) --
Decrease in subscription
receivable.................. -- 230,000 -- (300,000)
Increase in prepaid expenses. (39,252) (707) 15,158 (30,073)
Increased in deferred
commisions.................. -- -- (75,171) --
Increase in deferred income
tax......................... (131,377) -- 13,450 (48,020)
Increase in security
deposits.................... (78,702) (16,728) (25,742) (70,092)
Increase in other assets..... (675) -- (1,262)
Increase in accounts payable
and accrued expenses........ 822,961 771,128 734,670 385,826
Increase (decrease) in
customer deposits payable... 8,199 (13,950) 49,394 --
Increase in income tax
payable..................... 4,654 704 (6,079) 4,654
Cumulative effect of a change
in accounting principle..... -- -- -- (79,242)
--------- --------- --------- ---------
TOTAL ADJUSTMENTS........... 256,714 554,156 1,266,790 (590,273)
--------- --------- --------- ---------
Net cash provided by (used
in) operating activities... 470,300 284,684 693,606 (238,520)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Payments for the purchase of
property and equipment....... (725,380) (289,774) (675,787) (400,891)
Payments for the purchase of
intangible assets............ (14,300) (58,512) -- --
Cash received from security
deposits..................... -- -- -- 7,950
--------- --------- --------- ---------
Net cash used in investing
activities................. $(739,680) $(348,286) (675,787) $(392,941)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
Principal (repayments)
proceeds of long-term debt,
net.......................... $(105,565) $ 62,133 101,191 $ 67,116
(Repayment) proceeds of note
payable, bank................ (27,000) 27,000 -- (27,000)
Issuance of common stock...... 795,187 -- -- 760,133
Proceeds from sale of when
issued common stock.......... -- -- -- --
--------- --------- --------- ---------
Net cash provided by
financing activities....... 662,622 89,133 101,191 800,249
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN
CASH.......................... 393,242 25,531 119,010 168,788
CASH--Beginning................ 30,958 5,427 424,200 30,958
--------- --------- --------- ---------
CASH--Ending................... $ 424,200 $ 30,958 543,210 $ 199,746
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the years
ended December 31, 1995 and
1996:
Interest..................... $ 39,696 $ 13,853 24,946 $ 19,047
Income taxes................. $ 6,958 $ -- -- $ 270
Noncash financing and
investing activities:
</TABLE>
During 1996, the Company incurred equipment loans payable of $282,485 for the
purchase of equipment.
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
VOYAGER NETWORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Voyager Networks, Inc. (the "Company"), a Delaware corporation, was formed
April 22, 1992 and began operations on July 1, 1993 to provide worldwide data
and voice communication services.
Basis of Accounting
The accompanying financial statements have been prepared on the accrual
basis of accounting, from the books and records of the Company.
Property and Equipment
Property and equipment are carried at cost. Expenditures for major renewals
and betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense
as incurred. The cost of property and equipment is depreciated over the
estimated useful lives of the related assets. Depreciation is computed by the
use of accelerated methods for income tax purposes and by the use of straight-
line methods for financial reporting purposes. The Company enacted a change in
accounting principles for depreciation for the period ended December 31, 1996
(See Note 6).
Intangible Assets
Intangible assets consist of licensing fees to conduct business in various
states and organization costs which are amortized on a straight line basis
over 15 and five years, respectively.
Customer Deposits
The Company takes deposits from customers for service and equipment
purchases. These deposits are recognized by the Company as income when earned
in accordance with the specific agreement with the customer.
Advertising Costs
Advertising costs, consisting of advertising and promotional materials, are
capitalized over their estimated useful life, ranging from one to three years.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"). SFAS 123 requires compensation expense to be
recorded either by using the new fair value method or by using existing
accounting rules prescribed by Accounting Principles Board Option No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations with proforma disclosure of what net income and earnings per
share would have been had the Company adopted the new fair value method. The
Company intends to continue to account for its stock based compensation plans
in accordance with the provisions of APB 25 along
F-30
<PAGE>
VOYAGER NETWORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
with the related proforma disclosures. During 1996, no significant difference
resulted in measuring compensation costs under either APB 25 or SFAS 123.
Management Plans
Successful future operations are subject to certain risks and uncertainties
including, among others, actual and potential competition by entities with
greater financial resources, experience and market presence than the Company,
risks associated with consolidation in the industry, the need to manage growth
and expansion, certain technology and regulatory risks and the ability of the
Company to generate sufficient revenue and obtain additional financing. The
Company's future success will be substantially dependent on the continued
growth of the Internet, particularly with respect to its commercialization.
Rapid growth in the use of and interest in the Internet is a recent
phenomenon, and there can be no assurance that such growth will continue at
the same rate or at all or that commerce over the Internet will become
widespread.
The Company has entered into an agreement, subject to the approval by the
stockholders of the Company, to merge with GlobalCenter, Inc. ("Global") a
provider of high speed content management and distribution services over the
Internet. Subsequent to December 31, 1996 Global is planning an initial public
offering of its common stock. There can be, however, no assurance that the
offering will be successful.
If the Company does not complete its merger with Global or obtain other
financing, the Company would be forced to curtail its growth and, possibly to
implement cost reduction measures. Such cost reduction measures might include
reducing personnel costs and eliminating certain marketing activities among
other reductions. Implementation of such cost reduction measures could have a
material adverse effect on the Company's ability to provide competitive
service to its existing customers and to attract new customers.
In September 1997 Voyager decided to terminate the business of providing
voice telephone service to customers and concentrate its efforts on providing
digital distribution services.
Interim Periods
The results of operations for the six months ended June 30, 1997, are not
necessarily indicative of the results to be expected for the full year. All
information as of and for the six month periods ended June 30, 1996 and 1997,
is unaudited and, in the opinion of management, contains all adjustments
consisting only of normal recurring adjustments necessary for a fair
presentation of such information for the respective periods.
Fair Value of Financial Instrument
The estimated fair value of finacial instruments has been determined by the
Company using available market information and valuation methodologies.
Considerable judgement is required in estimating fair values. Accordingly, the
estimates may not be indicative of the amounts the Company could realize in a
current market exchange. The carrying amounts of cash, accounts receivable,
accounts payable and notes payable approximate fair values.
F-31
<PAGE>
VOYAGER NETWORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996 consists of the
following:
<TABLE>
<CAPTION>
ESTIMATED
1995 1996 USEFUL LIVES
-------- ---------- ------------
<S> <C> <C> <C>
Network and switching equipment................ $413,133 $1,108,050 5-7 years
Office equipment............................... 65,378 125,314 5 years
Furniture and fixtures......................... 33,111 101,788 5 years
Leasehold improvements......................... 54,585 159,806
-------- ----------
566,207 1,494,958
Less: accumulated depreciation................. 174,244 297,605
-------- ----------
Property and Equipment, net................... $391,963 $1,197,353
======== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1995 and 1996 was
$138,980 and $202,475, respectively.
NOTE 3--INTANGIBLE ASSETS
Intangible assets at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Licensing fees............................................... $58,512 $72,324
Organization costs........................................... 2,500 2,861
------- -------
61,012 75,185
Less: accumulated amortization............................... 2,811 7,927
------- -------
Intangible assets, net...................................... $58,201 $67,258
======= =======
</TABLE>
Amortization expense for the years ended December 31, 1996 and 1995 was
$5,243 and $2,061, respectively.
F-32
<PAGE>
VOYAGER NETWORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LONG-TERM DEBT
Long-term debt as December 31, 1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Equipment loan, payable due in thirty-six (36) monthly
installments of $927, including principal and interest
through December 1997, secured by underlying equipment...... $17,630 $ 9,832
Equipment loan, payable due in thirty-six (36) monthly
installments of $170, including principal and interest
through December 1997, secured by underlying equipment...... 3,785 2,073
Equipment loan, payable due in sixty (60) monthly
installments of $1,452, including principal and interest
through February 2001, secured by underlying equipment...... 64,533 46,233
Equipment loan, payable due in thirty-six (36) monthly
installments of $279, including principal and interest
through November 1999, secured by underlying equipment...... -- 7,422
------- --------
$85,948 $65,560
------- --------
Equipment loan, payable due in thirty-six (36) monthly
installments of $1,308, including principal and interest
through October 1999, secured by underlying equipment....... -- 30,949
Equipment loan, payable due in twenty-four (24) monthly
installments of $5,194, including principal and interest
through August 1998, secured by underlying equipment, with a
balloon payment of $13,440.................................. -- 102,736
Equipment loan, payable due in twelve (12) monthly
installments of $1,197, including principal and interest
through May 1997, secured by underlying equipment........... -- 4,568
Equipment loan, payable in twenty-four (24) monthly
installments of $4,493, including principal and interest
through December 1997, secured by underlying equipment...... -- 59,055
------- --------
Total Long-Term Debt........................................ 85,948 262,868
Less: Current Maturities..................................... 18,453 130,542
------- --------
Total Long-Term Debt, Less Current Maturities............... $67,495 $132,326
======= ========
</TABLE>
Maturities of long-term debt at December 31, 1996 for the next five (5) years
and in the aggregate are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
<S> <C>
1997........................................................... $130,542
1998........................................................... 88,500
1999........................................................... 26,172
2000........................................................... 14,833
2001........................................................... 2,821
--------
Total.......................................................... $262,868
========
</TABLE>
NOTE 5--NOTE PAYABLE, BANK
On June 1, 1995, the Company entered into a credit facility agreement for a
revolving credit line of $99,000 which bears interest at 2% over the prime
rate. As of December 31, 1995 and 1996 the outstanding balance was $27,000 and
$0, respectively. The line is collateralized by all of the Company's assets and
personally guaranteed by three of the Company's stockholders.
F-33
<PAGE>
VOYAGER NETWORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLES
In 1996 the Company changed their method of recording depreciation on their
property and equipment from the accelerated method to the straight-line method.
This charge would correctly reflect the actual useful lives of the assets. This
change, which has been accounted for as a cumulative effect of a change in
accounting principles amounted to $64,049 net of related income taxes (See Note
1).
NOTE 7--COMMITMENTS AND CONTINGENCIES
Operating Lease Arrangements
The Company conducts its operations from facilities that are leased under
noncancelable operating leases expiring in 2001. The Company pays property
taxes, insurance, maintenance and other expenses related to the leased
properties. Rental expense in 1995 and 1996 amounted to $72,800 and $137,756,
respectively.
The Company leases equipment under various noncancelable operating leases
expiring between 1997 to 2001.
Future minimum rental payments under the above noncancelable operating leases
as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ----------
<S> <C>
1997......................................................... $ 419,179
1998......................................................... 330,121
1999......................................................... 333,046
2000......................................................... 288,651
2001......................................................... 150,922
----------
Total........................................................ $1,521,919
==========
</TABLE>
Stock Option Plan
In 1996 the Company adopted a Stock Option Plan ("the Plan"). Each option
granted under the Plan is intended to be an incentive stock option within the
meaning of Section 422A of the Internal Revenue Code. The options may be
granted to any eligible employee of the Company at the discretion of the Board
of Directors (the "Board"). The stock may be issued pursuant to options granted
under the Plan, these options shall be shares of the Company's common stock,
$0.01 par value, which may be either treasury stock or authorized but unissued
stock not to exceed 2,500 shares. The option price shall be fixed by the Board
and stated in each option agreement, and shall not be less than the fair market
value of a share of the stock. As of December 31, 1996, the Board of Directors
granted 1,750 shares of options that range between $67 per share to $85 per
share.
Litigation
The Company is involved in litigation through the normal course of business.
The Company believes that the resolution of these matters will not have a
material adverse effect on the financial position of the Company.
F-34
<PAGE>
VOYAGER NETWORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY
In May 1996, an employee was issued 2,480 shares of the Company's common
stock for services rendered to the Company in lieu of compensation of $50,567.
This stock is subject to the terms of an employment agreement and will vest
over five years period as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES VESTING DATE
--------- -----------------
<S> <C> <C>
496 May 31, 1996
248 December 31, 1996
248 December 31, 1997
248 December 31, 1998
1,240 December 31, 1999
-----
Total........................ 2,480
=====
</TABLE>
The unvested portion of the common stock is subject to forfeiture provisions
contained in the employment agreement that are effective upon the occurrence of
early termination of the agreement or various other criteria by April 30, 1999.
The vested portion is being amortized as compensation expense on a pro rata
basis over the vesting period, based on the amount of shares vested during each
period. Compensation expense for such shares amounted to $15,187 during 1996.
NOTE 9--INCOME TAXES
The Company recognizes deferred tax assets for the future tax consequences of
events that have been recognized in their financial statements or tax returns.
Accordingly, the Company has recorded a deferred tax asset for the reduction in
income taxes payable in future years related to operating loss carryforwards
which the Company believes will be utilized against future taxable income.
The provision for income taxes for the years ended December 31, 1995 and 1996
consists of the following:
<TABLE>
<CAPTION>
1995 1996
---- ---------
<S> <C> <C>
Deferred..................................................... $ -- $(146,569)
Current...................................................... 704 12,958
---- ---------
Total...................................................... $704 $(133,611)
==== =========
</TABLE>
The Company utilized approximately $178,606 of net operating losses in 1996
to reduce the current period tax expense and has available $394,740 of net
operating loss carryforwards as of December 31, 1996 to reduce future taxable
income. These carryforwards expire in years through 2010.
NOTE 10--ECONOMIC DEPENDENCY
Major Customers
During 1995 and 1996, the Company sold a substantial portion of its products
to four customers. During the years ended December 31, 1995 and 1996, sales to
these customers were approximately $1,614,000 (43%) and $4,396,000 (54%),
respectively. As of December 31, 1995 and 1996, the amounts due from these
customers included in accounts receivable were $589,578 and $1,012,448,
respectively.
Major Suppliers
During 1995 and 1996, the Company purchased a substantial portion of its
carrier charges from one supplier. During the years ended December 31, 1995 and
1996, purchases from this supplier were approximately $1,538,000 (86%) and
$2,352,000 (49%), respectively. At December 31, 1995 and 1996, the amounts due
this supplier included in accounts payable were $515,947 and $937,000,
respectively.
F-35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GCIS, Inc.:
We have audited the accompanying balance sheet of GCIS, Inc. (a Delaware
corporation), as of December 31, 1996, and the related statements of
operations, stockholders' equity and cash flows for the eleven months then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GCIS, Inc. as of December
31, 1996, and the results of its operations and its cash flows for the eleven
months then ended in conformity with generally accepted accounting principles.
Phoenix, Arizona,
October 8, 1997.
F-36
<PAGE>
GCIS, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................. $ 3,326,997
Accounts receivable, net of allowance for doubtful accounts of
$46,811......................................................... 202,377
Inventory........................................................ 57,835
Prepaid telecommunication access fees............................ 600,000
Prepaid expenses and other current assets........................ 146,736
-----------
Total current assets............................................ 4,333,945
PROPERTY AND EQUIPMENT, net....................................... 536,198
OTHER ASSETS...................................................... 167,800
-----------
Total assets.................................................... $ 5,037,943
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 339,891
Accrued professional fees........................................ 243,489
Accrued telecommunication access fees............................ 188,422
Accrued bonuses.................................................. 184,990
Accrued payroll related benefits accrual......................... 137,195
Accrued interest................................................. 108,132
Current portion of notes payable................................. 500,000
Other accrued liabilities........................................ 131,720
-----------
Total current liabilities....................................... 1,833,839
NOTES PAYABLE, net of current portion............................. 2,100,000
-----------
Total liabilities............................................... 3,933,839
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $.001 par value; $.52 liquidation
preference; 8,000,000 shares authorized; 7,500,000 shares issued
and outstanding................................................. 7,500
Preferred stock, Series B, $.001 par value; $.52 liquidation
preference; 7,666,960 shares authorized, issued and outstanding. 7,667
Preferred stock, Series C, $.001 par value; $.15 liquidation
preference; 13,333,332 shares authorized, issued and
outstanding..................................................... 13,333
Common stock, $.001 par value; 40,000,000 shares authorized;
1,289,000 shares issued and outstanding......................... 1,289
Additional paid-in capital....................................... 7,344,594
Accumulated deficit.............................................. (6,270,279)
-----------
Total stockholders' equity...................................... 1,104,104
-----------
Total liabilities and stockholders' equity..................... $ 5,037,943
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-37
<PAGE>
GCIS, INC.
STATEMENT OF OPERATIONS
FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
SERVICE, ACCESS AND OTHER REVENUE................................. $ 1,218,055
-----------
COSTS AND EXPENSES:
Cost of revenue.................................................. 1,384,161
Sales and marketing.............................................. 1,687,105
General and administrative....................................... 1,199,909
Engineering and operations....................................... 2,648,463
Write down of property and equipment............................. 377,000
Write down of inventory.......................................... 76,500
-----------
Total costs and expenses........................................ 7,373,138
-----------
LOSS FROM OPERATIONS.............................................. (6,155,083)
-----------
INTEREST AND OTHER EXPENSE........................................ 115,196
-----------
Net loss........................................................ $(6,270,279)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-38
<PAGE>
GCIS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------ ---------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ------- --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Capitalization of the
Company, February
1996.................. 6,000,000 $ 6,000 100 $ -- $ 547,680 $ -- $ 553,680
Issuance of Series A
preferred stock....... 1,500,000 1,500 -- -- 748,500 -- 750,000
Issuance of Series B
preferred stock,...... 7,666,960 7,667 -- -- 3,994,486 -- 4,002,153
Issuance of Series C
preferred stock....... 13,333,332 13,333 -- -- 1,986,667 -- 2,000,000
Issuance of common
stock................. -- -- 1,288,900 1,289 67,261 -- 68,550
Net loss............... -- -- -- -- -- (6,270,279) (6,270,279)
---------- ------- --------- ------ ---------- ----------- -----------
BALANCE, December 31,
1996................... 28,500,292 $28,500 1,289,000 $1,289 $7,344,594 $(6,270,279) $ 1,104,104
========== ======= ========= ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-39
<PAGE>
GCIS, INC.
STATEMENT OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................... $(6,270,279)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation.................................................... 143,590
Write down of property and equipment............................ 377,000
Write down of inventory......................................... 76,500
Changes in assets and liabilities:
Increase in accounts receivable, net............................ (34,798)
Increase in inventories......................................... (130,790)
Increase in prepaid telecommunication access fees............... (600,000)
Decrease in prepaid expenses and other current assets........... 4,794
Increase in other assets........................................ (92,800)
Increase in accounts payable.................................... 92,543
Increase in accrued telecommunication access fees............... 188,422
Decrease in accrued professional fees........................... (59,511)
Increase in accrued bonuses..................................... 79,990
Increase in accrued payroll related benefits.................... 137,195
Increase in accrued interest.................................... 108,132
Decrease in other accrued liabilities........................... (45,952)
-----------
Net cash used in operating activities.......................... (6,025,964)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (274,064)
-----------
Net cash used in investing activities.......................... (274,064)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable...................................... 2,600,000
Issuance of Series A preferred stock............................. 750,000
Issuance of Series B preferred stock............................. 4,002,153
Issuance of Series C preferred stock............................. 2,000,000
Issuance of common stock......................................... 68,550
-----------
Net cash provided by financing activities...................... 9,420,703
-----------
NET INCREASE IN CASH.............................................. 3,120,675
CASH, beginning of period......................................... 206,322
-----------
CASH, end of period............................................... $ 3,326,997
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................... $ 44,000
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-40
<PAGE>
GCIS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations
Global Village Communication, Inc. ("GVCI"), a Delaware corporation, was
founded in June 1989, designs, develops and markets easy-to-use integrated
communication products and services for users of personal computers with
Windows, Macintosh, OS/2 or DOS operating systems. GCIS, Inc. ("GCIS" or "the
Company"), a former division of GVCI, delivers worldwide e-mail and full
Internet access in a plug-and-play package, which includes services ranging
from the router hardware to the service registration. In February 1996, GCIS
became a wholly owned subsidiary of GVCI, and accordingly, the financial
statements presented are for the period from February 1, 1996 through December
31, 1996.
Primenet Merger
On December 31, 1996, the Company merged with Primenet Services for the
Internet, Inc. ("Primenet"). In connection with the Primenet merger, Primenet
issued 178,179 shares of its common stock and 3,939,310 shares of its Series B
preferred stock in exchange for all of the issued and outstanding voting stock
of GCIS. Additionally, all outstanding options for common stock of GCIS were
assumed by Primenet in connection with the merger.
This merger was accounted for as a purchase in accordance with Accounting
Principles Board No. 16 and 17 accordingly. The purchase price was allocated
to the assets of GCIS based on their relative fair market values.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade receivables. The concentration of
credit risk is limited due to the large number of customers comprising the
Company's customer base, which is located primarily in the western United
States.
Inventory
Inventory consists of computer hardware and components for resale, which are
stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives and consist of the
following:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31,
LIFE 1996
--------- ------------
<S> <C> <C>
Network and computer equipment........................ 3 years $ 192,320
Customer premise equipment............................ 3 years 464,659
Software.............................................. 3-5 years 51,966
---------
708,945
Less: accumulated depreciation........................ (172,747)
---------
Property and equipment, net........................... $ 536,198
=========
</TABLE>
F-41
<PAGE>
GCIS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Customer premise equipment represents network routers which are leased to
customers under agreements with month-to-month terms.
In the event that facts and circumstances indicate that the cost of property
and equipment may be impaired, an evaluation of recoverability would be
performed. This evaluation would include the comparison of the future
estimated undiscounted cash flows associated with the assets to the carrying
amount of these assets to determine if a writedown to market value or
discounted cash value is required.
Based on an evaluation performed as of December 31, 1996, it was determined
that an impairment loss of approximately $377,000 should be recognized for
customer premise equipment as a result of technological advancements.
Revenue Recognition
Service, access and other revenue includes initial fixed connection charges,
fees related to the licensing agreements and monthly access fees. These
revenues are recognized as the service is provided.
Cost of Revenue
Cost of revenue consists primarily of network telecommunications costs,
referral fees, depreciation of network equipment, and personnel costs related
to network operations, technical and customer support.
Software Development Costs
Costs for the internal development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs directly associated with the development would be capitalized. To date,
the Company has essentially completed its software development concurrently
with the establishment of technological feasibility and, accordingly, no such
costs have been capitalized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) INCOME TAXES:
The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109").
SFAS No. 109 requires the use of an asset and liability approach in accounting
for income taxes. Deferred tax assets and liabilities are recorded based on
the differences between the financial statement and tax basis of assets and
liabilities and the tax rates in effect when these differences are expected to
reverse.
F-42
<PAGE>
GCIS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The income tax expense (benefit) is different than the amount that would be
computed by applying the United States corporate income tax rate to the loss
before income taxes. The differences are summarized as follows:
<TABLE>
<S> <C>
Income tax at the statutory rate (34%).......................... $ 2,081,000
Expenses not deductible for income tax purposes................. (4,400)
Deferred tax asset valuation allowance.......................... (2,076,600)
-----------
Income taxes .................................................. $ --
===========
</TABLE>
Management believes that there is sufficient uncertainty regarding the
realization of deferred tax assets such that a full valuation allowance has
been provided. The utilization of these carryforwards is limited under various
tax law provisions as a result of the change of ownership of GCIS.
(3) NOTE PAYABLE:
<TABLE>
<S> <C>
Term loan to stockholder, interest at the prime rate (8.25% at
December 31, 1996),
$125,000 payable per quarter with the first payment due March
31, 1997....................................................... $2,600,000
Less: Current portion........................................... (500,000)
----------
Long-term debt.................................................. $2,100,000
==========
</TABLE>
The note matures as follows:
<TABLE>
<CAPTION>
NOTES
PAYABLE
----------
<S> <C>
1997.............................................................. $ 500,000
1998.............................................................. 500,000
1999.............................................................. 500,000
2000.............................................................. 500,000
2001.............................................................. 500,000
Thereafter........................................................ 100,000
----------
$2,600,000
==========
</TABLE>
The Company has available a Revolving Credit and Term Loan Facility
("Facility Agreement"). The Facility Agreement was entered into by GCIS in
November 1996, prior to the Primenet merger. The maximum amount available to
the Company under the committed revolving credit line is $3,000,000, less the
aggregate term loan then outstanding. The committed term loan provides for a
maximum of $2,000,000, less the revolving credit line advances in excess of
$1,000,000. Amounts outstanding under this agreement bear interest at the
prime rate plus .75%. Amounts borrowed under the revolving line may be repaid
and reborrowed at anytime until November 1997, at which time all advances are
due. Unpaid principal balances under the term loan are payable in 36 equal
installments, plus interest, beginning in December 1997.
The company is required to meet certain financial covenants as described in
the Facility Agreement. The Facility Agreement is collateralized by cash,
accounts receivable, property and other assets of the Company. There was no
outstanding balance on this Facility Agreement at December 31, 1996.
This Facility Agreement was assumed by Primenet in connection with Primenet
merger and the terms have been subsequently modified.
F-43
<PAGE>
GCIS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) COMMITMENTS AND CONTINGENCIES:
Facilities
The Company has entered into a lease agreement for office space. Rent
expense was approximately $86,000 for the eleven months ended December 31,
1996.
Future minimum lease payments under noncancelable facility lease agreements
as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997............................................................. $171,012
1998............................................................. 171,012
1999............................................................. 42,753
2000............................................................. --
2001............................................................. --
Thereafter....................................................... --
--------
$384,777
========
</TABLE>
(5) STOCK OPTION PLANS:
In 1996, the Company adopted a stock option plan (the "Plan") with 5,009,250
shares of common stock reserved for issuance thereunder. The Plan provides for
discretionary grants of incentive stock options or nonstatutory stock options
to employees, officers, and independent contractors. The Board of Directors
has the discretion to determine the employees, officers, and independent
contractors who will receive discretionary awards, the type of awards to be
granted, and the term, vesting, and exercise prices.
The Plan allows for the exercise of unvested options. The shares purchased
under such options are subject to repurchase by the Company at the original
exercise price paid per share upon cessation of employment prior to vesting in
such shares. Such repurchase rights shall lapse with respect to the option
shares, and the options shall vest in their respective option shares based on
the vesting period determined by the Board of Directors.
All options outstanding at December 31, 1996 vest at a rate of 25% at the
end of the first year and 2% per month thereafter. These option exercise price
was $.05 per share. At December 31, 1996, no options had vested.
In connection with the Primenet merger on December 31, 1996, Primenet
assumed the options of employees of GCIS and converted the GCIS options to
options in the Company's common stock at terms economically identical to the
grantee.
The Company accounts for the Plan pursuant to the provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), Accounting for Stock-
Based Compensation. As permitted under SFAS No. 123, the Company has elected
to continue to account for stock transactions with their employees pursuant to
the provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock-Issued to Employees, under which no compensation cost has been
recognized as the exercise price of the issued options was equal to the fair
market value at the time of issuance. Had compensation cost for the plan been
recorded consistent with SFAS No. 123, the Company's net income would have
been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Net loss: As reported........... $(6,121,779)
Pro forma....................... $(6,130,994)
</TABLE>
F-44
<PAGE>
GCIS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1996; risk-free interest rates of 5.05% to 5.83%
expected life of .5 to 3.5 years.
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- --------------
<S> <C> <C>
Balance at January 31, 1996....................... -- $ --
Granted.......................................... 3,145,000 .05
Exercised........................................ (1,399,000) --
Forfeited........................................ -- .05
----------
Balance at December 31, 1996...................... 1,746,000 $.05
==========
</TABLE>
(6) ISSUANCE OF PREFERRED STOCK:
In April 1996, GCIS issued 1,500,000 shares of Series A Convertible
preferred stock to UUNET Technologies, Inc. in exchange for telecommunication
access services. These shares were valued at $750,000 at the date of issuance
and are recorded as prepaid telecommunication line fees. The prepaid
telecommunication line fees are expensed over five years. In connection with
The Primenet merger the Series A were exchanged for Series B Convertible
preferred stock which had similar terms as disclosed below.
In July 1996, GCIS completed its first round of third party financing,
issuing 7,666,960 shares of Series B Convertible preferred stock to two
venture capital firms at a price of $0.52 per share. On December 23, 1996,
GCIS completed a second round of venture capital financing. This round raised
approximately $2.0 million dollars in exchange for 13,333,332 shares of Series
C preferred stock at a price of $0.15 per share.
Each share of Series B Convertible Preferred Stock shall be convertible, at
the option of the holder, into one share of common stock. The shares of
Convertible Preferred Stock will be converted automatically into shares of
common stock at the then effective conversion price upon an initial public
offering of common stock.
The shares of Convertible Preferred Stock have a liquidation preference
equal to $3.77 per share plus accrued but unpaid dividends and have voting
rights equivalent to the same proportion of common stock to be owned after
conversion. The preferred stockholders have the right to receive dividends
equal to the dividends per share declared on the common stock into which the
preferred shares are convertible. As a class, the holders of the preferred
shares have the right, until such time as the preferred shares have been
converted to common stock, to elect two members of the Company's Board of
Directors.
F-45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GCIS, Inc.
We have audited the accompanying statement of net assets to be sold of GCIS,
Inc. (a former division of Global Village Communication, Inc.), as of January
31, 1996, and the related statement of revenues and expenses for the ten
months then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying statements have been prepared pursuant to the Merger
Agreement described in Note 1 between GCIS and Primenet Services for the
Internet, Inc. dated December 31, 1996, and are not intended to be a complete
presentation of the GCIS' assets and liabilities or revenues and expenses.
In our opinion, the statements referred to above present fairly, in all
material respects, the net assets of GCIS, Inc. as of January 31, 1996, to be
sold pursuant to the Purchase Agreement referred to in Note 1 and the
operating revenues and expenses for the ten months then ended in conformity
with generally accepted accounting principles.
Phoenix, Arizona,
October 8, 1997.
F-46
<PAGE>
GCIS, INC.
STATEMENT OF NET ASSETS TO BE SOLD
JANUARY 31, 1996
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash............................................................... $ 206,322
Accounts receivable................................................ 167,579
Inventory.......................................................... 3,545
Prepaid royalty.................................................... 79,320
Deposits........................................................... 50,000
Prepaid expenses and other......................................... 22,210
----------
Total current assets.............................................. 528,976
----------
PROPERTY AND EQUIPMENT, net......................................... 782,824
OTHER ASSETS........................................................ 75,000
----------
Total assets...................................................... $1,386,800
==========
LIABILITIES
LIABILITIES:
Accounts payable................................................... $ 247,348
Accrued professional fees.......................................... 303,000
Accrued bonuses.................................................... 105,000
Other accrued liabilities.......................................... 177,672
----------
Total liabilities................................................. 833,020
----------
NET ASSETS TO BE SOLD............................................... $ 553,780
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-47
<PAGE>
GCIS, INC.
STATEMENT OF REVENUES AND EXPENSES
FOR THE TEN MONTHS ENDED JANUARY 31, 1996
<TABLE>
<S> <C>
REVENUE:
Service, access and other.......................................... $ 375,941
Customer premise equipment......................................... 142,674
----------
Total revenue.................................................... 518,615
----------
COSTS AND EXPENSES:
Cost of revenue
Service, access and other.......................................... 816,709
Customer premise equipment......................................... 101,422
Sales and marketing................................................ 1,597,546
General and administrative......................................... 436,232
Engineering and operations......................................... 2,080,361
----------
Total costs and expenses......................................... 5,032,270
----------
NET LOSS FROM OPERATIONS............................................ (4,513,655)
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-48
<PAGE>
GCIS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations
Global Village Communication, Inc. ("GVCI"), a Delaware corporation, was
founded in June 1989, and designs, develops and markets easy-to-use integrated
communications products and services for users of personal computers with
Windows, Macintosh, OS/2 or DOS operating systems. GCIS, Inc. ("GCIS" or "the
Company"), a former division of GVCI, delivers worldwide e-mail and full
Internet access in a plug-and-play package, which includes everything from the
router hardware to the service registration. GCIS became a separate reporting
division of GVCI in April 1995 and in February 1996, became a wholly owned
subsidiary of GVCI. Accordingly, the financial statements presented represent
the period from April 1, 1995 to January 31, 1996, when the Company was a
separate reporting division.
Primenet Merger
On December 31, 1996, the Company was acquired by Primenet Services for the
Internet, Inc. (Primenet) pursuant to an agreement of merger ("Merger
Agreement"). In connection with the Primenet merger, Primenet issued 178,179
shares of common stock and 3,939,310 shares of Series B Preferred Stock in
exchange for all of the issued and outstanding voting stock of GCIS.
Additionally, all outstanding options for the purchase of common stock of GCIS
were assumed by Primenet in connection with the merger.
Basis of Presentation
The accompanying financial statements represent the operations of GCIS which
were acquired by Primenet on December 31, 1996. All significant intercompany
accounts and transactions have been eliminated.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade receivables. The concentration of
credit risk is limited due to the large number of customers comprising the
Company's customer base, which is located primarily in the western United
States.
Inventory
Inventory consists of computer hardware and components for resale, which are
stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives and consist of the
following:
<TABLE>
<CAPTION>
JANUARY 31,
USEFUL LIFE 1996
----------- -----------
<S> <C> <C>
Customer premise equipment........................... 3 years $780,162
Software............................................. 3-5 years 31,817
--------
811,979
Less: accumulated depreciation....................... (29,155)
--------
Property and equipment, net.......................... $782,824
========
</TABLE>
F-49
<PAGE>
GCIS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Customer premise equipment represents network routers which are leased to
customers under agreements with month-to-month terms.
In the event that facts and circumstances indicate that the cost of property
and equipment may be impaired, an evaluation of recoverability would be
performed. This evaluation would include the comparison of the future
estimated undiscounted cash flows associated with the assets to the carrying
amount of these assets to determine if a writedown to market value or
discounted cash value is required.
Revenue Recognition
Service, access and other revenue includes initial fixed connection charges,
fees related to the licensing agreements and monthly access fees. This revenue
is recognized as the service is provided.
Customer premise equipment revenue is recognized when installation of the
equipment is completed.
Cost of Revenue
Cost of revenue - service, access, and other consists primarily of network
telecommunications costs, referral fees, depreciation of network equipment,
and personnel costs related to network operations, technical and customer
support.
Cost of revenue - customer premise equipment consists primarily of the cost
of equipment sold to customers.
Software Development Costs
Costs for the internal development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs directly associated with the development would be capitalized. To date,
the Company has essentially completed its software development concurrently
with the establishment of technological feasibility and, accordingly, no such
costs have been capitalized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) INCOME TAXES:
The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109").
SFAS No. 109 requires the use of an asset and liability approach in accounting
for income taxes. Deferred tax assets and liabilities are recorded based on
the differences between the financial statement and tax basis of assets and
liabilities and the tax rates in effect when these differences are expected to
reverse.
The Company has recorded no provision or benefit for income taxes because of
its operating loss.
F-50
<PAGE>
GCIS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The income tax expense (benefit) is different than the amount that would be
computed by applying the United States corporate income tax rate to the loss
before income taxes. The differences are summarized as follows:
<TABLE>
<S> <C>
Income tax at the statutory rate (34%)......................... $(1,500,000)
State taxes, net of Federal benefit............................ (264,000)
Expenses not deductible for income tax purposes................ 2,000
Deferred tax asset valuation allowance......................... 1,762,000
-----------
Income taxes ................................................ $ --
===========
Significant components of the Company's deferred tax asset as of January 31,
1996, are as follows:
Depreciable and amortizable property and equipment............. (20,000)
Accruals not deductible for tax purposes....................... 68,000
Net operating loss carryforward................................ 1,714,000
Less: valuation allowance...................................... (1,762,000)
-----------
$ --
===========
</TABLE>
Management believes that there is sufficient uncertainty regarding the
realization of deferred tax assets such that a full valuation allowance has
been provided. The Company has generated approximately $4,285,000 of federal
net operating loss carryforwards for GVCI.
(3) SUBSEQUENT EVENTS:
Stock Option Plans
In 1996, the Company adopted a stock option plan (the "Plan") with 5,009,250
shares of common stock reserved for issuance thereunder. The Plan provides for
discretionary grants of incentive stock options or nonstatutory stock options
to employees, officers, and independent contractors. The Board of Directors
has the discretion to determine the employees, officers, and independent
contractors who will receive discretionary awards, the type of awards to be
granted, and the term, vesting, and exercise prices.
In connection with the Primenet merger on December 31, 1996, Primenet
assumed options of employees of GCIS and converted the GCIS options to options
in the Company at terms economically identical to the grantee (see Note 1).
F-51
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RE-LIED UPON AS HAVING BEEN AUTHO-RIZED BY THE COMPANY, ANY SELLING
STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-TUTE AN
OFFER TO SELL OR A SOLICI-TATION OF AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HEREUN-DER SHALL, UNDER ANY CIRCUMSTANC-ES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 3
Risk Factors............................................................ 6
Use of Proceeds......................................................... 15
Dividend Policy......................................................... 15
Capitalization.......................................................... 16
Dilution................................................................ 17
Selected Consolidated Financial Data.................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 19
Business................................................................ 29
Management.............................................................. 43
Certain Transactions.................................................... 52
Principal and Selling Stockholders...................................... 54
Description of Capital Stock............................................ 56
Shares Eligible for Future Sale......................................... 60
Underwriting............................................................ 62
Legal Matters........................................................... 63
Experts................................................................. 64
Additional Information.................................................. 64
Index to Financial Statements........................................... F-1
Report of Independent Auditors..........................................
</TABLE>
-----------
UNTIL , 199 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBU-TION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DE-LIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
SHARES
[LOGO OF GLOBALCENTER, INC. APPEARS HERE]
COMMON STOCK
-----------
PROSPECTUS
-----------
HAMBRECHT & QUIST
VOLPE BROWN WHELAN & COMPANY
, 1997
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
SEC registration fee............................................... $ 10,455
NASD filing fee.................................................... 3,950
Nasdaq National Market listing fee................................. *
Printing and engraving expenses.................................... 150,000
Legal fees and expenses............................................ 350,000
Accounting fees and expenses....................................... 150,000
Blue Sky qualification fees and expenses........................... 5,000
Transfer agent and registrar fees.................................. 10,000
Miscellaneous fees................................................. *
--------
Total.............................................................. $ *
========
</TABLE>
--------
*To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to the Restated Certificate of Incorporation of the
Registrant to be effective upon the completion of this offering, filed
herewith as Exhibit 3.1; the Restated Bylaws of the Registrant, filed herewith
as Exhibit 3.2; Section 145 of the Delaware General Corporation Law; and the
form of indemnification agreement filed herewith as Exhibit 10. , which, among
other things, and subject to certain conditions, authorize the Registrant to
indemnify, or indemnify by their terms, as the case may be, the directors and
officers of the Registrant against certain liabilities and expenses incurred
by such persons in connection with claims made by reason of their being such a
director or officer.
Section 7 of the form of the Underwriting Agreement filed as Exhibit 1.1 to
this Registration Statement provides for indemnification by the Underwriters
and their controlling persons, on the one hand, and of the Registrant and its
controlling persons on the other hand, for certain liabilities arising under
the Securities Act and the Securities Exchange Act of 1934, as amended.
The Registrant intends to obtain directors and officers insurance providing
indemnification for certain of the Registrant's directors, officers,
affiliates, partners or employees for certain liabilities.
The indemnification provisions in the Restated Bylaws, and the
indemnification agreements entered into between the Registrant and its
directors and executive officers, may be sufficiently broad to permit
indemnification of the Registrant's officers and directors for liabilities
arising under the Securities Act.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Form of Underwriting Agreement...................................... 1.1
Restated Certificate of Incorporation............................... 3.2
Amended and Restated Bylaws......................................... 3.4
Form of Indemnification Agreement entered into by the Registrant
with each of its directors and officers............................ 10.10
</TABLE>
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since October 1994, the Registrant has sold and issued the following
securities (without giving effect to the split of the Company's Common
Stock to be effected prior to the closing of this offering):
1. In October 1995, the Registrant issued and sold an aggregate of
3,600,000 shares of Common Stock to its founders in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.
2. During the period from October 1995 to July 1997, the Registrant
granted options to purchase an aggregate of 1,526,451 shares of Common
Stock to directors, officers, employees and consultants pursuant to the
Registrant's 1995 Stock Plan in reliance on Rule 701 promulgated under the
Securities Act.
3. On December 15, 1995 and January 12, 1996, the Registrant issued and
sold an aggregate of 400,000 shares of Series A Preferred Stock in a
private placement to 65 investors for aggregate consideration of $2,000,000
in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act.
4. On January 12, 1996, the Registrant issued a warrant to purchase up to
40,000 shares of the Registrant's Common Stock at an exercise price of
$6.00 per share to Fox & Company in connection with the private placement
of Series A Preferred Stock. The warrant expires, if not earlier exercised,
on January 11, 2001. Issuance of the warrant to purchase Common Stock was
made in reliance on the exemption from registration provided by Section
4(2) of the Securities Act.
5. On January 10, 1997, the Registrant issued an aggregate of 3,939,304
shares of Series B Preferred Stock in a private placement to 13 investors
in connection with the acquisition of GCIS. The issuance of Common Stock
was made in reliance on the exemption from registration provided by Section
4(2) of the Securities Act.
6. On May 6, 1997, the Registrant issued an aggregate of 4,133,977 shares
of Common Stock in a private placement to 14 investors in connection with
the acquisition of ISI. The issuance was made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act.
7. On May 15 and June 20 1997, the Registrant issued warrants to purchase
up to an aggregate of 13,300 shares of the Registrant's Common Stock at an
exercise price of $6.00 per share to Phoenix Leasing in connection with the
establishment of an equipment financing facility. The warrants expire, if
not earlier exercised, on May 15, 2007 and June 20, 1997, respectively.
Issuance of the warrants was made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
8. On June 26, 1997, the Registrant issued a warrant to purchase up to
10,000 shares of the Registrant's Common Stock at an exercise price of
$4.45 per share to SVB in connection with the expansion of a credit
facility. The warrant expires, if not earlier exercised, on June 26, 2002.
Issuance of the warrant was made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
9. During the period from July 1997 to October 1997, the Registrant
granted options to purchase an aggregate of 287,700 shares of Common Stock
to directors, officers, employees and consultants pursuant to the
Registrant's 1997 Stock Plan in reliance on Rule 701 promulgated under the
Securities Act.
10. On July 24, 1997, the Registrant issued and sold an aggregate of
2,028,651 shares of Series C Preferred Stock in a private placement to
three investors for aggregate consideration of $9,027,500.50 in reliance on
the exemption from registration provided by Section 4(2) of the Securities
Act.
11. On September 8, 1997, the Registrant issued a warrant to purchase up
to 12,000 shares of the Registrant's Common Stock at an exercise price of
$5.00 per share to Comdisco in connection with the execution of equipment
leases. The warrant expires, if not earlier exercised, three years from the
effective date of this Registration Statement. Issuance of the warrant was
made in reliance on the exemption from registration provided by Section
4(2) of the Securities Act.
12. As of September 30, 1997, the Registrant has granted (i) an aggregate
of 1,526,451 shares of Common Stock pursuant to the exercise of options
issued under the 1995 Stock Option Plan, and (ii) an aggregate of 287,700
shares of Common Stock pursuant to the exercise of options issued under the
1997 Stock Plan.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization by and among Primenet Services
for the Internet, Inc., GlobalCenter, Inc. and Primenet Acquisition
Corporation, dated December 31, 1996.
2.2 Agreement and Plan of Reorganization by and among GlobalCenter Inc.,
GlobalCenter Acquisition Corporation and I-Systems, Inc., dated
April 11, 1997.
2.3* Agreement and Plan of Reorganization by and among GlobalCenter,
Inc., GlobalCenter Merger Corporation and Voyager Networks, Inc.,
dated October 8, 1997.
3.1* Certificate of Incorporation of Registrant (pre-offering).
3.2* Restated Certificate of Incorporation of Registrant (post-offering).
3.3* Bylaws of Registrant (pre-offering).
3.4* Amended and Restated Bylaws of Registrant (post-offering).
