<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 1999
REGISTRATION NO. 333-84035
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERNAP NETWORK SERVICES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
WASHINGTON 7374 91-896926
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
601 UNION STREET, SUITE 1000
SEATTLE, WASHINGTON 98101
(206) 441-8800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ANTHONY C. NAUGHTIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTERNAP NETWORK SERVICES CORPORATION
601 UNION STREET, SUITE 1000
SEATTLE, WASHINGTON 98101
(206) 441-8800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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CHRISTOPHER W. WRIGHT, ESQ. PETER E. WILLIAMS III, ESQ.
DOUGLAS H. HAEUBER, ESQ. VICTOR H. SIM, ESQ.
H. MARLOW GREEN, ESQ. MAILE Y.C. YANG, ESQ.
COOLEY GODWARD LLP MORRISON & FOERSTER LLP
5200 CARILLON POINT 755 PAGE MILL ROAD
KIRKLAND, WA 98033-7355 PALO ALTO, CA 94304-1018
(425) 893-7700 (650) 813-5652
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value per
share................................ 10,005,000 $15.00 $150,075,000 $41,721(3)
- ---------------------------------------------------------------------------------------------------------------------------
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(1) Includes 1,305,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(g) under the Securities Act of
1933, as amended.
(3) $41,700 of this amount has been previously paid.
------------------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued September 21, 1999
8,700,000 Shares
[INTERNAP LOGO]
COMMON STOCK
-------------------------
INTERNAP NETWORK SERVICES CORPORATION IS OFFERING 8,700,000 SHARES OF ITS COMMON
STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS
FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE
BETWEEN $13 AND $15 PER SHARE.
-------------------------
WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "INAP."
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
-------------------------
PRICE $ A SHARE
-------------------------
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS TO INTERNAP
--------------- --------------- ---------------
<S> <C> <C> <C>
Per Share.......................... $ $ $
Total.............................. $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
InterNAP has granted the underwriters the right to purchase up to an additional
1,305,000 shares of common stock to cover over-allotments. Morgan Stanley & Co.
Incorporated expects to deliver the shares to purchasers on ,
1999.
-------------------------
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
, 1999
<PAGE> 3
(Inside Front Cover)
New version of inside front cover artwork:
[INTERNAP LOGO]
<PAGE> 4
The current Internet architecture was not designed for today's level of traffic
flows resulting in slow and unreliable Internet performance.
A cause of slow performance on the Internet is the loss of data as it travels
from one network to another. This results in slow and unreliable performance
that can frustrate Internet users.
Internet data loss
[Graphic depicting interaction between network backbones and public network
access points and private peering points]
<PAGE> 5
InterNAP provides high performance Internet connectivity service that is faster
and more reliable than conventional service.
Delivering network quality without peer.(TM)
Our P-NAP technology routes data over the Internet in a way that reduces data
loss, resulting in better Internet performance and quality of service for
Internet users.
Direct delivery routing minimizes data loss
[Graphic depicting interaction between network backbones and InterNAP P-NAP]
<PAGE> 6
(Inside Back Cover)
*
INTERNAP
1999 P-NAP Locations
[Graphic of map depicting 1999 P-NAP locations]
* Operational P-NAPs
* P-NAPs to be operational by the end of 1999
<PAGE> 7
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 7
Use of Proceeds..................... 18
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Financial Data............. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 22
Business............................ 33
</TABLE>
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PAGE
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Management.......................... 45
Certain Transactions................ 56
Principal Shareholders.............. 59
Description of Capital Stock........ 62
Shares Eligible for Future Sale..... 65
Underwriters........................ 68
Legal Matters....................... 70
Experts............................. 70
Where You Can Find More
Information....................... 71
Index to Financial Statements....... F-1
</TABLE>
-------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our common stock.
In this prospectus, "InterNAP," "we," "us," and "our" refer to InterNAP
Network Services Corporation and not to the underwriters. Unless otherwise
indicated, all information contained in this prospectus:
- Gives effect to the conversion of all outstanding shares of preferred
stock into 49,469,479 shares of common stock upon the closing of this
offering; and
- Assumes no exercise of the underwriters' over-allotment option.
UNTIL , 1999, 25 DAYS AFTER COMMENCEMENT OF THIS OFFERING, ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
InterNAP(R) and P-NAP(R) are registered trademarks of InterNAP. All other
brand names or trademarks appearing in this prospectus are the property of their
respective holders.
<PAGE> 8
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering, risks affecting our company and our financial statements and the notes
to our financial statements appearing elsewhere in this prospectus.
INTERNAP NETWORK SERVICES CORPORATION
InterNAP is a leading provider of fast, reliable and centrally managed
Internet connectivity services targeted at businesses seeking to maximize the
performance of mission-critical Internet-based applications. Customers connected
to one of our Private-Network Access Points, or P-NAPs, which are our patented
network routing infrastructures coupled with our proprietary ASsimilator routing
technology, have their data optimally routed to and from destinations on the
Internet in a manner that minimizes data loss resulting in better performance.
We offer our high performance Internet connectivity services at dedicated line
speeds of 1.5 Megabits per second, or Mbps, to 155 Mbps to customers desiring
higher transmission speeds, lower instances of data loss and greater quality of
service than they could receive from conventional Internet connectivity
providers. As of June 30, 1999, we provided consistent high performance Internet
connectivity services to approximately 120 customers, including Amazon.com,
Fidelity Investments, Go2Net, ITXC, Nasdaq, TheStreet.com and WebTV, each of
which represented at least 1% of our June 1999 revenues.
THE OPPORTUNITY
The Internet is rapidly becoming a critically important medium for
communications and commerce. However, businesses are unable to benefit from the
full potential of the Internet due, in part, to slow and unreliable data
transfers. This results primarily from the way Internet backbone networks
exchange data, current routing technologies and the Internet's architecture,
which was not designed to support today's large volumes of traffic. To compound
this problem, Internet traffic is expected to grow rapidly. In addition,
widespread adoption of applications that rely on network quality require
consistent, high speed data transfer. We believe the future of Internet
connectivity services will be driven by providers that, through high performance
Internet routing services, enable businesses to successfully execute their
mission-critical Internet-based applications over the public network
infrastructures.
OUR SOLUTION
We provide high performance Internet connectivity services through the
deployment of P-NAPs. Our P-NAPs maintain high speed, dedicated connections to
major global Internet backbone networks, such as AGIS, AT&T, Cable & Wireless
USA, GTE Internetworking, ICG Communications, Intermedia, PSINet, Sprint, UUNET
and Verio. Our technology platform optimally routes our customers' data through
these multiple backbone networks, generally bypassing Internet traffic
congestion and reducing data loss that frequently occurs at Internet data
exchange points known as public network access points and private peering
points. We currently operate eight P-NAPs which are located in the Atlanta,
Boston, Chicago, Los Angeles, New York, San Jose, Seattle and Washington, D.C.
metropolitan areas, and expect to complete the deployment of four additional
P-NAPs in the Dallas, Miami, New York and Philadelphia metropolitan areas by the
end of 1999.
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<PAGE> 9
Our services provide the following key advantages:
- High Performance Connectivity. We route our customers' traffic over the
Internet in a way that we believe provides consistently greater speed,
superior end-to-end control, predictability and reliability, than
services offered by conventional Internet connectivity providers.
- Highly Reliable Network Architecture. P-NAPs are designed with a highly
redundant network infrastructure, such that any of the Internet backbones
connected to a P-NAP can be used to instantly reroute customers' data in
the event of a backbone provider network outage.
- Superior Route Optimization and Management. Our proprietary routing
technology and network management system provide us with data to manage
network traffic and to offer economic settlements to backbone providers
for the transfer of our customers' data.
- Scalability and Flexibility. We manage each P-NAP independently and make
connection upgrades locally as required with each backbone provider. This
allows us to more readily scale our capacity as traffic levels increase,
without the need to make uniform upgrades throughout our system of
P-NAPs.
- Superior Customer Service and Support. Our customers receive the benefit
of our proprietary network monitoring and reporting tools and a single
point of contact with our highly skilled engineers for support inquiries,
network troubleshooting and diagnosis 24 hours a day, seven days a week.
OUR STRATEGY
Our objective is to be the leading provider of high performance Internet
connectivity services that enable businesses to run mission-critical
Internet-based applications over the public Internet and to establish and
maintain the standard of quality for Internet connectivity services. To achieve
this objective we intend to:
- Enhance our core technologies to provide the highest performance Internet
connectivity services.
- Continue to provide superior customer service and support.
- Expand our geographic coverage in key markets.
- Continue to build our brand awareness.
- Continue to target strategic markets.
- Maintain backbone provider neutrality.
------------------------
We are a Washington corporation. Our principal executive offices are
located at 601 Union Street, Suite 1000, Seattle, Washington 98101, and our
telephone number is (206) 441-8800. We maintain a worldwide web site at
www.internap.com. The reference to our worldwide web address does not constitute
incorporation by reference of the information contained at this site.
4
<PAGE> 10
THE OFFERING
Common stock offered.................... 8,700,000 shares
Common stock to be outstanding after the
offering................................ 62,201,228 shares
Use of proceeds......................... We intend to use the net proceeds
from the offering for capital
expenditures and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol.................................. INAP
The foregoing information is based upon the number of shares of common
stock outstanding as of June 30, 1999. This information does not include, as of
June 30, 1999:
- 5,035,000 shares reserved for issuance under our 1998 Stock Option/Stock
Issuance Plan, of which 4,132,622 shares were subject to outstanding
options;
- 6,500,000 shares reserved for issuance under our 1999 Equity Incentive
Plan, of which 2,004,000 shares were subject to outstanding options;
- 500,000 shares reserved for issuance under our 1999 Non-Employee Director
Stock Option Plan;
- 1,500,000 shares reserved for issuance under our 1999 Employee Stock
Purchase Plan; and
- 600,136 shares issuable upon exercise of outstanding warrants. See
"Description of Capital Stock" and "Management -- Incentive Stock Plans."
The foregoing information excludes 1,536,098 shares of common stock and a
warrant to purchase 768,049 shares of common stock to be issued to Inktomi
Corporation in a private placement that will close at the same time or
immediately after the closing of our initial public offering and warrants to
purchase 100,000 shares of common stock issued to seven shareholders in
connection with our standby credit facility.
5
<PAGE> 11
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED SIX MONTHS ENDED
(MAY 1, 1996) DECEMBER 31, JUNE 30,
TO DECEMBER 31, ----------------- ------------------
1996 1997 1998 1998 1999
--------------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 44 $ 1,045 $ 1,957 $ 731 $ 3,410
Total operating costs and expenses.... 961 2,455 8,907 2,277 19,862
Loss from operations.................. (917) (1,410) (6,950) (1,546) (16,452)
Net loss.............................. (959) (1,609) (6,973) (1,461) (16,149)
Basic and diluted net loss per
share............................... $ (.29) $ (.48) $ (2.09) $ (.44) $ (4.78)
Weighted average shares used in
computing basic and diluted net loss
per share........................... 3,333 3,333 3,336 3,336 3,378
Pro forma basic and diluted net loss
per share........................... $ (.31) $ (.34)
Weighted average shares used in
computing pro forma basic and
diluted net loss per share.......... 22,733 47,771
</TABLE>
Shares used in computing pro forma basic and diluted net loss per share
include the shares used in computing basic and diluted net loss per share
adjusted for the conversion of preferred stock into shares of common stock, as
if the conversion occurred at the date of original issuance.
The following table presents summary balance sheet data at June 30, 1999.
The pro forma as adjusted column in the balance sheet data below gives effect to
the conversion of our preferred stock outstanding as of June 30, 1999 into
49,469,479 shares of common stock, the receipt of the net proceeds from the sale
of 8,700,000 shares of common stock at an assumed initial public offering price
of $14.00 per share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us and the net proceeds
from the sale of 1,536,098 shares of common stock to Inktomi in a private
placement at an assumed price of $13.02 per share, after deducting the private
placement fee.
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<CAPTION>
AS OF JUNE 30, 1999
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
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BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $13,296 $144,470
Total assets................................................ 30,830 162,004
Capital lease obligations, less current portion............. 6,776 6,776
Total shareholders' equity.................................. 17,274 148,448
</TABLE>
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us or that we currently think are immaterial may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be seriously harmed. In such
case, the trading price of our common stock could decline, and you may lose all
or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NOT ACHIEVE OR
SUSTAIN ANNUAL PROFITABILITY
We have incurred net losses in each quarterly and annual period since we
began operations. We incurred a net loss of $1.6 million for the year ended
December 31, 1997 and a net loss of $7.0 million for the year ended December 31,
1998. Our net loss for the six months ended June 30, 1999 was $16.1 million. As
of June 30, 1999, our accumulated deficit was $25.7 million. As a result of our
expansion plans, we expect to incur net losses and negative cash flows from
operations on a quarterly and annual basis for at least 24 months, and we may
never become profitable.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR PROSPECTS
The revenue and income potential of our business and market is unproven,
and our limited operating history makes it difficult to evaluate our prospects.
We have only been in existence since 1996, and our services are only offered in
limited regions. You should consider and evaluate our prospects in light of the
risks and difficulties frequently encountered by relatively new companies,
particularly companies in the rapidly evolving Internet infrastructure and
connectivity markets.
NEGATIVE MOVEMENTS IN OUR QUARTERLY OPERATING RESULTS MAY DISAPPOINT
ANALYSTS' EXPECTATIONS, WHICH COULD HAVE A NEGATIVE IMPACT ON OUR STOCK
PRICE
Should our results of operations from quarter to quarter fail to meet the
expectations of public market analysts and investors, our stock price could
suffer. Any significant unanticipated shortfall of revenues or increase in
expenses could negatively impact our expected quarterly results of operations
should we be unable to make timely adjustments to compensate for them.
Furthermore, a failure on our part to estimate accurately the timing or
magnitude of particular anticipated revenues or expenses could also negatively
impact our quarterly results of operations.
Because our quarterly results of operations have fluctuated in the past and
will continue to fluctuate in the future, you should not rely on the results of
any past quarter or quarters as an indication of future performance in our
business operations or stock price. For example, increases in our quarterly
revenues for the quarters ended March 31, 1998 through June 30, 1999 have varied
between 30% and 74%, and total operating costs and expenses, as a percentage of
revenues, have fluctuated between 310% and 609%. Fluctuations in our quarterly
operating results depend on a number of factors. Some of these factors are
industry risks over which we have no control including the introduction of new
services by our competitors, fluctuations in the demand and sales cycle for our
services, fluctuations in the market for qualified sales and other personnel,
changes in the prices for Internet connectivity we pay backbone providers and
our ability to obtain local loop connections to our P-NAPs at favorable prices.
Other factors that may cause fluctuations in our quarterly operating
results arise from strategic decisions we have made or will make with respect to
the timing and magnitude of capital expenditures such as those associated with
the deployment of additional P-NAPS and the terms of
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<PAGE> 13
our Internet connectivity purchases. For example, our practice is to purchase
Internet connectivity from backbone providers at new P-NAPs before customers are
secured. We also have agreed to purchase Internet connectivity from some
providers without regard to the amount we resell to our customers.
IF WE ARE UNABLE TO MANAGE COMPLICATIONS THAT ARISE DURING DEPLOYMENT OF
NEW P-NAPS, WE MAY NOT SUCCEED IN OUR EXPANSION PLANS
Any delay in the opening of new P-NAPs would significantly harm our plans
to expand our business. In our effort to deploy new P-NAPs, we face various
risks associated with significant construction projects, including identifying
and locating P-NAP sites, construction delays, cost estimation errors or
overruns, equipment and material delays or shortages, the inability to obtain
necessary permits on a timely basis, if at all, and other factors, many of which
are beyond our control and all of which could delay the deployment of a new
P-NAP facility. The deployment of new P-NAPs, each of which takes approximately
four to six months to complete, is a key element of our business strategy. In
addition to our eight existing locations, we are planning to continue to deploy
P-NAPs across a wide range of geographic regions. Although we do market research
in a geographic area before deploying a P-NAP, we do not enter into service
contracts with customers prior to building a new P-NAP.
WE MAY BE UNABLE TO EFFECTIVELY INTEGRATE NEW P-NAPS INTO OUR EXISTING
NETWORK, WHICH COULD DISRUPT OUR SERVICE
New P-NAP facilities, if completed, will result in substantial new
operating expenses, including expenses associated with hiring, training,
retaining and managing new employees, provisioning capacity from backbone
providers, purchasing new equipment, implementing new systems, leasing
additional real estate and incurring additional depreciation expense. In
addition, if we do not institute adequate financial and managerial controls,
reporting systems, and procedures with which to operate multiple facilities in
geographically dispersed locations, our operations will be significantly harmed.
BECAUSE OUR REVENUES DEPEND HEAVILY ON A FEW SIGNIFICANT CUSTOMERS, A LOSS
OF MORE THAN ONE OF THESE SIGNIFICANT CUSTOMERS COULD REDUCE OUR REVENUES
We currently derive a substantial portion of our total revenues from a
limited number of customers, and the revenues from these customers may not
continue. For the six months ended June 30, 1999, revenues from U.S.
Electrodynamics, Inc. represented 10.6% of our total revenues. For the year
ended December 31, 1998, revenues from Go2Net represented 13.6% of our total
revenues. For the year ended December 31, 1997, revenues from Starcom Service
Corporation represented 20.8% of our total revenues and Go2Net represented 18.1%
of our total revenues. Typically, the agreements with our customers are based on
our standard terms and conditions of service and generally have terms ranging
from one year to three years. Revenues from these customers or from other
customers that have accounted for a significant portion of our revenues in past
periods, individually or as a group, may not continue. If such revenues do
continue, they may not reach or exceed historical levels in any future period.
For example, in 1998 Starcom defaulted on its payments to us, subsequently filed
for bankruptcy and is no longer a customer of ours. In addition, we may not
succeed in diversifying our customer base in future periods. Accordingly, we may
continue to derive a significant portion of our revenues from a relatively small
number of customers. Further, we have had limited experience with the renewal of
contracts by customers whose initial service contract terms have been completed
and these customers may not renew their contracts with us.
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IF WE ARE UNABLE TO CONTINUE TO RECEIVE COST-EFFECTIVE SERVICE FROM OUR
BACKBONE PROVIDERS, WE MAY NOT BE ABLE TO PROVIDE OUR INTERNET CONNECTIVITY
SERVICES ON PROFITABLE TERMS AND THESE BACKBONE PROVIDERS MAY NOT CONTINUE
TO PROVIDE SERVICE TO US
In delivering our services, we rely on Internet backbones which are built
and operated by others. In order to be able to provide optimal routing to our
customers through our P-NAPs, we must purchase connections from several Internet
backbone providers. We cannot assure you that these Internet backbone providers
will continue to provide service to us on a cost-effective basis, if at all, or
that these providers will provide us with additional capacity to adequately meet
customer demand. Furthermore, it is very unlikely that we could replace our
Internet backbone providers on comparable terms.
Currently, in each of our fully operational P-NAPs, we have connections to
at least six of the following 10 backbone providers: Apex Global Information
Systems (AGIS), AT&T, Cable & Wireless USA, Inc., GTE Internetworking, Inc., ICG
Communications, Intermedia Communications Inc., PSINet, Inc., Sprint Internet
Services, UUNET, an MCI WorldCom Company, and Verio, Inc. In addition, we do not
begin to operate a P-NAP until it is connected to at least two of the following
four backbone providers: UUNET, Sprint, Cable & Wireless USA and GTE
Internetworking. We may be unable to maintain relationships with, or obtain
necessary additional capacity from, these backbone providers. Furthermore, we
may be unable to establish and maintain relationships with other backbone
providers that may emerge or that are significant in geographic areas in which
we locate our P-NAPs.
COMPETITION FROM MORE ESTABLISHED COMPETITORS WHO HAVE GREATER REVENUES
COULD DECREASE OUR MARKET SHARE
The Internet connectivity services market is extremely competitive, and
there are few substantial barriers to entry. We expect competition from existing
competitors to intensify in the future, and we may not have the financial
resources, technical expertise, sales and marketing abilities or support
capabilities to compete successfully in our market. Many of our existing
competitors have greater market presence, engineering and marketing
capabilities, and financial, technological and personnel resources than we do.
As a result, our competitors may have several advantages over us as we seek to
develop a greater market presence.
Our competitors currently include backbone providers that provide us
connectivity services, including AGIS, AT&T, Cable & Wireless USA, GTE
Internetworking, ICG Communications, Intermedia, PSINet, Sprint, UUNET and
Verio, regional Bell operating companies which offer Internet access, and
global, national and regional Internet service providers.
In addition, if we are successful in implementing our international
expansion, we expect to encounter additional competition from international
Internet service providers as well as international telecommunications
companies.
COMPETITION FROM NEW COMPETITORS COULD DECREASE OUR MARKET SHARE
We also believe that new competitors will enter our market. Such new
competitors could include computer hardware, software, media and other
technology and telecommunications companies. A number of telecommunications
companies and online service providers have announced plans to offer or expand,
their network services. For example, GTE Internetworking, PSINet and Verio have
expanded their Internet access products and services through acquisition.
Further, the ability of some of these potential competitors to bundle other
services and products with their network services could place us at a
competitive disadvantage. Various companies are also exploring the possibility
of providing, or are currently providing, high-speed data services using
alternative delivery methods including the cable television infrastructure,
direct broadcast satellites, wireless cable and wireless
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local loop. In addition, Internet backbone providers may make technological
developments, such as improved router technology, that will enhance the quality
of their services.
PRICING PRESSURE COULD DECREASE OUR MARKET SHARE
Increased price competition or other competitive pressures could erode our
market share. We currently charge, and expect to continue to charge, more for
our Internet connectivity services than our competitors. For example, our
current standard pricing is approximately 4% more than UUNET's current standard
pricing and approximately 18% more than Sprint's current standard pricing. By
bundling their services and reducing the overall cost of their solutions,
telecommunications companies that compete with us may be able to provide
customers with reduced communications costs in connection with their Internet
connectivity services or private network services, thereby significantly
increasing the pressure on us to decrease our prices. We may not be able to
offset the effects of any such price reductions even with an increase in the
number of our customers, higher revenues from enhanced services, cost reductions
or otherwise. In addition, we believe that the Internet connectivity industry is
likely to encounter consolidation in the future. Consolidation could result in
increased pressure on us to decrease our prices.
A FAILURE IN OUR NETWORK OPERATIONS CENTER, P-NAPS OR COMPUTER SYSTEMS
WOULD CAUSE A SIGNIFICANT DISRUPTION IN THE PROVISION OF OUR INTERNET
CONNECTIVITY SERVICES
Although we have taken precautions against systems failure, interruptions
could result from natural disasters as well as power loss, telecommunications
failure and similar events. Our business depends on the efficient and
uninterrupted operation of our network operations center, our P-NAPs and our
computer and communications hardware systems and infrastructure. We currently
have one network operations center located in Seattle, and we have eight P-NAPs
which are located in the Atlanta, Boston, Chicago, Los Angeles, New York, San
Jose, Seattle and Washington, D.C. metropolitan areas. If we experience a
problem at our network operations center, we may be unable to provide Internet
connectivity services to our customers, provide customer service and support or
monitor our network infrastructure and P-NAPs, any of which would seriously harm
our business.
OUR BRAND IS NOT WELL-KNOWN, AND FAILURE TO DEVELOP BRAND RECOGNITION COULD
HURT OUR ABILITY TO COMPETE EFFECTIVELY
To successfully execute our strategy, we must strengthen our brand
awareness. If we do not build our brand awareness, our ability to realize our
strategic and financial objectives could be hurt. Many of our competitors have
well-established brands associated with the provision of Internet connectivity
services. To date, our market presence has been limited principally to the
Atlanta, Boston, Chicago, Los Angeles, New York, San Jose, Seattle and
Washington D.C. metropolitan areas. To date, we have attracted our existing
customers primarily through a relatively small sales force and word of mouth. In
order to build our brand awareness, we intend to significantly increase our
marketing efforts, which may not be successful, and we must continue to provide
high quality services. As part of our brand building efforts, we expect to
increase our marketing budget substantially as well as our marketing activities,
including advertising, tradeshows, direct response programs and new P-NAP launch
events. We may not succeed as planned.
BECAUSE ANY OF OUR KEY EMPLOYEES COULD TERMINATE HIS OR HER EMPLOYMENT AT
WILL, WE MAY BE UNABLE TO RETAIN SUFFICIENT NUMBERS OF QUALIFIED PERSONNEL
Our future performance depends to a significant degree upon the continued
contributions of our executive management team and key technical personnel. The
loss of any member of our executive management team or a key technical employee,
such as our Chief Executive Officer, Anthony Naughtin, our Chief Technology
Officer, Christopher Wheeler, or our Chief Financial Officer, Paul
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<PAGE> 16
McBride, could significantly harm us. Any of our officers or employees can
terminate his or her relationship with us at any time. To the extent that we are
able to expand our operations and deploy additional P-NAPs, our workforce will
be required to grow. Accordingly, our future success depends on our ability to
attract, hire, train and retain a substantial number of highly skilled
management, technical, sales, marketing and customer support personnel.
Competition for qualified employees is intense. Consequently, we may not be
successful in attracting, hiring, training and retaining the people we need,
which would seriously impede our ability to implement our business strategy.
IF WE ARE NOT ABLE TO SUPPORT OUR RAPID GROWTH EFFECTIVELY, OUR EXPANSION
PLANS MAY BE FRUSTRATED OR MAY FAIL
Our inability to manage growth effectively would seriously harm our plans
to expand our Internet connectivity services into new markets. Since the
introduction of our Internet connectivity services, we have experienced a period
of rapid growth and expansion which has placed, and continues to place, a
significant strain on all of our resources. For example, as of December 31, 1996
we had one operational P-NAP and nine employees compared to seven operational
P-NAPs and 221 full-time employees as of June 30, 1999. In addition, we had
$44,000 in revenues for the period from May 1, 1996 to December 31, 1996
compared to $3.4 million in revenues for the six months ended June 30, 1999. We
expect our growth to continue to strain our management, operational and
financial resources. For example, we may not be able to install adequate
financial control systems in an efficient and timely manner, and our current or
planned information systems, procedures and controls may be inadequate to
support our future operations. The difficulties associated with installing and
implementing new systems, procedures and controls may place a significant burden
on our management and our internal resources. Our plans to rapidly deploy
additional P-NAPs could place a significant strain on our management's time and
resources.
BECAUSE WE HAVE NO EXPERIENCE OPERATING INTERNATIONALLY, OUR INTERNATIONAL
EXPANSION MAY BE LIMITED
Although we currently operate in eight domestic metropolitan markets, a key
component of our strategy is to expand into international markets. We have no
experience operating internationally. We may not be able to adapt our services
to international markets or market and sell these services to customers abroad.
In addition to general risks associated with international business expansion,
we face the following specific risks in our international business expansion
plans:
- difficulties in establishing and maintaining relationships with foreign
backbone providers and local vendors, including co-location and local
loop providers; and
- difficulties in locating, building and deploying P-NAPs in foreign
countries and managing P-NAPs and network operations centers across
disparate geographic areas.
We may be unsuccessful in our efforts to address the risks associated with
our currently proposed international operations and our international sales
growth may therefore be limited.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY LOSE
RIGHTS TO SOME OF OUR MOST VALUABLE ASSETS
We believe that patents and other intellectual property rights are
important to our business and our future success. We file patent applications to
protect our technology, inventions and improvements to inventions that we
consider important to our business. The United States Patent and Trademark
Office, USPTO, has recently notified us that it has allowed the claims in our
initial patent application. Additional claims that were included by amendment in
that application are still pending. We cannot assure you that the USPTO will
allow any additional claims under our patent application, or, if allowed, that
any patent issued may not provide significant proprietary protection or
commercial
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<PAGE> 17
advantage to us. It is possible that any patents that have been or may be issued
to us could still be successfully challenged by third parties, which could
result in our loss of the right to prevent others from exploiting the inventions
claimed in those patents. Further, current and future competitors may
independently develop similar technologies, duplicate our services and products
or design around any patents that may be issued to us. In addition, effective
patent protection may not be available in every country in which we intend to do
business.
In addition to patent protection, we believe the protection of our
copyrightable materials, trademarks and trade secrets is important to our future
success. We rely on a combination of laws, such as copyright, trademark and
trade secret laws and contractual restrictions, such as confidentiality
agreements and licenses, to establish and protect our proprietary rights. In
particular, we generally enter into confidentiality agreements with our
employees and nondisclosure agreements with our customers and corporations with
whom we have strategic relationships. In addition, we generally register our
important trademarks with the USPTO to preserve their value and establish proof
of our ownership and use of these trademarks. Any trademarks that may be issued
to us may not provide significant proprietary protection or commercial advantage
to us. Despite any precautions that we have taken, intellectual property laws
and contractual restrictions may not be sufficient to prevent misappropriation
of our technology or deter others from developing similar technology.
WE MAY FACE LITIGATION AND LIABILITY DUE TO CLAIMS OF INFRINGEMENT OF THIRD
PARTY INTELLECTUAL PROPERTY RIGHTS
The telecommunications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important to our business. Any claims that our services infringe or may infringe
proprietary rights of third parties, with or without merit, could be
time-consuming, result in costly litigation, divert the efforts of our technical
and management personnel or require us to enter into royalty or licensing
agreements, any of which could significantly harm our operating results. In
addition, in our customer agreements, we agree to indemnify our customers for
any expenses or liabilities resulting from claimed infringement of patents,
trademarks or copyrights of third parties. If a claim against us were to be
successful and we were not able to obtain a license to the relevant or a
substitute technology on acceptable terms or redesign our products to avoid
infringement, our ability to compete successfully in our competitive market
would be impaired.
BECAUSE WE DEPEND ON THIRD PARTY SUPPLIERS FOR KEY COMPONENTS OF OUR
NETWORK INFRASTRUCTURE, FAILURES OF THESE SUPPLIERS TO DELIVER THEIR
COMPONENTS AS AGREED COULD HINDER OUR ABILITY TO PROVIDE OUR SERVICES ON A
COMPETITIVE AND TIMELY BASIS
Any failure to obtain required products or services from third party
suppliers on a timely basis and at an acceptable cost would affect our ability
to provide our Internet connectivity services on a competitive and timely basis.
We are dependent on other companies to supply various key components of our
infrastructure, including the local loops between our P-NAPs and our Internet
backbone providers and between our P-NAPs and our customers' networks. In
addition, the routers and switches used in our network infrastructure are
currently supplied by a limited number of vendors, including Cisco Systems, Inc.
Additional sources of these products may not be available in the future on
satisfactory terms, if at all. We purchase these products pursuant to purchase
orders placed from time to time. We do not carry significant inventories of
these products, and we have no guaranteed supply arrangements with our vendors.
We have in the past experienced delays in receiving shipments of equipment
purchased. To date, these delays have neither been material nor have adversely
affected us, but these delays could affect our ability to deploy P-NAPs in the
future on a timely basis. If Cisco Systems does not provide us with its routers,
or if our limited source
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suppliers fail to provide products or services that comply with evolving
Internet and telecommunications standards or that interoperate with other
products or services we use in our network infrastructure, we may be unable to
meet our customer service commitments.
WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE AND MAY NOT BE ABLE TO
SECURE ADEQUATE FUNDS ON TERMS ACCEPTABLE TO US
The expansion and development of our business will require significant
capital, which we may be unable to obtain, to fund our capital expenditures and
operations, including working capital needs. Our principal capital expenditures
and lease payments include the purchase, lease and installation of network
equipment such as routers, telecommunications equipment and other computer
equipment. The timing and amount of our future capital requirements may vary
significantly depending on numerous factors, including regulatory,
technological, competitive and other developments in our industry. During the
next twelve months, we expect to meet our cash requirements with existing cash,
cash equivalents and short-term investments, the net proceeds from this offering
and cash flow from sales of our services. However, our capital requirements
depend on several factors, including the rate of market acceptance of our
services, the ability to expand our customer base, the rate of deployment of
additional P-NAPs and other factors. If our capital requirements vary materially
from those currently planned, or if we fail to generate sufficient cash flow
from the sales of our services, we may require additional financing sooner than
anticipated or we may have to delay or abandon some or all of our development
and expansion plans or otherwise forego market opportunities.
We may not be able to obtain future equity or debt financing on favorable
terms, if at all. In addition, our credit agreement contains covenants
restricting our ability to incur further indebtedness. Future borrowing
instruments such as credit facilities and lease agreements are likely to contain
similar or more restrictive covenants and will likely require us to pledge
assets as security for borrowings thereunder. Our inability to obtain additional
capital on satisfactory terms may delay or prevent the expansion of our
business.
RISKS RELATED TO OUR INDUSTRY
BECAUSE THE DEMAND FOR OUR SERVICES DEPENDS ON CONTINUED GROWTH IN USE OF
THE INTERNET, A SLOWING OF THIS GROWTH COULD HARM THE DEVELOPMENT OF THE
DEMAND FOR OUR SERVICES
Critical issues concerning the commercial use of the Internet remain
unresolved and may hinder the growth of Internet use, especially in the business
market we target. Despite growing interest in the varied commercial uses of the
Internet, many businesses have been deterred from purchasing Internet
connectivity services for a number of reasons, including inconsistent or
unreliable quality of service, lack of availability of cost-effective,
high-speed options, a limited number of local access points for corporate users,
inability to integrate business applications on the Internet, the need to deal
with multiple and frequently incompatible vendors and a lack of tools to
simplify Internet access and use. Capacity constraints caused by growth in the
use of the Internet may, if left unresolved, impede further development of the
Internet to the extent that users experience delays, transmission errors and
other difficulties. Further, the adoption of the Internet for commerce and
communications, particularly by those individuals and enterprises that have
historically relied upon alternative means of commerce and communication,
generally requires an understanding and acceptance of a new way of conducting
business and exchanging information. In particular, enterprises that have
already invested substantial resources in other means of conducting commerce and
exchanging information may be particularly reluctant or slow to adopt a new
strategy that may make their existing personnel and infrastructure obsolete. The
failure of the market for business related Internet solutions to further develop
could cause our revenues to grow more slowly than anticipated and reduce the
demand for our services.
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BECAUSE THE INTERNET CONNECTIVITY MARKET IS NEW AND ITS VIABILITY IS
UNCERTAIN, THERE IS A RISK THAT OUR SERVICES MAY NOT BE ACCEPTED
We face the risk that the market for high performance Internet connectivity
services might fail to develop, or develop more slowly than expected, or that
our services may not achieve widespread market acceptance. This market has only
recently begun to develop, is evolving rapidly and likely will be characterized
by an increasing number of entrants. There is significant uncertainty as to
whether this market ultimately will prove to be viable or, if it becomes viable,
that it will grow. Furthermore, we may be unable to market and sell our services
successfully and cost-effectively to a sufficiently large number of customers.
We typically charge more for our services than do our competitors, which may
affect market acceptance of our services. Finally, if the Internet becomes
subject to a form of central management, or if the Internet backbone providers
establish an economic settlement arrangement regarding the exchange of traffic
between backbones, the problems of congestion, latency and data loss addressed
by our Internet connectivity services could be largely resolved and our core
business rendered obsolete.
IF WE ARE UNABLE TO RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID
TECHNOLOGICAL CHANGE, WE MAY LOSE OR FAIL TO ESTABLISH A COMPETITIVE
ADVANTAGE IN OUR MARKET
The Internet connectivity industry is characterized by rapidly changing
technology, industry standards, customer needs and competition, as well as by
frequent new product and service introductions. We may be unable to successfully
use or develop new technologies, adapt our network infrastructure to changing
customer requirements and industry standards, introduce new services or enhance
our existing services on a timely basis. Furthermore, new technologies or
enhancements that we use or develop may not gain market acceptance. Our pursuit
of necessary technological advances may require substantial time and expense,
and we may be unable to successfully adapt our network and services to alternate
access devices and technologies.
If our services do not continue to be compatible and interoperable with
products and architectures offered by other industry members, our ability to
compete could be impaired. Our ability to compete successfully is dependent, in
part, upon the continued compatibility and interoperability of our services with
products and architectures offered by various other industry participants.
Although we intend to support emerging standards in the market for Internet
connectivity, we cannot assure you that we will be able to conform to new
standards in a timely fashion, if at all, or maintain a competitive position in
the market.
NEW TECHNOLOGIES COULD DISPLACE OUR SERVICES OR RENDER THEM OBSOLETE
New technologies and industry standards have the potential to replace or
provide lower cost alternatives to our services. The adoption of such new
technologies or industry standards could render our existing services obsolete
and unmarketable. For example, our services rely on the continued widespread
commercial use of the set of protocols, services and applications for linking
computers known as Transmission Control Protocol/Internetwork Protocol, or
TCP/IP. Alternative sets of protocols, services and applications for linking
computers could emerge and become widely adopted. A resulting reduction in the
use of TCP/IP could render our services obsolete and unmarketable. Our failure
to anticipate the prevailing standard or the failure of a common standard to
emerge could hurt our business. Further, we anticipate the introduction of other
new technologies, such as telephone and facsimile capabilities, private
networks, multimedia document distribution and transmission of audio and video
feeds, requiring broadband access to the Internet, but we cannot assure you that
such technologies will create opportunities for us.
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SERVICE INTERRUPTIONS CAUSED BY SYSTEM FAILURES COULD HARM CUSTOMER
RELATIONS, EXPOSE US TO LIABILITY AND INCREASE OUR CAPITAL COSTS
Interruptions in service to our customers could harm our customer
relations, expose us to potential lawsuits and require us to spend more money
adding redundant facilities. Our operations depend upon our ability to protect
our customers' data and equipment, our equipment and our network infrastructure,
including our connections to our backbone providers, against damage from human
error or "acts of God." Even if we take precautions, the occurrence of a natural
disaster or other unanticipated problem could result in interruptions in the
services we provide to our customers.
Although we have built redundancy into our network and hosting facilities,
we do not have a formal disaster recovery plan and our network is currently
subject to various single points of failure. For example, a problem with one or
more of our backbone providers could cause an interruption in the services we
provide to some of our customers.
CAPACITY CONSTRAINTS COULD HARM CUSTOMER RELATIONS AND EXPOSE US TO
LIABILITY
Failure of the backbone providers and other Internet infrastructure
companies to continue to grow in an orderly manner could result in capacity
constraints leading to service interruptions to our customers. Although the
national telecommunications networks and Internet infrastructures have
historically developed in an orderly manner, there is no guarantee that this
orderly growth will continue as more services, users and equipment connect to
the networks. Failure by our telecommunications and Internet service providers
to provide us with the data communications capacity we require could cause
service interruptions.
OUR NETWORK AND SOFTWARE ARE VULNERABLE TO SECURITY BREACHES AND SIMILAR
THREATS WHICH COULD RESULT IN OUR LIABILITY FOR DAMAGES AND HARM OUR
REPUTATION
Despite the implementation of network security measures, the core of our
network infrastructure is vulnerable to computer viruses, break-ins, network
attacks and similar disruptive problems. This could result in our liability for
damages, and our reputation could suffer, thereby deterring potential customers
from working with us. Security problems caused by third parties could lead to
interruptions and delays or to the cessation of service to our customers.
Furthermore, inappropriate use of the network by third parties could also
jeopardize the security of confidential information stored in our computer
systems and in those of our customers.
Although we intend to continue to implement industry-standard security
measures, in the past some of these industry-standard measures have occasionally
been circumvented by third parties, although not in our system. Therefore, we
cannot assure you that the measures we implement will not be circumvented. The
costs and resources required to eliminate computer viruses and alleviate other
security problems may result in interruptions, delays or cessation of service to
our customers, which could hurt our business.
SHOULD THE GOVERNMENT MODIFY OR INCREASE ITS REGULATION OF THE INTERNET,
THE PROVISION OF OUR SERVICES COULD BECOME MORE COSTLY
There is currently only a small body of laws and regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, international, federal, state and
local governments may adopt laws and regulations which affect the Internet. The
nature of any new laws and regulations and the manner in which existing and new
laws and regulations may be interpreted and enforced cannot be fully determined.
The adoption of any future laws or regulations might decrease the growth of the
Internet, decrease demand for our services, impose taxes or other costly
technical requirements or otherwise increase the cost of doing business on the
Internet or in some other manner have a significantly harmful effect on us or
our customers. The
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government may also seek to regulate some segments of our activities as it has
with basic telecommunications services. Moreover, the applicability to the
Internet of existing laws governing intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity, libel, employment,
personal privacy and other issues is uncertain and developing. We cannot predict
the impact, if any, that future regulation or regulatory changes may have on our
business.
RISKS RELATED TO OUR OFFERING
OUR STOCK HAS NO PRIOR TRADING MARKET; YOU MAY NOT BE ABLE TO RESELL YOUR
STOCK AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE
Before this offering, there has not been a public trading market for our
common stock, and an active trading market for our common stock may not develop
or be sustained after this offering. Further, the market price of our common
stock may decline below our initial public offering price. The initial public
offering price will be determined by negotiations between the representatives of
the underwriters and us. See "Underwriting" for a discussion of the factors to
be considered in determining the initial public offering price.
INTERNET RELATED STOCK PRICES ARE ESPECIALLY VOLATILE, AND THIS VOLATILITY
MAY DEPRESS OUR STOCK PRICE
The stock market and specifically the stock prices of Internet related
companies have been very volatile. This volatility is often not related to the
operating performance of the companies. This broad market volatility and
industry volatility may reduce the price of our common stock, without regard to
our operating performance. Due to this volatility, the market price of our
common stock could significantly decrease.
SIGNIFICANT SHAREHOLDERS AND CURRENT MANAGEMENT WILL CONTROL APPROXIMATELY
60% OF OUR COMMON STOCK AFTER THIS OFFERING, AND THEIR CONTROL MAY LIMIT
YOUR ABILITY TO INFLUENCE THE OUTCOME OF MATTERS REQUIRING SHAREHOLDER
APPROVAL
Immediately following this offering, Morgan Stanley Venture Partners III,
L.P. and certain affiliated funds, collectively, Morgan Stanley Dean Witter
Venture Partners, H&Q InterNAP Investors, L.P., Oak Investment Partners VIII,
L.P., Vulcan Ventures Incorporated and Robert J. Lunday, Jr. will beneficially
own approximately 14.9%, 11.3%, 9.6%, 7.9% and 9.3%, respectively, of our
outstanding common stock. See "Principal Shareholders" and "Underwriters". In
addition, our executive officers and directors may be deemed to beneficially own
in the aggregate approximately 59.8% of our outstanding common stock, including
shares of our common stock that may be deemed to be owned by some of our
officers and directors as a result of their relationships with these entities.
Accordingly, Morgan Stanley Dean Witter Venture Partners, H&Q InterNAP
Investors, L.P., Oak Investment Partners VIII, L.P., Vulcan Ventures
Incorporated and Robert J. Lunday, Jr. and our executive officers and directors,
whether acting alone or together, will be able to exert considerable influence
over any shareholder vote, including any vote on the election or removal of
directors and any merger, consolidation or sale of all or substantially all of
our assets, and control our management and affairs. This control could limit
your ability to influence the outcome of matters requiring shareholder approval.
