<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
INTERNAP NETWORK SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<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)
PAUL E. MCBRIDE
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
INTERNAP NETWORK SERVICES CORPORATION
TWO UNION SQUARE
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:
<TABLE>
<S> <C>
CHRISTOPHER W. WRIGHT, ESQ. GAVIN B. GROVER, ESQ.
H. MARLOW GREEN, ESQ. RUSSELL J. WOOD, ESQ.
ERIC SCOTT CARNELL, ESQ. THEODORE S. KIM, ESQ.
COOLEY GODWARD LLP PHOENIX CAI, ESQ.
5200 CARILLON POINT MORRISON & FOERSTER LLP
KIRKLAND, WA 98033-7355 425 MARKET STREET
(425) 893-7700 SAN FRANCISCO, CA 94105-2482
(415) 268-7000
</TABLE>
--------------------------
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
<TABLE>
<CAPTION>
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)(2) SHARE (3) PRICE (3) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.001 par value per share 8,625,000 $72.40625 $624,503,907 $164,870
</TABLE>
(1) Includes 5,175,000 shares of Common Stock, which are being sold by selling
shareholders.
(2) Includes 1,125,000 shares of Common Stock, which the underwriters have the
option to purchase to cover over-allotments, if any.
(3) Determined in accordance with Rule 457(c) under the Securities Act of 1933,
as amended, as the average of the high ($75.75) and low ($69.0625) price of
the common stock on the Nasdaq National Market on January 26, 2000.
------------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JANUARY 27, 2000
7,500,000 SHARES
[LOGO]
COMMON STOCK
-----------------
INTERNAP NETWORK SERVICES CORPORATION IS OFFERING 3,000,000 SHARES AND THE
SELLING SHAREHOLDERS ARE OFFERING 4,500,000 SHARES.
-------------------
INTERNAP NETWORK SERVICES CORPORATION'S COMMON STOCK IS LISTED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "INAP." ON JANUARY 26, 2000, THE REPORTED LAST
SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $72.13 PER
SHARE.
-------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
-----------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS INTERNAP SHAREHOLDERS
-------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
PER SHARE............... $ $ $ $
TOTAL................... $ $ $ $
</TABLE>
INTERNAP NETWORK SERVICES CORPORATION AND THE SELLING SHAREHOLDERS HAVE GRANTED
THE UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN ADDITIONAL 1,125,000 SHARES OF
COMMON STOCK TO COVER OVER-ALLOTMENTS.
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.
MORGAN STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON
, 2000.
-------------------
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
CHASE H&Q
SALOMON SMITH BARNEY
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.................... 4
Risk Factors.......................... 7
Special Note Regarding Forward-Looking
Statements.......................... 18
Use of Proceeds....................... 19
Dividend Policy....................... 19
Price Range of Common Stock........... 19
Capitalization........................ 20
Dilution.............................. 21
Selected Financial Data............... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Business.............................. 32
Management............................ 44
Certain Transactions.................. 55
Principal and Selling Shareholders.... 57
Description of Capital Stock.......... 61
Shares Eligible for Future Sale....... 64
Underwriters.......................... 66
Legal Matters......................... 68
Experts............................... 68
Where You Can Find More Information... 68
Index to Financial Statements......... F-1
</TABLE>
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.
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.
All information in this prospectus relating to the number of shares of our
common stock, options and warrants is based upon information as of December 31,
1999 and gives effect to 100% share dividend paid on January 7, 2000 to
shareholders of record on December 27, 1999. Except as otherwise indicated, the
information in this prospectus assumes that the underwriters' over-allotment
option is not exercised.
InterNAP-Registered Trademark- and P-NAP-Registered Trademark- are
registered trademarks of InterNAP. All other brand names or trademarks appearing
in this prospectus are the property of their respective holders.
3
<PAGE>
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-NAP facilities, 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 December 31, 1999, we provided consistent high
performance Internet connectivity services to 247 customers, including Akamai
Technologies, Amazon.com, Beyond.com, Bizrate.com, Datek Online, Fidelity
Investments, Go2Net, MindSpring, The Nasdaq Stock Market, Network Associates,
The Street.com, Travelocity, Warner Bros. Online, Waterhouse Securities and
WebTV.
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-NAP facilities. Our P-NAP facilities maintain high speed,
dedicated connections to major global Internet backbone networks, such as AT&T,
Cable & Wireless USA, Global Crossing, GTE Internetworking, ICG Communications,
Intermedia, PSINet, Qwest Communications International, 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. As of January 20,
2000, we operated 13 P-NAP facilities which are located in the Atlanta, Boston,
Chicago, Dallas, Denver, Los Angeles, Miami, New York, Philadelphia, San Jose,
Seattle and Washington, D.C. metropolitan areas. We expect to have a total of 24
P-NAP facilities operational by the end of 2000.
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 and
superior end-to-end control, predictability and reliability, than services
offered by conventional Internet connectivity providers.
4
<PAGE>
- HIGHLY RELIABLE NETWORK ARCHITECTURE. P-NAP facilities are designed with a
highly redundant network infrastructure, such that any of the Internet
backbones connected to a P-NAP facility 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
and monitor 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 facility 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-NAP facilities.
- 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 continue to provide the highest
performance Internet connectivity services.
- Expand our suite of service offerings to drive additional demand for our
connectivity and satisfy our customers' needs.
- 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.
RECENT DEVELOPMENTS
EQUANT RELATIONSHIP. In December 1999, we entered into an agreement with
Equant to assist us in our international expansion. Equant will help support the
international deployment of our P-NAP facilities in exchange for the right to
provide our high performance connectivity services for customers connected to
its network.
PREFERRED CO-LOCATION PROGRAM. In January 2000, we entered into agreements
with leading co-location providers to offer our customers a high quality
co-location solution. Under this program we will provide our customers with the
ability to co-locate their equipment at various data centers throughout the
country while still maintaining access to our high performance connectivity
services.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by:
InterNAP.................................... 3,000,000 shares
Selling shareholders........................ 4,500,000 shares
Total..................................... 7,500,000 shares
Common stock to be outstanding after the
offering...................................... 135,089,172 shares
Use of proceeds................................. For working capital and general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market symbol................... INAP
</TABLE>
The foregoing information is based on the number of shares of common stock
outstanding as of December 31, 1999. This information does not include, as of
December 31, 1999:
- 15,440,942 shares subject to options with a weighted average exercise
price of $3.93 per share;
- 9,564,058 shares that could be issued under our stock plans; and
- 1,923,814 shares subject to outstanding warrants with a weighted average
exercise price of $5.12 per share.
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 1, 1996)
TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------
1996 1997 1998 1999
-------------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ 44 $ 1,045 $ 1,957 $ 12,520
Total operating costs and expenses................... 961 2,455 8,907 64,751
Loss from operations................................. (917) (1,410) (6,950) (52,231)
Net loss............................................. (959) (1,609) (6,973) (49,917)
Basic and diluted net loss per share................. $(.14) $ (.24) $ (1.04) $ (1.31)
Pro forma basic and diluted net loss per share....... $ (.15) $ (.46)
Weighted average shares used in computing pro forma
basic and diluted net loss per share............... 45,466 108,391
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term investments........... $205,352 $410,689
Total assets................................................ 245,546 450,883
Notes payable and capital lease obligations, less current
portion................................................... 14,378 14,378
Total shareholders' equity.................................. 210,500 415,837
</TABLE>
The as adjusted column reflects our sale of 3,000,000 shares of common stock
at an assumed public offering price of $72.13 per share and the application of
the estimated net proceeds of $205.3 million. We will not receive any of the
proceeds from the sale of shares by the selling shareholders.