4.1* Form of Registrant's Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Employment Agreement between Registrant and Nathan F. Raciborski
dated as of January 10, 1997.
10.2* Employment Agreement between Registrant and Allan M. Kaplan dated as
of January 10, 1997.
10.3* Employment Agreement between Registrant and Jonathan G. Heiliger
dated as of May 30, 1997.
10.4* Employment Agreement between Registrant and Dan M. Rasmussen dated
as of April 30, 1997.
10.5* Promissory Note by Dan M. Rasmussen in favor of Registrant dated as
of June 12, 1997.
10.6* Promissory Note by Joel Davis in favor of Registrant dated as of
December 16, 1996.
10.7* Promissory Note by Joel Davis in favor of Registrant dated as of
October 7, 1997.
10.8 Promissory Note by Nathan F. Raciborski in favor of Registrant dated
as of March 21, 1997.
10.9* Promissory Note by Allan M. Kaplan in favor of Registrant dated as
of March 21, 1997.
10.10 Form of Indemnification Agreement.
10.11* 1995 Stock Option Plan.
10.12* Amended and Restated 1997 Stock Plan.
10.13* 1997 Employee Stock Purchase Plan.
10.14* Master Service Agreement between Registrant and MFS Datanet, Inc.
dated as of November 21, 1995.
10.15* Master Service Agreement Amendment between Registrant and MFS
Datanet, Inc. dated as of June 6, 1996.
10.16* Lease Agreement between Registrant and Bill and Karen Foss dated as
of October 16, 1996 for facility located at 1111 Karlstad Drive,
Sunnyvale, California.
10.17* Sublease Agreement between Registrant and American Bankers
Association Service Corporation for facility located at 380 Herndon
Parkway, Herndon, Virginia.
10.18* Consent to Sublease between JBG/Spring Park Limited Partnership and
American Bankers Association Service Corporation for facility
located at 380 Herndon Parkway, Herndon, Virginia.
10.19 Sub-Lease Agreement among Registrant, Global Village Communication,
Inc. and Herman and Raymond Christensen dated as of April 1, 1996
for facility located at 1154 East Arques, Sunnyvale, California.
10.20* Lease and services agreement between Registrant and Telehouse
International Corporation of Europe, Ltd. dated January 27, 1997 for
the facility located at Coriander Avenue, East India Dock, London,
England E14.
10.21* Stock Pledge Agreement between Registrant and Nathan F. Raciborski
dated March 21, 1997.
10.22* Stock Pledge Agreement between Registrant and Allan M. Kaplan dated
March 21, 1997.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.23* Deed of Trust, Assignment of Rents, Security Agreement, Financing
Statement and Fixture Filing between Registrant, Lawyers Title of
Arizona, Inc. and Cocoon Capital Corporation dated April 22, 1997.
10.24* Stockholders' Agreement, as amended, between Registrant and certain
securityholders dated as of October 3, 1997.
11.1* Statement of computation of earnings per share.
21.1* List of Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.3 Consent of Marcum & Kliegman LLP, Certified Public Accountants.
24.1 Power of Attorney (included on page II-4).
27 Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULE
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
SUNNYVALE, COUNTY OF SANTA CLARA, STATE OF CALIFORNIA, ON THIS 16TH DAY OF
OCTOBER 1997.
GlobalCenter, Inc.
/s/ Douglas T. Hickey
By___________________________________
DOUGLAS T. HICKEY PRESIDENT AND
CHIEF EXECUTIVE OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Douglas T. Hickey and Wayne A. Pratt and each
of them singly, as true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign the Registration Statement filed
herewith and any or all amendments to said Registration Statement (including
post-effective amendments and registration statements filed pursuant to Rule
462 and otherwise), and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission
granting unto said attorneys-in-fact and agents the full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the foregoing, as full to all intents and purposes as he or
she might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his substitute, may lawfully
do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
SIGNATURES TITLE DATE
/s/ Douglas T. Hickey President, Chief October 16, 1997
- ------------------------------------- Executive Officer
DOUGLAS T. HICKEY and Director
(Principal
Executive Officer)
/s/ Wayne A. Pratt Senior Vice October 16, 1997
- ------------------------------------- President, Finance
WAYNE A. PRATT and Administration,
Chief Financial
Officer (Principal
Financial and
Accounting Officer)
/s/ John Hummer Director October 16, 1997
- -------------------------------------
JOHN HUMMER
/s/ Michael Moritz Director October 16, 1997
- -------------------------------------
MICHAEL MORITZ
/s/ Eric Hippeau Director October 16, 1997
- -------------------------------------
ERIC HIPPEAU
Director October 16, 1997
- -------------------------------------
TIMOTHY KOOGLE
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization by and among Primenet Services
for the Internet, Inc., GlobalCenter, Inc. and Primenet Acquisition
Corporation, dated December 31, 1996.
2.2 Agreement and Plan of Reorganization by and among GlobalCenter Inc.,
GlobalCenter Acquisition Corporation and I-Systems, Inc., dated April
11, 1997.
2.3* Agreement and Plan of Reorganization by and among GlobalCenter, Inc.,
GlobalCenter Merger Corporation and Voyager Networks, Inc., dated
October 8, 1997.
3.1* Certificate of Incorporation of Registrant (pre-offering).
3.2* Restated Certificate of Incorporation of Registrant (post-offering).
3.3* Bylaws of Registrant (pre-offering).
3.4* Amended and Restated Bylaws of Registrant (post-offering).
4.1* Form of Registrant's Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Employment Agreement between Registrant and Nathan F. Raciborski dated
as of January 10, 1997.
10.2* Employment Agreement between Registrant and Allan M. Kaplan dated as
of January 10, 1997.
10.3* Employment Agreement between Registrant and Jonathan G. Heiliger dated
as of May 30, 1997.
10.4* Employment Agreement between Registrant and Dan M. Rasmussen dated as
of April 30, 1997.
10.5* Promissory Note by Dan M. Rasmussen in favor of Registrant dated as of
June 12, 1997.
10.6* Promissory Note by Joel Davis in favor of Registrant dated as of
December 16, 1996.
10.7* Promissory Note by Joel Davis in favor of Registrant dated as of
October 7, 1997.
10.8 Promissory Note by Nathan F. Raciborski in favor of Registrant dated
as of March 21, 1997.
10.9* Promissory Note by Allan M. Kaplan in favor of Registrant dated as of
March 21, 1997.
10.10 Form of Indemnification Agreement.
10.11* 1995 Stock Option Plan.
10.12* Amended and Restated 1997 Stock Plan.
10.13* 1997 Employee Stock Purchase Plan.
10.14* Master Service Agreement between Registrant and MFS Datanet, Inc.
dated as of November 21, 1995.
10.15* Master Service Agreement Amendment between Registrant and MFS Datanet,
Inc. dated as of June 6, 1996.
10.16* Lease Agreement between Registrant and Bill and Karen Foss dated as of
October 16, 1996 for facility located at 1111 Karlstad Drive,
Sunnyvale, California.
10.17* Sublease Agreement between Registrant and American Bankers Association
Service Corporation for facility located at 380 Herndon Parkway,
Herndon, Virginia.
10.18* Consent to Sublease between JBG/Spring Park Limited Partnership and
American Bankers Association Service Corporation for facility located
at 380 Herndon Parkway, Herndon, Virginia.
10.19 Sub-Lease Agreement among Registrant, Global Village Communication,
Inc. and Herman and Raymond Christensen dated as of April 1, 1996 for
facility located at 1154 East Arques, Sunnyvale, California.
10.20* Lease and services agreement between Registrant and Telehouse
International Corporation of Europe, Ltd. dated January 27, 1997 for
the facility located at Coriander Avenue, East India Dock, London,
England E14.
10.21* Stock Pledge Agreement between Registrant and Nathan F. Raciborski
dated March 21, 1997.
10.22* Stock Pledge Agreement between Registrant and Allan M. Kaplan dated
March 21, 1997.
10.23* Deed of Trust, Assignment of Rents, Security Agreement, Financing
Statement and Fixture Filing between Registrant, Lawyers Title of
Arizona, Inc. and Cocoon Capital Corporation dated April 22, 1997.
10.24* Stockholders' Agreement, as amended, between Registrant and certain
securityholders dated as of October 3, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
11.1* Statement of computation of earnings per share.
21.1* List of Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.3 Consent of Marcum & Kliegman LLP, Certified Public Accountants.
24.1 Power of Attorney (included on page II-4).
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 1.1
GLOBALCENTER, INC.
__________ Shares/1/
COMMON STOCK
UNDERWRITING AGREEMENT
____________, 1997
HAMBRECHT & QUIST LLC
VOLPE BROWN WHELAN & COMPANY, LLC
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
GLOBALCENTER, INC., a Delaware corporation (herein called the Company),
proposes to issue and sell ______________ shares of its authorized but unissued
Common Stock, $0.001 par value (herein called the Common Stock), and the
stockholders of the Company named in Schedule II hereto (herein collectively
called the Selling Securityholders) propose to sell an aggregate of
______________ shares of Common Stock of the Company (said ______________ shares
of Common Stock being herein called the Underwritten Stock). The Company and the
Selling Securityholders propose to grant to the Underwriters (as hereinafter
defined) an option to purchase up to ______________ additional shares of Common
Stock (herein called the Option Stock and, with the Underwritten Stock herein,
collectively called the Stock). The Common Stock is more fully described in the
Registration Statement and the Prospectus hereinafter mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-_____), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act) of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule
- ------------------
/1/ Plus an option to purchase from the Company and the Selling Securityholders
up to __________ additional shares to cover over-allotments.
1
<PAGE>
430A and contained in the Prospectus referred to below, in the form in which it
became effective, and any registration statement filed pursuant to Rule 462(b)
of the rules and regulations of the Commission with respect to the Stock (herein
called a Rule 462(b) registration statement), and, in the event of any amendment
thereto after the effective date of such registration statement (herein called
the Effective Date), shall also mean (from and after the effectiveness of such
amendment) such registration statement as so amended (including any Rule 462(b)
registration statement). The term Prospectus as used in this Agreement shall
mean the prospectus relating to the Stock first filed with the Commission
pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as
included in the Registration Statement) and, in the event of any supplement or
amendment to such prospectus after the Effective Date, shall also mean (from and
after the filing with the Commission of such supplement or the effectiveness of
such amendment) such prospectus as so supplemented or amended. The term
Preliminary Prospectus as used in this Agreement shall mean each preliminary
prospectus included in such registration statement prior to the time it becomes
effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDERS.
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement and the Prospectus and as being conducted, and is
duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary (except
where the failure to be so qualified would not have a material adverse effect on
the business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole). The Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than GCIS, Inc., a Delaware corporation, and I-Systems, Inc., a Delaware
corporation.
(ii) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business,
other than as set forth in the Registration Statement and the Prospectus, and
since such dates, except in the ordinary course of business, neither the Company
nor any of its subsidiaries has entered into any material transaction not
referred to in the Registration Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply, in all material respects,
with the provisions of the Securities Act and the rules and regulations of the
Commission thereunder; on the Effective Date, the Registration Statement did not
contain any untrue statement of a material fact and did not omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading; and, on the Effective Date the Prospectus did
not and, on the Closing Date and any later date on which Option Stock is to be
purchased, will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
subparagraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in conformity
with information herein or otherwise furnished in writing to the Company by or
on behalf of the Underwriters for use in the Registration Statement or the
2
<PAGE>
Prospectus.
(iv) The Stock is duly and validly authorized, is (or, in the case
of shares of the Stock to be sold by the Company, will be, when issued and sold
to the Underwriters as provided herein) duly and validly issued, fully paid and
nonassessable and conforms to the description thereof in the Prospectus. No
further approval or authority of the stockholders or the Board of Directors of
the Company will be required for the transfer and sale of the Stock to be sold
by the Selling Securityholders or the issuance and sale of the Stock as
contemplated herein.
(v) Prior to the Closing Date, the Stock to be issued and sold by
the Company will be authorized for listing on the Nasdaq National Market upon
official notice of issuance.
(b) Each of the Selling Securityholders hereby represents and warrants
as follows:
(i) Such Selling Securityholder has good and marketable title to
all the shares of Stock to be sold by such Selling Securityholder hereunder,
free and clear of all liens, encumbrances, equities, security interests and
claims whatsoever, with full right and authority to deliver the same hereunder,
subject, in the case of each Selling Securityholder, to the rights of
______________, as Custodian (herein called the Custodian), and that upon the
delivery of and payment for such shares of the Stock hereunder, the several
Underwriters will receive good and marketable title thereto, free and clear of
all liens, encumbrances, equities, security interests and claims whatsoever.
(ii) Certificates in negotiable form for the shares of the Stock
to be sold by such Selling Securityholder have been placed in custody under a
Custody Agreement for delivery under this Agreement with the Custodian; such
Selling Securityholder specifically agrees that the shares of the Stock
represented by the certificates so held in custody for such Selling
Securityholder are subject to the interests of the several Underwriters and the
Company, that the arrangements made by such Selling Securityholder for such
custody, including the Power of Attorney provided for in such Custody Agreement,
are to that extent irrevocable, and that the obligations of such Selling
Securityholder shall not be terminated by any act of such Selling Securityholder
or by operation of law, whether by the death or incapacity of such Selling
Securityholder (or, in the case of a Selling Securityholder that is not an
individual, the dissolution or liquidation of such Selling Securityholder) or
the occurrence of any other event; if any such death, incapacity, dissolution,
liquidation or other such event should occur before the delivery of such shares
of the Stock hereunder, certificates for such shares of the Stock shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death, incapacity, dissolution, liquidation or other event
had not occurred, regardless of whether the Custodian shall have received notice
of such death, incapacity, dissolution, liquidation or other event.
(iii) Such Selling Securityholder has reviewed the Registration
Statement and Prospectus and, although such Selling Securityholder has not
independently verified the accuracy or completeness of all the information
contained therein, nothing has come to the attention of such Selling
Securityholder that would lead such Selling Securityholder to believe that on
the Effective Date, the Registration Statement contained any untrue statement of
a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading;
and, on the Effective Date the Prospectus contained and, on the Closing Date and
any later date on which Option Stock is to be purchased, contains any untrue
statement of a material fact or omitted or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
3
<PAGE>
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
______________ shares of the Underwritten Stock to the several Underwriters,
each Selling Securityholder agrees to sell to the several Underwriters the
number of shares of the Underwritten Stock set forth in Schedule II opposite the
name of such Selling Securityholder, and each of the Underwriters agrees to
purchase from the Company and the Selling Securityholders the respective
aggregate number of shares of Underwritten Stock set forth opposite its name in
Schedule I. The price at which such shares of Underwritten Stock shall be sold
by the Company and the Selling Securityholders and purchased by the several
Underwriters shall be $___________ per share. The obligation of each Underwriter
to the Company and each of the Selling Securityholders shall be to purchase from
the Company and the Selling Securityholders that number of shares of the
Underwritten Stock which represents the same proportion of the total number of
shares of the Underwritten Stock to be sold by each of the Company and the
Selling Securityholders pursuant to this Agreement as the number of shares of
the Underwritten Stock set forth opposite the name of such Underwriter in
Schedule I hereto represents of the total number of shares of the Underwritten
Stock to be purchased by all Underwriters pursuant to this Agreement, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
In making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company or the Selling Securityholders shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such notice to
purchase, or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon between you and such purchasing Underwriter or
Underwriters and upon the terms herein set forth, all or any part of the shares
of the Stock which such defaulting Underwriter or Underwriters agreed to
purchase. If the non-defaulting Underwriters fail so to make such arrangements
with respect to all such shares and portion, the number of shares of the Stock
which each non-defaulting Underwriter is otherwise obligated to purchase under
this Agreement shall be automatically increased on a pro rata basis to absorb
the remaining shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the shares and portion which the
defaulting Underwriter or Underwriters agreed to purchase if the aggregate
number of such shares of the Stock exceeds 10% of the total number of shares of
the Stock which all Underwriters agreed to purchase hereunder. If the total
number of shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase shall not be purchased or absorbed in accordance with the two
preceding sentences, the Company and the Selling Securityholders shall have the
right, within 24 hours next succeeding the 24-hour period above referred to, to
make arrangements with other underwriters or purchasers satisfactory to you for
purchase of such shares and portion on the terms herein set forth. In any such
case, either you or the Company and the Selling Securityholders shall have the
right to postpone the Closing Date determined as provided in Section 5 hereof
for not more than seven business days after the date originally fixed as the
Closing Date pursuant to said Section 5 in order that any necessary changes in
the Registration Statement, the Prospectus or any other documents or
arrangements may be made. If neither the non-defaulting Underwriters nor the
Company and the Selling Securityholders shall make arrangements within the 24-
hour periods stated above for the purchase of all the shares of the Stock which
the defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company or the Selling Securityholders to any non-
defaulting Underwriter and without any liability on the part of any non-
defaulting Underwriter to the Company or the Selling Securityholders. Nothing in
this paragraph (b), and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
4
<PAGE>
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company and the Selling Securityholders grant an option to the several
Underwriters to purchase, severally and not jointly, up to ______________ shares
in the aggregate of the Option Stock from the Company and the Selling
Securityholders at the same price per share as the Underwriters shall pay for
the Underwritten Stock. Said option may be exercised only to cover over-
allotments in the sale of the Underwritten Stock by the Underwriters and may be
exercised in whole or in part at any time (but not more than once) on or before
the thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover
page and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and you
on behalf of the respective Underwriters represent and warrant to the Company
that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 a.m., San Francisco time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, CA 94304, at 7:00 a.m., San Francisco time, on the fourth business day
after the date of this Agreement, or at such time on such other day, not later
than seven full business days after such fourth business day, as shall be agreed
upon in writing by the Company, the Selling Securityholders and you. The date
and hour of such delivery and payment (which may be postponed as provided in
Section 3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Wilson, Sonsini, Goodrich &
Rosati, 650 Page Mill Road, Palo Alto, CA 94304, at 7:00 a.m., San Francisco
time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order, and payment for the Stock purchased from the Selling
Securityholders shall be made to the Custodian, for the account of the Selling
Securityholders, in each case by one or more certified or official bank check or
checks in same day funds (and the Company and the Selling Securityholders agree
not to deposit any such check in the bank on which drawn until the day following
the date of its delivery to the Company or the Custodian, as the case may be).
Such payment shall be made upon delivery of certificates for the Stock to you
for the respective accounts of the several Underwriters against receipt therefor
signed by you. Certificates for the Stock to be delivered to you shall
5
<PAGE>
be registered in such name or names and shall be in such denominations as you
may request at least one business day before the Closing Date, in the case of
Underwritten Stock, and at least one business day prior to the purchase thereof,
in the case of the Option Stock. Such certificates will be made available to the
Underwriters for inspection, checking and packaging at the offices of Lewco
Securities Corporation, 2 Broadway, New York, New York 10004 on the business day
prior to the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New
York time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter.
Any such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
Each of the Company and the Selling Securityholders respectively covenants and
agrees as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company and
the Selling Securityholders will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be issued,
to obtain the withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each post-
effective amendment, if any, to the Registration Statement (together with, in
each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or
6
<PAGE>
amended will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances existing at the time such Prospectus is delivered
to such purchaser, not misleading. If, after the initial public offering of the
Stock by the Underwriters and during such period, the Underwriters shall propose
to vary the terms of offering thereof by reason of changes in general market
conditions or otherwise, you will advise the Company in writing of the proposed
variation, and, if in the opinion either of counsel for the Company or of
counsel for the Underwriters such proposed variation requires that the
Prospectus be supplemented or amended, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus or an amended prospectus
setting forth such variation. The Company authorizes the Underwriters and all
dealers to whom any of the Stock may be sold by the several Underwriters to use
the Prospectus, as from time to time amended or supplemented, in connection with
the sale of the Stock in accordance with the applicable provisions of the
Securities Act and the applicable rules and regulations thereunder for such
period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company and the Selling Securityholders jointly and severally
agree to pay all costs and expenses incident to the performance of their
obligations under this Agreement, including all costs and expenses incident to
(i) the preparation, printing and filing with the Commission and the National
Association of Securities Dealers, Inc. ("NASD") of the Registration Statement,
any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the
Underwriters of copies of any Preliminary Prospectus and of the several
documents required by paragraph (c) of this Section 6 to be so furnished, (iii)
the printing of this Agreement and related documents delivered to the
Underwriters, (iv) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v)
the furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (vi) the printing and
issuance of stock certificates, including the transfer agent's fees. The Selling
Securityholders will pay any transfer taxes incident to the transfer to the
Underwriters of the shares of the Stock being sold by the Selling
Securityholders.
(j) The Company and the Selling Securityholders jointly and severally
agree to reimburse you, for the account of the several Underwriters, for blue
sky fees and related disbursements (including counsel fees and disbursements and
cost of printing memoranda for the Underwriters) paid by
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or for the account of the Underwriters or their counsel in qualifying the Stock
under state securities or blue sky laws and in the review of the offering by the
NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company and the Selling Securityholders hereby agree to pay and shall
not affect any agreement which the Company and the Selling Securityholders may
make, or may have made, for the sharing of any such expenses and costs.
(l) The Company and each of the Selling Securityholders hereby agrees
that, without the prior written consent of Hambrecht & Quist LLC on behalf of
the Underwriters, the Company or such Selling Security holder, as the case may
be, will not, for a period of 180 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (i) sell,
offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to the Stock to be sold to the Underwriters pursuant to this
Agreement or, with respect to the Company only, to (A) shares of Common Stock
issued by the Company upon the exercise of options granted under the stock
option plans of the Company (the "Option Plans") or upon the exercise of
warrants outstanding as of the date hereof, all as described in footnote 1 to
the table under the caption "Capitalization" in the Preliminary Prospectus, and
(B) options to purchase Common Stock granted under the Option Plans. The Company
further agrees that, without the prior written consent of Hambrecht & Quist LLC
on behalf of the Underwriters, it will not release any holder of Common Stock
from any agreement between the Company and such holder pursuant to which such
holder has agreed not to sell, offer, contract to sell or otherwise transfer or
dispose of shares of the Company's Common Stock.
(m) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
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7. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) of this Section 7, the
Company and the Selling Securityholders jointly and severally agree to indemnify
and hold harmless each Underwriter and each person (including each partner or
officer thereof) who controls any Underwriter within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Securities Exchange Act of
1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and the Company and the Selling Securityholders jointly and severally
agree to reimburse each such Underwriter and controlling person for any legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
and the Selling Securityholders contained in this paragraph (a) shall not apply
to any such losses, claims, damages, liabilities or expenses if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of any Underwriter for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, (2) the indemnity agreement contained in this paragraph (a)
with respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
(excluding the documents incorporated therein by reference) and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented) unless the failure is the result of noncompliance by the Company
with paragraph (c) of Section 6 hereof, and (3) each Selling Securityholder
shall only be liable under this paragraph with respect to (A) information
pertaining to such Selling Securityholder furnished by or on behalf of such
Selling Securityholder expressly for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto or (B) facts that would constitute a breach of any
representation or warranty of such Selling Securityholder set forth in Section
2(b) hereof. The indemnity agreements of the Company and the Selling
Securityholders contained in this paragraph (a) and the representations and
warranties of the Company and the Selling Securityholders contained in Section 2
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholders from and against any
and all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and
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disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of such indemnifying Underwriter for use in the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto.
The indemnity agreement of each Underwriter contained in this paragraph (b)
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or
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parties. If, within a reasonable time after receipt of the Notice, no Notice of
Defense has been given, the indemnifying party or parties shall be responsible
for any legal or other expenses incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Securityholders on the one hand and the Underwriters on
the other shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the Stock received by the Company and the
Selling Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of
a summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Securityholders will, without
the prior written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
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(f) The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties contained in paragraph (a) of
Section 2 hereof and under the indemnity and reimbursement agreements contained
in the provisions of this Section 7 and Section 11 hereof shall be limited to an
amount equal to the initial public offering price of the stock sold by such
Selling Securityholder to the Underwriters. The Company and the Selling
Securityholders may agree, as among themselves and without limiting the rights
of the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Stock
impracticable, (iii) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, or The Nasdaq Stock Market, or limitations on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such exchange or system, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; provided, however, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing, and the
form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Cooley Godward llp, counsel for the Underwriters.
(c) You shall have received from Wilson, Sonsini, Goodrich & Rosati,
650 Page Mill Road, Palo Alto, CA 94304, counsel for the Company and the Selling
Securityholders, an opinion, addressed to the Underwriters and dated the Closing
Date, covering the matters set forth in Annex A hereto, and if Option Stock is
purchased at any date after the Closing Date, an additional opinion from
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such counsel, addressed to the Underwriters and dated such later date,
confirming that the statements expressed as of the Closing Date in such opinion
remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are not any franchises, contracts, leases or other documents which are
required to be filed as exhibits to the Registration Statement which have not
been filed as required, (vii) the representations and warranties of the Company
herein are true and correct in all material respects as of the Closing Date or
any later date on which Option Stock is to be purchased, as the case may be, and
(viii) there has not been any material change in the market for securities in
general or in political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to make a
public offering of the Stock, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from Arthur Andersen LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder and
based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the Original
Letter), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company or any of its subsidiaries which, in your
sole judgment, makes it impractical or inadvisable to proceed with the public
offering of the Stock or the purchase of the Option Stock as contemplated by the
Prospectus.
(g) You shall have received from Arthur Andersen LLP, a letter stating
that their
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review of the Company's system of internal accounting controls, to the extent
they deemed necessary in establishing the scope of their examination of the
Company's financial statements as at [SEPTEMBER 30, 1997] did not disclose any
weakness in internal controls that they considered to be material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers and stockholders agreements, in form reasonably satisfactory
to Hambrecht & Quist LLC, stating that without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will
not, for a period of 180 days following the commencement of the public offering
of the Stock by the Underwriters, directly or indirectly, (i) sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned
above or elsewhere in this Agreement shall be deemed to be in compliance with
the provisions hereof only if Cooley Godward llp, counsel for the Underwriters,
shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not
be fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company or the
Selling Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall
not be fulfilled, this Agreement may be terminated by the Company and the
Selling Securityholders by giving notice to you. Any such termination shall be
without liability of the Company and the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that in the event of any such
termination, the Company and the Selling Securityholders jointly and severally
agree to indemnify and hold harmless the Underwriters from all costs
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<PAGE>
or expenses incident to the performance of the obligations of the Company and
the Selling Securityholders under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Securityholder, to the provisions of paragraph (f) of Section 7), the
Company and the Selling Securityholders hereby jointly and severally agree to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 1154 East Arques Avenue,
Sunnyvale, California 94806, Attention: Chief Financial Officer; and if to the
Selling Securityholders, shall be mailed, telegraphed or delivered to the
Selling Securityholders in care of ________________________, at
______________________________________________________. All notices given by
telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraphs (l), (m) and (n) of Section 6 hereof shall be
of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
15
<PAGE>
Please sign and return to the Company and to the Selling Securityholders in
care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
GLOBALCENTER, INC.
By:__________________________
Douglas T. Hickey
President
SELLING SECURITYHOLDERS:
[List Names]
By:__________________________
[Attorney-in-Fact]
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
VOLPE BROWN WHELAN & COMPANY, LLC
By Hambrecht & Quist LLC
By:___________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
16
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
- ------------ ----------------
<S> <C>
Hambrecht & Quist LLC.........................................
Volpe Brown Whelan & Company, LLC.............................
Total.........................................................
================
</TABLE>
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
OF SELLING SECURITYHOLDERS TO BE SOLD
- -------------------------- ----------------
<S> <C>
Total...........................................................
================
</TABLE>
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF
WILSON, SONSINI, GOODRICH & ROSATI
COUNSEL FOR THE COMPANY
AND THE SELLING SECURITYHOLDERS
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, is duly qualified as a foreign
corporation and in good standing in each state of the United States of America
in which its ownership or leasing of property requires such qualification
(except where the failure to be so qualified would not have a material adverse
effect on the business, properties, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole), and has full corporate
power and authority to own or lease its properties and conduct its business as
described in the Registration Statement; all the issued and outstanding capital
stock of each of the subsidiaries of the Company has been duly authorized and
validly issued and is fully paid and nonassessable, and is owned by the Company
free and clear of all liens, encumbrances and security interests, and to the
best of such counsel's knowledge, no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to convert
any obligations into shares of capital stock or ownership interests in such
subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of
_______________ shares of Preferred Stock, none of which are outstanding, and
_______________ shares of Common Stock, $0.001 par value, of which
_______________ shares are outstanding (including the Underwritten Stock plus
the number of shares of Option Stock issued on the date hereof); proper
corporate proceedings have been taken validly to authorize such authorized
capital stock; all of the outstanding shares of such capital stock (including
the Underwritten Stock and the shares of Option Stock issued, if any) have been
duly and validly issued and are fully paid and nonassessable; any Option Stock
purchased after the Closing Date, when issued and delivered to and paid for by
the Underwriters as provided in the Underwriting Agreement, will have been duly
and validly issued and be fully paid and nonassessable; and no preemptive rights
of, or rights of refusal in favor of, stockholders exist with respect to the
Stock, or the issue and sale thereof, pursuant to the Certificate of
Incorporation or Bylaws of the Company and, to the knowledge of such counsel,
there are no contractual preemptive rights that have not been waived, rights of
first refusal or rights of co-sale which exist with respect to the Stock being
sold by the Selling Securityholders or the issue and sale of the Stock;
(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for that
purpose have been instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(v) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) of Form S-1 is to the best of such counsel's knowledge accurately and
adequately set forth therein in all material respects or no response is required
with respect to such items, the description of the Company's stock option plan
and the options granted and which may be granted thereunder and the options
granted otherwise than under such plan set forth in the Prospectus accurately
and fairly presents the information required to be shown with respect to said
plan and options to the extent required by the Securities Act and the rules and
regulations of the Commission thereunder;
A-1
<PAGE>
(vi) such counsel does not know of any franchises, contracts,
leases, documents or legal proceedings, pending or threatened, which, in the
opinion of such counsel, are of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not described and filed as required;
(vii) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company;
(viii) the Underwriting Agreement has been duly executed and
delivered by or on behalf of the Selling Securityholders, the Custody Agreement
between the Selling Securityholders and ______________________________, as
Custodian, and the Power of Attorney referred to in such Custody Agreement have
been duly executed and delivered by the several Selling Securityholders; the
Custody Agreement entered into by, and the Power of Attorney given by, each
Selling Securityholder is valid and binding on such Selling Securityholder; and
each Selling Securityholder has full legal right and authority to enter into the
Underwriting Agreement and to sell, transfer and deliver in the manner provided
in the Underwriting Agreement the shares of Stock sold by such Selling
Securityholder hereunder;
(ix) the issue and sale by the Company of the shares of Stock sold
by the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of, the Certificate of Incorporation or Bylaws of
the Company or any of its subsidiaries or any agreement or instrument known to
such counsel to which the Company or any of its subsidiaries is a party or any
applicable law or regulation, or so far as is known to such counsel, any order,
writ, injunction or decree, of any jurisdiction, court or governmental
instrumentality;
(x) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
(xi) good and marketable title to the shares of Stock sold by the
Selling Securityholders under the Underwriting Agreement, free and clear of all
liens, encumbrances, equities, security interests and claims, has been
transferred to the Underwriters who have severally purchased such shares of
Stock under the Underwriting Agreement, assuming for the purpose of this opinion
that the Underwriters purchased the same in good faith without notice of any
adverse claims;
(xii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Stock by
the Underwriters; and
(xiii) the Common Stock will be duly authorized for listing by the
Nasdaq National Market upon official notice of issuance.
In addition to the matters set forth above, counsel rendering the foregoing
opinion shall also include a statement to the effect that nothing has come to
the attention of such counsel that leads it to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial and statistical data contained or incorporated by reference therein,
as to which such counsel need not express any opinion or belief) at the
Effective Date contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, that the Prospectus (except as to the
financial statements and schedules and other financial and statistical data
contained or incorporated by reference therein, as to which such counsel need
not express any opinion or belief) as of its date or at the Closing Date (or any
later date on which Option Stock is
A-2
<PAGE>
purchased), contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
A-3
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
PRIMENET SERVICES FOR THE INTERNET, INC.
PRIMENET ACQUISITION CORPORATION
AND
GLOBALCENTER, INC.
December 31, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I -- THE MERGER......................................................... 1
1.1 The Merger............................................................... 1
1.2 Effective Time........................................................... 1
1.3 Effect of the Merger..................................................... 2
1.4 Certificate of Incorporation; Bylaws..................................... 2
1.5 Directors................................................................ 2
1.6 Effect on Capital Stock.................................................. 2
1.7 Dissenting Shares........................................................ 3
1.8 Surrender of Certificates................................................ 4
1.9 No Further Ownership Rights in Company Stock............................. 5
1.10 Lost, Stolen or Destroyed Certificates................................... 5
1.11 Tax Consequences......................................................... 5
1.12 Taking of Necessary Action; Further Action............................... 5
ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF GLOBALCENTER.................... 6
2.1 Organization and Standing; Articles and Bylaws........................... 6
2.2 Corporate Power.......................................................... 6
2.3 Subsidiaries............................................................. 6
2.4 Capitalization........................................................... 6
2.5 Authorization............................................................ 6
2.6 No Conflicts............................................................. 6
2.7 Title to Properties; Liens and Encumbrances.............................. 7
2.8 Patent and Other Proprietary Rights...................................... 7
2.9 GlobalCenter Contracts................................................... 7
2.10 Litigation............................................................... 8
2.11 Taxes.................................................................... 8
2.12 Insurance................................................................ 8
2.13 Employee Benefit Plans................................................... 8
2.14 Proprietary Information Agreements....................................... 8
2.15 Registration Rights...................................................... 9
2.16 Governmental Consents.................................................... 9
2.17 Environmental and Safety Laws............................................ 9
2.18 Related Party Transactions............................................... 9
2.19 Broker's and Finders' Fees............................................... 9
2.20 Compliance with Other Instruments........................................ 9
2.21 Disclosure............................................................... 9
2.22 Employees................................................................ 9
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
2.23 Financial Statements..................................................... 10
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB.................................................................. 10
3.1 Organization and Standing; Articles and Bylaws........................... 10
3.2 Corporate Power.......................................................... 10
3.3 Subsidiaries............................................................. 10
3.4 Capitalization........................................................... 10
3.5 Authorization............................................................ 11
3.6 No Conflicts............................................................. 11
3.7 Offering................................................................. 11
3.8 Title to Properties; Liens and Encumbrances.............................. 11
3.9 Patent and Other Proprietary Rights...................................... 11
3.10 Contracts................................................................ 12
3.11 Litigation............................................................... 12
3.12 Taxes.................................................................... 13
3.13 Insurance................................................................ 13
3.14 Employee Benefit Plans................................................... 13
3.15 Proprietary Information Agreements....................................... 13
3.16 Registration Rights...................................................... 13
3.17 Governmental Consents.................................................... 13
3.18 Environmental and Safety Laws............................................ 14
3.19 Related Party Transactions............................................... 14
3.20 Broker's and Finders' Fees............................................... 14
3.21 Compliance with Other Instruments........................................ 14
3.22 Disclosure............................................................... 14
3.23 Employees................................................................ 14
3.24 Financial Statements..................................................... 15
ARTICLE IV -- CONDUCT PRIOR TO THE EFFECTIVE TIME............................... 15
4.1 Conduct of Business of GlobalCenter...................................... 15
4.2 No Solicitation by GlobalCenter.......................................... 17
4.3 Conduct of Business of Primenet and Merger Sub........................... 17
4.4 No Solicitation by Primenet.............................................. 19
ARTICLE V -- ADDITIONAL AGREEMENTS.............................................. 20
5.1 Meeting of GlobalCenter Stockholders..................................... 20
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
5.2 Access to Information.................................................... 20
5.3 Expenses................................................................. 20
5.4 Public Disclosure........................................................ 20
5.5 Consents................................................................. 20
5.6 Legal Requirements....................................................... 21
5.7 Blue Sky Laws............................................................ 21
5.8 Best Efforts; Additional Documents and Further Assurances................ 21
5.9 Stock Options............................................................ 21
5.10 FIRPTA Compliance........................................................ 22
5.11 Indemnification.......................................................... 22
ARTICLE VI -- CONDITIONS TO THE MERGER.......................................... 22
6.1 Conditions to Obligations of Each Party to Effect the Merger............. 22
6.2 Additional Conditions to Obligations of GlobalCenter..................... 23
6.3 Additional Conditions to the Obligations of Primenet and Merger Sub...... 24
ARTICLE VII -- SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
TERMINATION, AMENDMENT AND WAIVER............................................... 25
7.1 Survival of Representations and Warranties............................... 25
7.2 Termination.............................................................. 25
7.3 Effect of Termination.................................................... 26
7.4 Amendment................................................................ 26
7.5 Extension; Waiver........................................................ 26
7.6 Break-Up Fee............................................................. 26
ARTICLE VIII -- GENERAL PROVISIONS.............................................. 26
8.1 Notices.................................................................. 26
8.2 Interpretation........................................................... 27
8.3 Counterparts............................................................. 27
8.4 Miscellaneous............................................................ 27
8.5 Governing Law............................................................ 28
8.6 Attorneys' Fees.......................................................... 28
</TABLE>
-iii-
<PAGE>
INDEX OF EXHIBITS AND SCHEDULES
Schedule/
Exhibit Description
- ------- -----------
Schedule 1.5 Initial Directors of Primenet
Schedule 1.6 Conversion of Stock
Schedule 2 GlobalCenter Disclosure Schedule
Schedule 3 Disclosure Schedule of Primenet and Merger Sub
Schedule 5.5-1 GlobalCenter Consents and Approvals to be Obtained
Schedule 5.5-2 Primenet or Merger Sub Consents and Approvals to be Obtained
Exhibit A Merger Agreement
Exhibit B Certificate of Incorporation of Surviving Corporation
Exhibit C Bylaws of Surviving Corporation
Exhibit D Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock of Primenet
Exhibit E Form of Investment Representation Statement
-iv-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of December 31, 1996 by and among Primenet Services for the
Internet, Inc., a Delaware corporation ("Primenet"), Primenet Acquisition
Corporation, a Delaware corporation ("Merger Sub"), and GlobalCenter, Inc., a
Delaware corporation ("GlobalCenter").
RECITALS
A. The Boards of Directors of each of GlobalCenter, Primenet and Merger
Sub believe it is in the best interests of each company and their respective
stockholders that, subject to the terms and conditions set forth in this
Agreement and the Agreement and Plan of Merger attached hereto as Exhibit A (the
---------
"Merger Agreement"), GlobalCenter and Merger Sub combine into a single company
through the statutory merger of Merger Sub with and into GlobalCenter (the
"Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, the outstanding shares of
Common Stock of GlobalCenter ("Company Common Stock") shall be converted into
shares of Common Stock of Primenet ("Primenet Common Stock") at the rate
determined herein.
C. Pursuant to the Merger, among other things, the outstanding shares of
each series of Preferred Stock of GlobalCenter (collectively, "Company Preferred
Stock") shall be converted into shares of Series B Preferred Stock of Primenet
("Primenet Series B Preferred Stock") at the rate determined herein.
D. GlobalCenter, Primenet and Merger Sub desire to make certain
representations and warranties and other agreements in connection with the
Merger.
E. The parties desire to structure the Merger in a manner intended to
qualify as a tax-free reorganization under the provisions of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Tax Code").
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement and the laws of
the State of Delaware, Merger Sub shall be merged with and into GlobalCenter,
the separate corporate existence of Merger Sub shall cease, and GlobalCenter
shall continue as the surviving corporation. GlobalCenter as the surviving
corporation after the Merger is hereinafter sometimes referred to as the
"Surviving Corporation."
<PAGE>
1.2 Effective Time. As promptly as practicable after the satisfaction or
--------------
waiver of the conditions set forth in Article VI hereof, the parties hereto
shall cause the Merger to be consummated by filing a Certificate of Merger (the
"Certificate of Merger") with the Secretary of State of the State of Delaware,
in such form as required by, and executed in accordance with the relevant
provisions of, the laws of the State of Delaware (the time of the later such
filing being the "Effective Time"). The closing of the transactions
contemplated hereby (the "Closing") shall take place at the offices of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo
Alto, CA 94304, on the date of the Effective Time (the "Closing Date").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
--------------------
shall be as provided in the applicable provisions of the laws of the State of
Delaware. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers and
franchises of GlobalCenter and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of GlobalCenter and Merger
Sub shall become the debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) At the Effective Time, the Amended and Restated Certificate of
Incorporation of GlobalCenter, as in effect immediately prior to the Effective
Time, shall be the Certificate of Incorporation of the Surviving Corporation
(the "Certificate of Incorporation") until thereafter amended as provided by law
and such Certificate of Incorporation; provided, however, that such Certificate
of Incorporation of the Surviving Corporation shall be amended and restated to
read in its entirety as set forth in the form of Certificate of Incorporation of
Surviving Corporation attached hereto as Exhibit B.
---------
(b) At the Effective Time, the Bylaws of GlobalCenter, as in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation until thereafter amended as provided by law, the Certificate of
Incorporation and such Bylaws; provided, however, that such Bylaws of the
Surviving Corporation shall be amended and restated to read in their entirety as
set forth in the form of Bylaws of Surviving Corporation attached hereto as
Exhibit C.
- ---------
1.5 Directors. The initial Board of Directors of Primenet shall consist
---------
of those individuals listed on Schedule 1.5 attached hereto. All initial and
------------
subsequent directors shall hold office in accordance with the Certificate of
Incorporation and Bylaws of Primenet, and until their respective successors are
duly elected or appointed and qualified.
1.6 Effect on Capital Stock. Subject to the terms and conditions of this
-----------------------
Agreement, as of the Effective Time, by virtue of the Merger and without any
action on the part of Merger Sub, GlobalCenter or the holder of any of the
following securities:
(a) Conversion of Company Common Stock. Each share of common stock,
----------------------------------
par value $0.001 per share, of GlobalCenter (the "Company Common Stock") issued
and outstanding immediately prior to the Effective Time (other than any shares
of Company Common Stock to be canceled pursuant to Section 1.6(c) hereof and any
Dissenting Shares (as defined and to the extent provided in Section 1.7(a)
hereof) will be canceled and extinguished and be converted automatically into
the right to receive shares of Primenet Common Stock in the amount set forth in
Schedule 1.6 (the "Common Stock Conversion Ratio"),
- ------------
-2-
<PAGE>
upon surrender of the certificate representing such share of Company Common
Stock in the manner provided in Section 1.8 hereof.
(b) Conversion of Company Preferred Stock. Each share of each series
-------------------------------------
of Company Preferred Stock, par value $0.001 per share, issued and outstanding
immediately prior to the Effective Time (other than any shares of Company
Preferred Stock to be canceled pursuant to Section 1.6(c) hereof and any
Dissenting Shares as defined and to the extent provided in Section 1.7(a)
hereof) will be canceled and extinguished and be converted automatically into
the right to receive shares of Primenet Series B Preferred Stock in the amount
set forth on Schedule 1.6 (the "Preferred Stock Conversion Ratio"), upon
------------
surrender of the certificate representing such share of Company Preferred Stock
in the manner provided in Section 1.8 hereof.
(c) Cancellation of Certain Company Stock. Each share of Company
-------------------------------------
Common Stock and Company Preferred Stock (together, "Company Stock") owned by
Merger Sub, Primenet, GlobalCenter or any direct or indirect wholly owned
subsidiary of Primenet or of GlobalCenter immediately prior to the Effective
Time shall be canceled and extinguished without any conversion thereof.
(d) Stock Options. At the Effective Time, all options to purchase
-------------
Company Common Stock then outstanding under GlobalCenter's 1996 Stock Option
Plan (the "Company Stock Option Plan") shall be assumed by Primenet in
accordance with Section 5.9 hereof.