Each of Morgan Stanley Dean Witter Venture Partners, H&Q InterNAP Investors,
L.P., Oak Investment Partners VIII, L.P. and Vulcan Ventures Incorporated has
one representative on our board of directors. In addition, Robert J. Lunday, Jr.
is one of our directors.
FUTURE SALES OF OUR COMMON STOCK BY OUR EXISTING SHAREHOLDERS COULD CAUSE
OUR STOCK PRICE TO FALL
If our shareholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, the market
price of our common stock may fall.
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Such sales might also make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. After completion of this offering and our private placement to
Inktomi, we will have 63,867,455 shares of common stock outstanding, assuming no
exercise of outstanding options or warrants after August 31, 1999. The officers,
directors and certain of our shareholders have agreed not to sell or otherwise
dispose of any of their shares for a period of 180 days after the date of this
prospectus. Morgan Stanley & Co. Incorporated, however, may in its own
discretion, at any time and in most cases without notice, release all or any
portion of the shares subject to lock-up agreements. For further information
regarding sales of stock subsequent to this offering, see "Shares Eligible for
Future Sale" and "Underwriting."
OUR MANAGEMENT HAS BROAD DISCRETION IN THE APPLICATION OF PROCEEDS, WHICH
MAY INCREASE THE RISK THAT THE PROCEEDS WILL NOT BE APPLIED EFFECTIVELY
The net proceeds of this offering are not allocated for specific purposes.
Our management will have broad discretion in determining how to spend the
proceeds of this offering and may spend proceeds in a manner that our
shareholders may not deem desirable.
YOU WILL EXPERIENCE IMMEDIATE AND SIGNIFICANT DILUTION OF BOOK VALUE PER
SHARE
The initial public offering price of our common stock will be substantially
higher than the net tangible book value per share of the outstanding common
stock immediately after this offering. Therefore, based upon an assumed initial
public offering price of $14.00 per share, if you purchase our common stock in
this offering, you will incur immediate dilution of $11.67 per share. If
additional shares are sold by the underwriters following exercise of their
over-allotment option, or if outstanding options or warrants to purchase shares
of common stock are exercised, there will be further dilution.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT MAY DISCOURAGE TAKE-OVER
ATTEMPTS AND DEPRESS THE MARKET PRICE OF OUR STOCK
Provisions of our amended and restated articles of incorporation and
by-laws, as well as provisions of Washington law, may make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
shareholders. See "Descriptions of Capital Stock" for a discussion of such
anti-takeover provisions.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "except," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risk Factors."
These factors may cause our actual results to differ materially from any
forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform such statements to actual results
or to changes in our expectations.
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USE OF PROCEEDS
The net proceeds to be received by us from the sale of 8,700,000 shares of
common stock in this offering are estimated to be $112.2 million ($129.2 million
if the underwriters exercise their over-allotment option in full), at an assumed
initial public offering price of $14.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us. In addition, the net proceeds to be received by us from the sale of
1,536,098 shares of common stock in a private placement to Inktomi are estimated
to be $19.0 million.
We expect to use approximately $40 million of our net proceeds for capital
expenditures associated with expansion of our network. We intend to use the
remaining net proceeds for general corporate purposes. The amounts we actually
expend for this expansion and other purposes may vary significantly and will
depend on a number of factors, including the amount of our future revenues and
other factors described under "Risk Factors." Accordingly, our management will
retain broad discretion in the allocation of the net proceeds of this offering.
A portion of the net proceeds may also be used to acquire or invest in
complementary businesses, technologies, product lines or products. We have no
current plans, agreements or commitments with respect to any acquisitions, and
we are not currently engaged in any negotiations with respect to any such
transaction. Pending these uses, the net proceeds of this offering will be
invested in short term, interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared nor paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. In addition, our loan and security
agreement with a commercial bank prohibits the payment of dividends.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- on an actual basis,
- on a pro forma basis to reflect the conversion upon the closing of this
offering of all outstanding shares of preferred stock into 49,469,479
shares of common stock; and
- on a pro forma as adjusted basis to reflect the sale of 8,700,000 shares
of the common stock offered in this offering at an assumed initial public
offering price of $14.00 per share, the sale of 1,536,098 shares of
common stock to Inktomi in a private placement at an assumed price of
$13.02 per share, and the receipt of the net proceeds therefrom, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
This information should be read in conjunction with our unaudited financial
statements and our unaudited pro forma financial information included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- -------------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Capital lease obligations, less current portion....... $ 6,776 $ 6,776 $ 6,776
-------- -------- --------
Shareholders' equity:
Convertible preferred stock: $.001 par value per
share, 50,069,615 shares authorized, 49,469,479
issued and outstanding, actual; 10,000,000 shares
authorized, no shares issued and outstanding, pro
forma and pro forma as adjusted.................. 50 -- --
Common stock: $.001 par value per share, 300,000,000
shares authorized, 4,031,749 issued and
outstanding, actual; 300,000,000 shares
authorized, 53,501,228 shares issued and
outstanding, pro forma; and 500,000,000 shares
authorized, 63,737,326 shares issued and
outstanding, pro forma as adjusted............... 4 54 64
Additional paid-in capital.......................... 57,023 57,023 188,187
Deferred stock compensation......................... (14,113) (14,113) (14,113)
Accumulated deficit................................. (25,690) (25,690) (25,690)
-------- -------- --------
Total shareholders' equity....................... 17,274 17,274 148,448
-------- -------- --------
Total capitalization........................ $ 24,050 $ 24,050 $155,224
======== ======== ========
</TABLE>
This capitalization table excludes the following shares as of June 30,
1999:
- 6,136,622 shares subject to options with a weighted average exercise
price of $1.58 per share;
- 6,703,296 shares that could be issued under our stock plans; and
- 600,136 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $.60 per share. See "Description of
Capital Stock" and "Management -- Incentive Stock Plans."
The foregoing information excludes a warrant to purchase 768,049 shares of
common stock that will be issued to Inktomi as part of the private placement
that will close at the same time or immediately after the closing of our initial
public offering and warrants to purchase 100,000 shares of common stock issued
to seven shareholders in connection with our standby credit facility.
19
<PAGE> 25
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$17.2 million, or approximately $.32 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible assets
less total liabilities, divided by the number of outstanding shares of common
stock, assuming conversion of all outstanding shares of preferred stock into
common stock. After giving effect to our sale of the 8,700,000 shares of common
stock in this offering at an assumed initial public offering price of $14.00 per
share, the sale of 1,536,098 shares to Inktomi in a private placement at an
assumed price of $13.02 per share, and our receipt of the estimated net proceeds
therefrom, our pro forma as adjusted net tangible book value as of June 30, 1999
would have been approximately $148.3 million, or $2.33 per share. This
represents an immediate increase in net tangible book value of $2.01 per share
to existing shareholders and an immediate dilution of $11.67 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value per share as of June 30,
1999................................................... $ .32
Increase per share attributable to Inktomi................ .34
Increase per share attributable to new investors.......... 1.67
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... 2.33
------
Dilution per share to new investors......................... $11.67
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999,
the differences between existing shareholders, Inktomi, and the purchasers of
shares in this offering. With respect to the number of shares of common stock
purchased, the total consideration paid and the average price per share paid,
before deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 53,501,228 84% $ 40,948,275 22% $ .77
Inktomi........................ 1,536,098 2 20,000,000 11 13.02
New investors.................. 8,700,000 14 121,800,000 67 14.00
---------- --- ------------ ---
Total................ 63,737,326 100% $182,748,275 100%
========== === ============ ===
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants outstanding as of June 30, 1999. As of June 30, 1999, there were
options outstanding to purchase a total of 6,136,622 shares with a weighted
average exercise price of $1.58 per share and warrants outstanding to purchase a
total of 600,136 shares with a weighted average exercise price of $.60 per
share. To the extent that any of these options or warrants are exercised, there
will be further dilution to new investors.
The foregoing information excludes a warrant to purchase 768,049 shares of
common stock that will be issued to Inktomi in connection with the private
placement that will close at the same time or immediately after the closing of
our initial public offering and warrants to purchase 100,000 shares of common
stock issued to seven shareholders in connection with our standby credit
facility.
20
<PAGE> 26
SELECTED FINANCIAL DATA
The following selected financial data are qualified by reference to, and
should be read in conjunction with, our financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this prospectus. The statement of
operations data presented below for the period from inception (May 1, 1996) to
December 31, 1996 and for the years ended December 31, 1997 and 1998 and the
selected balance sheet data at December 31, 1997 and 1998 are derived from our
financial statements that have been audited by PricewaterhouseCoopers LLP,
independent accountants, included elsewhere in this prospectus. The selected
balance sheet data at December 31, 1996 are derived from our financial
statements that have also been audited by PricewaterhouseCoopers LLP and that
are not included in this prospectus. The selected statement of operations data
for the six months ended June 30, 1998 and 1999 and the balance sheet data at
June 30, 1999 are derived from our unaudited financial statements included
elsewhere in this prospectus. The unaudited financial statements include, in the
opinion of our management, all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and results of operations for these periods. The financial data for the
six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999 or any other future
period.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
PERIOD FROM INCEPTION DECEMBER 31, JUNE 30,
(MAY 1, 1996) TO ------------------ -------------------
DECEMBER 31, 1996 1997 1998 1998 1999
--------------------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 44 $ 1,045 $ 1,957 $ 731 $ 3,410
----- ------- ------- ------- --------
Costs and expenses:
Cost of network and customer support.......... 321 1,092 3,216 994 7,906
Product development........................... 184 389 754 318 1,395
Sales and marketing........................... 78 261 2,822 352 5,869
General and administrative.................... 378 713 1,910 594 2,905
Amortization of deferred stock compensation... -- -- 205 19 1,787
----- ------- ------- ------- --------
Total operating costs and expenses..... 961 2,455 8,907 2,277 19,862
----- ------- ------- ------- --------
Loss from operations............................ (917) (1,410) (6,950) (1,546) (16,452)
Other income (expense):
Interest income............................... 6 36 169 121 450
Interest and financing expense................ (48) (235) (90) (36) (147)
Loss on disposal of assets.................... -- -- (102) -- --
----- ------- ------- ------- --------
Net loss........................................ $(959) $(1,609) $(6,973) $(1,461) $(16,149)
===== ======= ======= ======= ========
Basic and diluted net loss per share(1)......... $(.29) $ (.48) $ (2.09) $ (.44) $ (4.78)
===== ======= ======= ======= ========
Weighted average shares used to compute basic
and diluted net loss per share(1)............. 3,333 3,333 3,336 3,336 3,378
===== ======= ======= ======= ========
Pro forma basic and diluted net loss per
share(2)...................................... $ (.31) $ (.34)
======= ========
Weighted average shares used in computing pro
forma basic and diluted net loss per
share(2)...................................... 22,733 47,771
======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------- AS OF JUNE 30,
1996 1997 1998 1999
------ ------ ------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 145 $4,770 $ 275 $13,296
Total assets................................................ 1,099 5,987 7,487 30,830
Capital lease obligations, less current portion............. 421 240 2,342 6,776
Total shareholders' equity (deficit)........................ 43 4,829 (436) 17,274
</TABLE>
- -------------------------
(1) See note 1 of notes to financial statements for a description of the
computation of basic and diluted net loss per share and the number of shares
used to compute basic and diluted net loss per share.
(2) Pro forma per share calculations reflect the conversion of preferred stock
into shares of common stock as if the conversion occurred as of the date of
original issuance.
21
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our
financial statements, including the notes, appearing elsewhere in this
prospectus. Some information contained in the discussion and analysis set forth
below and elsewhere in this prospectus, including information with respect to
our plans and strategy for our business and related financing, includes
forward-looking statements that involve risk and uncertainties. See "Risk
Factors" for a discussion of important factors that could cause actual results
to differ materially from the results described in or implied by the
forward-looking statements contained in this prospectus.
OVERVIEW
We are a leading provider of fast, reliable and centrally managed Internet
connectivity services targeted at businesses seeking to maximize the performance
of mission-critical Internet-based applications. Customers connected to one of
our P-NAPs have their data optimally routed to and from destinations on the
Internet in a manner that minimizes the use of congested public network access
points and private peering points. This optimal routing of data traffic over the
multiplicity of networks that comprise the Internet enables higher transmission
speeds, lower instances of packet loss and greater quality of service. As of
June 30, 1999, we provided our high quality Internet connectivity services to
approximately 120 customers, including Amazon.com, Fidelity Investments, Go2Net,
ITXC, Nasdaq, TheStreet.com and WebTV Networks.
We were founded in May 1996 and began selling Internet connectivity
services from our first P-NAP, located in Seattle, during October 1996. We began
selling services from our second and third P-NAPs in New York City and San Jose
by December 1998. During the first six months of 1999, we began selling services
from our P-NAPs located in the Washington D.C., Los Angeles, Chicago and Boston
metropolitan areas. We began selling services from our eighth P-NAP in Atlanta
in August 1999. In addition, we expect to complete the deployment of four
additional P-NAPs in the United States by the end of 1999, bringing the total
number of revenue-generating P-NAPs to 12 by the end of 1999. In a March 9, 1999
interview with CNNfn our Chief Executive Officer stated that we expected to have
operational P-NAPs in a total of about 16 or 17 cities by the end of the year.
At the time he made this comment, we did not define an operational P-NAP as one
that is connected to at least two of the following four backbone providers:
UUNET, Sprint, Cable & Wireless USA and GTE. Therefore, the number of P-NAPs our
Chief Executive Officer discussed on CNNfn to be operational by the end of 1999
exceeded the 12 P-NAPs we currently expect to be operational because his comment
was not based on this criterion.
After we decide to open a new P-NAP, we enter into a deployment phase which
typically lasts four to six months, during which time we undertake to complete
the necessary arrangements required to make the P-NAP commercially ready for
service. Among other things, this usually entails obtaining co-location space to
locate our equipment, entering into agreements with backbone providers,
obtaining local loop connections from local telecommunications providers,
building P-NAPs and initiating pre-sales and marketing activities. Consequently,
we usually incur a significant amount of upfront costs related to making a P-NAP
commercially ready for service prior to generating revenues. Costs during this
period can vary depending on the size of the market, but are approximately $2.5
million, including capital expenditures. Therefore, our results of operations
will be negatively affected during times of P-NAP deployment.
Our customers are primarily businesses that desire high performance
Internet connectivity services in order to run mission-critical Internet-based
applications. Due to our high quality of service we generally price our services
at a premium to providers of conventional Internet connectivity
22
<PAGE> 28
services. We expect to remain a premium provider of high quality Internet
connectivity services and anticipate continuing our pricing policy in the
future. We believe customers will continue to demand the highest quality of
service as their Internet connectivity needs grow and become even more complex
and, as such, will continue to pay a premium for high quality of service.
Our revenues are generated primarily from the sale of Internet connectivity
services and, to a lesser extent, other ancillary services primarily provided
from our Seattle data center, such as co-location, web hosting and server
management services, and installation services at fixed rate or usage based
pricing to our customers that desire a DS-3 or faster connection. We offer T-1
connections only at a fixed rate. We recognize our revenues when we have
provided the related services.
Network and customer support costs are primarily comprised of the costs for
connecting to and accessing Internet backbone providers, as well as the costs
related to deploying, operating, installing and maintaining P-NAPs and our
network operations center. To the extent a P-NAP is located a distance from the
respective Internet backbone providers, we may incur additional local loop
charges on a recurring basis. Additionally, rental fees and depreciation costs
related to our P-NAPs are included in cost of network and customer support.
Product development costs consist principally of compensation and other
personnel costs, consultant fees and prototype costs related to the design,
development and testing of our proprietary technology, enhancement of our
network management software and development of our internal systems.
Significantly all of our product development costs are expensed as incurred.
Sales and marketing costs consist of compensation, commissions and other
costs for personnel engaged in marketing, sales and field service support
functions, as well as advertising, tradeshows, direct response programs, new
P-NAP launch events, management of our web site and other promotional costs.
General and administrative costs consist primarily of compensation and
other expenses for executive, finance, human resources and administrative
personnel, professional fees and other general corporate costs.
During the year ended December 31, 1998 and the six months ended June 30,
1999, in connection with the grant of certain stock options to employees, we
recorded deferred stock compensation totaling $16.1 million, representing the
difference between the deemed fair value of our common stock on the date such
options were granted and the exercise price. Such amount is included as a
reduction of shareholders' equity and is being amortized over the vesting period
of the individual options, generally four years, using an accelerated method as
described in Financial Accounting Standards Board Interpretation No. 28. We
recorded amortization of deferred stock compensation in the amount of $205,000
for the year ended December 31, 1998 and $1.8 million for the six months ended
June 30, 1999. At June 30, 1999, we had a total of $14.1 million remaining to be
amortized over the corresponding vesting periods of the stock options.
The revenue and income potential of our business and market is unproven,
and our limited operating history makes it difficult to evaluate our prospects.
We have only been in existence since 1996, and our services are only offered in
limited regions. We have incurred net losses in each quarterly and annual period
since our inception, and as of June 30, 1999, our accumulated deficit was $25.7
million.
23
<PAGE> 29
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth our statement of operations data for the six
quarters ended June 30, 1999, as well as the percentage of total revenues
represented by each item. This information has been derived from our unaudited
financial statements. In the opinion of our management, the unaudited financial
statements have been prepared on the same basis as the audited financial
statements appearing elsewhere in this prospectus and include all adjustments,
consisting only of normal recurring adjustments that we consider necessary for a
fair presentation of such information. The quarterly data should be read in
conjunction with our audited financial statements and the notes thereto
appearing elsewhere in this prospectus. The results of operations for any one
quarter are not necessarily indicative of the results of operations for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................................... $ 314 $ 417 $ 472 $ 754 $ 1,244 $ 2,166
------ ------ ------- ------- ------- --------
Costs and expenses:
Costs of network and customer support........... 440 554 797 1,425 2,346 5,560
Product development............................. 160 158 187 249 565 830
Sales and marketing............................. 128 224 715 1,755 2,236 3,633
General and administrative...................... 235 359 487 829 1,172 1,733
Amortization of deferred stock compensation..... 10 9 110 76 349 1,438
------ ------ ------- ------- ------- --------
Total operating costs and expenses....... 973 1,304 2,296 4,334 6,668 13,194
------ ------ ------- ------- ------- --------
Loss from operations.............................. (659) (887) (1,824) (3,580) (5,424) (11,028)
Other income (expense):
Interest income................................. 65 56 38 10 206 244
Interest and financing expense.................. (12) (24) (27) (27) (57) (90)
Loss on disposal of assets...................... -- -- -- (102) -- --
------ ------ ------- ------- ------- --------
Net loss.......................................... $ (606) $ (855) $(1,813) $(3,699) $(5,275) $(10,874)
====== ====== ======= ======= ======= ========
Basic and diluted net loss per share.............. $(0.18) $(0.26) $ (0.54) $ (1.11) $ (1.58) $ (3.18)
====== ====== ======= ======= ======= ========
Weighted average shares used in computing basic
and diluted net loss per share.................. 3,335 3,337 3,337 3,337 3,337 3,420
====== ====== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
----------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................... 100% 100% 100% 100% 100% 100%
---- ---- ---- ---- ---- ----
Costs and expenses:
Costs of network and customer support............ 140 133 170 189 189 257
Product development.............................. 51 38 40 33 45 38
Sales and marketing.............................. 41 54 151 233 180 168
General and administrative....................... 75 86 103 110 94 80
Amortization of deferred stock compensation...... 3 2 23 10 28 66
---- ---- ---- ---- ---- ----
Total operating costs and expenses........ 310 313 487 575 536 609
---- ---- ---- ---- ---- ----
Loss from operations............................... (210) (213) (387) (475) (436) (509)
Other income (expense):
Interest income.................................. 21 14 8 1 17 11
Interest and financing expense................... (4) (6) (5) (4) (5) (4)
Loss on disposal of assets....................... -- -- -- (13) -- --
---- ---- ---- ---- ---- ----
Net loss........................................... (193)% (205)% (384)% (491)% (424)% (502)%
==== ==== ==== ==== ==== ====
</TABLE>
24
<PAGE> 30
Our quarterly operating results have fluctuated significantly. We expect
that future operating results will be subject to similar fluctuations for a
variety of factors, which are difficult or impossible to predict. See "Risk
Factors -- Negative Movements in Our Quarterly Operating Results May Disappoint
Analysts' Expectations, Which Could Have a Negative Impact on Our Stock Price."
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, selected
statement of operations data for the periods indicated:
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED SIX MONTHS
INCEPTION DECEMBER 31, ENDED JUNE 30,
(MAY 1, 1996) TO ------------ --------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues................................. 100% 100% 100% 100% 100%
------ ---- ---- ---- ----
Costs and expenses:
Cost of network and customer support... 730 105 164 136 232
Product development.................... 418 37 39 43 41
Sales and marketing.................... 177 25 144 48 172
General and administrative............. 859 68 98 81 85
Amortization of deferred stock
compensation........................ -- -- 10 3 52
------ ---- ---- ---- ----
Total operating costs and
expenses.................... 2,184 235 455 311 582
------ ---- ---- ---- ----
Loss from operations..................... (2,084) (135) (355) (211) (482)
Other income (expense):
Interest income........................ 13 3 9 16 12
Interest and financing expense......... (109) (22) (5) (5) (4)
Loss on disposal of assets............. -- -- (5) -- --
------ ---- ---- ---- ----
Net loss................................. (2,180)% (154)% (356)% (200)% (474)%
====== ==== ==== ==== ====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
Revenues. Revenues increased 369% from $731,000 for the six-month period
ended June 30, 1998 to $3.4 million for the six-month period ended June 30,
1999. This increase of $2.7 million was primarily due to increased Internet
connectivity revenues. The increase in Internet connectivity revenues was
attributable to the increased sales at our existing P-NAPs and the opening of
six additional P-NAPs during 1999 and the second half of 1998, resulting in a
total of seven operational P-NAPs at June 30, 1999, as compared to one P-NAP at
June 30, 1998.
Costs of Network and Customer Support. Costs of network and customer
support increased 690% from $1.0 million for the six-month period ended June 30,
1998 to $7.9 million for the six-month period ended June 30, 1999. This increase
of $6.9 million was primarily due to increased connectivity costs related to
added connections to Internet backbone providers at each P-NAP, comprising 53%
of the increase, and to a lesser extent, additional compensation costs
comprising 17% of the increase, and depreciation expense related to the
equipment at newly deployed P-NAPs comprising 10% of the increase. The increase
in compensation costs is primarily attributable to headcount changes including
10 additional personnel at our network operations center, 24 additional
personnel in our customer installation department and 21 additional personnel in
our P-NAP deployment department. Network and customer support costs as a
percentage of total revenues are generally greater than 100% for newly deployed
P-NAPs because we purchase Internet connectivity
25
<PAGE> 31
capacity from the backbone providers in advance of securing new customers. We
expect these costs to increase in absolute dollars as we deploy additional
P-NAPs.
Product Development. Product development costs increased 346% from $318,000
for the six-month period ended June 30, 1998, to $1.4 million for the six-month
period ended June 30, 1999. This increase of $1.1 million was primarily due to
compensation costs related to the addition of 29 personnel, comprising 45% of
the increase, and outside consulting fees, comprising 35% of the increase. We
expect product development costs to increase in absolute dollars for the
foreseeable future.
Sales and Marketing. Sales and marketing costs increased 1,563% from
$352,000 for the six-month period ended June 30, 1998 to $5.9 million for the
six-month period ended June 30, 1999. This increase of $5.5 million was
primarily due to compensation costs related to the addition of 84 personnel,
comprising 71% of the increase, and to a lesser extent, facility costs related
to the addition of sales offices. As part of our expanded sales and marketing
activities, we hired a vice president of sales and marketing during the second
quarter of 1998 and additional sales personnel during the second half of 1998
and the first half of 1999.
General and Administrative. General and administrative costs increased 387%
from $594,000 for the six-months ended June 30, 1998, to $2.9 million for the
six-month period ended June 30, 1999. This increase of $2.3 million was
primarily due to compensation costs related to the addition of 26 personnel,
comprising 39% of the change, increased depreciation and amortization costs due
to the addition of corporate office space during the third quarter of 1998,
comprising 13% of the increase, and professional services costs, comprising 10%
of the increase. We expect general and administrative costs to increase in
absolute dollars as we deploy additional P-NAPs.
Other Income (Expense). Other income (expense) consists of interest income,
interest and financing expense and other non-operating expenses. Other income,
net, increased 256% from $85,000 for the six-month period ended June 30, 1998 to
$303,000 for the six-month period ended June 30, 1999. This increase was
primarily due to interest income earned on the proceeds from the Series C
preferred stock financing, partially offset by increased interest expense on
capital lease obligations.
INCEPTION TO DECEMBER 31, 1996 AND YEARS ENDED DECEMBER 31, 1997 AND 1998
Revenues. Revenues increased from $44,000 during the period from May 1,
1996 through December 31, 1996 to $1.0 million in 1997 and to $2.0 million in
1998. The 2,273% increase of $1.0 million in 1997, as compared to the period
ended December 31, 1996, and the 100% increase of $1.0 million in 1998, as
compared to 1997, were primarily due to increased Internet connectivity
revenues, comprising 75% of the 1997 increase and 76% of the 1998 increase,
other ancillary service revenues, comprising 15% of the 1997 increase and 12% of
the 1998 increase and, to a lesser extent, customer installation fees,
comprising 10% of the 1997 increase and 12% of the 1998 increase. The increase
in Internet connectivity revenues was attributable to the deployment of our
first P-NAP at the end of 1996 and of two additional P-NAPs during 1998,
resulting in a total of three operational P-NAPs at December 31, 1998.
Costs of Network and Customer Support. Costs of network and customer
support increased from $321,000 during the period from May 1, 1996 through
December 31, 1996 to $1.1 million in 1997 and to $3.2 million in 1998. Costs of
network and customer support increased by $771,000, or 240%, in 1997, as
compared to the period ended December 31, 1996, and by $2.1 million, or 191%, in
1998, as compared to 1997. These increases were primarily due to increased
connectivity costs related to added connections to Internet backbone providers
at each P-NAP, comprising 70% of the 1997 increase and 40% of the 1998 increase,
and depreciation expense related to the equipment at newly
26
<PAGE> 32
deployed P-NAPs, comprising 21% of the 1997 increase and 17% of the 1998
increase. In addition, the increase in costs of network and customer support
from 1997 to 1998 also included compensation costs, comprising 22% of the
increase, related to 6 additional personnel at our network operations center, 7
additional personnel in our customer installation department and 7 additional
personnel in our P-NAP deployment department.
Product Development. Product development costs increased from $184,000
during the period from May 1, 1996 through December 31, 1996 to $389,000 in 1997
and to $754,000 in 1998. Product development costs increased by $205,000, or
111%, in 1997, as compared to the period ended December 31, 1996, and by
$365,000, or 94%, in 1998, as compared to 1997. These increases were primarily
due to compensation costs, comprising 99% of the 1997 increase and 67% of the
1998 increase, and increased travel costs related to developing systems at new
P-NAPs comprising 20% of the 1998 increase. The increased compensation costs
were related to the addition of 4 personnel during the latter half of 1996, 2
personnel during 1997, and 4 personnel during 1998.
Sales and Marketing. Sales and marketing costs increased from $78,000
during the period from May 1, 1996 through December 31, 1996 to $261,000 in 1997
and to $2.8 million in 1998. Sales and marketing costs increased by $183,000, or
235%, in 1997, as compared to the period ended December 31, 1996 and by $2.5
million, or 958%, in 1998, as compared to 1997. These increases were primarily
due to compensation costs comprising 57% of the 1997 increase and 74% of the
1998 increase, travel and entertainment costs comprising 10% of the increase in
1997 and 1998, and marketing costs related to the creation of the marketing
department, comprising 31% of the 1997 increase. The increased compensation
costs were related to the addition of 2 personnel in the latter half of 1996, 1
person during 1997, and 40 personnel during 1998.
General and Administrative. General and administrative costs increased from
$378,000 during the period from May 1, 1996 through December 31, 1996 to
$713,000 in 1997 and to $1.9 million in 1998. General and administrative costs
increased by $335,000, or 89% in 1997, as compared to the period ended 1996 and
by $1.2 million, or 168%, in 1998, as compared to 1997. These increases were
primarily due to increased compensation costs, comprising 47% of the 1997
increase and 11% of the 1998 increase, depreciation and amortization, comprising
16% of the 1997 increase and 6% of the 1998 increase, facility costs, comprising
25% of the 1997 increase and 38% of the 1998 increase, outside consulting fees,
comprising 13% of the 1998 increase, travel costs related to the deployment of
new P-NAPs, comprising 13% of the 1998 increase, and bad debt expense in 1998
and the subsequent bankruptcy of a significant customer, comprising 9% of the
1998 increase. The increased compensation costs were related to the addition of
4 personnel in the latter half of 1996, and 13 personnel during the second half
of 1998.
Other Income (Expense). Other expense, net, increased from $42,000 for the
period from May 1, 1996 through December 31, 1996 to $199,000 in 1997 and
decreased to $23,000 in 1998. Other expense, net, increased by $157,000, or
374%, in 1997 as compared to the period ended December 31, 1996 primarily due to
an expense of $124,000 related to the issuance of warrants to purchase Series B
preferred stock, and additional interest expense on capital lease obligations,
partially offset by additional interest income on the proceeds from the Series B
preferred stock financing. Other expense, net, decreased by $176,000, or 88%, in
1998 primarily due to increased interest income earned on the proceeds from the
Series B preferred stock financing, offset by a loss on disposal of assets of
$102,000.
27
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PROVISION FOR INCOME TAXES
We incurred operating losses from inception through June 30, 1999, and
therefore have not recorded a provision for income taxes. We have recorded a
valuation allowance for the full amount of our net deferred tax assets, as the
future realization of the tax benefit is not currently likely.
As of December 31, 1998, we had net operating loss carry-forwards of $7.2
million. These loss carry-forwards are available to reduce future taxable income
and expire at various dates through 2018. Under the provisions of the Internal
Revenue Code, certain substantial changes in our ownership may limit the amount
of net operating loss carry-forwards that could be utilized annually in the
future to offset taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
issuance of our equity securities, capital leases and bank loans. We have raised
an aggregate of approximately $40.7 million, net of offering expenses, through
the sale of our equity securities.
At June 30, 1999, we had cash, cash equivalents and short-term investments
of $13.3 million. We have a revolving line of credit with Silicon Valley Bank
under which we are allowed to borrow up to $750,000. At June 30, 1999, we had
drawn $625,000 on the line of credit, with the remaining balance reserved as
collateral for our company credit cards. The line of credit requires interest
only payments at prime plus 1% and matured in May 1999. During July 1999, we
amended our existing line of credit and established a new line of credit with
the same financial institution. The new line of credit allows us to borrow up to
$3.0 million, as limited by certain borrowing base requirements which include
maintaining certain levels of monthly revenues and customer turnover ratios. The
new line of credit requires monthly payments of interest only at prime plus 1%,
9.25% as of August 31, 1999, and matures on June 30, 2000. We borrowed an
additional $900,000 on the new line of credit during July 1999.
On August 23, 1999, we entered into an equipment financing arrangement with
Finova Capital Corporation allowing us to borrow up to $5.0 million for the
purchase of property and equipment. The equipment financing arrangement includes
sublimits of $3.5 million for equipment costs and $1.5 million for the
acquisition of software and other P-NAP and facility costs. Loans under the $3.5
million sublimit require monthly principal and interest payments over a term of
48 months. This facility bears interest at 7.47% plus an index rate based on the
yield of 4-year U.S. Treasury Notes, 13.11% at August 31, 1999. Loans under the
$1.5 million sublimit require monthly principal and interest payments over a
term of 36 months. This facility bears interest at 7.45% plus an index rate
based on the yield of 4-year U.S. Treasury Notes, 13.09% at August 31, 1999.
Borrowings under each sublimit must be made prior to May 1, 2000. During August
1999, we borrowed approximately $1.9 million pursuant to this arrangement.
On August 31, 1999, we entered into a standby loan facility commitment
letter with 7 shareholders, including a director of ours who will also act as
the administrative agent for the proposed facility. Upon completion of a
definitive agreement, the facility will allow us to draw up to $10.0 million
prior to December 31, 1999. The facility will bear interest at prime plus 2%,
10.25% as of August 31, 1999, with principal and interest due on the earlier of
six months from the first draw or a public or private sale of stock.
Additionally, upon completion of the definitive agreement, we will issue
warrants to purchase 100,000 shares of common stock with an exercise price equal
to our initial public offering share price or at a price determined in a private
sale of our stock. Further, at our option, the facility can be extended for an
additional six month term in consideration for the issuance of warrants to
purchase an additional 100,000 shares of our common stock.
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Net cash used in operations was $13.3 million for the six months ended June
30, 1999. Net cash used in operations was $5.3 million in 1998, $1.1 million in
1997 and $679,000 in the period ended December 31, 1996. Net cash used in
operations for the six months ended June 30, 1999 was primarily due to net
operating losses, increases in accounts receivable and prepaid expenses,
partially offset by non-cash charges and an increase in accounts payable. Net
cash used in operations for the year ended December 31, 1998 was primarily due
to net operating losses and increases in accounts receivable and prepaid
expenses, partially offset by non-cash charges and increases in accounts payable
and accrued liabilities. Net cash used in operations for the year ended December
31, 1997 was primarily due to net operating losses and accounts receivable,
partially offset by non-cash charges. Net cash used in operations for the period
ended December 31, 1996 was primarily due to operating losses and prepaid
expenses, partially offset by an increase in accounts payable.
Net cash used in investing activities was $14.2 million for the six months
ended June 30, 1999. Net cash used in investing activities was $702,000 in 1998,
$141,000 in 1997 and $174,000 in the period ended December 31, 1996. Net cash
used in investing activities in each period reflects increased purchases of
property and equipment not financed by capital leases. Purchases of property and
equipment related to P-NAP deployments was primarily financed by capital leases
(such purchases are excluded from the net cash used in investing activities in
the statement of cash flows), and totaled $6.3 million for the six months ended
June 30, 1999, $3.6 million for the year ended 1998, $260,000 for the year ended
1997, and $740,000 for the period ended December 31, 1996. Additionally, for the
six month period ended June 30, 1999, $10.0 million was used to purchase short-
term investments.
Net cash provided from financing activities was $30.6 million for the six
months ended June 30, 1999, $1.5 million in 1998, $5.9 million in 1997 and $1.0
million in the period ended December 31, 1996. Net cash from financing
activities primarily reflects proceeds from the private sales of our equity
securities.
We expect to spend significant additional capital to recruit and train our
customer installation team and the sales force and to build out the sales
facilities related to newly deployed P-NAPs. In addition to P-NAP deployment,
although to a lesser extent, product development and the development of our
internal systems and software will continue to require significant capital
expenditures in the foreseeable future, as will the expansion of our marketing
efforts. We expect to continue to expend significant amounts of capital on
property and equipment related to the expansion of facility infrastructure,
computer equipment and for research and development laboratory and test
equipment to support on-going research and development operations.
On September 17, 1999, we entered into an agreement with Inktomi to sell
$20.0 million of common stock in a private placement that will close at the same
time or immediately after the closing of our initial public offering. Inktomi
will pay the same price per share paid by the public in our initial public
offering, less an amount equivalent to the underwriting discounts and
commissions per share. We will also issue to Inktomi a warrant to purchase
additional shares of our common stock. The number of shares underlying the
warrant will be equal to 50% of the number of shares Inktomi purchases in the
private placement, and the exercise price per share will be 150% of the price
per share Inktomi pays in the private placement. The warrant will have a 2 year
term and include demand and piggyback registration rights. The agreement also
prohibits Inktomi from acquiring additional shares of our stock for a period of
2 years. We will pay a placement fee of $1.0 million upon closing of the private
placement. In addition, we have agreed to use our best efforts to complete a
technical and marketing agreement with Inktomi by November 19, 1999.
We believe that the net proceeds from this offering and the net proceeds
from our private placement to Inktomi, together with our cash and cash
equivalents, short-term investments and funds
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available under the revolving and capital lease lines will be sufficient to
satisfy our cash requirements for the next 12 months. Depending on our rate of
growth and cash requirements, we may require additional equity or debt financing
to meet future working capital needs, which may have a dilutive effect on our
then current shareholders. We cannot assure you that such additional financing
will be available or, if available, that such financing can be obtained on
satisfactory terms. Our management intends to invest cash in excess of current
operating requirements in short-term, interest-bearing, investment-grade
securities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of our cash equivalents, short-term investments and
capital lease obligations are at fixed interest rates, and therefore the fair
value of these instruments is affected by changes in market interest rates.
However, as of June 30, 1999, all of our cash equivalents mature within three
months and all of our short-term investments mature within one year. As of June
30, 1999, we believe the reported amounts of cash equivalents, short-term
investments and capital lease obligations to be reasonable approximations of
their fair values. As a result, we believe that the market risk arising from our
holdings of financial instruments is minimal.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133, which will be effective for us for the fiscal years and quarters beginning
after June 15, 2000, requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. We are assessing the requirements of SFAS No. 133 and
the effects, if any, on our financial position, results of operations and cash
flows.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, or SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This standard requires companies to expense the costs of
start-up activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The adoption of
SOP 98-5 did not have a material impact on our results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, or SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
requires companies to capitalize qualifying computer software costs which are
incurred during the application development stage and amortize them over the
software's estimated useful life. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998, however early adoption is allowed. We adopted
the requirements of SOP 98-1 during 1998.
IMPACT OF YEAR 2000
Many computers, software and other equipment include computer code in which
calendar year data is abbreviated to only two digits. As a result of this design
decision, some of these systems could fail to operate or fail to produce correct
results if "00" is interpreted to mean 1900, rather than 2000. These problems
are widely expected to increase in frequency and severity as the year 2000
approaches, and are commonly referred to as the "Year 2000 problem."
General Readiness Assessment. The Year 2000 problem may affect the network
infrastructure, computers, software and other equipment that we use, operate or
maintain for our operations. As a
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result, we have formalized our Year 2000 compliance plan, to be implemented by a
team of employees, led by our internal information technology staff, responsible
for monitoring the assessment and remediation status of our Year 2000 projects
and reporting their status to the audit committee of our board of directors.
Additionally, according to our Year 2000 compliance plan, the project team has
compiled a listing of all mission-critical items, both internally developed and
externally purchased, which may be impacted by the Year 2000 problem. We are in
the process of obtaining verification or validation from any independent third
parties whose products and services are deemed mission-critical to our processes
to assess and correct any of our Year 2000 problems or the costs associated with
these products and services. We expect to have all third party verifications, or
replacement of the related item, completed by the end of the third quarter of
1999. We believe that we have identified most of the major computers, software
applications and related equipment used in connection with our internal
operations that will need to be evaluated to determine if they must be modified,
upgraded or replaced to minimize the possibility of a material disruption to our
business. We expect to complete this process before the occurrence of any
material disruption of our business.
Assessment of Internal Infrastructure. Beginning in 1998, we began
assessing the ability of our internally developed software, infrastructure and
technologies to operate properly in the year 2000. We believe that our current
internally developed software, infrastructure and technologies are Year 2000
compliant. We have completed a testing plan and expect to complete replacement
of any required components by the end of the third quarter of 1999.
Additionally, as we design and develop new products, we subject them to testing
for Year 2000 compliance and the ability to distinguish between various date
formats.
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems and other common devices may
be affected by the Year 2000 problem. We are currently contacting all related
third party suppliers or testing the related items. We expect to have this
process completed and necessary replacements finished by the end of third
quarter of 1999.
Costs of Remediation. We estimate the total cost of completing any required
modifications, upgrades or replacements of our internal systems will not exceed
$50,000, most of which we expect to incur during calendar 1999. This estimate is
being monitored, and we will revise it as additional information becomes
available.
Based on the activities described above, we do not believe that the Year
2000 problem will significantly harm our business or operating results. In
addition, we have not deferred any material information technology projects, nor
equipment purchases, as a result of our Year 2000 problem activities.
Business Relationships. As part of our Year 2000 plan, we are in the
process of reviewing third-party suppliers of components used in the delivery of
our services, including AT&T, Cable and Wireless USA, Cisco Systems, Intermedia,
GTE, Sprint, PSINet, Netcom, UUNET and Verio, to identify and, to the extent
possible, resolve issues involving the Year 2000 problem. Additionally, we are
in the process of reviewing significant customers, including U.S.
Electrodynamics and Go2Net, to identify and, to the extent possible, resolve
issues involving the Year 2000 problem. However, we have limited or no control
over the actions of these third-party suppliers and customers. Thus, while we
expect that we will be able to resolve any significant Year 2000 problems with
these third parties, there can be no assurance that these business relationships
will resolve any or all Year 2000 problems before the occurrence of a material
disruption to the operation of our business. Any failure of these third parties
to timely resolve Year 2000 problems with their systems could significantly harm
our business, financial condition and results of operations.
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Most Likely Consequences of Year 2000 Problems. We expect to identify and
resolve all Year 2000 problems that could significantly harm our business
operations. However, we believe that it is not possible to determine with
complete certainty that all Year 2000 problems affecting us have been identified
or corrected. The number of devices and systems that could be affected and the
interactions among these devices and systems are too numerous to address. In
addition, no one can accurately predict which Year 2000 problem-related failures
will occur or the severity, timing, duration, or financial consequences of these
potential failures. As a result, we believe that the following consequences are
possible:
- a significant number of operational inconveniences and inefficiencies for
us, our suppliers and our customers that will divert management's time
and attention and financial and human resources from ordinary business
activities;
- possible business disputes and claims, including claims under our quality
of service warranty, due to Year 2000 problems experienced by our
customers and incorrectly attributed to our services or performance,
which we believe will be resolved in the ordinary course of business;
- a few serious business disputes alleging that we failed to comply with
the terms of contracts or industry standards of performance, some of
which could result in litigation or contract termination; and
- one or more of our backbone or other telecommunication providers may
encounter difficulties related to the Year 2000 and, as a result, may not
be able to send data to or receive data from one or more of our P-NAPs.
Contingency Plans. We are currently developing contingency plans to be
implemented if our efforts to identify and correct Year 2000 problems affecting
our internal systems are not effective. We expect to complete our contingency
plans by the end of the third quarter of 1999. Depending on the systems
affected, these plans could include:
- accelerated replacement of affected equipment or software;
- short to medium-term use of backup equipment and software or other
redundant systems;
- increased work hours for our personnel or the hiring of additional
information technology staff; and
- the use of contract personnel to correct, on an accelerated basis, any
Year 2000 problems that arise or to provide interim alternate solutions
for information system deficiencies.
Our implementation of any of these contingency plans could significantly
harm our business, financial condition and results of operations.
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BUSINESS
OVERVIEW
InterNAP is a leading provider of fast, reliable and centrally managed
Internet connectivity services targeted at businesses seeking to maximize the
performance of mission-critical Internet-based applications. Customers connected
to one of our Private-Network Access Points, or P-NAPs, have their data
optimally routed to and from destinations on the Internet in a manner that
minimizes the use of congested public network access points and private peering
points. This optimal routing of data traffic over the multiplicity of networks
that comprise the Internet enables higher transmission speeds, lower instances
of data loss and greater quality of service than services offered by
conventional Internet connectivity providers. As of June 30, 1999, we provided
consistent high performance Internet connectivity services to approximately 120
customers, including Amazon.com, Fidelity Investments, Go2Net, ITXC, Nasdaq,
TheStreet.com and WebTV, each of which represented at least 1% of our June 1999
revenues.