6
<PAGE>
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 net losses of $1.6 million, $7.0 million and
$49.9 million for the years ended December 31, 1997, 1998 and 1999,
respectively. As of December 31, 1999, our accumulated deficit was
$59.5 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 the next 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 December 31, 1999 have
varied between 13% 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-NAP
facilities 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-NAP facilities and the terms of our Internet
connectivity purchases. For example, our practice is to purchase Internet
connectivity from backbone providers at new P-NAP facilities 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.
7
<PAGE>
IF WE ARE UNABLE TO MANAGE COMPLICATIONS THAT ARISE DURING DEPLOYMENT OF NEW
P-NAP FACILITIES, WE MAY NOT SUCCEED IN OUR EXPANSION PLANS
Any delay in the opening of new P-NAP facilities would significantly harm
our plans to expand our business. In our effort to deploy new P-NAP facilities,
we face various risks associated with significant construction projects,
including identifying and locating P-NAP facility sites, construction delays,
cost estimation errors or overruns, delays in connecting with local exchanges,
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-NAP facilities, each of which takes
approximately four to six months to complete, is a key element of our business
strategy. In addition to our 13 existing locations, we are planning to continue
to deploy P-NAP facilities across a wide range of geographic regions, including
foreign countries. Although we do market research in a geographic area before
deploying a P-NAP facility, we do not enter into service contracts with
customers prior to building a new P-NAP facility.
WE WILL INCUR ADDITIONAL EXPENSE ASSOCIATED WITH THE DEPLOYMENT OF NEW P-NAP
FACILITIES AND WE MAY BE UNABLE TO EFFECTIVELY INTEGRATE NEW P-NAP
FACILITIES 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 quarter ended December 31, 1999, revenues from our five
largest customers represented approximately 25% 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. 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.
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-NAP facilities, 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.
8
<PAGE>
Currently, in each of our fully operational P-NAP facilities, we have
connections to some combination of the following 11 backbone providers: AT&T,
Cable & Wireless USA, Inc., Global Crossing Telecommunications, Inc., GTE
Internetworking, Inc., ICG Communications, Intermedia Communications Inc.,
PSINet, Inc., Qwest Communications International, Inc., Sprint Internet
Services, UUNET, a MCI WorldCom Company, and Verio, Inc. 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-NAP facilities.
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 AT&T, Cable & Wireless USA, Global Crossing,
GTE Internetworking, ICG Communications, Intermedia, PSINet, Qwest
Communications International, 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 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 5% 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
9
<PAGE>
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-NAP FACILITIES 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-NAP facilities
and our computer and communications hardware systems and infrastructure. We
currently have one network operations center located in Seattle, and we have 13
P-NAP facilities which are located in the Atlanta, Boston, Chicago, Dallas,
Denver, Los Angeles, Miami, New York, Philadelphia, 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-NAP facilities, any of which would seriously harm our
business.
BECAUSE WE HAVE NO EXPERIENCE OPERATING INTERNATIONALLY, OUR INTERNATIONAL
EXPANSION MAY BE LIMITED
Although we currently operate in 12 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-NAP facilities and a
network operations center in foreign countries, including in the United
Kingdom and the Netherlands where we plan to deploy facilities in 2000,
and managing P-NAP facilities 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.
OUR BRAND IS RELATIVELY NEW, 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, Dallas, Denver, Los Angeles, Miami, New York,
Philadelphia, 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 facility launch events.
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<PAGE>
WE ARE DEPENDENT UPON OUR KEY EMPLOYEES AND MAY BE UNABLE TO ATTRACT OR
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 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-NAP facilities, 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 facility and nine employees compared to 12
operational P-NAP facilities and 299 full-time employees as of December 31,
1999. In addition, we had $44,000 in revenues for the period from May 1, 1996 to
December 31, 1996 compared to $12.5 million in revenues for the year ended
December 31, 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-NAP facilities could place a significant strain on
our management's time and resources.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY LOSE
RIGHTS TO SOME OF OUR MOST VALUABLE ASSETS
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. The United
States Patent and Trademark Office, or USPTO, issued a patent in September 1999
relating to an initial patent application we filed on September 3, 1997. The
patent is enforceable for a duration of 20 years from the date of filing, or
until September 3, 2017. We cannot assure you that this patent or any future
issued patent will provide significant proprietary protection or commercial
advantage to us or that the USPTO will allow any additional or future claims. We
have a second application pending and may file additional applications in the
future. Additional claims that were included by amendment in our initial
application have now been included in our second patent application. Our patent
and patent applications relate to our P-NAP facility technology. In addition, we
have filed a corresponding international patent application under the Patent
Cooperation Treaty.
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
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<PAGE>
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-NAP facilities and our
Internet backbone providers and between our P-NAP facilities 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-NAP facilities in the future on a timely basis. If Cisco Systems does not
provide us with its routers, or if our limited source 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.
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<PAGE>
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 12 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-NAP
facilities 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.
WE MAY FIND IT DIFFICULT TO INTEGRATE POTENTIAL FUTURE ACQUISITIONS, WHICH
COULD DISRUPT OUR BUSINESS, DILUTE SHAREHOLDER VALUE AND ADVERSELY AFFECT
OUR OPERATING RESULTS
We may acquire businesses and/or technology in the future, which would
complicate our management's tasks. We may need to integrate widely dispersed
operations that have different and unfamiliar corporate cultures. These
integration efforts may not succeed or may distract management's attention from
existing business operations. Our failure to successfully manage future
acquisitions could seriously harm our business. Also, our existing shareholders
would be diluted if we financed the acquisitions by issuing equity securities.
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
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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.
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
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<PAGE>
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.
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.
CAPACITY CONSTRAINTS COULD CAUSE SERVICE INTERRUPTIONS AND HARM CUSTOMER
RELATIONS
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 government may also seek to regulate some segments of our
activities as it has with basic telecommunications services. Moreover, the
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<PAGE>
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 PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
The market price of our common stock has been highly volatile and has
fluctuated significantly in the past. We believe that it may continue to
fluctuate significantly in the future in response to the following factors, some
of which are beyond our control:
- Variations in quarterly operating results;
- Changes in financial estimates by securities analysts;
- Changes in market valuations of Internet and telecommunications related
companies;
- Announcements by us of significant new customers, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- Delays in our P-NAP facility deployment schedule;
- Loss of a major client or failure to add new customers;
- Additions or departures of key personnel;
- Sales of equity securities in the future; and
- Fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of Internet and telecommunications
related companies.
SIGNIFICANT SHAREHOLDERS AND CURRENT MANAGEMENT WILL CONTROL APPROXIMATELY
47.3% 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 12.6%, 9.7%, 8.3%, 6.7% and 8.4%, respectively, of our
outstanding common stock. For additional information regarding significant
shareholders, see "Principal and Selling Shareholders" and "Underwriters." In
addition, our executive officers and directors may be deemed to beneficially own
in the aggregate approximately 47.3% of our outstanding common stock, including
shares of our common stock that will 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.
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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. 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, we will have
135,089,172 shares of common stock outstanding, assuming no exercise of
outstanding options or warrants after December 31, 1999. Our officers, directors
and selling shareholders have agreed not to sell or otherwise dispose of any of
their shares for a period of 90 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
"Underwriters."
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.
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 "Description of Capital Stock" for a discussion of such
anti-takeover provisions.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, that are based on our current expectations about our
company and our industry. 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," "expect," "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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<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 3,000,000 shares of
common stock we are offering will be approximately $205.3 million at an assumed
public offering price of $72.13 per share after deducting underwriting discounts
and commissions and estimated offering expenses of $760,000 payable by us. If
the underwriters' over-allotment option is exercised in full, we estimate that
such net proceeds to us will be approximately $236.3 million. We will not
receive any of the proceeds from the sale of shares of common stock by the
selling shareholders or from the underwriters' exercise of the over-allotment
option to purchase additional shares from the selling shareholders.