(e) Capital Stock of Merger Sub. Each share of common stock, par
---------------------------
value $0.001 per share, of Merger Sub issued and outstanding immediately prior
to the Effective Time shall be converted into and exchanged for one validly
issued, fully paid and nonassessable share of common stock, par value $0.001 per
share, of the Surviving Corporation. Each stock certificate of Merger Sub
evidencing ownership of any such shares of Merger Sub shall evidence ownership
of such shares of capital stock of the Surviving Corporation.
(f) Adjustments to Common Stock Conversion Ratio and the Preferred
--------------------------------------------------------------
Stock Conversion Ratio. The Common Stock Conversion Ratio and the Preferred
- ----------------------
Stock Conversion Ratio shall be adjusted to reflect fully the effect of any
stock split, reverse split, stock dividend (including any dividend or
distribution of securities convertible into Primenet Common Stock or Company
Stock), reorganization, recapitalization or other like change with respect to
Primenet Common Stock or Company Stock occurring after the date hereof and prior
to the Effective Time.
(g) Fractional Shares. No fraction of a share of Primenet Common
-----------------
Stock or Primenet Series B Preferred Stock (together, "Primenet Stock") will be
issued in connection with the Merger, but in lieu thereof each holder of shares
of Company Stock or Company Preferred Stock who would otherwise be entitled to a
fraction of a share of Primenet Stock (after aggregating all fractional shares
of Primenet Stock to be received by such holder) shall be entitled to receive
from Primenet cash payment in an amount equal to the product obtained by
multiplying such fraction of a share by the applicable Conversion Ratio set
forth for such class or series of shares on Schedule 1.6.
-------------
-3-
<PAGE>
1.7 Dissenting Shares.
-----------------
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares ("Dissenting Shares") of Company Stock held by a holder who has
demanded and perfected appraisal rights for such shares in accordance with the
laws of the State of Delaware and who, as of the Effective Time, has not
effectively withdrawn or lost such appraisal rights, shall not be converted into
or represent a right to receive Primenet Stock pursuant to Section 1.6 hereof,
but the holder thereof shall only be entitled to such rights as are granted by
the laws of the State of Delaware.
(b) Notwithstanding the provisions of Section 1.7(a) hereof, if any
holder of Company Stock who demands appraisal of such shares under the laws of
the State of Delaware shall effectively withdraw or lose (through failure to
perfect or otherwise) the right to appraisal, then, as of the later of the
Effective Time and the occurrence of such event, such holder's Company Stock
shall automatically be converted into and represent only the right to receive
Primenet Stock pursuant to Section 1.6 hereof, without interest thereon, upon
surrender of the certificate representing such shares as set forth herein.
(c) GlobalCenter shall give Primenet (i) prompt notice of any written
demands for appraisal of any shares of Company Stock, withdrawals of such
demands, and any other instruments served pursuant to the laws of the State of
Delaware and received by GlobalCenter and (ii) the opportunity to participate in
all negotiations and proceedings with respect to demands for appraisal under the
laws of the State of Delaware. GlobalCenter shall not, except with the prior
written consent of Primenet, voluntarily make any payment with respect to any
demands for appraisal of Company Stock or offer to settle or settle any such
demands. To the extent that there are sufficient funds held by GlobalCenter at
the Closing, all payments with respect to Dissenting Shares shall be made out of
funds of GlobalCenter, and no payments with respect to Dissenting Shares shall
be made out of the funds of Primenet unless insufficient funds are available
therefor out of the funds of GlobalCenter.
1.8 Surrender of Certificates.
-------------------------
(a) Exchange Agent. Prior to the Effective Time, Wilson Sonsini
--------------
Goodrich & Rosati, Professional Corporation, shall be designated to act as
exchange agent (the "Exchange Agent") in the Merger.
(b) Primenet to Provide Common Stock and Preferred Stock. At the
----------------------------------------------------
Effective Time, Primenet shall make available to the Exchange Agent for exchange
in accordance with this Article I certificates representing the number of shares
of Primenet Common Stock and Primenet Preferred Stock identified on Schedule 1.6
------------
hereto.
(c) Exchange Procedures. Prior to or promptly after the Effective
-------------------
Time, GlobalCenter and/or the Surviving Corporation shall cause to be mailed to
each holder of record of a certificate or certificates (the "Certificates")
which immediately prior to the Effective Time represented outstanding shares of
Company Stock whose shares were converted into the right to receive shares of
Primenet Stock pursuant to Section 1.6, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Primenet may
specify), and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of
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<PAGE>
Primenet Stock to which such holder is entitled pursuant to this Article I and
the Merger Agreement. Upon surrender of a Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by Primenet,
together with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the holder of such Certificate shall
be entitled to receive in exchange therefor a certificate representing the
number of whole shares of Primenet Stock to which such holder is entitled
pursuant to Section 1.6 and the Merger Agreement, based on the number of shares
of Company Stock so surrendered. The Certificate so surrendered shall forthwith
be canceled. Until so surrendered, each outstanding Certificate that, prior to
the Effective Time, represented shares of Company Stock will be deemed from and
after the Effective Time, for all corporate purposes, other than the payment of
dividends, to evidence the ownership of the number of full shares of Primenet
Common Stock into which such shares of Company Common Stock shall have been so
converted in accordance with Section 1.6.
(d) Certificates Not Surrendered. Until surrendered as contemplated
----------------------------
by Section 1.8(c) above, each Certificate shall be deemed at any time after the
Effective Date to represent the right to receive on such surrender the number of
shares of Primenet Stock to which the holder thereof is entitled pursuant to
Section 1.6 hereof and the Merger Agreement.
(e) Transfers of Ownership. If any certificate for shares of Primenet
----------------------
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer, that the person requesting such
exchange will have paid to Primenet or any agent designated by it any transfer
or other taxes required by reason of the issuance of a certificate for shares of
Primenet Stock in any name other than that of the registered holder of the
Certificate surrendered, or established to the satisfaction of Primenet or any
agent designated by it that such tax has been paid or is not payable, and that
such transfer is in accordance with Federal and state securities laws.
(f) No Liability. Notwithstanding anything to the contrary in this
------------
Section 1.8, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Primenet Stock or Company Stock
for any amount properly paid to a public official pursuant to any applicable
abandoned property, escheat or similar law.
1.9 No Further Ownership Rights in Company Stock. All shares of Primenet
--------------------------------------------
Stock issued upon the surrender for exchange of shares of Company Stock in
accordance with the terms hereof and the Merger Agreement shall be deemed to
have been issued in full satisfaction of all rights pertaining to such shares of
Company Stock, and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of Company Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
--------------------------------------
evidencing shares of Company Stock shall have been lost, stolen or destroyed,
the Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Certificates, upon the making of an affidavit of that fact by the holder
thereof, such shares of Primenet Stock, if any, as may be required pursuant to
Section 1.6; provided, however, that Primenet may, in its sole discretion and as
a condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver such assurances as Primenet in its
sole discretion deems appropriate including, if requested by Primenet, a bond in
such sum as it may
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<PAGE>
reasonably direct as indemnity against any claim that may be made against
Primenet or the Exchange Agent with respect to the Certificates alleged to have
been lost, stolen or destroyed.
1.11 Tax Consequences. It is intended by the parties hereto that the
----------------
Merger shall constitute a tax-free reorganization under the provisions of
Section 368(a) of the Tax Code.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
------------------------------------------
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of GlobalCenter and Merger Sub, the officers and directors of
GlobalCenter, Primenet and Merger Sub are fully authorized in the names of their
respective corporations or otherwise to take, and will take, all such lawful and
necessary action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF GLOBALCENTER
Except as set forth in the Schedule of Exceptions to GlobalCenter's
representations and warranties attached hereto as Schedule 2, GlobalCenter
----------
represents and warrants to Primenet and Merger Sub as follows:
2.1 Organization and Standing; Articles and Bylaws. GlobalCenter is a
----------------------------------------------
corporation duly organized and validly existing under, and by virtue of, the
laws of the State of Delaware and is in good standing under such laws.
GlobalCenter has requisite corporate power and authority to own and operate its
properties and assets, and to carry on its business as presently conducted and
as proposed to be conducted. GlobalCenter has furnished Primenet and Merger Sub
with copies of its Certificate of Incorporation and Bylaws, each as amended to
date. Said copies are true, correct and complete and contain all amendments
through the Closing Date.
2.2 Corporate Power. GlobalCenter will have at the Closing Date all
---------------
requisite legal and corporate power and authority to execute and deliver this
Agreement and each such other agreement, document or instrument attached as an
Exhibit hereto (collectively, the "Other Agreements"), and to carry out and
perform its obligations under the terms of this Agreement and Other Agreements.
2.3 Subsidiaries. GlobalCenter has no subsidiaries or affiliated
------------
companies and does not otherwise own or control, directly or indirectly, any
equity interest in any corporation, association or other business entity.
2.4 Capitalization. The authorized capital stock of GlobalCenter consists
--------------
of (a) 30,000,000 shares of Common Stock, $0.001 par value, 1,399,000 shares of
which are issued and outstanding, and (b) 20,000,000 shares of Preferred Stock,
$0.001 par value, of which (i) 8,000,000 have been designated Series A
Preferred, 7,500,000 shares of which are issued and outstanding, (ii) 7,666,960
shares have been designated Series B Preferred, all of which are issued and
outstanding, and (iii) 13,333,332 shares have been designated Series C
Preferred, 13,333,332 of which are issued and outstanding prior to the Closing.
The Board of Directors of GlobalCenter has granted options to purchase 1,644,100
shares of Common Stock. There are no other options, warrants or other rights to
purchase any of GlobalCenter's authorized
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<PAGE>
and unissued capital stock. All issued and outstanding shares of GlobalCenter's
capital stock have been duly authorized and validly issued, are fully paid and
nonassessable, and were issued in compliance with applicable federal and state
securities law. GlobalCenter is not a party or subject to any agreement or
understanding, and, to GlobalCenter's knowledge, there is no agreement or
understanding between any persons and/or entities, which affects or relates to
the voting or giving of written consents with respect to any security or by a
director of GlobalCenter.
2.5 Authorization. All corporate action on the part of GlobalCenter
-------------
necessary for the authorization, execution, delivery and performance of this
Agreement and the Other Agreements by GlobalCenter and the performance of all of
GlobalCenter's obligations hereunder has been taken or will be taken prior to
the Closing. This Agreement and the Other Agreements, when executed and
delivered by GlobalCenter, shall constitute valid and binding obligations of
GlobalCenter, enforceable in accordance with their terms, subject to laws of
general application relating to bankruptcy, insolvency and the relief of debtors
and rules of law governing specific performance, injunctive relief or other
equitable remedies.
2.6 No Conflicts. The execution, delivery and performance of this
------------
Agreement and the Other Agreements by GlobalCenter will not breach, cause a
default under or otherwise conflict with or give rise to any acceleration or
termination of the charter documents of GlobalCenter or any material contract or
agreement to which GlobalCenter is a party or by which it is bound or, to
GlobalCenter's knowledge, any statute, rule or governmental regulation
applicable to GlobalCenter.
2.7 Title to Properties; Liens and Encumbrances. GlobalCenter has (i)
-------------------------------------------
good and marketable title to all of its properties and assets, both real and
personal, and (ii) with respect to property it leases and to its knowledge, it
holds valid leasehold interests in such property; in each case, subject to no
mortgage, pledge, lien, security interest, conditional sale agreement,
encumbrance or charge, except in (X) the lien of current taxes not yet due and
payable, and (Y) liens and encumbrances which do not in any case or in the
aggregate materially detract from the value of the property subject thereto or
materially impair GlobalCenter's operations.
2.8 Patent and Other Proprietary Rights. GlobalCenter has all franchises,
-----------------------------------
permits, licenses and other similar authority necessary for the conduct of its
business, the lack of which could materially and adversely affect the operations
or condition, financial or otherwise, of GlobalCenter, and it is not in default
in any material respect under any of such franchises, permits, liens or other
similar authority. To the best of GlobalCenter's knowledge, GlobalCenter
possesses all patents, patent rights, trademarks, trademark rights, trade names,
trade name rights and copyrights necessary to conduct its business as now being
conducted and as planned to be conducted without conflict with or infringement
upon any valid rights of others and the lack of which could materially and
adversely affect the operations or condition, financial or otherwise, of
GlobalCenter, and GlobalCenter has not received any notice of infringement upon
or conflict with the asserted rights of others. GlobalCenter has a valuable
body of trade secrets, including know-how, concepts, computer programs and other
technical data (the "Proprietary Information") for the development, manufacture
and sale of its products. To GlobalCenter's knowledge, GlobalCenter has the
right to use the Proprietary Information, free and clear of any rights, liens,
encumbrances or claims of others, except that the possibility exists that other
persons may have independently developed trade secrets or technical information
similar or identical to those of GlobalCenter. GlobalCenter has not received
any communications alleging that GlobalCenter has violated, or by conducting its
business as proposed, would violate any of the patents, trademarks, service
marks, trade names, copyrights, trade secrets or other proprietary rights or
processes of any other person or entity. Neither the execution nor delivery of
this Agreement and the Other Agreements, nor the operation of GlobalCenter's
business by the employees of GlobalCenter, nor the conduct of GlobalCenter's
business as proposed will
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<PAGE>
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any of such employees is now obligated. GlobalCenter does not believe it is or
will be necessary to utilize any inventions of any of its employees (or people
it currently intends to hire) made prior to their employment by GlobalCenter.
2.9 GlobalCenter Contracts. GlobalCenter is not party to any contracts
----------------------
and agreements with expected receipts or expenditures in excess of $75,000 or
involving a license or grant of rights to or from GlobalCenter involving
patents, trademarks, copyrights or other proprietary information material to the
business of GlobalCenter, to which GlobalCenter is a party as of the date of the
Closing. All material contracts and agreements are legally binding, valid, and
in full force and effect in all material respects, and there is no indication of
reduced activity relating to such contract or agreement (other than in the
ordinary course of business) by any of the parties to any such contract or
agreement. GlobalCenter has no indebtedness for borrowed money (other than
trade payables incurred in the ordinary course of business) which GlobalCenter
has directly or indirectly created, incurred, assumed or guaranteed, or with
respect to which GlobalCenter has become directly or indirectly liable. Except
in the ordinary course of business, GlobalCenter has no material liability or
obligation, absolute or contingent, other than liabilities or obligations of
less than $25,000 each and in the aggregate less than $75,000, under purchase
orders, sales contracts, real property leases, equipment leases or similar
obligations. There are no agreements, understandings, instruments, contracts or
proposed transactions or judgments, orders, writs, decrees to which GlobalCenter
is a party or by which it is bound that involve (i) provisions restricting or
affecting the development, manufacture or distribution of GlobalCenter's
products or services or (ii) indemnification by GlobalCenter with respect to
infringements of proprietary rights, or (iii) which materially adversely affect
GlobalCenter's business as now conducted and as proposed to be conducted.
2.10 Litigation. There is no action, suit, proceeding or investigation
----------
pending against GlobalCenter or any of its properties before any court or
governmental agency (nor, to GlobalCenter's knowledge is there any reasonable
basis therefore or threat thereof). To GlobalCenter's knowledge, there is no
action, suit, proceeding or investigation pending against any of GlobalCenter's
employees (nor, to GlobalCenter's knowledge is there any reasonable basis
therefore or threat thereof) that involves the prior employment of any of
GlobalCenter's employees or former employees or their respective obligations
under any agreements with prior employers. GlobalCenter is not a party or
subject to the provisions of any order, writ, injunction, judgment, or decree of
any court or governmental agency or instrumentality. There is no action, suit,
proceeding or investigation by GlobalCenter currently pending or that
GlobalCenter intends to initiate.
2.11 Taxes. All federal, state, local and foreign tax returns required to
-----
be filed by GlobalCenter have been filed, if not yet filed have been granted
extensions of the filing dates which extensions have not expired, and all taxes,
assessments, fees and other governmental charges upon GlobalCenter, or upon any
of its properties, income or franchises, shown in such returns and on
assessments received by GlobalCenter to be due and payable have been paid, or
adequate reserves therefor have been established, or if any of such tax returns
have not been filed or if any such taxes have not been paid or so reserved, the
failure so to file or pay would not in the aggregate constitute a material
adverse event. GlobalCenter knows of no proposed additional tax assessment that
is not provided for in its financial statements. GlobalCenter has not elected
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be
treated as an S Corporation or a collapsible corporation pursuant to Section
341(f) or Section 1362(a) of the Code, nor has it made any other elections
pursuant to the Code (other than elections that relate solely to methods of
accounting, depreciation or amortization), that would have a material adverse
effect on the business, properties, prospects or financial condition of
GlobalCenter. GlobalCenter has never had a tax deficiency proposed or assessed
against it and
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<PAGE>
has not executed any waiver of any statute of limitations on the assessment or
collection of any tax or governmental charge. GlobalCenter has withheld or
collected from each payment made to each of its employees, the amount of all
taxes, including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories.
2.12 Insurance. GlobalCenter has fire and casualty insurance policies,
---------
with extended coverage, sufficient in amount (subject to reasonable deductibles)
to allow it to replace any of its properties that are material to GlobalCenter's
business as presently conducted. GlobalCenter has in effect insurance covering
risks associated with its business in such amounts as are customary in its
industry. GlobalCenter is not aware of any pending or threatened claims against
GlobalCenter for personal injuries or property damages.
2.13 Employee Benefit Plans. GlobalCenter does not have any Employee
----------------------
Benefit plan as defined in the Employee Retirement Income Security Act of 1974.
2.14 Proprietary Information Agreements. All current employees and
----------------------------------
officers of GlobalCenter have entered into proprietary information and
assignment agreements in the form previously provided to counsel to Primenet and
Merger Sub. GlobalCenter is not aware that any of its employees are in
violation thereof, and GlobalCenter will use commercially reasonable efforts to
prevent any such violation.
2.15 Registration Rights. Except as provided in the Second Amended and
-------------------
Restated Stockholders' Agreement, GlobalCenter is not under any obligation to
register any of its presently outstanding securities.
2.16 Governmental Consents. No consent, approval or authorization of
---------------------
registrations, qualifications, designation, declaration or filing with, any
governmental authority on the part of GlobalCenter is required in connection
with the valid execution and delivery of this Agreement or the Other Agreements,
or the consummation of any transaction contemplated hereby or thereby.
2.17 Environmental and Safety Laws. To GlobalCenter's knowledge,
-----------------------------
GlobalCenter is not in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to
GlobalCenter's knowledge, no material expenditures are or will be required in
order to comply with any of such existing statutes, law, or regulation.
2.18 Related Party Transactions. No employee, officer, or director of
--------------------------
GlobalCenter or member of his or her immediate family is indebted to
GlobalCenter, nor is GlobalCenter indebted (or committed to make loans or extend
or guarantee credit), to any of them. To GlobalCenter's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which GlobalCenter is affiliated or with which GlobalCenter has a business
relationship, or any firm or corporation that competes with GlobalCenter, except
that employees, officers or directors of GlobalCenter and members of their
immediate families may own stock in publicly traded companies that may compete
with GlobalCenter.
2.19 Broker's and Finders' Fees. GlobalCenter has not incurred, and will
--------------------------
not incur, directly or indirectly, any liability for brokerage or finders' fees
or agents' commissions or any similar charges in connection with this
Agreement or any transaction contemplated hereby.
2.20 Compliance with Other Instruments. GlobalCenter is not in violation
---------------------------------
or default of any provision of its Certificate of Incorporation or Bylaws or, to
the best of its knowledge, of any instrument,
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<PAGE>
judgment, order, writ, decree or contract to which it is a party or by which it
is bound or any provision of federal or state statute, rule or regulation
applicable to GlobalCenter. The execution, delivery and performance of this
Agreement, the Other Agreements, and the consummation of the transactions
contemplated hereby and thereby will not result in any such violation or be in
conflict with or constitute, with or without the passage of time and giving of
notice, either a default under any such provision, instrument, judgment, order,
writ, decree or contract or an event which results in the creation of any lien,
charge or encumbrance upon any assets of GlobalCenter or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to GlobalCenter, its business or
operations or any of its assets or properties.
2.21 Disclosure. GlobalCenter has provided Primenet and Merger Sub the
----------
information which such entities have requested in connection with the execution
of this Agreement and the Merger. No representation or warranty of GlobalCenter
contained in this Agreement, the Other Agreements, or any certificate furnished
or to be furnished to Primenet or Merger Sub at the Closing (when read together)
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made.
2.22 Employees. GlobalCenter is not aware that any officer or key
---------
employee, or that any group of key employees, intends to terminate their
employment with GlobalCenter, nor does GlobalCenter have a present intention to
terminate the employment of any of the foregoing. The employment of each
officer and employee of GlobalCenter is terminable at the will of GlobalCenter.
2.23 Financial Statements. GlobalCenter has delivered to Primenet and
--------------------
Merger Sub an unaudited balance sheet dated October 31, 1996 (the "Balance
Sheet") and an unaudited income statement dated October 31, 1996 (the "Income
Statement," and together with the Balance Sheet, the "Financial Statements").
The Financial Statements are complete and correct in all material respects and
accurately set out and describe the financial condition of GlobalCenter as of
October 31, 1996. Since October 31, 1996, there has not been any material
change in the assets or liabilities of GlobalCenter from those reflected in the
Financial Statements, except changes in the ordinary course of business which
have not been individually or, in the aggregate, materially adverse. In
addition, since October 31, 1996, GlobalCenter has not incurred any other
material liabilities which, individually or in the aggregate, are material to
the financial condition or operating results of GlobalCenter. Except as
disclosed in the Balance Sheet, GlobalCenter is not a guarantor or indemnitor of
any indebtedness of any other person, firm or corporation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as set forth in the Schedule of Exceptions to the representations
and warranties of Primenet and Merger Sub attached hereto as Schedule 3,
----------
Primenet and Merger Sub hereby jointly and severally represent and warrant to
GlobalCenter as follows:
3.1 Organization and Standing; Articles and Bylaws. Primenet is a
----------------------------------------------
corporation duly organized and validly existing under, and by virtue of, the
laws of the State of Delaware and is in good standing under such laws. Primenet
has requisite corporate power and authority to own and operate its properties
and assets, and to carry on its business as presently conducted and as proposed
to be conducted. Primenet
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<PAGE>
has furnished GlobalCenter with copies of the Certificate of Incorporation and
Bylaws of Primenet, as amended to date. Said copies are true, correct and
complete and contain all amendments through the Closing Date.
3.2 Corporate Power. Primenet will have at the Closing Date all requisite
---------------
legal and corporate power and authority to execute and deliver this Agreement
and each such other agreement, document or instrument attached as an Exhibit
hereto (collectively, the "Other Agreements"), and to carry out and perform its
obligations under the terms of this Agreement and the Other Agreements.
3.3 Subsidiaries. Other than Merger Sub, Primenet has no subsidiaries or
------------
affiliated companies and does not otherwise own or control, directly or
indirectly, any equity interest in any corporation, association or other
business entity. Merger Sub has no subsidiaries or affiliated companies and
does not otherwise own or control, directly or indirectly, any equity interest
in any corporation, association or other business entity.
3.4 Capitalization. The authorized capital stock of Primenet consists of
--------------
(a) 20,000,000 shares of Common Stock, $0.001 par value, 3,600,000 shares of
which are issued and outstanding, and (b) 1,000,000 shares of Preferred Stock,
$0.001 par value, of which (i) 400,000 shares have been designated Series A
Preferred, 400,000 shares of which are issued and outstanding. As of the
Closing, Primenet will have authorized a sufficient number of shares of Class B
Preferred Stock to permit the Merger to occur. The authorized capital stock of
Merger Sub consists of (a) 100 shares of Common Stock, $0.001 par value, 100 of
which are issued and outstanding prior to the Closing. The Board of Directors of
Primenet has approved the grant of warrants and options to purchase 190,750
shares of Common Stock. There are no other options, warrants or other rights to
purchase any of Primenet's or Merger Sub's authorized and unissued capital
stock. All issued and outstanding shares of Primenet's and Merger Sub's capital
stock have been duly authorized and validly issued, are fully paid and
nonassessable, and were issued in compliance with applicable federal and state
securities law. Neither Primenet nor Merger Sub is a party to nor subject to
any agreement or understanding, and, to Primenet's knowledge, there is no
agreement or understanding between any persons and/or entities, which affects or
relates to the voting or giving of written consents with respect to any security
or by a director of Primenet or Merger Sub.
3.5 Authorization. All corporate action on the part of Primenet and
-------------
Merger Sub necessary for the authorization, execution, delivery and performance
of this Agreement and the Other Agreements by Primenet and Merger Sub, the
authorization, sale, issuance and delivery of the Primenet Common Stock, and the
performance of all obligations of Primenet and of Merger Sub hereunder has been
taken or will be taken prior to the Closing. This Agreement and the Other
Agreements, when executed and delivered by Primenet and Merger Sub, shall
constitute valid and binding obligations of Primenet and Merger Sub, enforceable
in accordance with their terms, subject to laws of general application relating
to bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies. The
Primenet Series B Preferred Stock, when issued in compliance with the provisions
of this Agreement, will be validly issued, fully paid and nonassessable, and
free of any liens or encumbrances; provided, however, that such Shares will be
subject to restrictions on transfer under state and/or federal securities laws
and may be subject to certain liens by virtue of liens existing on Company Stock
prior to the Merger.
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3.6 No Conflicts. The execution, delivery and performance of this
------------
Agreement and the Other Agreements by Primenet or Merger Sub will not breach,
cause a default under or otherwise conflict with or give rise to any
acceleration or termination of the charter documents of Primenet or Merger Sub
or any material contract or agreement to which Primenet or Merger Sub is a party
or by which it is bound or, to Primenet's knowledge, any statute, rule or
governmental regulation applicable to Primenet or Merger Sub.
3.7 Offering. Subject to the accuracy of the representations of
--------
GlobalCenter in Article II hereof and in written responses to Primenet's
inquiries, if any, and the representations of the stockholders of GlobalCenter
in the Investment Representation Statements, substantially in the form attached
hereto as Exhibit E, the offer, sale and issuance of the Primenet Stock to be
issued in conformity with the terms of this Agreement constitute transactions
exempt from the registration requirements of Section 5 of the Securities Act of
1933, as amended (the "Securities Act"), and applicable Blue Sky laws.
3.8 Title to Properties; Liens and Encumbrances. Each of Primenet and
-------------------------------------------
Merger Sub has (i) good and marketable title to all of its properties and
assets, both real and personal, and (ii) with respect to property it leases and
to its knowledge, it holds valid leasehold interests in such property; in each
case, subject to no mortgage, pledge, lien, security interest, conditional sale
agreement, encumbrance or charge, except in (X) the lien of current taxes not
yet due and payable, and (Y) liens and encumbrances which do not in any case or
in the aggregate materially detract from the value of the property subject
thereto or materially impair the operations of Primenet or Merger Sub.
3.9 Patent and Other Proprietary Rights. Each of Primenet and Merger Sub
-----------------------------------
has all franchises, permits, licenses and other similar authority necessary for
the conduct of its business, the lack of which could materially and adversely
affect the operations or condition, financial or otherwise, of either Primenet
or Merger Sub, and it is not in default in any material respect under any of
such franchises, permits, liens or other similar authority. To the best of
Primenet's knowledge, each of Primenet and Merger Sub possesses all patents,
patent rights, trademarks, trademark rights, trade names, trade name rights and
copyrights necessary to conduct its respective business as now being conducted
and as planned to be conducted without conflict with or infringement upon any
valid rights of others and the lack of which could materially and adversely
affect the operations or condition, financial or otherwise, of either Primenet
or Merger Sub, and Primenet has not received any notice of infringement upon or
conflict with the asserted rights of others. Each of Primenet and Merger Sub
has a valuable body of trade secrets, including know-how, concepts, computer
programs and other technical data (the "Proprietary Information") for the
development, manufacture and sale of its products. To Primenet's knowledge,
each of Primenet and Merger Sub has the right to use the Proprietary
Information, free and clear of any rights, liens, encumbrances or claims of
others, except that the possibility exists that other persons may have
independently developed trade secrets or technical information similar or
identical to those of Primenet or Merger Sub. Neither Primenet nor Merger Sub
has received any communications alleging that either Primenet or Merger Sub has
violated, or by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, copyrights, trade secrets or
other proprietary rights or processes of any other person or entity. Neither
the execution nor delivery of this Agreement and the Other Agreements, nor the
operation of the business of Primenet or Merger Sub by its respective employees,
nor the conduct of the business of Primenet or Merger Sub as proposed will
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any of such employees is now obligated. Each of Primenet and Merger Sub does
not believe it is or will be necessary to utilize any inventions of any of its
respective employees (or people it currently intends to hire) made prior to
their employment by either Primenet, Merger Sub or GlobalCenter.
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3.10 Contracts. Neither Primenet nor Merger Sub is party to any contracts
---------
and agreements with expected receipts or expenditures in excess of $75,000 or
involving a license or grant of rights to or from either Primenet or Merger Sub
involving patents, trademarks, copyrights or other proprietary information
material to the business of either Primenet or Merger Sub, to which either
Primenet or Merger Sub is a party as of the date of the Closing. All material
contracts and agreements are legally binding, valid, and in full force and
effect in all material respects, and there is no indication of reduced activity
relating to such contract or agreement (other than in the ordinary course of
business) by any of the parties to any such contract or agreement. Neither
Primenet nor Merger Sub has indebtedness for borrowed money (other than trade
payables incurred in the ordinary course of business) which either Primenet or
Merger Sub has directly or indirectly created, incurred, assumed or guaranteed,
or with respect to which either Primenet or Merger Sub has become directly or
indirectly liable. Except in the ordinary course of business, neither Primenet
nor Merger Sub has material liability or obligation, absolute or contingent,
other than liabilities or obligations of less than $25,000 each and in the
aggregate less than $75,000, under purchase orders, sales contracts, real
property leases, equipment leases or similar obligations. There are no
agreements, understandings, instruments, contracts or proposed transactions or
judgments, orders, writs, decrees to which either Primenet or Merger Sub is a
party or by which it is bound that involve (i) provisions restricting or
affecting the development, manufacture or distribution of the products or
services of either Primenet or Merger Sub or (ii) indemnification by either
Primenet or Merger Sub with respect to infringements of proprietary rights, or
(iii) which materially adversely affect the business of either Primenet or
Merger Sub as now conducted and as proposed to be conducted.
3.11 Litigation. There is no action, suit, proceeding or investigation
----------
pending against either Primenet or Merger Sub or any of their respective
properties before any court or governmental agency (nor, to Primenet's knowledge
is there any reasonable basis therefore or threat thereof). To Primenet's
knowledge, there is no action, suit, proceeding or investigation pending against
employees of Primenet (nor, to Primenet's knowledge is there any reasonable
basis therefore or threat thereof) that involves the prior employment of the
employees of Primenet or former employees or their respective obligations under
any agreements with prior employers. Neither Primenet nor Merger Sub is a party
or subject to the provisions of any order, writ, injunction, judgment, or decree
of any court or governmental agency or instrumentality. There is no action,
suit, proceeding or investigation by either Primenet or Merger Sub currently
pending or that either Primenet or Merger Sub intends to initiate.
3.12 Taxes. All federal, state, local and foreign tax returns required to
-----
be filed by each of Primenet and Merger Sub have been filed, if not yet filed
have been granted extensions of the filing dates which extensions have not
expired, and all taxes, assessments, fees and other governmental charges upon
each of Primenet and Merger Sub, or upon any of its respective properties,
income or franchises, shown in such returns and on assessments received by each
of Primenet and Merger Sub to be due and payable have been paid, or adequate
reserves therefor have been established, or if any of such tax returns have not
been filed or if any such taxes have not been paid or so reserved, the failure
so to file or pay would not in the aggregate constitute a material adverse
event. Primenet knows of no proposed additional tax assessment that is not
provided for in its financial statements. Neither Primenet nor Merger Sub has
elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code"),
to be treated as an S Corporation or a collapsible corporation pursuant to
Section 341(f) or Section 1362(a) of the Code, nor has either Primenet or Merger
Sub made any other elections pursuant to the Code (other than elections that
relate solely to methods of accounting, depreciation or amortization), that
would have a material adverse effect on the business, properties, prospects or
financial condition of either Primenet or Merger Sub. Neither Primenet nor
Merger Sub has ever had a tax deficiency proposed or assessed against it and
neither has executed any
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waiver of any statute of limitations on the assessment or collection of any tax
or governmental charge. Primenet has withheld or collected from each payment
made to its employees, the amount of all taxes, including, but not limited to,
federal income taxes, Federal Insurance Contribution Act taxes and Federal
Unemployment Tax Act taxes required to be withheld or collected therefrom, and
has paid the same to the proper tax receiving officers or authorized
depositories.
3.13 Insurance. Each of Primenet and Merger Sub has fire and casualty
---------
insurance policies, with extended coverage, sufficient in amount (subject to
reasonable deductibles) to allow it to replace any of its properties that are
material to each of its respective businesses as presently conducted. Each of
Primenet and Merger Sub has in effect insurance covering risks associated with
its business in such amounts as are customary in its industry. Neither Primenet
nor Merger Sub is aware of any pending or threatened claims against it for
personal injuries or property damages.
3.14 Employee Benefit Plans. Neither Primenet nor Merger Sub has any
----------------------
Employee Benefit plan as defined in the Employee Retirement Income Security Act
of 1974.
3.15 Proprietary Information Agreements. All current employees and
----------------------------------
officers of Primenet have entered into proprietary information and assignment
agreements in the form previously provided to counsel to GlobalCenter. Primenet
is not aware that any of its employees are in violation thereof, and Primenet
will use commercially reasonable efforts to prevent any such violation.
3.16 Registration Rights. Except as provided in Primenet's Certificate of
-------------------
Designations for the Series A Preferred and the Private Placement Agreement
dated October 11, 1996 between Primenet and Fox & Company, Inc., Primenet is not
under any obligation to register any of its presently outstanding securities.
3.17 Governmental Consents. No consent, approval or authorization of
---------------------
registrations, qualifications, designation, declaration or filing with, any
governmental authority on the part of either Primenet or Merger Sub is required
in connection with the valid execution and delivery of this Agreement or the
Other Agreements, or the offer, sale or issuance of Primenet Common Stock or
Primenet Series B Preferred Stock, or the consummation of any transaction
contemplated hereby, except qualification (or taking such action as may be
necessary to secure an exemption from qualification, if available) of the offer
and sale of Primenet Common Stock and Primenet Series B Preferred Stock under
the California Corporate Securities Law of 1968, as amended, and other
applicable Blue Sky laws.
3.18 Environmental and Safety Laws. To Primenet's knowledge, neither
-----------------------------
Primenet nor Merger Sub is in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety, and to
Primenet's knowledge, no material expenditures are or will be required in order
to comply with any of such existing statutes, law, or regulation.
3.19 Related Party Transactions. No employee, officer, or director of
--------------------------
either Primenet or Merger Sub or member of his or her immediate family is
indebted to either Primenet or Merger Sub, nor is either Primenet or Merger Sub
indebted (or committed to make loans or extend or guarantee credit), to any of
them. To Primenet's knowledge, none of such persons has any direct or indirect
ownership interest in any firm or corporation with which either Primenet or
Merger Sub is affiliated or with which either Primenet or Merger Sub has a
business relationship, or any firm or corporation that competes with either
Primenet or Merger Sub, except that employees, officers or directors of both
Primenet and Merger Sub and members of their immediate families may own stock in
publicly traded companies that may compete with Primenet and Merger Sub.
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3.20 Broker's and Finders' Fees. Neither Primenet nor Merger Sub has
--------------------------
incurred, and neither will incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
3.21 Compliance with Other Instruments. Neither Primenet nor Merger Sub is
---------------------------------
in violation or default of any provision of the respective Certificates of
Incorporation and Bylaws of each of Primenet and Merger Sub nor, to the best of
Primenet's knowledge, of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound or any provision of
federal or state statute, rule or regulation applicable to either Primenet or
Merger Sub. The execution, delivery and performance of this Agreement, the Other
Agreements, and the consummation of the transactions contemplated hereby and
thereby will not result in any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any such provision, instrument, judgment, order, writ, decree or
contract or an event which results in the creation of any lien, charge or
encumbrance upon any assets of either Primenet or Merger Sub or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to either Primenet or Merger Sub,
their respective businesses or operations or any of the assets or properties of
Primenet or Merger Sub.
3.22 Disclosure. Primenet has provided GlobalCenter the information which
----------
it has requested in connection with the execution of this Agreement and the
Merger. No representation or warranty of either Primenet or Merger Sub
contained in this Agreement, the Other Agreements, or any certificate furnished
or to be furnished to GlobalCenter at the Closing (when read together) contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made.
3.23 Employees. Primenet is not aware that any officer or key employee, or
---------
that any group of key employees, intends to terminate their employment with
Primenet, nor does Primenet have a present intention to terminate the employment
of any of the foregoing. The employment of each officer and employee of Primenet
is terminable at the will of Primenet.
3.24 Financial Statements. Primenet has delivered to GlobalCenter an
--------------------
unaudited balance sheet dated September 30, 1996 (the "Balance Sheet") and an
unaudited income statement dated September 30, 1996 (the "Income Statement," and
together with the Balance Sheet, the "Financial Statements"). The Financial
Statements are complete and correct in all material respects and accurately set
out and describe the financial condition of Primenet as of September 30, 1996.
Since September 30, 1996, there has not been any material change in the assets
or liabilities of Primenet from those reflected in the Financial Statements,
except changes in the ordinary course of business which have not been
individually or, in the aggregate, materially adverse. In addition, since
September 30, 1996, Primenet has not incurred any other material liabilities
which, individually or in the aggregate, are material to the financial condition
or operating results of Primenet. Except as disclosed in the Balance Sheet,
Primenet is not a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of GlobalCenter. During the period from the date
-----------------------------------
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, GlobalCenter
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<PAGE>
agrees (except to the extent that Primenet shall otherwise consent in writing),
to carry on its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and, to the extent
consistent with such business, use all reasonable efforts consistent with past
practice and policies to preserve intact GlobalCenter's present business
organizations, keep available the services of its present officers and key
employees (other than those employees terminated with the permission of
Primenet) and preserve its relationships with customers, suppliers,
distributors, licensors, licensees and others having business dealings with it,
to the end that GlobalCenter's goodwill and ongoing businesses shall be
unimpaired at the Effective Time. GlobalCenter shall promptly notify Primenet of
any event or occurrence or emergency not in the ordinary course of business of
GlobalCenter, and any event which could reasonably be expected to have a
Material Adverse Effect. Except as expressly contemplated by this Agreement,
GlobalCenter shall not, without the prior written consent of Primenet:
(a) Except pursuant to existing contractual provisions of options
outstanding on the date hereof, accelerate, amend or change the period of
exercisability of options or restricted stock granted under the employee stock
plans of GlobalCenter or authorize cash payments in exchange for any options
granted under any of such plans;
(b) Enter into any commitment or transaction not in the ordinary
course of business (i) to be performed over a period longer than six months in
duration, or (ii) to purchase fixed assets for a purchase price in excess of
$50,000;
(c) Grant any severance or termination pay (i) to any director; or
(ii) to any employee except (A) payments made pursuant to written agreements
outstanding on the date hereof (all of which have been provided to Primenet) or
(B) in the case of employees who are not officers, grants which are made in the
ordinary course of business in accordance with GlobalCenter's standard past
practices;
(d) Except for licenses granted to end-users, OEM's or distributors
pursuant to GlobalCenter's standard license agreements, transfer to any person
or entity any GlobalCenter Proprietary Information;
(e) Enter into or amend any agreements pursuant to which any other
party is granted exclusive marketing or other rights of any type or scope with
respect to any products of GlobalCenter;
(f) Violate, amend or otherwise modify the terms of any of the
contracts, agreements or instruments set forth or required to be set forth in
GlobalCenter's Schedule of Exceptions.
(g) Commence any litigation;
(h) Declare or pay any dividends on or make any other distribution
(whether in cash, stock or property) in respect of any Company Stock, or split,
combine or reclassify any Company Stock, or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for shares of
Company Stock, or repurchase or otherwise acquire, directly or indirectly, any
shares of Company Stock except from former employees, directors and consultants
in accordance with agreements providing for the repurchase of shares at cost in
connection with any termination of service to GlobalCenter;
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<PAGE>
(i) Issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any Company Stock
or securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other securities other than options or warrants or
securities deliverable upon the exercise thereof as described in Section 2.4
above;
(j) Cause or permit any amendments to its Certificate of Incorporation
or Bylaws;
(k) Acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other manner,
any business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets that are material, individually or in the aggregate, to the business of
GlobalCenter;
(l) Sell, lease, license or otherwise dispose of any of its properties
or assets that are material, individually or in the aggregate, to the business
of GlobalCenter, except in the ordinary course of business;
(m) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of GlobalCenter or guarantee
any debt securities of others;
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay any special bonus or special remuneration to any
director or employee, or increase the salaries or wage rates of any employee
other than as reflected on GlobalCenter's Disclosure Schedule;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Pay, discharge or satisfy in an amount in excess of $50,000 in any
one case any claim, liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business of liabilities reflected or
reserved against in GlobalCenter Balance Sheet;
(q) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, file any material Return or
any amendment to a material Return, enter into any closing agreement, settle any
claim or assessment in respect of Taxes, or consent to any extension or waiver
of the limitation period applicable to any claim or assessment in respect of
Taxes; or
(r) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (q) above, or any action which would make
any of the representations or warranties or covenants of GlobalCenter contained
in this Agreement materially untrue or incorrect.
4.2 No Solicitation by GlobalCenter. Prior to the Effective Time,
-------------------------------
GlobalCenter will not (nor will GlobalCenter permit any of GlobalCenter's
officers, directors, stockholders, agents, representatives or affiliates to)
directly or indirectly, take any of the following actions with any party other
than Primenet and its designees:
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<PAGE>
(a) solicit, encourage, initiate or participate in any negotiations or
discussions with respect to any offer or proposal to acquire all or any
substantial part of GlobalCenter's business and properties or capital stock
whether by merger, purchase of assets, tender offer or otherwise;
(b) except as required by law and except for disclosures made to
others in the ordinary course of business, disclose any information not
customarily disclosed to any person other than its attorneys or financial
advisors concerning GlobalCenter's business and properties or afford to any
person or entity access to its properties, books or records; or
(c) assist or cooperate with any person to make any proposal to
purchase all or any part of GlobalCenter's capital stock or assets, other than
licensing of software in the ordinary course of business.
In the event GlobalCenter shall receive any offer or proposal, directly or
indirectly, of the type referred to in clause (a) or (c) above, or any request
for disclosure or access pursuant to clause (b) above, such party shall
immediately inform Primenet as to any such offer or proposal and will cooperate
with Primenet by furnishing to Primenet any information Primenet may reasonably
request.