We offer our high performance Internet connectivity services at dedicated
line speeds of 1.5 Megabits per second, or Mbps, to 155 Mbps to customers
desiring a superior level of Internet performance. We provide our high
performance connectivity services through the deployment of P-NAPs, which are
highly redundant network infrastructure facilities coupled with our patented
routing technology. P-NAPs maintain high speed, dedicated connections to major
global Internet networks, commonly referred to as backbones, such as AGIS, AT&T,
Cable & Wireless USA, GTE, ICG Communications, Intermedia, PSINet, Sprint, UUNET
and Verio. In addition, we have entered into a traffic exchange interconnect
agreement with America Online, Inc. We currently operate eight P-NAPs which are
located in the Atlanta, Boston, Chicago, Los Angeles, New York, San Jose,
Seattle and Washington, D.C. metropolitan areas. We expect to complete the
deployment of an additional four P-NAPs in the Dallas, Miami, New York and
Philadelphia metropolitan areas by the end of 1999.
We believe that our P-NAPs provide a quality of service over the public
Internet enabling our customers to realize the full potential of their existing
Internet-based applications, such as e-commerce and on-line trading. In
addition, we believe our P-NAPs will enable our customers to take advantage of
new services, such as using the Internet to make telephone calls or send
facsimiles, create private networks, distribute multimedia documents and send
and receive audio and video feeds.
INDUSTRY BACKGROUND
THE GROWING IMPORTANCE OF THE INTERNET FOR MISSION-CRITICAL INTERNET-BASED
APPLICATIONS
The Internet has emerged as a global medium for communications and
commerce. The growth in data that is transmitted over the Internet, or data
traffic, is driven by a number of factors, including the rapidly increasing
number of network-enabled and Internet-based applications, the growing number of
personal computers linked to the Internet, improvements in network-enabled
devices, servers and routers, and the increasing availability of broadband
connections. As an illustration of this growth, Pioneer Consulting, LLC
estimates that Internet bandwidth demand in North America will grow from 175
Gigabits per second in 1998 to 2,990 Gigabits per second in 2003, representing a
76% compound annual growth rate.
Once primarily used for e-mail and retrieving information, the Internet is
now being used as a communications platform for an increasing number of
mission-critical Internet-based applications, such as those relating to
electronic commerce, private networks, telephone and facsimile capabilities,
supply chain management, customer service and project coordination. To improve
the effectiveness of
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their mission-critical Internet-based applications, businesses are requiring
increasing levels of network performance, including speed, reliability and
manageability, across the Internet.
The loss of data as it is transmitted over the Internet and inefficiencies
in transferring data across the Internet are fundamental causes of
unsatisfactory performance of Internet-based applications. Many of these
problems are caused by the architectural shortcomings of the Internet that have
led to the largely unorchestrated transfer of data traffic from one commercially
run network to another. The recent increases in network capacity and
improvements in the performance of network devices fail to address many of the
problems associated with exchanging data between the multiple networks which
comprise the Internet. Further, the popularity of the Internet has resulted in
an ever-increasing number of users transmitting rapidly increasing volumes of
data across the Internet.
THE EMERGENCE OF MULTIPLE INTERNET BACKBONES
The Internet originated as a restricted network designed to provide
efficient and reliable long distance data communications among the disparate
computer systems used by government funded researchers and organizations. As
businesses began to use the Internet for functions critical to their core
strategies, telecommunications companies established additional networks, or
backbones, to supplement the original public infrastructure and satisfy this
increasing demand. In this way, the original public Internet infrastructure has
grown into a "network of networks" run by numerous commercial telecommunications
companies, each of which manages its own backbone. Currently, the Internet is a
global collection of hundreds of interconnected computer networks. Of these
networks, approximately a dozen commercial backbones contain the majority of the
global addressable routes on the Internet. These backbones were developed at
great expense but are nonetheless constrained by the fundamental limitations of
the Internet's architecture. They must connect to one another, or peer, to
permit their customers to communicate with each other. Consequently, many
backbone providers have agreed to exchange large volumes of data traffic through
a limited number of public network access points.
Five major public network access points are in use today, including the
Metropolitan Area Exchange East, or MAE East, near Washington, D.C. and MAE West
in San Jose. The public network access points are not centrally managed and no
single entity has the economic incentive or ability to facilitate problem
resolution, to optimize peering within the public network access points or to
bring about centralized routing administration. As a consequence of the lack of
coordination among backbones at these public peering points and in order to
avoid the increasing congestion and resulting data loss at the public network
access points, a number of the backbone providers have established private
interfaces connecting pairs of backbones for the exchange of traffic. Although
private peering arrangements are helpful for exchanging traffic, they do not
overcome the structural and economic shortcomings of the Internet.
THE PROBLEM OF INEFFICIENT ROUTING OF DATA TRAFFIC ON THE INTERNET
Data loss is a fundamental cause of the slowness and unreliability that are
characteristic of the Internet today. Data loss occurs when the devices handling
data lose track of packets before they can be transferred, or routed, to their
destination. When this occurs, the computer that originally sent a lost packet
will resend it until it receives confirmation of receipt by the destination
device, thus compounding the congestion. Data loss most frequently occurs at
Internet exchange points, such as public network access points and private
peering points. We believe that packet loss at the public network access points
can exceed 20% during peak hours. This can have a dramatic impact on the
effective speed at which data is transmitted over the Internet. For example,
according to an industry
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source, downloading a file from a web site under conditions with 1% data loss
can take up to twice as long as doing so when there is no data loss.
Due to the Internet's lack of central management, there is no organized
mechanism to route traffic to avoid congestion at the public network access
points and private peering points. The individual backbone providers only
control the routing of data within their backbones, and their routing practices
tend to compound the inefficiency of the Internet. When a backbone provider
receives a packet that is not destined for one of its own customers, it must
route it to another backbone provider to complete the delivery of the packet on
the Internet.
Since the use of a public network access point or a private peering point
typically involves no economic settlement, a backbone provider will often route
the data to the nearest point of traffic exchange, in an effort to get the
packet off its network and onto a competitor's backbone as quickly as possible.
In this manner, the backbone provider reduces capacity and management burdens on
its transport network. Consequently, in order to complete a communication, data
ordinarily passes through multiple networks and peering points without regard to
congestion or other factors that inhibit performance. Further, once data leaves
a backbone destined for another network, the backbone provider has no way of
controlling the quality of the end-to-end connection. As a result, it is
virtually impossible for a single backbone provider to offer a high quality of
service across disparate networks. For customers of conventional Internet
connectivity providers, this results in lost data, slower and more erratic
transmission speeds, and an overall lower quality of service. Equally important,
these customers have no control over these arrangements and have no single point
of contact that they can hold accountable for any decrease in service levels,
such as poor data transmission performance. An example of routing over the
Internet is depicted in the figure below.
[Graphic on page 36 depicting an example of routing over the Internet]
The Inefficiencies of the Internet Today:
A. Backbone A passes off the ISP Customer request for data at the nearest public
or private with Backbone B, regardless of congestion or performance problems
occurring at the exchange.
Free private peering provides no economic settlement between 2 networks,
thereby resulting in "best effort" delivery with no guarantees or
accountability for poor performance or lost data.
B. Using an asymmetric return route, Backbone B passes off the ISP Customer
request at a public peering exchange forcing the data to transit across yet
another potentially congested network infrastructure.
[GRAPHIC]
The Internet is rapidly becoming a critically important medium for
communications and commerce. However, businesses are unable to benefit from the
full potential of the Internet primarily because peering and routing practices,
current routing technologies, and the Internet's architecture were not designed
to support today's large and rapidly growing volume of traffic. We believe the
emergence of technologies and applications that rely on network quality and
require consistent and
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high speed data transfer, such as voice and fax over Internet Protocol, virtual
private network services, multimedia document distribution and audio and video
streaming, will be hindered by the performance problems of the Internet. We also
believe the future of Internet connectivity services will be driven by providers
that, through high performance Internet routing services, provide consistent
high quality of service and enable businesses to successfully execute their
mission-critical Internet-based applications over the public network
infrastructures.
THE INTERNAP SOLUTION
We are a leading provider of fast, reliable and centrally managed Internet
connectivity services targeted at businesses seeking to maximize the performance
of mission-critical Internet-based applications. Utilizing our proprietary
network architecture and advanced routing technologies, we route our customers'
data in an optimal manner over the Internet. We currently operate eight P-NAPs
across the United States. Our P-NAP network model is depicted below:
[Graphic on page 37 depicting P-NAP routing method]
The InterNAP Solution:
A. The P-NAP intelligently routes data transmissions between the ISP customer
and the P-NAP customer Web Site, bypassing congested and unreliable public
NAPs and private peering relationships.
B. The P-NAP intelligently routes data transmissions between the Web Site and
the P-NAP ISP Customer, bypassing congested and unreliable public and private
peering relationships.
C. For ISPs and Web Sites that are customers of the same P-NAP, data
transmissions occur within the local P-NAP infrastructure, bypassing the
Internet entirely.
[GRAPHIC]
By connecting to one of our P-NAPs, mission-critical inbound and outbound
data transmissions travel an optimal route to and from destinations on the
Internet. This optimal routing of data traffic over the Internet enables higher
transmission speeds, lower instances of data loss and greater quality of
service. Our high performance Internet connectivity services provide the
following key advantages:
High Performance Connectivity. We route our customers' traffic over the
Internet in a way that we believe provides consistently greater speed, along
with superior end-to-end control, predictability and reliability, than services
offered by conventional Internet connectivity providers. Our P-NAPs have
high-speed, direct connections to major global Internet backbones. Our
proprietary technology may be used to route data directly to the Internet
backbone on which a given destination resides, thereby giving our customers
direct access to the destination network for a large majority of global Internet
addresses. This network architecture combined with our proprietary routing
technology generally bypasses congested public network access points and private
peering points, reduces data
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loss and improves reliability and performance for our customers to any of our
multiple backbone connections. In addition, customers directly connected to the
same P-NAP get one-hop access when communicating with each other, completely
avoiding the public Internet.
We use multiple connections to major backbones to create our own virtual
backbone, instead of owning or operating an expensive long-haul backbone
infrastructure. As a result, we can offer customers improved service levels by
optimally routing traffic between any two P-NAPs using our virtual backbone.
Consequently, any customer connected to any P-NAP will experience optimal public
backbone network performance in communicating with any other customer connected
to any other P-NAP. A model of InterNAP's virtual backbone created between any
two P-NAPs is depicted below:
[Graphic on page 38 depicting the InterNAP virtual backbone]
[GRAPHIC]
Highly Reliable Network Architecture. P-NAPs are designed with a highly
redundant network infrastructure, including multiple local loop connections from
multiple carriers. This design minimizes interruptions of network operations. If
a backbone network connected to a P-NAP should fail, we can instantly reroute
data using any of the remaining networks connected to the P-NAP. As a result,
our customers experience more reliable services and are less likely to need and
pay for redundant Internet backbone connections.
Superior Route Optimization and Management. Our proprietary routing
technology and network management system provide us with data that enables us to
manage network traffic and to offer economic settlements to backbone providers
for the transfer of our customers' data packets. As a result, we are able to
obtain full sets of global Internet Protocol routes from each backbone provider
connected to a P-NAP, and choose from among these routes the most optimal route
for our customers' traffic. We are therefore able to hold all of our backbone
providers accountable for performance within their respective networks. In
addition, because we manage all backbone connections into and out of each P-NAP,
we are able to centrally forecast and plan for upgrades. We believe this
consistently provides our customers with better service and minimizes congestion
and data packet loss for all of the backbones to which our P-NAPs are connected.
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Scalability and Flexibility. Our Internet connectivity services are
designed to be scalable and flexible. Since P-NAPs are localized
infrastructures, not long haul backbones, we can manage capacity issues and
traffic flows for each backbone provider at each P-NAP separately. Unlike a
backbone provider, we do not need to make uniform capacity upgrades across an
entire network as traffic levels increase. Furthermore, an upgrade to one
backbone provider does not require similar upgrades to all backbones connected
to a P-NAP or upgrades throughout our system of P-NAPs. This allows us to more
readily scale our capacity as traffic levels increase.
Superior Customer Service and Support. Our network operations center is
staffed 24 hours a day, seven days a week, by skilled engineers. Equipped with
sophisticated traffic management reporting and diagnostic tools, they provide
our customers with a single point of contact for support inquiries, network
troubleshooting and diagnosis. The network operations center constantly monitors
the operation of all our P-NAPs, as well as the backbones connected to them, and
provides our customers and backbone providers with real-time notification and
management of events that might affect service, such as network congestion,
equipment failures and network or power outages. Given the overall complexity of
our technology and our highly skilled engineers, we believe that our customer
support services create a significant barrier to entry for competitors. In
addition, since we are a paying customer of each backbone provider connected to
a P-NAP, we believe we can get better response times, service level agreements
and trouble ticket resolution than Internet service providers that rely on free
public peering arrangements.
STRATEGY
Our objective is to be the leading provider of high performance Internet
connectivity services that enable businesses to run mission-critical
Internet-based applications and to establish and maintain the standard of
quality for Internet connectivity services. We are committed to attracting,
hiring and retaining exceptional employees at all levels of our organization in
order to realize these objectives. Key components of our strategy include:
Enhance Our Core Technologies to Provide the Highest Performance Internet
Connectivity Services. We plan to continue developing our P-NAPs, as well as our
network operations center, to enhance the level of service we provide to our
customers. Our P-NAPs and network operations center have been designed to allow
expansion of the features and functionalities of our services and have the
scalability required to meet the growing needs of customers. We believe that
enhancements to our proprietary technologies are integral to our ability to
continue to penetrate new markets and to provide new value-added services to
existing customers. For example, we intend to use the intelligent routing
capabilities of our P-NAPs to enable our customers to take advantage of new
services such as telephone and facsimile capabilities, private networks,
multimedia document distribution and audio and video feeds.
Continue to Provide Superior Customer Service and Support. We intend to
continue providing our customers with superior customer service and support
24-hours a day, seven days a week. We believe that we can continue to improve
our competitive position by supporting our service with our highly-skilled
engineers, sophisticated traffic management reporting and diagnostic tools, and
network operations center. To reduce the risk of service interruptions, we plan
to build a second network operations center that will also monitor all of our
P-NAPs. We intend to use our status as a paying customer of the major backbone
providers to obtain a higher level of service which we can pass on to our
customers.
Expand Our Geographic Coverage in Key Markets. We currently offer our
services through our P-NAPs in eight key metropolitan areas across the United
States and intend to aggressively deploy P-NAPs in key markets across the United
States and internationally. As part of our deployment plan,
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<PAGE> 44
we expect to complete the deployment of four additional P-NAPs in the United
States by the end of 1999.
Continue to Build Our Brand Awareness. We intend to aggressively build our
customer base by increasing awareness of the InterNAP brand. We believe that
associating our brand with a high quality of service is key to the expansion of
our customer base. As we grow in size, we intend to invest in building brand
awareness through a marketing plan that includes P-NAP launch events, trade
shows, speaking events and media appearances, news announcements, advertisements
and customer testimonials.
Continue to Target Strategic Markets. We intend to expand our sales and
marketing activities by continuing to focus on five strategic market segments,
including high technology, e-commerce and retail, communication providers,
financial services, and entertainment and publishing. The businesses in these
market segments are characterized by early adoption of Internet services and a
need for fast, reliable and manageable Internet connectivity services. By
focusing on specific strategic markets we expect to be able to leverage our
industry knowledge and highly experienced sales force to extend our market
reach. We also intend to expand our indirect sales channels by partnering with
leading resellers with strong backgrounds and market presence in these markets.
Maintain Backbone Provider Neutrality. At each P-NAP, we have connections
with at least four major backbone providers. In order to provide one-hop service
to a large majority of Internet destinations, we must maintain high-volume
connections with major backbone providers. We plan to continue to do this as new
backbone providers emerge, as existing backbone providers increase in market
size in the metropolitan areas where our P-NAPs are located and as global
Internet traffic patterns change. We do not favor one backbone provider over
another, but rather use our proprietary technology to route packets directly to
the backbone on which an Internet destination is located. We believe this
provides substantial benefits to all backbone providers to whom we connect,
because we deliver only packets destined for each backbone provider's customers,
thus improving the efficiencies of their infrastructure.
CUSTOMERS
We have established a diversified base of customers across a wide range of
industries. As of June 30, 1999, we had approximately 120 customers. The
following is a list of selected customers whose monthly bill was between $5,000
and $94,000 for June 1999:
<TABLE>
<S> <C> <C>
Adforce Go2Net Seattle Times
Adknowledge Homegrocer.com Shopping.com
Advanced Radio Telecom Humongous Entertainment TheStreet.com
Amazon.com ITXC Corp Tradescape.com
art.com Nasdaq U.S. Electrodynamics
Datek Online Primus Telecommunications Waterhouse Investor Services
eBay Recreational Equipment, Inc. WebTV Networks
Enron Communications Seanet Corporation Won.net
Fidelity Investments
</TABLE>
We offer superior customer service and support from our network operations
center staffed 24 hours a day, seven days a week by highly skilled network
engineers who use our sophisticated traffic management reporting and diagnostic
tools. As of June 30, 1999, we had 92 employees dedicated to customer service,
network support and P-NAP engineering. Our customer service personnel are also
available to assist customers whose operations require specialized procedures.
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Our customer contracts generally cover the provision of services for a one
to three year period and may contain service level warranties. To date, none of
our customers has utilized this warranty to receive a credit for a period of
free service. We have had limited contract renewal experience with customers
whose initial service contract terms have expired. From inception through June
30, 1999, 23 customers have chosen to renew their contract or upgrade their
service under a new contract prior to their original contract's expiration, and
we have identified six customers that have chosen not to renew their service
with us.
SERVICES
We offer Internet connectivity services to our customers over T-1, DS-3 and
OC-3 telecommunication connections at speeds ranging from 1.5 Mbps to 155 Mbps.
T1, DS-3 and OC-3 are three of many possible media used to transport Internet
Protocol packets across the Internet. T1 is a telecommunications standard that
carries voice calls or data at a rate of 1.544 million bits per second over a
communication line. DS-3 carries voice calls or data at a rate of 45 million
bits per second, and OC-3 carries voice calls or data at a rate of 155 million
bits per second. Our list prices for a single connection range from $2,695 to
$193,320 per month depending on the connection purchased. Customers who connect
to a P-NAP with a DS-3 or faster connection have a choice of fixed rate pricing
or usage based pricing. Otherwise, customers pay a fixed fee for our Internet
connectivity services. Usage based pricing varies according to the volume of
data sent and received over the connection.
Customers that have networking equipment or servers located within P-NAP
facilities may connect directly to the P-NAP using standard Ethernet connections
with speeds ranging from 10 Mbps to 200 Mbps. We also offer our customers
additional value added services, including:
- InterNAP Diversity Plus. Our Diversity Plus service allows customers to
maintain multiple connections to InterNAP and other backbone providers
while still taking advantage of the optimal routing capabilities of the
P-NAP. In a typical Diversity Plus configuration, the customer has a
connection to a P-NAP and to one or more backbone providers of their
choice. The customer's router is configured using our proprietary routing
technology to route packets addressed to Internet destinations located on
the alternate provider's backbone through the customer's direct
connection while other packets are routed to the P-NAP. In this manner,
the customer can use redundant Internet connections, while also taking
advantage of the unique features of the P-NAP.
- Connections to Data Centers. Many of our customers have their servers
located at third party data centers. We connect to these customers either
by establishing a circuit directly to their routers or through a
connection we have with the network maintained by the third party data
center operator. We have our own data center in our Seattle P-NAP at
which a number of our customers have co-located their servers.
- Installation Services. We perform installation services necessary to
connect our customers' networks to our P-NAPs.
TECHNOLOGY
P-NAP Architecture. The P-NAP architecture was engineered as a reliable and
scalable network access point. Multiple routers and multiple backbone
connections provide back-ups in case of the failure of any single P-NAP circuit
or device.
The P-NAP architecture is designed to grow as our customers' traffic
demands grow and as we add new customers. Our P-NAP model provides for the
addition of significant backbone providers as necessary.
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InterNAP only deploys P-NAPs within central office grade facilities. All
P-NAP facilities are equipped with battery backup and emergency generators, as
well as dual heating, ventilation and air conditioning systems.
ASsimilator Routing Technology. ASsimilator technology is a software based
system for Internet Protocol route management that interfaces with the P-NAP
infrastructure to provide the high performance routing service characteristics
of the P-NAP. The system is a seamless integration of databases, software
programs, router configuration processes and route verification methods.
ASsimilator periodically downloads the global routing tables being
advertised by all of the backbone networks touching the P-NAP. It then
automatically determines exactly which Internet Protocol routes are attached to
which networks and assesses how the world of Internet Protocol addresses are
connected to the Internet. ASsimilator then routes data to its intended
destination backbone in normal instances as well as in failure scenarios. A
verification system also allows ASsimilator to monitor the routing of data, and
if routing is found to be suboptimal, adjustments can be made to optimize
routing. ASsimilator controls both outbound routing to a backbone network from
the P-NAP as well as inbound routing from a backbone network.
Distributed Network Management System. We have developed a highly scalable
proprietary network management system optimized for monitoring P-NAPs. With the
use of our distributed network management system, our network operations center
is capable of real-time monitoring of the backbones connected to each P-NAP,
customer circuits, network devices and servers 24 hours a day, seven days a
week. This system provides our network operations center with proactive trouble
notification, allowing for instantaneous identification and handling of
problems, frequently before our customers become aware of network problems. This
system also captures and provides bandwidth usage reports for billing and
customer reports. Data provided by the system is an integral part of our
capacity planning and provisioning process, helping us to forecast and plan
upgrades before capacity becomes strained.
Product Development Costs. Our product development costs include research
and development costs, which were approximately $184,000 for the period from
inception May 1, 1996 to December 31, 1996, $389,000 for the year ended December
31, 1997, $708,000 for the year ended December 31, 1998 and $903,000 for the six
month period ended June 30, 1999. We expect our product development costs to
increase as we hire additional engineers and technical personnel to develop new
products and services and upgrade existing ones.
SALES AND MARKETING
Our sales and marketing objective is to achieve broad market penetration
and increase brand name recognition by targeting enterprises that depend upon
the Internet for mission-critical operations. As of June 30, 1999, we had 50
employees engaged in direct sales and sales management, 17 in sales
administration and support, 13 in technical support and 12 in marketing located
in 10 cities.
Sales. We have developed a direct high-end sales organization with managers
who have an average of over 15 years of relevant sales experience and
representatives who have many years of relevant sales experience with a broad
range of telecommunications and technology companies. In addition, our highly
trained technical sales engineers and client interaction engineers, who
facilitate optimal routing solutions for our customers, are responsible for
generating recurring sales revenues and serve to complement our sales force.
When we deploy a new P-NAP, we set up a dedicated team of sales representatives
and engineers focused exclusively on that market. We believe this localized
direct sales approach allows us to respond to regional competitive
characteristics, educate customers,
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and identify and close business opportunities better than a centralized sales
force. We are also developing an indirect sales channel for our products and
services through relationships with content developers, cable companies, DSL
service providers, consulting companies and Internet service providers.
Marketing. Our marketing efforts are designed to help educate customers in
our targeted vertical markets to understand that a service provider is now
available that can provide a quality of service over the entire Internet that
enables them to launch and execute mission-critical Internet-based applications.
Our marketing activities have included collateral advertising, tradeshows,
direct response programs, new P-NAP launch events and management of our Web
site. These programs are targeted at key information technology executives as
well as senior marketing and finance managers. In addition, we conduct
comprehensive public relations efforts focused on cultivating industry analyst
and media relationships with the goal of securing broad media coverage and
public recognition of our proprietary high speed public Internet communications
solutions.
Our marketing organization is responsible for expanding our value added
service offerings into horizontal markets as new bandwidth intensive
applications such as telephone and facsimile transmissions over the Internet,
private networks, multimedia document distribution, audio and video feeds and
other emerging technologies are introduced.
COMPETITION
The Internet-based connectivity services market is extremely competitive
and there are few substantial barriers to entry. We expect that competition will
intensify in the future, and we may not have the financial resources, technical
expertise, sales and marketing abilities or support capabilities to compete
successfully in our market. Many of our existing competitors have greater market
presence, engineering and marketing capabilities, and financial, technological
and personnel resources than we do. Our competitors include:
- backbone providers that provide us connectivity services including AGIS,
AT&T, Cable & Wireless USA, GTE Internetworking, ICG Communications,
Intermedia, PSINet, Sprint, UUNET and Verio;
- regional Bell operating companies which offer Internet access; and
- global, national and regional Internet service providers.
Because relatively low barriers to entry characterize our market, we expect
other companies to enter our market. In addition, if we are successful in
implementing our international expansion, we will encounter additional
competition from international Internet service providers as well as
international telecommunication companies. As new participants enter the
Internet connectivity services market, we will face increased competition. Such
new competitors could include computer hardware, software, media and other
technology and telecommunications companies. A number of telecommunications
companies and online service providers currently offer, or have announced plans
to offer or expand, their network services. Other companies have expanded their
Internet access products and services as a result of acquisitions. Further, the
ability of some of our competitors to bundle other services and products with
their network services could place us at a competitive disadvantage. Various
companies are also exploring the possibility of providing, or are currently
providing, high-speed data services using alternative delivery methods. In
addition, Internet backbone providers may make technological developments, such
as improved router technology, that will enhance the quality of their services.
We believe that the principal competitive factors in our market are speed
and reliability of connectivity, quality of facilities, level of customer
service and technical support, price, brand
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recognition, the effectiveness of sales and marketing efforts, and the timing
and market acceptance of new solutions and enhancements to existing solutions
developed by us and our competitors. We believe that we presently are positioned
to compete favorably with respect to most of these factors. In particular, many
of our competitors have built and must maintain capital-intensive backbone
infrastructures that are highly dependent on traditional public and private
peering exchanges. Each backbone provider tries to offer high quality service
within its own network but is unable to guarantee service quality once data
leaves its network, and there is little incentive to optimize the
interoperability of traffic between networks. We actively route traffic in an
optimal manner, thereby providing customers with a high level of service and
increasing the efficiency of the backbone providers themselves. However, the
market for Internet connectivity services is evolving rapidly, and we cannot
assure you that we will compete successfully in the future. As a result, we may
not maintain a competitive position against current or future competitors. See
"Risk Factors -- Competition from More Established Competitors Who Have Greater
Revenues Could Decrease Our Market Share."
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trademark, trade secret and
other intellectual property law, nondisclosure agreements and other protective
measures to protect our proprietary technology. InterNAP and P-NAP are
trademarks of InterNAP which are registered in the United States. To date, we
have made two patent applications in the United States. The United States Patent
and Trademark Office has recently notified us that it has allowed four of the
claims in our initial patent application. When the initial patent issues, it
will be enforceable for a duration of twenty years from the date of filing, or
until September 3, 2017. Additional claims that were included by amendment in
that application have now been included in our second patent application. All of
the patents and patent applications relate to our P-NAP technology. In addition,
we have filed a corresponding international patent application under the Patent
Cooperation Treaty.
We also enter into confidentiality and invention assignment agreements with
our employees and consultants and control access to and distribution of our
proprietary information. Despite our efforts to protect our proprietary rights,
departing employees and other unauthorized parties may attempt to copy or
otherwise obtain and use our products and technology. Monitoring unauthorized
use of our products and technology is difficult, and we cannot be certain that
the steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States.
From time to time, third parties may assert patent, copyright, trademark
and other intellectual property rights claims or initiate litigation against us
or our suppliers or customers with respect to existing or future products and
services. Although we have not been a party to any claims alleging infringement
or intellectual property rights, we cannot assure you that we will not be
subject to these claims in the future. Further, we may in the future initiate
claims or litigation against third parties for infringement of our proprietary
rights to determine the scope and validity of our proprietary rights or those of
our competitors. Any of these claims, with or without merit, may be
time-consuming, result in costly litigation and diversion of technical and
management personnel or require us to cease using infringing technology, develop
noninfringing technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on acceptable
terms, if at all. In the event of a successful claim of infringement and our
failure or inability to develop noninfringing technology or license the
infringed or similar technology on a timely basis, our business and results of
operations may be seriously harmed.
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EMPLOYEES
As of June 30, 1999, we employed 221 full-time persons, 12 of whom were
engaged in product development, 92 in sales and marketing, 92 in professional
services and 25 in finance, administration and operations. None of our employees
is represented by a labor union, and we have not experienced any work stoppages
to date. We consider our employee relations to be good.
FACILITIES
Our executive offices are located in Seattle, Washington and consist of
approximately 20,700 square feet that are leased under an agreement that expires
in 2003. On July 1, 1999, we entered into a third amendment to our lease
increasing our total square footage to approximately 74,100 square feet as of
October 1, 1999. We lease facilities for our network operations center, sales
offices and P-NAPs in a number of metropolitan areas and specific cities. We
believe that our existing facilities, including the additional space, are
adequate for our current needs and that suitable additional or alternative space
will be available in the future on commercially reasonable terms as needed.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not currently involved in
any material legal proceedings.
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MANAGEMENT
Our executive officers and directors, the positions held by them and their
ages as of June 30, 1999 are as follows:
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Anthony C. Naughtin...................... 43 Chief Executive Officer and Director
Paul E. McBride.......................... 37 Chief Financial Officer and Vice
President of Finance
Christopher D. Wheeler................... 32 Chief Technology Officer and Vice
President
Charles M. Ortega........................ 44 Vice President of Sales & Marketing
Mike N. Joseph........................... 51 Vice President of Operations and Field
Engineering
Richard Perez............................ 46 Vice President of Deployment
Eugene Eidenberg......................... 59 Chairman of the Board
William J. Harding(1).................... 51 Director
Fredric W. Harman(1)..................... 39 Director
Robert J. Lunday, Jr.(2)................. 60 Director
Kevin L. Ober(1)(2)...................... 38 Director
Robert D. Shurtleff, Jr.(2).............. 45 Director
</TABLE>
- -------------------------
(1) Member of audit committee.
(2) Member of compensation committee.
Anthony C. Naughtin founded InterNAP and has served as our Chief Executive
Officer since May 1996. Mr. Naughtin has also served as our President from May
1996 to August 1999 and as our director since October 1997. Prior to founding
InterNAP, he was vice president for commercial network services at ConnectSoft,
Inc., an Internet and e-mail software developer, from May 1995 to May 1996. From
February 1992 to May 1995, Mr. Naughtin was the director of sales at
NorthWestNet, an NSFNET regional network. Mr. Naughtin has served as a director
of Fine.com International Corp., a services-computer processing and data
preparation company since December 1996. Mr. Naughtin holds a Bachelor of Arts
in communications from the University of Iowa and is a graduate of the Creighton
School of Law.
Paul E. McBride has served as our Vice President of Finance and
Administration since May 1996. He has also served as our Chief Financial Officer
since June 1999. Prior to joining InterNAP, Mr. McBride was Vice President of
Finance and Operations at ConnectSoft Inc. from February 1995 to March 1996.
From December 1992 to January 1995, he served as Chief Financial Officer and
Vice President of Finance at PenUltimate, Inc., a software developer. Mr.
McBride holds a Bachelor of Arts in Economics and a Bachelor of Science in
Finance from the University of Colorado and holds a Master of Business
Administration from the University of Southern California.
Christopher D. Wheeler has served as our Chief Technology Officer and Vice
President since May 1996. Prior to joining InterNAP, Mr. Wheeler was co-founder,
President and Chief Executive Officer of interGlobe Networks, Inc., a TCP/IP
consulting firm from 1994 to 1996. Mr. Wheeler also worked in advanced
network/Internet technology areas at NorthwestNet, which is now Verio Northwest,
and was responsible for backbone engineering, routing technology design, network
management tools development, network operations and systems engineering at the
University of
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Washington from 1989 to 1994. Mr. Wheeler holds a Bachelor of Science in
Computer Science from the University of Washington.
Charles M. Ortega has served as our Vice President of Sales and Marketing
since April 1998. Prior to joining InterNAP, Mr. Ortega was Director of Sales
for Global and Corporate National Accounts at MCI Communications Corporation
from 1989 to April 1998. Prior to MCI, he held senior sales management positions
with Wang Laboratories and Hewlett Packard. Mr. Ortega holds a Bachelor of
Science degree in Kinesiology from UCLA, and a Master of Business Administration
from the Joan Anderson School of Business at UCLA.
Mike N. Joseph has served as our Vice President of Operations and Field
Engineering since August 1999. He has served as our Vice President of Operations
since June 1999 and as our Director of Corporate Engineering Operations from
September 1998 to June 1999. Prior to joining InterNAP, Mr. Joseph served as
Director, and later Vice President of Technical Services of Cellular Technical
Services, a manufacturer of clone detection products, from July 1996 to June
1998. Prior to that, Mr. Joseph was Director of Operational System Support for
AT&T Wireless, a wireless services provider, from August 1995 to May 1996. From
July 1994 to August 1995, Mr. Joseph was Manager of Global Engineering at Cable
& Wireless, a global voice and Internet connectivity company. Mr. Joseph
attended the University of Houston.
Richard Perez has served as our Vice President of Deployment since August
1999 and as our Vice President of Deployment, Field Engineering and Provisioning
from December 1998 to August 1999. Prior to joining InterNAP, Mr. Perez worked
for 17 years at MCI Communications Corporation, serving in various managerial
and technical positions. Mr. Perez attended the University of Maryland and is a
past Advisory Board member of the University of Washington's Data Communications
Extension.
Eugene Eidenberg has served as a director and chairman of InterNAP since
November 1997 and as chairman of the board of directors since 1998. Dr.
Eidenberg has served as a Principal of Hambrecht & Quist Venture Associates
since 1998 and was an advisory director at the San Francisco investment banking
firm of Hambrecht & Quist from 1995 to 1998. Dr. Eidenberg served for 12 years
in a number of senior management positions with MCI Communications Corporation.
His positions at MCI included Senior Vice President for Regulatory and Public
Policy, President of MCI's Pacific Division, Executive Vice President for
Strategic Planning and Corporate Development and Executive Vice President for
MCI's international businesses. Dr. Eidenberg is currently a director of LXR
Biotechnology, AAPT Ltd. and several private companies. Dr. Eidenberg holds a
Ph.D. and a Master of Arts degree from Northwestern University and a Bachelor of
Arts degree from the University of Wisconsin.
William J. Harding has served as a director of InterNAP since January 1999.
Since 1994, Dr. Harding has been an employee and Principal of Morgan Stanley &
Co. Incorporated. In addition, Dr. Harding has served as a managing member of
Morgan Stanley Venture Partners, L.L.C., the general partner of Morgan Stanley
Dean Witter Venture Partners. Prior to joining Morgan Stanley Dean Witter, he
was a General Partner of several venture capital partnerships affiliated with
J.H. Whitney & Co. Dr. Harding was associated with Amdahl Corporation from 1976
to 1985, serving in various technical and business positions. He is currently a
director of ScanSoft, Inc., Persistence Software, Inc., Commerce One, Inc. and
several private companies. Dr. Harding holds a Ph.D. in engineering from Arizona
State University and a Master of Science degree in systems engineering and
Bachelor of Science degree in engineering mathematics from the University of
Arizona.
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Fredric W. Harman has served as a director of InterNAP since January 1999.
Since 1994, Mr. Harman has served as a Managing Member of the General Partners
of venture capital funds affiliated with Oak Investment Partners. Mr. Harman
served as a General Partner of Morgan Stanley Venture Capital, L.P. from 1991 to
1994. Mr. Harman serves as a director of Inktomi Corporation, ILOG, S.A., Primus
Knowledge Solutions and several privately held companies. Mr. Harman holds a
Bachelor of Science degree and a Masters degree in electrical engineering from
Stanford University and a Master of Business Administration from Harvard
University.
Robert J. Lunday, Jr. has served as a director of InterNAP since inception.
Mr. Lunday has served as President of Lunday Communications, Inc., an investment
company, since 1973. He was a founder of Commnet Cellular, Inc. and served on
its board of directors from 1983 to 1989.
Kevin L. Ober has served as a director of InterNAP since October 1997. Mr.
Ober has been a member of the investment team at Vulcan Ventures, Inc. since
November 1993 and in this capacity serves as a director in several portfolio
companies including Nexabit Networks, NETSchools Corporation and Command Audio,
Inc. Prior to working at Vulcan Ventures, Mr. Ober served in various positions
at Conner Peripherals, Inc., a computer hard disk drive manufacturer. Mr. Ober
holds a Master of Business Administration from Santa Clara University and
Bachelor of Science degree in business administration from St. John's
University.
Robert D. Shurtleff, Jr. has served as a director of InterNAP since January
1997. In 1999, Mr. Shurtleff founded S.L. Partners, a strategic consulting group
focused on early stage companies. From 1988 to 1998, Mr. Shurtleff held various
positions at Microsoft Corporation, including Program Management and Development
Manager and General Manager Workgroup Solutions Product Unit. Prior to working
at Microsoft Corporation, Mr. Shurtleff worked at Hewlett Packard Company from
1979 to 1988. Mr. Shurtleff holds a Bachelor of Arts degree in computer science
from the University of California at Berkeley.
BOARD COMPOSITION
Upon the closing of this offering, we will have authorized a range of
directors from five to nine. In accordance with the terms of our amended
articles of incorporation, the terms of office of the board of directors will be
divided into three classes:
- Class I directors, whose term will expire at the annual meeting of
shareholders to be held in 2000;
- Class II directors, whose term will expire at the annual meeting of
shareholders to be held in 2001; and
- Class III directors, whose term will expire at the annual meeting of
shareholders to be held in 2002.
Our Class I directors will be Robert J. Lunday, Jr. and Robert D.
Shurtleff, Jr., our Class II directors will be Fredric W. Harman and Kevin L.
Ober, and our Class III directors will be Eugene Eidenberg, William J. Harding
and Anthony C. Naughtin. At each annual meeting of shareholders after the
initial classification, the successors to directors whose terms will then expire
will be elected to serve from the time of election and qualification until the
third annual meeting following election. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of our board of directors may have the effect
of delaying or preventing a change in control or management of InterNAP.
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COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established an audit committee and a
compensation committee. Our audit committee consists of Kevin L. Ober, Fredric
W. Harman and William J. Harding. The audit committee reviews our internal
accounting procedures and consults with and reviews the services provided by our
independent accountants.
Our compensation committee consists of Kevin L. Ober, Robert J. Lunday, Jr.
and Robert D. Shurtleff, Jr. The compensation committee reviews and recommends
to the board of directors the compensation and benefits of all our officers and
establishes and reviews general policies relating to compensation and benefits
for our employees.
BOARD-COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
DIRECTOR COMPENSATION
Our directors currently do not receive any cash compensation for their
services on the board of directors or any committees of the board. They are
reimbursed for certain expenses in connection with attendance at board and
committee meetings. From time to time, certain non-employee directors have
received grants of options to purchase shares of our common stock. In March
1998, Messrs. Eidenberg and Ober each were granted an option to purchase 200,000
shares of our common stock at an exercise price of $.06 per share. Non-employee
directors are expected to receive an initial option to purchase 40,000 shares of
common stock and an annual option to purchase 10,000 shares of common stock
under our 1999 non-employee directors' stock option plan.
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EXECUTIVE COMPENSATION
The table below sets forth summary information concerning compensation paid
by us during the fiscal year ended December 31, 1998 to (a) our Chief Executive
Officer and President and (b) three of our other executive officers other than
the Chief Executive Officer whose salary and bonus for fiscal year 1998 exceeded
$100,000 and who served as an executive officer during fiscal year 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- ------------
ALL OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- --------------------------- --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Anthony C. Naughtin,
Chief Executive Officer
and President.......... $123,750 $ -- $ -- $ -- $ --
Paul E. McBride,
Chief Financial Officer
and Vice President..... 113,750 -- -- -- --
Christopher D. Wheeler,
Chief Technical Officer
and Vice President..... 113,750 -- -- -- --
Charles M. Ortega,
Vice President of Sales
and Marketing.......... 81,658 20,000 30,000 360,000 12,000(1)
</TABLE>
- ---------------
(1) Consists of living expenses.
STOCK OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following table sets forth information regarding options granted to
certain of our executive officers during the fiscal year ended December 31,
1998:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES OF
TOTAL OPTIONS STOCK
SHARES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM($)
OPTIONS IN FISCAL PRICE PER EXPIRATION --------------------
NAME GRANTED(#) YEAR(%) SHARE($) DATE 5% 10%
---- ----------- ------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Ortega.............. 360,000 10.5% $ .06 7/21/08 $13,584 $34,425
</TABLE>
Twenty-five percent of these options vest on the first anniversary of the
date of hire and the remainder vest in equal installments each month over the
three-year period following the first anniversary of the date of hire. Options
were granted at an exercise price equal to the fair market value of our common
stock, as determined by the board of directors on the date of grant.
The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the SEC. There can be no assurance provided to any
executive officer or any other holder of our securities that the actual stock
price appreciation over the option term will be at the assumed 5% and 10% levels
or at any other defined level.
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<PAGE> 55
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information as of December 31, 1998
regarding options held by certain of our executive officers. There were no stock
appreciation rights outstanding at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT DECEMBER 31, 1998(#) DECEMBER 31, 1998($)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Ortega..... -- -- -- 360,000 -- $32,400
</TABLE>
In the table above, the value of unexercised in-the-money options is based
on the fair market value of our common stock, determined by the board of
directors as discussed above to be $.15 per share on or about December 31, 1998,
minus the per share exercise price multiplied by the number of shares.
EMPLOYMENT AGREEMENTS
We have entered into employment letter agreements with several of our
officers, including Anthony C. Naughtin, Paul E. McBride, Christopher D. Wheeler
and Charles M. Ortega. Each letter agreement sets forth the officer's
compensation level. Under each letter agreement an officer serves at-will and
employment may be terminated by us or by the officer at any time, with or
without cause and with or without notice. Each employment agreement contains a
noncompetition covenant one year in duration.
INCENTIVE STOCK PLANS
1998 Stock Option/Stock Issuance Plan. Our board of directors adopted our
1998 Stock Option/Stock Issuance Plan on February 2, 1998 and our shareholders
approved it on March 1, 1998. On January 19, 1999, our board reserved an
additional 1,000,000 shares for option grants under the 1998 Plan, which the
shareholders approved on January 26, 1999. We have reserved a total of 5,035,000
shares for issuance under the 1998 Plan. As of June 30, 1999, 695,082 shares had
been issued upon the exercise of options granted under the 1998 Plan and options
to purchase 4,132,622 shares were outstanding, with 207,296 shares reserved for
future grants or purchases under the 1998 Plan. Options currently outstanding
under the 1998 Plan will continue in full force and effect under the terms of
the 1998 Plan until these outstanding options are exercised or terminated.