We expect to use our net proceeds for capital expenditures associated with
the expansion of our network, working capital, and 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.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
INAP. Public trading of the common stock commenced on September 29, 1999. Prior
to that time, there was no public market for our common stock. The table below
sets forth the high and low sale price for our common stock for the periods
indicated as adjusted for our 100% share dividend paid on January 7, 2000 to
shareholders of record on December 27, 1999:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Fourth Quarter (from September 29, 1999)................. $92.97 $19.50
YEAR ENDED DECEMBER 31, 2000:
First Quarter (through January 26, 2000)................. $99.00 $62.06
</TABLE>
The last reported sale price of our common stock on the Nasdaq National
Market on January 26, 2000 was $72.13 per share.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999 on
an actual basis and on an as adjusted basis to give effect to our sale of
3,000,000 shares of our common stock offered in this offering at an assumed
public offering price of $72.13 per share and the application of the estimated
net proceeds of $205.3 million.
This information should be read in conjunction with our audited financial
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Notes payable and capital lease obligations, less current
portion................................................... $ 14,378 $ 14,378
-------- --------
Shareholders' equity:
Convertible preferred stock: 10,000,000 shares authorized,
no shares issued and outstanding, actual and as
adjusted................................................ -- --
Common stock: $.001 par value per share, 500,000,000
shares authorized, 132,089,172 issued and outstanding,
actual; 135,089,172 shares issued and outstanding, as
adjusted................................................ 132 135
Additional paid-in capital................................ 287,054 492,388
Deferred stock compensation............................... (17,228) (17,228)
Accumulated deficit....................................... (59,458) (59,458)
-------- --------
Total shareholders' equity.............................. 210,500 415,837
-------- --------
Total capitalization.................................. $224,878 $430,215
======== ========
</TABLE>
This capitalization table excludes the following shares as of December 31, 1999:
- 15,440,942 shares subject to options with a weighted average exercise
price of $3.93 per share;
- 9,564,058 shares that could be issued under our stock plans; and
- 1,923,814 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $5.12 per share. See "Description of
Capital Stock" and "Management - Incentive Stock Plans."
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DILUTION
Our net tangible book value as of December 31, 1999 was approximately $210.3
million, or approximately $1.59 per share of common stock. Net tangible book
value per share represents the amount of our total tangible assets less total
liabilities, divided by 132,089,172 shares of common stock outstanding as of
December 31, 1999. After giving effect to the receipt of the net proceeds from
our sale of 3,000,000 shares of common stock at an assumed public offering price
of $72.13 per share, our net tangible book value as of December 31, 1999 would
have been approximately $415.7 million, or $3.08 per share. This represents an
immediate increase in net tangible book value of $1.49 per share to existing
shareholders and an immediate dilution of $69.05 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $72.13
Net tangible book value per share as of December 31,
1999.................................................... $1.59
Increase in net tangible book value per share attributable
to new investors........................................ 1.49
-----
Net tangible book value per share after this offering....... 3.08
-------
Dilution per share to new investors......................... $69.05
=======
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants outstanding after December 31, 1999. As of December 31, 1999, there
were options outstanding to purchase a total of 15,440,942 shares with a
weighted average exercise price of $3.93 per share and warrants outstanding to
purchase a total of 1,923,814 shares with a weighted average exercise price of
$5.12 per share. To the extent that any of these options or warrants are
exercised, there will be further dilution to new investors.
21
<PAGE>
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 years ended December 31, 1997, 1998 and
1999, and the selected balance sheet data at December 31, 1998 and 1999 are
derived from our financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, included elsewhere in this
prospectus. The statement of operations data presented below for the period from
inception (May 1, 1996) to December 31, 1996, and the selected balance sheet
data at December 31, 1996 and 1997 are derived from our financial statements
that have also been audited by PricewaterhouseCoopers LLP and that are not
included in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MAY 1, 1996) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, ------------------------------
1996 1997 1998 1999
--------------------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 44 $ 1,045 $ 1,957 $ 12,520
------ ------- ------- --------
Costs and expenses:
Cost of network and customer support...................... 321 1,092 3,216 27,412
Product development....................................... 184 389 754 3,919
Sales and marketing....................................... 78 261 2,822 17,523
General and administrative................................ 378 713 1,910 8,328
Amortization of deferred stock compensation............... -- -- 205 7,569
------ ------- ------- --------
Total operating costs and expenses.................... 961 2,455 8,907 64,751
------ ------- ------- --------
Loss from operations........................................ (917) (1,410) (6,950) (52,231)
Other income (expense):
Interest income........................................... 6 36 169 3,388
Interest and financing expense............................ (48) (235) (90) (1,074)
Loss on disposal of assets................................ -- -- (102) --
------ ------- ------- --------
Net loss.................................................... $ (959) $(1,609) $(6,973) $(49,917)
====== ======= ======= ========
Basic and diluted net loss per share (1).................... $ (.14) $ (.24) $ (1.04) $ (1.31)
====== ======= ======= ========
Weighted average shares used to compute basic and diluted
net loss per share (1).................................... 6,666 6,666 6,673 37,994
====== ======= ======= ========
Pro forma basic and diluted net loss per share (2).......... $ (.15) $ (.46)
======= ========
Weighted average shares used in computing pro forma basic
and diluted net loss per share (2)........................ 45,466 108,391
======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------
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 $205,352
Total assets................................................ 1,099 5,987 7,487 245,546
Notes payable and capital lease obligations, less current
portion................................................... 421 240 2,342 14,378
Total shareholders' equity (deficit)........................ 43 4,829 (436) 210,500
</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 that occurred upon the closing of the Company's
initial public offering as if the conversion occurred as of the date of
original issuance of the preferred stock.
22
<PAGE>
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-NAP facilities 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.
After we decide to open a new P-NAP facility, we enter into a deployment
phase which typically lasts four to six months, during which time we execute the
required steps to make the P-NAP facility 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-NAP
facilities and initiating pre-sales and marketing activities. Consequently, we
usually incur a significant amount of upfront costs related to making a P-NAP
facility commercially ready for service prior to generating revenues. Therefore,
our results of operations will be negatively affected during times of P-NAP
facility deployment.
As of December 31, 1999, we had a total of 12 P-NAP facilities deployed in
the Atlanta, Boston, Chicago, Dallas, Los Angeles, Miami, New York,
Philadelphia, San Jose, Seattle and Washington D.C. metropolitan areas, and
expect to have a total of 24 P-NAP facilities operational by the end of 2000.
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 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-NAP facilities and
our network operations center. To the extent a P-NAP facility 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-NAP facilities are included in cost of
network and customer support.
23
<PAGE>
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. Our product
development costs are generally 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 facility 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 years ended December 31, 1998 and December 31, 1999, in
connection with the grant of certain stock options to employees, we recorded
deferred stock compensation totaling $25.0 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 $7.6 million for the year ended
December 31, 1999. At December 31, 1999, we had a total of $17.2 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 December 31, 1999, our accumulated deficit was
$59.5 million.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth our statement of operations data for the
eight quarters ended December 31, 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.