4.3 Conduct of Business of Primenet and Merger Sub. During the period
----------------------------------------------
from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, each of Primenet and Merger
Sub agrees (except to the extent that GlobalCenter shall otherwise consent in
writing), to carry on its respective business in the usual, regular and ordinary
course in substantially the same manner as heretofore conducted and, to the
extent consistent with such business, use all reasonable efforts consistent with
past practice and policies to preserve intact each of their respective present
business organizations, keep available the services of its respective present
officers and key employees (other than those key employees terminated with the
permission of GlobalCenter) and preserve its respective relationships with
customers, suppliers, distributors, licensors, licensees and others having
business dealings with it, to the end that each of Primenet's and Merger Sub's
goodwill and ongoing businesses shall be unimpaired at the Effective Time. Each
of Primenet and Merger Sub shall promptly notify GlobalCenter of any event or
occurrence or emergency not in the ordinary course of its respective business
and any event which could reasonably be expected to have a Material Adverse
Effect. Except as expressly contemplated by this Agreement, neither Primenet
nor Merger Sub shall, without the prior written consent of GlobalCenter:
(a) Except pursuant to existing contractual provisions of options
outstanding on the date hereof, accelerate, amend or change the period of
exercisability of options or restricted stock granted under the employee stock
plans of Primenet or Merger Sub or authorize cash payments in exchange for any
options granted under any of such plans;
(b) Enter into any commitment or transaction not in the ordinary
course of business (i) to be performed over a period longer than six months in
duration, or (ii) to purchase fixed assets for a purchase price in excess of
$50,000;
(c) Grant any severance or termination pay (i) to any director; or
(ii) to any employee except (A) payments made pursuant to written agreements
outstanding on the date hereof (all of which have been provided to GlobalCenter)
or (B) in the case of employees who are not officers, grants which are
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<PAGE>
made in the ordinary course of business in accordance with the standard past
practices of Primenet or Merger Sub;
(d) Except for licenses granted to end-users, OEM's or distributors
pursuant to the standard license agreements of Primenet or Merger Sub, transfer
to any person or entity any Proprietary Information of Primenet or Merger Sub;
(e) Enter into or amend any agreements pursuant to which any other
party is granted exclusive marketing or other rights of any type or scope with
respect to any products of Primenet or Merger Sub;
(f) Violate, amend or otherwise modify the terms of any of the
contracts, agreements or instruments set forth or required to be set forth in
the Schedule of Exceptions of Primenet and Merger Sub;
(g) Commence any litigation;
(h) Declare or pay any dividends on or make any other distribution
(whether in cash, stock or property) in respect of any Primenet Stock, or split,
combine or reclassify any Primenet Stock, or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for shares of
Primenet Stock, or repurchase or otherwise acquire, directly or indirectly, any
shares of Primenet Stock except from former employees, directors and consultants
in accordance with agreements providing for the repurchase of shares at cost in
connection with any termination of service to Primenet;
(i) Issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any Primenet Stock
or securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other securities other than options or warrants or
securities deliverable upon the exercise thereof and described in Section 3.4
above;
(j) Cause or permit any amendments to its Certificate of Incorporation
or Bylaws;
(k) Acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other manner,
any business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets that are material, individually or in the aggregate, to the business of
Primenet or Merger Sub;
(l) Sell, lease, license or otherwise dispose of any of its properties
or assets that are material, individually or in the aggregate, to the business
of Primenet or Merger Sub, except in the ordinary course of business;
(m) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of Primenet or Merger Sub or
guarantee any debt securities of others;
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<PAGE>
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay any special bonus or special remuneration to any
director or employee, or increase the salaries or wage rates of any employee
other than as reflected on the Schedule of Exceptions of Primenet or Merger Sub;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Pay, discharge or satisfy in an amount in excess of $50,000 in any
one case any claim, liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business of liabilities reflected or
reserved against in the Balance Sheet of Primenet;
(q) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, file any material Return or
any amendment to a material Return, enter into any closing agreement, settle any
claim or assessment in respect of Taxes, or consent to any extension or waiver
of the limitation period applicable to any claim or assessment in respect of
Taxes; or
(r) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.3(a) through (q) above, or any action which would make
any of the representations or warranties or covenants of Primenet or Merger Sub
contained in this Agreement materially untrue or incorrect.
4.4 No Solicitation by Primenet. Prior to the Effective Time, Primenet
---------------------------
will not (nor will Primenet permit any of Primenet's officers, directors,
stockholders, agents, representatives or affiliates to) directly or indirectly,
take any of the following actions with any party other than GlobalCenter and its
designees:
(a) solicit, encourage, initiate or participate in any negotiations or
discussions with respect to any offer or proposal to acquire all or any
substantial part of Primenet's business and properties or capital stock whether
by merger, purchase of assets, tender offer or otherwise;
(b) except as required by law and except for disclosures made to
others in the ordinary course of business, disclose any information not
customarily disclosed to any person other than its attorneys or financial
advisors concerning Primenet's business and properties or afford to any person
or entity access to its properties, books or records; or
(c) assist or cooperate with any person to make any proposal to
purchase all or any part of Primenet's capital stock or assets, other than
licensing of software in the ordinary course of business.
In the event Primenet shall receive any offer or proposal, directly or
indirectly, of the type referred to in clause (a) or (c) above, or any request
for disclosure or access pursuant to clause (b) above, such party shall
immediately inform GlobalCenter as to any such offer or proposal and will
cooperate with GlobalCenter by furnishing to GlobalCenter any information
GlobalCenter may reasonably request.
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<PAGE>
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Meeting of GlobalCenter Stockholders.
------------------------------------
(a) GlobalCenter shall promptly after the date hereof take all action
necessary in accordance with the laws of the State of Delaware and its
Certificate of Incorporation and Bylaws to convene a meeting of GlobalCenter's
shareholders (the "Company Stockholders' Meeting") to approve this Agreement and
the Merger Agreement in the form attached hereto as Exhibit A or to effect an
---------
action by written consent without a meeting. GlobalCenter shall consult with
Primenet and use all reasonable efforts to hold GlobalCenter Stockholder's
Meeting on a day acceptable to Primenet and shall not postpone or adjourn (other
than postponement for the absence of a quorum) GlobalCenter Stockholders'
Meeting without the consent of Primenet. GlobalCenter shall use its best
efforts to solicit from stockholders of GlobalCenter proxies in favor of the
Merger and shall take all other action necessary or advisable to secure the vote
or consent of stockholders required by the laws of the State of Delaware to
effect the Merger.
(b) Primenet shall promptly after the date hereof take all action
necessary in accordance with the laws of the State of Delaware and its
Certificate of Incorporation and Bylaws to convene a meeting of Primenet's
stockholders (the "Primenet Stockholders' Meeting") or to effect an action by
written consent without a meeting, to approve, among other things, this
Agreement, the Merger Agreement in the form attached hereto as Exhibit A and the
---------
Certificate of Designations, Preferences and Rights of Series B Convertible
Stock of Primenet in the form attached hereto as Exhibit D. Primenet shall
---------
consult with GlobalCenter and use all reasonable efforts to hold the Primenet
Stockholders' Meeting on a day acceptable to GlobalCenter and shall not postpone
or adjourn (other than postponement for the absence of a quorum) the Primenet
Stockholders' Meeting without the consent of GlobalCenter. Primenet shall use
its best efforts to secure the vote or consent of stockholders required by laws
of the State of Delaware to effect the Merger.
5.2 Access to Information. Each party hereto shall afford each other
---------------------
party hereto and its accountants, counsel and other representatives, reasonable
access during normal business hours during the period prior to the Effective
Time to (a) all of its respective properties, books, contracts, commitments and
records, and (b) all other information concerning its respective business,
properties and personnel as each other party may reasonably request. Each party
hereto agrees to provide to each other party hereto and its accountants, counsel
and other representatives copies of internal financial statements promptly upon
request. No information or knowledge obtained in any investigation pursuant to
this Section 5.2 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.3 Expenses. Whether or not the Merger is consummated, all expenses
--------
incurred in connection with the Merger and this Agreement ("Expenses") shall be
the obligation of the party incurring such expenses.
5.4 Public Disclosure. Prior to the Effective Time, no disclosure
-----------------
(whether or not in response to an inquiry) of the existence or any subject
matter of this Agreement shall be made by any party hereto unless approved by
Primenet and GlobalCenter prior to release.
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5.5 Consents. Each of Primenet and GlobalCenter shall promptly apply for
--------
or otherwise seek, and use its best efforts to obtain, all consents and
approvals required to be obtained by it for the consummation of the Merger,
and GlobalCenter shall use its best efforts to obtain all consents, waivers and
approvals under any of GlobalCenter's material agreements, contracts, licenses
or leases in order to preserve the benefits thereunder for the Surviving
Corporation and otherwise in connection with the Merger; GlobalCenter represents
and warrants that all of such consents and approvals with respect to
GlobalCenter are set forth in Schedule 5.5-1, and Primenet and Merger Sub
--------------
jointly and severally represent and warrant that all of such consents and
approvals with respect to Primenet or Merger Sub are set forth in
Schedule 5.5-2.
- --------------
5.6 Legal Requirements. Each of Primenet, Merger Sub and GlobalCenter
------------------
will take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on them with respect to the consummation of
the transactions contemplated by this Agreement and will promptly cooperate with
and furnish information to any party hereto in connection with any such
requirements imposed upon such other party in connection with the consummation
of the transactions contemplated by this Agreement and will take all reasonable
actions necessary to obtain (and will cooperate with the other parties hereto in
obtaining) any consent, approval, order or authorization of, or any
registration, declaration or filing with, any governmental entity or other
person, required to be obtained or made in connection with the taking of any
action contemplated by this Agreement.
5.7 Blue Sky Laws. Primenet shall use its best efforts to comply with the
-------------
securities and Blue Sky laws of all jurisdictions that are applicable to the
issuance of Primenet Stock pursuant hereto. GlobalCenter shall use its best
efforts to assist Primenet as may be necessary to comply with the securities and
Blue Sky laws of all jurisdictions that are applicable in connection with the
issuance of Primenet Stock pursuant hereto.
5.8 Best Efforts; Additional Documents and Further Assurances. Each of
---------------------------------------------------------
the parties to this Agreement shall use its best efforts to effectuate the
transactions contemplated hereby and to fulfill and cause to be fulfilled the
conditions to closing under this Agreement. Each party hereto, at the request
of another party hereto, shall execute and deliver such other instruments and do
and perform such other acts and things as may be reasonably necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.9 Stock Options.
-------------
(a) At the Effective Time, each outstanding option to purchase shares
of Company Common Stock (each a "Company Option") under GlobalCenter's 1996
Stock Option Plan, whether vested or unvested, shall be, in connection with the
Merger, assumed by Primenet under Primenet's 1995 Stock Option Plan, as amended.
Each Company Option so assumed by Primenet under this Agreement shall continue
to have, and be subject to, substantially the same terms and conditions set
forth in GlobalCenter's 1996 Stock Option Plan and as provided in the
respective option agreements immediately prior to the Effective Time, except
that (i) such Company Option shall be exercisable for that number of whole
shares of Primenet Common Stock equal to the product of (A) the number of shares
of Company Common Stock that were issuable upon exercise of such Company Option
immediately prior to the Effective Time multiplied by (B) the Common Stock
Conversion Ratio, and (ii) the per share exercise price for the shares of
Primenet Common Stock issuable upon exercise of such assumed Company Option
shall be equal to the
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<PAGE>
quotient determined by dividing (A) the exercise price per share of Company
Common Stock at which such Company Option was exercisable immediately prior to
the Effective Time by (B) the Common Stock Conversion Ratio, rounded up to the
nearest whole cent, all in accordance with the rules of Section 424(a) of the
Tax Code, and the regulations promulgated thereunder, and such rules shall apply
even with respect to options that are not "incentive stock options" within the
meaning of Section 424 of the Tax Code.
(b) It is the intention of the parties that GlobalCenter Options that
are incentive stock options as defined in Section 422 of the Tax Code assumed by
Primenet qualify following the Effective Time as incentive stock options as
defined in Section 422 of the Tax Code.
5.10 FIRPTA Compliance. GlobalCenter will provide the notification to the
-----------------
Internal Revenue Service required pursuant to Treasury Regulation Section 1.897-
2(h)(2).
5.11 Indemnification. Each of GlobalCenter and Primenet agree to indemnify
---------------
and hold the other party harmless from all damages, losses or expenses,
including, without limitation, interest and penalties, reasonable attorneys fees
and expenses, suffered or paid, directly or indirectly, as a result of or
arising out of:
(a) the failure of any representation or warranty by such
indemnifying party made in this Agreement and the Other Agreements to be true
and correct in all respects as of the date of this Agreement and as of the
Effective Date, or
(b) any breach or nonfulfillment of any agreement made by such
indemnifying party pursuant hereto.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Stockholder Approval. This Agreement, the Merger and other
--------------------
transactions contemplated hereby shall have been approved and adopted by the
requisite vote of the stockholders of GlobalCenter, Primenet and Merger Sub.
(b) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by any Governmental Entity seeking any of the foregoing be
pending; nor shall there be any action taken, or any statute, rule, regulation
or order enacted, entered, enforced or deemed applicable to the Merger, which
makes the consummation of the Merger illegal.
(c) Tax Opinions. GlobalCenter shall have received a written opinion
------------
from Wilson Sonsini Goodrich & Rosati, counsel to GlobalCenter, to the effect
that the Merger will constitute a tax-free
-23-
<PAGE>
reorganization within the meaning of Section 368(a) of the Code, and Primenet
shall have received a written opinion from O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, a professional association, counsel to Primenet, to
the effect that the Merger will constitute a tax-free reorganization within the
meaning of Section 368(a) of the Code. In rendering such opinions, counsel may
rely on (and to the extent reasonably required, the parties and their respective
stockholders shall make) reasonable representations related thereto.
(d) State Securities Laws. Primenet shall have obtained all necessary
---------------------
securities law permits and qualifications, or secured an exemption therefrom,
required by any state for the consummation of the Merger and the delivery of
Primenet Stock in connection therewith. In securing any required permits,
qualifications or exemptions therefrom, Primenet may rely on the representations
made by GlobalCenter stockholders in the Investment Representation Statement
attached hereto as Exhibit E.
---------
(e) Board Membership. The individuals listed on Schedule 1.5 hereto
---------------- ------------
shall have been elected to the Board of Directors of Primenet.
(f) Primenet Approval of Series B Preferred Stock. The Certificate of
---------------------------------------------
Designations, Preferences and Rights of Series B Convertible Preferred Stock of
Primenet in the form attached hereto as Exhibit D shall have been approved by
---------
the Board of Directors of Primenet.
(g) Amendment of Certificate of Incorporation of Primenet. The
-----------------------------------------------------
Certificate of Incorporation of Primenet shall have been amended to permit the
issuance of the Series B Convertible Preferred Stock of Primenet in connection
with this Agreement, the Merger, and the other transactions contemplated hereby.
6.2 Additional Conditions to Obligations of GlobalCenter. The
----------------------------------------------------
obligations of GlobalCenter to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by GlobalCenter:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Primenet and Merger Sub in this Agreement shall be true and
correct in all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time, and each of
Primenet and Merger Sub shall have performed and complied in all material
respects with all covenants, obligations and conditions of this Agreement
required to be performed and complied with by it as of the Effective Time.
(b) Certificate of Primenet. GlobalCenter shall have been provided
-----------------------
with a certificate executed on behalf of Primenet by its President and its Chief
Financial Officer or Treasurer to the effect that, as of the Effective Time (i)
all representations and warranties made by Primenet and Merger Sub under this
Agreement are true and correct in all material respects; and (ii) all covenants,
obligations and conditions of this Agreement to be performed by Primenet and
Merger Sub on or before such date have been so performed in all material
respects.
(c) Third Party Consents. Any and all consents, waivers and approvals
--------------------
required from third parties relating to contracts and agreements of Primenet or
Merger Sub so that the Merger and other transactions contemplated hereby do not
adversely affect the rights of, and benefits to, the Surviving
-24-
<PAGE>
Corporation thereunder (including, without limitation, all consents, waivers and
approvals set out on Schedule 5.5 hereto) shall have been obtained.
------------
(d) Satisfactory Form of Legal Matters. The form, scope and substance
----------------------------------
of all legal matters contemplated hereby and all closing documents and other
papers delivered hereunder shall be reasonably acceptable to counsel to
GlobalCenter.
(e) Legal Opinion. GlobalCenter shall have received a legal opinion
-------------
from O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, a professional
association, counsel to Primenet and Merger Sub, in form and substance
reasonably satisfactory to GlobalCenter and its counsel.
(f) No Dissenters. Holders of no more than 10% of the outstanding
-------------
Common Stock of Primenet or Merger Sub (with Primenet Preferred Stock treated on
an as-if-converted into Primenet Common Stock basis) shall have exercised, nor
shall they continue to have the right to exercise, appraisal rights with respect
to the transactions contemplated by this Agreement.
(g) Resignation of Directors and Officers of Primenet. The current
-------------------------------------------------
members of the Board of Directors of Primenet not listed on Schedule 1.5 hereto
------------
shall have resigned their respective positions as directors and officers of
Primenet as of the Closing.
6.3 Additional Conditions to the Obligations of Primenet and Merger Sub.
-------------------------------------------------------------------
The obligations of Primenet and Merger Sub to consummate and effect this
Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, exclusively by Primenet:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of GlobalCenter in this Agreement shall be true and correct in
all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time, and
GlobalCenter shall have performed and complied in all material respects with all
covenants, obligations and conditions of this Agreement required to be performed
and complied with by it as of the Effective Time.
(b) Certificate of GlobalCenter. Primenet shall have been provided
---------------------------
with a certificate executed on behalf of GlobalCenter by its President and Chief
Financial Officer to the effect that, as of the Effective Time (i) all
representations and warranties made by GlobalCenter under this Agreement are
true and complete in all material respects; and (ii) all covenants, obligations
and conditions of this Agreement to be performed by GlobalCenter on or before
such date have been so performed in all material respects.
(c) Third Party Consents. Any and all consents, waivers and approvals
--------------------
required from third parties relating to the contracts and agreements of
GlobalCenter so that the Merger and other transactions contemplated hereby do
not adversely affect the rights of, and benefits to, the Surviving Corporation
thereunder (including, without limitation, all consents, waivers and approvals
set out on Schedule 5.5) shall have been obtained.
------------
(d) Satisfactory Form of Legal Matters. The form, scope and substance
----------------------------------
of all legal matters contemplated hereby and all closing documents and other
papers delivered hereunder shall be reasonably acceptable to Primenet's counsel.
-25-
<PAGE>
(e) Legal Opinion. Primenet shall have received a legal opinion from
-------------
Wilson Sonsini Goodrich & Rosati, counsel to GlobalCenter, in form and substance
reasonably satisfactory to Primenet and its counsel.
(f) No Dissenters. Holders of no more than 10% of the outstanding
-------------
Company Common Stock (with Company Preferred Stock treated on an as-if-converted
into Company Common Stock basis) shall have exercised, nor shall they continue
to have the right to exercise, appraisal rights with respect to the transactions
contemplated by this Agreement provided, however, that the allowable percentage
of dissenting shares shall be reduced to the extent necessary to ensure that the
former shareholders of GlobalCenter exchange in the Merger, for shares of
Primenet Common Stock, (and not for cash), an amount of Company Common Stock
which constitutes control of GlobalCenter (within the meaning of Section 368(C)
of the Tax Code).
(g) Investment Representation Statements. All shareholders of
------------------------------------
GlobalCenter who are to receive any shares of Primenet Stock in connection with
the Merger shall have executed and delivered to Primenet Investment
Representation Statements providing for certain representations and agreements
and agreeing to be bound by certain terms of this Agreement in connection with
resales of Primenet Stock.
(h) Resignation of Directors and Officers of GlobalCenter. The
-----------------------------------------------------
current members of the Board of Directors of GlobalCenter not listed on Schedule
--------
1.5 hereto shall have resigned their respective positions as directors and
- ---
officers of GlobalCenter as of the Closing.
(i) FIRPTA Compliance. At the Closing, GlobalCenter shall have
-----------------
delivered to Primenet a properly executed statement conforming to the
requirements of Treasury Regulation Sections 1.897-2(h)(1)(i) and 1.1445-
2(c)(3).
(j) Letter Agreement. Primenet shall have entered into a letter
----------------
agreement reasonably satisfactory to Primenet relating to voting of directors.
(k) Employment Agreements. Merger Sub shall enter into employment
---------------------
agreements with Nathan Raciborski and Allan Kaplan.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
TERMINATION, AMENDMENT AND WAIVER
7.1 Survival of Representations and Warranties. All covenants to be
------------------------------------------
performed prior to the Effective Time, representations and warranties in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Merger.
7.2 Termination. This Agreement may be terminated and the Merger
-----------
abandoned at any time prior to the Effective Time:
(a) by mutual consent of GlobalCenter and Primenet;
-26-
<PAGE>
(b) by Primenet if it is not in material breach of its obligations
under this Agreement, and there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of GlobalCenter and such breach has not been cured within 15 days after
notice to GlobalCenter.
(c) by GlobalCenter if it is not in material breach of its respective
obligations under this Agreement and there has been a material breach of any
representation, warranty, covenant or agree ment contained in this Agreement on
the part of Primenet or Merger Sub and such breach has not been cured within 15
days after notice to Primenet;
(d) by any party hereto if: (i) the Closing has not occurred by
February 28, 1997, (ii) there shall be a final nonappealable order of a federal
or state court in effect preventing consummation of the Merger; (iii) there
shall be any action taken, or any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any Governmental
Entity which would make consummation of the Merger illegal; or (iv) there shall
be any action taken, or any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any Governmental
Entity, which would (A) prohibit Primenet's or GlobalCenter's ownership or
operation of all or a material portion of the business of GlobalCenter, or
compel Primenet or GlobalCenter to dispose of or hold separate all or a material
portion of the business or assets of GlobalCenter or Primenet as a result of the
Merger or (B) render Primenet, Merger Sub or GlobalCenter unable to consummate
the Merger, except for any waiting period provisions.
Where action is taken to terminate this Agreement pursuant to this Section
7.2, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
7.3 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 7.2, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Primenet, Merger Sub or
GlobalCenter or their respective officers, directors or shareholders, except if
such termination results from the breach by a party hereto of any of its
representations, warranties, covenants or agreements set forth in this
Agreement.
7.4 Amendment. This Agreement may be amended by the parties hereto at any
---------
time before or after approval of matters presented in connection with the Merger
by the stockholders of those parties required by applicable law to so approve
but, after any such stockholder approval, no amendment shall be made which by
law requires the further approval of stockholders of a party without obtaining
such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
7.5 Extension; Waiver. At any time prior to the Effective Time, any party
-----------------
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
-27-
<PAGE>
7.6 Break-Up Fee. In the event that either party shall elect to terminate
------------
this Agreement and not to proceed with the Merger and the non-terminating party
shall have fulfilled (prior to such termination) all of its obligations (or has
tendered such fulfillment) required to be fulfilled or complied with at such
time, then the terminating party shall pay to such non-terminating party one
hundred thousand dollars ($100,000).
ARTICLE VII
GENERAL PROVISIONS
8.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via telecopy to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a) if to Primenet or Merger Sub, to:
Primenet Services for the Internet, Inc.
1224 East Washington Street
Phoenix, Arizona 85034
Attention: Chief Executive Officer
Fax: (602) 416-6111
with a copy to:
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012-1656
Attention: Robert S. Kant
Fax: (602) 263-2900
(b) if to GlobalCenter, to:
GlobalCenter, Inc.
1154 East Arques Avenue
Sunnyvale, California 94086
Attention: Chief Executive Officer
Fax: (404) 328-4806
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Alan K. Austin
Fax: (415) 493-6811
-28-
<PAGE>
8.2 Interpretation. When a reference is made in this Agreement to
--------------
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. As used in this Agreement, the phrase "to the
best of [a party's] knowledge," "to [a party's] knowledge," "[a party] is not
aware," and similar phrases shall mean the knowledge of such party and of the
officers and directors of such party after careful consideration of the matters
set forth in the representation that is so qualified and a diligent review of
all files, documents, agreements and other materials in such person's possession
or subject to his or her control. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.4 Miscellaneous. This Agreement, the Exhibits hereto and the documents,
-------------
instruments and other agreements among the respective parties to each thereof
(a) constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof; (b) are not intended to confer upon any person other than the respective
parties hereto and to each thereof any rights or remedies hereunder; and (c)
shall not be assigned by operation of law or otherwise except as otherwise
specifically provided.
8.5 Governing Law. This Agreement shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of the State of
Delaware.
8.6 Attorneys' Fees. If any party to this Agreement brings an action
---------------
against another party to this Agreement to enforce its rights under this
Agreement, the prevailing party shall be entitled to recover its reasonable
costs and expenses, including reasonable attorneys' fees and costs, incurred in
connection with such action, including any appeal of such action.
[Remainder of Page Intentionally Left Blank]
-29-
<PAGE>
IN WITNESS WHEREOF, Primenet, Merger Sub and GlobalCenter have caused this
Agreement to be signed by their duly authorized respective officers, all as of
the date first written above.
PRIMENET SERVICES FOR THE
INTERNET, INC.
By: /s/ Nathan Raciborski
-----------------------------------
Title: President
--------------------------------
PRIMENET ACQUISITION CORPORATION
By: /s/ Nathan Raciborski
-----------------------------------
Title:
--------------------------------
GLOBALCENTER, INC.
By: /s/ Douglas T. Hickey
-----------------------------------
Title: CEO
--------------------------------
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
<PAGE>
EXHIBIT 2.2
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
GLOBALCENTER, INC.
GLOBALCENTER ACQUISITION CORPORATION
AND
I-SYSTEMS, INC.
April 11, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<C> <S> <C>
ARTICLE I THE MERGER............................................. 1
1.1 The Merger................................................ 1
1.2 Effective Time............................................ 1
1.3 Effect of the Merger...................................... 2
1.4 Certificate of Incorporation; Bylaws...................... 2
1.5 Directors................................................. 2
1.6 Effect on Capital Stock................................... 2
1.7 Dissenting Shares......................................... 3
1.8 Surrender of Certificates................................. 4
1.9 No Further Ownership Rights in ISI Stock.................. 5
1.10 Lost, Stolen or Destroyed Certificates.................... 5
1.11 Tax Consequences.......................................... 5
1.12 Taking of Necessary Action; Further Action................ 5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF ISI................. 5
2.1 Organization and Standing; Qualification; Articles and
Bylaws.................................................... 5
2.2 Corporate Power........................................... 6
2.3 Subsidiaries.............................................. 6
2.4 Capitalization............................................ 6
2.5 Authorization............................................. 6
2.6 Title to Properties; Liens and Encumbrances............... 6
2.7 Patent and Other Proprietary Rights....................... 6
2.8 ISI Contracts............................................. 7
2.9 Litigation................................................ 7
2.10 Taxes..................................................... 7
2.11 Insurance................................................. 8
2.12 Employee Benefit Plans.................................... 8
2.13 Proprietary Information Agreements........................ 8
2.14 Registration Rights....................................... 8
2.15 Governmental Consents..................................... 8
2.16 Permits................................................... 8
2.17 Environmental and Safety Laws............................. 8
2.18 Related Party Transactions................................ 9
2.19 Broker's and Finders' Fees................................ 9
2.20 Compliance with Other Instruments......................... 9
2.21 Employees................................................. 9
2.22 Financial Statements...................................... 9
2.23 Labor Agreements and Actions.............................. 9
2.25 Pooling of Interests...................................... 10
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
<TABLE>
<C> <S> <C>
2.26 Disclosure.................................................. 11
ARTICLE III REPRESENTATIONS AND WARRANTIES OF GLOBALCENTER AND
MERGER SUB....................................................... 11
3.1 Organization and Standing; Qualification; Articles and
Bylaws...................................................... 11
3.2 Corporate Power............................................. 11
3.3 Subsidiaries................................................ 11
3.4 Capitalization.............................................. 11
3.5 Authorization............................................... 12
3.6 Offering.................................................... 12
3.7 Title to Properties; Liens and Encumbrances................. 12
3.8 Patent and Other Proprietary Rights......................... 12
3.9 Contracts................................................... 13
3.10 Litigation.................................................. 13
3.11 Taxes....................................................... 14
3.12 Insurance................................................... 14
3.13 Employee Benefit Plans...................................... 14
3.14 Proprietary Information Agreements.......................... 14
3.15 Registration Rights......................................... 14
3.16 Governmental Consents....................................... 15
3.17 Permits..................................................... 15
3.18 Environmental and Safety Laws............................... 15
3.19 Related Party Transactions.................................. 15
3.20 Broker's and Finders' Fees.................................. 15
3.21 Compliance with Other Instruments........................... 15
3.22 Employees................................................... 16
3.23 Financial Statements........................................ 16
3.24 Labor Agreements and Actions................................ 16
3.25 No Changes.................................................. 16
3.26 Pooling of Interests........................................ 17
3.27 Disclosure.................................................. 17
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME..................... 17
4.1 Conduct of Business of ISI.................................. 17
4.2 No Solicitation by ISI...................................... 19
4.3 Conduct of Business of GlobalCenter......................... 20
4.4 No Solicitation by GlobalCenter............................. 22
ARTICLE V ADDITIONAL AGREEMENTS.................................... 22
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
5.1 Meeting of ISI Stockholders................................. 22
5.2 Access to Information....................................... 22
5.3 Expenses.................................................... 23
5.4 Public Disclosure........................................... 23
5.5 Consents.................................................... 23
5.6 Legal Requirements.......................................... 23
5.7 Blue Sky Laws............................................... 23
5.8 Commercially Reasonable Efforts; Additional Documents and
Further Assurances.......................................... 23
5.9 Stock Options............................................... 23
5.10 FIRPTA Compliance........................................... 24
5.11 Reorganization.............................................. 24
5.12 Indemnification; Limitation of Liability.................... 24
ARTICLE VI CONDITIONS TO THE MERGER................................ 24
6.1 Conditions to Obligations of Each Party to Effect the
Merger...................................................... 24
6.2 Additional Conditions to Obligations of ISI................. 26
6.3 Additional Conditions to the Obligations of GlobalCenter
and Merger Sub.............................................. 27
ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW;
TERMINATION, AMENDMENT AND WAIVER
7.1 Survival of Representations and Warranties.................. 28
7.2 Escrow Arrangements......................................... 28
7.3 Termination................................................. 28
7.4 Effect of Termination....................................... 29
7.5 Amendment................................................... 29
7.6 Extension; Waiver........................................... 29
7.7 Break-Up Fee................................................ 29
ARTICLE VIII GENERAL PROVISIONS.................................... 29
8.1 Notices..................................................... 29
8.2 Interpretation.............................................. 30
8.3 Counterparts................................................ 30
8.4 Miscellaneous............................................... 30
8.5 Governing Law............................................... 30
8.6 GlobalCenter Guarantee...................................... 30
</TABLE>
-iii-
<PAGE>
INDEX OF EXHIBITS AND SCHEDULES
<TABLE>
<CAPTION>
Schedule
Exhibit Description
- ------- -----------
<C> <S>
Schedule 1.5 Initial Directors of GlobalCenter
Schedule 1.6 Conversion of Stock
Schedule 2 I-Systems, Inc. Disclosure Schedule
Schedule 3 Disclosure Schedule of GlobalCenter and Merger Sub
Schedule 5.5-1 ISI Consents and Approvals to be Obtained
Schedule 5.5-2 GlobalCenter or Merger Sub Consents and Approvals to be
Obtained
Exhibit A Merger Agreement
Exhibit B Certificate of Incorporation of Surviving Corporation
Exhibit C Bylaws of Surviving Corporation
Exhibit D Form of Investment Representation Statement
Exhibit E Form of Affiliate Agreement
Exhibit F Form of Escrow Agreement
Exhibit G Amendment No. 1 to Stockholders' Agreement between
GlobalCenter, Inc. and stockholders listed thereon.
</TABLE>
-iv-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of April 11, 1997 by and among GlobalCenter, Inc., a Delaware
corporation ("GlobalCenter"), GlobalCenter Acquisition Corporation, a Delaware
corporation ("Merger Sub"), and I-Systems, Inc., a Delaware corporation ("ISI").
RECITALS
A. The Boards of Directors of each of ISI, GlobalCenter and Merger Sub
believe it is in the best interests of each company and their respective
stockholders that, subject to the terms and conditions set forth in this
Agreement and the Agreement and Plan of Merger attached hereto as Exhibit A (the
---------
"Merger Agreement"), ISI and Merger Sub combine into a single company through
the statutory merger of Merger Sub with and into ISI (the "Merger") and, in
furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, the outstanding shares of
Common Stock of ISI, par value $0.0001 per share ("ISI Common Stock"), and each
series of Preferred Stock of ISI, par value $0.0001 per share (the "ISI
Preferred Stock," and together with the ISI Common Stock, the "ISI Stock"),
shall be converted into shares of Common Stock of GlobalCenter ("GlobalCenter
Common Stock") at the rate determined herein.
C. ISI, GlobalCenter and Merger Sub desire to make certain
representations and warranties and Ancillary Agreements in connection with the
Merger.
D. The parties desire to structure the Merger in a manner intended to
qualify as a tax-free reorganization under the provisions of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code").
E. The parties desire that the Merger qualifies for "pooling of
interests" accounting treatment.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration
the receipt and sufficiency of which is hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement and the laws of
the State of Delaware, Merger Sub shall be merged with and into ISI, the
separate corporate existence of Merger Sub shall cease, and ISI shall continue
as the surviving corporation. ISI as the surviving corporation after the Merger
is hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Effective Time. As promptly as practicable after the satisfaction or
--------------
waiver of the conditions set forth in Article VI hereof, the parties hereto
shall cause the Merger to be consummated by
<PAGE>
filing a Certificate of Merger (the "Certificate of Merger") with the Secretary
of State of the State of Delaware, in such form as required by, and executed in
accordance with the relevant provisions of, the laws of the State of Delaware
(the time of the later such filing being the "Effective Time"). The closing of
the transactions contemplated hereby (the "Closing") shall take place at the
offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo
Alto, CA 94304, on the date of the Effective Time (the "Closing Date").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
--------------------
shall be as provided in the applicable provisions of the laws of the State of
Delaware. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers and
franchises of ISI and Merger Sub shall vest in the Surviving Corporation, and
all debts, liabilities and duties of ISI and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) At the Effective Time, the Amended and Restated Certificate of
Incorporation of ISI, as in effect immediately prior to the Effective Time,
shall be the Certificate of Incorporation of the Surviving Corporation (the
"Certificate of Incorporation") until thereafter amended as provided by law and
such Certificate of Incorporation; provided, however, that such Certificate of
Incorporation of the Surviving Corporation shall be amended and restated to read
in its entirety as set forth in the form of Certificate of Incorporation of
Surviving Corporation attached hereto as Exhibit B.
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(b) At the Effective Time, the Bylaws of ISI, as in effect immediately
prior to the Effective Time shall be the Bylaws of the Surviving Corporation
until thereafter amended as provided by law, the Certificate of Incorporation
and such Bylaws; provided, however, that such Bylaws of the Surviving
Corporation shall be amended and restated to read in their entirety as set forth
in the form of Bylaws of Surviving Corporation attached hereto as Exhibit C.
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1.5 Directors. The initial Board of Directors of the Surviving
---------
Corporation shall consist of those individuals listed on Schedule 1.5 attached
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hereto. All initial and subsequent directors shall hold office in accordance
with the Certificate of Incorporation and Bylaws of the Surviving Corporation,
and until their respective successors are duly elected or appointed and
qualified.
1.6 Effect on Capital Stock. Subject to the terms and conditions of this
-----------------------
Agreement, as of the Effective Time, by virtue of the Merger and without any
action on the part of Merger Sub, ISI or the holder of any of the following
securities:
(a) Conversion of ISI Common Stock. Each share of ISI Common Stock
------------------------------
issued and outstanding immediately prior to the Effective Time (other than any
shares of ISI Common Stock to be canceled pursuant to Section 1.6(c) hereof and
any Dissenting Shares (as defined and to the extent provided in Section 1.7(a)
hereof) will be canceled and extinguished and be converted automatically into
the right to receive shares of GlobalCenter Common Stock in the amount set forth
in Schedule 1.6 (the "Common Stock Conversion Ratio"), upon surrender of the
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certificate representing such share of ISI Common Stock in the manner provided
in Section 1.8 hereof.
(b) Conversion of ISI Preferred Stock. Each share of each series of
---------------------------------
ISI Preferred Stock issued and outstanding immediately prior to the Effective
Time (other than any shares of ISI
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Preferred Stock to be canceled pursuant to Section 1.6(c) hereof and any
Dissenting Shares as defined and to the extent provided in Section 1.7(a)
hereof) will be canceled and extinguished and be converted automatically into
the right to receive shares of GlobalCenter Common Stock in the amount set forth
on Schedule 1.6 (the "Preferred Stock Conversion Ratio"), upon surrender of the
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certificate representing such share of ISI Preferred Stock in the manner
provided in Section 1.8 hereof.
(c) Cancellation of Certain ISI Stock. Each share of ISI Stock owned
---------------------------------
by Merger Sub, GlobalCenter, ISI or any direct or indirect wholly owned
subsidiary of GlobalCenter or of ISI immediately prior to the Effective Time
shall be canceled and extinguished without any conversion thereof.
(d) Stock Options. At the Effective Time, all options to purchase ISI
-------------
Common Stock then outstanding under ISI's 1996 Stock Plan (the "ISI Stock Plan")
shall be assumed by GlobalCenter in accordance with Section 5.9 hereof.
(e) Capital Stock of Merger Sub. Each share of common stock, par
---------------------------
value $0.001 per share, of Merger Sub issued and outstanding immediately prior
to the Effective Time shall be converted into and exchanged for one validly
issued, fully paid and nonassessable share of common stock, par value $0.001 per
share, of the Surviving Corporation. Each stock certificate of Merger Sub
evidencing owner ship of any such shares of Merger Sub shall evidence ownership
of such shares of capital stock of the Surviving Corporation.
(f) Adjustments to Common Stock Conversion Ratio and the Preferred
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Stock Conversion Ratio. The Common Stock Conversion Ratio and the Preferred
- ----------------------
Stock Conversion Ratio shall be adjusted to reflect fully the effect of any
stock split, reverse split, stock dividend (including any dividend or
distribution of securities convertible into GlobalCenter Common Stock or ISI
Stock), reorganization, recapitalization or other like change with respect to
GlobalCenter Common Stock or ISI Stock occurring after the date hereof and prior
to the Effective Time.
(g) Fractional Shares. No fraction of a share of GlobalCenter Common
-----------------
Stock will be issued in connection with the Merger, and any such fraction shall
be rounded down to the nearest whole number.
1.7 Dissenting Shares.
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(a) Notwithstanding any provision of this Agreement to the contrary,
any shares ("Dissenting Shares") of ISI Stock held by a holder who has demanded
and perfected appraisal rights for such shares in accordance with the laws of
the State of Delaware and who, as of the Effective Time, has not effectively
withdrawn or lost such appraisal rights, shall not be converted into or
represent a right to receive GlobalCenter Stock pursuant to Section 1.6 hereof,
but the holder thereof shall only be entitled to such rights as are granted by
the laws of the State of Delaware.
(b) Notwithstanding the provisions of Section 1.7(a) hereof, if any
holder of ISI Stock who demands appraisal of such shares under the laws of the
State of Delaware shall effectively withdraw or lose (through failure to perfect
or otherwise) the right to appraisal, then, as of the later of the Effective
Time and the occurrence of such event, such holder's ISI Stock shall
automatically be converted into and represent only the right to receive
GlobalCenter Stock pursuant to Section 1.6 hereof, without interest thereon,
upon surrender of the certificate representing such shares as set forth herein.
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(c) ISI shall give GlobalCenter (i) prompt notice of any written
demands for appraisal of any shares of ISI Stock, withdrawals of such demands,
and any other instruments served pursuant to the laws of the State of Delaware
and received by ISI and (ii) the opportunity to participate in all negotiations
and proceedings with respect to demands for appraisal under the laws of the
State of Delaware. ISI shall not, except with the prior written consent of
GlobalCenter, voluntarily make any payment with respect to any demands for
appraisal of ISI Stock or offer to settle or settle any such demands. To the
extent that there are sufficient funds held by ISI at the Closing, all payments
with respect to Dissenting Shares shall be made out of funds of ISI, and no
payments with respect to Dissenting Shares shall be made out of the funds of
GlobalCenter unless insufficient funds are available therefor out of the funds
of ISI.
1.8 Surrender of Certificates.
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(a) Exchange Agent. Prior to the Effective Time, Wilson Sonsini
--------------
Goodrich & Rosati, Professional Corporation, shall be designated to act as
exchange agent (the "Exchange Agent") in the Merger.
(b) GlobalCenter to Provide Common Stock. At the Effective Time,
------------------------------------
GlobalCenter shall make available to the Exchange Agent for exchange in
accordance with this Article I certificates representing the number of shares of
GlobalCenter Common Stock identified on Schedule 1.6 hereto.
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(c) Exchange Procedures. Prior to or promptly after the Effective
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Time, ISI and/or the Surviving Corporation shall cause to be mailed to each
holder of record of a certificate or certificates (the "Certificates") which
immediately prior to the Effective Time represented outstanding shares of ISI
Stock whose shares were converted into the right to receive shares of
GlobalCenter Stock pursuant to Section 1.6, (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as GlobalCenter
may specify), and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of GlobalCenter
Stock to which such holder is entitled pursuant to this Article I and the Merger
Agreement. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by GlobalCenter,
together with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the holder of such Certificate shall
be entitled to receive in exchange therefor a certificate representing the
number of whole shares of GlobalCenter Stock to which such holder is entitled
pursuant to Section 1.6 and the Merger Agreement, based on the number of shares
of ISI Stock so surrendered. The Certificate so surrendered shall forthwith be
canceled. Until so surrendered, each outstanding Certificate that, prior to the
Effective Time, represented shares of ISI Stock will be deemed from and after
the Effective Time, for all corporate purposes, other than the payment of
dividends, to evidence the ownership of the number of full shares of
GlobalCenter Common Stock into which such shares of ISI Stock shall have been so
converted in accordance with Section 1.6.
(d) Certificates Not Surrendered. Until surrendered as contemplated
----------------------------
by Section 1.8(c) above, each Certificate shall be deemed at any time after the
Effective Date to represent the right to receive on such surrender the number of
shares of GlobalCenter Stock to which the holder thereof is entitled pursuant to
Section 1.6 hereof and the Merger Agreement.
(e) Transfers of Ownership. If any certificate for shares of
----------------------
GlobalCenter Stock is to be issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it
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will be a condition of the issuance thereof that the Certificate so
surrendered will be properly endorsed and otherwise in proper form for transfer,
that the person requesting such exchange will have paid to GlobalCenter or any
agent designated by it any transfer or other taxes required by reason of the
issuance of a certificate for shares of GlobalCenter Stock in any name other
than that of the registered holder of the Certificate surrendered, or
established to the satisfaction of GlobalCenter or any agent designated by it
that such tax has been paid or is not payable, and that such transfer is in
accordance with Federal and state securities laws.
(f) No Liability. Notwithstanding anything to the contrary in this
------------
Section 1.8, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of GlobalCenter Stock or ISI Stock
for any amount properly paid to a public official pursuant to any applicable
abandoned property, escheat or similar law.
1.9 No Further Ownership Rights in ISI Stock. All shares of GlobalCenter
----------------------------------------
Stock issued upon the surrender for exchange of shares of ISI Stock in
accordance with the terms hereof and the Merger Agreement shall be deemed to
have been issued in full satisfaction of all rights pertaining to such shares of
ISI Stock, and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of ISI Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
--------------------------------------
evidencing shares of ISI Stock shall have been lost, stolen or destroyed, the
Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Certificates, upon the making of an affidavit of that fact by the holder
thereof, such shares of GlobalCenter Stock, if any, as may be required pursuant
to Section 1.6; provided, however, that GlobalCenter may, in its sole discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed Certificates to deliver such assurances as
GlobalCenter in its sole discretion deems appropriate including, if requested by
GlobalCenter, a bond in such sum as it may reasonably direct as indemnity
against any claim that may be made against GlobalCenter or the Exchange Agent
with respect to the Certificates alleged to have been lost, stolen or destroyed.
1.11 Tax Consequences. It is intended by the parties hereto that the
----------------
Merger shall constitute a tax-free reorganization under the provisions of
Section 368(a) of the Code.
1.12 Taking of Necessary Action; Further Action. If, at any time after
------------------------------------------
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of ISI and Merger Sub, the officers and directors of ISI,
GlobalCenter and Merger Sub are fully authorized in the names of their
respective corporations or otherwise to take, and will take, all such lawful and
necessary action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ISI
Except as set forth in the Schedule of Exceptions to GlobalCenter's
representations and warranties attached hereto as Schedule 2, ISI represents and
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warrants to GlobalCenter and Merger Sub as follows:
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2.1 Organization and Standing; Qualification; Articles and Bylaws. ISI is
-------------------------------------------------------------
a corporation duly organized and validly existing under, and by virtue of, the
laws of the State of Delaware and is in good standing under such laws. ISI has
requisite corporate power and authority to own and operate its properties and
assets, and to carry on its business as presently conducted and as proposed to
be conducted. ISI is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on its business or properties. ISI has furnished
GlobalCenter and Merger Sub with copies of its Certificate of Incorporation and
Bylaws, each as amended to date. Said copies are true, correct and complete and
contain all amendments through the date hereof.