The 1998 Plan provides for grants of incentive stock options that qualify
under Section 422 of the Internal Revenue Code of 1986, nonstatutory stock
options and common stock awards to employees, directors and consultants.
Incentive stock options may be granted only to employees.
The 1998 Plan is administered by a committee appointed by the board. This
committee determines the terms of awards granted, including the exercise price,
the number of shares subject to the award and the exercisability of awards. The
exercise price of incentive stock options granted under the 1998 Plan must be at
least equal to the fair market value of our common stock on the date of grant.
However, for any employee holding more than 10% of the voting power of all
classes of our stock, the exercise price of incentive stock options must be
equal to at least 110% of the fair market value. The exercise price of
nonstatutory stock options is set by the administrator of the 1998 Plan. The
maximum term of options granted under the 1998 Plan is ten years.
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<PAGE> 56
An optionee whose relationship as an employee, director or consultant with
us or any related corporation ceases for any reason, other than for death, total
and permanent disability or "for cause," may exercise options in the three-month
period following the cessation, or such other period of time as determined by
the administrator, unless such options terminate or expire sooner, or later, by
their terms. The three-month period is extended to twelve months for
terminations due to total and permanent disability or death. Options terminate
immediately upon an optionee's termination "for cause." Generally, the
optionholder may not transfer a stock option other than by will or the laws of
descent or distribution.
In the event of specific corporate transactions, the board of directors
may, in its sole discretion,
- accelerate the vesting of outstanding options under the 1998 Plan,
- arrange for outstanding options to be assumed or substituted for similar
options by a successor corporation,
- arrange for outstanding options to be replaced by a comparable cash
incentive program of the successor corporation or
- take no action with respect to outstanding options, in which case such
options will terminate upon the completion of the corporate transaction.
The 1998 Plan will terminate on the earlier of ten years from its adoption
by the board or the date all shares have been issued.
1999 Equity Incentive Plan. Our board adopted the 1999 Equity Incentive
Plan on June 19, 1999. As of June 30, 1999, an aggregate of 6,500,000 shares of
common stock, subject to shareholder approval, have been authorized for issuance
under the Incentive Plan. As of June 30, 1999, options to purchase an aggregate
of 2,004,000 shares were outstanding under the Incentive Plan and 4,496,000
shares were currently available for future grant of stock awards under the
Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, nonstatutory
stock options, restricted stock purchase rights and stock bonuses to our
employees, consultants and directors. Incentive stock options may be granted
only to employees. The Incentive Plan is administered by the board of directors
or a committee appointed by the board. The board or committee determines the
terms of awards granted, including the exercise price, the number of shares
subject to the award and the exercisability of awards. The exercise price of
incentive stock options granted under the Incentive Plan must be at least equal
to the fair market value of our common stock on the date of grant. However, for
any employee holding more than 10% of the voting power of all classes of our
stock, the exercise price will be at least equal to 110% of the fair market
value. The exercise price of nonstatutory stock options is set by the
administrator of the Incentive Plan, but can be no less than 85% of the fair
market value. The maximum term of options granted under the Incentive Plan is
ten years.
Unless otherwise provided in an option agreement, an optionee whose
relationship as an employee, director or consultant with us or any related
corporation ceases for any reason, other than for death, total and permanent
disability or "for cause," may exercise options in the three-month period
following this cessation, or such other period of time as determined by the
administrator, unless these options terminate or expire sooner, or later, by
their terms. The three-month period is extended to twelve months for
terminations due to total and permanent disability and eighteen months for
terminations due to death. Options terminate immediately upon an optionee's
termination "for cause." Generally, the optionholder may not transfer a stock
option other than by will or the laws of descent or distribution unless the
optionholder holds a nonstatutory stock option
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<PAGE> 57
that provides for transfer in the stock option agreement. However, an
optionholder may designate a beneficiary who may exercise the option following
the optionholder's death.
A change in control of Internap is defined in the Incentive Plan as the
sale of substantially all of our assets or merger with or into another
corporation. If a change in control occurs, any outstanding options held by
persons then performing services for us as an employee, director or consultant
may either be assumed or continued or an equivalent award may be substituted by
the surviving entity. In this situation, if options are not assumed, continued
or substituted, these options will become fully exercisable, including shares as
to which they would not otherwise be exercisable, and restricted stock will
become fully vested. Options also become fully exercisable in the event of a
securities acquisition representing 50% or more of the combined voting power of
our securities or if a participant's service is terminated by a surviving
corporation for any reason other than "for cause" within 13 months following a
change in control.
Upon the first nine anniversaries of the adoption date of the Incentive
Plan, an additional number of shares will automatically be added to the number
of shares already reserved for issuance under the Incentive Plan. The additional
number of shares will not be more than the lesser of
- 3 1/2% of the number of shares of our common stock issued and outstanding
on the anniversary date or
- 6,500,000 shares.
When we become subject to Section 162(m) of the Internal Revenue Code,
which denies a deduction to publicly held corporations for compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000, no person may be granted options under the Incentive Plan
covering more than 3,000,000 shares of common stock in any calendar year.
Restricted stock purchase awards are granted under the Incentive Plan in
accordance with a vesting schedule determined by the board or a committee
appointed by the board. These restricted stock purchase awards are subject to a
right of repurchase by us. The price of a restricted stock purchase award under
the Incentive Plan cannot be less than 85% of the fair market value of the stock
subject to the award on the date of grant. Stock bonuses may be awarded for past
services without a purchase payment. Unless otherwise specified, rights under a
stock bonus or restricted stock bonus agreement generally may not be transferred
other than by will or the laws of descent and distribution as long as the stock
awarded pursuant to an agreement remains subject to the agreement.
Subject to shareholder approval, as necessary, our board of directors may
amend the Incentive Plan at any time. The Incentive Plan will terminate on the
day before the 10th anniversary of its adoption by the board.
1999 Employee Stock Purchase Plan. In July 1999, our board of directors
adopted, subject to shareholder approval, the 1999 Employee Stock Purchase Plan.
A total of 1,500,000 shares of common stock have been reserved for issuance
under the purchase plan. Upon the first nine anniversaries of the adoption date
of the purchase plan, the number of shares reserved for issuance under the
purchase plan will automatically be increased by 2% of the total number of
shares of common stock then outstanding or, if less, by 1,500,000 shares. The
purchase plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code.
The purchase plan provides a means by which employees may purchase common
stock of InterNAP through payroll deductions. The purchase plan is implemented
by offering rights to eligible employees. Under the purchase plan, we may
specify offerings with a duration of not more than 27 months, and may specify
shorter purchase periods within each offering. The first offering will begin
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<PAGE> 58
on the effective date of this offering and terminate on June 30, 2001. Purchase
dates will occur each December 31 and June 30 after the initial offering.
Employees who participate in an offering under the purchase plan may have
up to 15% of their earnings withheld. The amount withheld is then used to
purchase shares of the common stock on specified dates determined by the board
of directors. The price of common stock purchased under the purchase plan will
be equal to 85% of the lower of the fair market value of the common stock at the
commencement date of each offering period or the relevant purchase date.
Employees may end their participation in an offering at any time during the
offering except during the 15 day period immediately prior to a purchase date.
Employees' participation in all offerings will end automatically on termination
of their employment with us or one of our subsidiaries.
Unless otherwise determined by our board of directors, employees are
eligible to participate in the purchase plan only if they are customarily
employed by us, or one of our subsidiaries designated by the board of directors,
for at least 20 hours per week and five months per calendar year. No employee
may be granted rights under the purchase plan if immediately after the rights
are granted, the employee will have voting power over 5% or more of our
outstanding capital stock. Eligible employees may be granted rights only if the
rights together with any other rights granted under employee stock purchase
plans, do not permit an employee's rights to purchase our stock to accrue at a
rate which exceeds $25,000 of fair market value of our stock for each calendar
year in which our rights are outstanding.
Upon a change in control of InterNAP, our board of directors has discretion
to provide that each right to purchase common stock
- will be assumed
- an equivalent right substituted by the successor corporation or
- all sums collected by payroll deductions to be applied to purchase stock
immediately prior to the change in control. The board of directors has
the authority to amend or terminate the purchase plan, but no such action
may adversely affect any outstanding rights to purchase common stock.
1999 Non-Employee Directors' Stock Option Plan. In July 1999, our board of
directors adopted, subject to shareholder approval, the 1999 Non-Employee
Directors' Stock Option Plan. The directors' plan provides for the automatic
grant of options to purchase shares of common stock to non-employee directors of
InterNAP. The directors' plan is administered by our compensation committee.
An aggregate of 500,000 shares of common stock may be issued pursuant to
options granted under the directors' plan. Each person who is elected or
appointed for the first time to be a non-employee director after the effective
date of this offering will be granted an initial grant to purchase 40,000 shares
of common stock upon election or appointment. In addition, on the day following
each annual meeting of our shareholders, each non-employee director who has
served as a non-employee director for at least six months and who continues to
serve as a non-employee director of ours will be automatically granted an option
to purchase 10,000 shares of common stock. Each option granted under the
directors' plan will be fully vested on the date it is granted. No option
granted under the directors' plan may be exercised more than ten years from the
date on which it was granted. The exercise price of options under the directors'
plan will equal the fair market value of the common stock on the date of grant.
A non-employee director whose service as a non-employee director or employee of
or consultant to us or any of our affiliates ceases for any reason other than
death or permanent and total disability may exercise vested options in the
three-month period following the cessation unless the options terminate or
expire sooner by their terms. Vested options
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<PAGE> 59
may be exercised during the 12-month period after a non-employee director's
service ceases due to disability and during the 18-month period after such
service ceases due to death. The directors' plan will terminate in July 2009,
unless terminated earlier by our board of directors.
Upon specific changes in control of InterNAP, all outstanding stock awards
under the directors' plan may be assumed by the surviving entity or replaced
with similar stock awards granted by the surviving entity.
401(k) Plan. We have established a tax-qualified employee savings and
retirement plan, the 401(k) Plan, for eligible employees. Eligible employees may
elect to defer a percentage of their pre-tax gross compensation in the 401(k)
Plan, subject to the statutorily prescribed annual limit. We may make matching
contributions on behalf of all participants in the 401(k) Plan in an amount
determined by our board of directors. We may also make additional discretionary
profit sharing contributions in such amounts as determined by the board of
directors, subject to statutory limitations. Matching and profit-sharing
contributions are subject to a vesting schedule; all other contributions are at
all times fully vested. We intend the 401(k) Plan, and the accompanying trust,
to qualify under Sections 401(k) and 501 of the Internal Revenue Code so that
contributions to the 401(k) Plan by our employees or by us, and income earned on
plan contributions, are not taxable to employees until withdrawn from the 401(k)
Plan, and so that we will be able to deduct our contributions, when made. The
trustee under the 401(k) Plan, at the direction of each participant, invests the
assets of the 401(k) Plan in any of a number of investment options.
LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
Our articles of incorporation limit the liability of directors to the
fullest extent permitted by the Washington Business Corporation Act as it
currently exists or as it may be amended in the future. Consequently, subject to
the Washington Business Corporation Act, no director will be personally liable
to us or our shareholders for monetary damages resulting from his or her conduct
as a director of InterNAP, except liability for:
- acts or omissions involving intentional misconduct or knowing violations
of law;
- unlawful distributions; or
- transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally
entitled.
Upon the closing of this offering, our articles of incorporation will also
provide that we may indemnify any individual made a party to a proceeding
because that individual is or was a director or officer of ours, and this right
to indemnification will continue as to an individual who has ceased to be a
director or officer and will inure to the benefit of his or her heirs, executors
or administrators. Any repeal of or modification to our articles of
incorporation may not adversely affect any right of a director or officer of
ours who is or was a director or officer at the time of such repeal or
modification. To the extent the provisions of our articles of incorporation
provide for indemnification of directors or officers for liabilities arising
under the Securities Act of 1933, those provisions are, in the opinion or the
Securities and Exchange Commission, against public policy as expressed in the
Securities Act and they are therefore unenforceable.
Upon the closing of this offering, our bylaws will provide that we will
indemnify our directors and officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law.
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<PAGE> 60
Upon the closing of this offering, we will enter into agreements to
indemnify our directors and certain officers, in addition to indemnification
provided for in our articles of incorporation or bylaws. These agreements, among
other things, indemnify our directors and certain 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 us arising
out of such person's services as our director or officer or any other company or
enterprise to which the person provides services at our request. We believe that
these provisions and agreements are necessary to attract and retain qualified
persons as directors and officers. We also currently maintain liability
insurance for our officers and directors.
CHANGE OF CONTROL ARRANGEMENTS
Under the 1998 Stock Option/Stock Issuance Plan, if specific corporate
transactions occur, including the sale of substantially all of our assets or a
merger with or into another corporation, the plan administrator may, in its sole
discretion,
- accelerate the vesting of outstanding options under the 1998 Plan,
- arrange for outstanding options to be assumed or substituted for similar
options by a successor corporation,
- arrange for outstanding options to be replaced by a comparable cash
incentive program of the successor corporation or
- take no action with respect to outstanding options, in which case the
options will terminate upon the completion of the corporate transaction.
Under the 1999 Equity Incentive Plan, if a change in control occurs,
including the sale of substantially all of our assets or a merger with or into
another corporation, any outstanding options held by persons then performing
services for us as an employee, director or consultant may,
- either be assumed or continued,
- an equivalent award may be substituted by the surviving entity, or,
- if the options are not assumed, continued or substituted, the options
will become fully exercisable, including shares as to which they would
not otherwise be exercisable, and restricted stock will become fully
vested.
Options also become fully exercisable upon the occurrence of a securities
acquisition representing 50% or more of the combined voting power of our
securities, or if a participant's service is terminated by a surviving
corporation for any reason other than "for cause" within 13 months following a
change in control.
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<PAGE> 61
CERTAIN TRANSACTIONS
Since our inception in May 1996, we have issued and sold securities to the
persons listed in the following table who are our executive officers, directors
or principal shareholders. You may find more details about shares held by these
purchasers in the "Principal Shareholders" section.
The per share purchase prices for our Series A, Series B and Series C
preferred stock were $.102, $.60 and $1.08, respectively. Upon the closing of
this offering, each outstanding share of our Series A, Series B and Series C
preferred stock will convert into one share of common stock on a one-for-one
basis. Warrants are exercisable for our Series B preferred stock at a per share
exercise price of $.60.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED COMMON
INVESTOR STOCK STOCK STOCK WARRANTS STOCK
-------- --------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Anthony C. Naughtin................................... -- -- -- -- 916,952
Paul E. McBride(1).................................... -- -- -- -- 916,952
Christopher D. Wheeler................................ -- -- -- -- 916,952
Robert D. Shurtleff, Jr.(2)........................... -- 338,304 357,160 432,266 --
Robert J. Lunday, Jr.(3).............................. 6,666,667 -- -- -- --
H&Q InterNAP Investors, L.P.(4)....................... -- 1,685,000 1,866,958 -- --
Morgan Stanley Dean Witter Venture Partners(5)........ -- -- 9,259,259 -- --
Oak Investment Partners VIII, L.P.(6)................. -- -- 6,018,519 -- --
TI Ventures, LP(7).................................... -- 1,666,667 1,759,556 -- --
Vulcan Ventures Incorporated(8)....................... -- 2,500,000 2,236,071 -- --
</TABLE>
- -------------------------
(1) Consists of 916,952 shares of common stock issued to Mr. McBride, of which
250,000 shares of common stock were subsequently transferred by Mr. McBride
to the McBride Trust and 46,000 shares of common stock to other
shareholders.
(2) Consists of 338,304 shares of Series B preferred stock issued to Mr.
Shurtleff, of which 199,916 were subsequently transferred to other
shareholders, warrants to purchase 432,266 shares of Series B preferred
stock, of which Mr. Shurtleff subsequently exercised 116,666, and 357,160
shares of Series C preferred stock issued to Mr. Shurtleff.
(3) Consists of 6,666,667 shares of Series A preferred stock issued to Mr.
Lunday, of which 844,280 were subsequently transferred to other
shareholders.
(4) Mr. Eidenberg, one of our directors, is a principal of Hambrecht & Quist
Venture Associates.
(5) Consists of 780,000 shares of Series C preferred stock held by Morgan
Stanley Venture Investors III, L.P., 355,417 shares of Series C preferred
stock held by The Morgan Stanley Venture Partners Entrepreneur Fund, L.P.
and 8,123,842 shares of Series C preferred stock held by Morgan Stanley
Venture Partners III, L.P. Dr. Harding, one of our directors, is a managing
member of the general partner of the Morgan Stanley Dean Witter Venture
Partners Funds. The institutional managing member of the general partner of
each of the Morgan Stanley Dean Witter Venture Partners Funds is a
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., the parent of
Morgan Stanley & Co. Incorporated.
(6) Consists of 5,904,167 shares of Series C preferred stock held by Oak
Investment Partners VIII, L.P. and 114,352 shares of Series C preferred
stock held by Oak VIII Affiliates Fund, L.P. Mr. Harman, one of our
directors, is a managing member of the general partner of venture capital
funds affiliated with Oak Investment Partners.
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<PAGE> 62
(7) Consists of 1,666,667 shares of Series B preferred stock held by TI
Ventures, LP, and 1,759,556 shares of Series C preferred stock issued to TI
Ventures, LP of which 88,047 were subsequently transferred to other
shareholders.
(8) Mr. Ober, one of our directors, is a member of the investment team of Vulcan
Ventures Incorporated.
In addition, we have granted options to certain of our executive officers.
See "Management -- Executive Compensation."
Pursuant to a Limited Liability Company Agreement of InterNAP Network
Services, L.L.C., in October 1996, we sold 1,787,180 Class A Units in InterNAP
Network Services, L.L.C. to certain investors, including our officers Paul E.
McBride, Christopher D. Wheeler and Anthony C. Naughtin, for an aggregate
consideration of $1,787. InterNAP Network Services, L.L.C. was dissolved on
October 27, 1997. InterNAP was incorporated in the State of Washington in
October 1997. These Class A Units were exchanged for shares of common stock at
an exchange of 1 to 1.667.
In May 1996, we issued 2,000,000 Class B Units in InterNAP Network
Services, L.L.C. to Robert J. Lunday, Jr., in consideration for arranging a
guarantee of certain of our leasehold obligations and an unconditional promise
to contribute $500,000 to our capital on or before October 15, 1996.
Additionally, Lunday Communications loaned us $475,000 in 1996 and we repaid the
principal and interest during 1996. Robert J. Lunday, Jr., one of our directors,
is president of Lunday Communications, Inc. Further, in May 1996, Mr. Lunday
purchased an additional 2,000,000 Class B Units for $500,000. These Class B
Units were exchanged for shares of Series A preferred stock at an exchange ratio
of 1 to 1:667.
Pursuant to a shareholders agreement, dated October 1, 1997, among
InterNAP, Robert J. Lunday, Jr., and some of our founders, including Anthony C.
Naughtin, Paul E. McBride and Christopher D. Wheeler, Mr. Lunday granted to each
founder an option to purchase, under conditions set out in the shareholder
agreement, his or her pro rata share (as that term is defined in the shareholder
agreement) of 5,000,000 of the 6,666,667 shares of Series A preferred stock, or
common stock upon conversion, owned by Mr. Lunday at the date of the shareholder
agreement at a price of $1.26 per share. Mr. Lunday, one of our directors, is
father-in-law of Mr. McBride, our Chief Financial Officer and Vice President of
Finance.
In an assignment agreement, dated October 3, 1997, between InterNAP, Ophir
Ronen and Christopher D. Wheeler, our Chief Technology Officer, Mr. Wheeler and
Mr. Ronen assigned all of their right, title and interest in and to that certain
application for Letters Patent of the United States entitled Private Network
Access Point Router for Interconnecting Among Internet Route Providers.
On October 29, 1997, December 29, 1997 and February 4, 1998, we sold an
aggregate of 12,862,558 shares of Series B preferred stock to 36 investors,
including H&Q InterNAP Investors, L.P., TI Ventures, LP and Vulcan Ventures
Incorporated, three of our principal shareholders, at an aggregate purchase
price of $7,717,534 or $.60 per share. The investor group included Robert D.
Shurtleff, Jr., one of our directors, who converted a promissory note dated
February 13, 1997 in the amount of $125,000 plus accrued interest for 221,638
shares of Series B preferred stock.
On January 11, 1999, Lunday Communications, Inc. loaned $500,000 to us,
represented by a promissory note that bore interest at the rate of prime plus 2%
and had a maturity date of February 15, 1999. We repaid the outstanding
principal and accrued interest on the loan in February 1999 from the proceeds of
the Series C financing.
On January 13, 1999, Robert D. Shurtleff, Jr., one our directors, loaned
$600,000 to us, represented by a promissory note that bore interest at the rate
of prime plus 2% and had a maturity
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<PAGE> 63
date of February 15, 1999. We repaid the outstanding principal and accrued
interest on the loan in February 1999 from the proceeds of the Series C
financing.
On January 28, 1999 and February 26, 1999, we sold an aggregate of
29,629,630 shares of Series C preferred stock to 44 investors, including Robert
D. Shurtleff, Jr., one of our directors, and H&Q InterNAP Investors, L.P.,
Morgan Stanley Dean Witter Venture Partners, Oak Investment Partners VIII, L.P.,
TI Ventures, LP and Vulcan Ventures Incorporated, five of our principal
shareholders, at an aggregate purchase price of $32,000,000, or $1.08 per share.
We have entered into employment letter agreements with several of our key
employees, including Anthony C. Naughtin, Paul E. McBride, Charles M. Ortega and
Christopher D. Wheeler. These agreements are described in "Management-Employment
Agreements."
We plan to enter into indemnification agreements with our directors and
executive officers for the indemnification of and advancement of expenses to
such persons to the fullest extent permitted by law. We also intend to enter
into these agreements with our future directors and executive officers.
On August 31, 1999, we entered into a standby loan facility commitment
letter with seven shareholders, including a director of ours who will also act
as the administrative agent for the proposed facility. Upon completion of a
definitive agreement, the facility will allow us to draw up to $10,000,000 prior
to December 31, 1999. The facility will bear interest at prime plus 2% with
principal and interest due on the earlier of six months from the first draw or a
public or private sale of stock. Additionally, upon completion of the definitive
agreement, we will issue warrants to purchase 100,000 shares of common stock
with an exercise price equal to our initial public offering share price or at a
price determined in a private sale of our stock. Further, at our option, the
facility can be extended for an additional six month term in consideration for
the issuance of warrants to purchase an additional 100,000 shares of our common
stock.
On September 17, 1999, we entered into an agreement with Inktomi to sell
$20.0 million of common stock in a private placement that will close at the same
time or immediately after the closing of our initial public offering. Inktomi
will pay the same price share paid by the public in our initial public offering,
less an amount equivalent to the underwriting discounts and commissions per
share. We will also issue Inktomi a warrant to purchase additional shares of our
common stock. The number of shares underlying the warrant will be equal to 50%
of the number of shares Inktomi purchases in the private placement, and the
exercise price per share will be 150% of the price per share Inktomi pays in the
private placement. The warrant will have a 2 year term and include demand and
piggyback registration rights. The agreement also prohibits Inktomi from
acquiring additional shares of our stock for a period of 2 years. We will pay a
placement fee of $1.0 million upon closing of the private placement transaction.
In addition, we have agreed to use our best efforts to complete a technical and
marketing agreement with Inktomi by November 19, 1999.
We believe that the foregoing transactions were in our best interest and
were made on terms no less favorable to us than could have been obtained from
unaffiliated third parties. All future transactions between us and any of our
officers, directors or principal shareholders will be approved by a majority of
the independent and disinterested members of the board of directors, will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties and will be in connection with our bona fide business purposes.
58
<PAGE> 64
PRINCIPAL SHAREHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of August 31, 1999 and as adjusted
to reflect our sale of shares for:
- each person who we know to own beneficially more than five percent of the
common stock,
- each of our directors,
- certain of our executive officers, and
- all directors and executive officers as a group.
Except as indicated, and subject to community property laws where
applicable, the persons named have sole voting and investment power with respect
to all shares shown as beneficially owned by them. Percentage of beneficial
ownership is based on 53,631,357 shares of common stock outstanding on an
as-converted basis as of August 31, 1999. This assumes no exercise of the
underwriters' over-allotment option. If the underwriters' over-allotment option
is exercised in full, we will sell up to an aggregate of 10,005,000 shares of
common stock and up to 63,636,357 shares of common stock will be outstanding
after the completion of this offering. The foregoing information and the
following table excludes 1,536,098 shares of common stock and a warrant to
purchase 768,049 shares of common stock to be issued to Inktomi in a private
placement that will close at the same time or immediately after the closing of
our initial public offering and warrants to purchase 100,000 shares of common
stock issued to seven shareholders in connection with our standby credit
facility.
The number of shares beneficially owned by each shareholder is determined
under rules promulgated by the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under these rules,
beneficial ownership includes any shares as to which the individual or entity
has sole or shared voting power or investment power and any shares as to which
the individual or entity has the right to acquire beneficial ownership within 60
days after August 31, 1999 through the exercise of any stock option or other
right. The inclusion in this table of these shares, however, does not constitute
an admission that the named shareholder is a direct or indirect beneficial owner
of, or receives the economic benefit from these shares.
Unless otherwise indicated in the table set forth below, each person or
entity named below has an address in care of our principal executive offices.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
OWNED
SHARES --------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Morgan Stanley Dean Witter Venture Partners(1)........... 9,259,259 17.3% 14.9%
c/o Morgan Stanley Dean Witter Venture Partners
1221 Avenue of the Americas
New York, NY, 10020
William J. Harding(1).................................... 9,259,259 17.3 14.9
H&Q InterNAP Investors, L.P.(2).......................... 7,090,134 13.2 11.4
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
</TABLE>
59
<PAGE> 65
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
OWNED
SHARES --------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
TI Ventures, LP(2)....................................... 7,090,134 13.2% 11.4%
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Eugene Eidenberg(2)...................................... 7,090,134 13.2 11.4
Oak Investment Partners VIII, L.P.(3).................... 5,958,334 11.1 9.6
525 University Avenue, Suite 1300
Palo Alto, CA, 94301
Fredric W. Harman(3)..................................... 5,958,334 11.1 9.6
Robert J. Lunday, Jr.(4) ................................ 5,822,387 10.9 9.3
Vulcan Ventures Incorporated(5).......................... 4,936,071 9.2 7.9
110 100th Avenue Northwest, Suite 550
Bellevue, WA, 98004
Kevin L. Ober(5)......................................... 4,936,071 9.2 7.9
Fidelity Investors II Limited Partnership(6)............. 2,777,778 5.2 4.5
82 Devonshire Street, R25D
Boston, MA, 02110-2106
FTT Ventures Limited(6).................................. 2,777,778 5.2 4.5
82 Devonshire Street, R25D
Boston, MA, 02110-2106
Paul E. McBride(7)....................................... 2,689,804 4.9 4.2
Anthony C. Naughtin(8)................................... 2,292,380 4.2 3.6
Christopher D. Wheeler(9)................................ 2,292,380 4.2 3.6
Robert D. Shurtleff, Jr.(10)............................. 904,148 1.7 1.4
Charles M. Ortega(11).................................... 135,000 * *
All directors and executive officers as a group
(10 persons)(12)....................................... 37,253,613 68.8 59.2
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1%.
(1) Consists of 780,000 shares held by Morgan Stanley Venture Investors III,
L.P., 355,417 shares held by The Morgan Stanley Venture Partners
Entrepreneur Fund, L.P. and 8,123,842 shares held by Morgan Stanley Venture
Partners III, L.P. The institutional managing member of the general partner
of Morgan Stanley Dean Witter Venture Partners is a wholly-owned subsidiary
of Morgan Stanley Dean Witter & Co., the parent of Morgan Stanley & Co.
Incorporated. Dr. William J. Harding, one of our directors, is a managing
member of the general partner of Morgan Stanley Dean Witter Venture
Partners. Dr. Harding disclaims beneficial ownership of the shares held by
Morgan Stanley Dean Witter Venture Partners, except to the extent of his
proportionate interest therein.
(2) Consists of 3,551,958 shares held by H&Q InterNAP Investors, L.P.,
3,338,176 shares held by TI Ventures, LP, 91,666 shares issuable upon
exercise of vested options that are held by Mr. Eugene Eidenberg and
108,334 shares issuable upon exercise of options held by Mr. Eidenberg that
are exercisable within 60 days of August 31, 1999 but subject to repurchase
60
<PAGE> 66
by InterNAP under terms set forth in a notice of grant of stock option. Mr.
Eidenberg, the chairman of our board of directors, is a Principal of
Hambrecht and Quist Venture Associates. Mr. Eidenberg disclaims beneficial
ownership of the shares held by H&Q InterNAP Investors, L.P. and TI
Ventures, LP.
(3) Consists of 5,845,126 shares held by Oak Investment Partners VIII, L.P. and
113,208 shares held by Oak VIII Affiliates Fund L.P. Mr. Fredric W. Harman,
one of our directors, is a managing member of the general partners of
venture capital funds affiliated with Oak Investment Partners. Mr. Harman
disclaims beneficial ownership of the shares held by Oak Investment
Partners VIII, L.P. and Oak VIII Affiliates Fund L.P.
(4) Includes 5,000,000 shares subject to an option under a Shareholders
Agreement dated October 1, 1997, in favor of original Class A Members of
InterNAP Network Services, L.L.C., including Paul E. McBride, Anthony C.
Naughtin and Christopher D. Wheeler.
(5) Consists of 4,736,071 shares held by Vulcan Ventures Incorporated, 91,666
shares held by Mr. Kevin L. Ober and 108,334 shares held by Mr. Ober that
are subject to repurchase by InterNAP under terms set forth in a notice of
grant of stock option. Mr. Ober, one of our directors, is a member of the
investment team of Vulcan Ventures Incorporated. Mr. Ober disclaims
beneficial ownership in the shares held by Vulcan Ventures Incorporated.
(6) Consists of 1,388,889 shares owned by Fidelity Investors II Limited
Partnership and 1,388,889 shares owned by FTT Ventures Limited, an
affiliate of Fidelity Investors II Limited Partnership.
(7) Includes 250,000 shares held by the McBride Trust, 110,856 shares held by
Mr. McBride FBO Emily A. McBride UTMA, 110,856 shares held by Mr. McBride
FBO Seth L. McBride UTMA, 110,856 shares held by Mr. McBride's wife in her
own name, and 1,375,428 shares that may be purchased from Mr. Robert J.
Lunday, Jr. upon exercise of an outstanding option under a Shareholder
Agreement, dated October 1, 1997. Mr. Lunday is Mr. McBride's father-
in-law.
(8) Includes 1,375,428 shares that may be purchased from Mr. Robert J. Lunday,
Jr. upon exercise of an outstanding option under a Shareholder Agreement,
dated October 1, 1997.
(9) Includes 1,375,428 shares that may be purchased from Mr. Robert J. Lunday,
Jr. upon exercise of an outstanding option under a Shareholder Agreement,
dated October 1, 1997.
(10) Includes 325,350 shares issuable upon exercise of warrants exercisable
within 60 days of August 31, 1999.
(11) Includes 30,000 shares issuable upon exercise of options exercisable within
60 days of August 31, 1999.
(12) Includes 555,350 shares subject to options and warrants which are
exercisable within 60 days of August 31, 1999.
61
<PAGE> 67
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, the authorized capital stock
consists of 500,000,000 shares of common stock, $.001 par value, and 10,000,000
shares of preferred stock, $.001 par value. The following description of our
capital stock does not purport to be complete and is subject to and qualified in
its entirety by our amended and restated articles of incorporation and bylaws
and by the applicable provisions of Washington law.
COMMON STOCK
As of June 30, 1999, there were 53,501,228 shares of common stock
outstanding, after giving effect to the conversion of all outstanding shares of
preferred stock into 49,469,479 shares of common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the shareholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common stock
are entitled to receive ratably such dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock. Holders of
common stock have no preemptive, conversion, subscription or other rights. There
are no redemption or sinking fund provisions applicable to the common stock.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred
stock will be converted at a rate of one share of common stock for each share of
preferred stock into an aggregate of 49,469,479 shares of common stock.
Following the conversion, our articles of incorporation will be amended and
restated to delete all references to such shares of preferred stock. Under the
amended and restated articles of incorporation, the board has the authority,
without further action by shareholders, to issue up to 10,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges, qualifications and restrictions granted to or imposed upon such
preferred stock, including dividend rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preference and sinking fund terms,
any or all of which may be greater than the rights of the common stock. The
issuance of preferred stock could adversely affect the voting power of holders
of common stock and reduce the likelihood that such holders will receive
dividend payments and payments upon liquidation. Such issuance could have the
effect of decreasing the market price of the common stock. The issuance of
preferred stock could have the effect of delaying, deferring or preventing a
change in control. We have no present plans to issue any shares of preferred
stock.
WARRANTS
As of June 30, 1999, warrants to purchase an aggregate of 600,136 shares of
Series B preferred stock were outstanding at an exercise price of $.60 per
share. Each warrant contains provisions for the adjustment of the exercise price
and the aggregate number of shares issuable upon the exercise of the warrant in
the event of stock dividends, stock splits, reorganizations and
reclassifications and consolidations. Upon the closing of this offering, all
warrants to purchase Series B preferred stock will become exercisable for common
stock at the rate of one share of common stock for each share of preferred stock
underlying the warrants.
62
<PAGE> 68
REGISTRATION RIGHTS
After this offering, the holders of 53,065,499 shares of common stock,
including shares issuable upon exercise of warrants, or their permitted
transferees, are entitled to certain rights with respect to the registration of
such shares under the Securities Act. In addition, with the closing of the
private placement, Inktomi will hold rights in connection with 1,536,098 shares
of common stock and a warrant to purchase 768,049 shares of common stock that
require us to register its shares for future sale under certain circumstances.
If we propose to register any of our securities under the Securities Act for our
own account or the account of any of our shareholders other than the holders of
the registrable shares, holders of the registrable shares are entitled, subject
to certain limitations and conditions, to notice of this registration and are,
subject to certain conditions and limitations, entitled to include registrable
shares in the registration, provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of shares
included in the registration. In addition, commencing 180 days after the
effective date of the registration statement of which this prospectus is a part,
we may be required to prepare and file a registration statement under the
Securities Act at our expense if requested to do so by the holders of at least
21,186,199 of the registrable shares, provided the reasonably expected aggregate
offering price will equal or exceed $5,000,000. We are required to use our best
efforts to effect such registration, subject to certain conditions and
limitations. We are not obligated to effect more than two of these
shareholder-initiated registrations. Further, holders of registrable securities
may require us to file additional registration statements on Form S-3, subject
to certain conditions and limitations.
We are required to bear substantially all costs incurred in connection with
any of the registrations described above, other than underwriting discounts and
commissions. The registration rights described above could result in substantial
future expenses and adversely affect any future equity or debt offerings.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF AMENDED AND RESTATED ARTICLES OF
INCORPORATION, BYLAWS, AS AMENDED, AND WASHINGTON LAW
Our board of directors, without shareholder approval, will have upon the
closing of this offering authority under our amended and restated articles of
incorporation to issue preferred stock with rights superior to the rights of the
holders of common stock. As a result, our board could issue preferred stock
quickly and easily, which could adversely affect the rights of holders of common
stock and which our board could issue with terms calculated to delay or prevent
a change in control or make removal of management more difficult.
Election and Removal of Directors. Effective upon the closing of this
offering, our articles of incorporation will provide for the division of our
board of directors into three classes, as nearly as equal in number as possible,
with the directors in each class serving for a three-year term, and one class
being elected each year by our shareholders. The Class I term will expire at the
annual meeting of shareholders to be held in 2000; the Class II term will expire
at the annual meeting of shareholders to be held in 2001; and the Class III term
will expire at the annual meeting of shareholders to be held in 2002. At each
annual meeting of shareholders after the initial classification, the successors
to directors whose terms will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following election.
Because this system of electing and removing directors generally makes it more
difficult for shareholders to replace a majority of the board of directors, it
may discourage a third party from making a tender offer or otherwise attempting
to gain control and may maintain the incumbency of the board of directors.
Shareholder Meetings. Upon the closing of this offering our bylaws, as
amended, will provide that, except as otherwise required by law or by our
amended and restated articles of incorporation,
63
<PAGE> 69
special meetings of the shareholders can only be called pursuant to a resolution
adopted by our board of directors, the chairman of the board or president. These
provisions of our amended and restated articles of incorporation and bylaws, as
amended, could discourage potential acquisition proposals and could delay or
prevent a change in control. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the board of
directors and in the policies formulated by the board of directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. The provisions also are
intended to discourage certain tactics that may be used in proxy fights.
However, such provisions could have the effect of discouraging others from
making tender offers for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of our shares that could result from actual or
rumored takeover attempts. Such provisions also may have the effect of
preventing changes in our management.
Washington law also imposes restrictions on certain transactions between a
corporation and certain significant shareholders. Chapter 23B.19.040 of the
Washington Business Corporation Act prohibits a "target corporation," with
certain exceptions, from engaging in certain significant business transactions
with an "acquiring person," which is defined as a person or group of persons
that beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of
the target corporation's board of directors prior to the time of acquisition.
Such prohibited transactions include, among other things:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the
shares; or
- allowing the acquiring person to receive any disproportionate benefits as
a shareholder.
After the five-year period, a "significant business transaction" may occur,
as long as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deferring or preventing a change in control.
TRANSFER AGENT
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
64
<PAGE> 70
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of the common stock.
Upon completion of this offering, we will have outstanding 63,867,455
shares of common stock, assuming the issuance of 8,700,000 shares of common
stock offered in this prospectus, the sale of 1,536,098 shares of common stock
to Inktomi in a private placement transaction that will close at the same time
or immediately after the closing of our initial public offering, conversion of
all shares of preferred stock and no exercise of options or warrants after
August 31, 1999. Of these shares, the shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act; provided, however, that if shares are purchased by "affiliates," as that
term is defined in Rule 144 under the Securities Act, their sales of shares
would be subject to certain limitations and restrictions that are described
below.
We issued and sold the remaining 53,631,357 shares of common stock,
assuming conversion of all shares of preferred stock, held by existing
shareholders as of August 31, 1999 in reliance on exemptions from the
registration requirements of the Securities Act. Of these shares, 53,008,758
shares will be subject to lock-up agreements described below on the effective
date of the offering. Upon expiration of the lock-up agreements, 180 days after
the effective date of the prospectus, 23,579,557 shares will become eligible for
sale, subject in most cases to the limitations of Rule 144.
<TABLE>
<CAPTION>
DAYS AFTER DATE OF SHARES ELIGIBLE
THIS PROSPECTUS FOR SALE COMMENT
------------------ --------------- -------
<S> <C> <C>
Upon effectiveness...... 8,700,000 Shares sold in the offering
90 days................. 410,476 Shares saleable under Rule 144 that are not subject to
the lock-up
180 days................ 23,579,557 Lock-up released: shares saleable under Rules 144 and
701
</TABLE>
In addition, holders of stock options and warrants could exercise their
options and warrants and sell the shares issued upon exercise as described
below. As of August 31, 1999 there were a total of 595,700 shares of common
stock that could be issued upon exercise of outstanding warrants, of which
594,917 are subject to lock-up agreements. In addition, we issued to Inktomi a
warrant to purchase 768,049 shares of common stock in a private placement that
will close at the same time or immediately after the closing of our initial
public offering. All shares Inktomi will acquire in the private placement,
including shares Inktomi may acquire upon exercise of its warrant, are subject
to lock-up agreements. As of August 31, 1999, there were a total of 6,848,029
shares of common stock subject to outstanding options under our stock plans,
347,879 of which were vested. However, all of these shares are subject to
lock-up agreements. Immediately after the completion of the offering, we intend
to file registration statements on Form S-8 under the Securities Act to register
all of the shares of common stock issued or reserved for future issuance under
our stock plans. On the date 180 days after the effective date of this
prospectus, a total of 1,371,097 shares of common stock subject to outstanding
options are exercisable. After the effective dates of the registration
statements on Form S-8, shares purchased upon exercise of options granted
pursuant to our 1998 Stock Option/ Stock Issuance Plan generally would be
available for resale in the public market.
The officers, directors and certain of our shareholders have agreed not to
sell or otherwise dispose of any of their shares for a period of 180 days after
the date of this prospectus. Morgan Stanley & Co. Incorporated, however, may in
its sole discretion, at any time and in most cases without notice, release all
or any portion of the shares subject to lock-up agreements.
65
<PAGE> 71
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 623,197 shares immediately after the effective date
of this offering; or
- 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 other requirements regarding the
manner of sale, notice filing and the availability of current public information
about us.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of the offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of these options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one year minimum holding period
requirement.
REGISTRATION RIGHTS
Following this offering, the holders of 52,809,408 shares of common stock
and of warrants exercisable for 256,091 shares of common stock will, under
certain circumstances, have rights to require us to register their shares for
future sale. In addition, Inktomi holds rights in connection with 1,536,098
shares of common stock and a warrant to purchase 768,049 shares of common stock
to require us to register its shares for future sale under certain
circumstances.
LOCK-UP AGREEMENTS
All officers and directors and certain holders of common stock or
securities convertible for common stock and options and warrants to purchase
common stock have agreed pursuant to certain "lock-up" agreements that they will
not offer, sell, contract to sell, pledge, grant any option to sell, or
otherwise dispose of, directly or indirectly, any shares of common stock or
securities convertible or exchangeable for common stock, or warrants or other
rights to purchase common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Morgan Stanley & Co.
Incorporated.
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<PAGE> 72
DIRECTED SHARE PROGRAM
At our request, the underwriters have reserved up to 435,000 shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees and their family members and to our business associates. These shares
will be offered at the public offering price shown on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares.
67
<PAGE> 73
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement, the underwriters named below, for whom Morgan Stanley & Co.
Incorporated, Credit Suisse First Boston Corporation, Donaldson, Lufkin &
Jenrette Securities Corporation, and Hambrecht & Quist L.L.C. are acting as
representatives, have severally agreed to purchase, and we have agreed to sell
to them, severally, an aggregate of 8,700,000 shares of common stock. The number
of shares of common stock that each underwriter has agreed to purchase is set
forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Credit Suisse First Boston Corporation......................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Hambrecht & Quist LLC.......................................
--------
Total.............................................
========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept delivery
of the shares of common stock offered hereby are subject to the approval of
certain legal matters by their counsel and to certain other conditions. The
underwriters are obligated to take and pay for all of the shares of common stock
offered by this prospectus if any shares are taken. However, the underwriters
are not required to take or pay for the share covered by the underwriters
over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any underwriters may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to certain dealers. After
the initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.
Pursuant to the underwriting agreement, we have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to purchase
up to an aggregate of 1,305,000 additional shares of common stock at the public
offering price listed on the cover page of this prospectus, less underwriting
discounts and commissions. The underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, made in connection with the
offering of the shares of common stock offered by this prospectus. To the extent
such option is exercised, each underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of the
additional shares of common stock as the number listed next to such
underwriter's name in the preceding table bears to the total number of shares of
common stock listed next to the names of all underwriters in the preceding
table. If the underwriter's over-allotment option is exercised in full, the
total price to the public would be $140,070,000, the total underwriters'
discounts and commissions would be $9,804,900 and the total proceeds to us would
be $129,165,100.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
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<PAGE> 74
We have applied for approval of our common stock for quotation on the
Nasdaq National Market under the symbol "INAP."