24
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 314 $ 417 $ 472 $ 754 $ 1,244 $ 2,166 $ 3,613 $ 5,497
----- ------ ------- ------- ------- -------- -------- --------
Costs and expenses:
Costs of network and customer
support............................. 440 554 797 1,425 2,346 5,560 8,428 11,078
Product development................... 160 158 187 249 565 830 1,053 1,471
Sales and marketing................... 128 224 715 1,755 2,236 3,633 4,691 6,963
General and administrative............ 235 359 487 829 1,172 1,733 2,216 3,207
Amortization of deferred stock
compensation........................ 10 9 110 76 349 1,438 2,505 3,277
----- ------ ------- ------- ------- -------- -------- --------
Total operating costs and and
expenses........................ 973 1,304 2,296 4,334 6,668 13,194 18,893 25,996
----- ------ ------- ------- ------- -------- -------- --------
Loss from operations.................... (659) (887) (1,824) (3,580) (5,424) (11,028) (15,280) (20,499)
Other income (expenses):
Interest income....................... 65 56 38 10 206 244 93 2,845
Interest and financing expense........ (12) (24) (27) (27) (57) (90) (640) (287)
Loss on disposal of assets............ -- -- -- (102) -- -- -- --
----- ------ ------- ------- ------- -------- -------- --------
Net loss................................ $(606) $ (855) $(1,813) $(3,699) $(5,275) $(10,874) $(15,827) $(17,941)
===== ====== ======= ======= ======= ======== ======== ========
Basic and diluted net loss per share.... $(.09) $ (.13) $ (.27) $ (.55) $ (.79) $ (1.59) $ (1.92) $ (.14)
===== ====== ======= ======= ======= ======== ======== ========
Weighted average shares used in
computing basic and diluted net loss
per share............................. 6,671 6,673 6,673 6,673 6,674 6,839 8,246 129,314
===== ====== ======= ======= ======= ======== ======== ========
AS A PERCENTAGE OF REVENUES:
Revenues................................ 100% 100% 100% 100% 100% 100% 100% 100%
----- ------ ------- ------- ------- -------- -------- --------
Costs and expenses:
Costs of network and customer
support............................. 140 133 170 189 189 257 233 202
Product development................... 51 38 40 33 45 38 29 27
Sales and marketing................... 41 54 151 233 180 168 130 127
General and administrative............ 75 86 103 110 94 80 61 58
Amortization of deferred stock
compensation........................ 3 2 23 10 28 66 69 60
----- ------ ------- ------- ------- -------- -------- --------
Total operating costs and
expenses........................ 310 313 487 575 536 609 522 474
----- ------ ------- ------- ------- -------- -------- --------
Loss from operations.................... (210) (213) (387) (475) (436) (509) (422) (374)
Other income (expenses):
Interest income....................... 21 14 8 1 17 11 3 52
Interest and financing expenses....... (4) (6) (5) (4) (5) (4) (18) (5)
Loss on disposal of assets............ -- -- -- (13) -- -- -- --
----- ------ ------- ------- ------- -------- -------- --------
Net loss................................ (193)% (205)% (384)% (491)% (424)% (502)% (437)% (327)%
===== ====== ======= ======= ======= ======== ======== ========
</TABLE>
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."
25
<PAGE>
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>
YEAR ENDED
DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... 100% 100% 100%
---- ---- ----
Costs and expenses:
Cost of network and customer support...................... 105 164 219
Product development....................................... 37 39 31
Sales and marketing....................................... 25 144 140
General and administrative................................ 68 98 67
Amortization of deferred stock compensation............... -- 10 60
---- ---- ----
Total operating costs and expenses...................... 235 455 517
---- ---- ----
Loss from operations........................................ (135) (355) (417)
Other income (expense):
Interest income........................................... 3 9 27
Interest and financing expense............................ (22) (5) (9)
Loss on disposal of assets................................ -- (5) --
---- ---- ----
Net loss.................................................... (154)% (356)% (399)%
==== ==== ====
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND 1999
REVENUES. Revenues increased 525% from $2.0 million for the year ended
December 31, 1998, to $12.5 million for the year ended December 31, 1999. This
increase of $10.5 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-NAP facilities and the opening of nine
additional P-NAP facilities during 1999, resulting in a total of 12 operational
P-NAP facilities at December 31, 1999, as compared to three P-NAP facilities at
December 31, 1998.
COSTS OF NETWORK AND CUSTOMER SUPPORT. Costs of network and customer
support increased 756% from $3.2 million for the year ended December 31, 1998,
to $27.4 million for the year ended December 31, 1999. This increase of
$24.2 million was primarily due to increased connectivity costs related to added
connections to Internet backbone providers at each P-NAP facility, comprising
48% of the increase, and to a lesser extent, additional compensation costs,
related to the addition of 69 personnel, comprising 14% of the increase, and
depreciation expense related to the equipment at newly deployed P-NAP
facilities, comprising 13% of the increase. Network and customer support costs
as a percentage of total revenues are generally greater than 100% for newly
deployed P-NAP facilities because we purchase Internet connectivity 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-NAP
facilities.
PRODUCT DEVELOPMENT. Product development costs increased 411% from $754,000
for the year ended December 31, 1998, to $3.9 million for the year ended
December 31, 1999. This increase of $3.1 million was primarily due to
compensation costs related to the addition of 53 personnel, comprising 52% of
the increase, and outside consulting fees, comprising 25% 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 525% from
$2.8 million for the year ended December 31, 1998, to $17.5 million for the year
ended December 31, 1999. This increase of $14.7 million
26
<PAGE>
was primarily due to compensation costs related to the addition of 71 personnel,
comprising 66% of the increase, marketing and advertising costs, comprising 11%
of the increase, and to a lesser extent, facility costs related to the addition
of sales offices.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased 337%
from $1.9 million for the year ended December 31, 1998, to $8.3 million for the
year ended December 31, 1999. This increase of $6.4 million was primarily due to
compensation costs related to the addition of 44 personnel, comprising 46% of
the increase, increased depreciation and amortization costs due to the addition
of corporate office space during the third quarter of 1999, comprising 9% of the
increase, and professional services costs, comprising 12% of the increase. We
expect general and administrative costs to increase in absolute dollars as we
deploy additional P-NAP facilities.
OTHER INCOME (EXPENSE). Other income (expense) consists of interest income,
interest and financing expense and other non-operating expenses. Other income,
net, increased from an expense of $23,000 for the year ended December 31, 1998,
to other income, net of $2.3 million for the year ended December 31, 1999. This
increase was primarily due to interest income earned on the proceeds from our
private equity financings and initial public offering.
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES. Revenues increased 100% from $1.0 million in 1997 to
$2.0 million in 1998. This increase was primarily due to increased Internet
connectivity revenues, comprising 76% of the increase, other ancillary service
revenues, comprising 12% of the increase, and to a lesser extent, customer
installation fees, comprising 12% of the increase. The increase in Internet
connectivity revenues was attributable to the deployment of two additional P-NAP
facilities resulting in a total of three operational P-NAP facilities at
December 31, 1998.
COSTS OF NETWORK AND CUSTOMER SUPPORT. Costs of network and customer
support increased 191% from $1.1 million in 1997 to $3.2 million in 1998. This
increase was primarily due to increased connectivity costs related to added
connections to Internet backbone providers at each P-NAP facility, comprising
40% of the increase, and depreciation expense related to the equipment at newly
deployed P-NAP facilities, comprising 17% of the 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 six
additional personnel at our network operations center, seven additional
personnel in our customer installation department and seven additional personnel
in our P-NAP facility deployment department.
PRODUCT DEVELOPMENT. Product development costs increased 94% from $389,000
in 1997 to $754,000 in 1998. This increase was primarily due to increased
compensation costs, comprising 67% of the increase, and increased travel costs
related to developing systems at new P-NAP facilities, comprising 20% of the
increase. The increased compensation costs were related to the addition of
product development personnel during 1998.