2.2 Corporate Power. ISI has all requisite legal and corporate power and
---------------
authority to execute and deliver this Agreement and each such other agreement,
document or instrument attached as an Exhibit hereto (collectively, the
"Ancillary Agreements"), and to carry out and perform its obligations under the
terms of this Agreement and the Ancillary Agreements.
2.3 Subsidiaries. ISI has no subsidiaries or affiliated companies and
------------
does not otherwise own or control, directly or indirectly, any equity interest
in any corporation, association or other business entity.
2.4 Capitalization. The authorized capital stock of ISI consists of (a)
--------------
17,000,000 shares of Common Stock, $0.0001 par value, 8,999,969 shares of which
are issued and outstanding, and (b) 3,100,000 shares of Preferred Stock, $0.0001
par value, all of which have been designated Series A Preferred, 3,050,000
shares of which are issued and outstanding prior to the Closing. The Board of
Directors of ISI has granted options to purchase 995,000 shares of Common Stock.
There are no other options, warrants or other rights to purchase any of ISI's
authorized and unissued capital stock. All issued and outstanding shares of
ISI's capital stock have been duly authorized and validly issued, are fully paid
and nonassessable, and were issued in compliance with applicable federal and
state securities law. ISI is not a party or subject to any agreement or
understanding, and, to ISI's knowledge, there is no agreement or understanding
between any persons and/or entities, which affects or relates to the voting or
giving of written consents with respect to any security or by a director of ISI.
2.5 Authorization. All corporate action on the part of ISI, its officers,
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directors and stockholders necessary for the authorization, execution, delivery
and performance of this Agreement and the Ancillary Agreements by ISI and the
performance of all of ISI's obligations hereunder has been taken or will be
taken prior to the Closing. This Agreement and the Ancillary Agreements, when
executed and delivered by ISI, shall constitute valid and binding obligations of
ISI, enforceable in accordance with their respective terms, subject to laws of
general application relating to bankruptcy, insolvency and the relief of debtors
and rules of law governing specific performance, injunctive relief or other
equitable remedies.
2.6 Title to Properties; Liens and Encumbrances. ISI has (i) good and
-------------------------------------------
marketable title to all of its properties and assets owned by it, both real and
personal, and (ii) with respect to property it leases, to its knowledge, it is
in compliance with such leases and holds valid leasehold interests in such
property; in each case, subject to no mortgage, pledge, lien, security interest,
conditional sale agreement, encumbrance or charge, except in (X) the lien of
current taxes not yet due and payable, and (Y) liens and encumbrances which do
not in any case or in the aggregate materially detract from the value of the
property subject thereto or materially impair ISI's operations.
2.7 Patent and Other Proprietary Rights. To the best of ISI's knowledge,
-----------------------------------
ISI possesses all patents, patent rights, trademarks, trademark rights, trade
names, trade name rights and copyrights
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necessary to conduct its business as now being conducted and as planned to be
conducted without conflict with or infringement upon any valid rights of others
and the lack of which could materially and adversely affect the operations or
condition, financial or otherwise, of ISI, and ISI has not received any notice
of infringement upon or conflict with the asserted rights of others. ISI has a
valuable body of trade secrets, including know-how, concepts, computer programs
and other technical data (the "Proprietary Information") for the development and
sale of its products and the provision of services. To ISI's knowledge, ISI has
the right to use the Proprietary Information, free and clear of any rights,
liens, encumbrances or claims of others, except that the possibility exists that
other persons may have independently developed trade secrets or technical
information similar or identical to those of ISI. ISI has not received any
communications alleging that ISI has violated, or by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights, trade secrets or other proprietary rights or processes of any
other person or entity. ISI is not aware that any of its employees is subject to
any judgment, decree or order of any court or administrative agency, that would
interfere with the use of such employee's best efforts to promote the interest
of ISI or that would conflict with ISI 's business as proposed to be conducted.
To ISI's knowledge, neither the execution nor delivery of this Agreement and the
Ancillary Agreements, nor the operation of ISI's business by the employees of
ISI, nor the conduct of ISI's business as proposed will conflict with or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, any contract, covenant or instrument under which any of such employees is
now obligated. ISI does not believe that it is utilizing or that it will be
necessary to utilize, and will not utilize, any inventions, assets or rights of
any of ISI's employees, consultants or vendors (or people it currently intends
to hire) made or owned prior to their employment with or engagement by ISI, in
violation of any limitations or restrictions to which such employee, consultant
or vendor is a party or to which any of such inventions, assets or rights may be
subject. To ISI's knowledge, none of ISI's employees, consultants or vendors has
taken, removed or made use of any proprietary documentation, manuals, products,
materials or any other intangible item from his or her previous employer, and
ISI will not make use of any such proprietary items in the business of ISI.
2.8 ISI Contracts. ISI is not party to any contracts and agreements with
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expected receipts or expenditures in excess of $75,000 or involving a license or
grant of rights to or from ISI involving patents, trademarks, copyrights or
other proprietary information as of the date of the Closing. All material
contracts and agreements are legally binding against ISI, valid, and in full
force and effect in all material respects, and there is no indication of reduced
activity relating to such contract or agreement (other than in the ordinary
course of business) by any of the parties to any such contract or agreement.
ISI has no indebtedness for borrowed money (other than trade payables incurred
in the ordinary course of business) which ISI has directly or indirectly
created, incurred, assumed or guaranteed, or with respect to which ISI has
become directly or indirectly liable. Except in the ordinary course of
business, ISI has no material liability or obligation, absolute or contingent,
other than liabilities or obligations of less than $25,000 each and in the
aggregate less than $75,000, under purchase orders, sales contracts, real
property leases, equipment leases or similar obligations. There are no
agreements, understandings, instruments, contracts or proposed transactions or
judgments, orders, writs, decrees to which ISI is a party or by which it is
bound that involve (i) provisions restricting or affecting the development,
manufacture or distribution of ISI's products or services or (ii)
indemnification by ISI with respect to infringements of proprietary rights.
2.9 Litigation. There is no action, suit, proceeding or investigation
----------
pending against ISI or any of its properties before any court or governmental
agency (nor, to ISI's knowledge is there any threat thereof). There is no
action, suit, proceeding or investigation pending (nor, to ISI's knowledge is
there any threat thereof) that questions the validity of this Agreement or the
Ancillary Agreements or the right of ISI
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to enter into them, or to consummate the transactions contemplated hereby or
thereby, that might result, either individually or in the aggregate, in a
material adverse change in the assets, condition or affairs of ISI, financially
or otherwise, or any change in the current equity ownership of ISI. To ISI's
knowledge, there is no action, suit, proceeding or investigation pending against
any of ISI's employees (nor, to ISI's knowledge is there any threat thereof)
that involves the prior employment of any of ISI's employees or former employees
or their respective obligations under any agreements with prior employers. To
ISI's knowledge, ISI is not a party or subject to the provisions of any order,
writ, injunction, judgment, or decree of any court or governmental agency or
instrumentality specifically naming ISI. There is no action, suit, proceeding or
investigation by ISI currently pending or that ISI intends to initiate.
2.10 Taxes. All federal, state, local and foreign tax returns required
-----
to be filed by ISI have been filed, or if not yet filed, ISI has been granted
extensions of the filing dates which extensions have not expired, and all taxes,
assessments, fees and other governmental charges in the nature of taxes
("Taxes") upon ISI, or upon any of its properties, income or franchises, shown
in such returns and on assessments received by ISI to be due and payable have
been paid, or adequate reserves therefor have been established, or if any of
such tax returns have not been filed or if any such taxes have not been paid or
so reserved, the failure so to file or pay would not in the aggregate constitute
a material adverse event. Such tax returns and reports are true and correct in
all material respects. ISI knows of no proposed additional tax assessment that
is not provided for in its financial statements. ISI has not elected pursuant
to the Code, to be treated as an S Corporation or a collapsible corporation
pursuant to Section 1362(a) or Section 341(f), respectively, of the Code nor
has it made any other elections pursuant to the Code (other than elections that
relate solely to methods of accounting, depreciation or amortization or
elections made in tax returns made available to GlobalCenter), that would have a
material adverse effect on the business, properties, prospects or financial
condition of ISI. ISI has never had a tax deficiency proposed or assessed
against it and has not executed any waiver of any statute of limitations on the
assessment or collection of any tax or governmental charge. ISI has withheld or
collected from each payment made to each of its employees, the amount of all
taxes, including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories.
2.11 Insurance. ISI has fire and casualty insurance policies, with
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extended coverage, sufficient in amount (subject to reasonable deductibles) to
allow it to replace any of its properties that are material to ISI's business as
presently conducted, should such properties be damaged or destroyed. ISI has in
effect insurance covering risks associated with its business in such amounts as
are customary in its industry. ISI is not aware of any pending or threatened
claims against ISI for personal injuries or property damages.
2.12 Employee Benefit Plans. Schedule 2.13 describes each Employee
----------------------
Benefit Plan of ISI as defined in the Employee Retirement Income Security Act of
1974.
2.13 Proprietary Information Agreements. All current and former
----------------------------------
employees, consultants and officers of ISI have entered into proprietary
information and assignment agreements in the form previously provided to counsel
to GlobalCenter and Merger Sub. ISI is not aware that any of its employees are
in violation thereof, and ISI will use commercially reasonable efforts to
prevent any such violation.
2.14 Registration Rights. ISI is not under any obligation to register any
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of its presently outstanding securities. To ISI's knowledge, no stockholders of
ISI have entered into any agreements with respect to the voting of capital stock
of ISI.
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2.15 Governmental Consents. No consent, approval or authorization of
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registrations, qualifications, designation, declaration or filing with, any
governmental authority on the part of ISI is required in connection with the
valid execution and delivery of this Agreement or the Ancillary Agreements, or
the consummation of any transaction contemplated hereby or thereby.
2.16 Permits. ISI has all franchises, permits, licenses and any similar
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authority necessary for the conduct of its business as now being conducted, the
lack of which could materially and adversely affect the business, properties,
prospects, or financial condition of ISI and believes that it can obtain,
without undue burden or expense, any similar authority for the conduct of its
business as planned to be conducted. ISI is not in default in any material
respect under any of such franchises, permits, licenses or other similar
authority.
2.17 Environmental and Safety Laws. To ISI's knowledge, ISI is not in
-----------------------------
violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to ISI's knowledge, no
material expenditures are or will be required in order to comply with any of
such existing statutes, law, or regulation. ISI has not received notice of
violation of any such statute, law or regulation.
2.18 Related Party Transactions. No employee, officer, or director of ISI
--------------------------
or member of his or her immediate family is indebted, directly or indirectly, to
ISI, nor is ISI indebted (or committed to make loans or extend or guarantee
credit), to any of them. To ISI's knowledge, none of such persons has any
direct or indirect ownership interest in any firm or corporation with which ISI
is affiliated or with which ISI has a business relationship, or any firm or
corporation that competes with ISI, except that employees, officers or directors
of ISI and members of their immediate families may own stock in publicly traded
companies that may compete or have business relationships with ISI. To ISI's
knowledge, no officer or director or any member of their immediate families is,
direct or indirectly, interested in any material contract with ISI.
2.19 Broker's and Finders' Fees. ISI has not incurred, and will not incur,
--------------------------
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
2.20 Compliance with Other Instruments. ISI is not in violation or
---------------------------------
default of any provision of its Certificate of Incorporation or Bylaws or, to
the best of its knowledge, of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound or any provision of
federal or state statute, rule or regulation applicable to ISI. ISI is not aware
that any party having a material contract or commitment with ISI is not in
compliance therewith in all material respects. The execution, delivery and
performance of this Agreement, the Ancillary Agreements, and the consummation of
the transactions contemplated hereby and thereby will not result in any such
violation or be in conflict with or constitute, with or without the passage of
time and giving of notice, either a default under or give rise to any
acceleration or termination of any such provision, instrument, judgment, order,
writ, decree or contract or an event which results in the creation of any lien,
charge or encumbrance upon any assets of ISI or the suspension, revocation,
impairment, forfeiture, or nonrenewal of any material permit, license,
authorization, or approval applicable to ISI, its business or operations or any
of its assets or properties.
2.21 Employees. ISI is not aware that any officer or key employee, or
---------
that any group of key employees, intends to terminate their employment with ISI,
nor does ISI have a present intention to terminate
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the employment of any of the foregoing. The employment of each officer and
employee of ISI is terminable at the will of ISI.
2.22 Financial Statements. ISI has delivered to ISI and Merger Sub an
--------------------
unaudited balance sheet dated February 28, 1997 (the "ISI Balance Sheet") and an
unaudited income statement dated February 28, 1997 (the "ISI Income Statement,"
and together with the ISI Balance Sheet, the "ISI Financial Statements"). The
ISI Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods indicated, except that they may not contain all footnotes required by
such generally accepted accounting principles. The ISI Financial Statements are
complete and correct in all material respects and accurately set out and
describe the financial condition of ISI as of February 28, 1997. Since February
28, 1997, there has not been any material change in the assets or liabilities of
ISI from those reflected in the ISI Financial Statements, except changes in the
ordinary course of business which have not been individually or, in the
aggregate, materially adverse. In addition, since February 28, 1997, ISI has
not incurred any other material liabilities, contingent or otherwise, which,
individually or in the aggregate, are material to the financial condition or
operating results of ISI. Except as disclosed in the ISI Balance Sheet, ISI is
not a guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.
2.23 Labor Agreements and Actions. ISI is not bound by or subject to (and
----------------------------
none of its assets or properties is bound by or subject to) any written or oral,
express or implied, contract, commitment or arrangement with any labor union,
and no labor union has requested or, to the knowledge of ISI, has sought to
represent any of the employees, representatives or agents of ISI. There is no
strike or other labor dispute involving ISI pending, or to the knowledge of ISI
threatened, which could have a material adverse effect on the assets,
properties, financial condition, operating results, or business of ISI (as such
business is presently conducted and as it is proposed to be conducted), nor is
ISI aware of any labor organization activity involving its employees.
2.24 No Changes. Since February 28, 1997, there has not been:
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(a) any change in the assets, liabilities, financial condition or
operating results of ISI from that reflected in the ISI Balance Sheet, except
changes in the ordinary course of business that have not had, in the aggregate,
a material adverse effect on ISI's business;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of ISI (as such business is presently
conducted and as it is proposed to be conducted);
(c) any waiver or compromise by ISI of a valuable right or of a
material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by ISI, except in the ordinary course of business and
that is not material to the business, properties, prospects or financial
condition of ISI (as such business is presently conducted and as it is proposed
to be conducted);
(e) any material change to a material contract or agreement by which
ISI or any of its assets is bound or subject;
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(f) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder;
(g) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any officer or key
employee of ISI;
(i) any mortgage, pledge, transfer of a security interest in, or lien,
created by ISI, with respect to any of its material properties or assets, except
liens for taxes not yet due or payable;
(j) any loans or guarantees made by ISI to or for the benefit of its
employees, officers or directors, or any members of their immediate families,
other than travel advances and other advances made in the ordinary course of its
business; or
(k) any declaration, setting aside or payment or other distribution in
respect to any of ISI's capital stock, or any direct or indirect redemption,
purchase, or other acquisition of any of such stock by ISI.
2.25 Pooling of Interests. As of the Closing Date, neither ISI nor, to
--------------------
its knowledge, any of its affiliates, has taken, agreed to take, or bound itself
to take any action that would prevent ISI or GlobalCenter from accounting for
the business combination to be effected by the Merger as a "pooling of
interests."
2.26 Disclosure. ISI has provided GlobalCenter and Merger Sub the
----------
information which such entities have requested in connection with the execution
of this Agreement and the Merger. No representation or warranty of ISI
contained in this Agreement, the Ancillary Agreements, or any certificate
furnished or to be furnished to GlobalCenter or Merger Sub at the Closing (when
read together) contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein not misleading in light of the circumstances under which they were
made.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF GLOBALCENTER AND MERGER SUB
With respect to representations and warranties of the GlobalCenter Parties
(as defined below) that are qualified by knowledge, the statement "to
GlobalCenter's knowledge" shall be deemed to include the knowledge of a
particular GlobalCenter Party with respect to such GlobalCenter Party. Except
as set forth in the Schedule of Exceptions to the representations and warranties
of GlobalCenter and Merger Sub attached hereto as Schedule 3, GlobalCenter and
----------
Merger Sub hereby jointly and severally represent and warrant to ISI as follows:
3.1 Organization and Standing; Qualification; Articles and Bylaws. Each
-------------------------------------------------------------
of GlobalCenter, Merger Sub and GCIS, Inc. (each, a "GlobalCenter Party," and
collectively, the "GlobalCenter Parties") is a corporation duly organized and
validly existing under, and by virtue of, the laws of the State of Delaware
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and is in good standing under such laws. Each GlobalCenter Party has requisite
corporate power and authority to own and operate its properties and assets, and
to carry on its business as presently conducted and as proposed to be conducted.
Each GlobalCenter Party is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on the GlobalCenter Parties' business or properties,
taken as a whole. GlobalCenter has furnished ISI with copies of the Certificate
of Incorporation and Bylaws of GlobalCenter, as amended to date. Said copies are
true, correct and complete and contain all amendments through the date hereof.
3.2 Corporate Power. Each of GlobalCenter and Merger Sub has requisite
---------------
legal and corporate power and authority to execute and deliver this Agreement
and each of the Ancillary Agreements, and to carry out and perform its
obligations under the terms of this Agreement and the Ancillary Agreements.
3.3 Subsidiaries. Other than Merger Sub and GCIS, Inc., Global Center has
------------
no subsidiaries or affiliated companies and does not otherwise own or control,
directly or indirectly, any equity interest in any corporation, association or
other business entity. Merger Sub has no subsidiaries or affiliated companies
and does not otherwise own or control, directly or indirectly, any equity
interest in any corporation, association or other business entity. Merger Sub
does not currently conduct any operations.
3.4 Capitalization. The authorized capital stock of GlobalCenter consists
--------------
of (a) 20,000,000 shares of Common Stock, $0.001 par value, 3,851,553 shares of
which are issued and outstanding, and (b) 10,000,000 shares of Preferred Stock,
$0.001 par value, of which (i) 400,000 shares have been designated Series A
Preferred, 400,000 shares of which are issued and outstanding and (ii) 4,000,000
shares have been designated Series B Preferred, 3,939,304 shares of which are
issued and outstanding. The authorized capital stock of Merger Sub consists of
(a) 100 shares of Common Stock, $0.001 par value, 100 of which are issued and
outstanding to GlobalCenter prior to the Closing. The Board of Directors of
GlobalCenter has approved the grant of warrants to purchase 40,000 shares of
Common Stock and options to purchase 1,538,447 shares of Common Stock. The
Board of Directors of GlobalCenter has reserved 1,600,000 shares of Common Stock
to be issued under its 1995 Stock Option Plan. There are no other options,
warrants or other rights to purchase any of GlobalCenter's or Merger Sub's
authorized and unissued capital stock. All issued and outstanding shares of
GlobalCenter's and Merger Sub's capital stock have been duly authorized and
validly issued, are fully paid and nonassessable, and were issued in compliance
with applicable federal and state securities law. Neither GlobalCenter nor
Merger Sub is a party to nor subject to any agreement or understanding, and, to
GlobalCenter's knowledge, there is no agreement or understanding between any
persons and/or entities, which affects or relates to the voting or giving of
written consents with respect to any security or by a director of GlobalCenter
or Merger Sub.
3.5 Authorization. All corporate action on the part of GlobalCenter, its
-------------
officers, directors and stockholders and Merger Sub, its officers and directors
necessary for the authorization, execution, delivery and performance of this
Agreement and the Ancillary Agreements by GlobalCenter and Merger Sub, the
authorization, sale, issuance and delivery of the GlobalCenter Common Stock, and
the performance of all obligations of GlobalCenter and of Merger Sub hereunder
has been taken or will be taken prior to the Closing. This Agreement and the
Ancillary Agreements, when executed and delivered by GlobalCenter and Merger
Sub, as appropriate, shall constitute valid and binding obligations of such
parties, enforceable in accordance with their respective terms, subject to laws
of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies. The GlobalCenter Common Stock, when issued in
compliance with the
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provisions of this Agreement, will be validly issued, fully paid and
nonassessable, and free of any liens or encumbrances; provided, however, that
such Shares will be subject to restrictions on transfer under state and/or
federal securities laws and may be subject to certain liens by virtue of liens
existing on ISI Stock prior to the Merger.
3.6 Offering. Subject to the accuracy of the representations of ISI in
--------
Article II hereof and in written responses to GlobalCenter's inquiries, if any,
and the representations of the stockholders of ISI in the Investment
Representation Statements, substantially in the form attached hereto as Exhibit
-------
E, the offer, sale and issuance of the GlobalCenter Stock to be issued in
- -
conformity with the terms of this Agreement constitute transactions exempt from
the registration requirements of Section 5 of the Securities Act of 1933, as
amended (the "Securities Act"), and applicable Blue Sky laws.
3.7 Title to Properties; Liens and Encumbrances. Each GlobalCenter Party
-------------------------------------------
has (i) good and marketable title to all of its properties and assets owned by
it, both real and personal, and (ii) with respect to property it leases, to
GlobalCenter's knowledge, it is in compliance with such leases and holds valid
leasehold interests in such property; in each case, subject to no mortgage,
pledge, lien, security interest, conditional sale agreement, encumbrance or
charge, except in (X) the lien of current taxes not yet due and payable, and (Y)
liens and encumbrances which do not in any case or in the aggregate materially
detract from the value of the property subject thereto or materially impair the
operations of GlobalCenter and its subsidiaries, taken as a whole. With respect
to property and assets leased by a GlobalCenter Party, each such party is in
compliance with such leases and, to GlobalCenter's knowledge, holds a valid
leasehold interest free of any claims, liens or encumbrances.
3.8 Patent and Other Proprietary Rights. To the best of GlobalCenter's
-----------------------------------
knowledge, the GlobalCenter Parties possess all patents, patent rights,
trademarks, trademark rights, trade names, trade name rights and copyrights
necessary to conduct their business as now being conducted and as planned to be
conducted without conflict with or infringement upon any valid rights of others
and the lack of which could materially and adversely affect the operations or
condition, financial or otherwise, of the GlobalCenter Parties, taken as a
whole, and GlobalCenter has not received any notice of infringement upon or
conflict with the asserted rights of others. The GlobalCenter Parties have a
valuable body of trade secrets, including know-how, concepts, computer programs
and other technical data (the "Proprietary Information") for the development,
manufacture and sale of their products and provision of their services. To
GlobalCenter's knowledge, the GlobalCenter Parties have the right to use the
Proprietary Information, free and clear of any rights, liens, encumbrances or
claims of others, except that the possibility exists that other persons may have
independently developed trade secrets or technical information similar or
identical to those of the GlobalCenter Parties. No GlobalCenter Party has
received any communications alleging that such party has violated, or by
conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights, trade secrets or other
proprietary rights or processes of any other person or entity. No GlobalCenter
Party is aware that any of its employees is subject to any judgment, decree or
order of any court or administrative agency, that would interfere with the use
of such employee's best efforts to promote the interest of GlobalCenter or that
would conflict with GlobalCenter's business as proposed to be conducted. To
GlobalCenter's knowledge, neither the execution nor delivery of this Agreement
and the Ancillary Agreements, nor the operation of the business of the
GlobalCenter Parties by their respective employees, nor the conduct of the
business of the GlobalCenter Parties as proposed will conflict with or result in
a breach of the terms, conditions or provisions of, or constitute a default
under, any contract, covenant or instrument under which any of such employees is
now obligated. GlobalCenter does not believe that it is utilizing or that it
will be necessary to utilize, and will not utilize, any inventions,
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assets or rights of any GlobalCenter Parties' employees, consultants or vendors
(or people it currently intends to hire) made or owned prior to their employment
with or engagement by a GlobalCenter Party, in violation of any limitations or
restrictions to which such employee, consultant or vendor is a party or to which
any of such inventions, assets or rights may be subject. To GlobalCenter's
knowledge, none of the GlobalCenter Parties' employees, consultants or vendors
has taken, removed or made use of any proprietary documentation, manuals,
products, materials or other intangible item from his or her previous employer,
and no GlobalCenter Party will make use of any such proprietary items in the
business of GlobalCenter.
3.9 Contracts. No GlobalCenter Party is party to any contracts and
---------
agreements with expected receipts or expenditures in excess of $75,000 or
involving a license or grant of rights to or from a GlobalCenter Party involving
patents, trademarks, copyrights or other proprietary information as of the date
of the Closing. All material contracts and agreements are legally binding
against each GlobalCenter Party who is a signatory thereto, valid, and in full
force and effect in all material respects, and there is no indication of reduced
activity relating to such contract or agreement (other than in the ordinary
course of business) by any of the parties to any such contract or agreement. No
GlobalCenter Party has indebtedness for borrowed money (other than trade
payables incurred in the ordinary course of business) which any GlobalCenter
Party has directly or indirectly created, incurred, assumed or guaranteed, or
with respect to which a GlobalCenter Party has become directly or indirectly
liable. Except in the ordinary course of business, no GlobalCenter Party has
material liability or obligation, absolute or contingent, other than liabilities
or obligations of less than $25,000 each and in the aggregate less than $75,000,
under purchase orders, sales contracts, real property leases, equipment leases
or similar obligations. There are no agreements, understandings, instruments,
contracts or proposed transactions or judgments, orders, writs, decrees to which
a GlobalCenter Party is a party or by which it is bound that involve (i)
provisions restricting or affecting the development, manufacture or distribution
of the products or services of a GlobalCenter Party or (ii) indemnification by a
GlobalCenter Party with respect to infringements of proprietary rights.
3.10 Litigation. There is no action, suit, proceeding or investigation
----------
pending against any GlobalCenter Party or any of their respective properties
before any court or governmental agency (nor, to GlobalCenter's knowledge is
there any threat thereof). There is no action, suit, proceeding or
investigation pending (nor, to GlobalCenter's knowledge is there any threat
thereof) that questions the validity of this Agreement or the Ancillary
Agreements or the right of GlobalCenter or Merger Sub to enter into them, or to
consummate the transactions contemplated hereby or thereby, that might result,
either individually or in the aggregate, in any material adverse changes in the
assets, condition or affairs of the GlobalCenter Parties, taken as a whole,
financially or otherwise, or any change in the current equity ownership of
GlobalCenter; nor is GlobalCenter aware that there is any basis for the
foregoing. To GlobalCenter's knowledge, there is no action, suit, proceeding or
investigation pending against employees of a GlobalCenter Party (nor, to
GlobalCenter's knowledge is there any threat thereof) that involves the prior
employment of the employees of a GlobalCenter Party or former employees or their
respective obligations under any agreements with prior employers. To
GlobalCenter's knowledge, no GlobalCenter Party is a party or subject to the
provisions of any order, writ, injunction, judgment, or decree of any court or
governmental agency or instrumentality specifically naming a GlobalCenter Party.
There is no action, suit, proceeding or investigation by a GlobalCenter Party
currently pending or that GlobalCenter intends to initiate.
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3.11 Taxes. All federal, state, local and foreign tax returns required to
-----
be filed by each GlobalCenter Party have been filed, or if not yet filed, the
GlobalCenter Parties have been granted extensions of the filing dates which
extensions have not expired, and all Taxes upon each GlobalCenter Party, or upon
any of its properties, income or franchises, shown in such returns and on
assessments received by each GlobalCenter Party to be due and payable have been
paid, or adequate reserves therefor have been established, or if any of such tax
returns have not been filed or if any such taxes have not been paid or so
reserved, the failure so to file or pay would not in the aggregate constitute a
material adverse event. Such tax returns and reports are true and correct in all
material respects. GlobalCenter knows of no proposed additional tax assessment
that is not provided for in its financial statements. No GlobalCenter Party has
elected pursuant to the Code, to be treated as an S Corporation or a collapsible
corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has
any GlobalCenter Party made any other elections pursuant to the Code (other than
elections that relate solely to methods of accounting, depreciation or
amortization or elections made in tax returns made available to ISI), that would
have a material adverse effect on the business, properties, prospects or
financial condition of the GlobalCenter Parties, taken as a whole. GlobalCenter
has never had a tax deficiency proposed or assessed against it and neither has
executed any waiver of any statute of limitations on the assessment or
collection of any tax or governmental charge. Each GlobalCenter Party has
withheld or collected from each payment made to its employees, the amount of all
taxes, including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories.
3.12 Insurance. GlobalCenter has fire and casualty insurance policies,
---------
with extended coverage, sufficient in amount (subject to reasonable deductibles)
to allow it to replace any properties of the GlobalCenter parties that are
material to the business of GlobalCenter and its subsidiaries, taken as a whole,
as presently conducted, should such properties be destroyed or damaged.
GlobalCenter has in effect insurance covering risks associated with its business
in such amounts as are customary in its industry. GlobalCenter is not aware of
any pending or threatened claims against any GlobalCenter Party for personal
injuries or property damages.
3.13 Employee Benefit Plans. Schedule 3.13 describes each Employee
----------------------
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
3.14 Proprietary Information Agreements. All current and former
----------------------------------
employees, consultants and officers of the GlobalCenter Parties have entered
into proprietary information and assignment agreements in the form previously
provided to counsel to ISI. GlobalCenter is not aware that any of its employees
are in violation thereof, and GlobalCenter will use commercially reasonable
efforts to prevent any such violation.
3.15 Registration Rights. Except as provided in GlobalCenter's
-------------------
Certificate of Designations for the Series A Preferred and the Information and
Registration Rights Agreement, GlobalCenter is not under any obligation to
register any of its presently outstanding securities. To GlobalCenter's
knowledge, no stockholders of GlobalCenter have entered into any agreements with
respect to the voting of capital stock of GlobalCenter.
3.16 Governmental Consents. No consent, approval or authorization of
---------------------
registrations, qualifications, designation, declaration or filing with, any
governmental authority on the part of any GlobalCenter Party is required in
connection with the valid execution and delivery of this Agreement or
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the Ancillary Agreements, or the offer, sale or issuance of GlobalCenter Common
Stock, or the consummation of any transaction contemplated hereby, except
qualification (or taking such action as may be necessary to secure an exemption
from qualification, if available) of the offer and sale of GlobalCenter Common
Stock under the California Corporate Securities Law of 1968, as amended, and
other applicable Blue Sky laws.
3.17 Permits. The GlobalCenter Parties have all franchises, permits,
-------
licenses and any similar authority necessary for the conduct of their business
as now being conducted, the lack of which could materially and adversely affect
the business, properties, prospects, or financial condition of the GlobalCenter
Parties, taken as a whole, and believes that it can obtain, without undue burden
or expense, any similar authority for the conduct of its business as planned to
be conducted. The GlobalCenter Parties are not in default in any material
respect under any such franchises, permits, licenses or other similar authority.
3.18 Environmental and Safety Laws. To GlobalCenter's knowledge, the
-----------------------------
GlobalCenter Parties are not in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety, and to
GlobalCenter's knowledge, no material expenditures are or will be required in
order to comply with any of such existing statutes, law, or regulation. No
GlobalCenter Party has received notice of violation of any such statute, law or
regulation.
3.19 Related Party Transactions. No employee, officer, or director of any
--------------------------
GlobalCenter Party or member of his or her immediate family is indebted,
directly or indirectly, to any GlobalCenter Party, nor is any GlobalCenter Party
indebted (or committed to make loans or extend or guarantee credit), to any of
them. To GlobalCenter's knowledge, none of such persons has any direct or
indirect ownership interest in any firm or corporation with which any
GlobalCenter Party is affiliated or with which any GlobalCenter Party has a
business relationship, or any firm or corporation that competes with any
GlobalCenter Party, except that employees, officers or directors of any
GlobalCenter Party and members of their immediate families may own stock in
publicly traded companies that may compete or have business relationships with a
GlobalCenter Party. To GlobalCenter's knowledge, no officer or director or any
member of their immediate families is, directly or indirectly, interested in any
material contract with any GlobalCenter Party.
3.20 Broker's and Finders' Fees. No GlobalCenter Party has incurred, and
--------------------------
will not incur, directly or indirectly, any liability for brokerage or finders'
fees or agents' commissions or any similar charges in connection with this
Agreement or any transaction contemplated hereby.
3.21 Compliance with Other Instruments. No GlobalCenter Party is in
---------------------------------
violation or default of any provision of their respective Certificates of
Incorporation and Bylaws nor, to the best of GlobalCenter's knowledge, of any
instrument, judgment, order, writ, decree or contract to which it is a party or
by which it is bound or any provision of federal or state statute, rule or
regulation applicable to such party. GlobalCenter is not aware that any party
having a material contract or commitment with a GlobalCenter Party is not in
compliance therewith in all material respects. The execution, delivery and
performance of this Agreement, the Ancillary Agreements, and the consummation of
the transactions contemplated hereby and thereby will not result in any such
violation or be in conflict with or constitute, with or without the passage of
time and giving of notice, either a default under or give rise to any
acceleration or termination of any such provision, instrument, judgment, order,
writ, decree or contract or an event which results in the creation of any lien,
charge or encumbrance upon any assets of either GlobalCenter or Merger Sub or
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the suspension, revocation, impairment, forfeiture, or nonrenewal of any
material permit, license, authorization, or approval applicable to either
GlobalCenter or Merger Sub, their respective businesses or operations or any of
the assets or properties of GlobalCenter or Merger Sub. The consummation of the
transactions contemplated hereby will not result in an adjustment in the
conversion price of GlobalCenter's Preferred Stock.
3.22 Employees. GlobalCenter is not aware that any officer or key
---------
employee, or that any group of key employees, intends to terminate their
employment with any GlobalCenter Party, nor does any GlobalCenter Party have a
present intention to terminate the employment of any of the foregoing. The
employment of each officer and employee of GlobalCenter is terminable at the
will of GlobalCenter. GlobalCenter has no current intent to terminate any
employees of ISI.
3.23 Financial Statements. GlobalCenter has delivered to ISI an unaudited
--------------------
consolidated balance sheet dated February 28, 1997 (the "GlobalCenter Balance
Sheet") and an unaudited consolidated income statement dated February 28, 1997
(the "GlobalCenter Income Statement," and together with the GlobalCenter Balance
Sheet, the "GlobalCenter Financial Statements"). The GlobalCenter Financial
Statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods indicated,
except that they may not contain all footnotes required by such generally
accepted accounting principles. The GlobalCenter Financial Statements are
complete and correct in all material respects and accurately set out and
describe the financial condition of GlobalCenter as of February 28, 1997. Since
February 28, 1997, there has not been any material change in the assets or
liabilities of GlobalCenter from those reflected in the GlobalCenter Financial
Statements, except changes in the ordinary course of business which have not
been individually or, in the aggregate, materially adverse. In addition, since
February 28, 1997, no GlobalCenter Party has incurred any other material
liabilities, contingent or otherwise, which, individually or in the aggregate,
are material to the financial condition or operating results of the GlobalCenter
Parties, taken as a whole. Except as disclosed in the GlobalCenter Balance
Sheet, no GlobalCenter Party is a guarantor or indemnitor of any indebtedness of
any other person, firm or corporation.
3.24 Labor Agreements and Actions. No GlobalCenter Party is bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of
GlobalCenter, has sought to represent any of the employees, representatives or
agents of GlobalCenter. There is no strike or other labor dispute involving any
GlobalCenter Party pending, or to the knowledge of GlobalCenter threatened,
which could have a material adverse effect on the assets, properties, financial
condition, operating results, or business of the GlobalCenter Parties, taken as
a whole (as such business is presently conducted and as it is proposed to be
conducted), nor is GlobalCenter aware of any labor organization activity
involving its employees.
3.25 No Changes. Since February 28, 1997, there has not been:
----------
(a) any change in the assets, liabilities, financial condition or
operating results of the GlobalCenter Parties from that reflected in the
GlobalCenter Balance Sheet, except changes in the ordinary course of business
that have not had, in the aggregate, a material adverse effect on GlobalCenter's
business;
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(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the GlobalCenter Parties, taken as a whole,
(as such business is presently conducted and as it is proposed to be conducted);
(c) any waiver or compromise by the GlobalCenter Parties of a valuable
right or of a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by the GlobalCenter Parties, except in the ordinary
course of business and that is not material to the business, properties,
prospects or financial condition of the GlobalCenter Parties, taken as a whole,
(as such business is presently conducted and as it is proposed to be conducted);
(e) any material change to a material contract or agreement by which
the GlobalCenter Parties or any of their assets is bound or subject;
(f) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder;
(g) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any officer or key
employee of the GlobalCenter Parties;
(i) any mortgage, pledge, transfer of a security interest in, or lien,
created by a GlobalCenter Party, with respect to any of its material properties
or assets, except liens for taxes not yet due or payable;
(j) any loans or guarantees made by a GlobalCenter Party to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business; or
(k) any declaration, setting aside or payment or other distribution in
respect to any of GlobalCenter's capital stock, or any direct or indirect
redemption, purchase, or other acquisition of any of such stock by GlobalCenter.
3.26 Pooling of Interests. As of the Closing Date, neither GlobalCenter
--------------------
or Merger Sub nor, to GlobalCenter's knowledge, any of their respective
affiliates, has taken, agreed to take, or bound itself to take any action that
would prevent ISI or GlobalCenter from accounting for the business combination
to be effected by the Merger as a "pooling of interests."
3.27 Disclosure. GlobalCenter has provided ISI the information which it
----------
has requested in connection with the execution of this Agreement and the Merger.
No representation or warranty of either GlobalCenter or Merger Sub contained in
this Agreement, the Ancillary Agreements, or any certificate furnished or to be
furnished to ISI at the Closing (when read together) contains any untrue
statement of a
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material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein not misleading in light of the
circumstances under which they were made.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of ISI. During the period from the date of this
--------------------------
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, ISI agrees (except to the extent that GlobalCenter shall
otherwise consent in writing which consent shall not be unreasonably withheld),
to carry on its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and, to the extent
consistent with such business, use commercially reasonable efforts consistent
with past practice and policies to preserve intact ISI's present business
organizations, keep available the services of its present officers and key
employees (other than those employees terminated with the permission of
GlobalCenter) and preserve its relationships with customers, suppliers,
distributors, licensors, licensees and others having business dealings with it,
with the goal that ISI's goodwill and ongoing businesses shall be unimpaired at
the Effective Time. ISI shall promptly notify GlobalCenter of any event or
occurrence or emergency not in the ordinary course of business of ISI, and any
event which could reasonably be expected to have a material adverse effect on
the business, prospects or financial condition ("Material Adverse Effect")of
ISI. Except as expressly contemplated by this Agreement, ISI shall not, without
the prior written consent of GlobalCenter, which consent shall not be
unreasonably withheld:
(a) Except pursuant to existing contractual provisions of options
outstanding on the date hereof, accelerate, amend or change the period of
exercisability of options or restricted stock granted under the employee stock
plans of ISI or authorize cash payments in exchange for any options granted
under any of such plans;
(b) Enter into any commitment or transaction not in the ordinary
course of business (i) to be performed over a period longer than six months in
duration, or (ii) to purchase fixed assets for a purchase price in excess of
$75,000;
(c) Grant any severance or termination pay (i) to any director; or
(ii) to any employee except (A) payments made pursuant to written agreements
outstanding on the date hereof (all of which have been provided to GlobalCenter)
or (B) in the case of employees who are not officers, grants which are made in
the ordinary course of business in accordance with ISI's standard past
practices;
(d) Except for licenses granted to end-users, OEM's or distributors
pursuant to ISI's standard license agreements, transfer to any person or entity
any ISI Proprietary Information;
(e) Enter into or amend any agreements pursuant to which any other
party is granted exclusive marketing or other rights of any type or scope with
respect to any products or services of ISI;
(f) Violate, amend or otherwise modify the terms of any of the
contracts, agreements or instruments set forth or required to be set forth in
ISI's Schedule of Exceptions.
(g) Commence any litigation;
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(h) Declare or pay any dividends on or make any other distribution
(whether in cash, stock or property) in respect of any ISI Stock, or split,
combine or reclassify any ISI Stock, or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of ISI
Stock, or repurchase or otherwise acquire, directly or indirectly, any shares of
ISI Stock except from former employees, directors and consultants in accordance
with agreements providing for the repurchase of shares at cost in connection
with any termination of service to ISI;
(i) Issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any ISI Stock or
securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other securities other than options or warrants or
securities deliverable upon the exercise thereof as described in Section 2.4
above;
(j) Cause or permit any amendments to its Certificate of Incorporation
or Bylaws;
(k) Acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the assets, stock or other equity
interests of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets that are material, individually
or in the aggregate, to the business of ISI;
(l) Sell, lease, license or otherwise dispose of any of its properties
or assets that are material, individually or in the aggregate, to the business
of ISI, except in the ordinary course of business;
(m) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of ISI or guarantee any debt
securities of others;
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay any special bonus or special remuneration to any
director or employee, or increase the salaries or wage rates of any employee
other than as reflected on ISI's Schedule of Exceptions;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Pay, discharge or satisfy in an amount in excess of $75,000 in any
one case any claim, liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business of liabilities reflected or
reserved against in the ISI Balance Sheet;
(q) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, file any material return or
any amendment to a material return, enter into any closing agreement, settle any
claim or assessment in respect of Taxes, or consent to any extension or waiver
of the limitation period applicable to any claim or assessment in respect of
Taxes; or
(r) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (q) above, or any action which would make
any of the representations or warranties or covenants of ISI contained in this
Agreement materially untrue or incorrect.
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<PAGE>
4.2 No Solicitation by ISI. Prior to the Effective Time, ISI will not
----------------------
(nor will ISI permit any of ISI's officers, directors, stockholders, agents,
representatives or affiliates to) directly or indirectly, take any of the
following actions with any party other than GlobalCenter and its designees:
(a) solicit, encourage, initiate or participate in any negotiations or
discussions with respect to any offer or proposal to acquire all or any
substantial part of ISI's business and properties or capital stock whether by
merger, purchase of assets, tender offer or otherwise;
(b) except as required by law and except for disclosures made to
others in the ordinary course of business, disclose any information not
customarily disclosed to any person other than its attorneys or financial
advisors concerning ISI's business and properties or afford to any person or
entity access to its properties, books or records; or
(c) assist or cooperate with any person to make any proposal to
purchase all or any part of ISI's capital stock or assets, other than licensing
of software in the ordinary course of business.
In the event ISI shall receive any offer or proposal, directly or
indirectly, of the type referred to in clause (a) or (c) above, or any request
for disclosure or access pursuant to clause (b) above, ISI shall immediately
inform GlobalCenter as to any such offer or proposal and will cooperate with
GlobalCenter by furnishing to GlobalCenter any information GlobalCenter may
reasonably request.