We, the directors, officers, shareholders and certain optionholders of ours
have each agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, we will not, during the period
commencing on the date of this prospectus and ending 180 days after such date,
directly or indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of
common stock.
Any such transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
- the sale to the underwriters of the shares of common stock under the
underwriting agreement;
- the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus which is described in this prospectus;
- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares; or
- issuances of certain shares of common stock or options to purchase
shares of common stock pursuant to our employee benefit plans as in
existence on the date of this prospectus.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering if the syndicate repurchases previously distributed
shares of common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time. Upon consummation of this offering,
affiliates of Morgan Stanley & Co. Incorporated will own 14.9% of the common
stock on an as-converted basis (14.6% if the over-allotment option granted to
the underwriters is exercised in full). Currently, affiliates of Morgan Stanley
& Co. Incorporated have designated one member to the board of directors (Dr.
Harding). Dr. Harding is a principal and employee of Morgan Stanley & Co.
Incorporated. See "Management." Morgan Stanley & Co. Incorporated may continue
to provide investment banking and financial advisory services to us for which it
may receive customary fees and commissions.
69
<PAGE> 75
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
On September 17, 1999, we entered into an agreement with Inktomi to sell
$20.0 million of common stock in a private placement that will close at the same
time or immediately after the closing of our initial public offering. In
connection with this transaction, we agreed to pay Morgan Stanley & Co.
Incorporated a private placement fee of $1.0 million for services provided in
connection with the financing.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. The public offering price for the shares of common stock will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be our record of operations, our current financial position
and future prospects and our industry in general, the experience of our
management, sales, earnings and certain of our other financial and operating
information in recent periods, the price-earnings ratios, price-sales ratios,
market prices of securities and certain financial and operating information of
companies engaged in activities similar to ours. The estimated public offering
price range set forth on the cover page of this prospectus is subject to change
as a result of market conditions and other factors.
LEGAL MATTERS
The legality of the shares of common stock offered hereby will be passed
upon for us by Cooley Godward LLP, Kirkland, Washington. An investment
partnership of Cooley Godward attorneys beneficially owns an aggregate 46,296
shares of our common stock. Certain legal matters will be passed upon for the
underwriters by Morrison & Foerster LLP, Palo Alto, California.
EXPERTS
The financial statements of InterNAP Network Services Corporation as of
December 31, 1997 and 1998 and for the period from inception (May 1, 1996) to
December 31, 1996 and for the years ended December 31, 1997 and 1998, included
in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
70
<PAGE> 76
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, with respect to the common stock offered by this prospectus. As
permitted by the rules and regulations of the SEC, this prospectus, which is a
part of the registration statement, omits certain information, exhibits,
schedules and undertakings included in the registration statement. For further
information pertaining to us and the common stock offered by this prospectus,
reference is made to the registration statement and its exhibits and schedules.
Statements contained in this prospectus regarding the contents or provisions of
any contract or other document referred to in this prospectus 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,
with each statement being qualified in all respects by the reference to a
document or contract. A copy of the registration statement may be inspected
without charge at the office of the SEC at 450 Fifth Street, NW, Washington,
D.C. 20549, and at the SEC's regional offices located at the Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any
part of the registration statement may be obtained from these offices upon the
payment of the fees prescribed by the SEC. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1 800-SEC-0330.
In addition, registration statements and other filings made with the SEC through
its Electronic Data Gathering, Analysis and Retrieval, or EDGAR, system are
publicly available through the SEC's Web site on the Internet's World Wide Web,
located at http://www.sec.gov. The registration statement, including all
exhibits and amendments to the registration statement, was filed with the SEC
through EDGAR.
71
<PAGE> 77
INTERNAP NETWORK SERVICES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheet............................................... F-3
Statement of Operations..................................... F-4
Statement of Shareholders' Equity (Deficit)................. F-5
Statement of Cash Flows..................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 78
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
InterNAP Network Services Corporation
In our opinion, the accompanying balance sheet and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of InterNAP Network
Services Corporation at December 31, 1997 and 1998, and the results of its
operations and its cash flows for the period from inception (May 1, 1996) to
December 31, 1996 and for the years ended December 31, 1997 and 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Seattle, Washington
April 2, 1999
F-2
<PAGE> 79
INTERNAP NETWORK SERVICES CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY AT
----------------- JUNE 30, JUNE 30,
1997 1998 1999 1999
------- ------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 4,770 $ 275 $ 3,301
Short-term investments.................................. -- -- 9,995
Accounts receivable, net of allowance of $27, $65, and
$78, respectively.................................... 228 766 1,577
Prepaid expenses and other assets....................... 8 280 197
------- ------- --------
Total current assets............................ 5,006 1,321 15,070
Property and equipment, net............................... 867 5,828 13,665
Restricted cash........................................... -- -- 1,019
Patents and trademarks, net............................... 48 48 79
Deposits and other assets, net............................ 66 290 997
------- ------- --------
Total assets.................................... $ 5,987 $ 7,487 $ 30,830
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................ $ 345 $ 2,603 $ 2,638
Accrued liabilities..................................... 94 713 737
Deferred revenues....................................... 84 284 23
Note payable............................................ 34 -- --
Line of credit.......................................... -- 650 625
Capital lease obligations, current portion.............. 361 1,331 2,757
------- ------- --------
Total current liabilities....................... 918 5,581 6,780
Capital lease obligations, less current portion........... 240 2,342 6,776
------- ------- --------
Total liabilities............................... 1,158 7,923 13,556
------- ------- --------
Commitments and contingencies
Shareholders' equity (deficit):
Convertible preferred stock, $.001 par value, authorized
50,070 shares; 17,195, 19,645, 49,469 and no pro
forma shares issued and outstanding, respectively;
aggregate liquidation preference of $6,998, $8,466
and $40,584, respectively............................ 18 20 50 $ --
Common stock, $.001 par value, authorized 300,000
shares; 3,333, 3,336, 4,032, and 53,501 (pro forma)
shares issued and outstanding, respectively.......... 3 3 4 54
Additional paid-in capital.............................. 7,376 9,576 57,023 57,023
Deferred stock compensation............................. -- (494) (14,113) (14,113)
Accumulated deficit..................................... (2,568) (9,541) (25,690) (25,690)
------- ------- -------- --------
Total shareholders' equity (deficit)............ 4,829 (436) 17,274 $ 17,274
------- ------- -------- ========
Total liabilities and shareholders' equity
(deficit)..................................... $ 5,987 $ 7,487 $ 30,830
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 80
INTERNAP NETWORK SERVICES CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM SIX
INCEPTION YEARS ENDED MONTHS ENDED
(MAY 1, 1996) DECEMBER 31, JUNE 30,
TO DECEMBER ----------------- ------------------
31, 1996 1997 1998 1998 1999
------------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 44 $ 1,045 $ 1,957 $ 731 $ 3,410
------ ------- ------- ------- --------
Costs and expenses:
Cost of network and customer
support........................... 321 1,092 3,216 994 7,906
Product development.................. 184 389 754 318 1,395
Sales and marketing.................. 78 261 2,822 352 5,869
General and administrative........... 378 713 1,910 594 2,905
Amortization of deferred stock
compensation...................... -- -- 205 19 1,787
------ ------- ------- ------- --------
Total operating costs and
expenses..................... 961 2,455 8,907 2,277 19,862
------ ------- ------- ------- --------
Loss from operations................. (917) (1,410) (6,950) (1,546) (16,452)
Other income (expense):
Interest income...................... 6 36 169 121 450
Interest and financing expense....... (48) (235) (90) (36) (147)
Loss on disposal of assets........... -- -- (102) -- --
------ ------- ------- ------- --------
Net loss.......................... $ (959) $(1,609) $(6,973) $(1,461) $(16,149)
====== ======= ======= ======= ========
Basic and diluted net loss per share... $ (.29) $ (.48) $ (2.09) $ (.44) $ (4.78)
====== ======= ======= ======= ========
Weighted average shares used in
computing basic and diluted net loss
per share............................ 3,333 3,333 3,336 3,336 3,378
====== ======= ======= ======= ========
Pro forma basic and diluted net loss
per share (unaudited)................ $ (.31) $ (.34)
======= ========
Weighted average shares used in
computing pro forma basic and diluted
net loss per share (unaudited)....... 22,733 47,771
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 81
INTERNAP NETWORK SERVICES CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FROM INCEPTION (MAY 1, 1996) TO JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A AND CONVERTIBLE COMMON
B UNIT PREFERRED STOCK STOCK
-------------- ---------------- -------------- ADDITIONAL DEFERRED
PAR PAR PAR PAID-IN STOCK ACCUMULATED
UNITS VALUE SHARES VALUE SHARES VALUE CAPITAL COMPENSATION DEFICIT
------ ----- ------- ------ ------ ----- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Class A Units... 2,000 $ 2 -- $-- -- $-- $ -- $ -- $ --
Issuance of Class B Units... 4,000 4 -- -- -- -- 996 -- --
Net loss.................... -- -- -- -- -- -- -- -- (959)
------ --- ------ --- ----- --- ------- -------- --------
Balances, December 31,
1996...................... 6,000 6 -- -- -- -- 996 -- (959)
Exchange of Class A Units
for common stock at an
exchange ratio of
1:1.667................... (2,000) (2) -- -- 3,333 3 (1) -- --
Exchange of Class B Units
for Series A preferred
stock at an exchange ratio
of 1:1.667................ (4,000) (4) 6,667 7 -- -- (3) -- --
Convertible notes payable
and accrued interest
converted to Series B
preferred stock........... -- -- 927 1 -- -- 556 -- --
Value ascribed to bridge
financing warrants........ -- -- -- -- -- -- 124 -- --
Issuance of Series B
preferred stock, net of
issuance costs
of $47.................... -- -- 9,601 10 -- -- 5,704 -- --
Net loss.................... -- -- -- -- -- -- -- -- (1,609)
------ --- ------ --- ----- --- ------- -------- --------
Balances, December 31,
1997...................... -- -- 17,195 18 3,333 3 7,376 -- (2,568)
Issuance of Series B
preferred stock, net of
issuance costs
of $21.................... -- -- 2,333 2 -- -- 1,376 -- --
Issuance of common stock to
an employee............... -- -- -- -- 3 -- 1 -- --
Value ascribed to lease
financing warrants........ -- -- -- -- -- -- 54 -- --
Exercise of warrants to
purchase Series B
preferred stock........... -- -- 117 -- -- -- 70 -- --
Deferred compensation
related to grants of stock
options................... -- -- -- -- -- -- 699 (699) --
Amortization of deferred
stock compensation........ -- -- -- -- -- -- -- 205 --
Net loss.................... -- -- -- -- -- -- -- -- (6,973)
------ --- ------ --- ----- --- ------- -------- --------
Balances, December 31,
1998...................... -- -- 19,645 20 3,336 3 9,576 (494) (9,541)
Issuances of Series C
preferred stock, net of
issuance costs
of $85.................... -- -- 29,630 30 -- -- 31,884 -- --
Exercise of warrants to
purchase Series B
preferred stock........... -- -- 194 -- -- -- 116 -- --
Exercise of employee stock
options................... -- -- -- -- 696 1 41 -- --
Deferred compensation
related to grants of stock
options................... -- -- -- -- -- -- 15,406 (15,406) --
Amortization of deferred
stock compensation........ -- -- -- -- -- -- -- 1,787 --
Net loss.................... -- -- -- -- -- -- -- -- (16,149)
------ --- ------ --- ----- --- ------- -------- --------
Balances, June 30, 1999
(unaudited)............... -- $-- 49,469 $50 4,032 $ 4 $57,023 $(14,113) $(25,690)
====== === ====== === ===== === ======= ======== ========
<CAPTION>
TOTAL
--------
<S> <C>
Issuance of Class A Units... $ 2
Issuance of Class B Units... 1,000
Net loss.................... (959)
--------
Balances, December 31,
1996...................... 43
Exchange of Class A Units
for common stock at an
exchange ratio of
1:1.667................... --
Exchange of Class B Units
for Series A preferred
stock at an exchange ratio
of 1:1.667................ --
Convertible notes payable
and accrued interest
converted to Series B
preferred stock........... 557
Value ascribed to bridge
financing warrants........ 124
Issuance of Series B
preferred stock, net of
issuance costs
of $47.................... 5,714
Net loss.................... (1,609)
--------
Balances, December 31,
1997...................... 4,829
Issuance of Series B
preferred stock, net of
issuance costs
of $21.................... 1,378
Issuance of common stock to
an employee............... 1
Value ascribed to lease
financing warrants........ 54
Exercise of warrants to
purchase Series B
preferred stock........... 70
Deferred compensation
related to grants of stock
options................... --
Amortization of deferred
stock compensation........ 205
Net loss.................... (6,973)
--------
Balances, December 31,
1998...................... (436)
Issuances of Series C
preferred stock, net of
issuance costs
of $85.................... 31,914
Exercise of warrants to
purchase Series B
preferred stock........... 116
Exercise of employee stock
options................... 42
Deferred compensation
related to grants of stock
options................... --
Amortization of deferred
stock compensation........ 1,787
Net loss.................... (16,149)
--------
Balances, June 30, 1999
(unaudited)............... $ 17,274
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 82
INTERNAP NETWORK SERVICES CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED SIX MONTHS ENDED
(MAY 1, 1996) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------- ------------------
1996 1997 1998 1998 1999
---------------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (959) $(1,609) $(6,973) $(1,461) $(16,149)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 103 297 725 247 1,305
Loss on disposal of assets............................ -- -- 102 -- --
Non-cash interest and financing expense............... -- 146 7 2 9
Provision for doubtful accounts....................... -- 27 140 92 58
Amortization of deferred stock compensation........... -- -- 205 19 1,787
Changes in operating assets and liabilities:
Accounts receivable................................ (31) (224) (678) (135) (869)
Prepaid expenses and other assets.................. (113) 38 (391) (117) (580)
Accounts payable................................... 264 82 721 (75) 1,370
Deferred revenues.................................. -- 84 200 (75) (261)
Accrued liabilities................................ 57 37 619 57 24
------- ------- ------- ------- --------
Net cash used in operating activities.............. (679) (1,122) (5,323) (1,446) (13,306)
------- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (174) (93) (641) (343) (4,221)
Deposits on property and equipment........................ -- -- (58) -- --
Purchase of short-term investments........................ -- -- -- -- (9,995)
Payments for patents and trademarks....................... -- (48) (3) -- (33)
------- ------- ------- ------- --------
Net cash used in investing activities.............. (174) (141) (702) (343) (14,249)
------- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder loan and line of credit......... 475 180 -- -- 1,100
Repayment of shareholder loan and line of credit.......... (475) (180) -- -- (1,100)
Issuance of notes payable................................. 69 -- -- -- --
Proceeds from issuance of Class A and B Units............. 1,002 -- -- -- --
Principal payments on note payable........................ -- (34) (34) -- --
Net increase (decrease) in line of credit................. -- -- 650 250 (25)
Payments on capital lease obligations..................... (73) (327) (534) (187) (875)
Proceeds from equipment leaseback financing............... -- -- -- -- 428
Restricted cash related to obtaining lease line........... -- -- -- -- (1,019)
Proceeds from exercise of stock options................... -- -- -- -- 42
Proceeds from issuance of convertible notes payable....... -- 660 -- -- --
Principal payments on convertible note payable............ -- (125) -- -- --
Proceeds from issuance of preferred stock, net of issuance
cost.................................................... -- 5,714 1,448 1,378 32,030
------- ------- ------- ------- --------
Net cash provided by financing activities.......... 998 5,888 1,530 1,441 30,581
------- ------- ------- ------- --------
Net increase (decrease) in cash and cash equivalents........ 145 4,625 (4,495) (348) 3,026
Cash and cash equivalents at beginning of period............ -- 145 4,770 4,770 275
------- ------- ------- ------- --------
Cash and cash equivalents at end of period.................. $ 145 $ 4,770 $ 275 $ 4,422 $ 3,301
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized........ $ 48 $ 103 $ 82 $ 34 $ 138
======= ======= ======= ======= ========
Purchase of property and equipment financed with capital
leases.................................................. $ 740 $ 260 $ 3,606 $ -- $ 6,307
======= ======= ======= ======= ========
Purchase of property and equipment included in accounts
payable................................................. $ -- $ -- $ 1,537 $ -- $ 202
======= ======= ======= ======= ========
Conversion of convertible notes to Series B preferred
stock................................................... $ -- $ 535 $ -- $ -- $ --
======= ======= ======= ======= ========
Value ascribed to warrants................................ $ -- $ 124 $ 54 $ 14 $ --
======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 83
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
InterNAP Network Services Corporation (the "Company") was originally
incorporated in the State of Washington as a limited liability company ("LLC")
in May 1996. The Company was re-incorporated in the State of Washington in
October 1997 as a C corporation without changing its ownership. The Articles of
Incorporation were further amended in January 1999 to provide for the
authorization of additional common and preferred stock and, accordingly, the
disclosures in the financial statements and related notes have been adjusted to
reflect this amendment for all periods presented.
The Company is a leading provider of fast, reliable and centrally managed
Internet connectivity services targeted at businesses seeking to maximize the
performance of mission-critical Internet-based applications. Customers connected
to one of the Company's Private-Network Access Points ("P-NAPs") have their data
optimally routed to and from destinations on the Internet in a manner that
minimizes the use of congested public network access points and private peering
points.
The Company began selling Internet connectivity services from its first
P-NAP, located in Seattle, during October 1996. The Company began selling
services from its second and third P-NAPs in New York City and San Jose by
December 1998. During the six months ended June 30, 1999, the Company began
selling services from P-NAPs located in the Washington D.C., Los Angeles,
Chicago and Boston metropolitan areas.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses since
inception and the expansion and development of its business plan will require
significant capital. The Company is currently seeking additional financing;
however, there can be no assurance that the Company will be able to obtain such
equity or debt financing when required, or, if available, on acceptable terms.
If the Company fails to obtain capital when required, the Company could modify,
delay or abandon some or all of the Company's business and expansion plans,
which management believes would result in the reduction of expenditures.
INTERIM FINANCIAL INFORMATION
The financial information at June 30, 1999 and for the six months ended
June 30, 1998 and 1999, and the related notes, are unaudited but include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation, in all material respects, of its
financial position, operating results, and cash flows for the interim date and
periods presented. Results for the six-month period ended June 30, 1999 are not
necessarily indicative of results for the entire fiscal year or future periods.
ESTIMATES AND ASSUMPTIONS
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 in the
financial statements and disclosure of contingent assets and liabilities at the
date of the financial statements. Examples of estimates subject to possible
revision based upon the outcome of future events include depreciation of
property and equipment, income tax liabilities,
F-7
<PAGE> 84
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the valuation allowance against the deferred tax assets and the allowance for
doubtful accounts. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
The Company generally considers any highly liquid investments purchased
with an original or remaining maturity of three months or less at the date of
purchase to be cash equivalents.
The Company classifies, at the date of acquisition, its marketable
securities into categories in accordance with the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Currently, the Company classifies its securities as
available-for-sale which are reported at fair market value with the related
unrealized gains and losses included in shareholders' equity (deficit).
Unrealized gains and losses were not material for all periods presented.
Realized gains and losses and declines in value of securities judged to be other
than temporary are included in other income (expense). Interest and dividends on
all securities are included in interest income. The fair value of the Company's
short-term investments are based on quoted market prices. The carrying value of
those investments approximates their fair value. At June 30, 1999, short-term
investments consisted of commercial paper and government securities with
maturities of less than one year.
The Company invests its cash and cash equivalents in deposits with two
financial institutions that may, at times, exceed federally insured limits.
Management believes that the risk of loss is minimal. To date, the Company has
not experienced any losses related to temporary cash investments.
ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
The Company extends trade credit terms to its customers based upon a credit
analysis performed by management. Further credit reviews are done on a periodic
basis as necessary. Generally, collateral is not required on accounts
receivable, however, advance deposits are collected for accounts considered
credit risks.
During 1998, the Company had two significant customers representing
approximately 13.6% and 9.6% of revenues and 9.9% and 11.0% of accounts
receivable at December 31, 1998, respectively. Additionally, the Company had a
single customer which is billed for its quarterly services in advance and, as a
result, comprised 23.4% of accounts receivable at December 31, 1998. Similarly,
during 1997, the Company had a significant customer representing 18.1% of
revenues and 28.1% of accounts receivable at December 31, 1997. In addition, a
significant customer which represented 20.8% of 1997 revenues and 35.5% of
accounts receivable at December 13, 1997, declared bankruptcy during 1998.
Consequently, the Company did not recognize significant revenue from this
customer during 1998 and the accounts receivable balance at December 31, 1997,
for which a reserve was provided for in the allowance for doubtful accounts, was
written off during 1998 when it was determined that the Company would not be
able to recover the balance. For 1996, the Company had two significant customers
which represented 14.9% and 56.2% of revenues.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, capital lease
obligations, and the line of credit are
F-8
<PAGE> 85
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
carried at cost. The Company's short-term financial instruments approximate fair
value due to their relatively short maturities. The carrying value of the
Company's long-term financial instruments approximate fair value as the interest
rates approximate current market rates of similar debt.
PROPERTY AND EQUIPMENT
Property and equipment consists principally of routers, telecommunications
equipment and other computer equipment. Network equipment and furniture and
equipment are carried at original acquisition cost and depreciated or amortized
on a straight-line basis over the estimated useful lives of the assets which
range from 3 to 7 years. Leasehold improvements are amortized on a straight-line
basis over the shorter of their estimated useful lives or the term of the
related lease. Additions and improvements that increase the value or extend the
life of an asset are capitalized. Maintenance and repairs are expensed as
incurred. Gains or losses from asset disposals are charged to operations in the
year of disposition.
Direct construction costs of each P-NAP, including equipment and labor
costs, are capitalized during the construction period. In addition, the Company
capitalizes interest costs as part of the cost of its P-NAPs when the P-NAPs
require an extended period of time to ready them for their intended use. During
1998, the Company capitalized approximately $78,000 and $34,000 of labor and
interest costs, respectively, related to the construction of several P-NAPs.
These costs are included as part of the cost of the network equipment.
The Company currently purchases the majority of its network equipment from
one vendor. The Company does not carry significant inventory of such equipment.
Failure to obtain the network equipment when required could negatively impact
the Company's operating results until an alternative supply source is
established. Although there are a limited number of other suppliers, there can
be no assurance that such equipment would be available and on comparable terms.
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
Costs of computer software developed or obtained for internal use are
capitalized while in the application development stage and are expensed while in
the preliminary stage and the post-implementation stage. During 1998, the
Company capitalized approximately $76,000 of internal development costs incurred
during the application development stage of certain software. These costs are
included as part of the cost of network equipment.
PATENTS AND TRADEMARKS
Capitalized patent and trademark costs represent professional fees incurred
for patent and trademark filings and are capitalized at cost. Patents and
trademarks are amortized over 15 years. Accumulated amortization as of December
31, 1997 and 1998 was $284 and $3,698, respectively.
VALUATION OF LONG LIVED ASSETS
The Company periodically evaluates the carrying value of its long-lived
assets, including, but not limited to, property and equipment, patents and
trademarks, and other assets. The carrying value of a long-lived asset is
considered impaired when the undiscounted cash flow from such asset is
separately identifiable and is estimated to be less than its carrying value. In
that event, a loss is recognized
F-9
<PAGE> 86
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
based on the amount by which the carrying value exceeds the fair market value of
the long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long lived assets to be disposed of would be determined in a similar
manner, except that fair market values would be reduced by the cost of disposal.
INCOME TAXES
The Company accounts for income taxes under the liability method. Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company provides a valuation allowance, if necessary,
to reduce deferred tax assets to their estimated realizable value.
DEBT ISSUED WITH STOCK PURCHASE WARRANTS
Proceeds from debt issued with stock purchase warrants are allocated
between the debt and the warrants based on their relative fair values, and the
value ascribed to the warrants, based on the Black-Scholes option pricing model,
is amortized to interest expense over the term of the related debt using the
effective interest method. When the Company issues stock purchase warrants in
conjunction with obtaining a lease financing line of credit, the fair value of
the warrants, based on the Black-Scholes option pricing model, is included as a
deferred financing cost in deposits and other assets and is amortized to
interest expense over the term of the lease line using the straight-line method.
At December 31, 1998, $46,934 of deferred financing costs, net of accumulated
amortization of $7,525, are included in deposits and other assets, net.
STOCK-BASED COMPENSATION
Employee stock options are accounted for under the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25") "Accounting
for Stock Issued to Employees" and related interpretations.
REVENUE RECOGNITION
The Company recognizes service revenues as they are earned. Revenues from
initial installation of customer network connections are recognized when
installations are complete. Customers are billed on the last day of each month
either on a usage or a flat-rate basis. The usage based billing relates to the
month in which the billing occurs, whereas certain flat rate billings are for
the month subsequent to the billing month. Deferred revenues consist of revenues
for services to be delivered in the future and consist primarily of advance
billings for flat rate customers.
PRODUCT DEVELOPMENT COSTS
Product development costs are primarily related to network engineering
costs associated with changes to the functionality of the Company's proprietary
services and network architecture. Such costs that do not qualify for
capitalization are expensed as incurred. Research and development costs are
expensed as incurred. Included in product development costs are research and
development costs
F-10
<PAGE> 87
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
which for the period from inception (May 1, 1996) to December 31, 1996, the
years ended December 31, 1997 and 1998 and the six months ended June 30, 1998
and 1999 amounted to approximately $184,000, $389,000, $708,000, $318,000
(unaudited) and $903,000 (unaudited), respectively.
ADVERTISING COSTS
The Company expenses advertising costs as they are incurred. Advertising
expense for 1997 and 1998 was $15,670 and $63,433, respectively. There was no
advertising expense for the period from inception (May 1, 1996) to December 31,
1996.
COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective
January 1, 1998. SFAS No. 130 requires the disclosure of comprehensive income
and its components in a full set of general-purpose financial statements.
Comprehensive income is the change in equity from transactions and other events
and circumstances other than those resulting from investments by owners and
distributions to owners. SFAS No. 130 had no impact on the Company and,
accordingly, a separate statement of comprehensive income has not been
presented.
NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the weighted
average number of shares of common stock outstanding during the period, less the
weighted average number of unvested shares of common stock issued that are
subject to repurchase. Basic and diluted pro forma net loss per share, as
presented in the statement of operations, has been computed as described above
and also gives effect to the conversion of the convertible preferred stock
(using the if-converted method) from the original date of issuance. The Company
has excluded all convertible preferred stock, warrants to purchase convertible
preferred stock, outstanding options to purchase common stock and shares subject
to repurchase from the calculation of diluted net loss per share, as such
securities are antidilutive for all periods presented.
F-11
<PAGE> 88
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted (unaudited) net loss per share (in thousands, except per
share data):
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
INCEPTION YEAR ENDED ENDED
(MAY 1, 1996) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------- ------------------
1996 1997 1998 1998 1999
---------------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss............................. $ (959) $(1,609) $(6,973) $(1,461) $(16,149)
====== ======= ======= ======= ========
Basic and diluted:
Weighted average shares of common
stock outstanding used in
computing basic and diluted net
loss per share.................. 3,333 3,333 3,336 3,336 3,378
====== ======= ======= ======= ========
Basic and diluted net loss per
share.............................. $ (.29) $ (.48) $ (2.09) $ (.44) $ (4.78)
====== ======= ======= ======= ========
Pro forma (unaudited):
Net loss........................... $(6,973) $(16,149)
======= ========
Shares used above.................. 3,336 3,378
Pro forma adjustment to reflect
weighted effect of assumed
conversion of convertible
preferred stock................. 19,397 44,393
------- --------
Weighted average shares used in
computing pro forma basic and
diluted net loss per common
share........................... 22,733 47,771
======= ========
Pro forma basic and diluted net loss
per common share (unaudited)....... $ (.31) $ (.34)
======= ========
Antidilutive securities not included
in diluted net loss per share
calculation:
Convertible preferred stock..... 6,667 17,195 19,645 19,529 49,469
Options to purchase common
stock......................... -- -- 3,412 400 6,137
Warrants to purchase Series B
preferred stock............... -- 786 794 828 600
Unvested shares of common stock
subject to repurchase......... -- -- -- -- 50
------ ------- ------- ------- --------
6,667 17,981 23,851 20,757 56,256
====== ======= ======= ======= ========
</TABLE>
UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY
Upon closing of the offering contemplated by this prospectus, all of the
convertible preferred stock outstanding will automatically be converted into
common stock. Unaudited pro forma shareholders' equity at June 30, 1999, as
adjusted for the assumed conversion of convertible preferred stock based on the
shares of convertible preferred stock outstanding at June 30, 1999, is disclosed
on
F-12
<PAGE> 89
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the balance sheet. Series A, B and C preferred stock convert to common stock at
a conversion rate of one to one.
SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS No. 131") "Disclosures about Segments of an Enterprise and Related
Information," which is effective for fiscal years beginning after December 31,
1997. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas,
and major customers. The Company's operations consist of Internet connectivity
services, other ancillary services, such as co-location, web hosting and server
management, and installation services. Management uses one measurement of
profitability and does not disaggregate its business for internal reporting.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133, which will be effective for the Company for fiscal years and quarters
beginning after June 15, 2000, requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The Company is assessing the
requirements of SFAS No. 133 and the effects, if any, on the Company's financial
position, results of operations and cash flows.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This statement
requires companies to capitalize qualifying computer software costs which are
incurred during the application development stage and amortize them over the
software's estimated useful life. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. The Company adopted the requirements of SOP
98-1 during 1998.
In April 1998, the American Institute of Certified Public Accountants
issued Statements of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities." This statement requires companies to expense the costs of
start-up activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The Company
adopted SOP 98-5 during 1999, which did not have a material impact on its
results of operations.
F-13
<PAGE> 90
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1997 1998 1999
------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Network equipment........................................ $ 88 $1,150 $ 1,972
Network equipment under capital lease.................... 908 4,465 9,735
Furniture, equipment and software........................ 7 424 2,322
Furniture, equipment and software under capital lease.... 92 142 948
Leasehold improvements................................... 171 688 998
------ ------ -------
1,266 6,869 15,975
Less: Accumulated depreciation and amortization ($258,
$952 and $1,747 (unaudited) related to capital leases
at December 31, 1997 and 1998, and June 30, 1999,
respectively).......................................... (399) (1,041) (2,310)
------ ------ -------
Property and equipment, net.............................. $ 867 $5,828 $13,665
====== ====== =======
</TABLE>
Depreciation and amortization expense for the period from inception (May 1,
1996) to December 31, 1996, the years ended December 31, 1997 and 1998 and the
six months ended June 30, 1998 and 1999 amounted to $102,746, $297,027,
$720,762, $245,320 (unaudited) and $1,303,253 (unaudited), respectively. Assets
under capital leases are pledged as collateral for the underlying lease
agreements.
3. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
Compensation payable................................. $33 $567 $423
Taxes payable........................................ 49 95 52
Other................................................ 12 51 262
--- ---- ----
$94 $713 $737
=== ==== ====
</TABLE>
4. NOTES PAYABLE AND LINE OF CREDIT:
During November 1997, the Company entered into a line of credit agreement
(the "Line") with a bank allowing aggregate borrowings of up to $750,000 for the
purchase of equipment and for working capital. The Line is collateralized by the
assets of the Company and interest is payable at prime plus 1% (8.75% at
December 31, 1998). The Line requires interest only payments monthly and expires
in May 1999. Among other things, the lender has the right to require immediate
payment in the event of a material adverse change in the financial position of
the Company. A material adverse change is defined as a material impairment in
the perfection or priority of the bank's collateral or a material impairment of
the prospect of repayment of the Line. As of December 31, 1998 and 1997, the
Company had $650,000 and $0, respectively, outstanding on the Line.
F-14
<PAGE> 91
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company entered into a series of convertible notes payable
(the "Bridge Financing Agreements") to finance working capital equipment
requirements prior to the sale of Series B preferred stock. The total amount
borrowed under the Bridge Financing Agreements was $660,000. The Bridge
Financing Agreements had various due dates within 1997, with interest at 9% per
year. The Bridge Financing Agreements were either converted to Series B
preferred stock or repaid during 1997 and there were no amounts outstanding at
December 31, 1997. In connection with the Bridge Financing Agreements, the
Company issued warrants to purchase 785,759 shares of Series B preferred stock
at a price of $.60 per share, which resulted in financing expense of $124,310.
The Company also entered into an agreement during 1997 with a shareholder
to provide a $250,000 working capital line of credit. During 1997, the Company
borrowed $180,000 on the line and recorded interest expense of $5,020. All
amounts borrowed under the working capital line of credit were repaid during
1997.
At December 31, 1997, the Company had a note payable due to a lessor for
leasehold improvements in the amount of $34,444, which was repaid in full during
1998. The note included interest at 10% and was guaranteed by certain
shareholders and officers of the Company.
5. CAPITAL LEASES:
The Company has leases for a significant portion of its property and
equipment which are classified as capital leases. Interest on equipment and
furniture leases range from 4% to 20%, expire through 2003 and generally include
an option allowing the Company to purchase the equipment or furniture at the end
of the lease term for fair market value.
Future minimum capital lease payments together with the present value of
the minimum lease payments are as follows as of December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1999........................................................ $ 1,663
2000........................................................ 1,414
2001........................................................ 1,152
2002........................................................ 39
2003........................................................ 10
-------
Total minimum lease payments...................... 4,278
Less: amount representing interest.......................... (605)
-------
Present value of minimum lease payments..................... 3,673
Less: current portion....................................... (1,331)
-------
Capital lease obligations, less current portion........... $ 2,342
=======
</TABLE>
At December 31, 1998, the Company had approximately $900,000 available on a
lease line with a financing company and, in January and February 1999, the
Company drew the remaining $900,000 for the purchase of certain property and
equipment.
In March 1999, the Company amended an existing lease credit facility with a
vendor which increased the available line by $4,000,000 through March 31, 1999
and an additional $2,000,000 subsequent to March 31, 1999, if certain terms and
conditions are met. The $4,000,000 and
F-15
<PAGE> 92
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
$2,000,000 increases require the Company to maintain $539,100 and $359,400,
respectively, in a restricted account for twenty four months. Alternatively, the
Company may establish an unused line of credit at a commercial bank for the same
amounts.
6. INCOME TAXES:
Prior to the re-incorporation of the Company in October 1997, the Company
operated as an LLC and was not subject to income taxes.
As of December 31, 1998, the Company has net operating loss carryforwards
of approximately $7,242,000, expiring through 2018. The Company has placed a
valuation allowance against its deferred tax assets due to the uncertainty
surrounding the realization of such assets. Management evaluates, on a quarterly
basis, the recoverability of the deferred tax asset and the level of the
valuation allowance. At such time as it is determined that it is more likely
than not that the deferred tax assets are realizable, the valuation allowance
will be reduced.
The Company's ability to use its net operating losses to offset future
income is subject to restrictions in the Internal Revenue Code which could limit
the Company's future use of its net operating losses if certain stock ownership
changes occur. The Company's deferred tax assets and liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
----- -------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards.......................... $ 94 $ 2,680
Allowance for doubtful accounts........................... 9 24
Property and equipment.................................... 9 --
Other..................................................... 2 --
----- -------
114 2,704
Deferred income tax liabilities:
Property and equipment.................................... -- (58)
----- -------
114 2,646
Valuation allowance....................................... (114) (2,646)
----- -------
Net deferred tax assets................................... $ -- $ --
===== =======
</TABLE>
The following is a reconciliation of the income tax benefit to the amount
calculated based on the statutory federal rate of 34% and the estimated state
apportioned rate of 3%, net of the federal tax benefit, for the period from
inception (May 1, 1996) to December 31, 1996 and for the years ended December
31, 1997 and 1998.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal income tax benefit at statutory rates.............. (34)% (34)% (34)%
State income tax benefit at statutory rates................ -- -- (3)
Non-taxable LLC losses..................................... 34 25 --
Change in valuation allowance.............................. -- 9 37
--- --- ---
Effective tax rate......................................... --% --% --%
=== === ===
</TABLE>
F-16
<PAGE> 93
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE RETIREMENT PLAN:
During March 1998, the Company established a 401(k) Retirement Plan (the
"Plan") which covers substantially all eligible employees. The Plan is a
qualified salary reduction plan in which all eligible participants may elect to
have a percentage of their pre-tax compensation contributed to the Plan, subject
to certain guidelines issued by the Internal Revenue Service. The Company can
contribute to the plan at the discretion of the Board of Directors. To date, no
contributions have been made by the Company.
8. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
Leases relating to office space and P-NAP rental space are classified as
operating. Future minimum lease payments on non-cancelable operating leases are
as follows at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
<S> <C>
1999........................................................ $1,009
2000........................................................ 944
2001........................................................ 904
2002........................................................ 754
2003........................................................ 484
------
$4,095
======
</TABLE>
Rent expense was approximately $61,000, $111,000, $571,000, $95,827
(unaudited) and $1,003,136 (unaudited) for the period from inception (May 1,
1996) to December 31, 1996, for the years ended December 31, 1997 and 1998 and
for the six months ended June 30, 1998 and 1999, respectively.
SERVICE COMMITMENTS
The Company has entered into contracts with a backbone service provider and
a local exchange carrier to provide interconnection services. The contract with
the local exchange carrier provides for volume pricing based on a minimum
monthly payment. The required minimum monthly payment to the local exchange
carrier does not begin until six months after the deployment of the related
P-NAP and, as a result, will not begin until mid-1999. During that interim
period, the monthly payments are based on actual usage.
F-17
<PAGE> 94
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Minimum payments under these service commitments are as follows at December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
<S> <C>
1999........................................................ $ 693
2000........................................................ 1,383
2001........................................................ 1,054
2002........................................................ 240
------
$3,370
======
</TABLE>
9. SHAREHOLDERS' EQUITY (DEFICIT):
In January 1999, the Articles of Incorporation were amended to provide for
the authorization of additional common and preferred stock (the "Amendment")
and, accordingly, the disclosures in the financial statements and related notes
have been adjusted to reflect the Amendment for all periods presented.
CONVERTIBLE PREFERRED STOCK
At December 31, 1998, after giving effect to the Amendment, preferred stock
consists of the following (in thousands):
<TABLE>
<CAPTION>
ISSUED ADDITIONAL COMMON STOCK
SHARES AND PAID-IN RESERVED FOR LIQUIDATION
SERIES DESIGNATED OUTSTANDING PAR VALUE CAPITAL (NET) CONVERSION PREFERENCE
- ------ ---------- ----------- --------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
A 6,667 6,667 $ 7 $ 993 6,667 $ 680
B 13,773 12,978 13 7,706 12,978 7,786
C 29,630 -- -- -- -- --
------ ------ --- ------ ------ ------
50,070 19,645 $20 $8,699 19,645 $8,466
====== ====== === ====== ====== ======
</TABLE>
Preferred stock may be issued in one or more series, each with such
designations, preferences, rights, qualifications, limitations and restrictions
as the Board of Directors of the Company may determine at the time of issuance.
During 1997, the Board of Directors authorized 30,000,000 shares of preferred
stock. As a result of the Amendment in January 1999, the number of shares
authorized for preferred stock was increased to 50,069,615 shares.
Each share of Series A, Series B and Series C preferred stock is
convertible on a one-for-one basis to common stock at the option of the holder,
subject to adjustment in certain instances or automatically upon registration of
the Company's common stock pursuant to a public offering under the Securities
Act of 1933, as amended (an "Offering"). The Series A and Series B preferred
stock would be converted upon an Offering at a price of not less than $1.20 per
share with aggregate proceeds of not less than $7,000,000. The Series C
preferred stock would be converted upon an Offering at a price of not less than
$3.00 per share with aggregate proceeds of not less than $20,000,000. Automatic
conversion of Series A and Series B preferred stock would also occur on such
date as fewer than 1,333,333 and 2,185,609 shares remained outstanding,
respectively. Additionally, automatic conversion of Series A preferred stock
would occur upon written agreement of the holders
F-18
<PAGE> 95
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of a majority of Series A preferred stock, or, in the case of Series B and
Series C preferred stock, upon written agreement of the holders of 66 2/3% of
such shares.
The holder of each share of preferred stock has the right to one vote for
each share of common stock into which such preferred stock can be converted.
Preferred shareholders have the same voting rights and powers as common
shareholders. Holders of the Company's preferred stock and warrants also have
certain registration rights.
Holders of preferred stock are entitled to receive dividends in preference
to any dividends paid to holders of common stock. Dividends are based on a rate
equal to 8% per share per annum of the original issue price, or $.102, $.60 and
$1.08 per share for Series A, Series B, and Series C preferred stock,
respectively. No dividends shall be paid to common or Series A preferred
shareholders unless all dividends payable to Series B and Series C preferred
shareholders have been paid or set apart on a pro rata basis. Dividends are not
cumulative and are payable when and if declared by the Board of Directors.
In the event of a liquidation of the Company, the holders of Series B and
Series C preferred stock will receive a liquidation preference of up to $.60 and
$1.08 per share, respectively, over the holders of common or Series A preferred
stock, adjusted for any combinations, consolidations, stock distributions, or
declared but unpaid dividends. Upon satisfaction of the Series B and Series C
preferred stock liquidation preference, distributions will be made to Series A
preferred shareholders in an amount equal to $.102 per share, adjusted for any
combinations, consolidations, stock distributions, or declared but unpaid
dividends. Upon completion of preference distributions to Series A, Series B and
Series C preferred shareholders, any remaining amounts will be distributed among
the holders of Series A, Series B, and Series C preferred stock and common
shareholders on a pro rata basis.
COMMON STOCK
As a result of the Amendment, the number of shares of common stock
authorized was increased to 100,000,000 from 70,000,000.
CLASS A AND B UNITS
During 1996, conducting business as an LLC, the Company issued 2,000,000
Class A units to its founding members upon incorporation and subsequently sold
4,000,000 Class B units. All units were exchanged for preferred and common stock
during 1997 as part of the re-incorporation.
WARRANTS TO PURCHASE SERIES B PREFERRED STOCK
During 1997, the Company issued warrants to purchase up to 785,759 shares
of Series B preferred stock at $.60 per share in conjunction with its bridge
financing. During 1998, the Company issued warrants to purchase up to 125,001
shares of Series B preferred stock at $.60 per share in connection with various
lease financings. The warrants to purchase Series B preferred stock
automatically convert to warrants to purchase common stock upon the automatic
conversion of the Series B preferred stock into common stock. During 1998, a
warrant holder exercised warrants to purchase 116,666 shares of Series B
preferred stock, resulting in proceeds to the Company of $70,000.
F-19
<PAGE> 96
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Outstanding warrants to purchase shares of Series B preferred stock at December
31, 1998 are as follows (shares in thousands):
<TABLE>
<CAPTION>
YEAR OF EXERCISE
EXPIRATION PRICE SHARES
- ---------- -------- ------
<S> <C> <C>
2002 $.60 669
2008 $.60 125
---
794
===
</TABLE>
During January of 1999, two warrant holders exercised warrants to purchase
a total of 193,958 shares of Series B preferred stock, resulting in proceeds to
the Company of $116,375.