SALES AND MARKETING. Sales and marketing costs increased 973% from $261,000
in 1997 to $2.8 million in 1998. The increase was primarily due to increased
compensation costs, comprising 74% of the increase, and increased travel and
entertainment costs, comprising 10% of the increase. The increased compensation
costs were related to the addition of 40 personnel during 1998.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased 166%
from $713,000 in 1997 to $1.9 million in 1998. The increase was primarily due to
compensation costs, comprising 11% of the increase, depreciation and
amortization comprising 6% of the increase, facility costs, comprising 38% of
the increase, outside consulting fees, comprising 13% of the increase, travel
costs related to the deployment of new P-NAP facilities, comprising 13% of the
increase, and bad debt expense in 1998 and the
27
<PAGE>
subsequent bankruptcy of a significant customer, comprising 9% of the increase.
The increased compensation costs were related to the addition of 13 personnel
during the second half of 1998.
OTHER INCOME (EXPENSE). Other expense, net, decreased from $199,000 in 1997
to $23,000 in 1998. Other expense, net, decreased by $176,000, or 88%, in 1998
primarily due to increased interest income earned on the proceeds from our
private equity financings, offset by a loss on disposal of assets of $102,000.
PROVISION FOR INCOME TAXES
We incurred operating losses from inception through December 31, 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, 1999, we had net operating loss carry-forwards of
$50.3 million. These loss carry-forwards are available to reduce future taxable
income and expire at various dates through 2019. 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 $261.6 million, net of offering expenses, through
the sale of our equity securities. In January 2000, a 100% stock dividend was
paid on our common stock and, accordingly, all related disclosures have been
revised to reflect the stock dividend for all periods presented.
In October 1999, we sold 19,000,000 shares of our common stock at an initial
public offering price of $10.00 per share resulting in net proceeds of
$176.7 million. During October 1999, in connection with our initial public
offering, the underwriters exercised their overallotment option, resulting in
the sale of an additional 2,850,000 shares of our common stock at $10.00 per
share for additional net proceeds of $26.5 million. Upon the closing of our
initial public offering, all shares of outstanding preferred stock converted
into 98,953,050 shares of common stock.
Concurrent with the closing of our initial public offering on October 4,
1999, we sold 2,150,537 shares of common stock to Inktomi Corporation for $9.30
per share, resulting in proceeds of $19.0 million. In conjunction with this
investment, we issued a warrant to Inktomi to purchase 1,075,268 shares of our
common stock at an exercise price of $13.95 per share. The warrant has a
two-year term and includes demand and piggyback registration rights. On
November 24, 1999, Inktomi exercised 50% of these warrants through a cashless
exercise, resulting in the issuance of 397,250 shares of our common stock to
Inktomi. The agreement also prohibits Inktomi from acquiring additional shares
of our common stock for a period of two years. In addition, we intend to
complete a joint technical and marketing agreement with Inktomi.
At December 31, 1999, we had cash, cash equivalents and investments of
$210.4 million. We have a revolving line of credit with Silicon Valley Bank
under which we are allowed 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 line of credit requires monthly
payments of interest only at prime plus 1%, or 9.5%, as of December 31, 1999,
and matures on June 30, 2000. As of December 31, 1999, we had outstanding
borrowings of $1.5 million on the line of credit.
On September 23, 1999, we signed a standby loan facility agreement with
seven shareholders, which matured upon the closing of our initial public
offering. This facility allowed us to draw up to $10 million, prior to the
earlier of maturity or December 31, 1999, but we did not draw any amounts on
this facility
28
<PAGE>
prior to maturity. In connection with this facility, we issued warrants to
purchase 200,000 shares of common stock with exercise prices of $10.00 per
share. The estimated fair value ascribed to the warrants was $536,000 based upon
the Black Scholes option pricing model, and we recorded this amount as a
financing expense for the year ended December 31, 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 facility 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 7.5% plus an index rate based
on the yield of 4-year U.S. Treasury Notes. This rate was 13.7% at December 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 7.9%
plus an index rate based on the yield of three-year U.S. Treasury Notes. This
rate was 14.0% at December 31, 1999. Borrowings under each sublimit must be
drawn prior to May 1, 2000. As of December 31, 1999, we had outstanding
borrowings of approximately $3.9 million pursuant to this arrangement.
On November 19, 1999, we amended an existing equipment lease credit facility
with a vendor to increase our available credit by $17.5 million. As of
December 31, 1999, we had approximately $11 million available under this credit
facility.
Net cash used in operations was $1.1 million, $5.3 million and
$33.8 million in the years ended December 31, 1997, 1998 and 1999, respectively.
Net cash used in operations for the year ended December 31, 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 increases in
accounts receivable, partially offset by non-cash charges.
Net cash used in investing activities was $141,000, $855,000 and
$68.0 million in the years ended December 31, 1997, 1998 and 1999, respectively.
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 facility 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 $26,000,
$3.6 million and $15.9 million for the years ended December 31, 1997, 1998 and
1999, respectively. Additionally, for the year ended December 31, 1999,
$65.2 million was used to purchase investments offset by proceeds of
$10 million from the disposition of certain investments.
Net cash provided from financing activities was $5.9 million, $1.7 million
and $256.7 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Net cash from financing activities primarily reflects proceeds
from the public and 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-NAP facilities. In addition to P-NAP
facility 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.
29
<PAGE>
We believe that the net proceeds from this offering together with our cash
and cash equivalents, investments and funds available under our 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, 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
December 31, 1999, all of our cash equivalents mature within three months and
all of our short-term investments mature within one year. As of December 31,
1999, we believe the reported amounts of cash equivalents, 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 December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. We believe that the
impact of SAB 101 would have no material effect on our financial position or
results of operations.
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,
which were expected to increase in frequency and severity as of January 1, 2000,
and may continue or increase in the future, are commonly referred to as the
"Year 2000 problem."
Based on the activities described below, 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 or
equipment purchases as a result of our Year 2000 problem activities. We have
experienced no material Year 2000 problems in the period since January 1, 2000.
We continue to monitor our systems for Year 2000 compliance.
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 result, we formalized our Year 2000 compliance
plan, implemented by a team of employees led by our internal information
technology staff, who were responsible for monitoring the assessment and
remediation status
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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 compiled a listing of all mission-critical items, both
internally developed and externally purchased, which may be impacted by the Year
2000 problem. We obtained 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 believe that we identified most of the major
computers, software applications and related equipment used in connection with
our internal operations that needed to be evaluated to determine if they
required modification, upgrading or replacement to minimize the possibility of a
material disruption to 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 completed a testing plan and completed replacement of any required
components. 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 contacted all related third party
suppliers or tested the related items.
COSTS OF REMEDIATION. The total cost of completing any required
modifications, upgrades or replacements of our internal systems did not exceed
$50,000, most of which was incurred during the 1999 calendar year. We do not
anticipate incurring any material costs or expenditures related to the Year 2000
problem during the 2000 calendar year or beyond.
BUSINESS RELATIONSHIPS. As part of our Year 2000 plan, we reviewed the Year
2000 compliance plans of third-party suppliers of components used in the
delivery of our services, including AT&T, Cable and Wireless USA, Cisco Systems,
Global Crossing, GTE Internetworking, ICG Communications, Intermedia, Netcom,
PSINet, Qwest Communications International, Sprint, UUNET and Verio, to identify
and, to the extent possible, resolve issues involving the Year 2000 problem.
Additionally, we reviewed significant customers 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. There can be no assurance that these businesses resolved any or all
Year 2000 problems or that they will not incur future problems, which could
result in a material disruption to the operation of our business in the future.