4.3 Conduct of Business of GlobalCenter. During the period from the date
-----------------------------------
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, each of the GlobalCenter Parties agrees (except
to the extent that ISI shall otherwise consent in writing which consent shall
not be unreasonably withheld), to carry on its respective business in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted and, to the extent consistent with such business, use commercially
reasonable efforts consistent with past practice and policies to preserve intact
each of their respective present business organizations, keep available the
services of its respective present officers and key employees (other than those
key employees terminated with the permission of ISI) and preserve its respective
relationships with customers, suppliers, distributors, licensors, licensees and
others having business dealings with it, with the goal that each of the
GlobalCenter's Parties' goodwill and ongoing businesses shall be unimpaired at
the Effective Time. GlobalCenter shall promptly notify ISI of any event or
occurrence or emergency not in the ordinary course of business and any event
which could reasonably be expected to have a Material Adverse Effect on the
GlobalCenter Parties, taken as a whole. Except as expressly contemplated by this
Agreement, no GlobalCenter Party shall, without the prior written consent of
ISI, which consent shall not be unreasonably withheld:
(a) Except pursuant to existing contractual provisions of options
outstanding on the date hereof, accelerate, amend or change the period of
exercisability of options or restricted stock granted under the employee stock
plans of GlobalCenter or authorize cash payments in exchange for any options
granted under any of such plans;
(b) Enter into any commitment or transaction not in the ordinary
course of business (i) to be performed over a period longer than six months in
duration, or (ii) to purchase fixed assets for a purchase price in excess of
$75,000;
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<PAGE>
(c) Grant any severance or termination pay (i) to any director; or
(ii) to any employee except (A) payments made pursuant to written agreements
outstanding on the date hereof (all of which have been provided to ISI) or (B)
in the case of employees who are not officers, grants which are made in the
ordinary course of business in accordance with the standard past practices of
GlobalCenter;
(d) Except for licenses granted to end-users, OEM's or distributors
pursuant to the standard license agreements of such GlobalCenter Party, transfer
to any person or entity any Proprietary Information of such GlobalCenter Party;
(e) Enter into or amend any agreements pursuant to which any other
party is granted exclusive marketing or other rights of any type or scope with
respect to any products or services of such GlobalCenter Party;
(f) Violate, amend or otherwise modify the terms of any of the
contracts, agreements or instruments set forth or required to be set forth in
the Schedule of Exceptions of GlobalCenter;
(g) Commence any litigation;
(h) Declare or pay any dividends on or make any other distribution
(whether in cash, stock or property) in respect of any GlobalCenter Stock, or
split, combine or reclassify any GlobalCenter Stock, or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of GlobalCenter Stock, or repurchase or otherwise acquire, directly
or indirectly, any shares of GlobalCenter Stock except from former employees,
directors and consultants in accordance with agree ments providing for the
repurchase of shares at cost in connection with any termination of service to
GlobalCenter;
(i) Issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any GlobalCenter
Stock or securities convertible into, or subscrip tions, rights, warrants or
options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other securities other than options or
warrants or securities deliverable upon the exercise thereof and described in
Section 3.4 above;
(j) Cause or permit any amendments to its Certificate of Incorporation
or Bylaws;
(k) Acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the assets, stock or other equity
interests of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets that are material, individually
or in the aggregate, to the business of GlobalCenter;
(l) Sell, lease, license or otherwise dispose of any of its properties
or assets that are material, individually or in the aggregate, to the business
of GlobalCenter; except in the ordinary course of business;
(m) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of GlobalCenter or guarantee
any debt securities of others;
-22-
<PAGE>
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay any special bonus or special remuneration to any
director or employee, or increase the salaries or wage rates of any employee
other than as reflected on the Schedule of Exceptions of GlobalCenter;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Pay, discharge or satisfy in an amount in excess of $75,000 in any
one case any claim, liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business of liabilities reflected or
reserved against in the GlobalCenter Balance Sheet;
(q) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, file any material return or
any amendment to a material return, enter into any closing agreement, settle any
claim or assessment in respect of Taxes, or consent to any extension or waiver
of the limitation period applicable to any claim or assessment in respect of
Taxes; or
(r) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.3(a) through (q) above, or any action which would make
any of the representations or warranties or covenants of GlobalCenter contained
in this Agreement materially untrue or incorrect.
4.4 No Solicitation by GlobalCenter. Prior to the Effective Time,
-------------------------------
GlobalCenter will not (nor will GlobalCenter permit any of GlobalCenter's
officers, directors, stockholders, agents, representatives or affiliates to)
directly or indirectly, take any of the following actions with any party other
than ISI and its designees:
(a) solicit, encourage, initiate or participate in any negotiations or
discussions with respect to any offer or proposal to acquire all or any
substantial part of GlobalCenter's business and properties or capital stock
whether by merger, purchase of assets, tender offer or otherwise;
(b) except as required by law and except for disclosures made to
others in the ordinary course of business, disclose any information not
customarily disclosed to any person other than its attorneys or financial
advisors concerning GlobalCenter's business and properties or afford to any
person or entity access to its properties, books or records; or
(c) assist or cooperate with any person to make any proposal to
purchase all or any part of GlobalCenter's capital stock or assets, other than
licensing of software in the ordinary course of business.
In the event GlobalCenter shall receive any offer or proposal, directly or
indirectly, of the type referred to in clause (a) or (c) above, or any request
for disclosure or access pursuant to clause (b) above, such party shall
immediately inform ISI as to any such offer or proposal and will cooperate with
ISI by furnishing to ISI any information ISI may reasonably request.
-23-
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ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Meeting of ISI Stockholders.
---------------------------
ISI shall promptly after the date hereof take all action necessary in
accordance with the laws of the State of Delaware and its Certificate of
Incorporation and Bylaws to convene a meeting of ISI's Stockholders (the "ISI
Stockholders' Meeting") to approve this Agreement and the Merger Agreement in
the form attached hereto as Exhibit A or to effect an action by written consent
---------
without a meeting. ISI shall consult with GlobalCenter and use commercially
reasonable efforts to hold ISI Stockholders' Meeting on a day acceptable to
GlobalCenter and shall not postpone or adjourn (other than postponement for the
absence of a quorum) ISI Stockholders' Meeting without the consent of
GlobalCenter. ISI shall use its commercially reasonable efforts to solicit from
stockholders of ISI proxies in favor of the Merger and shall take all other
action necessary or advisable to secure the vote or consent of stockholders
required by the laws of the State of Delaware to effect the Merger.
5.2 Access to Information. Each party hereto shall afford each other
---------------------
party hereto and its accountants, counsel and other representatives, reasonable
access during normal business hours during the period prior to the Effective
Time to (a) all of its respective properties, books, contracts, commitments and
records, and (b) all other information concerning its respective business,
properties and personnel as each other party may reasonably request. Each party
hereto agrees to provide to each other party hereto and its accountants, counsel
and other representatives copies of internal financial statements promptly upon
request. No information or knowledge obtained in any investigation pursuant to
this Section 5.2 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.3 Expenses. Whether or not the Merger is consummated, all expenses
--------
incurred in connection with the Merger and this Agreement ("Expenses") shall be
the obligation of the party incurring such expenses.
5.4 Public Disclosure. Prior to the Effective Time, no disclosure
-----------------
(whether or not in response to an inquiry) of the existence or any subject
matter of this Agreement shall be made by any party hereto unless approved by
GlobalCenter and ISI prior to release except as required by law.
5.5 Consents. Each of GlobalCenter and ISI shall promptly apply for or
--------
otherwise seek, and use its best efforts to obtain, all consents and approvals
required to be obtained by it for the consummation of the Merger, and ISI shall
use its best efforts to obtain all consents, waivers and approvals under any of
ISI's material agreements, contracts, licenses or leases in order to preserve
the benefits thereunder for the Surviving Corporation and otherwise in
connection with the Merger; ISI represents and warrants that all of such
consents and approvals with respect to ISI are set forth in Schedule 5.5-1, and
--------------
GlobalCenter represents and warrants that all of such consents and approvals
with respect to GlobalCenter are set forth in Schedule 5.5-2.
--------------
5.6 Legal Requirements. Each of GlobalCenter, Merger Sub and ISI will
------------------
take commercially reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on them with respect to the consummation of
the transactions contemplated by this Agreement and will promptly cooperate with
and furnish information to any party hereto in connection with any such require-
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<PAGE>
ments imposed upon such other party in connection with the consummation of the
transactions contem plated by this Agreement and will take all reasonable
actions necessary to obtain (and will cooperate with the other parties hereto in
obtaining) any consent, approval, order or authorization of, or any
registration, declaration or filing with, any governmental entity or other
person, required to be obtained or made in connection with the taking of any
action contemplated by this Agreement.
5.7 Blue Sky Laws. GlobalCenter shall use its commercially reasonable
-------------
efforts to comply with the securities and Blue Sky laws of all jurisdictions
that are applicable to the issuance of GlobalCenter Stock pursuant hereto. ISI
shall use its commercially reasonable efforts to assist GlobalCenter as may be
necessary to comply with the securities and Blue Sky laws of all jurisdictions
that are applicable in connection with the issuance of GlobalCenter Stock
pursuant hereto.
5.8 Commercially Reasonable Efforts; Additional Documents and Further
-----------------------------------------------------------------
Assurances. Each of the parties to this Agreement shall use its commercially
- ----------
reasonable efforts to effectuate the transactions contemplated hereby and to
fulfill and cause to be fulfilled the conditions to closing under this
Agreement. Each party hereto, at the request of another party hereto, shall
execute and deliver such other instruments and do and perform such other acts
and things as may be reasonably necessary or desirable for effecting completely
the consummation of this Agreement and the transactions contemplated hereby.
5.9 Stock Options.
-------------
(a) At the Effective Time, each outstanding option to purchase shares
of ISI Common Stock (each an "ISI Option") under ISI's 1996 Stock Plan, whether
vested or unvested, shall be, in connec tion with the Merger, assumed by
GlobalCenter under GlobalCenter's 1995 Stock Option Plan, as amended. Each ISI
Option so assumed by GlobalCenter under this Agreement shall continue to have,
and be subject to, substantially the same terms and conditions set forth in
ISI's 1996 Stock Plan and as provided in the respective option agreements
immediately prior to the Effective Time, except that (i) such ISI Option shall
be exercisable for that number of whole shares of GlobalCenter Common Stock
equal to the product of (A) the number of shares of ISI Common Stock that were
issuable upon exercise of such ISI Option immediately prior to the Effective
Time multiplied by (B) the Common Stock Conversion Ratio, and (ii) the per share
exercise price for the shares of GlobalCenter Common Stock issuable upon
exercise of such assumed ISI Option shall be equal to the quotient determined by
dividing (A) the exercise price per share of ISI Common Stock at which such ISI
Option was exercisable immediately prior to the Effective Time by (B) the Common
Stock Conversion Ratio, rounded up to the nearest whole cent, all in accordance
with the rules of Section 424(a) of the Code, and the regulations promulgated
thereunder, and such rules shall apply even with respect to options that are not
"incentive stock options" within the meaning of Section 424 of the Code.
(b) It is the intention of the parties that ISI Options that are
incentive stock options as defined in Section 422 of the Code assumed by
GlobalCenter qualify following the Effective Time as incentive stock options as
defined in Section 422 of the Code.
5.10 FIRPTA Compliance. ISI will provide the notification to the Internal
-----------------
Revenue Service required pursuant to Treasury Regulation Section 1.897-2(h)(2).
5.11 Reorganization. No party shall take any action which would cause the
--------------
Merger to fail to qualify as a "reorganization" within the meaning of Section
368(a) of the Code.
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<PAGE>
5.12 Indemnification; Limitation of Liability.
----------------------------------------
(a) Each of ISI and GlobalCenter agree to indemnify and hold the other
party harmless from any and all losses, claims, damages, liabilities, costs,
expenses or other damages, including, without limitation, interest and
penalties, reasonable attorneys fees and expenses, suffered or paid, directly or
indirectly, as a result of or arising out of:
(i) the failure of any representation or warranty by such
indemnifying party made in this Agreement and the Ancillary Agreements to be
true and correct in all respects as of the date of this Agreement and as of the
Effective Date, or
(ii) any breach or nonfulfillment of any agreement made by such
indemnifying party pursuant hereto.
(b) GlobalCenter hereby acknowledges and agrees that, if the
transactions contemplated hereby close, its sole recourse, absent fraud, shall
be to the Escrow Fund.
(c) The obligations of ISI are more fully set forth in the Escrow
Agreement attached hereto as Exhibit E.
----------
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Board of Director and Stockholder Approval. This Agreement, the
------------------------------------------
Merger and other transactions contemplated hereby shall have been approved and
adopted by the requisite vote of the board of directors and stockholders of each
of ISI, GlobalCenter and Merger Sub.
(b) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by any Governmental Entity seeking any of the foregoing be
pending; nor shall there be any action taken, or any statute, rule, regulation
or order enacted, entered, enforced or deemed applicable to the Merger, which
makes the consummation of the Merger illegal.
(c) Tax Opinions. ISI shall have received a written opinion from
------------
Venture Law Group, A Professional Corporation, counsel to ISI, to the effect
that the Merger will constitute a tax-free reorganization within the meaning of
Section 368(a) of the Code, and GlobalCenter shall have received a written
opinion from Wilson Sonsini Goodrich & Rosati, P.C., counsel to GlobalCenter, to
the effect that the Merger will constitute a tax-free reorganization within the
meaning of Section 368(a) of the Code. In rendering such opinions, counsel may
rely on (and to the extent reasonably required, the parties and their respective
stockholders shall make) reasonable representations related thereto.
(d) Intentionally Left Blank.
------------------------
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<PAGE>
(e) State Securities Laws. GlobalCenter shall have obtained all
---------------------
necessary securities law permits and qualifications, or secured an exemption
therefrom, required by any state for the consummation of the Merger and the
delivery of GlobalCenter Stock in connection therewith. In securing any
required permits, qualifications or exemptions therefrom, GlobalCenter may rely
on the representations made by ISI stockholders in the Investment Representation
Statements attached hereto as Exhibit D.
---------
(f) Board Membership. (i) The individuals listed on Schedule 1.5
---------------- ------------
hereto shall have been elected to the Board of Directors of the Surviving
Corporation.
(ii) Daniel Rasmussen shall have been elected to the Board of
Directors of GlobalCenter.
(g) Affiliates. (i) ISI shall have delivered to GlobalCenter a
----------
certificate of an officer of ISI on behalf of ISI identifying all persons who
are, in the view of ISI at the time of the ISI Stockholders' Meeting convened in
accordance with Section 5.1 hereto, "affiliates" of ISI as that term is used in
-----------
paragraphs (c) and (d) of Rule 145 under the Securities Action of 1933, as
amended (the "ISI Affiliates").
(ii) GlobalCenter shall have delivered to ISI a certificate of an
officer of GlobalCenter on behalf of GlobalCenter identifying all persons who
are "affiliates" of GlobalCenter as that term is used in paragraphs (c) and (d)
of Rule 145 under the Securities Action of 1933, as amended (the "GlobalCenter
Affiliates," and together with the ISI Affiliates, the "Affiliates").
(h) Affiliate Agreements. (i) ISI shall have delivered to
--------------------
GlobalCenter an executed Affiliate Agreement in the form attached hereto as
Exhibit E for each of the ISI Affiliates.
- ---------
(ii) GlobalCenter shall have delivered to ISI an executed Affiliate
Agreement in the form attached hereto as Exhibit E for each of the GlobalCenter
---------
Affiliates.
(i) Escrow Agreement. An escrow agreement in the form attached hereto
----------------
as Exhibit E shall have been executed and delivered by each of the signatories
------- -
contemplated thereby and shall be in full force and effect.
6.2 Additional Conditions to Obligations of ISI. The obligations of ISI
-------------------------------------------
to consummate and effect this Agreement and the transactions contemplated hereby
shall be subject to the satisfaction at or prior to the Effective Time of each
of the following conditions, any of which may be waived, in writing, exclusively
by ISI:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of GlobalCenter and Merger Sub in this Agreement shall be true
and correct in all material respects on and as of the Effective Time as though
such representations and warranties were made on and as of such time, and each
of GlobalCenter and Merger Sub shall have performed and complied in all material
respects with all covenants, obligations and conditions of this Agreement
required to be performed and complied with by it as of the Effective Time.
(b) Certificate of GlobalCenter. ISI shall have been provided with a
---------------------------
certificate executed on behalf of GlobalCenter by its President and its Chief
Financial Officer or Treasurer to the
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<PAGE>
effect that, as of the Effective Time (i) all representations and warranties
made by GlobalCenter and Merger Sub under this Agreement are true and correct in
all material respects; and (ii) all covenants, obligations and conditions of
this Agreement to be performed by GlobalCenter and Merger Sub on or before such
date have been so performed in all material respects.
(c) Third Party Consents. Any and all consents, waivers and approvals
--------------------
required from third parties relating to contracts and agreements of GlobalCenter
or Merger Sub so that the Merger and other transactions contemplated hereby do
not adversely affect the rights of, and benefits to, GlobalCenter thereunder
(including, without limitation, all consents, waivers and approvals set out on
Schedule 5.5 hereto) shall have been obtained.
- ------------
(d) Satisfactory Form of Legal Matters. The form, scope and substance
----------------------------------
of all legal matters contemplated hereby and all closing documents and other
papers delivered hereunder shall be reasonably acceptable to counsel to ISI.
Each party shall have received from the other parties documents reasonably
requested and reasonably acceptable to such party.
(e) Legal Opinion. ISI shall have received a legal opinion from
-------------
Wilson Sonsini Goodrich & Rosati, P.C., counsel to GlobalCenter and Merger Sub,
in form and substance reasonably satisfactory to ISI and its counsel.
(f) GlobalCenter shall have entered into Employment Agreements with
Dan Rasmussen and Jonathan Heiliger.
(g) GlobalCenter shall have entered into offer letters with the
following individuals: Scott Santana, Dave Moroney, Scott Nelson, and David
Graziano.
(h) Holders of shares of ISI Stock shall be granted registration
rights pursuant to Amendment No. 1 to the Stockholders' Agreement in the form
attached hereto as Exhibit G.
---------
6.3 Additional Conditions to the Obligations of GlobalCenter and Merger
-------------------------------------------------------------------
Sub. The obligations of GlobalCenter and Merger Sub to consummate and effect
- ---
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, exclusively by GlobalCenter:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of ISI in this Agreement shall be true and correct in all
material respects on and as of the Effective Time as though such representations
and warranties were made on and as of such time, and ISI shall have performed
and complied in all material respects with all covenants, obligations and
conditions of this Agreement required to be performed and complied with by it as
of the Effective Time.
(b) Certificate of ISI. GlobalCenter shall have been provided with a
------------------
certificate executed on behalf of ISI by its President and Chief Financial
Officer to the effect that, as of the Effective Time (i) all representations and
warranties made by ISI under this Agreement are true and complete in all
material respects; and (ii) all covenants, obligations and conditions of this
Agreement to be performed by ISI on or before such date have been so performed
in all material respects.
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<PAGE>
(c) Third Party Consents. Any and all consents, waivers and approvals
--------------------
required from third parties relating to the contracts and agreements of ISI so
that the Merger and other transactions contemplated hereby do not adversely
affect the rights of, and benefits to, GlobalCenter or the Surviving Corporation
thereunder (including, without limitation, all consents, waivers and approvals
set out on Schedule 5.5) shall have been obtained.
------------
(d) Satisfactory Form of Legal Matters. The form, scope and substance
----------------------------------
of all legal matters contemplated hereby and all closing documents and other
papers delivered hereunder shall be reasonably acceptable to GlobalCenter's
counsel. Each party shall have received from the other parties documents
reasonably requested and reasonably acceptable to such party.
(e) Legal Opinion. GlobalCenter shall have received a legal opinion
-------------
from Venture Law Group, P.C., counsel to ISI, in form and substance reasonably
satisfactory to GlobalCenter and its counsel.
(f) No Dissenters. Holders of no more than 10% of the outstanding ISI
-------------
Common Stock (with ISI Preferred Stock treated on an as-if-converted into ISI
Common Stock basis) shall have exercised, nor shall they continue to have the
right to exercise, appraisal rights with respect to the transactions
contemplated by this Agreement provided, however, that the allowable percentage
of dissenting shares shall be reduced to the extent necessary to ensure that the
former stockholders of ISI exchange in the Merger, for shares of GlobalCenter
Common Stock, (and not for cash), an amount of ISI Common Stock which
constitutes control of ISI (within the meaning of Section 368(C) of the Code).
(g) Investment Representation Statements. All shareholders of ISI who
------------------------------------
are to receive any shares of GlobalCenter Stock in connection with the Merger
shall have executed and delivered to GlobalCenter Investment Representation
Statements providing for certain representations and agreements and agreeing to
be bound by certain terms of this Agreement in connection with resales of
GlobalCenter Stock.
(h) Resignation of Directors and Officers of ISI. The current members
--------------------------------------------
of the Board of Directors of ISI not listed on Schedule 1.5 hereto shall have
------------
resigned their respective positions as directors and officers of ISI as of the
Closing.
(i) FIRPTA Compliance. At the Closing, ISI shall have delivered to
-----------------
GlobalCenter a properly executed statement conforming to the requirements of
Treasury Regulation Sections 1.897-2(h)(1)(i) and 1.1445-2(c)(3).
(j) Termination of Agreements. The Co-sale Agreement dated November
-------------------------
15, 1997 among the Company and certain stockholders of the Company, the Voting
Agreement dated November 15, 1997 among certain stockholders of the Company and
the Investors' Rights Agreement dated November 15, 1997 among the Company and
certain stockholders of the Company shall be terminated prior to, or effective
at, the Closing.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW;
TERMINATION, AMENDMENT AND WAIVER
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7.1 Survival of Representations and Warranties. All covenants to be
------------------------------------------
performed prior to the Effective Time, representations and warranties in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Merger.
7.2 Escrow Arrangements. Concurrent with the Effective Time, GlobalCenter
-------------------
Common Stock shall be placed in an escrow fund (the "Escrow Fund"), to be
governed by the terms of the Escrow Agreement attached hereto as Exhibit F. The
-------
Escrow Fund shall be available to compensate GlobalCenter and its affiliates for
losses incurred by GlobalCenter and its affiliates in connection with breaches
of representations, warranties, or covenants contained herein or delivered
pursuant hereto. The terms and conditions of the Escrow Fund shall be set forth
more fully in the Escrow Agreement.
7.3 Termination. This Agreement may be terminated and the Merger
-----------
abandoned at any time prior to the Effective Time:
(a) by mutual consent of ISI and GlobalCenter;
(b) by GlobalCenter if it is not in material breach of its obligations
under this Agreement, and there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of ISI and such breach has not been cured within 15 days after notice
to ISI.
(c) by ISI if it is not in material breach of its respective
obligations under this Agreement and there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of GlobalCenter or Merger Sub and such breach has not been cured within
15 days after notice to GlobalCenter;
(d) by any party hereto if: (i) the Closing has not occurred by April
30, 1997, (ii) there shall be a final nonappealable order of a federal or state
court in effect preventing consummation of the Merger; (iii) there shall be any
action taken, or any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any Governmental Entity which would
make consummation of the Merger illegal; or (iv) there shall be any action
taken, or any statute, rule, regulation or order enacted, promulgated or issued
or deemed applicable to the Merger by any Governmental Entity, which would (A)
prohibit GlobalCenter's or ISI's ownership or operation of all or a material
portion of the business of ISI, or compel GlobalCenter or ISI to dispose of or
hold separate all or a material portion of the business or assets of ISI or
GlobalCenter as a result of the Merger or (B) render GlobalCenter, Merger Sub or
ISI unable to consummate the Merger, except for any waiting period provisions.
Where action is taken to terminate this Agreement pursuant to Section 7.3,
it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
7.4 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 7.3, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of GlobalCenter, Merger Sub or
ISI or their respective officers, directors or shareholders, except if such
termination results from the breach by a party hereto of any of its
representations, warranties, covenants or agreements set forth in this
Agreement.
-30-
<PAGE>
7.5 Amendment. This Agreement may be amended by the parties hereto at any
---------
time before or after approval of matters presented in connection with the Merger
by the stockholders of those parties required by applicable law to so approve
but, after any such stockholder approval, no amendment shall be made which by
law requires the further approval of stockholders of a party without obtaining
such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
7.6 Extension; Waiver. At any time prior to the Effective Time, any party
-----------------
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
7.7 Break-Up Fee. In the event that either party shall elect to terminate
------------
this Agreement and not to proceed with the Merger pursuant to Sections 7.3(b) or
7.3(c) then the non-terminating party shall pay to the terminating party one
hundred thousand dollars ($100,000) (the "Break-Up Fee"). The parties hereto
acknowledge that the damages incurred by virtue of a termination of this
Agreement are difficult to calculate and therefore agree that the Break-Up Fee
shall be liquidated damages for any such termination, absent fraud.
ARTICLE VII
GENERAL PROVISIONS
8.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certi fied mail (return receipt
requested) or sent via telecopy to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a) if to GlobalCenter or Merger Sub, to:
GlobalCenter, Inc.
1154 East Arques Avenue
Sunnyvale, CA 94086
Attention: Chief Executive Officer
Fax: (408) 328-4806
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Alan K. Austin
Fax: (415) 493-6811
(b) if to ISI, to:
-31-
<PAGE>
I-Systems, Inc.
1111 Karlstad Drive
Sunnyvale, CA 94089
Attention: Chief Executive Officer
Fax: (408) 541-9878
with a copy to:
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, CA 94025
Attn: Jeffrey Y. Suto
Fax: (415) 233-8386
8.2 Interpretation. When a reference is made in this Agreement to
--------------
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without limi
tation." The table of contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. As used in this Agreement, the phrase "to the
best of [a party's] knowledge," "to [a party's] knowledge," "[a party] is not
aware," and similar phrases shall mean the knowledge of such party and of the
officers and directors of such party after careful consideration of the matters
set forth in the representation that is so qualified and a diligent review of
all files, documents, agreements and other materials in such person's possession
or subject to his or her control. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.4 Miscellaneous. This Agreement, the Exhibits hereto and the documents,
-------------
instruments and ancillary agreements among the respective parties to each
thereof (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof; (b) are not intended to confer upon any person other than the respective
parties hereto and to each thereof any rights or remedies hereunder; and (c)
shall not be assigned by operation of law or otherwise except as otherwise
specifically provided.
8.5 Governing Law. This Agreement shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of the State of
Delaware.
-32-
<PAGE>
8.6 GlobalCenter Guarantee. The representations, warranties and covenants
----------------------
of each GlobalCenter Party are hereby guaranteed by GlobalCenter to the same
extent as if such representations, warranties and covenants were made by
GlobalCenter.
-33-
<PAGE>
IN WITNESS WHEREOF, GlobalCenter, Merger Sub and ISI have caused this
Agreement to be signed by their duly authorized respective officers, all as of
the date first written above.
GLOBALCENTER, INC.
By: /s/ Douglas T. Hickey
_____________________________________
Title: CEO
__________________________________
GLOBALCENTER ACQUISITION CORPORATION
By: /s/ Douglas T. Hickey
_____________________________________
Title:__________________________________
I-SYSTEMS, INC.
By: /s/ Dan Rasmussen
_____________________________________
Title: President
__________________________________
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
<PAGE>
EXHIBIT 10.8
PROMISSORY NOTE
---------------
$500,000.00 Sunnyvale, California
March 21, 1997
FOR VALUE RECEIVED, the undersigned, Nathan Raciborski ("Borrower")
hereby promises to pay to GlobalCenter, Inc., a Delaware corporation (the
"Company"), the principal sum of Five Hundred Thousand and No/100 Dollars
($500,000.00), with interest thereon at the rate equal to the applicable federal
rate as published by the Internal Revenue Service from time to time, at the
principal offices of the Company, upon the following terms and conditions:
The principal amount of this Note and all accrued but unpaid interest
from the date hereof shall be due on March 31, 2002 (the "Original Maturity
Date").
On the Original Maturity Date, if there is not a publicly traded
market for the Company's common stock, or if the value of the common stock is
less than $5.00 per share (as adjusted for any stock splits, stock dividends or
other recapitalization), then at the option of the undersigned, the principal
amount of this Note and all accrued but unpaid interest from the date hereof
shall become due and payable on March 31, 2007
The undersigned shall have the right to prepay at any time, and from
time to time, without premium or penalty all or any portion of the principal
and/or accrued interest hereunder.
The undersigned hereby waives presentment, protest, demand for
payment, notice of dishonor and all other notices or demands in connection with
the delivery, acceptance, performance, default or endorsement of this Note.
This Note is originally secured by a pledge of two hundred thousand
(200,000) Common Shares of the Company pursuant to a Stock Pledge Agreement of
even date herewith which is on file with the Secretary of the Company.
The undersigned agrees to pay any costs of collection of this Note,
including without limitation reasonable attorneys' fees and costs, in the event
it is not fully paid when due.
This Note has been made and delivered in the State of Arizona and
shall be construed in accordance with, and all actions arising hereunder shall
be governed by, the laws of the State of Arizona.
March 21, 1997
/s/ Nathan Raciborski
_______________________________________
Nathan Raciborski
<PAGE>
EXHIBIT 10.10
GLOBALCENTER, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this _____ day
of October, 1997, by and between GlobalCenter, Inc., a Delaware corporation (the
"Company"), and _________________ ("Indemnitee").
WHEREAS the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited; and
WHEREAS the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, in consideration for Indemnitee's services as an officer or
director of the Company, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit, proceeding or any alternative
dispute resolution mechanism, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that Indemnitee is or was a director, officer, employee or agent of
the Company, or any subsidiary of the Company, or by reason of the fact that
Indemnitee is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settle ment, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
---------------
create a presumption that Indemnitee did not act in good faith and in a manner
which Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, or, with respect to any criminal action or proceeding,
create a presumption that Indemnitee's conduct was unlawful.
<PAGE>
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, or by reason
of the fact that Indemnitee is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
and, to the fullest extent permitted by law, amounts paid in settlement actually
and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or suit if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, except that no indemnification shall be made in
respect of any claim, issue or matter as to which Indemnitee shall have been
adjudged to be liable to the Company unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery of the State of Delaware or such other court shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Subsections (a) and (b) of this Section 1, or in
defense of any claim, issue or matter therein, Indemnitee shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
Indemnitee in connection therewith.
2. Agreement to Serve. In consideration of the protection afforded by
------------------
this Agreement, Indemnitee agrees to continue to serve in his capacity at the
will of the Company (or under separate agreement, if such agreement exists) so
long as he is duly appointed or elected and qualified in accordance with the
applicable provisions of the Bylaws of the Company or any subsidiary of the
Company or until such time as he tenders his resignation in writing. Nothing
contained in this Agreement is intended to create in Indemnitee any right to
continued employment.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any
such action, suit or proceeding). Indemnitee hereby undertakes to repay such
amounts advanced only if, and to the extent that, it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Company as
authorized hereby. The advances to be made hereunder shall be paid by the
Company to Indemnitee within thirty (30) days following delivery of a written
request therefor by Indemnitee to the Company.
-2-
<PAGE>
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his right to be indemnified under this Agreement, give
the Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the President of the
Company at the address shown on the signature page of this Agreement (or such
other address as the Company shall designate in writing to Indemnitee). Notice
shall be deemed received three business days after the date postmarked if sent
by domestic certified or registered mail, properly addressed, five business days
if sent by airmail to a country outside of North America; otherwise notice shall
be deemed received when such notice shall actually be received by the Company.
In addition, Indemnitee shall give the Company such information and cooperation
as it may reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 and this Section 3 shall be made no later than thirty (30) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within thirty (30) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 14 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed. However, Indemnitee
shall be entitled to receive interim payments of expenses pursuant to Subsection
3(a) unless and until such defense may be finally adjudicated by court order or
judgment from which no further right of appeal exists. It is the parties'
intention that if the Company contests Indemnitee's right to indemnification,
the question of Indemnitee's right to indemnification shall be for the court to
decide, and neither the failure of the Company (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) to have made a determination that
indemnification of Indemnitee is proper in the circumstances because Indemnitee
has met the applicable standard of conduct required by applicable law, nor an
actual determination by the Company (including it Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) that Indemnitee has not met such applicable standard of
conduct, shall create a presumption that Indemnitee has or has not met the
applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
-3-
<PAGE>
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election to do so. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to employ his counsel in any such proceeding at Indemnitee's expense; and
(ii) if (A) the employment of counsel by Indemnitee has been previously
authorized by the Company, (B) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and Indemnitee in the
conduct of any such defense, or (C) the Company shall not, in fact, have
employed counsel to assume the defense of such proceeding, then the fees and
expenses of Indemnitee's counsel shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be, ipso facto, within
---- -----
the purview of Indemnitee's rights and Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested Directors, the General Corporation Law of
the State of Delaware, or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while holding such office. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity even
though he may have ceased to serve in such capacity at the time of any action,
suit or other covered proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by him in the investigation, defense, appeal or settlement of any civil
or criminal action, suit or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
-4-
<PAGE>
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from
----------------------------------------
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
policies of director and officer liability insurance, Indemnitee shall be named
as an insured in such a manner as to provide Indemnitee the same rights and
benefits as are accorded to the most favorably insured of the Company's
directors, if Indemnitee is a director; or of the Company's officers, if
Indemnitee is not a director of the Company but is an officer. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
-----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such suit; or
-5-
<PAGE>
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company.
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
opposed to the best interests of the Company" as referred to in this Agreement.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
-6-
<PAGE>
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
14. Notice. All notices, requests, demands and other communications under
-------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
------------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
16. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of Delaware, as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware without regard to the conflict of law principles thereof.
17. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
-------- -------
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
-7-
<PAGE>
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
GLOBALCENTER, INC.
By:_____________________________
Its:____________________________
AGREED TO AND ACCEPTED:
INDEMNITEE:
______________________________
(signature)
Name: ____________________
Address: ____________________
____________________
____________________
-9-
<PAGE>
EXHIBIT 10.3
Sub-Lease Agreement
This sub-lease agreement made on 1 day of May 1996 between
-------- ---
Global Village Communication Inc. (the "Sub-lessor") and Global Center, Inc.
(the "Sub-lessee"), both corporations being Delaware companies. The effective
date for this Sub-Lease is April 1, 1996.
<TABLE>
<CAPTION>
<S> <C>
1) Global Center, Inc. accepts and will abide by the terms and conditions stated on the original lease signed by
Global Village Communication, Inc. on the 14th day of July, 1994. A copy of that Lease and the First
Amendment dated June 22, 1995 are attached.
2) The Term of the sub-lease is for 36 months from the effective date of the agreement.
3) The Rent shall be $12,860.75 per month for 36 months.
----------
4) The monthly common expenses will be distributed on the basis of total Square Feet used by Global Center as a
percentage of the total Square Feet leased by Global Village Communication. As of this lease date the numbers
are:
</TABLE>
<TABLE>
<S> <C>
Total Square Ft. Leased By Global Village. 128,153.6
Total Global Center Sub-Leased per this leased 15,750.0
Global Centers Percentage 12.29%
</TABLE>
The common expenses average approximately $33,925.00 per quarter of
which Global Centers portion would be approximately $4,169.00 per quarter.
These amounts will be paid monthly based on this average ($1,389.67) and
adjusted quarterly against the actual charges incurred by the landlord on
behalf of the lessee and sub-lessee. Global Village Communication will
provide Global Center with a reconciliation of the aforementioned common
expenses at the time they are provided by the landlord and any additional
sums due Global Village Communication are required to be paid within 15 days
by Global Center to Global Village Communication. If the actual amounts
incurred are less than the quarterly average, the amount overpaid will be
carried over to the following quarter.
TENANT
Global Village Communication, Inc.
/s/ BERNARD MILLER 5/23/96
- --------------------------------------- -----------------
Name Date
Director and Chief Information Officer
- ---------------------------------------
Title
SUB-LESSEE
Global Center, Inc.
/s/ REX CARDINALE 5/23/96
- --------------------------------------- -----------------
Name Date
President
- ---------------------------------------
Title
LANDLORD
Hermnan Christensen, Jr. And Raymond P. Christensen
/s/ HERMAN CHRISTENSEN, JR. 7/10/96
- --------------------------------------- -----------------
Name Date
/s/ RAYMOND P. CHRISTENSEN 7/10/96
- --------------------------------------- -----------------
Name Date
<PAGE>
LEASE AGREEMENT
This Lease Agreement is made and entered into by and between HERMAN
CHRISTENSEN, JR. and RAYMOND P. CHRISTENSEN, jointly, the Landlord, and GLOBAL
VILLAGE COMMUNICATION, INC. a Delaware Corporation Tenant as of this 14th day of
----
July, 1994.
1. DEMISE: In consideration of the rents and all other charges and payments
payable by Tenant, and for the agreements, terms and conditions to be performed
by Tenant in this Lease, LANDLORD DOES HEREBY LEASE TO TENANT, AND TENANT DOES
HEREBY HIRE AND TAKE FROM LANDLORD, the Premises described below (the
"Premises"), upon the agreements, terms and conditions of this Lease for the
Term hereinafter stated.
2. PREMISES: The Premises demised by this Lease are approximately 73,648.6
square feet of space in the building at 1144 East Arques Avenue, Sunnyvale,
California as shown on attached Exhibit A being in "as is" condition together
---------
with the outside areas to the extent set forth in paragraph 44 below and parking
set forth in paragraph 45 below. No easement for light or air is incorporated
in the Premises.
The Premises demised by this Lease shall also include the Tenant
Improvements on the terms and conditions set forth.
3. TERM: The term of this Lease (the "Term") shall be for the period of 66
months commencing on October 15, 1994.
Early possession of the Premises for the purpose of constructing tenant
improvements shall be on July 15, 1994, and subject to Addendum Two.
4. RENT:
(a) Base Rent. Tenant shall pay to Landlord, in advance on the first day of
---------
each calendar month, without further notice or demand and without offset or
deduction, the monthly installments of rent specified below:
<TABLE>
<CAPTION>
Full Calendar Months Base Rental/Month/NNN
<S> <C>
1-10 $24,304.04
11-22 $56,980.76
23-34 $59,887.94
35-46 $63,570.37
47-57 $67,349.71
58-66 $69,481.64
</TABLE>
However, in order to have rent payable on the first day of each calendar
month, upon execution of this Lease, Tenant shall pay to Landlord base rental
and additional rent for the period October 15 through October 31, 1994 and the
Security Deposit hereafter set forth.
b) Additional Rent. In addition to the Base Rent, Tenant shall pay to
---------------
Landlord, in accordance with this Paragraph 4, Tenant's proportionate share of
the following items related to the Building, the Property, and/or the Outside
Areas (as defined in Paragraph 4 (b) (3)) (the Additional Rent").
(1) Taxes and Assessments. All real estate taxes and assessments
---------------------
applicable to the Term. Real estate taxes and assessments shall include any form
of assessment, license, fee, tax, levy, penalty (if a result of Tenant's
delinquency), or tax (other than net income, estate, succession,
<PAGE>
inheritance, transfer or franchise taxes), imposed by any authority having the
direct or indirect power to tax or by any city, county, state or federal
government or any improvement or other district or division thereof, whether
such tax is (i) determined by the area of the Premises, the Building or the
Property, or any part thereof or the Rent and other sums payable hereunder by
Tenant, including, but not limited to, any gross income or excise tax levied by
any of the foregoing authorities with respect to receipt of Rent or other sums
due under this Lease; (ii) upon any legal or equitable interest of Landlord in
the Premises, the Building or the Property, or any part thereof; (iii) upon this
transaction or any document to which Tenant is a party creating or transferring
any interest in the Premises, the Building or the Property; (iv) levied or
assessed in lieu of, in substitution for, or in addition to, existing or
additional taxes against the Premises, the Building or the Property, whether or
not now customary or within the contemplation of the parties; or (v) surcharge
against the parking area. Tenant and Landlord acknowledge that Proposition 13
was adopted by the voters of the State of California in the June, 1978 election
and that assessments, taxes, fees, levies and charges may be imposed by
governmental agencies for such purposes as fire protection, street, sidewalk,
road, utility construction and maintenance, refuse removal and for other
governmental services which may formerly have been provided without charge to
property owners or occupants. It is the intention of the parties that all new
and increased assessments, taxes, fees, levies and charges due to Proposition 13
or any other cause are to be included within the definition of real property
taxes for purposes of this Lease.
(2) Insurance. All insurance premiums, including premiums for "all
---------
risk", fire and extended coverage (including earthquake endorsements) insurance
for the Building, public liability insurance, other insurance as Landlord deems
necessary, and any deductibles paid under policies of any such insurance.
(3) Outside Areas Expenses. All costs to operate, manage, maintain,
----------------------
repair, supervise, insure (including provision of public liability insurance)
and administer the areas outside of the Building ("Outside Areas"), including
but not limited to watering, fertilizing, landscaping, tree work, spraying,
window washing of exterior window surfaces, plant and tree replacement,
lighting, building alarm system, repair of paving and sidewalks, striping,
clean-up and sweeping.
(4) Parking Charges. Any parking charges or other costs levied,
---------------
assessed or imposed by, or at the direction of, or resulting from statutes or
regulations, or interpretations thereof, promulgated by any governmental
authority or insurer in connection with the use or occupancy of the Building,
the Outside Areas and/or the Property.
(5) Maintenance and Repair of Building. All costs to maintain, repair,
----------------------------------
and replace the building, including structural portions of the roof, the roof
coverings, the foundations, the floor slab, the load bearing walls, and the
exterior walls (including the painting thereof) of the Building, and all costs
to maintain, repair and replace all utility and plumbing systems, fixtures and
equipment located outside the Building. Notwithstanding said provisions, the
cost of any improvement or replacement to the building under this sub-
paragraph, which exceeds $25,000.00 in cost and which has a useful life of more
than 5 years, shall be amortized on a straight-line basis together with interest
thereon at the rate of 8-1/2% per annum, and only the amortized portion of such
cost and interest shall be included in costs recoverable by Landlord. Also
notwithstanding anything to the contrary, Landlord shall not recover any costs
in excess of $5,000.00 per repair or replacement incurred in maintaining,
repairing or replacing the exterior load bearing walls, foundation, and
structural components of the roof. The
2
<PAGE>
portion of any such costs up to $5,000.00 per repair or replacement, shall be
passed through to Tenant.
(6) Management and Administration. All costs for management and
-----------------------------
administration of the Building and the Property, including a property management
fee, accounting, auditing, billing, postage, employee benefits, payroll taxes,
etc. All such expenses shall be reasonable and in accordance with good
management practices and shall not exceed 1% of annual Base Rent.
(c) Allocation of Costs.
-------------------
(1) If said real estate taxes and assessments are assessed against
the entire building and building site, each of greater extent than the
"Premises", the taxes and assessments allocated to the leased premises shall be
pro-rated on a square footage or other equitable basis, as calculated by
Landlord, such as the tax assessor's relative valuations. If the assessed value
of the Landlords premises is increased by the inclusion therein of a value
placed upon the personal property or improvements of the Tenant, and if the
Landlord pays the taxes based on such increased assessment, the Tenant shall,
upon demand, repay to the Landlord the portion of such taxes resulting from
such increase in assessment. In the event the Premises and any improvements
installed therein by Tenant or Landlord are valued by the assessor
disproportionately higher or lower than those of other Tenants in the building
or parcel, Tenant's share of the property taxes shall be readjusted upwards or
downwards accordingly, and Tenant agrees to such readjusted share. Such
determination shall be made by Landlord from the respective valuations assigned
in the assessor's work sheet or such other information as may be reasonably
available. Landlord's reasonable determination thereof, in good faith, shall be
conclusive. Increase in real estate taxes due to reappraisal because of transfer
of Landlord's interest to a third party, shall not be charged to Tenant under
this sub-paragraph (c) (1).
(2) Insurance, Outside Areas Expenses, Parking Charges, Maintenance
and repair of building, and management and administration expense shall be
charged to Tenant in proportion to that portion of the total rentable building
area on the site rented by Tenant hereunder. Until further buildings on the site
are completed, Tenant's share shall be calculated as 73,648.6 square
feet/163,706 square feet or 44.99%. Tenants share of expenses for insurance,
outside area and management and administration shall not exceed the amounts
shown below for the following periods:
<TABLE>
<S> <C>
October 15, 1994-December 31, 1995 - $64,074.28
January 1, 1996-December 31, 1996 - $55,678.34
January 1, 1997-December 31, 1997 - $58,462.26
January 1, 1998-December 31, 1998 - $61,385.37
January 1, 1999-December 31, 1999 - $64,454.64
January 1, 2000-April 14, 2000 - $19,739.23
</TABLE>
Any excess of Tenant's share of expenses over said amounts, shall be carried
forward to the next succeeding year.
(d) Payment of Additional Rent.