10. STOCK OPTION PLAN:
In March 1998, the Company's Board of Directors adopted the 1998 Stock
Option/Stock Issuance Plan (the "1998 Plan"), which provides for the issuance of
incentive stock options ("ISOs") and non-qualified options to eligible
individuals responsible for the management, growth and financial success of the
Company. The Company has applied the accounting principles discussed below to
stock option commitments made by the Company. Shares of common stock reserved
for the 1998 Plan in March 1998 totaled 4,035,000 and were increased to
5,035,000 in January 1999.
ISOs may be issued only to employees of the Company and have a maximum term
of 10 years from the date of grant. The exercise price for ISOs may not be less
than 100% of the estimated fair market value of the common stock at the time of
the grant. In the case of options granted to holders of more than 10% of the
voting power of the Company, the exercise price may not be less than 110% of the
estimated fair market value of the common stock at the time of grant, and the
term of the option may not exceed five years. Options become exercisable in
whole or in part from time to time as determined by the Board of Directors,
which will administer the Plan. Both ISOs and non-qualified options generally
vest over four years.
The Company has elected to account for stock-based compensation using the
intrinsic value method prescribed in APB 25. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the fair value of the
Company's stock at the date of grant over the exercise price to be paid to
acquire the stock.
Option activity for 1998 is as follows (there was no activity in 1997 and
for the period from inception (May 1, 1996) to December 31, 1996) (shares in
thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Granted............................................. 3,412 $.10
Exercised........................................... -- --
Canceled............................................ -- --
-----
Balance, December 31, 1998.......................... 3,412 $.10
=====
</TABLE>
Options granted during 1998 include 400,000 non-qualified options granted
to members of the Board of Directors ("Directors' Options") which are
immediately exercisable, and upon exercise, are
F-20
<PAGE> 97
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
subject to the terms of restricted stock purchase agreements. The Directors'
Options, or if exercised, the related restricted stock, vest over a period of
four years from the vesting commencement date, as determined by the Board of
Directors.
The following table summarizes information about options outstanding at
December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE (EXCLUDING
OPTIONS OUTSTANDING OPTIONS WHICH SHARES WOULD BE
- ---------------------------------------------------- SUBJECT TO THE COMPANY'S RIGHT
WEIGHTED AVERAGE OF REPURCHASE)
NUMBER REMAINING -------------------------------
OF CONTRACTUAL LIFE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES SHARES (IN YEARS) OF SHARES EXERCISE PRICE
- --------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
$.06 1,916 9.49 184 $.06
$.15 1,496 9.85 -- --
----- ---
$.06 - $.15 3,412 9.65 184 $.06
===== ===
</TABLE>
The Company has adopted the disclosure only provisions of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation." Pro forma information regarding the net loss is required by SFAS
No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method. The fair value of options
granted in 1998 was estimated at the date of grant using the minimum value
method allowed for non-public companies assuming no expected dividends and the
following weighted-average assumptions: risk-free interest rate of 6.00%;
volatility of 0%; and an expected life of 6 years.
For purposes of the pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting periods. If the
Company had accounted for compensation expense related to stock options under
the fair value method prescribed by SFAS No. 123, the net loss and the basic and
diluted net loss per share for the year ended December 31, 1998 would have been
approximately $6,985,000 and $2.09, respectively.
During 1998, options to purchase 3,411,749 shares of the Company's common
stock, with a weighted-average exercise price of $.10 per share and a
weighted-average option fair value of $.23 per share, were granted with an
exercise price below the estimated market value at the date of grant.
DEFERRED STOCK COMPENSATION
During 1998, the Company issued stock options to certain employees under
the 1998 Plan with exercise prices below the deemed fair value of the Company's
common stock at the date of grant. In accordance with the requirements of APB
25, the Company has recorded deferred stock compensation for the difference
between the exercise price of the stock options and the deemed fair value of the
Company's common stock at the date of grant. This deferred stock compensation is
amortized to expense over the period during which the options or common stock
subject to repurchase vest, generally four years, using an accelerated method as
described in Financial Accounting Standards Board Interpretation No. 28. As of
December 31, 1998, the Company has recorded deferred stock compensation related
to these options in the total amount of $697,830, of which $204,599 has been
amortized to expense during 1998. The weighted average exercise price of
F-21
<PAGE> 98
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the 3,411,749 options to purchase common stock was $.10 and the weighted average
fair value per share was $.31 during 1998.
11. EVENTS SUBSEQUENT TO DECEMBER 31, 1998:
BRIDGE NOTES PAYABLE
In January 1999, the Company borrowed $1,100,000 from two existing
shareholders as a bridge loan until the completion of the Series C financing.
Interest on these notes was at prime plus 2% and was repaid in full, plus
accrued interest, during February of 1999.
PREFERRED STOCK
In February 1999, the Company sold 29,629,630 shares of Series C preferred
stock at a price of $1.08 per share, resulting in gross proceeds of
approximately $32,000,000, prior to deducting issuance costs.
DEBT COVENANTS
The bank line of credit agreement requires that the Company provide audited
financial statements prior to March 31 of each year. The December 31, 1998
financial statements were issued subsequent to March 31, 1999 and, accordingly,
resulted in a violation of this covenant. The Company has obtained a waiver for
this violation from the bank.
12. EVENTS SUBSEQUENT TO DECEMBER 31, 1998 (UNAUDITED):
FINANCING ARRANGEMENTS
Line of Credit: During July 1999, the Company amended its existing line of
credit and established a new line of credit (the "New Line") with the same
financial institution. The New Line allows the Company to borrow up to
$3,000,000, as limited by certain borrowing base requirements which include
maintaining certain levels of monthly revenues and customer turnover ratios. The
New Line requires monthly payments of interest only at prime plus 1% and matures
on June 30, 2000. Events of default for the New Line include failure to maintain
certain financial covenants or a material adverse change in the financial
position of the Company. A material adverse change is defined as a material
impairment in the perfection or priority of the bank's collateral or a material
impairment of the prospect of repayment of the New Line. The Company borrowed an
additional $900,000 on the New Line during July 1999.
Equipment Financing: During August 1999, the Company entered into an
equipment financing arrangement with a finance company which allows borrowings
of up to $5,000,000 for the purchase of property and equipment. The equipment
financing arrangement includes sublimits of $3,500,000 for equipment costs and
$1,500,000 for the acquisition of software and other P-NAP and facility costs.
Loans under the $3,500,000 sublimit require monthly principal and interest
payments over a term of 48 months. This facility bears interest at 7.47% plus an
index rate based on the yield of 4-year U.S. Treasury Notes (13.11% at August
31, 1999). Loans under the $1,500,000 sublimit require monthly principal and
interest payments over a term of 36 months. This facility bears interest at
7.45% plus an index rate based on the yield of 4-year U.S. Treasury Notes
(13.09% at August 31, 1999).
F-22
<PAGE> 99
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Borrowings under each sublimit must be made prior to May 1, 2000. During August
1999, the Company borrowed approximately $1,900,000 pursuant to this
arrangement. Amounts borrowed are collateralized by the property and equipment
purchased and require monthly payments of principle and interest.
Standby Credit Facility. On August 31, 1999, the Company signed a financing
commitment letter with 7 shareholders, including a director of the Company who
will also act as the administrative agent for the proposed facility. Upon
completion of a definitive agreement, the facility will allow the Company to
draw up to $10,000,000 prior to December 31, 1999. The facility will bear
interest at prime plus 2% with principal and interest due on the earlier of six
months from the first draw or a public or private sale of stock. Additionally,
upon completion of the definitive agreement, the Company will issue warrants to
purchase 100,000 shares of common stock with an exercise price equal to the
Company's initial public offering share price or a price determined in a private
sale of stock. Further, at the Company's option, the facility can be extended
for an additional six month term in consideration for the issuance of warrants
to purchase an additional 100,000 shares of common stock.
Sale of Equity. On September 17, 1999, the Company entered into an
agreement with Inktomi Corporation ("Inktomi") to sell $20,000,000 of common
stock in a private placement that will close at the same time or immediately
after the closing of the Company's initial public offering. Inktomi will pay the
same price per share paid by the public in the initial public offering, less an
amount equivalent to the underwriting discounts and commissions per share. The
Company will also issue Inktomi a warrant to purchase additional shares of
common stock. The number of shares underlying the warrant will be equal to 50%
of the number of shares Inktomi purchases in the private placement, and the
exercise price per share will be 150% of the price Inktomi pays in the private
placement. The warrant will have a 2 year term and include demand and piggyback
registration rights. The agreement also prohibits Inktomi from acquiring
additional shares of the Company's common stock for a period of 2 years. The
Company will pay a placement fee of $1,000,000 upon closing of the private
placement. In addition, the Company has agreed to use its best efforts to
complete a technical and marketing agreement with Inktomi by November 19, 1999.
STOCK OPTIONS
During the six months ended June 30, 1999, the Company granted an
additional 1,468,500 options under the 1998 Plan. During June 1999, the
Company's Board of Directors adopted the 1999 Equity Incentive Plan (the "1999
Plan") which provides for the issuance of ISOs and nonqualified stock options to
eligible individuals responsible for the management, growth and financial
success of the Company. As of June 30, 1999, 6,500,000 shares of common stock
are reserved for the 1999 Plan, of which 2,004,000 options were outstanding. The
terms of the 1999 Plan are the same as the 1998 Plan with respect to ISO
treatment and vesting. During the six months ended June 30, 1999, the Company
granted 3,482,500 options with exercise prices below the deemed fair value of
the Company's common stock and recorded approximately $15,406,000 of deferred
stock compensation related to such options, and amortized approximately
$1,787,000 to expense. The weighted average exercise price per share of the
3,482,500 options to purchase common stock was $2.72 and the weighted average
fair value per share was $7.14 during 1999. Subsequent to June 30, 1999, the
Company granted 943,000 options to purchase shares of common stock to certain
employees with exercise prices below the deemed fair value of the Company's
common stock and will record approximately $5,558,000 of deferred compensation
related to such options.
F-23
<PAGE> 100
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
During July 1999, the Company adopted the 1999 Non-Employee Directors'
Stock Option Plan (the "Director Plan"). The Director Plan provides for the
grant of non-qualified stock options to non-employee directors. A total of
500,000 shares of the Company's common stock have been reserved for issuance
under the Director Plan. Initial grants, which are fully vested as of the date
of the grant, of 40,000 shares of the Company's common stock are to be made
under the Director Plan to all non-employee directors upon the closing of an
initial public offering and, thereafter, to each eligible non-employee director
on the date such person is first elected or appointed as a non-employee
director. On the day after each of the Company's annual shareholder meetings,
starting with the annual meeting in 2000, each non-employee director will
automatically be granted a fully vested and exercisable option for 10,000
shares, provided such person has been a non-employee director of the Company for
at least the prior six months. The options are exercisable as long as the
non-employee director continues to serve as a director, employee or consultant
of the Company or any of its affiliates.
EMPLOYEE STOCK PURCHASE PLAN
During July 1999, the Company adopted the Employee Stock Purchase Plan (the
"ESPP"). The ESPP allows all full-time employees to participate by purchasing
the Company's common stock using a uniform percentage of compensation at a
discount allowed under guidelines issued by the Internal Revenue Service. A
total of 1,500,000 shares of the Company's common stock has been reserved for
issuance under the ESPP. Each year, the number of shares reserved for issuance
under the purchase plan will automatically be increased by 2% of the total
number of shares of common stock then outstanding or, if less, by 1,500,000
shares.
COMMON STOCK
During July 1999, the Board of Directors increased the number of authorized
shares of common stock to 300,000,000 shares.
OPERATING LEASES
As of June 30, 1999, the Company entered into various operating lease
agreements which increased the total payments that will be paid on
non-cancelable leases over the next five years by approximately $5,205,000 to
approximately $9,300,000.
F-24
<PAGE> 101
[INTERNAP LOGO]
<PAGE> 102
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 Company in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 41,721
NASD filing fee............................................. 15,508
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving costs................................ 200,000
Legal fees and expenses..................................... 425,000
Accounting fees and expenses................................ 250,000
Blue Sky fees and expenses.................................. 5,000
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous expenses...................................... 57,771
----------
Total............................................. $1,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23.B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). The directors and officers of InterNAP also may be
indemnified against liability they may incur for serving in that capacity
pursuant to a liability insurance policy maintained by InterNAP for such
purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary damages
for acts or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Section 5 of InterNAP's Amended and Restated Articles of
Incorporation, as amended by Articles of Amendment (Exhibit 3.2 hereto) contains
provisions implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to InterNAP and its shareholders.
InterNAP has entered into certain indemnification agreements with its
directors and certain of its officers, the form of which is attached as Exhibit
10.1 to this Registration Statement and incorporated herein by reference. The
indemnification agreements provide InterNAP's directors and certain of its
officers with indemnification to the maximum extent permitted by the WBCA.
The Underwriting Agreement, which is attached as Exhibit 1.1 to the
Registration Statement, provides for indemnification by the Underwriters of
InterNAP and its executive officers and directors and by InterNAP of the
Underwriters, for certain liabilities, including liabilities arising under the
Securities Act, in connection with matters specifically provided in writing by
the Underwriters for inclusion in this Registration Statement.
II-1
<PAGE> 103
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, we have issued unregistered securities to a
limited number of persons, as described below. None of these transactions
involved any underwriters, underwriting discounts or commissions, or any public
offering, and we believe that each transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation
D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and
contracts relating to compensation as provided under Rule 701. The recipients of
securities in each of these transactions represented their intention to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends were affixed
to the share certificates and instruments issued in such transactions. All
recipients had adequate access to information about us, through their
relationships with us.
Since May 1, 1996 we have issued and sold the following securities:
Pursuant to a Limited Liability Company Agreement of InterNAP Network
Services, L.L.C., dated October 11, 1996, we sold 1,787,180 Class A Units in
InterNAP Network Services, L.L.C. to certain investors, including our officers
Paul E. McBride, Christopher D. Wheeler and Anthony C. Naughtin, for an
aggregate consideration of $1,787. InterNAP Network Services, L.L.C. was
dissolved on October 27, 1997. InterNAP was incorporated in the State of
Washington in October 1997. These Class A Units were exchanged for shares of
common stock at an exchange ratio of 1 to 1.667.
In May 1996, we issued 2,000,000 Class B Units in InterNAP Network
Services, L.L.C. to Robert J. Lunday, Jr., in consideration for arranging a
guarantee of certain of our leasehold obligations and an unconditional promise
to contribute $500,000 to our capital on or before October 15, 1996.
Additionally, Lunday Communications loaned us $475,000 in 1996 and we repaid the
principal and interest during 1996. Robert J. Lunday, Jr., one of our directors,
is president of Lunday Communications, Inc. Further, in May 1996, Mr. Lunday
purchased an additional 2,000,000 Class B Units for $500,000. These Class B
Units were exchanged for shares of Series A preferred stock at an exchange ratio
of 1 to 1:667.
On October 29, 1997, December 29, 1997 and February 4, 1998, we sold an
aggregate of 12,862,558 shares of Series B preferred stock to 36 investors,
including H&Q InterNAP Investors, L.P., TI Ventures, LP and Vulcan Ventures
Incorporated, three of our principal shareholders, at an aggregate purchase
price of $7,717,534 or $.60 per share. The investor group included Robert D.
Shurtleff, Jr., one of our directors, who converted a promissory note dated
February 13, 1997 in the amount of $125,000 plus accrued interest for 221,638
shares of Series B preferred stock.
On January 28, 1999 and February 26, 1999, we sold an aggregate of
29,629,630 shares of Series C preferred stock to 44 investors, including Robert
D. Shurtleff, Jr., one of our directors, and H&Q InterNAP Investors, L.P.,
Morgan Stanley Dean Witter Venture Partners, Oak Investment Partners VIII, L.P.,
TI Ventures, LP and Vulcan Ventures Incorporated, five of our principal
shareholders, at an aggregate purchase price of $32,000,000 or $1.08 per share.
From May 1, 1996 to December 1998, we issued warrants to 12 private
investors to purchase an aggregate of 794,092 shares of Series B preferred stock
at a weighted average exercise price of $.60.
In May and September 1998, we issued warrants to First Portland Corporation
and Phoenix Leasing Incorporated, to purchase an aggregate of 116,668 shares of
Series B preferred stock at a weighted average exercise price of $.60.
From July 22, 1998, date of the first issuance of options under our 1998
Stock Option Plan, through August 31, 1999, we granted stock options to purchase
an aggregate of 4,880,249 shares of common stock, with exercise prices ranging
from $.06 to $.80 per share, to employees and directors pursuant to our 1998
Stock Option Plan. Of these options, options for an aggregate of 810,255 shares
II-2
<PAGE> 104
have been exercised, options for an aggregate of 347,879 shares are exercisable,
options for an aggregate of 80,445 shares have been cancelled and options for an
aggregate of 3,979,029 shares remain outstanding. Pursuant to our 1999 Equity
Incentive Plan, as of August 31, 1999 we have granted stock options to purchase
2,884,000 shares of our common stock, with exercise prices ranging from $4.00 to
$8.00 per share to employees, consultants and directors of which 15,000 have
been cancelled and options for an aggregate of 2,869,000 remain outstanding.
On September 17, 1999, we entered into an agreement with Inktomi
Corporation to sell $20,000,000 of common stock in a private placement that will
close at the same time or immediately after the closing of our initial public
offering. Inktomi will pay the same price per share paid by the public in the
initial public offering, less underwriting discounts and commissions per share.
We will also issue Inktomi a warrant to purchase additional shares of common
stock. The number of shares underlying the warrant will be equal to 50% of the
number of shares Inktomi purchases in the private placement, and the exercise
price per share will be 150% of the price Inktomi pays in the private placement.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1+ Amended and Restated Articles of Incorporation of InterNAP,
as amended.
3.2+ Form of Amended and Restated Articles of Incorporation to be
filed upon the closing of the offering made pursuant to this
Registration Statement.
3.3+ Bylaws of InterNAP, as currently in effect.
3.4+ Form of Amended and Restated Bylaws of InterNAP to be filed
upon the closing of the offering made pursuant to this
Registration Statement.
4.1+ Specimen Common Stock Certificate.
5.1+ Opinion of Cooley Godward LLP.
10.1+ Form of Indemnification Agreement between the Registrant and
each of its directors and certain of its officers.
10.2+ 1999 Non-Employee Directors' Stock Option Plan.
10.3+ Form of 1999 Non-Employee Directors' Stock Option Agreement.
10.4+ 1999 Employee Stock Purchase Plan.
10.5+ 1998 Stock Option/Stock Issuance Plan.
10.6+ Form of 1998 Stock Option Agreement.
10.7+ 1999 Equity Incentive Plan.
10.8+ Form of 1999 Equity Incentive Plan Stock Option Agreement.
10.9+ Lease Agreement, dated June 11, 1998, between Registrant and
Union Square Limited Partnership, as amended.
10.10+ Lease Agreement, dated June 1, 1996, between Registrant and
Sixth & Virginia Properties.
10.11+ Form of Employee Confidentiality, Nonraiding and
Noncompetition Agreement used between Registrant and its
Executive Officers.
10.12+ Form of Stock Purchase Warrant.
10.13+ Preferred Stock Purchase Warrant, dated December 15, 1998,
between Registrant and Bob Kingsbook.
10.14+ Preferred Stock Purchase Warrant, dated September 1, 1998,
between Registrant and Phoenix Leasing Incorporated.
</TABLE>
II-3
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.15+ Preferred Stock Purchase Warrant, dated May 5, 1998, between
Registrant and First Portland Corporation.
10.16+ Preferred Stock Purchase Warrant, dated December 24, 1998,
between Registrant and Robert Shurtleff, Jr.
10.17+ Amended and Restated Investor Rights Agreement, dated
January 28, 1999.
10.18+ Shareholders Agreement, dated October 1, 1997.
10.19+ Amended and Restated Loan and Security Agreement, dated June
30, 1999, between Registrant and Silicon Valley Bank.
10.20+ Master Agreement To Lease Equipment, dated January 20, 1998
between Registrant and Cisco Systems Capital Corporation.
10.21+ Employment Agreement, dated April 10, 1996, between
Registrant and Christopher D. Wheeler.
10.22+ Employment Agreement, dated May 16, 1996, between Registrant
and Anthony C. Naughtin.
10.23+ Employee Confidentiality, Nonraiding and Noncompetition
Agreement, dated May 16, 1996 between Registrant and Paul E.
McBride.
10.24+ Employment Agreement, dated March 18, 1998, between
Registrant and Michael Ortega.
10.25+ Standby Loan Facility Commitment Letter, dated August 31,
1999, between Registrant and David Cornfield, Dan Newell,
Richard Saada, Paul Canniff, Robert Lunday, Todd Warren,
Robert D. Shurtleff, Jr. and S.L. Partners, Inc.
10.26+ Master Loan and Security Agreement, dated August 23, 1999
between Registrant and Finova Capital Corporation.
10.27 Common Stock and Warrant Purchase Agreement, dated September
17, 1999, between Registrant and Inktomi Corporation.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2+ Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney (contained on signature page).
27.1+ Financial Data Schedule.
</TABLE>
- -------------------------
+ Previously filed.
(b) SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE
NUMBER DESCRIPTION
- -------- -----------
<C> <S>
1.1 Report of Independent Accountants on Financial Statement
Schedule.
1.2 Valuation and Qualifying Accounts and Reserves Schedule.
</TABLE>
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the Underwriters at the closing specified
in the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification by us for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the provisions referenced in Item 14 of this registration
statement or otherwise, we have 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
II-4
<PAGE> 106
liabilities (other than the payment by us of expenses incurred or paid by our
director, officer, or controlling person 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, we 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.
We hereby undertake 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 us pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act will 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-5
<PAGE> 107
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
InterNAP has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereinto duly authorized, in the
City of Seattle, State of Washington, on the 20th day of September, 1999.
INTERNAP NETWORK SERVICES
CORPORATION
By: *
-----------------------------------
Anthony C. Naughtin
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chief Executive Officer September 20, 1999
- ----------------------------------------------------- and President (Principal
Anthony C. Naughtin Executive Officer)
/s/ PAUL E. MCBRIDE Vice President and Chief September 20, 1999
- ----------------------------------------------------- Financial Officer
Paul E. McBride (Principal Finance and
Accounting Officer)
* Chairman of the Board September 20, 1999
- -----------------------------------------------------
Eugene Eidenberg
* Director September 20, 1999
- -----------------------------------------------------
William J. Harding
* Director September 20, 1999
- -----------------------------------------------------
Frederic W. Harman
* Director September 20, 1999
- -----------------------------------------------------
Robert J. Lunday, Jr.
* Director September 20, 1999
- -----------------------------------------------------
Kevin L. Ober
</TABLE>
II-6
<PAGE> 108
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director September 20, 1999
- -----------------------------------------------------
Robert D. Shurtleff, Jr.
By: /s/ PAUL E. MCBRIDE
-------------------------------------------------
Paul E. McBride
(Attorney-in-Fact)
</TABLE>
II-7
<PAGE> 109
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors and Shareholders
InterNAP Network Services Corporation
Our audits of the financial statements referred to in our report dated
April 2, 1999 appearing in the Registration Statement on Form S-1 also included
an audit of the financial statement schedule listed in Item 16 of this
Form S-1. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related financial statements.
PricewaterhouseCoopers LLP
Seattle, Washington
April 2, 1999
S-1
<PAGE> 110
Valuation and qualifying accounts and reserves (in thousands)
<TABLE>
<CAPTION>
Balance at Charges to Charges to Balance at
beginning of costs & other end of
Description fiscal period expenses accounts Deductions fiscal period
- ------------------------------------ ------------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Allowance for doubtful accounts $ 27 $ 27
Tax valuation allowance $ 114 114
Year Ended December 31, 1998
Allowance for doubtful accounts $ 27 140 $ 102 65
Tax valuation allowance 114 2,532 2,646
</TABLE>
<PAGE> 111
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1+ Form of Underwriting Agreement.
3.1+ Articles of Incorporation of InterNAP, as amended.
3.2+ Form of Amended and Restated Articles of Incorporation to be
filed upon the closing of the offering made pursuant to this
Registration Statement.
3.3+ Bylaws of InterNAP, as currently in effect.
3.4+ Form of Amended and Restated Bylaws of InterNAP to be filed
upon the closing of the offering made pursuant to this
Registration Statement.
4.1+ Specimen Common Stock Certificate.
5.1+ Opinion of Cooley Godward LLP.
10.1+ Form of Indemnification Agreement between the Registrant and
each of its directors and certain of its officers.
10.2+ 1999 Non-Employee Directors' Stock Option Plan.
10.3+ Form of 1999 Non-Employee Directors' Stock Option Agreement.
10.4+ 1999 Employee Stock Purchase Plan.
10.5+ 1998 Stock Option/Stock Issuance Plan.
10.6+ Form of 1998 Stock Option Agreement.
10.7+ 1999 Equity Incentive Plan.
10.8+ Form of 1999 Equity Incentive Plan Stock Option Agreement.
10.9+ Lease Agreement, dated June 11, 1998, between Registrant and
Union Square Limited Partnership, as amended.
10.10+ Lease Agreement, dated June 1, 1996, between Registrant and
Sixth & Virginia Properties.
10.11+ Form of Employee Confidentiality, Nonraiding and
Noncompetition Agreement used between Registrant and its
Executive Officers.
10.12+ Form of Stock Purchase Warrant.
10.13+ Preferred Stock Purchase Warrant, dated December 15, 1998,
between Registrant and Bob Kingsbook.
10.14+ Preferred Stock Purchase Warrant, dated September 1, 1998,
between Registrant and Phoenix Leasing Incorporated.
10.15+ Preferred Stock Purchase Warrant, dated May 5, 1998, between
Registrant and First Portland Corporation.
10.16+ Preferred Stock Purchase Warrant, dated December 24, 1998,
between Registrant and Robert Shurtleff, Jr.
10.17+ Amended and Restated Investor Rights Agreement, dated
January 28, 1999.
10.18+ Shareholder Agreement, dated October 1, 1997.
10.19+ Amended and Restated Loan and Security Agreement, dated June
30, 1999, between Registrant and Silicon Valley Bank.
10.20+ Master Agreement To Lease Equipment, dated January 20, 1998
between Registrant and Cisco Systems Capital Corporation.
10.21+ Employment Agreement, dated April 10, 1996, between
Registrant and Christopher D. Wheeler.
10.22+ Employment Agreement, dated May 16, 1996, between Registrant
and Anthony C. Naughtin.
10.23+ Employee Confidentiality, Nonraiding and Noncompetition
Agreement, dated May 16, 1996 between Registrant and Paul E.
McBride.
10.24+ Employment Agreement, dated March 18, 1998, between
Registrant and Michael Ortega.
</TABLE>
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.25+ Standby Loan Facility Commitment Letter, dated August 31,
1999, between Registrant and David Cornfield, Dan Newell,
Richard Saada, Paul Canniff, Robert Lunday, Todd Warren,
Robert D. Shurtleff, Jr. and S.L. Partners, Inc.
10.26+ Master Loan and Security Agreement, dated August 23, 1999
between Registrant and Finova Capital Corporation.
10.27 Common Stock and Warrant Purchase Agreement, dated September
17, 1999, between Registrant and Inktomi Corporation.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2+ Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney (contained on signature page).
27.1+ Financial Data Schedule.
</TABLE>
- -------------------------
+ Previously filed.
<PAGE> 1
EXHIBIT 10.27
INTERNAP NETWORK SERVICES CORPORATION
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
SEPTEMBER 17, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 1. ISSUANCE OF INVESTOR SHARES AND WARRANT.......................................1
SECTION 2. CLOSING, DELIVERY AND PAYMENT.................................................2
2.1 Closing.......................................................................2
2.2 Deliveries....................................................................2
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................................2
3.1 Organization, Good Standing and Qualification.................................2
3.2 Capitalization; Voting Rights.................................................3
3.3 Authorization; Binding Obligations............................................4
3.4 Compliance With Other Instruments.............................................4
3.5 Information...................................................................4
3.6 Other Registration Rights.....................................................4
SECTION 4. REPRESENTATIONS AND WARRANTIES OF INVESTOR....................................5
4.1 Requisite Power and Authority.................................................5
4.2 Investment Representations....................................................5
4.3 Transfer Restrictions.........................................................6
4.4 No Public Market..............................................................6
SECTION 5. CONDITIONS TO THE INVESTOR'S AND COMPANY'S OBLIGATIONS AT THE CLOSING.........7
SECTION 6. STANDSTILL AGREEMENT..........................................................7
SECTION 7. MISCELLANEOUS.................................................................8
7.1 Governing Law.................................................................8
7.2 Survival......................................................................8
7.3 Successors and Assigns........................................................8
7.4 Entire Agreement..............................................................8
7.5 Severability..................................................................8
7.6 Amendment and Waiver..........................................................8
7.7 Notices.......................................................................8
7.8 Expenses......................................................................9
7.9 Titles and Subtitles..........................................................9
7.10 Counterparts..................................................................9
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
7.11 Broker's Fees.................................................................9
7.12 Pronouns......................................................................9
7.13 California Corporate Securities Law...........................................9
</TABLE>
ii.
<PAGE> 4
LIST OF EXHIBITS
EXHIBIT A Warrant
EXHIBIT B Amended and Restated Rights Agreement
EXHIBIT C Lock-up Letter
1.
<PAGE> 5
INTERNAP NETWORK SERVICES CORPORATION
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
THIS COMMON STOCK AND WARRANT PURCHASE AGREEMENT (the "Agreement") is
Tendered into effective as of September 17, 1999, by and among INTERNAP NETWORK
SERVICES CORPORATION, a Washington corporation (the "Company"), and INKTOMI
CORP., a Delaware corporation (the "Investor").
RECITALS
WHEREAS, the Investor desires to purchase shares of the Company's Common
Stock (the "Common Stock") and a Warrant to purchase additional shares of Common
Stock (the "Warrant"); and
WHEREAS, the Company desires to issue and sell Common Stock and the
Warrant to the Investor on the terms and conditions set forth herein
concurrently or immediately following the closing of the initial public offering
of the Company's Common Stock (the "IPO").
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
SECTION 1. ISSUANCE OF INVESTOR SHARES AND WARRANT.
Subject to the terms and conditions hereof, at the Closing, the Company
will, for an aggregate purchase price of $20,000,000 payable to the Company by
the Investor:
(a) issue and sell to the Investor, and the Investor will
purchase from the Company, an aggregate number of shares of Common Stock (the
"Investor Shares") determined by dividing (i) $20,000,000 by (ii) the per share
"Proceeds to InterNAP" specified on the cover page of the final prospectus (the
"Final Prospectus") relating to the IPO (such per share price is referred to
herein as the "Common Stock Purchase Price"); and
(b) issue to the Investor the Warrant, in the form of EXHIBIT A
attached hereto. The number of shares of Common Stock the Investor may purchase
pursuant to the Warrant ("Warrant Shares") shall be equal to fifty percent (50%)
of the number of Investor Shares purchased by the Investor at the Closing. The
price per share at which the Investor may purchase Warrant Shares shall be one
hundred fifty percent (150%) of the Common Stock Purchase Price. The parties
agree that the Company's agreement to issue the Warrant is made as an inducement
solely in connection with the Investor's agreement to purchase the Investor
Shares, and not for any other reason.
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
1.
<PAGE> 6
SECTION 2. CLOSING, DELIVERY AND PAYMENT.
2.1 CLOSING. The purchase and sale of the Investor Shares and the
issuance of the Warrant shall take place at a closing (the "Closing") at the
offices of Cooley Godward LLP, 5200 Carillon Point, Kirkland, Washington
98033-7356, on the date of the closing of the IPO or at such later time or place
as the parties may mutually agree (such date is hereinafter referred to as the
"Closing Date").
2.2 DELIVERIES.
(a) COMPANY DELIVERIES. At the Closing, subject to the terms and
conditions hereof, the Company will deliver to the Investor the following:
(i) Certificates representing the Investor Shares;
(ii) The Warrant;
(iii) The Amended and Restated Investor Rights Agreement
in the form attached hereto as EXHIBIT B (the "Rights Agreement"); provided,
that the Company may amend the form of the Rights Agreement to provide for
certain piggy-back registration rights to be granted to lenders pursuant to the
Standby Loan Facility dated August 27, 1999 (the "Standby Loan Facility") so
long as such piggy-back rights are junior to the rights of Inktomi.
(b) PURCHASER DELIVERIES. At the Closing, the Investor shall
deliver to the Company the following:
(i) A wire transfer of immediately available funds or a
cashier's check in the amount of $20,000,000; and
(ii) A lock-up letter in the form attached hereto as
EXHIBIT C.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to the Investor as of the
date of this Agreement as follows:
3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized and validly existing under the laws of the State of
Washington. The Company has all requisite corporate power and authority to own
and operate its properties and assets, to execute and deliver this Agreement,
the Warrant and the Rights Agreement, to issue and sell the Investor Shares, the
Warrant and the Warrant Shares (upon exercise of the Warrant), to carry out the
provisions of this Agreement and the Rights Agreement and to carry on its
business as presently conducted and as presently proposed to be conducted. The
Company is duly qualified and is authorized to do business and is in good
standing as a foreign corporation in all jurisdictions in which the nature of
its activities and of its properties (both owned and leased)
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
2.
<PAGE> 7
makes such qualification necessary, except for those jurisdictions in which
failure to do so would not have a material adverse effect on the Company or its
business.
3.2 CAPITALIZATION; VOTING RIGHTS. As of August 31, 1999, the authorized
capital stock of the Company consists of 100,000,000 shares of Common Stock (par
value $0.001 per share), 4,108,381 shares of which are issued and outstanding,
and 50,069,615 shares of Preferred Stock (par value $0.001 per share), 6,666,667
of which are designated Series A Preferred Stock, all of which are issued and
outstanding, 13,773,318 of which are designated Series B Preferred Stock,
13,173,182 of which are issued and outstanding, and 29,629,630 of which are
designated Series C Preferred Stock, all of which are issued and outstanding. At
the Closing, the authorized and outstanding capitalization of the Company will
be as set forth in the Final Prospectus. All issued and outstanding shares of
the Company's capital stock (a) have been duly authorized and validly issued,
(b) are fully paid and non-assessable and (c) were issued in compliance with all
applicable state and federal laws concerning the issuance of securities. The
rights, preferences, privileges and restrictions of the Investor Shares are as
stated in the Articles of Incorporation, as amended and restated, of the Company
(the "Articles"). Each series of Preferred Stock is convertible into Common
Stock on a one-for-one basis and will automatically convert into Common Stock at
the time of the closing of the IPO. The Warrant Shares have been duly and
validly reserved for issuance. Other than (1) the aggregate of 13,535,000 shares
of Common Stock reserved for issuance under the Company's 1998 Stock
Option/Stock Issuance Plan, 1999 Equity Incentive Plan, 1999 Employee Stock
Purchase Plan and 1999 Non-Employee Directors' Stock Option Plan, (2) warrants
to purchase an aggregate of 600,136 shares of Series B Preferred Stock, (3)
registration rights held by holders of 52,965,499 shares of Common Stock and
Preferred Stock pursuant to that certain Amended and Restated Rights Agreement
dated January 28, 1999, which will be replaced by the Rights Agreement the form
of which is attached hereto as EXHIBIT B, and (4) warrants to purchase an
aggregate of up to 200,000 shares of Common Stock pursuant to the Standby Loan
Facility, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy or
shareholder agreements, or agreements of any kind for the purchase or
acquisition from the Company of any of its securities. Of the reserved shares of
Common Stock described in item (1) of the preceding sentence, (i) options to
purchase 6,136,622 shares have been granted and are currently outstanding, and
(ii) 7,398,378 shares of Common Stock remain available for issuance to officers,
directors, employees and consultants pursuant to such Stock Option Plan. When
issued in compliance with the provisions of this Agreement and the Articles, the
Investor Shares and the Warrant Shares will be validly issued, fully paid and
non-assessable, and will be free of any liens or encumbrances; provided,
however, that the Investor Shares and the Warrant Shares may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
herein or as otherwise required by such laws at the time a transfer is proposed.
Except as described in this Section 3.2, there are no options, warrants, calls,
rights, commitments or agreements of any character, written or oral, to which
the Company is a party or by which it is bound that obligate the Company to
issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of the Company.
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
3.
<PAGE> 8
3.3 AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on the part
of the Company, its officers, directors and shareholders necessary for the
authorization of this Agreement and the Rights Agreement, the performance of all
obligations of the Company hereunder and thereunder at the Closing and the
authorization, sale, issuance and delivery of the Warrant, Warrant Shares and
Investor Shares pursuant hereto (or upon exercise of the Warrant as the case may
be) has been taken or will be taken prior to the Closing. The Agreement, the
Warrant and the Rights Agreement, when executed and delivered, will be valid and
binding obligations of the Company enforceable in accordance with their terms,
except (a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights; (b) general principles of equity that restrict the
availability of equitable remedies; and (c) to the extent that the
enforceability of the indemnification provisions in Section 2.9 of the Rights
Agreement may be limited by applicable laws.
3.4 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation
of any term of its Articles of Incorporation or Bylaws, or in any material
respect of any term or provision of any material mortgage, indenture, contract,
agreement, instrument, judgment or decree to which it is a party or by which it
is bound and is not in material violation of any order, or to the Company's
knowledge, any statute, law, rule or regulation applicable to the Company. The
execution, delivery, and performance of and compliance with this Agreement, the
Warrant and the Rights Agreement, and the issuance and sale of the Investor
Shares, the Warrant and Warrant Shares pursuant hereto (or upon exercise of the
Warrant as the case may be), will not, with or without the passage of time or
giving of notice, result in any such material violation, or be in conflict with
or constitute a default under any such term, or result in the creation of any
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to the
Company, its business or operations or any of its assets or properties.
3.5 INFORMATION. The Company's Registration Statement on Form S-1 (File
No. 333-84035) as amended by Amendment No. 1 and as subsequently amended (the
"Registration Statement") and the Final Prospectus do not and will not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
3.6 OTHER REGISTRATION RIGHTS. The piggy-back registration rights the
Company shall grant to certain lenders pursuant to the Standby Loan Facility
will be junior to the registration rights granted to Inktomi pursuant to the
Rights Agreement in the event that Inktomi is entitled to and exercises such
registration rights.
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
4.
<PAGE> 9
SECTION 4. REPRESENTATIONS AND WARRANTIES OF INVESTOR.
The Investor hereby represents and warrants to the Company as follows:
(such representations and warranties do not lessen or obviate the
representations and warranties of the Company set forth in this Agreement):
4.1 REQUISITE POWER AND AUTHORITY. The Investor has all necessary power
and authority under all applicable provisions of law to execute and deliver this
Agreement, the Warrant and the Rights Agreement and to carry out their
provisions. All action on the Investor's part required for the lawful execution
and delivery of this Agreement, the Warrant and the Rights Agreement have been
or will be effectively taken prior to the Closing. Upon their execution and
delivery, this Agreement, the Warrant and the Rights Agreement will be valid and
binding obligations of the Investor, enforceable in accordance with their terms,
except (a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights, (b) general principles of equity that restrict the
availability of equitable remedies and (c) to the extent that the enforceability
of the indemnification provisions of Section 2.9 of the Rights Agreement may be
limited by applicable laws.
4.2 INVESTMENT REPRESENTATIONS. The Investor understands that the
Investor Shares, the Warrant and the Warrant Shares may not be registered under
the Securities Act on the ground that the sale provided for in this Agreement
and the issuance of securities hereunder is exempt pursuant to Section 4(2) of
the Securities Act, and that the Company's reliance on such exemption is
predicated in part on the Investor's representations set forth herein. The
Investor hereby represents and warrants as follows:
(a) INVESTOR BEARS ECONOMIC RISK. The Investor has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. The Investor must bear the economic risk
of this investment indefinitely unless the Investor Shares, the Warrant or the
Warrant Shares are registered pursuant to the Securities Act, or an exemption
from registration is available.
(b) ACQUISITION FOR OWN ACCOUNT. The Investor is acquiring the
Investor Shares, the Warrant and the Warrant Shares for the Investor's own
account for investment only, and not with a view towards their distribution.
(c) INVESTOR CAN PROTECT ITS INTEREST. The Investor represents
that by reason of its, or of its management's, business or financial experience,
the Investor has the capacity to protect its own interests in connection with
the transactions contemplated by this Agreement, the Warrant and the Rights
Agreement. Further, the Investor is aware of no publication of any advertisement
in connection with the purchase of securities contemplated by this Agreement.
(d) ACCREDITED INVESTOR. The Investor represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
5.
<PAGE> 10
(e) COMPANY INFORMATION. The Investor has received and read the
Registration Statement and has had an opportunity to discuss the Company's
business, management and financial affairs with directors, officers and
management of the Company and has had the opportunity to review the Company's
operations and facilities. The Investor has also had the opportunity to ask
questions of and receive answers from the Company and its management regarding
the terms and conditions of this investment.
(f) RULE 144. The Investor acknowledges and agrees that the
Investor Shares, the Warrant and, if issued, the Warrant Shares must be held
indefinitely unless they are subsequently registered under the Securities Act or
an exemption from such registration is available. The Investor has been advised
or is aware of the provisions of Rule 144 promulgated under the Securities Act
as in effect from time to time, which permits limited resale of shares purchased
in a private placement subject to the satisfaction of certain conditions,
including, among other things: the availability of certain current public
information about the Company, the resale occurring following the required
holding period under Rule 144 and the number of shares being sold during any
three-month period not exceeding specified limitations. The Investor
acknowledges that if the applicable requirements of Rule 144 are not met,
registration under the Securities Act or compliance with another exemption from
registration will be required for any disposition of its stock. The Investor
understands that although Rule 144 is not exclusive, the Securities and Exchange
Commission has expressed its opinion that persons proposing to sell restricted
securities received in a private offering other than in a registered offering or
pursuant to Rule 144 will have a substantial burden of proof establishing that
an exemption from registration is available for such offers or sales and that
such persons and the brokers who participate in the transactions do so at their
own risk.
4.3 TRANSFER RESTRICTIONS. The Investor acknowledges and agrees that the
Investor Shares, the Warrant and, if issued, the Warrant Shares are subject to
restrictions on transfer as set forth in the Rights Agreement. The Investor
covenants that, in the absence of an effective registration statement covering
the securities in question, it will sell, transfer or otherwise dispose of the
Warrant, Warrant Shares and Investor Shares only in a manner consistent with its
representations and covenants set forth in this Agreement, the Warrant and the
Rights Agreement. In connection therewith, the Investor acknowledges that the
Company shall make a notation on its stock records regarding the restrictions on
transfer set forth in this Agreement and the Warrant and shall transfer shares
on the books of the Company only to the extent not inconsistent therewith.
4.4 NO PUBLIC MARKET. The Investor understands that no public market now
exists for any of the securities issued by the Company, and there is no
assurance a public market will be created.