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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-NAP facilities, 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 December 31, 1999, we
provided consistent high performance Internet connectivity services to
approximately 247 customers, including Akamai Technologies, Amazon.com,
Beyond.com, Bizrate.com, Datek Online, Fidelity Investments, Go2Net, MindSpring,
The Nasdaq Stock Market, Network Associates, The Street.com, Travelocity, Warner
Bros. Online, Waterhouse Securities, and WebTV.
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-NAP facilities,
which are highly redundant network infrastructure facilities coupled with our
patented routing technology. P-NAP facilities maintain high speed, dedicated
connections to major global Internet networks, commonly referred to as
backbones, such as AT&T, Cable & Wireless USA, Global Crossing, GTE, ICG
Communications, Intermedia, PSINet, Qwest Communications International, Sprint,
UUNET and Verio. As of January 20, 2000, we operated 13 P-NAP facilities which
are located in the Atlanta, Boston, Chicago, Dallas, Denver, Los Angeles, Miami,
New York, Philadelphia, San Jose, Seattle and Washington, D.C. metropolitan
areas, and expect to have 24 P-NAP facilities operational by the end of 2000.
We believe that our P-NAP facilities provide a superior 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-NAP facilities 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 300 Gigabits per second in 1999
to 4,500 Gigabits per second in 2004, representing a 72% 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 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
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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, thereby compounding the problem.
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 substantial
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 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.
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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.
CONVENTIONAL ROUTING OVER THE INTERNET TODAY
[Graphic 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.
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 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.
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Utilizing our proprietary network architecture and advanced routing
technologies, we route our customers' data in an optimal manner over the
Internet. As of January 20, 2000, we had 13 P-NAP facilities in operation across
the United States. Our P-NAP facility network model is depicted below:
THE INTERNAP SOLUTION
[Graphic depicting P-NAP facility routing method]
The InterNAP Solution:
A. The P-NAP facility intelligently routes data transmissions between the ISP
customer and the P-NAP facility customer Web Site, bypassing congested and
unreliable public NAPs and private peering relationships.
B. The P-NAP facility 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 facility, data
transmissions occur within the local P-NAP facility infrastructure, bypassing
the Internet entirely.
By connecting to one of our P-NAP facilities, 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 and
superior end-to-end control, predictability and reliability, than services
offered by conventional Internet connectivity providers. Our P-NAP facilities
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 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 facility 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-NAP facilities using our virtual
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backbone. Consequently, any customer connected to any P-NAP facility will
experience optimal public backbone network performance in communicating with any
other customer connected to any other P-NAP facility. A model of InterNAP's
virtual backbone created between any two P-NAP facilities is depicted below:
THE INTERNAP VIRTUAL BACKBONE
[Graphic depicting the InterNAP virtual backbone]
HIGHLY RELIABLE NETWORK ARCHITECTURE. P-NAP facilities 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 facility should
fail, we can instantly reroute data using any of the remaining networks
connected to the P-NAP facility. 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 facility, 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 facility, 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-NAP facilities are connected.
SCALABILITY AND FLEXIBILITY. Our Internet connectivity services are
designed to be scalable and flexible. Since P-NAP facilities are localized
infrastructures, not long haul backbones, we can manage capacity
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issues and traffic flows for each backbone provider at each P-NAP facility
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 facility or upgrades throughout our system of
P-NAP facilities. 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-NAP facilities, 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 facility, 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 CONTINUE TO PROVIDE THE HIGHEST PERFORMANCE
INTERNET CONNECTIVITY SERVICES. We plan to continue developing our P-NAP
facilities, as well as our network operations center, to enhance the level of
service we provide to our customers. Our P-NAP facilities 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-NAP facilities 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.
EXPAND SERVICE OFFERING. We intend to expand our suite of service offerings
to drive additional demand for our connectivity and satisfy our customers needs.
We will continue to evaluate additional service offerings, which we may offer or
partner with providers of such service offerings, in order to drive additional
connectivity sales. Such services may include but are not limited to
co-location, advanced encryption services, data recovery services, content
replication, IP clearinghouse and settlement, and audio and video streaming
services. In January 2000, we entered into agreements with leading co-location
providers to offer our customers a high quality co-location solution. Under this
program we will provide our customers with the ability to co-locate their
equipment at various data centers throughout the country while still maintaining
access to our high performance connectivity services.
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
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also monitor all of our P-NAP facilities. We also use our status as a paying
customer of the major backbone providers to obtain a higher level of service,
which we pass on to our customers.
EXPAND OUR GEOGRAPHIC COVERAGE IN KEY MARKETS. We currently offer our
services through our P-NAP facilities in 12 key metropolitan areas across the
United States and intend to continue to aggressively deploy additional P-NAP
facilities in key markets across the United States and internationally. As part
of our deployment plan, we expect to have a total of 24 P-NAP facilities in the
United States and abroad by the end of 2000. In December 1999, we entered into
an agreement with Equant to assist us in our international expansion. Equant
will help support the international deployment of our P-NAP facilities in
exchange for the right to provide our high performance connectivity services to
customers connected to its network.
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 facility 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 facility, 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-NAP facilities 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.
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CUSTOMERS
We have established a diversified base of customers across a wide range of
industries. As of December 31, 1999, we had approximately 247 customers. The
following is a list of customers whose monthly bill was between $10,000 and
$158,000 for December 1999:
Adforce
Adknowledge
Advanced Radio Telecom
Akamai Technologies
Aladdin Systems
Amazon.com
Apple Computer
Art.com
Beyond.com
Bizrate.com
Cobalt
Commtouch Software
Consumer Financial Network
Data Broadcasting Corporations
Datek Online
Deluxe Payment Protection
Emergent Media
Fidelity Investments
Flycast Network
Go2Net
HomeGrocer.com
Inautix Technologies
Intel Corporation
Internet Shopping Network
The Island ECN
ISP Channel
ITXC
LanMinds Internet Services
MindSpring Enterprises
N2H2
The Nasdaq Stock Market
Net Access Corporation/
Planet.com
Network Associates
OnSite
REI
Seanet
The Seattle Times
Shopping.com
Speakeasy
StarMedia Network
TheStreet.com
Tradescape Online
Travelocity
US Electrodynamics
Warner Bros. Online
Waterhouse Securities
WebTV Networks
WebVision
Won.Net
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 December 31, 1999, we had 156 employees dedicated to customer
service, network support and P-NAP facility engineering. Our customer service
personnel are also available to assist customers whose operations require
specialized procedures.
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
December 31, 1999, we have identified seven 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.
T-1, DS-3 and OC-3 are three of many possible media used to transport Internet
Protocol packets across the Internet. T-1 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 facility 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.
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Customers that have networking equipment or servers located within P-NAP
facilities may connect directly to the P-NAP facility 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 facility. In a typical Diversity Plus configuration, the customer
has a connection to a P-NAP facility 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 facility. In this
manner, the customer can use redundant Internet connections, while also
taking advantage of the unique features of the P-NAP facility.
- 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 facility
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-NAP facilities.
TECHNOLOGY
P-NAP FACILITY ARCHITECTURE. The P-NAP facility 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
facility circuit or device.
The P-NAP facility architecture is designed to grow as our customers'
traffic demands grow and as we add new customers. Our P-NAP facility model
provides for the addition of significant backbone providers as necessary.
InterNAP only deploys P-NAP facilities 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
facility infrastructure to provide the high performance routing service
characteristics of the P-NAP facility. 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 facility. 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 facility as well as inbound routing from a backbone network. We plan
on beta testing a new version of ASsimilator, which will add further
enhancements to our existing routing technology, by the third quarter of 2000.
DISTRIBUTED NETWORK MANAGEMENT SYSTEM. We have developed a highly scalable
proprietary network management system optimized for monitoring P-NAP facilities.