--------------------------
(1) Upon execution of this Lease, Landlord shall submit to
Tenant an estimate of monthly Additional Rent for the period between October 15,
1994 and the following December 31 and Tenant shall pay such estimated
Additional Rent in advance on a monthly basis concurrently with the payment of
the Base Rent. Tenant shall continue to make said monthly payments until
notified by Landlord of a change therein. By March
3
<PAGE>
1 of each calendar year, Landlord shall endeavor to provide to Tenant a
statement showing the actual Additional Rent due to Landlord for the prior
calendar year, prorated from the Commencement Date during the first year. If the
total of the monthly payments of Additional Rent that Tenant has made for the
prior calendar year (or portion thereof during which this Lease was in effect)
is less than the actual Additional Rent chargeable to Tenant for such prior
calendar year, then Tenant shall pay the difference in a lump sum within thirty
(30) days after receipt of such statement from Landlord. Any overpayment by
Tenant of Additional Rent for the prior calendar year shall be promptly refunded
to Tenant no later than April 15.
(2) The actual Additional Rent for the prior calendar year
shall be used for purposes of calculating Tenant's monthly payment of estimated
Additional Rent for the current year, subject to adjustment as provided above,
except that in any year in which resurfacing of the parking area or material
roof repairs are planned, Landlord may include the estimated cost of such work
in the estimated monthly Additional Rent. Landlord shall make final
determination of Additional Rent for the year in which this Lease terminates as
soon as possible after termination. Tenant shall remain liable for payment of
any amount due to Landlord in excess of the estimated Additional Rent previously
paid by Tenant, and, conversely, Landlord shall promptly return to Tenant any
overpayment, even though the Term has expired and Tenant has vacated the
Premises. Failure of Landlord to submit statements as called for herein shall
not be deemed a waiver of Tenant's obligation to pay Additional Rent as herein
provided. Tenant shall have the right to review and audit Landlord's records
relating to Additional Rent at Tenant's expense, at Landlord's business office,
provided Tenant has given Landlord reasonable prior notice.
(e) General Payment Terms. The Base Rent, Additional Rent and all
---------------------
other sums payable by Tenant to Landlord hereunder are referred to as the
"Rent". All Rent shall be paid without deduction, offset or abatement in lawful
money of the United States of America. Rent for any partial month during the
Term shall be prorated for the portion thereof falling due within the Term.
5. LATE CHARGE: Notwithstanding any other provision of this Lease,
Tenant hereby acknowledges that late payment to Landlord of Rent, or other
amounts due hereunder will cause Landlord to incur costs not contemplated by
this Lease, the exact amount of which will be extremely difficult to ascertain.
If any Rent or other sums due from Tenant are not received by Landlord or by
Landlord's designated agent within ten (10) days after their due date, then
Tenant shall pay to Landlord a late charge equal to six percent (6%) of such
overdue amount, plus any attorneys' fees incurred by Landlord by reason of
Tenant's failure to pay Rent and/or other charges when due hereunder. Landlord
and Tenant hereby agree that such late charges represent a fair and reasonable
estimate of the cost that Landlord will incur by reason of Tenant's late
payment. Landlord's acceptance of such late charges shall not constitute a
waiver of Tenant's default with respect to such overdue amount or estop Landlord
from exercising any of the other rights and remedies granted under this Lease.
Initials:
Landlord ^^ Tenant ^^
---- ----
6. SECURITY DEPOSIT: Concurrently with Tenant's execution of the
Lease, Tenant shall deposit with Landlord the Security Deposit in the amount of
$57,300. as security for the full and faithful performance of each and every
term, covenant and condition of this Lease. Landlord may use, apply or retain
the whole or any part of the Security Deposit as may be reasonably necessary (a)
to remedy Tenant's default in the payment of any Rent, (b) to repair damage to
the Premises caused by Tenant, (c) to clean the
4
<PAGE>
Premises upon termination of this Lease, (d) to reimburse Landlord for the
payment of any amount which Landlord may reasonably spend or be required to
spend by reason of Tenant's default, or (e) to compensate Landlord for any other
loss or damage which Landlord may suffer by reason of Tenant's default. Should
Tenant faithfully and fully comply with all of the terms, covenants and
conditions of this Lease, within thirty (30) days following the expiration of
the Term, the Security Deposit or any balance thereof shall be returned to
Tenant or, at the option of Landlord, to the last assignee of Tenant's interest
in this Lease. Landlord shall deposit said Security Deposit in a savings account
in a bank or savings and loan institution, and Tenant will be entitled to
interest thereon at the rate paid by the savings institution, payable to Tenant
at the termination of the lease. If Landlord so uses or applies all or any
portion of said deposit, within ten (10) days after written demand therefor
Tenant shall deposit cash with Landlord in an amount sufficient to restore the
Security Deposit to the full extent of the above amount, and Tenant's failure to
do so shall be a default under this Lease. In the event Landlord transfers its
interest in this Lease, Landlord shall transfer the then remaining amount of the
Security Deposit to Landlord's successor in interest, and thereafter Landlord
shall have no further liability to Tenant with respect to such Security Deposit.
7. POSSESSION:
(a) Tenant's Right of Possession. Tenant shall be entitled to
----------------------------
occupancy of the Premises for fixturation commencing at the Early Occupancy
Period (See Addendum Two).
(b) Delay in Delivering Possession. If Landlord cannot deliver
------------------------------
possession of the Premises to Tenant at the commencement of the Term, i.e., on
October 15, 1994, this Lease shall not be void or voidable, nor shall Landlord,
or Landlord's agents be liable to Tenant for any loss or damage resulting
therefrom. Tenant shall not be liable for Rent until Landlord delivers
possession of the Premises to Tenant. The expiration date of the Term shall be
extended by the same number of days that Tenant's possession of the Premises is
delayed.
8. USE OF PREMISES:
(a) Permitted Uses. The Premises shall be used only for R & D, general
--------------
office, sales, administration, shipping/receiving, storage and light
manufacturing, to the extent permitted by governmental regulations. No printed
circuit board manufacture or wafer fabrication shall be permitted, or any
activities involving toxic substances, except that Tenant shall be permitted to
use customary office products and cleansers and minor quantities of cleaners and
solvents in connection with its business, but subject as to such cleaners and
solvents, the prior written consent of Landlord, which shall not be unreasonably
withheld.
(b) Compliance with Governmental Regulations. Tenant shall, at
----------------------------------------
Tenant's expense, faithfully observe and comply with all Municipal, State and
Federal statutes, rules, regulations, ordinances, requirements, and orders, now
in force or which may hereafter be in force pertaining to the Premises or
Tenant's use thereof, including without limitation, any statutes, rules,
regulations, ordinances, requirements, or orders requiring installation of fire
sprinkler systems and removal of asbestos placed on the Premises by Tenant,
whether substantial in cost or otherwise, and all recorded covenants, conditions
and restrictions affecting the Property ("Private Restrictions") now in force or
which may hereafter be in force; provided that no such fixture Private
Restrictions shall materially affect Tenant's use and enjoyment of the Premises
or Property and provided, however, that Tenant shall not be required to make
structural changes to the Premises or Building not related to
5
<PAGE>
Tenant's specific use of the Premises unless the requirement for such changes is
imposed as a result of any improvements or additions made or proposed to be made
at Tenant's request. The judgment of any court of competent jurisdiction, or the
admission of Tenant in any action or proceeding against Tenant, whether Landlord
be a party thereto or not, that Tenant has violated any such rule, regulation,
ordinance, statute or Private Restrictions, shall be conclusive of that fact as
between Landlord and Tenant.
9. ACCEPTANCE OF PREMISES: By execution hereof, Tenant accepts the
Premises as suitable for Tenant's intended use and as being in good and sanitary
operating order, condition and repair, AS IS, and without representation or
warranty by Landlord as to the condition, or use or occupancy which may be made
thereof. Any exceptions to the foregoing must be by written agreement executed
by Landlord and Tenant, and specifically set forth in Addendum One.
10. SURRENDER: Tenant agrees that on the termination of this Lease,
Tenant shall surrender the premises in the same condition as herein agreed they
have been received, damage caused by war, earthquake and ordinary wear and tear
excepted but with carpets vacuumed and other floors "broom clean". At the time
of termination of this lease, Landlord may require any or all of the alterations
or additions installed by Tenant or by Landlord for the benefit of Tenant at
Tenant's request to be removed and the premises restored to their original
condition, whether or not said alterations or additions have become part of the
premises under paragraph 11 hereof. Notwithstanding the foregoing, Tenant shall
not be required to remove the Tenant Improvements made at the commencement of
the Term, and subsequent alterations and improvements unless (I) Tenant has not
requested Landlord's consent to them (whether or not such consent is required)
or, (II) Tenant has requested such consent and Landlord has notified Tenant, at
the time of Tenant's request for consent that such removal will be required.
Upon surrender of the premises, either at the expiration of the term or
otherwise, Lessee agrees to remove all personal property and rubbish from the
premises; but if not so removed by Tenant, Landlord may have the same removed at
Tenant's expense. All property of Tenant not so removed, unless such non-removal
is consented to by Landlord, shall be deemed abandoned by Tenant, provided that
in such event Tenant shall remain liable to Landlord for all costs incurred in
storing and disposing of such abandoned property of Tenant. If the Premises are
not surrendered at the end of the term or sooner termination of this lease,
Tenant hereby indemnifies Landlord against loss or liability resulting from
delay by Tenant in so surrendering the Premises including, without limitation,
any claims made by any succeeding tenant founded on such delay. In the event of
surrender of this lease, Landlord shall have the option of terminating all
existing sub-leases or of assigning said sub-leases to Landlord.
11. ALTERATIONS AND ADDITIONS:
(a) Except for non-structural interior alterations and additions
costing less than $15,000.00 per alteration or addition, Tenant shall not make,
or permit to be made, any alteration or addition to the Premises, or any part
thereof, without the prior written consent of Landlord, such consent not to be
unreasonably withheld. Landlord's failure to disapprove proposed alterations or
additions within 10 working days after Landlord's receipt of the request for
approval, shall be deemed approval. Normal repair and maintenance work shall
not be deemed to be an alteration or addition to the Premises.
(b) Any alteration or addition to the Premises (including those in
subparagraph (a)) shall be at Tenant's sole cost and expense, in compliance with
all applicable laws and requirements requested by Landlord,
6
<PAGE>
and in accordance with plans and specifications submitted in writing to Landlord
and approved as to alterations and additions costing over $15,000.00.
(c) All additions, alterations or improvements, including, but not
limited to, heating, lighting, electrical, air conditioning, fire extinguishers,
lighting fixtures, ballasts, light globes, and tubes, hot water heaters, fixed
partitioning, drapery, wall covering and paneling, built-in cabinet work and
carpeting installations made by Tenant, together with all property that has
become an integral part of the Building, shall at once be and become the
property of Landlord, and shall not be deemed trade fixtures, but any or all are
subject to removal pursuant to paragraph 10 hereof. Notwithstanding the
foregoing, the following Tenant improvements, if paid for by Tenant and not
included in the Tenant Improvement Allowance, namely telecommunication and
computer-related equipment, including specialized flooring, cabling, air
conditioning equipment (for the sole purpose of cooling said computers), may be
removed by Tenant so long as Tenant repairs any damage caused by such removal.
(d) Tenant agrees not to proceed to make such alterations or
additions, notwithstanding consent from Landlord to do so, until five (5) days
after Tenants receipt of such consent.
12. MAINTENANCE OF PREMISES:
(a) Maintenance by Tenant. Throughout the Term, Tenant shall, at its
---------------------
sole expense, (1) keep and maintain in good order, condition, and repair, and to
repair and to replace the Premise, and every part thereof, including glass,
windows, window frames, skylights, door closers, locks, storefronts, interior
and exterior doors and door frames, and the interior of the Premises, (excepting
only those portions of the Building to be maintained by Landlord, as provided in
Paragraph 12(c) below), (2) keep and maintain in good order and condition,
repair, and replace all utility and plumbing systems, fixtures and equipment,
including without limitation, electricity, gas, HVAC, water, and sewer, located
in or on the Premises, and furnish all expendables, including fluorescent tubes,
ballasts, light bulbs, paper goods and soaps, used in the Premises, (3) repair
all damage to the Building or the Outside Areas caused by the negligence or
willful misconduct of Tenant or its agents, employees, contractors or invitees
or other persons, including vandals. Tenant shall not do anything to cause any
damage, deterioration or unsightliness to the Building and the Outside Areas.
Tenant also agrees to maintain and pay for a service contract which meets the
manufacturer's recommendations of the air conditioning and heating systems
installed in the leased premises. Landlord reserves the right to hire a
licensed HVAC contractor to inspect annually the heating and air conditioning
system. If this contractor finds deficiencies in the condition of this system,
Tenant agrees to make all repairs and corrections within a reasonable period of
time at Tenant's expense, and after 30 days notice pay the cost of the
inspections by Landlord's contractor. If no deficiencies are found, Landlord
shall pay for the cost of the inspections.
(b) Landlord's Right to Maintain and Repair at Tenant's Expense.
-----------------------------------------------------------
Notwithstanding the foregoing, Landlord shall have the right, but not the
obligation, at Tenant's expense, to enter the Premises and perform Tenant's
maintenance, repair and replacement work. Within thirty (30) days after invoice
therefor from Landlord, Tenant shall pay all reasonable costs and expenses
incurred by Landlord in connection with such maintenance, repair and replacement
work. Landlord shall have the right to perform Tenant's maintenance, repair and
replacement work only if Tenant fails to take appropriate remedial action within
ten (10) days after receiving written notice from Landlord specifying the nature
of Tenant's failure to comply with
7
<PAGE>
Paragraph 12(a) of the Lease. Notwithstanding the foregoing, if Tenant's failure
to maintain, repair or replace as required by Paragraph 12(a) of the Lease
creates an immediate danger of material further damage to the Premises, Landlord
shall not be required to give the notice to Tenant set forth in the previous
sentence.
(c) Maintenance by Landlord. Subject to the provisions of Paragraphs
------------------------
12(a), 22 and 23, and further subject to Tenant's obligation under Paragraph 4
to reimburse Landlord, in the form of Additional Rent, for Tenant's
Proportionate Share of the cost and expense of the following items, Landlord
agrees to repair and maintain the following items: the structural portions of
the roof and the roof coverings (provided that Tenant installs no additional air
conditioning or other equipment on the roof that damages structural portions of
the roof or the roof coverings), the foundation, the floor slab, the load
bearing walls, and the exterior walls (excluding any glass therein but including
the painting thereof) of the Building; the utility and plumbing systems,
(including fountain and sewer lines), fixtures and equipment located outside the
Building; and the parking areas, landscaping, sprinkler systems, alarm system,
sidewalks, driveways, curbs, and lighting systems in the Outside Areas.
Landlord shall not be required to repair or maintain conditions due to any act,
negligence or omission of Tenant or its agents, contractors, employees or
invitees. Landlord's obligation hereunder to repair and maintain is subject to
the condition precedent that Landlord shall have received written notice of the
need for such repairs and maintenance. Tenant shall promptly report in writing
to Landlord any defective condition known to it which Landlord is required to
repair.
(d) Tenant's Waiver of Rights. Tenant hereby expressly waives all
--------------------------
rights to make repairs at the expense of Landlord or to terminate this Lease, as
provided for in California Civil Code Sections 1941 and 1942, and 1932 (1),
respectively, and any similar or successor statute or law in effect or any
amendment thereof during the Term.
(e) Initial 12 month Maintenance by Landlord. Landlord shall pay at
----------------------------------------
its expense for all repairs to the five Trane gas heaters and the five Trane air
conditioning units on the roof, less a $250.00 deductible for each call for
repairs, for the first twelve months after October 15, 1994, provided Tenant
gives Landlord 24 hours advance written notice of said need for repairs.
Landlord shall have the right to contract for said repairs, within a reasonable
period. Landlord shall also pay at its expense for all repairs to the roof, roof
membrane, and parking lot for the first twelve months after October 15, 1994.
This obligation of Landlord shall also extend to replacement of any
material, if repairs are not feasible.
Excluded from this obligation are any repairs or replacement directly caused
by Tenant, and its construction or misuse of the Premises.
The cost to Landlord Tinder this Paragraph 12(e) shall not be passed through
to Tenant under Paragraphs 4 (b) (5) and 12(a).
13. LANDLORD'S INSURANCE: Landlord shall purchase and keep in force fire,
extended coverage and "all risk" insurance covering the Building, and earthquake
coverage at the option of the Landlord. Tenant shall, at its sole cost and
expense, comply with any and all reasonable requirements pertaining to the
Premises of any insurer necessary for the maintenance of reasonable fire and
public liability insurance, covering building and appurtenances. Landlord, at
Tenant's cost, may maintain "Loss of Rents" insurance, insuring that the Rent
will be paid in a timely manner to Landlord for a period of at least twelve
(12) months if the Premises are destroyed or rendered unusable or inaccessible
by any cause insured against
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under this Lease. The premium for such Loss of Rents insurance shall be
Additional Rent as set forth in Paragraph 4(b) (2).
14. TENANT'S INSURANCE:
(a) Public Liability Insurance. Tenant shall, at Tenant's expense
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secure and keep in force a "broad form" public liability insurance and property
damage policy covering the Premises and the Outside Areas, insuring Tenant, and
naming Landlord and its lenders as additional insureds, against any liability
arising out of the ownership, use, occupancy or maintenance of the Premises and
all Outside Areas. The minimum limit of coverage of such policy shall be in the
amount of not less than One Million Dollars ($1,000,000.) for injury or death of
one person in any one accident or occurrence and in the amount of not less than
One Million Dollars ($1,000,000.) for injury or death of more than one person in
any one accident or occurrence, shall include an extended liability endorsement
providing contractual liability coverage (which shall include coverage for
Tenant's indemnification obligations in this Lease), and shall contain a
severability of interest clause or a cross liability endorsement. Such insurance
shall further insure Landlord and Tenant against liability for property damage
of at least One Million Dollars ($1,000,000.). The limit of any insurance shall
not limit the liability of Tenant hereunder. No policy shall be cancelable or
subject to reduction of coverage, without at least thirty (30) days prior
written notice to Landlord, and loss payable clauses shall be subject to
Landlord's approval. Such policies of insurance shall be issued as primary
policies and not contributing with or in excess of coverage that Landlord may
carry, by an insurance company authorized to do business in the State of
California for the issuance of such type of insurance coverage and rated A:XIII
or better in Best's Key Rating Guide. A copy of said policy or a certificate
-----------------------
evidencing to Landlord's reasonable satisfaction that such insurance is in
effect shall be delivered to Landlord upon commencement of the Term, and
thereafter whenever said policies are renewed or modified, and also whenever
Landlord shall reasonable request.
(b) Personal Property Insurance. Tenant shall maintain in full force
---------------------------
and effect on all of its fixtures and equipment on the Premises, a policy or
policies of fire and extended coverage insurance with standard coverage
endorsement to the extent of the full replacement cost thereof. During the term
of this Lease the proceeds from any such policy or policies of insurance shall
be used for the repair or replacement of the fixtures and equipment so insured.
Landlord shall have no interest in the insurance upon Tenant's equipment and
fixtures and will sign all documents reasonably necessary in connection with the
settlement of any claim or loss by Tenant. Landlord will not carry insurance on
Tenant's possessions. Tenant shall furnish Landlord with a certificate
evidencing to Landlord's reasonable satisfaction that such insurance is
currently in effect; and whenever required, shall satisfy Landlord that such
policy is in full force and effect.
15. INDEMNIFICATION:
(a) Of Landlord. Tenant shall indemnify and hold harmless Landlord and
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agents, employees, partners, shareholders, directors, invitees, and independent
contractors (collectively "Agents") of Landlord against and from any and all
claims, liabilities, judgments, costs, demands, causes of action and expenses
(including, without limitation, reasonable attorneys' fees) arising from (1)
Tenant's use of the Premises or from any activity done, permitted or suffered by
Tenant, its agents, employees or independent contractors in and about the
Premises, the Building or the Property, and (2) any act, neglect, fault, willful
misconduct or omission of Tenant, or Tenant's Agents and invitees or from any
breach or default in the terms of this Lease by Tenant, and (3) any action or
proceeding brought on account of any matter
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in items (1) or (2). If any action or proceeding is brought against Landlord by
reason of any such claim, upon notice from Landlord, Tenant shall defend the
same at Tenant's expense by counsel reasonably satisfactory to Landlord. As a
material part of the consideration to Landlord, Tenant hereby assumes all risk
of damage to property or injury to persons in or about the Premises from any
cause whatsoever (except that which is caused by the sole active negligence or
willful misconduct by Landlord or its Agents or by the failure of Landlord to
observe any of the terms and conditions of this Lease), if such failure has
persisted for an unreasonable period of time after written notice of such
failure), and Tenant hereby waives all claims in respect thereof against
Landlord. The obligations of Tenant under this Paragraph 15 shall survive any
termination of this Lease.
(b) No Impairment of Insurance. The foregoing indemnity shall not
--------------------------
relieve any insurance carrier of its obligations under any policies required to
be carried by either party pursuant to this Lease, to the extent that such
policies cover the peril or occurrence that results in the claim that is subject
to the foregoing indemnity.
16. SUBROGATION: Landlord and Tenant hereby mutually waive any claim
against the other during the Term for any injury to person or loss or damage to
any of their property located on or about the Premises, the Building or the
Property that is caused by or results from perils covered by insurance carried
by the respective parties, to the extent of the proceeds of such insurance
actually received with respect to such injury, loss or damage, whether or not
due to the negligence of the other party or its agents. Because the foregoing
waivers will preclude the assignment of any claim by way of subrogation to an
insurance company or any other person, each party now agrees to immediately give
to its insurer written notice of the terms of these mutual waivers. Nothing in
this Paragraph 16 shall relieve a party of liability to the other for failure to
carry insurance required by this Lease.
17. ABANDONMENT: Tenant shall not abandon the Premises at any time during
the Term. In the event of abandonment, the rights and remedies of Tenant and
Landlord shall be determined in accordance with the applicable California
statutes in effect at the time of abandonment.
18. FREE FROM LIENS: Tenant shall keep the Premises and the Property free
from any liens arising out of any work performed, materials furnished, or
obligations incurred by or for Tenant.
19. ADVERTISEMENTS AND SIGNS: Tenant shall not place or permit to be placed
in, upon, or about the Premises or the Property any signs, advertisements or
notices without obtaining Landlord's prior written consent or without complying
with applicable law, and will not conduct, or permit to be conducted, any sale
by auction on the Premises or otherwise on the Property. Tenant shall remove any
sign, advertisement or notice placed on the Premises by Tenant upon the
expiration of the Term or sooner termination of this Lease, and Tenant shall
repair any damage or injury to the Premises or the Property caused thereby, all
at Tenant's expense. If any signs are not removed, or necessary repairs not
made, Landlord shall have the right to remove the signs and repair any damage of
injury to the Premises at Tenant's sole cost and expense. Landlord hereby
consents to Tenant's installing, at its expense, such signs located either on
the Building, in front of the Building (on Arques Avenue), or on both,
provided that such signs shall be in keeping both in number and size as those
currently identifying Signetics. The special designs for the signs shall be
submitted to and must receive prior written approval of Landlord.
20. UTILITIES. Tenant shall pay for all water, sewer, gas, heat, light,
power, telephone service and all other materials and services supplied to the
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Premises. If Tenant fails to pay for any of the foregoing when due, Landlord may
pay the same and add such amount to the Rent.
It is understood that certain utility lines and controls, serving
premises other than the leased Premise, have been installed within the leased
Premise. It is agreed that such lines and controls may remain therein, and
access shall be provided by Tenant for the maintenance of said lines and
controls. Landlord shall give Tenant prior notice of such access and shall use
reasonable efforts to minimize any inconvenience to Tenant.
It is further understood that certain utility services, including water,
power, gas, sewer and HVAC are not separately metered to the Premises, but also
serve other adjoining premises. Landlord and Tenant agree that Landlord shall
submit at regular billing intervals, when utility bills are received, an
allocation of the monthly charges applicable to, each user by area occupied by
each. Said allocated charges shall constitute additional rent. Landlord and
Tenant agree that such allocation shall cease as to any service for which
Landlord shall arrange for a separate meter for the Premises. The allocated
costs shall also include the expense of maintenance, repair and replacement of
equipment providing distribution of said utility services, which shall be
charged on the same area basis.
21. ENTRY BY LANDLORD. Tenant shall permit Landlord and its Agents to enter
into and upon the Premises at all reasonable times, upon reasonable notice of no
less than twenty-four (24) hours, (except in the case of an emergency, for which
no notice shall be required), and subject to Tenant's reasonable security
arrangements, for the purpose of inspecting the same or showing the Premises to
prospective purchasers, lenders or tenants or to alter, improve, maintain and
repair the Premises as required or permitted of Landlord under the terms hereof,
without any liability to Tenant for any loss of occupation or quiet enjoyment of
the Premises thereby occasioned (except for actual damages resulting from the
negligence or willful misconduct of Landlord or its agents); and Tenant shall
permit Landlord to post notices of non-responsibility and ordinary "for sale" or
"for lease" signs, provided that Landlord may post such "for lease" signs and
exhibit the Premises to prospective tenants only during the six (6) months prior
to termination of this Lease. No such entry shall be construed to be a forcible
or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant
from the Premises.
22. DESTRUCTION AND DAMAGE:
(a) If the Building is damaged by fire or other perils covered by
extended coverage insurance, Landlord shall, at Landlord's option:
(1) Subject to the provisions of Paragraph 4 of Addendum One
hereof, in the event of total destruction (which shall mean destruction or
damage in excess of twenty-five percent (25%) of the full insurable value
thereof) of the Building, elect either to commence promptly to repair and
restore the Building and prosecute the same diligently to completion, in which
event this lease shall remain in full force and effect; or not to repair or
restore the Building, in which event this Lease shall terminate. Landlord shall
give Tenant written notice of its intention within sixty (60) days after the
occurrence of such destruction. If Landlord elects not to restore the Building,
this Lease shall be deemed to have terminated as of the date of such total
destruction.
(2) In the event of a partial destruction (which shall mean
destruction or damage to an extent not exceeding twenty-five percent (25%) of
the full insurable value thereof) of the Building for which Landlord will
receive insurance proceeds sufficient to cover the cost to repair and
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restore such partial destruction and, if the damage thereto is such that the
Building may be substantially repaired or restored to its condition existing
immediately prior to such damage or destruction within one hundred eighty (180)
days from the date of such destruction, Landlord shall commence and proceed
diligently with the work of repair and restoration, in which event the Lease
shall continue in full force and effect. If such repair and restoration
requires longer than one hundred eighty (180) days or if the insurance proceeds
therefor (plus any amounts Tenant may elect or is obligated to contribute) are
not sufficient to cover the cost of such repair and restoration, Landlord may
elect either to so repair and restore, in which event the Lease shall continue
in full force and effect, or not to repair or restore, in which event the Lease
shall terminate. In either case, Landlord shall give written notice to Tenant of
its intention within sixty (60) days after the destruction occurs. If Landlord
elects not to restore the Building, this Lease shall be deemed to have
terminated as of the date of such partial destruction.
(3) Notwithstanding anything to the contrary contained in
this Paragraph 22, in the event of damage to the Building or the Premises
occurring during the last twelve (12) months of the Term, Landlord may elect to
terminate this Lease by written notice of such election given to Tenant within
thirty (30) days after the damage occurs.
(b) Subject to the provisions of Paragraph 4 of Addendum One hereon,
if the Building is damaged by any peril not covered by extended coverage
insurance, and the cost to repair such damage exceeds any amount Tenant may
agree to contribute, Landlord may elect either to commence promptly to repair
and restore the Building and prosecute the same diligently to completion, in
which event this Lease shall remain in full force and effect; or not to repair
or restore the Building, in which event this Lease shall terminate. Landlord
shall give Tenant written notice of its intention within sixty (60) days after
the occurrence of such damage. If Landlord elects not to restore the Building,
this Lease shall be deemed to have terminated as of the date on which Tenant
surrenders possession of the Premises to Landlord, except that if the damage to
the Premises materially impairs Tenant's ability to continue its business
operations in the Premises, then this Lease shall be deemed to have terminated
as of the date such damage occurred.
(c) In the event of repair and restoration as herein provided, the
monthly installments of Base Rent shall be abated proportionately in the ratio
which Tenant's use of the Premises is impaired during the period of such repair
or restoration, unless the damage was caused by the negligent or willful acts of
omissions of Tenant, in which event there shall be abatement of Base Rent only
to the extent of rental abatement insurance proceeds received by Landlord.
Tenant shall not be entitled to any compensation or damages for loss of use of
the whole or any part of the Premises and/or any inconvenience or annoyance
occasioned by such damage, repair or restoration.
(d) If Landlord is obligated to or elects to repair or restore as
herein provided, Landlord shall repair or restore only those portions of the
Building and Premises which were originally provided at Landlord's expense,
substantially to their condition existing immediately prior to the occurrence of
the damage or destruction; and Tenant shall promptly repair and restore, at
Tenant's expense, Tenant's fixtures, improvements, alterations and additions in
and to the Premises or Building which were not provided at Landlord's expense.
(e) Tenant hereby waives the provisions of California Civil Code
Section 1932(2) and Section 1933(4) which permit termination of a lease upon
destruction of the leased premises, and the provisions of any similar
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law now or hereinafter in effect, and the provisions of this Paragraph 22 shall
govern exclusively in case of such destruction.
23. CONDEMNATION: If twenty-five percent (25%) or more of the Building
or the parking area for the Premises is taken for any public or quasi-public
purpose by any lawful governmental power or authority, by exercise of the right
of appropriation, inverse condemnation, condemnation or eminent domain, or sold
to prevent such taking (each such event being referred to as a "Condemnation"),
Landlord or Tenant may, at its option, terminate this Lease as of the date title
vests in the condemning party. If the Building after any Condemnation and any
repairs by Landlord would be untenantable for the conduct of Tenant's business
operations, Tenant shall have the right to terminate this Lease as of the date
title vests in the condemning party. If either party elects to terminate this
Lease as provided herein, such election shall be made by written notice to the
other party given within thirty (30) days after the nature and extent of such
Condemnation have been finally determined. Tenant shall not because of such
taking assert any claim against Landlord. Landlord shall be entitled to receive
the proceeds of all Condemnation awards, (except separate awards for trade
fixtures and relocation expense), and Tenant hereby assigns to Landlord all of
its interest in such awards. If less than twenty-five percent (25) of the
Building or the parking area is taken, Landlord at its option may terminate this
Lease. If neither Landlord nor Tenant elects to terminate this Lease to the
extent permitted above, Landlord shall promptly proceed to restore the Premises,
to the extent of any Condemnation award received by Landlord, to substantially
their same condition as existed prior to such Condemnation, allowing for the
reasonable effects of such Condemnation, and a proportionate abatement shall be
made to the Base Rent corresponding to the time during which, and to the portion
of the floor area of the Building (adjusted for any increase thereto resulting
from any reconstruction) of which, Tenant is deprived on account of such
Condemnation and restoration. The provisions of California Code of Civil
Procedure Section 1265.130, which allows either party to petition the Superior
Court to terminate the Lease in the event of a partial taking of the Premises,
and any other applicable law now or hereafter enacted, are hereby waived by
Landlord and Tenant.
24. ASSIGNMENT AND SUBLETTING
(a) Tenant shall not voluntarily or by operation of law, (1) mortgage,
pledge, hypothecate or encumber this Lease or any interest herein, (2) assign or
transfer this Lease or any interest herein, sublet the Premises or any part
thereof, or any right or privilege appurtenant thereto, or allow any other
person (the employees, agents and invitees of Tenant excepted) to occupy or use
the Premises, or any portion thereof, without first obtaining the written
consent of Landlord, which consent shall not be withheld unreasonably. When
Tenant requests Landlord's consent to such assignment or subletting, it shall
notify Landlord in writing of the name and address of the proposed assignee or
subtenant and the nature and character of the business of the proposed assignee
or subtenant and shall provide current financial statements for the proposed
assignee or subtenant prepared in accordance with generally accepted accounting
principles. Tenant shall also provide Landlord with a copy of the proposed
sublet or assignment agreement, including all material terms and conditions
thereof. Landlord shall have the option, to be exercised within thirty (30) days
of receipt of the foregoing, to (1) cancel this Lease to the extent of the
proposed sublease as of the commencement date stated in the proposed sublease or
assignment, (2) acquire from Tenant the interest, or any portion thereof, in
this Lease and/or the Premises that Tenant proposes to assign or sublease, on
the same terms and conditions as stated in the proposed sublet or assignment
agreement, (3) consent to the proposed assignment or sublease, or (4) refuse its
consent to the proposed assignment or sublease, providing that such consent
shall not be unreasonably withheld.
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(b) Without otherwise limiting the criteria upon which Landlord may
withhold its consent, Landlord may take into account the reputation and credit
worthiness of the proposed assignee or subtenant, the character of the business
proposed to be conducted in the Premises or portion thereof sought to be
subleased, and the potential impact of the proposed assignment or sublease on
the economic value of the Premises. In any event, Landlord may withhold its
consent to any assignment or sublease, if (1) the actual use proposed to be
conducted in the Premises or portion thereof conflicts with the provisions of
Paragraph 8(a) or (b) above or with any other lease which restricts the use to
which any space in the Building may be put, or (2) the proposed assignment or
sublease requires unreasonable alterations, improvements or additions to the
Premises or portions thereof.
(c) If Landlord approves an assignment or subletting as herein
provided, Tenant shall pay to Landlord, as Additional Rent, 50% of the
difference, if any, between (1) the Base Rent plus Additional Rent allocable to
that part of the Premises affected by such assignment or sublease pursuant to
the provisions of this Lease, and (2) the rent and any additional rent paid by
the assignee or sublease to Tenant, after deducting the costs incurred by Tenant
in connection with any such assignment or sublease. The assignment or sublease
agreement, as the case may be, after approval by Landlord, shall not be amended
without Landlord's prior written consent, and shall contain a provision
directing the assignee or subtenant to pay the rent and other sums due
thereunder directly to Landlord upon receiving written notice from Landlord that
Tenant is in default under this Lease with respect to the payment of Rent.
Landlord's collection of such rent and other sums shall not constitute an
acceptance by Landlord of attornment by such assignee or subtenant. A consent to
one assignment subletting, occupation or use, and consent to any assignment or
subletting shall in no way relieve Tenant of any liability under this Lease. Any
assignment or subletting without Landlord's consent shall be void, and shall, at
the option of Landlord, constitute a Default under this Lease.
(d) Tenant shall pay Landlord's reasonable fees, not to exceed Five
Hundred Dollars ($500.00) per transaction, incurred in connection with
Landlord's review and processing of documents regarding any proposed assignment
or sublease.
(e) Tenant acknowledges and agrees that the restrictions, conditions
and limitations imposed by this Paragraph 24 on Tenant's ability to assign or
transfer this Lease or any interest herein, to sublet the Premises or any part
thereof, to transfer or assign any right or privilege appurtenant to the
Premises, or to allow any other person to occupy or, use the Premises or any
portion thereof, are, for the purposes of California Civil Code Section 1951.4,
as amended from time to time, and for all other purposes, reasonable at the time
that the Lease was entered into, and shall be deemed to be reasonable at the
time that Tenant seeks to assign or transfer this Lease or any interest herein,
to sublet the Premises or any part thereof, to transfer or assign any right or
privilege appurtenant to the Premises, or to allow any other person to occupy or
use the Premises or any portion thereof.
(f) Notwithstanding anything to the contrary herein, Landlord's
consent shall not be required for any transfer, assignment or subletting of the
Premises (or any portion thereof) to any entity which controls, is controlled
by, or is under common control with Tenant; to any entity which results from a
merger of or consolidation with Tenant; to any entity which acquires
substantially all of the assets of Tenant, as a going concern, with respect to
the business that is being conducted in the Premises; or to entity engaged in a
bona fide joint venture with Tenant.
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25. TENANT'S DEFAULT: The occurrence of any one of the following events
shall constitute an event of default on the part of Tenant ("Default"):
(a) The abandonment of the Premises by Tenant;
(b) Failure to pay any installment of Rent or any other monies due and
payable hereunder, said failure continuing for a period of 10 calendar days
after the same is due;
(c) A general assignment by Tenant for the benefit of creditors;
(d) The filing of a voluntary petition in bankruptcy by Tenant, the
filing of a voluntary petition for an arrangement, the filing of a petition,
voluntary or involuntary, for reorganization, or the filing of an involuntary
petition by Tenant's creditors, said involuntary petition remaining
undischarged for a period of sixty (60) days;
(e) Receivership, attachment, or other judicial seizure of substantially
all of Tenant's assets on the Premises, such attachment or other seizure
remaining undismissed or undischarged for a period of sixty (60) days after the
levy thereof;
(f) Failure of Tenant to execute and deliver to Landlord any estoppel
certificate, subordination agreement, or lease amendment within the time periods
and in the manner required by Paragraph 30 or 31 or 40.
(g) An assignment or sublease, or attempted assignment or sublease, of
this Lease or the Premises by Tenant contrary to the provision of Paragraph 24,
unless such assignment or sublease is expressly conditioned upon Tenant having
received Landlord's consent thereto;
(h) Failure of Tenant to restore the Security Deposit to the amount and
within the time period provided in Paragraph 6 above;
(i) Failure in the performance of any of Tenant's covenants, agreements
or obligations hereunder (except those failures specified as events of Default
in other Paragraphs or this Paragraph 25, which shall be governed by such other
Paragraphs), which failure continues for ten (10) calendar days after written
notice thereof from Landlord to Tenant provided that if Tenant has exercised
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reasonable diligence to cure such failure and such failure cannot be cured
within such ten (10) day period despite reasonable diligence, Tenant shall not
be in default under this subparagraph unless Tenant fails thereafter diligently
and continuously to prosecute the cure to completion; and
(j) Chronic delinquency by Tenant in the payment of Rent, or any other
periodic payments required to be paid by Tenant under this Lease. "Chronic
delinquency" shall mean failure by Tenant to pay Rent, or any other payments
required to be paid by Tenant under this Lease within (5) calendar days after
written notice thereof for any three (3) months (consecutive or nonconsecutive)
during any twelve (12) month period. In the event of a Chronic Delinquency, in
addition to Landlord's other remedies for Default provided in this Lease, at
Landlord's option, Landlord shall have the right to require that Rent be paid by
Tenant quarterly, in advance.
Tenant agrees that any notice given by Landlord pursuant to Paragraph
25(b), (i) or (j) above shall satisfy the requirements for notice under
California Code of Civil Procedure Section 1161, and Landlord shall not be
required to give any additional notice in order to be entitled to commence an
unlawful detainer proceeding.
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26. LANDLORD'S REMEDIES:
(a) Termination. In the event of any Default by Tenant, then in addition
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to any other remedies available to Landlord at law or in equity and under this
Lease, Landlord shall have the immediate option to terminate this Lease and all
rights of Tenant hereunder by giving written notice of such intention to
terminate. In the event that Landlord shall elect to so terminate this Lease
then Landlord may recover from Tenant:
(1) the worth at the time of award of any unpaid Rent and any other
sums due and payable which have been earned at the time of such termination;
plus
(2) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable 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
(3) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable for the balance of the term of this
Lease after the time of award exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided; plus
(4) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course would be likely to result
therefrom, including, without limitation, any costs or expenses reasonably and
necessarily incurred by Landlord (i) in retaking possession of the Premises;
(ii) in maintaining, repairing, preserving, restoring, replacing, cleaning,
altering or rehabilitating the Premises or any portion thereof, including such
acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or
(iv) for any other costs necessary or appropriate to relet the Premises; plus
(5) such reasonable attorneys' fees incurred by Landlord as a result
of a Default, and costs in the event suit is filed by Landlord to enforce such
remedy; and plus
(6) at Landlord's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable law.
As used in subparagraphs (1) and (2) above, the "worth at the time of award" is
computed by allowing interest at an annual rate equal to twelve percent (12%)
per annum or the maximum rate permitted by law, whichever is less. As used in
subparagraph (3) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award, plus one percent (1%). Tenant waives
redemption of relief from forfeiture under California Code of Civil Procedure
Sections 1174 and 1179, or under any other present or future law, in the event
Tenant is evicted or Landlord takes possession of the Premises by reason of any
Default or Tenant hereunder.
(b) Continuation of Lease. In the event of any Default by Tenant, then
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in addition to any other remedies available to Landlord at law or in equity and
under this Lease, Landlord shall have the remedy described in California Civil
Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's
Default and abandonment and recover Rent as it becomes due, provided Tenant has
the right to sublet or assign, subject only to reasonable limitations).
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(c) Re-entry. In the event of any Default by Tenant, Landlord shall also
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have the right, with or without terminating this Lease, in compliance with
applicable law, to re-enter the Premises and remove all persons and property
from the Premises; such property may be removed and stored in a public warehouse
or elsewhere at the cost of and for the account of Tenant.
(d) Reletting. In the event of the abandonment of the Premises by
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Tenant or in the event that Landlord shall elect to re-enter as provided in
Paragraph 26(b) or shall take possession of the Premises pursuant to legal
proceeding or pursuant to any notice provided by law, then if Landlord does not
elect to terminate this Lease as provided in Paragraph 26(a), Landlord may from
time to time, without terminating this Lease, relet the Premises or any part
thereof for such term or terms and at such rental or rentals and upon such other
terms and conditions as Landlord in its sole discretion may deem advisable with
the right to make alterations and repairs to the Premises. In the event that
Landlord shall elect to so relet, then rentals received by Landlord from such
reletting shall be applied in the following order: (1) to reasonable attorneys'
fees incurred by Landlord as a result of a Default and costs in the event suit
is filed by Landlord to enforce such remedies; (2) to the payment of any
indebtedness other than Rent due hereunder from Tenant to Landlord; (3) to the
payment of any reasonable costs of such reletting; (4) to the payment of the
costs of any reasonable alterations and repairs to the Premises; (5) to the
payment of Rent due and unpaid hereunder; and (6) the residue, if any, shall be
held by Landlord and applied in payment of future Rent and other sums payable by
Tenant hereunder as the same may become due and payable hereunder. Should that
portion of such rentals received from such reletting during any month, which is
applied to the payment of Rent hereunder, be less than the Rent payable during
the month by Tenant hereunder, then Tenant shall pay such deficiency to
Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall
also pay to Landlord, as soon as ascertained, any costs and expenses reasonably
and necessarily incurred by Landlord in such reletting or in making such
alterations and repairs not covered by the rentals received from such reletting.
(e) Termination. No re-entry or taking of possession of the Premises by
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Landlord pursuant to this Paragraph 26 shall be construed as an election to
terminate this Lease unless a written notice of such intention is given to
Tenant or unless the termination thereof is decreed by a court of competent
jurisdiction. Notwithstanding any reletting without termination by Landlord
because of any Default by Tenant, Landlord may at any time after such reletting
elect to terminate this Lease for any such Default.
(f) Cumulative Remedies. The remedies herein provided are not exclusive
-------------------
and Landlord shall have any and all other remedies provided herein or by law or
in equity.
(g) No Surrender. 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 Term, and such acceptance by Landlord of surrender by
Tenant shall only flow from and must be evidenced by a written acknowledgment of
acceptance of surrender signed by Landlord. The surrender of this Lease by
Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects
in writing that such merger takes place, but shall operate as an assignment to
Landlord of any and all existing subleases, or Landlord may, at its option,
elect in writing to treat such surrender as a merger terminating Tenant's estate
under this Lease, and
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thereupon Landlord may terminate any or all such subleases by notifying the
sublessee of its election so to do within (5) days after such surrender.
27. ATTORNEY'S FEES: In the event any legal action or proceeding,
including arbitration and declaratory relief, is commenced for the purpose of
enforcing any rights or remedies pursuant to this Lease, the prevailing party
shall be entitled to recover from the non-prevailing party reasonable attorneys'
fees, as well as costs or suit, in said action or proceeding, whether or not
such action is prosecuted to judgment.
28. TAXES: Tenant shall be liable for and shall pay, prior to delinquency,
all taxes levied against personal property and trade or business fixtures of
Tenant. If any alteration, addition or improvement installed by Tenant pursuant
to Paragraph 11, or any personal property, trade fixture or other property of
Tenant, is assessed and taxed with the Property, Tenant shall pay such taxes to
Landlord within fifteen (15) days after delivery to Tenant of a statement
therefor.