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
6.
<PAGE> 11
SECTION 5. CONDITIONS TO THE INVESTOR'S AND COMPANY'S OBLIGATIONS AT THE
CLOSING.
The obligation of the Company to issue Investor Shares and the Warrant
to the Investor at the Closing shall be subject to the fulfillment on or before
the Closing of each of the following conditions:
(a) PERFORMANCE. The Investor and the Company shall have
performed and complied in all material respects with all covenants, agreements,
obligations and conditions contained in this Agreement that are required to be
performed or complied with by them on or before Closing.
(b) REPRESENTATIONS AND WARRANTIES. The representations and
warranties set forth in Sections 3 and 4 shall be true and correct as of the
date hereof and as of the Closing Date.
(c) CERTIFICATES. The Investor and the Company shall each have
received an accurate certificate signed by an executive officer of the other,
dated as of the Closing Date, certifying as to the fulfillment of the conditions
in Sections 5(a) and (b).
(d) LEGAL INVESTMENT. On the Closing Date, the sale and issuance
of the Investor Shares and the Warrant shall be legally permitted by all laws
and regulations to which the Investor and the Company are subject.
(e) CONSENTS, PERMITS AND WAIVERS. The Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement, the Warrant and
the Rights Agreement, and no preliminary or permanent injunction or other
binding order, decree or ruling issued by a court or governmental agency shall
be in effect which shall have the effect of preventing the consummation of the
transactions contemplated by this Agreement.
(f) IPO. The IPO shall have closed within ninety (90) days of
the date hereof.
SECTION 6. STANDSTILL AGREEMENT.
For a period of two years after the date hereof, the Investor shall not,
and shall cause each of its parents (if any) and subsidiaries to not, acquire
beneficial ownership (as such term is defined in Rule 13d-3 of the Exchange Act)
of any securities of the Company in addition to the Investor Shares, the
Warrant, and the Warrant Shares, that would result in the aggregate beneficial
ownership of the Investor and its parents and subsidiaries of capital stock of
the Company (as defined below) equaling or exceeding ten percent (10%) of the
outstanding capital stock of the Company. The Investor or any of its parents and
subsidiaries shall not purchase any securities of the Company without having
given ten (10) days prior written notice to the Company or without having
received the prior written consent of the Company. Upon notice
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
7.
<PAGE> 12
thereof, the Company shall inform the Investor whether such purchases cause the
aggregate beneficial ownership of the Investor and its Affiliates to equal or
exceed ten percent (10%) of the outstanding capital stock of the Company.
SECTION 7. MISCELLANEOUS.
7.1 GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of Washington as such laws are applied to agreements
between Washington residents entered into and performed entirely in Washington.
7.2 SURVIVAL. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by the Investor and the closing
of the transactions contemplated hereby; provided, however, that the
representations and warranties set forth in Section 3 shall expire on the first
anniversary of the Closing Date, and no claim based on an alleged breach of such
representations and warranties may be asserted after such date. All statements
as to factual matters contained in any certificate or other instrument delivered
by or on behalf of the Company pursuant hereto in connection with the
transactions contemplated hereby shall be deemed to be representations and
warranties by the Company hereunder solely as of the date of such certificate or
instrument.
7.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Investor Shares, the Warrant and/or the
Warrant Shares from time to time.
7.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules hereto,
the Rights Agreement and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and agreements
except as specifically set forth herein and therein.
7.5 SEVERABILITY. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
7.6 AMENDMENT AND WAIVER. This Agreement may be amended or modified only
upon the written consent of the Company and the Investor.
7.7 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified; (b) when sent by confirmed facsimile if sent during normal
business hours of the recipient, if not, then on the next business day; (c) five
(5) days after having been sent by registered or certified mail, return receipt
requested, postage prepaid; or (d) one (1) day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written
verification of receipt. All
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
8.
<PAGE> 13
communications shall be sent to the Company and the Investor at the address as
set forth on the signature pages hereof or at such other address as the Company
or the Investor may designate by ten (10) days advance written notice to the
other parties hereto.
7.8 EXPENSES. Each party to this Agreement shall pay all costs and
expenses, including any legal expenses, it incurs with respect to the
negotiation, execution, delivery, performance and enforcement of the Agreement.
7.9 TITLES AND SUBTITLES. The titles of the sections and subsections of
the Agreement are for convenience of reference only and are not to be considered
in construing this Agreement.
7.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
7.11 BROKER'S FEES. Each party hereto represents and warrants that no
agent, broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker's or
finder's fee or any other commission directly or indirectly in connection with
the transactions contemplated herein. Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 7.11 being untrue.
7.12 PRONOUNS. All pronouns contained herein, and any variations
thereof, shall be deemed to refer to the masculine, feminine or neutral,
singular or plural, as to the identity of the parties hereto may require.
7.13 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH
QUALIFICATION IS UNLAWFUL. PRIOR TO ACCEPTANCE OF SUCH CONSIDERATION BY THE
COMPANY, THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED
UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION
BEING AVAILABLE.
[This Space Intentionally Left Blank.]
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
9.
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed this Common Stock
and Warrant Purchase Agreement as of the date set forth in the first paragraph
hereof.
COMPANY:
INTERNAP NETWORK SERVICES
CORPORATION
By: /s/ ANTHONY C. NAUGHTIN
---------------------------------
Name: Anthony C. Naughtin
-------------------------------
Title: President and Chief Executive
Officer
------------------------------
Address: 601 Union Street,
Suite 1000
Seattle, Washington 98101
INVESTOR:
INKTOMI CORP.
By: /s/ RICHARD PIERCE
---------------------------------
Name: Richard Pierce
-------------------------------
Title: Vice President of Marketing
------------------------------
Address: 4100 East Third Avenue
Foster City, CA 94404
Attn: Vice President of
Business Development
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
<PAGE> 15
EXHIBIT A
NO. COMW-1
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK OF
INTERNAP NETWORK SERVICES CORPORATION
SEPTEMBER ___, 1999
(VOID AFTER SEPTEMBER ___, 2001)
This certifies that INKTOMI CORP. or its assigns (the "Holder"), for value
received, is entitled to purchase from INTERNAP NETWORK SERVICES CORPORATION, a
Washington corporation (the "Company"), having a place of business at 601 Union
Street, Suite 1000, Seattle, Washington 98101, a maximum of ______________ fully
paid and nonassessable shares of the Company's Common Stock ("Common Stock") for
cash at an initial exercise price equal to $______ per share (the "Stock
Purchase Price") at any time or from time to time up to and including 5:00 p.m.
(Pacific time) on September ___, 2001 (the "Expiration Date") upon surrender to
the Company at its principal office (or at such other location as the Company
may advise the Holder in writing) of this Warrant properly endorsed with the
Form of Subscription attached hereto duly filled in and signed and, if
applicable, upon payment in cash or by check of the aggregate Stock Purchase
Price for the number of shares for which this Warrant is being exercised
determined in accordance with the provisions hereof. The Stock Purchase Price
and the number of shares purchasable hereunder are subject to adjustment as
provided in Section 3 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
1.1 GENERAL. This Warrant is exercisable at the option of the holder
of record hereof, at any time or from time to time, from the date hereof up to
the Expiration Date for all or any part of the shares of Common Stock (but not
for a fraction of a share) which may be purchased hereunder. The Company agrees
that the shares of Common Stock purchased under this Warrant shall be and are
deemed to be issued to the Holder hereof as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered, properly endorsed, the completed, executed Form of Subscription
delivered and
<PAGE> 16
payment made for such shares. Certificates for the shares of Common Stock so
purchased, together with any other securities or property to which the Holder
hereof is entitled upon such exercise, shall be delivered to the Holder hereof
by the Company at the Company's expense within a reasonable time after the
rights represented by this Warrant have been so exercised. In case of a purchase
of less than all the shares that may be purchased under this Warrant, the
Company shall cancel this Warrant and execute and deliver a new Warrant or
Warrants of like tenor for the balance of the shares purchasable under the
Warrant surrendered upon such purchase to the Holder hereof within a reasonable
time. Each stock certificate so delivered shall be in such denominations of
Common Stock as may be requested by the Holder hereof and shall be registered in
the name of such Holder.
1.2 NET ISSUE EXERCISE. Notwithstanding any provisions herein to the
contrary, if the fair market value of one share of the Company's Common Stock is
greater than the Stock Purchase Price (at the date of calculation as set forth
below), in lieu of exercising this Warrant for cash, the Holder may elect to
receive shares equal to the value (as determined below) of this Warrant (or the
portion thereof being canceled) by surrender of this Warrant at the principal
office of the Company together with the properly endorsed Form of Subscription
and notice of such election in which event the Company shall issue to the Holder
a number of shares of Common Stock computed using the following formula:
X = Y (A-B)
----
A
Where X = the number of shares of Common Stock to be issued to the Holder
Y = the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised, the
portion of the Warrant being canceled (at the date
of such calculation)
A = the fair market value of one share of the
Company's Common Stock (at the date of such
calculation)
B = Stock Purchase Price (as adjusted to the date
of such calculation)
For purposes of the above calculation, fair market value of one share of Common
Stock shall be (i) the average of the closing selling prices of the Common Stock
on the stock exchange determined by the Company's board of directors to be the
primary market for the Common Stock over the ten (10) trading day period (or
such shorter period immediately following the closing of an initial public
offering) ending on the date prior to the date the Holder exercises its rights
under this Section 1.2, as such prices are officially quoted in the composite
tape of the transactions on such exchange, or if the foregoing does not apply,
(ii) if the Common Stock is traded over-the-counter, the average of the closing
bid prices (or, if such information is available, the closing selling prices) of
the Common Stock over the ten (10) trading day period (or such shorter period
immediately following the closing of an initial public offering) ending on the
date prior to
2.
<PAGE> 17
the date the Holder exercises its rights under this Section 1.2,
as such prices are reported by the National Association of Securities Dealers
through its Nasdaq National Market, any successor system or any exchange on
which it is listed, whichever is applicable, or (iii) if there is no public
market for the Common Stock, the price shall be determined by mutual agreement
of the Holder and the Company, and if the Holder and the Company are unable to
agree, by an investment banker of national reputation selected by the Company
and reasonably acceptable to the Holder.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company covenants
and agrees that all shares of Common Stock that may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any shareholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees
that, during the period within which the rights represented by this Warrant may
be exercised, the Company will at all times have authorized and reserved, for
the purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant, a sufficient number of shares of authorized but
unissued Common Stock, or other securities and property, when and as required to
provide for the exercise of the rights represented by this Warrant. The Company
will take all such action as may be necessary to assure that such shares of
Common Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic securities
exchange upon which the Common Stock may be listed; provided, however, that the
Company shall not be required to effect a registration under Federal or State
securities laws with respect to such exercise except pursuant to valid
registration rights held by the Holder. The Company will not take any action
that would result in any adjustment of the Stock Purchase Price (as set forth in
Section 3 hereof) if the total number of shares of Common Stock issuable after
such action upon exercise of all outstanding warrants, together with all shares
of Common Stock then outstanding and all shares of Common Stock then issuable
upon exercise of all options and upon the conversion of all convertible
securities then outstanding, would exceed the total number of shares of Common
Stock then authorized by the Company's Articles of Incorporation, as amended
(the "Articles").
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.
3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall at
any time subdivide its outstanding shares of Common Stock into a greater number
of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall
3.
<PAGE> 18
be combined into a smaller number of shares, the Stock Purchase Price in effect
immediately prior to such combination shall be proportionately increased.
3.2 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY,
RECLASSIFICATION. If at any time or from time to time the holders of Common
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(a) Common Stock or any shares of stock or other securities which
are at any time directly or indirectly convertible into or exchangeable for
Common Stock, or any rights or options to subscribe for, purchase or otherwise
acquire any of the foregoing by way of dividend or other distribution,
(b) any cash paid or payable otherwise than as a cash dividend,
or
(c) Common Stock or additional stock or other securities or
property (including cash) by way of spinoff, split-up, reclassification,
combination of shares or similar corporate rearrangement, (other than shares of
Common Stock issued as a stock split or adjustments in respect of which shall be
covered by the terms of Section 3.1 above), then and in each such case, the
Holder hereof shall, upon the exercise of this Warrant, be entitled to receive,
in addition to the number of shares of Common Stock receivable thereupon, and
without payment of any additional consideration therefor, the amount of stock
and other securities and property (including cash in the cases referred to in
clause (b) above and this clause (c)) which such Holder would hold on the date
of such exercise had he been the holder of record of such Common Stock as of the
date on which holders of Common Stock received or became entitled to receive
such shares or all other additional stock and other securities and property.
3.3 CERTAIN EVENTS. If any change in the outstanding Common Stock of
the Company or any other event occurs as to which the other provisions of this
Section 3 are not strictly applicable or if strictly applicable would not fairly
protect the purchase rights of the Holder of the Warrant in accordance with such
provisions, then the Board of Directors of the Company shall make an adjustment
in the number and class of shares available under the Warrant, the Stock
Purchase Price or the application of such provisions, so as to protect such
purchase rights as aforesaid. The adjustment shall be such as will give the
Holder of the Warrant upon exercise for the same aggregate Stock Purchase Price
the total number, class and kind of shares as he would have owned had the
Warrant been exercised prior to the event and had he continued to hold such
shares until after the event requiring adjustment.
3.4 NOTICES OF CHANGE.
(a) Immediately upon any adjustment in the number or class of
shares subject to this Warrant and of the Stock Purchase Price, the Company
shall give written notice thereof to the Holder, setting forth in reasonable
detail and certifying the calculation of such adjustment.
4.
<PAGE> 19
(b) The Company shall give written notice to the Holder at least
ten (10) business days prior to the date on which the Company closes its books
or takes a record for determining rights to receive any dividends or
distributions.
4. MERGER, CONSOLIDATION, SALE, REORGANIZATION OR LIQUIDATION. Upon a
merger, consolidation, acquisition of all or substantially all of the property
or stock, reorganization or liquidation of the Company (collectively, a
"Reorganization") prior to the Expiration Date, as a result of which the
shareholders of the Company receive cash, stock or other property in exchange
for their shares of Common Stock, this Warrant shall be canceled and all rights
granted hereunder shall terminate; provided, however, that the Company shall
have delivered to the Holder written notice of the Reorganization at least
fifteen (15) days prior to such Reorganization and that the Holder shall have
the right immediately prior to the Reorganization to exercise this Warrant; and,
provided further, that if the Holder has not notified the Company of its intent
to exercise this Warrant before its termination, then this Warrant shall
automatically be deemed to have been exercised under Section 1.2 at the closing
of the Reorganization.
5. ISSUE TAX. The issuance of certificates for shares of Common Stock upon
the exercise of the Warrant shall be made without charge to the Holder of the
Warrant for any issue tax (other than any applicable income taxes) in respect
thereof; provided, however, that the Company shall not be required to pay any
tax that may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the then Holder of the
Warrant being exercised.
6. CLOSING OF BOOKS. The Company will at no time close its transfer books
against the transfer of any warrant or of any shares of Common Stock issued or
issuable upon the exercise of any warrant in any manner which interferes with
the timely exercise of this Warrant.
7. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a shareholder of
the Company or any other matters or any rights whatsoever as a shareholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised. No provisions hereof, in the absence of affirmative action by the
holder to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such Holder for the Stock Purchase Price or as a shareholder of the Company,
whether such liability is asserted by the Company or by its creditors.
8. WARRANTS TRANSFERABLE. Subject to compliance with applicable federal
and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the holder hereof (except
for transfer taxes), upon surrender of this Warrant properly endorsed. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that this Warrant, when endorsed in blank, shall be deemed negotiable,
and that the holder hereof, when this Warrant shall have been so endorsed, may
be treated by the Company, at the
5.
<PAGE> 20
Company's option, and all other persons dealing with this Warrant as the
absolute owner hereof for any purpose and as the person entitled to exercise the
rights represented by this Warrant, or to the transfer hereof on the books of
the Company any notice to the contrary notwithstanding; but until such transfer
on such books, the Company may treat the registered owner hereof as the owner
for all purposes.
9. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the holder of this Warrant and of the holder of
shares of Common Stock issued upon exercise of this Warrant, shall survive the
exercise of this Warrant.
10. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
11. NOTICES. Any notice, request or other document required or permitted
to be given or delivered to the holder hereof or the Company shall be delivered
or shall be sent by certified mail, postage prepaid, to each such holder at its
address as shown on the books of the Company or to the Company at the address
indicated therefor in the first paragraph of this Warrant or such other address
as either may from time to time provide to the other.
12. BINDING EFFECT ON SUCCESSORS. All of the obligations of the Company
relating to the Common Stock issuable upon the exercise of this Warrant shall
survive the exercise and termination of this Warrant. All of the covenants and
agreements of the Company shall inure to the benefit of the successors and
assigns of the holder hereof.
13. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of Washington.
14. LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
15. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise
of this Warrant. The Company shall, in lieu of issuing any fractional share, pay
the holder entitled to such fraction a sum in cash equal to such fraction
multiplied by the then effective Stock Purchase Price.
[THIS SPACE INTENTIONALLY LEFT BLANK]
6.
<PAGE> 21
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized this ______ day of
_____________, 1999.
INTERNAP NETWORK SERVICES CORPORATION
a Washington corporation
By:_________________________________________
Title:______________________________________
ATTEST:
_______________________________
Secretary
<PAGE> 22
EXHIBIT A
SUBSCRIPTION FORM
Date: _________________, 19___
INTERNAP NETWORK SERVICES CORPORATION
601 Union Street, Suite 1000
Seattle, Washington 98101
Attn: President
Ladies and Gentlemen:
[ ] The undersigned hereby elects to exercise the warrant issued to it by
______________ (the "Company") and dated ___________ _____, ____ Warrant
No. COMW-___ (the "Warrant") and to purchase thereunder
__________________________________ shares of the Common Stock of the
Company (the "Shares") at a purchase price of
___________________________________________ Dollars ($__________) per
Share or an aggregate purchase price of __________________________________
Dollars ($__________) (the "Purchase Price").
[ ] The undersigned hereby elects to convert _______________________ percent
(____%) of the value of the Warrant pursuant to the provisions of Section
1.2 of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
Very truly yours,
INKTOMI CORP.
By:__________________________________
Title:_______________________________
<PAGE> 23
EXHIBIT B
AMENDED AND RESTATED RIGHTS AGREEMENT
<PAGE> 24
INTERNAP NETWORK SERVICES CORPORATION
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
SEPTEMBER __, 1999
<PAGE> 25
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1 GENERAL........................................................1
1.1 Definitions.......................................................1
SECTION 2 RESTRICTIONS ON TRANSFER; REGISTRATION.........................3
2.1 Restrictions On Transfer..........................................3
2.2 Demand Registration...............................................4
2.3 Piggyback Registrations...........................................6
2.4 Form S-3 Registration.............................................8
2.5 Expenses Of Registration..........................................9
2.6 Obligations Of The Company........................................9
2.7 Termination Of Registration Rights...............................11
2.8 Delay Of Registration; Furnishing Information....................11
2.9 Indemnification..................................................11
2.10 Assignment Of Registration Rights................................14
2.11 Amendment Of Registration Rights.................................14
2.12 Limitation On Subsequent Registration Rights.....................15
2.13 "Market Stand-Off" Agreement.....................................15
2.14 Rule 144 Reporting...............................................16
SECTION 3 COVENANTS OF THE COMPANY......................................16
3.1 Basic Financial Information And Reporting........................16
3.2 Inspection Rights................................................17
3.3 Confidentiality Of Records.......................................17
3.4 Reservation Of Common Stock......................................17
3.5 Stock Vesting....................................................17
3.6 Board Election Rights............................................18
3.7 Employee Confidentiality, Nonraiding and Noncompetition
Agreement........................................................18
3.8 Directors' Liability And Indemnification.........................18
3.9 Board Of Directors Approval......................................18
3.10 Real Property Holding Corporation................................18
3.11 Qualified Small Business Stock...................................19
</TABLE>
<PAGE> 26
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
3.12 Termination Of Covenants.........................................19
3.13 Visitation Rights................................................19
SECTION 4 RIGHT TO MAINTAIN INTEREST....................................20
4.1 Subsequent Offerings.............................................20
4.2 Exercise Of Rights...............................................20
4.3 Issuance Of Equity Securities To Other Persons...................20
4.4 Termination Of Rights To Maintain Interest.......................21
4.5 Transfer Of Rights To Maintain Interest..........................21
4.6 Excluded Securities..............................................21
SECTION 5 MISCELLANEOUS.................................................22
5.1 Governing Law....................................................22
5.2 Survival.........................................................22
5.3 Successors and Assigns...........................................22
5.4 Entire Agreement.................................................22
5.5 Severability.....................................................22
5.6 Amendment and Waiver.............................................22
5.7 Delays or Omissions..............................................23
5.8 Notices..........................................................23
5.9 Attorneys' Fees..................................................23
5.10 Titles and Subtitles.............................................23
5.11 Counterparts.....................................................23
</TABLE>
<PAGE> 27
INTERNAP NETWORK SERVICES CORPORATION
AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is entered into as of
the ___ day of September, 1999, by and among INTERNAP NETWORK SERVICES
CORPORATION, a Washington corporation (the "Company") and (i) INKTOMI
CORPORATION, a Delaware corporation ("Inktomi"), (ii) the holders of the
Company's Series C Preferred Stock ("Series C Stock") listed on EXHIBIT A
hereto, (iii) the holders of the Company's Series B Preferred Stock ("Series B
Stock") listed on EXHIBIT B hereto, and (iv) the individuals holding the
Company's common stock ("Common Stock") and Series A Preferred Stock ("Series A
Stock") set forth on Exhibit B hereto (the "Founders"). The parties described in
clause (ii) shall be referred to hereinafter, collectively, as the "Investors"
and each individually as an "Investor." The parties described in clauses (iii)
and (iv) shall be referred to hereinafter, collectively, as the "Prior
Shareholders."
RECITALS
WHEREAS, the Company has issued shares of Common Stock, Series A Stock,
Series B Stock and Series C Stock and has granted certain registration rights to
certain holders thereof pursuant to Section 2 of that certain Amended and
Restated Investor Rights Agreement dated January 28, 1999, as amended (the
"Prior Agreement");
WHEREAS, the Company proposes to sell and issue to Inktomi shares of
Common Stock and the Warrant to purchase shares of Common Stock pursuant to, and
on terms contemplated by, that certain Common Stock and Warrant Purchase
Agreement dated September ___, 1999 (the "Inktomi Agreement");
WHEREAS, as a condition of entering into the Inktomi Agreement, Inktomi
has requested that the Company extend to it registration rights as set forth
below; and
WHEREAS, the Company, the Investors, and the Prior Shareholders desire
to amend and restate the Prior Agreement and to accept the rights and
obligations created pursuant hereto which shall supersede the Prior Agreement.
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement and in the Inktomi Agreement, the parties mutually agree as follows:
SECTION 1 GENERAL
1.1 DEFINITIONS. As used in this Agreement the following terms shall
have the following respective meanings:
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
<PAGE> 28
"FORM S-3" means such form under the Securities Act as in effect on the
date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
"FOUNDERS" means all holders of Common Stock and Series A Preferred
Stock as of the date of this agreement and their authorized transferees.
"FOUNDERS' STOCK" means all Common Stock and Series A Preferred Stock of
the Company held by the Founders, upon the Closing, and any Common Stock issued
or issuable with respect to such Common Stock upon any recapitalizations, stock
splits, stock dividends or similar distributions.
"HOLDER" means any holder of outstanding Registrable Securities that
have not been sold to the public, but only if such holder is an Investor or a
holder of Series B Stock (or, solely with regards to Sections 2.3, 2.5, 2.8(b),
2.9, 2.13 and 5.6(b), a Founder) or an assignee or transferee of registration
rights in accordance with Section 2.10 hereof.
"INITIATING HOLDERS" means Holders who in the aggregate hold at least
forty percent (40%) of the Registrable Securities.
"INITIAL OFFERING" means the Company's first firm commitment
underwritten public offering of its Common Stock registered under the Securities
Act.
"REGISTER," "REGISTERED" AND "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of such
registration statement or document.
"REGISTRABLE SECURITIES" means (a) Common Stock of the Company issued or
issuable upon conversion of the Shares; (b) any Common Stock of the Company
issued as (or issuable upon the conversion or exercise of any warrant, right or
other security which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, such above-described securities;
and (c) Common Stock of the Company issued to Inktomi pursuant to the Inktomi
Agreement and upon exercise of the Warrant. For purposes of the registration
rights granted to holders of Company securities pursuant to Section 2.3 hereof
and for purposes of the obligations imposed upon holders of Registrable
Securities under Sections 2.9 and 2.13, but not for the definition of Initiating
Holders or for purposes of Section 5.6(a), "Registrable Securities" shall
include Founders' Stock. Notwithstanding the foregoing, Registrable Securities
shall not include any securities sold by a person to the public either pursuant
to a registration statement or Rule 144 or sold in a private transaction in
which the transferor's rights under Section 2 of this Agreement are not
assigned.
"REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of shares
determined by calculating the total number of shares of the Company's Common
Stock that are Registrable Securities and either (a) are then issued and
outstanding or (b) are issuable pursuant to then exercisable or convertible
securities.
2.
<PAGE> 29
"REGISTRATION EXPENSES" shall mean all expenses incurred by the Company
in complying with Sections 2.2, 2.3 and 2.4 hereof, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, reasonable fees and disbursements not
to exceed Fifteen Thousand Dollars ($15,000) of a single special counsel for the
Holders, blue sky fees and expenses and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).
"SEC" OR "COMMISSION" means the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SELLING EXPENSES" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities pursuant to this
Agreement, as well as fees and disbursements of legal counsel for the selling
Holders, except as to those included in Registration Expenses, as defined above.
"SHARES" shall mean (i) the Company's Series B Stock held by the Prior
Shareholders as of the date hereof listed on EXHIBIT B hereto and their
permitted assigns, and (ii) the Company's Series C Stock held by the Investors
listed on EXHIBIT A hereto and their permitted assigns.
"WARRANT" shall mean that certain Common Stock Warrant to be issued to
Inktomi by the Company pursuant to the Inktomi Agreement.
SECTION 2 RESTRICTIONS ON TRANSFER; REGISTRATION
2.1 RESTRICTIONS ON TRANSFER
(a) Each Holder and Inktomi agree not to make any disposition of
all or any portion of the Shares or Registrable Securities unless and until:
(i) There is then in effect a registration statement
under the Securities Act covering such proposed disposition and such disposition
is made in accordance with such registration statement; or
(ii) (A) The transferee has agreed in writing to be
bound by the terms of this Agreement, (B) such Holder or Inktomi, as the case
may be, shall have notified the Company of the proposed disposition and shall
have furnished the Company with a detailed statement of the circumstances
surrounding the proposed disposition, and (C) if reasonably requested by the
Company, such Holder or Inktomi, as the case may be, shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the
Securities Act. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
(iii) Notwithstanding the provisions of paragraphs (i)
and (ii) above, no such registration statement or opinion of counsel shall be
necessary for a transfer by a Holder or Inktomi, as the case may be, which is
(A) a partnership to its partners or former partners in
3.
<PAGE> 30
accordance with partnership interests, (B) a corporation to its shareholders in
accordance with their interest in the corporation, (C) a limited liability
company to its members or former members in accordance with their interest in
the limited liability company, (D) to the Holder's family member or trust for
the benefit of an individual Holder or (E) an "affiliate (as defined in the
Securities Act) of such Holder or Inktomi, as the case may be, provided that
such affiliate is an "accredited investor" (as defined in the Securities Act);
provided that in each case the transferee will be subject to the terms of this
Agreement to the same extent as if he, she or it were an original signatory
hereunder.
(b) Each certificate representing Shares or Registrable
Securities shall (unless otherwise permitted by the provisions of the Agreement)
be stamped or otherwise imprinted with a legend substantially similar to the
following (in addition to any legend required under applicable state securities
laws or as provided elsewhere in this Agreement):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS
AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.
(c) The Company shall be obligated to reissue promptly
unlegended certificates at the request of any holder thereof if the holder shall
have obtained an opinion of counsel (which counsel may be counsel to the
Company) reasonably acceptable to the Company to the effect that the securities
proposed to be disposed of may lawfully be so disposed of without registration,
qualification or legend.
(d) Any legend endorsed on an instrument pursuant to applicable
state securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.
2.2 DEMAND REGISTRATION
(a) (i) Subject to the conditions of this Section 2.2, if the
Company shall receive a written request from the Initiating Holders that the
Company file a registration statement under the Securities Act covering the
registration of at least twenty-five percent (25%) of the Registrable Securities
held by such Initiating Holders and having an aggregate offering price to the
public in excess of five million dollars ($5,000,000) (a "Qualified Public
Offering"), then the Company shall, within thirty (30) days of the receipt
thereof, give written notice of such request to all Holders and, subject to the
limitations of this Section 2.2, use its best efforts to effect, as soon as
practicable, the registration under the Securities Act of all Registrable
Securities and the Holders request to be registered.
(ii) Subject to the conditions of this Section 2.2, if
the Company shall receive a written request from Inktomi that the Company file a
registration statement under the
4.
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Securities Act covering the registration of any of the Registrable Securities
held by Inktomi and having an aggregate offering price in excess of five million
dollars ($5,000,000), then the Company shall, within thirty (30) days of the
receipt thereof, give written notice of such request to all Holders and, subject
to the limitations of this Section 2.2, use its best efforts to effect, as soon
as practicable, the registration under the Securities Act of all Registrable
Securities that Inktomi and the Holders request to be registered.
(b) If the Initiating Holders or Inktomi, as the case may be,
intend to distribute the Registrable Securities covered by their request by
means of an underwriting, they shall so advise the Company as a part of their
request made pursuant to this Section 2.2 or any request pursuant to Section 2.4
and the Company shall include such information in the written notice referred to
in Section 2.2(a) or Section 2.4(a), as applicable. In such event, the right of
any Holder to include its Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) to the extent provided herein. Should any Holder or Inktomi, as
the case may be, propose to distribute his, her or its, securities through such
underwriting, such Holder or Inktomi shall enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders or by Inktomi
if Inktomi initiated the registration (which underwriter or underwriters shall
be reasonably acceptable to the Company). Notwithstanding any other provision of
this Section 2.2 or Section 2.4, if the underwriter advises the Company that
marketing factors require a limitation of the number of securities to be
underwritten (including Registrable Securities) then the Company shall so advise
Inktomi and all Holders of Registrable Securities that would otherwise be
underwritten pursuant hereto, and the number of shares that may be included in
the underwriting shall be allocated,
(i) in the case of an underwritten registration
initiated by the Initiating Holders, to the Holders of such Registrable
Securities on a pro rata basis based on the number of Registrable Securities
held by all such Holders (including the Initiating Holders but not including the
Founders); and
(ii) in the case of an underwritten registration
initiated by Inktomi, first to Inktomi until all shares of Registrable
Securities that Inktomi desires to register are included in such registration
and second to the remaining Holders of such Registrable Securities on a pro rata
basis based on the number of Registrable Securities held by all such Holders
(including the Initiating Holders but not including the Founders).
Any Registrable Securities excluded or withdrawn from such underwriting shall be
withdrawn from the registration.
(c) The Company shall not be required to effect a registration
pursuant to this Section 2.2:
(i) as to any Holder, prior to October 29, 2001,
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<PAGE> 32
(ii) as to Inktomi, prior to one hundred eighty (180)
days following the closing of the Company's Initial Offering;
(iii) as to any Holder, after the Company has effected
two (2) registrations pursuant to Section 2.2(a)(i), and such registrations have
been declared effective;
(iv) as to Inktomi, after the Company has affected one
(1) registration pursuant to Section 2.2(a)(ii), and such registrations have
been declared or ordered effective;
(v) during the period starting with the date of the
filing, and ending on the date one hundred eighty (180) days following the
effective date, of the registration statement pertaining to the Initial
Offering; provided that the Company makes reasonable good faith efforts to cause
such registration statement to become effective;
(vi) if within thirty (30) days of receipt of a written
request pursuant to Section 2.2(a)(i) from Initiating Holders the Company gives
notice to the Holders of the Company's intention to make its Initial Offering
within ninety (90) days;
(vii) if within thirty (30) days of receipt of a written
request pursuant to Section 2.2(a)(ii) from Inktomi the Company gives notice to
Inktomi of the Company's intention to file a registration statement on Form S-1
or Form S-3 within ninety (90) days; provided, however, that if the Company
gives the foregoing notice, then Inktomi shall be entitled to include its
Registrable Securities in such registration statement in accordance with the
provisions of Section 2.3 as if Inktomi were a "Holder" and pari passu with the
Holders referred to in Section 2.3(a)(ii) who elect to participate in such
registration; or
(viii) if the Company shall furnish to Holders
requesting a registration pursuant to this Section 2.2 or to Inktomi if Inktomi
is requesting such a registration, a certificate signed by the Chairman of the
Board stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its shareholders
for such registration statement to be effected at such time, in which event the
Company shall have the right to defer such filing for one period of not more
than ninety (90) days after receipt of the request of the Initiating Holders or
Inktomi, as the case may be; provided, however, that such right to delay a
request shall be exercised by the Company not more than once in any twelve (12)
month period.
2.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to the filing
of any registration statement under the Securities Act for purposes of a public
offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to employee benefit
plans or with respect to corporate reorganizations or other transactions under
Rule 145 of the Securities Act) and will afford each such Holder an opportunity
to include in such registration statement all or part of such Registrable
Securities held by such Holder; provided, however, that no Holder shall be
eligible to so participate in such registration if such Holder could have sold
such Registrable Securities on an unrestricted basis pursuant to Rule 144 of the
Securities Act during the
6.
<PAGE> 33
four-week period immediately preceding the effectiveness of such registration;
provided further, that such participation right shall not be granted to any
Holders following the fifth anniversary of the closing of the Initial Offering.
Each Holder desiring to include in any such registration statement all or any
part of the Registrable Securities held by it shall, within fifteen (15) days
after the above-described notice from the Company, so notify the Company in
writing. Such notice shall state the intended method of disposition of the
Registrable Securities by such Holder. If a Holder decides not to include all of
its Registrable Securities in any registration statement thereafter filed by the
Company, such Holder shall nevertheless continue to have the right to include
any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Company with respect to offerings
of its securities, all upon the terms and conditions set forth herein.
(a) UNDERWRITING. If the registration statement under which the
Company gives notice under this Section 2.3 is for an underwritten offering, the
Company shall so advise the Holders of Registrable Securities. In such event,
the right of any such Holder to be included in a registration pursuant to this
Section 2.3 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their Registrable Securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of the Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated,
(i) first, to the Company;
(ii) second, to the Holders who are (a) Investors, (b)
holders of Series B Stock, and (c) Robert J. Lunday, Jr. on a pro rata basis
based on the total number of Registrable Securities held by such Holders and Mr.
Lunday;
(iii) third, to Robert J. Lunday, Jr.;
(iv) fourth, to Holders who are Founders (other than Mr.
Lunday) on a pro rata basis based on the total number of Registrable Securities
held by such Holders; and
(v) fifth, to any other shareholders of the Company
(other than a Holder) on a pro rata basis.
No such reduction shall (y) reduce the securities being offered by the Company
for its own account to be included in the registration and underwriting, or (z)
reduce the amount of securities of Robert J. Lunday, Jr. and the selling Holders
who are Investors or holders of Series B Stock to below twenty-five percent
(25%) of the total amount of securities to be included in such registration,
unless such offering is the Initial Offering and such registration does not
include shares of any other selling shareholders, in which event any or all of
the Registrable Securities of the Holders (including Mr. Lunday) may be excluded
in accordance with the preceding sentence. In no event will shares of any other
selling shareholder be included in such registration which would reduce the
number of shares which may be included by Holders without the written
7.
<PAGE> 34
consent of Holders of not less than sixty-six and two-thirds percent (66 2/3%)
of the Registrable Securities proposed to be sold in the offering.
(b) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 2.3 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration. The Registration
Expenses of such withdrawn registration shall be borne by the Company in
accordance with Section 2.5 hereof.
2.4 FORM S-3 REGISTRATION. In case the Company shall receive from any
Holder or Holders of at least fifteen percent (15%) of the Registrable
Securities or from Inktomi a written request or requests that the Company effect
a registration on Form S-3 (or any successor to Form S-3) or any similar
short-form registration statement and any related qualification or compliance
with respect to all or a part of the Registrable Securities owned by such
Holder, Holders, or Inktomi, the Company will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders of Registrable
Securities or to Inktomi, as the case may be; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of the
Registrable Securities of such Holder, Holders or Inktomi as are specified in
such request, together with all or such portion of the Registrable Securities of
any other Holder or Holders joining in such request as are specified in a
written request given within fifteen (15) days after receipt of such written
notice from the Company; provided, however, that the Company shall not be
obligated to effect any such registration, qualification or compliance pursuant
to this Section 2.4:
(i) if Form S-3 (or any successor or similar form) is
not available for such offering;
(ii) if the Holders or Inktomi, as the case may be,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public, net of
underwriting costs, of less than five hundred thousand dollars ($500,000);
(iii) if the Company shall furnish to the Holders or to
Inktomi, as the case may be, a certificate signed by the Chairman of the Board
of Directors of the Company stating that in the good faith judgment of the Board
of Directors of the Company, it would be seriously detrimental to the Company
and its shareholders for such Form S-3 Registration to be effected at such time,
in which event the Company shall have the right to defer the filing of the Form
S-3 registration statement for one period of not more than ninety (90) days
after receipt of the request of the Holder, Holders or Inktomi under this
Section 2.4; provided, that such right to delay a request shall be exercised by
the Company not more than once in any twelve (12) month period;
8.
<PAGE> 35
(iv) if the Company has, within the six (6) month period
preceding the date of such request, already effected one (1) registration on
Form S-3 for the Holders or Inktomi pursuant to this Section 2.4;
(v) in any particular jurisdiction in which the Company
would be required to qualify to do business or to execute a general consent to
service of process in effecting such registration, qualification or compliance;
or
(vi) as to Inktomi, after the Company shall have
effected two (2) registrations pursuant to Section 2.4, and such registrations
have been declared effective.
(c) Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders or Inktomi, as the case may be. Subject to
Section 2.5 below, all Selling Expenses incurred in connection with
registrations requested pursuant to this Section 2.4 shall be paid by the
selling Holders or Inktomi pro rata in proportion to the number of shares sold
by each, and by the Company, if it participates in such registration, pro rata
in proportion to the number of shares sold by it.
2.5 EXPENSES OF REGISTRATION. Except as specifically provided herein,
all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 2.2 or any registration under
Section 2.3 or Section 2.4 herein shall be borne by the Company. All Selling
Expenses incurred in connection with any registrations under those sections,
shall be borne by the holders of the securities so registered pro rata on the
basis of the number of shares so registered. The Company shall not, however, be
required to pay for expenses of any registration proceeding begun pursuant to
Section 2.2 or 2.4, the request of which has been subsequently withdrawn by the
Holders requesting such registration or Inktomi, as the case may be, unless (a)
the withdrawal is based upon material adverse information concerning the Company
of which the Holders requesting such registration or Inktomi, as the case may
be, were not aware at the time of such request or (b) the Holders of a majority
of Registrable Securities or Inktomi, as the case may be, agree to forfeit
their, or its, right to one requested registration pursuant to Section 2.2 or
Section 2.4, as applicable, in which event such right shall be forfeited by all
Holders in the case of a forfeiture by any Holder. If the Holders or Inktomi are
required to pay the Registration Expenses, such expenses shall be borne by the
holders of securities (including Registrable Securities) requesting such
registration in proportion to the number of shares for which registration was
requested. If the Company is required to pay the Registration Expenses of a
withdrawn offering pursuant to clause (a) above, then the Holders or Inktomi, as
the case may be, shall not forfeit their, or its, rights pursuant to Section 2.2
or Section 2.4 to a demand registration.
2.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use all reasonable efforts to cause
such registration statement to become effective, and, upon the request of either
the Holders of a majority of the Registrable Securities registered thereunder or
of Inktomi, keep such registration statement effective for up
9.
<PAGE> 36
to ninety (90) days or, if earlier, until the Holder, Holders or Inktomi, as the
case may be, shall have completed the distribution related thereto.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders or to Inktomi, as the case may be,
such number of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other documents
as they, or it, as the case may be, may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them or it, as the
case may be.
(d) Use all reasonable efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders or Inktomi, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting or Inktomi, as the case may be, shall also
enter into and perform his, her or its obligations under such an agreement.
(f) Notify Inktomi or each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing.
(g) Furnish, at the request of either a majority of the Holders
participating in the registration or Inktomi, as the case may be, on the date
that such Registrable Securities are delivered to the underwriters for sale, if
such securities are being sold through underwriters, or, if such securities are
not being sold through underwriters, on the date that the registration statement
with respect to such securities becomes effective, (i) an opinion, dated as of
such date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering and reasonably satisfactory to a majority in
interest of the Holders requesting registration or to Inktomi, as the case may
be, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities or to Inktomi, as the case may be, and
(ii) a letter dated as of such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration or to Inktomi, as the case may be, addressed to
the underwriters, if any, and if
10.
<PAGE> 37
permitted by applicable accounting standards, to the Holders requesting
registration of Registrable Securities or to Inktomi, as the case may be..
2.7 TERMINATION OF REGISTRATION RIGHTS
(a) All registration rights granted to Holders under this
Section 2 shall terminate and be of no further force and effect five (5) years
after the date of the Company's Initial Offering. In addition, the registration
rights of a Holder shall expire if (a) the Company has completed its Initial
Offering and is subject to the provisions of the Exchange Act, (b) such Holder
(together with its affiliates, partners and former partners) holds less than one
percent (1%) of the Company's outstanding Common Stock (treating all share of
convertible Preferred Stock on an as converted basis) and (c) all Registrable
Securities held by and issuable to such Holder (and its affiliates, partners and
former partners) may be sold under Rule 144 during any ninety (90) day period.
(b) All registration rights granted to Inktomi under this
Section 2 shall terminate and be of no further force and effect two (2) years
after the date of the Company's Initial Offering. In addition, the registration
rights of Inktomi shall expire if (a) the Company has completed its Initial
Offering and is subject to the provisions of the Exchange Act, (b) Inktomi
(together with its affiliates) holds less than one percent (1%) of the Company's
outstanding Common Stock and (c) all Registrable Securities held by and issuable
to Inktomi (and its affiliates) may be sold under Rule 144 during any ninety
(90) day period.
2.8 DELAY OF REGISTRATION; FURNISHING INFORMATION
(a) Neither Inktomi nor any Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 2.
(b) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to Section 2.2, 2.3 or 2.4 that the selling
Holders or Inktomi, as the case may be, shall furnish to the Company such
information regarding such Holders or Inktomi, the Registrable Securities held
by such Holders or Inktomi and the intended method of disposition of such
securities as shall be required to effect the registration of their Registrable
Securities.