With the use of our distributed network management system, our network
operations center is capable of real-time monitoring of the backbones
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<PAGE>
connected to each P-NAP facility, 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.
RESEARCH AND 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
$3.1 million for the year ended December 31, 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 December 31, 1999, we had 59
employees engaged in direct sales and sales management, 18 in sales
administration and support, 22 in technical support and 12 in marketing located
in 12 cities.
SALES. We have developed a direct high-end sales organization with managers
who have extensive 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 facility, 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, 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 facility 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
41
<PAGE>
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, AT&T,
Cable & Wireless, USA, Global Crossing, GTE Internetworking, ICG
Communications, Intermedia, PSINet, Qwest Communications International,
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 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. The United
States Patent and Trademark Office, or USPTO, issued a patent in September 1999
relating to an initial patent application we filed on September 3, 1997. The
patent is enforceable for a duration of 20 years from the date of filing, or
until September 3, 2017. We have a second application pending and may file
additional applications in the future. Additional claims that were included by
amendment in our initial application have now been included in our second patent
application. Our patent and patent applications relate to our P-NAP facility
technology. In addition, we have filed a corresponding international patent
application under the Patent Cooperation Treaty.
42
<PAGE>
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.
EMPLOYEES
As of December 31, 1999, we employed 299 full-time persons, 156 of whom were
engaged in engineering and operations, 111 in sales and marketing and 32 in
finance and administration. 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 74,100 square feet that are leased under an agreement that expires
in 2003. We lease facilities for our network operations center, sales offices
and P-NAP facilities 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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<PAGE>
MANAGEMENT
Our executive officers and directors, the positions held by them and their
ages as of December 31, 1999 are as follows:
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- ----------- ------------------------------------------------------------------
<S> <C> <C>
Anthony C. Naughtin.................... 43 Chief Executive Officer, President and Director
Paul E. McBride........................ 37 Chief Financial Officer, Vice President of Finance and
Administration, and Secretary
Christopher D. Wheeler................. 32 Chief Technology Officer and Vice President
Charles M. Ortega...................... 44 Vice President of Sales & Marketing
Mike N. Joseph......................... 52 Vice President of Operations and Field Engineering
Richard Perez.......................... 47 Vice President of Deployment
Richard K. Cotton...................... 39 Vice President of Carrier Relations
Alan D. Norman......................... 41 Vice President of Corporate Development
Eugene Eidenberg....................... 60 Chairman of the Board
William J. Harding(1).................. 51 Director
Frederic 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 since
May 1996 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 Washington from 1989 to 1994. Mr. Wheeler holds a Bachelor of
Science in Computer Science from the University of Washington.
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<PAGE>
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 John Anderson School of Business at UCLA.
MIKE N. JOSEPH has served as our Vice President of Operations and Field
Engineering since August 1999. He served as our Vice President of Operations
from June 1999 to August 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.
RICHARD K. COTTON has served as our Vice President of Carrier Relations
since September 1999. From September 1996 to September 1999, Mr. Cotton served
as Vice President and General Counsel, then as Senior Vice President in charge
of site acquisition and network planning at WinStar Communications, a national
telecommunications company. From April 1993 to September 1996, Mr. Cotton served
as Senior Attorney and subsequently Director of Law and Public Policy at MCI
Telecommunications Corporation. Mr. Cotton holds a Bachelor of Science from New
York University and is a graduate of the Brooklyn Law School.
ALAN D. NORMAN has served as our Vice President of Corporate Development
since August 1999. From May 1996 to August 1999, Mr. Norman served as Vice
President, General Manager of New Business Development at Etak, a unit of Sony
Corporation. From September 1992 through April 1996, Mr. Norman served as Vice
President, General Manager of the Automotive Business Unit for Etak, then owned
by News Corporation. Mr. Norman holds a Master of Science in Business from
Stanford University and a Bachelor of Science from Stanford University.
EUGENE EIDENBERG has served as a director and chairman of InterNAP since
November 1997. Mr. 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. Mr. 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. Mr. Eidenberg is currently a
director of AAPT Ltd. and several private companies. Mr. Eidenberg holds a Ph.D.
and a Master of Arts from Northwestern University and a Bachelor of Arts 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 of and is a Managing Director of
Morgan Stanley Dean Witter. 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
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business positions. He is currently a director of 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 in systems
engineering and Bachelor of Science in engineering mathematics from the
University of Arizona.
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, Quintus Corporation and several privately held companies.
Mr. Harman holds a Bachelor of Science and a Master of Science 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 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 in computer science from the University of California at Berkeley.
BOARD COMPOSITION
We have authorized a range of directors from five to nine. In accordance
with the terms of our amended and restated articles of incorporation, the terms
of office of the board of directors are 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 are Robert J. Lunday, Jr. and Robert D. Shurtleff,
Jr., our Class II directors are Fredric W. Harman and Kevin L. Ober, and our
Class III directors are Eugene Eidenberg, William J. Harding and Anthony C.
Naughtin. Mr. Lunday does not intend to stand for reelection at our 2000 annual
meeting of shareholders. We are in the process of identifying a nominee to stand
for election to Class I of our board of directors at our 2000 annual meeting of
shareholders. At each annual meeting of shareholders, the successors to
directors whose terms 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. Because this
system of electing and removing directors generally makes it more difficult for
shareholders to replace a majority of the board of directors,
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<PAGE>
it may discourage a third party from making a tender offer or otherwise
attempting a gain control and may maintain the incumbency of the board of
directors.
COMMITTEES OF THE BOARD OF DIRECTORS
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
400,000 shares of our common stock at an exercise price of $.03 per share. Upon
the closing of our initial public offering, non-employee directors received an
initial option to purchase 80,000 shares of common stock and are expected to
receive and an annual option to purchase 20,000 shares of common stock under our
1999 non-employee directors' stock option plan.
EXECUTIVE COMPENSATION
The table below sets forth summary information concerning compensation paid
by us during the fiscal years ended December 31, 1999, 1998 and 1997,
respectively, to (a) our Chief Executive Officer and President and (b) four of
our other executive officers other than the Chief Executive Officer whose salary
and bonus for fiscal year 1999 exceeded $100,000 and who served as an executive
officer during fiscal year 1999:
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------------- -------------
ALL OTHER SECURITIES ALL OTHER
ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) ($)
- ------------------------------------------ --------- ---------- ----------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Anthony C. Naughtin....................... 1999 $ 171,239 $ 58,500 $ -- 600,000 $ --
Chief Executive Officer and President 1998 123,750 -- -- -- --
1997 125,000 -- -- -- --
Paul E. McBride........................... 1999 137,996 54,000 -- 400,000 --
Chief Financial Officer and Vice 1998 113,750 -- -- -- --
President 1997 115,000 -- -- -- --
Christopher D. Wheeler.................... 1999 137,500 54,000 -- 400,000 --
Chief Technical Officer and Vice 1998 113,750 -- -- -- --
President 1997 115,000 -- -- -- --
Charles M. Ortega(2)...................... 1999 137,996 30,000 82,500 830,000 --
Vice President of Sales and Marketing 1998 81,658 20,000 30,000 720,000 12,000(1)
Richard Perez(2).......................... 1999 125,701 48,500 -- 340,000 --
Vice President of Development 1998 39,583 -- -- -- --
</TABLE>
- ------------------------
(1) Consists of living expenses.
(2) Messrs. Ortega and Perez joined us in 1998.