29. EFFECT OF CONVEYANCE: The term "Landlord" as used in this Lease, means
only the owner for the time being of the Property containing the Building, so
that, in the event of any sale of the Property or the Building, Landlord shall
be and hereby is entirely freed and relieved of all covenants and obligations of
Landlord hereunder accruing from and after the transfer, and it shall be deemed
and construed, without further agreement between the parties and the purchaser
at any such sale, that the purchaser of the Property or the Building has assumed
and agreed to carry out any and all covenants and obligations of Landlord
hereunder.
30. TENANTS ESTOPPEL CERTIFICATE: From time to time, upon written request
of Landlord, Tenant shall execute, acknowledge and deliver to Landlord or its
designee, a written certificate stating (a) the date this Lease was executed,
the Commencement Date of the Term and the date the Term expires; (b) the date
Tenant entered into occupancy of the Premises; (c) the amount of Rent and the
date to which such Rent has been paid; (d) that this Lease is in full force and
effect and has not been assigned, modified, supplemented or amended in any way
(or, if assigned, modified, supplemented or amended, specifying the date and
terms of any agreement so affecting this Lease); (e) that this Lease represents
the entire agreement between the parties with respect to Tenant's right to use
and occupy the Premises (or specifying such other agreements, if any): (f) that
all obligations under this Lease to be performed by Landlord as of the date of
such certificate have been satisfied (or specifying those as to which Tenant
claims that Landlord has yet to perform); (g) that all required contributions by
Landlord to Tenant on account of Tenant's improvements have been received (or
stating exceptions thereto); (h) to the best of Tenant's knowledge that on such
date there exist no defenses or offsets that Tenant has against the enforcement
of this Lease by Landlord (or stating exceptions thereto; (i) that no Rent or
other sum payable by Tenant hereunder has been paid more than one (1) month in
advance (or stating exceptions thereto); (j) that security has been deposited
with Landlord, stating the amount thereof; and (k) any other matters evidencing
the status of this Lease that may be required either by a lender making a loan
to Landlord to be secured by a deed of trust covering the Premises or by a
purchaser of the Premises. Any such certificate delivered pursuant to this
Paragraph 30 may be relied upon by a prospective purchaser of Landlord's
interest or a mortgagee of Landlord's interest or assignee of any mortgage upon
Landlord's interest in the Premises. If Tenant shall fail to provide such
certificate within ten (10) days of receipt by Tenant of a written request by
Landlord as herein provided, such failure shall, at Landlord's election,
constitute a Default linder this Lease, and Tenant shall be deemed to have given
such certificate as above provided without modification and shall be deemed to
have given such certificate as above provided without
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modification and shall be deemed to have admitted the accuracy of any
information supplied by Landlord to a prospective purchaser or mortgagee.
31. SUBORDINATION: Landlord shall have the right to cause this Lease to be
and remain subject and subordinate to any and all mortgages, deeds of trust
("Encumbrances") that are now or may hereafter be executed covering the
Premises, or any renewals, modifications, consolidations, replacements or
extensions thereof, for the full amount of all advances made or to be made
thereunder and without regard to the time or character of such advances,
together with interest thereon and subject to all the terms and provisions
thereof; provided only that in the event of the foreclosure of any such
-------------
mortgage or deed of trust, so long as Tenant is not in default, the holder
thereof ("Holder") shall agree to recognize Tenant's rights under this Lease as
long as Tenant shall pay the Rent and observe and perform all the provisions of
this Lease to be observed and performed by Tenant. Within ten (10) days after
Landlord's written request, Tenant shall execute, acknowledge and deliver any
and all reasonable documents required by Landlord or the Holder to effectuate
such subordination. If Tenant fails to do so, such failure shall constitute a
Default by Tenant under this Lease. Notwithstanding anything to the contrary set
forth in this Paragraph 31, Tenant hereby attorns and agrees to attorn to any
person or entity purchasing or otherwise acquiring the Premises at any sale or
other proceeding or pursuant to the exercise of any other rights, powers or
remedies under such Encumbrance.
32. ENVIRONMENTAL COVENANTS:
(a) As used herein, the term "Hazardous Material" shall mean any
substance or material which has been determined by any state, federal or local
governmental authority to be capable of posing a risk of injury to health,
safety or property, including all of those materials and substances designated
as hazardous or toxic by the city in which the Premises are located, the U.S.
Environmental Protection Agency, the Consumer Product Safety Commissions, the
Food and Drug Administration, the California Water Resources Control Board, the
Regional Water Quality Control Board, San Francisco Bay Region, the California
Air Resources Board, CAL/OSHA Standards Board, Division of Occupational Safety
and Health, the California Department of Food and Agriculture, the California
Department of Health Services, and any federal agencies that have overlapping
jurisdiction with such California agencies, or any other governmental agency now
or hereafter authorized to regulate materials and substances in the environment.
Without limiting the generality of the foregoing, the term "Hazardous Material"
shall include all of those materials and substances defined as "hazardous
materials" or "hazardous waste" in Sections 66680 through 66685 of Title 22 of
the California Administrative Code, Division 4, Chapter 30, as the same
products, fractions, constituents and sub-constituents of petroleum or
petroleum-related substances, asbestos, and any other materials requiring
remediation now or in the future under federal, state or local statutes,
ordinances, regulations or policies.
(b) Tenant represents, warrants and covenants (i) that it will use
and store in, on or about the Premises, only those Hazardous Materials that are
necessary for Tenant to conduct its business activities on the Premises, (ii)
that, with respect to any such Hazardous Materials, Tenant shall comply with all
applicable federal, state and local laws, rules, regulations, policies and
authorities relating to the storage, use, disposal or cleanup of Hazardous
Materials, including, but not limited to, the obtaining of proper permits,
and (iii) that it will not dispose of any Hazardous Materials in, on or about
the Premises under any circumstances except as permitted by applicable law.
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(c) Tenant shall immediately notify Landlord of any inquiry, test,
investigation or enforcement proceeding by or against Tenant, Landlord or the
Premises concerning a Hazardous Material. Tenant acknowledges that Landlord, as
the owner of the Premises, shall have the right to negotiate, defend, approve
and appeal, any action taken or order issued with regard to a Hazardous Material
by an applicable governmental authority. Landlord shall immediately notify
Tenant of any inquiry, test, investigation or enforcement proceeding against the
Premises concerning a Hazardous Material on the Premises. Tenant shall pay
Landlord's cost of negotiating, defending or appealing any action or order
issued with regard to Hazardous Material by an applicable governmental authority
if Tenant caused, permitted or suffered such Hazardous Material to come onto the
Premises. Landlord agrees to indemnify, defend and hold Tenant harmless from and
against the cost and expense of any remediation or cleanup work required by any
governmental agency to be performed on the Premises as a result of any Hazardous
Materials existing on the Premises on the date of this Lease.
(d) If Tenant's storage, use or disposal of any Hazardous Material in,
on or adjacent to the Premises results in any contamination of the Premises, the
soil or surface of groundwater (1) requiring remediation under federal, state or
local statutes, ordinances, regulations, or policies, or (2) at levels which are
unacceptable to Landlord, in Landlord's reasonable judgment, Tenant agrees to
clean up said contamination. Tenant further agrees to indemnify, defend and
hold Landlord harmless from and against any claims, liabilities, suits, causes
of action, costs, expenses or fees, including reasonable attorneys' fees and
costs, arising out of or in connection with any remediation, cleanup work,
inquiry or enforcement proceeding in connection therewith, and any Hazardous
Materials currently or hereafter used, stored or disposed of by Tenant or its
agents, employees, contractors or invitees in, on or adjacent to the Premises.
(e) Notwithstanding any other right of entry granted to Landlord under
this Lease, Landlord shall have the right upon reasonable prior written notice
(except in an emergency or in a situation where there is a danger of immediate
further contamination, in which case no prior notice will be required) to enter
the Premises or to have consultants enter the Premises throughout the term of
this Lease for the purpose of (1) determining whether the Premises are in
conformity with federal, state and local statues, regulations, ordinances, and
policies including those pertaining to the environmental condition of the
Premises, (2) conducting an environmental audit or investigation of the Premises
for purposes of sale, transfer, conveyance or financing, (3) determining whether
Tenant has complied with this Paragraph 32, and (4) determining the corrective
measures, if any, required of Tenant to ensure the safe use, storage and
disposal of Hazardous Materials, or to remove Hazardous Materials (except to the
extent used, stored or disposed of by Tenant or its agents, employees,
contractors or invitees in compliance with applicable law). Tenant agrees to
provide access and reasonable assistance for such inspections. Such inspections
may include, but are not limited to, entering the Premises or adjacent property
with drill rigs or other machinery for the purpose of obtaining laboratory
samples. Landlord shall not be limited in the number of such inspections during
the term of this Lease. To the extent such inspection disclose the presence of
Hazardous Materials used, stored or disposed of other than in accordance with
subparagraph (b) (ii) above, Tenant shall reimburse Landlord for the reasonable
cost of such inspections within ten (10) days of receipt of a written statement
thereof. If such consultants determine that the Premises are contaminated with
Hazardous Materials used, stored or disposed of by Tenant or its agents,
employees, contractors or invitees, Tenant shall, in a timely manner, at its
expense, remove such Hazardous Materials or otherwise comply with the
recommendations of such consultants to the reasonable
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satisfaction of Landlord and any applicable governmental agencies. The right
granted to Landlord herein to inspect the Premises shall not create a duty on
Landlord's part to inspect the Premises, or liability of Landlord for Tenant's
use, storage or disposal of Hazardous Materials, it being understood that Tenant
shall be solely responsible for all liability in connection therewith. Landlord
shall be liable for the gross negligence or willful misconduct of Landlord or
its agents, employees or consultants in conducting the aforementioned
inspections.
(f) Tenant shall surrender that Premises to Landlord upon the
expiration or earlier termination of this Lease free of debris, waste and
Hazardous Materials used, stored or disposed of by Tenant or its agents,
employees, contractors or invitees, and in a condition which complies with all
governmental statutes, ordinances, regulations and policies,
recommendations of consultants hired by Landlord, and such other reasonable
requirements as may be imposed by Landlord.
(g) Tenant's obligations under this Paragraph 32 shall survive
termination of this Lease, and Tenant waives the Statute of Limitations, as to
Landlord, applicable to any action brought hereunder.
(h) Landlord hereby discloses to Tenant that the Premises and the
Property are in an area in which contamination of soils or groundwater by
Hazardous Materials exist. If Tenant desires more definite information
regarding the existence or possible existence of contamination by Hazardous
Materials of soils or groundwater of or beneath the Premises, the Property, or
other real property in the general area of the Property, then Tenant shall
investigate such matters.
33. NOTICES: All notices and demands which may or are to be required or
permitted to be given to either party by the other hereunder shall be in writing
and shall be sent by United States mail, postage prepaid, certified, or by
personal delivery or overnight courier, addressed to the addressee at the
address for such addressee as specified herein, or to such other place as such
party may from time to time designate in a notice to the other party given as
provided herein. Notice shall be deemed given upon the earlier of actual receipt
or the date On which delivery was attempted if Tenant refuses to receive.
34. WAIVER: The waiver of any breach of any term, covenant or condition of
this Lease shall not be deemed to be a waiver of such term, covenant or
condition or any subsequent breach of the same or any other term, covenant or
condition herein contained. The subsequent acceptance of Rent by Landlord shall
not be deemed to be a waiver of any preceding breach by Tenant, other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
Rent. No delay or omission in the exercise of any right. or remedy of Landlord
on any Default by Tenant shall impair such a right or remedy or be construed as
a waiver. Any waiver by landlord of any Default must be in writing and shall not
be a waiver of any other Default concerning the same or any other provisions of
this Lease.
35. HOLDING OVER: Any holding over after the expiration of the Term,
without the express written consent of Landlord, shall constitute a Default and,
without limiting Landlord's remedies provided in this Lease, such holding over
shall be construed to be a tenancy at sufferance, at a rental rate of one
hundred twenty percent (120%) of the Base Rent last due in this Lease, plus
Additional Rent, and shall otherwise be on the terms and conditions herein
specified, so far as applicable.
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36. SUCCESSORS AND ASSIGNS: The terms, covenants and conditions of this
Lease shall, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of all of the parties
hereto. If Tenant shall consist of more than one entity or person, the
obligations of Tenant under this Lease shall be joint and several.
37. TIME: Time is of the essence of this Lease and each and every term,
condition and provision herein.
38. BROKERS: Landlord represents and warrants to Tenant that neither it nor
its officers or agents not anyone acting on its behalf has dealt with any real
estate broker except Holcomb Realty and Tenant represents to Landlord that
Cornish & Carey is its sole real estate broker in such negotiations, and each
party agrees to indemnify and hold harmless the other from any claim or claims,
and costs and expenses, including attorney's fees, incurred by the indemnified
party in conjunction with any such claim or claims of any other broker or
brokers to a commission in connection with this Lease as a result of the actions
of the indemnifying party.
39. RULES AND REGULATIONS: Tenant agrees to comply with such reasonable
rules and regulations as Landlord may adopt from time to time for the orderly
and proper operating of the Building and parking and other common areas. Such
rules may include but shall not be limited to the following: (a) restriction of
employee parking to a limited, designated area or areas; and (b) regulation of
the removal, storage and disposal of Tenant's refuse and other rubbish at the
sole cost and expense of Tenant. The rules and regulations shall be binding upon
Tenant upon delivery of a copy of them to Tenant. Landlord shall not be
responsible to Tenant for the failure of any other person to observe and abide
by any of said rules and regulations.
40. MORTGAGEE PROTECTION:
(a) Modifications for Lender. If, in connection with obtaining financing
------------------------
for the Premises or any portion thereof, Landlord's lender shall request
reasonable modifications to this Lease as a condition to such financing, Tenant
shall not unreasonably withhold, delay or defer its consent to such
modifications, provided such modifications do not materially adversely affect
Tenant's rights or increase Tenant's obligations under this Lease.
(b) Rights to Cure. Tenant agrees to give to any trust deed or mortgage
--------------
holder ("Holder"), by registered mail, at the same time as it is given to
Landlord, a copy of any notice of default given to Landlord, provided that prior
-------------
to such notice Tenant has been notified, in writing, (by way of notice of
assignment of rents and leases, or otherwise) of the address of such Holder.
Tenant further agrees that if Landlord shall have failed to cure such default
within the time provided for is this Lease, then the Holder shall have an
additional twenty (20) days after expiration of such period, or after receipt of
such notice from Tenant (if such notice to the Holder is required by this
Paragraph 42(b), whichever shall last occur, within which to cure such default
or if such default cannot be cured within that time, then such additional time
as may be necessary if within such twenty (20) days, any Holder has commenced
and is diligently pursuing the remedies necessary to cure such default
(including but not limited to commencement of foreclosure proceedings, if
necessary to effect such cure), in which event this Lease shall not be
terminated.
41. ENTIRE AGREEMENT: This Lease, including the Exhibits and any Addenda
attached hereto, which are hereby incorporated herein by this reference,
contains the entire agreement of the parties hereto, and no representations,
inducements, promises or agreements, oral or otherwise,
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between the parties, not embodied herein or therein, shall be of any force and
effect.
42. CONSTRUCTION: This Lease shall be construed and interpreted in
accordance with the laws of the State of California. The parties acknowledge and
agree that no rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall be employed in the interpretation of
this Lease, including the Exhibits and any Addenda attached hereto. All captions
in this Lease are for reference only and shall not be used in the interpretation
of this Lease. Whenever required by the context of this Lease, the singular
shall include the plural, the masculine shall include the feminine, and vice
versa. If any provision of this Lease shall be determined to be illegal or
unenforceable, such determination shall not affect any other provision of this
Lease and all such other provisions shall remain in full force and effect.
43. REPRESENTATIONS AND WARRANTIES OF TENANT:
Tenant hereby makes the following representations and warranties, each of which
is material and being relied upon by Landlord, is true in all respects as of the
date of this Lease, and shall survive the expiration or termination of the
Lease.
(a) If Tenant is an entity, Tenant is duly organized, validly existing
and in good standing under the laws of the state of its organization and the
persons executing this Lease on behalf of Tenant have the full right and
authority to execute this Lease on behalf of Tenant and to bind Tenant without
the consent or approval of any other person or entity. Tenant has full power,
capacity, authority and legal right to execute and deliver this Lease and to
perform all of its obligations hereunder. This Lease is a legal, valid and
binding obligation of Tenant, enforceable in accordance with its terms.
(b) Tenant has not (1) made a general assignment for the benefit of
creditors, (2) filed any voluntary petition in bankruptcy or suffered the filing
of an involuntary petition by any creditors, (3) suffered the appointment of a
receiver to take possession of all or substantially all of its assets, (4)
suffered the attachment or other judicial seizure of all or substantially all of
its assets, (5) admitted in writing its inability to pay its debts as they come
due, or (6) made an offer of settlement, extension or composition to its
creditors generally.
Landlord and Tenant have executed and delivered this Lease as of the date
first hereinabove set forth.
44. OUTSIDE AREAS.
(a) Subject to the terms and conditions of this lease and such rules and
regulations as Landlord may from time to time prescribe, Tenant and Tenant's
employees, invitees, guests and customers shall have the nonexclusive right to
use the access roads, parking areas, and facilities provided and designated by
Landlord for the general use and convenience of the occupants of the building in
which the premises are located, which areas and facilities are referred to
herein at "Outside Area". This right shall terminate upon the termination of
this lease. Landlord reserves the right from time to time to make changes in
the shape, size, location, amount and extent of "Outside Area", and in
painting of exterior walls, Landlord further reserves the right to promulgate
such reasonable rules and regulations relating to the use of the "Outside Area",
and any part or parts thereof, as Landlord may deem appropriate for the best
interests of the occupants of the building. The rules and regulations shall be
binding upon Tenant upon delivery of a copy of them to Tenant and Tenant shall
abide by them and cooperate in their observance. Such rules and regulations may
be
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amended by Landlord from time to time, with or without advance notice, and all
amendments shall be effective upon delivery of a copy to Tenant. Tenant agrees
to require its employees, executives, invitees, guests and customers to abide by
such rules and regulations including parking regulations.
(b) Landlord shall operate, manage and maintain the "Outside Area",
and landscaping and the surface of the exterior walls. The manner in which the
"Outside Area" shall be maintained and the expenditures for such maintenance
shall be at the discretion of Lessor.
(c) No materials, supplies, equipment, finished products or semi-
finished products, raw materials or articles of any nature shall be stored upon
or permitted to remain on any portion of the leased premises outside of the
building constructed thereon, except with the prior written consent of the
Landlord. No waste materials or refuse shall be dumped upon or permitted to
remain unreasonable upon any part of the leased premises outside of building
proper, unless approved by Landlord.
(d) Tenant shall not use solid hard tires on any fork lifts or dollies
on paved parking, truck loading or driveway areas, and in the event Tenant
violates this provision, Tenant shall be responsible for the cost of resurfacing
the entire area.
45. PARKING. Motor vehicle parking shall be non-exclusive, subject to
reallocation by Landlord from time to time. Landlord reserves the right to
designate from time to time the parking spaces for vehicles of Tenant and its
guests and invitees. Said spaces shall total 280 less the number eliminated by
revisions to existing handicap parking and the installation of a dock. The
current designation of 280 spaces is shown on attached Exhibit B (2 pages).
Tenant agrees that Landlord shall have no responsibility for policing these
parking spaces or seeing that they are used exclusively by Tenant's employees,
guests, or invitees. Tenant shall not at any time park or permit the parking of
Tenant's trucks or other vehicles, or the trucks or other vehicles of others in
driveways or adjacent to loading areas as to interfere in any way with the use
of such areas, nor shall Tenant at any time park or permit the parking of Tenant
vehicles or trucks, or the vehicles or trucks of Tenant's suppliers or invitees
in any portion of the "Parking Area" not designated by Landlord for such use by
Tenant. Tenant shall not park or permit to be parked inoperative vehicles or
equipment on any portion of the "Outside Area" and agrees that no vehicle will
be parked on the "Outside Area" for longer than eighteen (18) hours in any
twenty-four (24) hour period.
46. CALCULATION OF AREA:
The square footage of the leased premises (approximately 73,648.6 square
feet as set forth in Paragraph 2) has been calculated in this manner: the area
of the leased building, measured from the outer extent (drip line) of metal and
built-up roofed areas, or the outer walls, and to the center of interior party
walls. The Premises shall be deemed for all purposes and agreed to consist of
73,648.6 square feet.
47. TENANT IMPROVEMENTS:
Tenant shall select and retain an architect or facilities planner who
shall prepare "tenant improvement" drawings and specifications for revisions to
the premises which are accepted by Tenant in "AS IS" condition, subject to the
provisions of Addendum 1, Paragraph 1.
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"Tenant Improvements" as stated in the Lease shall include only those
improvements within the Premises which are depicted on the Final Plans and
Specifications or described herein below.
The Tenant Improvements may include, but are not limited to:
(a) Partitioning, doors, floor coverings, finishes, ceilings, wall
coverings and painting, millwork and similar items.
(b) Electrical wiring, lighting fixtures, outlets and switches, and
other electrical work.
(c) Duct work, terminal boxes, defusers and accessories required for
the completion of the heating, ventilation and air conditioning systems serving
the Premises, including the cost of meter and key control for after-hour air
conditioning.
(d) Any additional Tenant requirements including, but not limited to
odor control, special heating, ventilation and air conditioning, noise or
vibration control or other special system.
(e) All fire and life safety control systems such as fire walls,
sprinklers, halon, fire alarms, including piping, wiring and accessories serving
the Premises.
(f) All plumbing, fixtures, pipes, and accessories serving the
Premises.
(g) Changes to handicapped parking or ramps.
Landlord shall provide in writing, not later than five (5) business days
after request therefor, approval or disapproval of preliminary and Final Plans
and Specifications. Landlord and Tenant shall indicate their approval of the
Final Plans and Specifications by initialing them. Upon completion of the Final
Plans and Specifications and approval thereof by Landlord and Tenant, Tenant
will obtain general contractor bids and furnish a cost breakdown to Landlord. In
the event the estimated Tenant Improvements Cost, based on such bids and the
reasonably anticipated costs of other items constituting the Tenant Improvement
Cost, exceeds the sum of the Tenant Improvements Allowance plus any amounts
which Tenant desires to pay as an Excess Tenant Improvements Costs, the Final
Plans and Specifications may be revised, at Tenant's cost and expense. Any such
revisions shall be subject to Landlord's approval, and the amended Final Plans
and Specifications, as approved by Landlord and Tenant, shall thereafter be
deemed to be the Final Plans and specifications for the Tenant Improvements. The
amended Final Plans and Specifications shall be approved by Landlord in writing
not later than five (5) business days after Tenant's request therefor. Tenant
shall thereafter submit such amended Final Plans and Specifications to general
contractors selected by Tenant and approved by Landlord for re-bidding, and
shall furnish a cost breakdown to Tenant. If the estimated Tenant Improvements
Cost, as determined by the bids based on the amended Final Plans and
Specifications and the reasonably anticipated costs or other items constituting
the Tenant Improvements Cost, result in an Excess Tenant Improvements Cost, then
Tenant may make further revisions as required to delete such items from the
Final Plans and Specifications in order to eliminate any Excess Tenant
Improvements Cost or, if Tenant does not elect to make further revisions, Tenant
shall pay such Excess Tenant Improvements Cost as and when required below.
When the Final Plans and Specifications (as amended, if required above) have
been approved by Landlord and Tenant, Tenant shall submit
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such Final Plans and Specifications to all governmental authorities having
rights of approval over the Tenant Improvement work and shall apply for all
governmental approvals and building permits. Subject to its obligations, Tenant
shall thereafter commence and proceed to have completed construction of the
Tenant Improvements in a good and workmanlike manner by a general contractor
approved by Landlord.
Landlord shall provide an allowance for the planning and construction of
Tenant Improvements in the amount of Ten Dollars per square foot ($736,486.00).
In addition Landlord shall provide $10,000 plus an amount of up to $15,000,
the $15,000 to be matched by equal amount from the above Ten Dollar per square
foot tenant improvement allowance to correct non-conformities with current codes
as required by governmental authorities and to apply moisture sealant under
floor tiles. The total amount (a maximum of $761,486) shall be known as the
Tenant Improvement Allowance and shall be the maximum contribution by Landlord
for Tenant Improvement Costs including correcting any non-conformities to codes
or any other deficiencies. Should the actual cost of planning and constructing
those Tenant Improvements depicted on the Final Plans and Specifications be less
than the Tenant Improvements Allowance shall be reduced to an amount equal to
said actual cost.
The Tenant Improvements Cost ("Tenant Improvements Cost") shall include all
costs and expenses associated with the design, preparation, approval and
construction of the Tenant Improvements, including, but not limited, to the
following:
(a) All costs of preliminary and final architectural and engineering
plans and specifications for the Tenant Improvements, and engineering costs
associated with completion of the State of California energy utilization
calculations under Title 24 legislation;
(b) All costs of obtaining building permits and other necessary
authorizations from local governmental authorities;
(c) All costs of interior design and finish schedule plans and
specifications including as-build drawings;
(d) All direct and indirect costs of procuring, constructing and
installing the Tenant Improvements in the Premises;
(e) Utility connection fees.
In no event shall the Tenant Improvements Cost include any costs of procuring,
constructing or installing in the Premises any of Tenant's personal property or
trade fixtures.
In addition, Landlord shall, if requested to do so by Tenant at the time of
determining the final cost of the Tenant Improvements provide an additional
allowance of up to Five Dollars per square foot ("Additional Tenant Improvement
Funds"). The Additional Tenant Improvement Funds shall be used to construct and
install the Tenant Improvements and for no other purpose. Tenant shall reimburse
Landlord for the Additional Tenant Improvement Funds as provided for in this
Paragraph. The full amount of the Additional Tenant Improvement Funds, together
with interest thereon at the rate of eight and one-half percent (8-1/2%) per
annum, shall be amortized on a straight line basis over the number of months of
the Initial Term. The monthly amount resulting from such amortization
("Additional Tenant Improvement Funds Reimbursement") shall be added to the
monthly Base Rent amount set forth in Paragraph 4 of the Lease due by Tenant to
Landlord when Base Rent is due, as increased Base Rent. Any increase to Base
Rent
26
<PAGE>
shall for purposes of this Lease constitute "Base Rent". Landlord shall
calculate the amount of the monthly Additional Tenant Improvement Funds
Reimbursement, and such amount shall be the Additional Tenant Improvement Funds
Reimbursement. Thereafter, Landlord and Tenant shall execute a memorandum to
this Lease setting forth the amount by which Base Rent has been increased.
Landlord shall reimburse Tenant for Tenant Improvement Costs (up to the sum
of the Tenant Improvement Allowance, and if applicable, the Additional Tenant
Improvement Funds) within 10 days after presentation of invoices therefor and
proof that such invoices have been paid by Tenant. Tenant shall be entitled to
submit paid invoices to Landlord from time to time (but not more frequently than
once every 30 days) during construction.
48. CONTINUING OPTION: Landlord grants Tenant an option to lease the
remaining space in the South wing of the building (approximately 54,585 square
feet currently occupied by Kalpana Inc. under sublease from Philips
Semiconductors). This option to lease shall be for a lease with terms and
condition identical to this lease with the following exception:
1) Base monthly rent shall be $.7765/square foot/month to be paid
monthly;
2) The $10.00/square foot tenant improvement allowance and Landlord's
maximum contribution to rectification of Code non-conformities ($.3394/square
foot) specified in Paragraph 47 shall be decreased to amounts which are
proportionate to the number of months of the term for the additional space
compared to sixty-six months. Example: if the term for the additional space is
fifty months, the amount for tenant improvements shall be $7.576/square foot
($10.00 x 50/66) and Landlord's maximum contribution to rectification of Code
non-conformities shall be $.2571/square foot ($.3394 x 50/66);
3) The additional $5.00 per square foot specified in Paragraph
47 for tenant improvements shall be available to Tenant for the same purpose
under the same terms and conditions;
4) If the optioned space is vacant at the time of the exercise of the
option, early occupancy shall commence immediately and rental and occupancy
shall commence 90 days after option exercise. If the space is occupied at the
time of exercise of the option, early occupancy shall commence immediately on
surrender of the premises by the existing tenant, and rental and occupancy shall
commence 60 days thereafter. No rental shall be charged by Landlord during early
occupancy periods.
5) The space subject to the option shall be solidly contiguous to the
premises under this lease and shall not be less than 18,415 square feet at each
option exercise with a natural break with the remaining space considering HVAC,
electrical, other utilities, and layout. The remaining space also must be
reasonably leasable by Lessor. This continuing option is subject to any right of
Diamond Computer Systems, Inc. under its lease with Landlord. This continuing
option shall be for the period ending December 31,1996, and shall not be
exercisable if the space is under lease or subject to a fully executed letter of
intent between Landlord and a third party. It is exercisable by Tenant by
written notice to Landlord to be received by Landlord only during the first
seven days of each month of the period ending December 31, 1996. To exercise
this continuing option, Tenant must have performed all the covenants and
obligations of Tenant and Tenant's financial condition must be at least equal
to that at the time of execution of this lease. If Tenant has not exercised said
option by April 7, 1995, Kalpana (lessee of adjoining space) may exercise its
option to extend its option to extend its lease
27
<PAGE>
of the adjoining 54,585 square feet for a lease term expiring February 29, 1996.
In such event, the period in which Tenant's option may be exercised is extended
to June 30, 1997.
The term of the expanded lease, which the exercise of the option shall
implement, shall commence as set forth in sub-paragraph 4 above, and end on the
termination date of the base lease. However, the said term shall be extended if
the option to extend under the base lease has been exercised, to coincide with
the extended termination date of the base lease. The rental and other provisions
applicable to the extended option period of the base lease, including
arbitration, shall be applicable to the premises added under the continuing
option and in effect such added premises shall be part of the base lease.
49. RIGHT OF FIRST OFFER: In the event that any space becomes available to
Landlord in the north wing of the building (approximately 35,552 square feet
currently under lease to Diamond Computer Systems, Inc.) Landlord shall notify
Tenant in writing of its availability at rent at 100% of "Fair Market Value"
with a term to end on the same date as the ending date of this lease. Tenant
shall have five working days after receipt of said notice to express its
interest. However after the aforesaid five working days, Landlord shall have
the right to lease said space to any tenant as Landlord determines.
In the event that Landlord and Tenant cannot agree on a determination of
"Fair Market Rent", "Fair Market Rent" shall be determined in the same manner as
in paragraph 50 - option to extend this lease.
50. OPTION TO EXTEND: Landlord grants to Tenant an option to extend the
term of this lease for one period of five years subject to all terms and
conditions herein contained except this paragraph, the maximum on "outside area"
expense set forth in paragraph 4 (c) (2), paragraph 47 - Tenant Improvements,
and monthly rental including escalation which shall be determined as set forth
below. In order to exercise this option, Tenant must have performed all the
covenants and obligations of Tenant herein and at least six months before the
ending date of the initial term of this lease must have delivered to Landlord
written notice of the exercise of this option.
As of the date of exercise by Tenant of its option to extend, the monthly
base rental a maximum for "outside area" expenses and escalation of base rent,
all for the Extended Term shall be subject to negotiation between the Landlord
and Tenant. Not later than five (5) full calendar months prior to the expiration
date of the Initial Term, Landlord and Tenant shall meet and endeavor to agree
between themselves as to the fair market base monthly rental of the premises,
escalation thereof, and maximum for "outside area" expenses, all as of the
commencement of the Extended Term. If the parties are able to agree on such fair
market base monthly rental, escalation and maximum, said base monthly,
escalation and maximum rental shall be the rental escalation and maximum for the
premises during the Extended Term, the escalation agreed upon, and the maximum
"outside area" expenses. In the event the parties fail to agree upon said
amounts for the Extended Term, at least four (4) full calendar months prior to
commencement thereof, the base monthly rental for the Extended Term, including
escalation thereof, but not including maximum "outside area" expense, shall be
determined by appraisal in the manner hereafter set forth. Notwithstanding the
foregoing, Landlord and Tenant agree that the Outside Area Expense Maximum shall
in no event exceed, (a) for the first 12 months of the Extended Term, an amount
per square foot equal to 72 cents multiplied by a fraction, the numerator of
which is the CPI Index (hereinafter defined) for the month immediately prior to
the month in which the Extended Term commences and the denominator of which is
the CPI Index for the month immediately prior to the first full
28
<PAGE>
calendar month of the Term hereof, and (b) for each subsequent 12 month period,
the Outside Area Expense maximum established for the previous 12 month period,
increased by 5%. As used herein "CPI Index" means the United States Department
of Labor's Bureau of Labor Statistic's Consumer Price Index, All Urban
Consumers, All Items, for the San Francisco-Oakland-San Jose area (1982-84=100)
or any comparable successor index.
In the event it becomes necessary under this subparagraph to determine the
fair market base monthly rental of the premises by appraisal, Landlord and
Tenant, no later than three (3) full calendar months prior to commencement of
the Extended Term, each shall appoint an experienced real estate appraiser with
at lease five (5) years experience in the leasing of industrial office property
in the general vicinity of the premises. The two appraisers so selected shall
each determine the fair market base monthly rental for the premises taking into
account the value of the property and comparable prevailing rentals including
escalations for a five (5) year term in that area. Such appraisers shall, within
twenty (20) business days after their appointment, complete there appraisals and
submit their appraisal reports to Landlord and Tenant. If the fair market
monthly base rental of the premises established in the two (2) appraisals varies
by ten percent (10%) or less of the higher rental, the average of the two shall
be controlling. If said fair market monthly base rental varies by more than ten
percent (10%) of the higher rental, said appraisers, within ten (10) days after
the submission of the last appraisal, shall appoint a third appraiser who shall
also meet the qualifications set forth above. Such third appraiser shall, within
twenty (20) business days after his appointment, determine by appraisal the fair
market monthly base rental of the premises, taking into account the same factors
referred to above, and submit his appraisal report to Landlord and Tenant. The
fair market monthly base rental determined by the third appraiser for the
premises shall be controlling, unless it is less than that set forth in the
lower appraisal previously obtained, in which case the value set forth in said
lower appraisal shall be controlling, or unless it is greater than that set
forth in the higher appraisal previously obtained, in which case the base rental
set forth in said higher appraisal shall be controlling. If either Landlord or
Tenant fails to appoint an appraiser or if an appraiser appointed by either of
them fails, after his appointment, to submit his appraisal within the required
period in accordance with the foregoing, the appraisal submitted by the other
appraiser shall be controlling. The term "fair market monthly base rental" used
for all purposes of this paragraph, shall include escalation over the five year
term. The cost of all appraisals under this subparagraph shall be borne equally
by Landlord and Tenant. Upon determination of the fair market base monthly
rental by appraisal and an agreement between Landlord and Tenant on a maximum
for "outside area" expenses the parties hereto shall immediately execute an
addendum to this Lease stating the fair market base monthly rental so
determined, the escalation applicable thereto, and the "outside area" expense
maximum, the latter item being subject to agreement between Landlord and Tenant,
but not arbitration.
In the event of exercise of the option to extend, the security deposit shall
continue to be held under the provisions of the lease, to be returned to Tenant
to the extent therein set forth, within 30 days after the termination of the
extension period and vacation of the premises by Tenant.
It is agreed that this Option to Extend is personal to Tenant and to
successor Tenant as defined by paragraph 24(f) and has been granted because of
specific use of the premises by Tenant and agreements in the lease concerning
Tenant's improvements. In the event this lease is assigned or sublet to any
third party or entity, this Option to Extend shall be null and void.
Landlord and Tenant have executed and delivered this Lease as of the date
first hereinabove set forth.
29
<PAGE>
LANDLORD TENANT
Herman Christensen, Jr. and Global Village
Raymond P. Christensen Communication, Inc.
/s/ Herman Christensen, Jr. /s/ James M. Walker
_____________________________ By _____________________________
Herman Christensen, Jr.
/s/ Raymond P. Christensen Printed
_____________________________ Name: James M. Walker
Raymond P. Christensen --------------------------
Title: VP Finance
--------------------------
801 American St.
San Carlos, CA 94070
By: ____________________________
Printed
Name:___________________________
30
<PAGE>
ADDENDUM ONE
TO
LEASE AGREEMENT
dated
by and between
HERMAN CHRISTENSEN, JR. AND RAYMOND P. CHRISTENSEN
as Landlord,
and
GLOBAL VILLAGE COMMUNICATION, INC., as Tenant
MODIFICATIONS, ADDITIONS AND AMENDMENTS TO LEASE
The provisions of this Addendum One shall modify, amend and be in addition
to the provisions of the Lease. Where the provisions of this Addendum One are
inconsistent with the provisions of the Lease, the provisions of this Addendum
One shall govern.
1. Tenant, has inspected the premises and determined that the plumbing and
electrical systems, the HVAC and the roof are in good working order and
condition, with the following exceptions:
HVAC repairs per quote of May 31, 1994 by Precision Air, $11,620.00.
Roofing repairs, per quote of May 19, 1994 by Blues Roofing, $6,960.00.
Fire Extinguishers, units to be furnished in all installed cabinets.
Said work shall be accomplished pursuant to "Amendment to Lease", dated July 14,
1994 between Herman Christensen, Jr. and Raymond P. Christensen, as Lessors and
Signetics Corporation (now Philips Semiconductors) as Lessee, of premises at
1144 East Arques, Sunnyvale, California, which Amendment has been co-signed by
Global Village Communication, Inc.
2. Landlord warrants and represents to Tenant that to the best of
Landlord's knowledge the Premises on the date this Lease is executed are in
compliance with all such Regulatory Requirements and Private Restrictions and
that there is no asbestos on the Premises. Tenant shall not bring nor permit
asbestos to be brought onto the Premises.
3. In the event Tenant wishes to install additional air conditioning or
other equipment on the roof, Tenant shall furnish an engineer's report
certifying that the structural integrity of the roof and roof covering will not
be adversely affected by the proposed addition.
4. Notwithstanding the provisions of Paragraph 22 of the Lease to the
contrary, in the event Landlord elects to repair or restore the Premises and
such repair or restoration is reasonably estimated by Landlord to require more
than two hundred ten days (210) days from the date of destruction, Landlord
shall notify Tenant and Tenant shall have ten (10) days after receipt of such
notice to elect to terminate the Lease by giving written notice of such
election to Landlord. If Tenant so elects to terminate the Lease, such
termination shall be effective as of (i) if Tenant is in possession of the
Premises following such damage or destruction, the date Tenant surrenders
possession of the Premises to Landlord following Tenant's election to terminate
the Lease or (ii) if Tenant is unable to occupy the Premises following such
damage and destruction, the date on which the damage or destruction occurred.
<PAGE>
EXHIBIT A
PHASE II
[PLAN DIAGRAM APPEARS HERE]
<PAGE>
AMENDMENT TO LEASE
This agreement shall constitute an Amendment to the Lease dated July 31, 1984 of
premises known as 1144 East Arques, Sunnyvale, California and consisting of a
building of approximately 128,154 square feet, together with common areas and
parking, all as described in said lease between Herman Christensen, Jr. and
Raymond P. Christensen, ("Lessors") and Signetics Corporation (now Philips
Semiconductors) (as "Lessee").
WHEREAS Lessors and Lessee intend to amend said lease by reducing the area of
the building leased to Lessees by 73,648.6 square feet effective October 15,
1994, and
WHEREAS the said lease expires November 30, 1994, and the Lessors and Lessee
have agreed that Lessee will pay Lessors the sum of $104,593.19 not later than
October 14, 1994 as consideration for the early termination of the 73,648.6
square foot portion of the area leased;
NOW THEREFORE IT IS HEREBY AGREED between the Lessors and Lessee as follows:
1. The July 31, 1984 lease of the premises at 1144 East Arques,
Sunnyvale, California is amended effective as of 12:01 A.M. October 15, 1994, so
that the 73,648.6 square foot portion of the premises described within the
yellow lines on Exhibits A and B hereto attached as a part hereof, is removed
from the premises leased, together with the right to 280 parking spaces as
designated, and said portion of the leased premises is surrendered by Lessee to
Lessors.
2. Rent for the premises remaining under said lease is reduced from
$191,003.61 per month to $81,233.84 per month, pro-rated for the period October
15 through 31, 1994 and in full for the month of November, 1994.
3. Lessee's share of common area expense is reduced from 78.283% to
33.295% also effective as of the date of this amendment and pro-rated for the
period October 15 through 31, 1994 and in full for the month of November, 1994.
4. The reduced rent and charges in paragraphs 2 and 3 hereof are payable by
Lessee to Lessor at the times provided in the lease.
5. Certain utility services, including water, power, gas, sewer, and HVAC
are metered to the entire premises, including the portion being removed from the
lease. The parties agree to allocate the bills for such utilities, when
received, for monthly charges applicable to each user, proportional to the area
served by such utilities. The allocated charges shall constitute additional
rent, payable as set forth in the lease.
6. Lessors and Lessee agree that without additional consideration and
without altering the provisions of paragraphs 2 and 3 hereof, Global Village
Communication, Inc., the tenant with whom Lessors are negotiating a lease for
the removed space in the building, may have early occupancy for the purpose of
installing tenant improvements from and after July 15, 1994. During the period
from the actual commencement of said early occupancy through October 14, 1994,
the cost of utilities, as described in Paragraph 5, shall be allocated as to
monthly charges, with the first $360.00 per day to Lessee, the next $135.00 per
day to Global Village Communication, Inc. and any remaining daily amount
divided equally between Lessee and Global Village Communication, Inc.
1
<PAGE>
Said GLOBAL VILLAGE COMMUNICATIONS, INC. further indemnifies Lessee or damage
arising out of or caused by the early occupancy of GLOBAL VILLAGE
COMMUNICATIONS, INC. in the premises, or the acts or omissions of its
employees, agents, invitees, contractors, or sub-contractors.
Dated July 14 1994
GLOBAL VILLAGE COMMUNICATIONS, INC.
by /s/ James M. Walker
---------------------
_____________________
3
<PAGE>
EXHIBIT A
PHASE II
[PLAN DIAGRAM APPEARS HERE]
<PAGE>
EXHIBIT B
PHASE II
[PLAN DIAGRAM APPEARS HERE]
<PAGE>
EXHIBIT 23.2
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Phoenix, Arixona,
October 13, 1997.
<PAGE>
EXHIBIT 23.3
[LETTERHEAD OF MARCUM & KLIEGMAN]
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Voyager Networks, Inc.
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-1) and related prospectus of GlobalCenter,
Inc., and the inclusion of our report dated May 5, 1997 with respect to the
financial statements for the years ended December 31, 1996 and 1995.
/s/ Marcum & Kliegman LLP
New York, New York,
October 16, 1997.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 6,462,823 526,877
<SECURITIES> 0 0
<RECEIVABLES> 1,230,475 2,356,415
<ALLOWANCES> 608,000 660,400
<INVENTORY> 223,482 578,656
<CURRENT-ASSETS> 8,527,507 4,189,112
<PP&E> 4,723,072 6,687,722
<DEPRECIATION> 1,290,002 2,360,032
<TOTAL-ASSETS> 15,778,433 14,276,359
<CURRENT-LIABILITIES> 6,294,742 9,796,482
<BONDS> 0 0
0 0
4,339 4,339
<COMMON> 7,912 7,978
<OTHER-SE> 6,944,627 1,518,428
<TOTAL-LIABILITY-AND-EQUITY> 15,778,433 14,276,359
<SALES> 1,465,765 840,662
<TOTAL-REVENUES> 12,950,360 9,967,273
<CGS> 6,722,950 7,180,620
<TOTAL-COSTS> 32,611,349 15,764,922
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 142,433 231,000
<INCOME-PRETAX> (19,778,893) (5,966,555)
<INCOME-TAX> (39,475) (52,573)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (19,739,418) (5,913,982)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