(c) The Company shall have no obligation with respect to any
registration requested pursuant to Section 2.2 or Section 2.4 if, due to the
operation of subsection 2.2(b), the number of shares or the anticipated
aggregate offering price of the Registrable Securities to be included in the
registration does not equal or exceed the number of shares or the anticipated
aggregate offering price required to originally trigger the Company's obligation
to initiate such registration as specified in Section 2.2 or Section 2.4,
whichever is applicable.
2.9 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 2.2, 2.3 or 2.4:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, Inktomi, the partners, officers, directors and
legal counsel of each Holder or Inktomi, any underwriter (as defined in the
Securities Act) for such Holder or Inktomi and
11.
<PAGE> 38
each person, if any, who controls such Holder, Inktomi or underwriter within the
meaning of the Securities Act or the Exchange Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation") by the Company: (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) 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
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any state securities law in
connection with the offering covered by such registration statement; and the
Company will reimburse Inktomi and each such Holder, partner, officer, director,
legal counsel, underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this Section 2.9(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company, which consent shall
not be unreasonably withheld, nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by Inktomi and each such Holder, partner, officer,
director, legal counsel, underwriter or controlling person of Inktomi or such
Holder.
(b) To the extent permitted by law, each Holder will, if
Registrable Securities held such Holder are included in the securities as to
which such registration qualifications or compliance is being effected,
indemnify and hold harmless the Company, each of its directors, officers and
legal counsel, and each person, if any, who controls the Company within the
meaning of the Securities Act, any underwriter, Inktomi or any of Inktomi's
directors, officers or any person who controls Inktomi, if any, and any other
Holder selling securities under such registration statement or any of such
Holder's other partners, directors or officers or any person who controls such
Holder, against any losses, claims, damages or liabilities (joint or several) to
which the Company or any such director, officer, controlling person,
underwriter, Inktomi or any of Inktomi's directors or officers or any person who
controls Inktomi, if any, or other such Holder, or partner, director, officer or
controlling person of such other Holder may become subject under the Securities
Act, the Exchange Act or other federal or state law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereto) arise out of or
are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder under an instrument duly executed
by such Holder and stated to be specifically for use in connection with such
registration; and each such Holder will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, legal counsel,
controlling person, underwriter Inktomi or any of Inktomi's directors, officers,
legal counsel or controlling person, if any, or other Holder, or partner,
officer, director, legal counsel or controlling person of such other Holder in
connection with investigating or defending any such loss, claim, damage,
liability or action if it is judicially determined that there was such a
Violation; provided,
12.
<PAGE> 39
however, that the indemnity agreement contained in this Section
2.9(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder or Inktomi, as the case may be, which consent shall not be
unreasonably withheld; provided further, that in no event shall any indemnity
under this Section 2.9 exceed the proceeds from the offering received by such
Holder or Inktomi, as the case may be.
(c) To the extent permitted by law, Inktomi will, if Registrable
Securities held by Inktomi are included in the securities as to which such
registration qualifications or compliance is being effected, indemnify and hold
harmless the Company, each of its directors, officers and legal counsel, and
each person, if any, who controls the Company within the meaning of the
Securities Act, any underwriter and any other Holder selling securities under
such registration statement or any of such other Holder's partners, directors or
officers of such Holder or any person who controls such Holder, against any
losses, claims, damages or liabilities (joint or several) to which the Company
or any such director, officer, controlling person, underwriter or other such
Holder, or partner, director, officer or controlling person of such other Holder
may become subject under the Securities Act, the Exchange Act or other federal
or state law, insofar as such losses, claims, damages or liabilities (or actions
in respect thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished by Inktomi under an
instrument duly executed by Inktomi and stated to be specifically for use in
connection with such registration; and Inktomi will reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer, legal
counsel, controlling person, underwriter or other Holder, or partner, officer,
director, legal counsel or controlling person of such other Holder in connection
with investigating or defending any such loss, claim, damage, liability or
action if it is judicially determined that there was such a Violation; provided,
however, that the indemnity agreement contained in this Section 2.9(b) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of the Holder,
which consent shall not be unreasonably withheld; provided further, that in no
event shall any indemnity under this Section 2.9 exceed the proceeds from the
offering received by such Holder.
(d) Promptly after receipt by an indemnified party under this
Section 2.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 2.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 2.9, but the omission so to deliver
written notice to the
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indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 2.9.
(e) If the indemnification provided for in this Section 2.9 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided, that in no event shall any contribution by a
Holder or by Inktomi hereunder exceed the proceeds from the offering received by
such Holder or Inktomi.
(f) The obligations of the Company, the Holders and Inktomi
under this Section 2.9 shall survive completion of any offering of Registrable
Securities in a registration statement and the termination of this Agreement. No
indemnifying party, in the defense of any such claim or litigation, shall,
except with the consent of each indemnified party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect to such claim or litigation.
2.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company
to register Registrable Securities pursuant to this Section 2 may be assigned
(a) by a Holder to a transferee or assignee of Registrable Securities which (i)
previously holds Registrable Securities, (ii) is a subsidiary, parent, general
partner, limited partner or retired partner of a Holder, or is a Holder's family
member or trust for the benefit of an individual Holder, or (iii) acquires at
least Seventy-five Thousand (75,000) shares of Registrable Securities (as
adjusted for stock splits and combinations); and (b) by Inktomi to a transferee
or assignee of Registrable Securities which (i) previously holds Registrable
Securities, (ii) is a subsidiary or parent of Inktomi or an entity that
controls, is controlled by or is under common control with Inktomi, or (iii)
acquires at least Seventy-five Thousand (75,000) shares of Registrable
Securities (as adjusted for stock splits and combinations); provided, however,
(X) the transferor shall, within ten (10) days after such transfer, furnish to
the Company written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights are
being assigned and (Y) such transferee shall agree to be subject to all
restrictions set forth in this Agreement.
2.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 2
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company, the Holders of at least sixty-six and two-thirds
percent (66 2/3%) of the Registrable Securities then outstanding; provided,
however, that any amendment adversely affecting the rights of Inktomi
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under this Section 2 shall require the written consent of Inktomi. Any amendment
or waiver effected in accordance with this Section 2.11 shall be binding upon
Inktomi, each Holder and the Company. By acceptance of any benefits under this
Article 2, Inktomi and Holders of Registrable Securities hereby agree to be
bound by the provisions hereunder.
2.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of
this Agreement, the Company shall not, without the prior written consent of the
Holders of sixty-six and two-thirds percent (66 2/3%) of the Registrable
Securities then outstanding, enter into any agreement with any holder or
prospective holder of any securities of the Company that would grant such holder
or prospective holder rights to register its shares in any registration filed
under this Section 2, unless under the terms of such agreement, such holder or
prospective holder may include such securities only to the extent that the
inclusion of its securities will not reduce the amount of Registrable Securities
of the Holders and that is included; provided, however, if such rights are pari
passu or superior to Inktomi's rights, the Company shall not enter into such
agreement granting such rights without the written consent of Inktomi. The
Holders and Inktomi hereby acknowledge that they are familiar with that certain
Standby Loan Facility dated August 27, 1999 (the "Shurtleff Loan Facility") and
the Credit Agreement and other instruments [to be] entered into pursuant to the
Shurtleff Loan Facility, and that the Company will grant certain registration
rights to the persons named as Lenders in the Shurtleff Loan Facility with
respect to the securities that may be issued to such Lenders on conversion of
the Shurtleff Loan Facility and pursuant to the Common Stock warrants provided
for therein (the "Shurtleff Warrants").
2.13 "MARKET STAND-OFF" AGREEMENT.
(a) Each Holder and Inktomi hereby agree that it shall not sell
or otherwise transfer or dispose of any Common Stock (or other securities) of
the Company held by he, she or it (other than those included in the
registration) for a period specified by the representative of the underwriters
of Common Stock (or other securities) of the Company not to exceed one hundred
eighty (180) days following the effective date of a registration statement of
the Company filed under the Securities Act, provided that all officers,
directors and affiliates of the Company and holders of at least two percent (2%)
of the Company's voting securities enter into similar agreements.
(b) Each Holder and Inktomi agree to execute and deliver such
other agreements as may be reasonably requested by the Company or the
underwriter that are consistent with the foregoing or that are necessary to give
further effect thereto. In addition, if requested by the Company or the
representative of the underwriters of Common Stock (or other securities) of the
Company, each Holder and Inktomi shall provide, within ten (10) days of such
request, such information as may be required by the Company or such
representative in connection with the completion of any public offering of the
Company's securities pursuant to a registration statement filed under the
Securities Act. The obligations described in this Section 2.13 shall not apply
to a registration relating solely to employee benefit plans on Form S-1 or Form
S-8 or similar forms that may be promulgated in the future, or a registration
relating solely to a Commission Rule 145 transaction on Form S-4 or similar
forms that may be promulgated in the future. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of said one
hundred eighty (180) day period.
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2.14 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the SEC that may permit the sale of the
Registrable Securities to the public without registration, the Company agrees to
use its best efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act, at all times after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public;
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act; and
(c) So long as a Holder or Inktomi, as the case may be, own any
Registrable Securities, furnish to such Holder and Inktomi forthwith upon
request: a written statement by the Company as to its compliance with the
reporting requirements of said Rule 144 of the Securities Act and with the
reporting requirements of the Exchange Act (at any time after it has become
subject to such reporting requirements); a copy of the most recent annual or
quarterly report of the Company; and such other reports and documents as a
Holder or Inktomi, as the case may be, may reasonably request in availing
himself, herself or itself of any rule or regulation of the SEC allowing it to
sell any such securities without registration.
2.15 REGISTRATION RIGHTS UNDER PRIOR AGREEMENT. The registration rights
contained in this Agreement set forth the sole and entire agreement among the
Company, Inktomi, the Investors and the Prior Shareholders on the subject matter
hereof and supersede any and all rights granted and covenants made under the
Prior Agreement (and the undersigned parties to the Prior Agreement hereby amend
such agreements such that the registration rights provided for herein shall
apply to all parties under the Prior Agreement).
SECTION 3 COVENANTS OF THE COMPANY
3.1 BASIC FINANCIAL INFORMATION AND REPORTING
(a) The Company will maintain true books and records of account
in which full and correct entries will be made of all its business transactions
pursuant to a system of accounting established and administered in accordance
with generally accepted accounting principles consistently applied, and will set
aside on its books all such proper accruals and reserves as shall be required
under generally accepted accounting principles consistently applied.
(b) As soon as practicable after the end of each fiscal year of
the Company, and in any event within one hundred twenty (120) days thereafter,
the Company will furnish each Investor and holder of Series B Stock a
consolidated balance sheet of the Company, as at the end of such fiscal year,
and a consolidated statement of income and a consolidated statement of cash
flows of the Company, for such year, all prepared in accordance with generally
accepted accounting principles consistently applied and setting forth in each
case in comparative form the figures for the previous fiscal year, all in
reasonable detail. Such financial statements shall be accompanied by a report
and opinion thereon by independent public accountants of national standing
selected by the Company's Board of Directors.
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(c) The Company will furnish each Investor and holder of Series
B Stock, as soon as practicable after the end of the first, second and third
quarterly accounting periods in each fiscal year of the Company, and in any
event within forty-five (45) days thereafter, a consolidated balance sheet of
the Company as of the end of each such quarterly period, and a consolidated
statement of income and a consolidated statement of cash flows of the Company
for such period and for the current fiscal year to date, prepared in accordance
with generally accepted accounting principles, with the exception that no notes
need be attached to such statements and year-end audit adjustments may not have
been made.
(d) So long as an Investor or holder of Series B Stock (with its
affiliates) shall own at least Four Hundred Thousand (400,000) shares of
Registrable Securities (as adjusted for stock splits and combinations) (each, a
"Major Investor), the Company will furnish each such Major Investor (i) at least
thirty (30) days prior to the beginning of each fiscal year, an annual budget
and operating plans for such fiscal year (broken down by month) (and as soon as
available, any subsequent revisions thereto); and (ii) as soon as practicable
after the end of each month, and in any event within forty-five (45) days
thereafter, a consolidated balance sheet as of the end of each such month, and a
consolidated statement of income and a consolidated statement of cash flows of
the Company for such month and for the current fiscal year to date, including a
comparison to plan figures for such period, prepared in accordance with
generally accepted accounting principles consistently applied, with the
exception that no notes need be attached to such statements and year-end audit
adjustments may not have been made.
3.2 INSPECTION RIGHTS. Each Investor and holder of Series B Stock shall
have the right to visit and inspect any of the properties of the Company or any
of its subsidiaries, and to discuss the affairs, finances and accounts of the
Company or any of its subsidiaries with its officers, and to review such
information as is reasonably requested all at such reasonable times and as often
as may be reasonably requested; provided, however, that the Company shall not be
obligated to disclose information about the Company to a competitor of the
Company.
3.3 CONFIDENTIALITY OF RECORDS. Each Investor and holder of Series B
Stock agrees to use, and to use its best efforts to insure that its authorized
representatives use, the same degree of care as such Investor and holder of
Series B Stock uses to protect its own confidential information to keep
confidential any information furnished to it which the Company identifies as
being confidential or proprietary (so long as such information is not in the
public domain), except that such Investor and holder of Series B Stock may
disclose such proprietary or confidential information to any partner, subsidiary
or parent of such Investor and holder of Series B Stock for the purpose of
evaluating its investment in the Company as long as such partner, subsidiary or
parent is advised of the confidentiality provisions of this Section 3.3.
3.4 RESERVATION OF COMMON STOCK. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the conversion of the
Preferred Stock, all Common Stock issuable from time to time upon such
conversion.
3.5 STOCK VESTING. Unless otherwise approved by the Board of Directors,
all stock options and other stock equivalents issued after the date of this
Agreement to employees, directors, consultants and other service providers shall
be subject to vesting as follows: (a) twenty-five percent (25%) of such stock
shall vest at the end of the first year following the
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<PAGE> 44
earlier of the date of issuance or such person's services commencement date with
the company, and (b) seventy-five percent (75%) of such stock shall vest in
equal monthly increments over the remaining three (3) years. With respect to any
shares of stock purchased by any such person, the Company's repurchase option
shall provide that upon such person's termination of employment or service with
the Company, with or without cause, the Company or its assignee (to the extent
permissible under applicable securities laws and other laws) shall have the
option to purchase at cost any unvested shares of stock held by such person.
3.6 BOARD ELECTION RIGHTS. For so long as H&Q InterNAP Investors, LP and
TI Ventures, LP ("H&Q") collectively hold at least one million (1,000,000)
shares of Registrable Securities, H&Q shall have the right to designate one (1)
nominee to be elected to the Board of Directors at each election of directors.
For so long as Morgan Stanley Venture Partners ("MSVP") holds at least one
million (1,000,000) shares of Registrable Securities, MSVP shall have the right
to designate one (1) nominee to be elected to the Board of Directors at each
election of directors.
3.7 EMPLOYEE CONFIDENTIALITY, NONRAIDING AND NONCOMPETITION AGREEMENT.
The Company shall require all employees and consultants to execute and deliver
an Employee Confidentiality, Nonraiding and Noncompetition Agreement and an
Employee Inventions Agreement in the forms attached as EXHIBIT F-1 and F-2,
respectively, to that certain Series C Preferred Stock Purchase Agreement dated
January 28, 1999 (the "Series C Purchase Agreement") or Proprietary Information
and Inventions Agreement.
3.8 DIRECTORS' LIABILITY AND INDEMNIFICATION. The Company's Articles of
Incorporation and Bylaws shall provide (a) for elimination of the liability of
director to the maximum extent permitted by law and (b) for indemnification of
directors for acts on behalf of the Company to the maximum extent permitted by
law.
3.9 BOARD OF DIRECTORS APPROVAL. The Company shall not, without the
approval of a majority of the Board of Directors, with all directors voting,
take any of the following actions:
(a) incur any debt or obligation, including capital lease or
purchase obligations, in excess of two hundred fifty thousand dollars
($250,000);
(b) initiate or establish any compensation program or plan,
including any program or plan concerning the base salary or bonus of officers;
(c) establish any stock option plans or programs or award any
stock options pursuant to such programs or plans;
(d) hire or appoint any officers of the Company;
(e) enter into any agreement for the purchase or lease of any
real estate; or
(f) implement or revise any annual budget or other operating
plan.
3.10 REAL PROPERTY HOLDING CORPORATION. The Company covenants that it
will operate in a manner such that it will not become a "United States real
property holding
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corporation" ("USRPHC") as that term is defined in Section 897(c)(2) of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder (the
"Code"). The Company agrees to make determinations as to its status as a USRPHC,
and will file statements concerning those determinations with the Internal
Revenue Service, in the manner and at the times required under Reg. Section
1.897-2(h), or any supplementary or successor provision thereto. Within thirty
(30) days of a request from an Investor or any of its partners, the Company will
inform the requesting party, in the manner set forth in Reg. Section 1.897-
2(h)(1)(iv) or any supplementary or successor provision thereto, whether that
party's interest in the Company constitutes a United States real property
interest (within the meaning of Section 897(c)(1) of the Code and the
regulations thereunder) and whether the Company has provided to the Internal
Revenue Service all required notices as to its USRPHC status.
3.11 QUALIFIED SMALL BUSINESS STOCK. The Company covenants that so long
as any of the shares of Series C Preferred Stock, or the Common Stock into which
such shares are converted, are held by an Investor (or authorized transferee in
whose hands such shares or Common Stock are eligible to qualify as Qualified
Small Business Stock as defined in Section 1202(c) of the Code), it will use
commercially reasonable efforts (including complying with any applicable filing
or reporting requirements imposed by the Code on issuers of Qualified Small
Business Stock) to cause such shares of Series C Preferred Stock, or the Common
Stock into which they are converted, to qualify as Qualified Small Business
Stock; provided, however, that "commercially reasonable efforts" as used in this
Section 3.29 shall not be construed to require the Company to operate its
business in a manner that would adversely affect its business, limit its future
prospects or alter the timing or resource allocation related to its planned
operations or financing activities.
3.12 TERMINATION OF COVENANTS. All covenants of the Company contained in
this Section 3 of this Agreement shall expire and terminate as to each Investor
and holder of Series B Stock upon the earlier of (i) the effective date of the
registration statement pertaining to the Initial Offering or (ii) upon (a) the
sale, lease or other disposition of all or substantially all of the assets of
the Company or (b) an acquisition of the Company by another corporation or
entity by consolidation, merger or other reorganization in which the holders of
the Company's outstanding voting stock immediately prior to such transaction
own, immediately after such transaction, securities representing less than fifty
percent (50%) of the voting power of the corporation or other entity surviving
such transaction, provided that this Section 3.11(ii)(b) shall not apply to a
merger effected exclusively for the purpose of changing the domicile of the
Company (a "Change in Control").
3.13 VISITATION RIGHTS. So long as Fidelity Investors II Limited
Partnership and FTT Ventures Inc. or their affiliates (collectively, "Fidelity")
shall own 666,667 shares of Series C Preferred Stock, the Company shall allow
one representative designated by Fidelity to attend all meetings of the
Company's Board of Directors in a nonvoting capacity, and in connection
therewith, the Company shall give such representative copies of all notices,
minutes, consents and other materials, financial or otherwise, which the Company
provides to its Board of Directors; provided, however, that the Company reserves
the right to exclude such representative from access to any material or meeting
or portion thereof if the Company believes upon advice of counsel that such
exclusion is reasonably necessary to preserve the attorney-client privilege, to
protect highly confidential proprietary information or for other similar
reasons.
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SECTION 4 RIGHT TO MAINTAIN INTEREST
4.1 SUBSEQUENT OFFERINGS. Each Investor and holder of Series B Stock
shall have a right to purchase its Pro Rata Share (as defined herein) of all
Equity Securities, as defined below, that the Company may, from time to time,
propose to sell and issue after the date of this Agreement, other than the
Equity Securities excluded by Section 4.6 hereof. The Company may, at its
election, sell such Investor and holder of Series B Stock its Pro Rata Amount of
Equity Securities at the initial closing of the sale of Equity Securities or at
a subsequent closing of which shall take place within ninety (90) days of the
initial closing. The Pro Rata Share of an Investor and holder of Series B Stock
shall be equal to the ratio of (a) the number of shares of the Company's Common
Stock (including all shares of Common Stock issued or issuable upon conversion
of the Preferred Stock) which such Investor and holder of Series B Stock is
deemed to hold immediately prior to the issuance of such Equity Securities to
(b) the total number of shares of the Company's outstanding Common Stock
(including all shares of Common Stock issued or issuable upon conversion of the
Preferred Stock) immediately prior to the issuance of the Equity Securities. The
term "Equity Securities" shall mean (i) any Common Stock, Preferred Stock or
other security of the Company, (ii) any security convertible, with or without
consideration, into any Common Stock, Preferred Stock or other security
(including any option to purchase such a convertible security), (iii) any
security carrying any warrant or right to subscribe to or purchase any Common
Stock, Preferred Stock or other security or (iv) any such warrant or right.
4.2 EXERCISE OF RIGHTS. If the Company proposes to issue any Equity
Securities, it shall give each Investor and holder of Series B Stock written
notice before such issuance or within ten (10) days thereafter, describing the
type of Equity Securities, the price and number of shares and the general terms
and conditions upon which the Company proposes to issue or has issued the same.
Each Investor and holder of Series B Stock shall have thirty (30) days from the
giving of such notice to agree to purchase up to the amount of Equity Securities
equal to Pro Rata Share of such Equity Securities of the Investor and holder of
Series B Stock for the price and upon the general terms and conditions specified
in the notice by giving written notice to the Company and stating therein the
quantity of Equity Securities to be purchased. Any such purchase shall occur at
the initial closing of the sale of Equity Securities or, at the Company's
election, at a subsequent closing within ninety (90) days of the initial
closing. Notwithstanding the foregoing, the Company shall not be required to
offer or sell such Equity Securities to any Investor and holder of Series B
Stock who would cause the Company to be in violation of applicable federal
securities laws by virtue of such offer or sale.
4.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If not all of the
Investors and holders of Series B Stock elect to purchase their Pro Rata Share
of the Equity Securities, then the Company shall promptly notify in writing the
Investors and holders of Series B Stock who do so elect and shall offer such
Investors and holders of Series B Stock the right to acquire such unsubscribed
shares. Each Investor and holder of Series B Stock shall have fifteen (15) days
after receipt of such notice to notify the Company of its election to purchase
all or a portion thereof of the unsubscribed shares. If the Investors and
holders of Series B Stock fail to exercise in full the right to maintain
interest within said forty-five (45) day period set forth in Section 4.2 and
4.3, the Company shall have ninety (90) days thereafter to sell the Equity
Securities in respect of which the rights of the Investors and holders of Series
B Stock were not exercised, at a
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<PAGE> 47
price and upon general terms and conditions no more favorable to the purchasers
thereof than specified in the Company's notice to the Investors and holders of
Series B Stock pursuant to Section 4.2 hereof. If the Company has not sold such
Equity Securities within ninety (90) days of the notice provided pursuant to
Section 4.2, the Company shall not thereafter issue or sell any Equity
Securities without first offering such securities to the Investors and holders
of Series B Stock in the manner provided above.
4.4 TERMINATION OF RIGHTS TO MAINTAIN INTEREST. The rights to maintain
interest established by this Section 4 shall not apply to, and shall terminate
upon (i) the effective date of the registration statement pertaining to the
Initial Offering or (ii) a Change in Control.
4.5 TRANSFER OF RIGHTS TO MAINTAIN INTEREST. The rights to maintain
interest of each Investor and holder of Series B Stock under this Section 4 may
be transferred to the same parties, subject to the same restrictions as any
transfer of registration rights pursuant to Section 2.10.
4.6 EXCLUDED SECURITIES. The rights to maintain interest established by
this Section 4 shall have no application to any of the following Equity
Securities:
(a) shares of Common Stock (and/or options, warrants or other
Common Stock purchase rights issued pursuant to such options, warrants or other
rights) issued or to be issued to employees, officers or directors of, or
consultants or advisors to the Company or any subsidiary, pursuant to stock
purchase or stock option plans or other arrangements that are approved by a
majority of the entire Board of Directors;
(b) stock issued pursuant to any rights or agreements
outstanding as of the date of this Agreement, options and warrants outstanding
as of the date of this Agreement; and stock issued pursuant to any such rights
or agreements granted after the date of this Agreement, provided that the rights
to maintain interest established by this Section 4 applied with respect to the
initial sale or grant by the Company of such rights or agreements;
(c) capital stock or warrants or options to purchase capital
stock issued in connection with bona fide acquisitions, mergers or similar
transactions, the terms of which are approved by a majority of the entire Board
of Directors of the Corporation;
(d) shares of Common Stock issued in connection with any stock
split, stock dividend or recapitalization by the Company;
(e) shares of Common Stock issued upon conversion of the Shares;
(f) capital stock, or options or warrants to purchase capital
stock, issued to financial institutions or lessors in connection with commercial
credit arrangements, equipment financings or any similar transactions approved
by a majority of the entire Board of Directors;
(g) shares of Common Stock issued in a public offering prior to
or in connection with which all outstanding shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock will be converted to
Common Stock;
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(h) shares of Common Stock and the Warrant issued to Inktomi
pursuant the Inktomi Agreement and the Common Stock issued on the exercise of
the Warrant; and
(i) the Shurtleff Warrants and shares of Common Stock issued
upon exercise of the Shurtleff Warrants and on conversion of the Shurtleff Loan
Facility.
SECTION 5 MISCELLANEOUS
5.1 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Washington as applied to agreements among
Washington residents entered into and to be performed entirely within
Washington.
5.2 SURVIVAL. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by any Holder and the closing
of the transactions contemplated hereby. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument.
5.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.
5.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules hereto,
the Inktomi Agreement, the Series C Purchase Agreement and the other documents
delivered pursuant thereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and no party
shall be liable or bound to any other in any manner by any representations,
warranties, covenants and agreements except as specifically set forth herein and
therein.
5.5 SEVERABILITY. In case any provision of the Agreement shall be
invalid, illegal, or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
5.6 AMENDMENT AND WAIVER
(a) Except as otherwise expressly provided and subject to
Section 5.6(b) below, this Agreement may be amended or modified only upon the
written consent of the Company and the Holders of at least sixty-six and
two-thirds percent (66 2/3%) of the Registrable Securities.
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(b) Except as otherwise expressly provided, no amendment or
modification of this Agreement shall adversely affect the rights of the Holders
under this Agreement without the written consent of the Holders of at least
sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities.
(c) Notwithstanding the foregoing, this Agreement may be amended
with only the written consent of the Company to include additional purchasers of
Shares as "Investors," "Holders" and parties hereto.
5.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any Holder upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of any
similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent or approval of any kind or character on
any Holder's part of any breach, default or noncompliance under the Agreement or
any waiver on such Holder's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, by law or otherwise afforded to Holders, shall be cumulative and not
alternative.
5.8 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified, (b) when sent by confirmed facsimile if sent during normal
business hours of the recipient; if not, then on the next business day, (c) five
(5) days after having been sent by registered or certified mail, return receipt
requested, postage prepaid, or (d) one (1) day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written
verification of receipt. All communications shall be sent to the party to be
notified at the address as set forth on the signature pages hereof or EXHIBIT A
or EXHIBIT B hereto or at such other address as such party may designate by ten
(10) days advance written notice to the other parties hereto.
5.9 ATTORNEYS' FEES. In the event that any dispute among the parties to
this Agreement should result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
5.10 TITLES AND SUBTITLES. The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
5.11 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
23.
<PAGE> 50
IN WITNESS WHEREOF, the parties hereto have executed this Investor
Rights Agreement as of the date set forth in the first paragraph hereof.
COMPANY:
INTERNAP NETWORK SERVICES
CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 51
INKTOMI CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 52
INVESTORS:
MORGAN STANLEY VENTURE PARTNERS III,
L.P.
By: Morgan Stanley Venture Partners
III, L.L.C.
Its: General Partner
By: Morgan Stanley Venture
Capital III, Inc.
Its: Institutional Managing
Member
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
MORGAN STANLEY VENTURE INVESTORS
III, L.P.
By: Morgan Stanley Venture Partners
III, L.L.C.
Its: General Partner
By: Morgan Stanley Venture
Capital III, Inc.
Its: Institutional Managing
Member
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
THE MORGAN STANLEY VENTURE PARTNERS
ENTREPRENEUR FUND, L.P.
By: Morgan Stanley Venture Partners
III, L.L.C.
Its: General Partner
By: Morgan Stanley Venture
Capital III, Inc.
Its: Institutional Managing
Member
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 53
OAK INVESTMENT PARTNERS VIII,
LIMITED PARTNERSHIP
By: Oak Associates VIII, LLC
Its: General Partner
By:
---------------------------------
Fredric W. Harman
Managing Member
OAK VIII AFFILIATES FUND, LIMITED
PARTNERSHIP
By: Oak VIII Affiliates, LLC
Its: General Partner
By:
---------------------------------
Fredric W. Harman
Managing Member
FIDELITY INVESTORS II LIMITED
PARTNERSHIP
By: Fidelity Investors Management,
LLC
Its:General Partner
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
FTT VENTURES LIMITED
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 54
GC&H INVESTMENTS
By:
Name: John L. Cardoza
Title: Executive Partner
EVEREN SECURITIES, INC. CUSTODIAN
FBO VICTOR A. INCE, M.D., ROTH IRA
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
KIRLAN VENTURE CAPITAL, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
KIRLAN VENTURE PARTNERS II, L.P.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
JOHN P. MORBECK
REGIS FAMILY LIMITED PARTNERSHIP
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 55
ADELSON INVESTORS, LLC
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
BRINC LLC
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
PAUL CANNIFF
------------------------------------
LAWRENCE W. COHEN
------------------------------------
DAVID CORNFIELD
------------------------------------
DENNIS CUCCIA
------------------------------------
PETER CUCCIA
THOMAS J. CUCCIA & VICTORIA
ADAMS-CUCCIA JT TEN
------------------------------------
THOMAS J. CUCCIA
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 56
VICTORIA ADAMS-CUCCIA
DOLL TECHNOLOGY INVESTMENT FUND
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
DOLL TECHNOLOGY AFFILIATES FUND, LP
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
DOLL TECHNOLOGY SIDE FUND, LP
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
ELIZABETH DUNN
GAK LIMITED
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 57
H&Q INTERNAP INVESTORS, L.P.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
THE JOAN HABER MELLEA SEPARATE
PROPERTY TRUST
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
ROBERT JULL
------------------------------------
ERIC LOCKARD
------------------------------------
KIRSTEN S. MORBECK
------------------------------------
DAN NEWELL
------------------------------------
ALAN NORMAN
------------------------------------
TOM AND PEGGY PHILLIPS JT TEN
------------------------------------
TOM PHILLIPS
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 58
------------------------------------
PEGGY PHILLIPS
------------------------------------
JOE PRUSKOWSKI
PS CAPITAL VENTURES, LP
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
RICHARD SAADA
SEAPOINT VENTURES, LLC
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
PS CAPITAL VENTURES, LP
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
THE SHURTLEFF FAMILY TRUST, ROBERT
D. SHURTLEFF, SR. AND NANCY H.
SHURTLEFF TRUSTEES
By:
---------------------------------
Name:
-------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 59
Title:
------------------------------
------------------------------------
ROBERT D. SHURTLEFF, JR.
------------------------------------
SUSAN P. SIGL
------------------------------------
MARK SMITH
THE STEVEN J. GOODMAN REVOCABLE
LIVING TRUST
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
ALEXANDRIA H. STONE
TI VENTURES, L.P.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
VULCAN VENTURES INCORPORATED
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 60
------------------------------------
TODD WARREN
------------------------------------
RUSTY WILLIAMS
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 61
SERIES B PREFERRED SHAREHOLDERS:
PS CAPITAL HOLDINGS, L.P.
By: PS Capital, Inc.
By:
---------------------------------
Kenneth I. Starr
Vice President
------------------------------------
LAWRENCE W. COHEN
------------------------------------
DAVID J. CORNFIELD
------------------------------------
DENNIS CUCCIA
------------------------------------
PETER CUCCIA
------------------------------------
THOMAS J. CUCCIA
THE STEVEN J. GOODMAN REVOCABLE
LIVING TRUST
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 62
THE STEVEN J. GOODMAN CHARITABLE
REMAINDER TRUST
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
JOE PRUSKOWSKI
VICTOR AND TERRY INCE TRUST
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
DAN NEWELL
------------------------------------
ROBERT D. SHURTLEFF, JR.
THE SHURTLEFF GARRETSON EDUCATION
TRUST
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
TODD WARREN
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 63
H&Q INTERNAP INVESTORS, L.P.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
TI VENTURES, LP
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
KIRLAN I
By: Kirlan Venture Capital, Inc.
---------------------------------
Its:
-----------------------------
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
KIRLAN VENTURE PARTNERS II, L.P.
By: Kirlan Venture Capital, Inc.
Its:
-----------------------------
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 64
VULCAN VENTURES INCORPORATED
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
ADELSON INVESTORS, LLC
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
GAK LIMITED
By:
---------------------------------
Name: Horace Hertz
-------------------------------
Title: General Partner
------------------------------
DOLL TECHNOLOGY INVESTMENT FUND
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
DOLL TECHNOLOGY AFFILIATES FUND,
L.P.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 65
DOLL TECHNOLOGY SIDE FUND, L.P.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
BRINC LLC
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
THE JOAN HABER MELLEA SEPARATE
PROPERTY TRUST
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
THE DAWES TRUST
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
CHRISTOPHER DAWES AND ELIZABETH
SHURTLEFF
------------------------------------
CHRISTOPHER DAWES
------------------------------------
ELIZABETH SHURTLEFF
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 66
------------------------------------
CLARENCE N. SHURTLEFF
------------------------------------
RICHARD SAADA
------------------------------------
TOM AND PEGGY PHILLIPS
------------------------------------
TOM PHILLIPS
------------------------------------
PEGGY PHILLIPS
------------------------------------
ERIC LOCKARD
------------------------------------
PAUL CANNIFF
------------------------------------
MARK SMITH
------------------------------------
BARBARA BOWEN
------------------------------------
ROBERT JULL
------------------------------------
RUSTY WILLIAMS
------------------------------------
ELIZABETH DUNN
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 67
------------------------------------
ALAN NORMAN
------------------------------------
MARK AND JAN ZUCKER
------------------------------------
MARK ZUCKER
------------------------------------
JAN ZUCKER
ZUCKER IRREVOCABLE TRUST
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
SHIRLEY CORNFIELD
------------------------------------
RONALD J. CORNFIELD
------------------------------------
LINDA J. CORNFIELD
------------------------------------
GLEN A. KOLIDES
LINDA JOAN CORNFIELD'S CHILDREN'S
TRUST
By:
---------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 68
Name:
-------------------------------
Title:
------------------------------
------------------------------------
ALEXANDRIA H. STONE
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 69
SERIES A PREFERRED SHAREHOLDERS:
------------------------------------
ROBERT J. LUNDAY, JR.
------------------------------------
ROBERT LUNDAY
------------------------------------
PAUL E. MCBRIDE
------------------------------------
SUSAN MCBRIDE
PAUL E. MCBRIDE, CUSTODIAN FBO EMILY
A. MCBRIDE UTMA
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
PAUL E. MCBRIDE, CUSTODIAN FBO SETH
L. MCBRIDE UTMA
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
BOCINSKY FAMILY L.L.C.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 70
COMMON STOCK SHAREHOLDERS:
------------------------------------
ANTHONY C. NAUGHTIN
------------------------------------
CHRISTOPHER D. WHEELER
CDW LIMITED PARTNERSHIP
By: CDW Services, Inc.
General Partner
By:
---------------------------------
Name: Christopher D. Wheeler
-------------------------------
Title: President
------------------------------
------------------------------------
PAUL E. MCBRIDE
------------------------------------
JAMES P. BOCINSKY
------------------------------------
OPHIR RONEN
------------------------------------
TIM HINDERLITER
------------------------------------
LORRAINE PETRIE
------------------------------------
JON KIRK
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 71
FOUNDERS:
------------------------------------
ROBERT J. LUNDAY, JR.
------------------------------------
PAUL E. MCBRIDE
------------------------------------
ANTHONY C. NAUGHTIN
------------------------------------
CHRISTOPHER D. WHEELER
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 72
EXHIBIT A
INVESTORS
SERIES C PREFERRED SHAREHOLDERS
Morgan Stanley Venture Partners III, L.P.
Morgan Stanley Venture Investors III, L.P.
The Morgan Stanley Venture Partners Entrepreneur Fund, L.P.
Oak Investment Partners VIII, Limited Partnership
Oak VIII Affiliate Fund, Limited Partnership
Fidelity Investors II Limited Partnership
FTT Ventures Limited
Adelson Investors, LLC
BRINC LLC
Paul Caniff
Lawrence W. Cohen
David Cornfield
Dennis Cuccia
Peter Cuccia
Thomas J. Cuccia & Victoria Adams-Cuccia JT TEN
Doll Technology Affiliates Fund, LP
Doll Technology Investment Fund
Doll Technology Side Fund, LP
Elizabeth Dunn
Everen Securities, Inc. Custodian FBO Victor A. Ince, M.D., Roth IRA
GAK Limited
GC&H Investments
H&Q InterNAP Investors, L.P.
The Joan Haber Mellea Separate Property Trust
Robert Jull
Kirlan Venture Capital, Inc.
Kirlan Venture Partners II, LP
Eric Lockard
John P. Morbeck
Kirsten S. Morbeck
Dan Newell
Alan Norman
Tom and Peggy Phillips, JT TEN
Joe Pruskowski
PS Capital Ventures, LP
Regis Family Limited Partnership
Richard Saada
Seapoint Ventures LLC
The Shurtleff Family Trust, Robert D. Shurtleff, Sr. and Nancy H. Shurtleff
Trustees
<PAGE> 73
Robert D. Shurtleff, Jr.
Susan P. Sigl
Mark Smith
The Steven J. Goodman Revocable Living Trust
Alexandria H. Stone
TI Ventures, LP
Vulcan Ventures Incorporated
Todd Warren
Rusty Williams
<PAGE> 74
EXHIBIT B
PRIOR SHAREHOLDERS
SERIES B PREFERRED SHAREHOLDERS
H&Q InterNAP Partners, LP H&Q InterNAP Investors, L.P.
TI Ventures, LP
Kirlan I
Kirlan Venture Partners II, L.P.
PS Capital Holdings, L.P.
Vulcan Ventures Incorporated
Adelson Investors, LLC
Lawrence W. Cohen
David Cornfield
Dennis Cuccia
Peter Cuccia
Thomas J. Cuccia
GAK Limited
The Steven J. Goodman Revocable Living Trust
Steven J. Goodman Charitable Remainder Trust
Victor and Terry Ince Trust
Dan Newell
Robert D. Shurtleff, Jr.
Todd Warren
BRINC LLC
Joe Pruskowski
Richard Saada
Tom and Peggy Phillips
Eric Lockard
Paul Canniff
Mark Smith
Barbara Bowen
Robert Jull
Rusty Williams
Doll Technology Affiliates Fund, LP
Doll Technology Side Fund, LP
Doll Technology Investment Fund
Elizabeth Dunn
Alan Norman
The Joan Haber Mellea Separate Property Trust
The Christopher and Elizabeth Dawes Children's Trust
Linda J. Cornfield
Ronald J. Cornfield
Shirley J. Cornfield
Christopher G. Dawes and Elizabeth Dawes
<PAGE> 75
Glen A. Kolides
Linda Joan Cornfield's Children's Trust
Clarence N. Shurtleff
The Shurtleff Garretson Education Trust
Alexandria H. Stone
Mark and Jan Zucker
Zucker Irrevocable Trust
<PAGE> 76
SERIES A PREFERRED SHAREHOLDERS
Robert Lunday
Robert J. Lunday, Jr.
Paul E. McBride
Susan McBride
Paul E. McBride, Custodian FBO Emily A. McBride, UTMA
Paul E. McBride, Custodian FBO Seth L. McBride, UTMA
COMMON STOCK SHAREHOLDERS
Anthony C. Naughtin
Christopher D. Wheeler
CDW Limited Partnership
Paul E. McBride
James P. Bocinsky
Ophir Ronen
Tim Hinderliter
Lorraine Petrie
Jon Kirk
FOUNDERS
Robert J. Lunday, Jr.
Paul E. McBride
Anthony C. Naughtin
Christopher D. Wheeler
<PAGE> 77
EXHIBIT C
LOCK-UP LETTER
<PAGE> 78
EXHIBIT A
(FORM OF LOCK-UP LETTER]
_______________, 1999
Morgan Stanley Dean Witter & Co. Incorporated
Credit Suisse First Boston
Donaldson, Lufkin & Jenrette
Hambrecht & Quist
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") proposes to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with InterNAP Network Services Corporation, a
Washington corporation (the "COMPANY"), providing for the public offering (the
"PUBLIC OFFERING") by the several Underwriters, including Morgan Stanley (the
"UNDERWRITERS"), of shares (the "SHARES") of the Common Stock ($.001 par value)
of the Company (the "COMMON STOCK").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date of the final prospectus relating to the Public Offering (the "PROSPECTUS"),
and ending 180 days after such date of the Prospectus, (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
Common Stock, whether any such transaction described in clauses (1) or (2) 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 (a) the sale of any
Shares to the Underwriters pursuant to the Underwriting Agreement, (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering, (c) if the
undersigned is an individual, transfers of any shares of the Common Stock or
securities convertible into or exchangeable or exercisable for the Common Stock
either during his or her lifetime or on death by will or intestacy to his or her
immediate family or to a trust the beneficiaries of which are exclusively the
undersigned and/or a member or members of his or her
1
<PAGE> 79
immediate family or (d) if the undersigned is a corporation or a partnership,
transfers of shares of Common Stock or securities convertible into or
exchangeable or exercisable for the Common Stock as a distribution to partners
or shareholders of the undersigned; provided, however, that prior to any such
transfer in clauses (c) or (d) above each transferee shall execute an agreement,
satisfactory to Morgan Stanley, pursuant to which each transferee shall agree to
receive and hold such shares of Common Stock, or securities convertible into or
exchangeable or exercisable for the Common Stock, subject to the provisions
hereof, and there shall be no further transfer except in accordance with the
provisions hereof. For the purposes of this paragraph, "immediate family" shall
mean spouse, lineal descendant, father, mother, brother or sister of the
transferor.
In addition, the undersigned agrees that, without the prior written
consent of Morgan Stanley on behalf of the Underwriters, it will not, during the
period commencing on the date hereof and ending 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
It is understood that, if the Company notifies you that it does not intend
to proceed with the Public Offering, if the Underwriting Agreement does not
become effective, or if the Underwriting Agreement (other than the provisions
thereof which survive termination) shall terminate or be terminated prior to
payment for and delivery of the Shares, the undersigned will be released from
the undersigned's obligations under this agreement.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
_________________________________________
(Name)
Address:
_________________________________________
_________________________________________
2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Amendment No. 2
to Form S-1 of our reports dated April 2, 1999 relating to the financial
statements and financial statement schedule of InterNAP Network Services
Corporation, which appear in such Registration Statement. We also consent to
the reference to us under the headings "Experts" and "Selected Financial Data"
in such Registration Statement.
PricewaterhouseCoopers LLP
Seattle, Washington
September 17, 1999