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,
1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF STOCK
SHARES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM ($)
OPTIONS IN FISCAL PRICE PER EXPIRATION ------------------------
NAME GRANTED (#) YEAR (%) SHARE ($) DATE 5% 10%
- ------------------------------------------- ----------- ------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Anthony C. Naughtin........................ 600,000 1.03% $ 2.00 6/18/09 $ 754,674 $ 1,912,491
Paul E. McBride............................ 400,000 5.64 2.00 6/18/09 503,116 1,274,994
Christopher D. Wheeler..................... 400,000 3.76 2.00 6/18/09 503,116 1,274,994
Charles M. Ortega.......................... 110,000 3.76 2.00 6/18/09 138,357 350,623
Richard Perez.............................. 40,000 * 2.00 6/18/09 50,312 127,499
</TABLE>
- ------------------------
* Less than 1%.
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>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information as of December 31, 1999 regarding
options held by certain of our executive officers. There were no stock
appreciation rights outstanding at December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON DECEMBER 31, 1999 (#) DECEMBER 31, 1999 ($)
EXERCISE VALUE --------------------------- ---------------------------
NAME (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Anthony C. Naughtin............ -- -- -- 600,000 $ -- $50,700,000
Paul E. McBride................ -- -- -- 400,000 -- 33,800,000
Christopher D. Wheeler......... -- -- -- 400,000 -- 33,800,000
Charles M. Ortega.............. 255,000 -- 45,000 530,000 3,891,150 45,612,400
Richard Perez.................. -- -- 91,667 248,333 7,922,320 21,385,179
</TABLE>
In the table above, the value of unexercised in-the-money options is based
on the fair market value of our common stock, based upon the last reported sales
price of our common stock on December 31, 1999 of $86.50, 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 the 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. We have reserved a total of
10,070,000 shares for issuance under our 1998 Stock Option/Stock Issuance Plan.
As of December 31, 1999, 9,760,498 shares were granted under the 1998 Plan and
options to purchase 7,345,442 shares were outstanding, with 659,558 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.
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.
49
<PAGE>
The three-month period is extended to 12 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.
AMENDED 1999 EQUITY INCENTIVE PLAN. As of December 31, 1999, an aggregate
of 13,000,000 shares of common stock have been authorized for issuance under our
Amended 1999 Equity Incentive Plan. As of December 31, 1999, options to purchase
an aggregate of 7,615,500 shares were outstanding under the Incentive Plan and
5,384,500 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 12 months for terminations
due to total and permanent disability and 18 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 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.
50
<PAGE>
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
- 13,000,000 shares.
Pursuant 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 6,000,000 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. A total of 3,000,000 shares of common
stock have been reserved for issuance under our 1999 Employee Stock 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 3,000,000 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 began on
September 29, 1999 and will terminate on June 30, 2001. Purchase dates occur
each December 31 and June 30.
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 is 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 ends 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
51
<PAGE>
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. Our 1999 Non-Employee
Directors' Stock Option 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
1,000,000 shares of common stock may be issued pursuant to options granted under
the directors' plan. As of December 31, 1999, options to purchase an aggregate
of 480,000 shares were outstanding under the directors' plan and 520,000 shares
were currently available for future grant of stock awards under the directors'
plan. Each of our non-employee directors was granted an initial grant to
purchase 80,000 shares of common stock upon the closing of our initial public
offering. Also, each person who is appointed or elected for the first time as a
non-employee director will be granted an initial grant to purchase 80,000 shares
of common stock upon such 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 is automatically granted
an option to purchase 20,000 shares of common stock. Each option granted under
the directors' plan is 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
equals 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 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. Effective January 1, 2000, the
Company began matching 50% of employee contributions, up to a maximum of 6% of
each employee's gross wage. 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
52
<PAGE>
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 amended and restated 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.
Our amended and restated articles of incorporation 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 amended and restated 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 amended and restated 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.
Our bylaws 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.
We have entered into agreements to indemnify our directors and certain
officers, in addition to indemnification provided for in our amended and
restated 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;
53
<PAGE>
- 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 Amended 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.
54
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1999, 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 and Selling Shareholders" section.
The per share purchase price for our Series C preferred stock was $0.54.
Upon closing of our initial public offering, each previously outstanding share
of our preferred stock, including the Series C preferred stock, converted into
common stock on a one-for-one basis.
<TABLE>
<CAPTION>
SERIES C
PREFERRED
INVESTOR STOCK
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
Robert D. Shurtleff, Jr............................................................................. 714,320
H&Q InterNAP Investors L.P.(1)...................................................................... 3,733,916
Morgan Stanley Dean Witter Venture Partners(2)...................................................... 18,518,518
Oak Investment Partners VIII, L.P.(3)............................................................... 12,037,038
TI Ventures, L.P. (4)............................................................................... 3,519,112
Vulcan Ventures Incorporated(5)..................................................................... 4,472,142
</TABLE>
- ------------------------
(1) Mr. Eidenberg, one of our directors, is a principal of Hambrecht & Quist
Venture Associates.
(2) Consists of 1,560,000 shares of Series C preferred stock held by Morgan
Stanley Venture Investors III, L.P., 710,834 shares of Series C preferred
stock held by The Morgan Stanley Venture Partners Entrepreneur Fund, L.P.
and 16,247,684 shares of Series C preferred stock held by Morgan Stanley
Venture Partners III, L.P. The Series C preferred stock converted into
shares of our common stock on a one-for-one basis upon the closing of our
initial public offering. 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.
(3) Consists of 11,808,334 shares of Series C preferred stock held by Oak
Investment Partners VIII, L.P. and 228,704 shares of Series C preferred
stock held by Oak VIII Affiliates Fund, L.P. The Series C preferred stock
converted into shares of our common stock on a one-for-one basis upon the
closing of our initial public offering. Mr. Harman, one of our directors, is
a managing member of the general partner of venture capital funds affiliated
with Oak Investment Partners.
(4) Consists of 3,519,112 shares of Series C preferred stock held by TI
Ventures, L.P. of which 176,094 were subsequently transferred to other
shareholders. The Series C preferred stock converted into shares of our
common stock on a one-for-one basis upon the closing of our initial public
offering.
(5) 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 shareholder 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 10,000,000 of the 13,333,334 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 $0.63 per share. This option remains outstanding.
Mr. Lunday, one of our directors, is father-in-law of Mr. McBride, our Chief
Financial Officer and Vice President of Finance and Administration.
55
<PAGE>
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
our Series C financing. The Series C preferred stock converted into shares of
common stock on a one-for-one basis upon the closing of our initial public
offering.
On January 13, 1999, Robert D. Shurtleff, Jr., one of 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 date of February 15, 1999. We repaid the
outstanding principal and accrued interest on the loan in February 1999 from the
proceeds of our Series C financing. The Series C preferred stock converted into
shares of common stock on a one-for-one basis upon the closing of our initial
public offering.
On January 28, 1999 and February 26, 1999, we sold an aggregate of
59,259,260 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 $0.54 per share.
The Series C preferred stock converted into shares of common stock on a
one-for-one basis upon the closing of our initial public offering.
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 have entered 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 September 7, 1999, we entered into a letter agreement with Richard K.
Cotton under which 100,000 shares of common stock underlying his option grant
fully vest and he will receive severance pay equal to six months of his
compensation, including employee benefits, in the event of his termination for
reasons other than his voluntary resignation, death or for cause.
On September 23, 1999, we signed a standby loan facility agreement with
seven shareholders, which matured upon the closing of our initial public
offering. This facility allowed us to draw up to $10 million prior to the
earlier of maturity or December 31, 1999, but we did not draw any amounts on
this facility prior to maturity. In connection with this facility, we issued
warrants to purchase 200,000 shares of common stock with exercise prices of
$10.00 per share. The estimated fair value ascribed to the warrants was $536,000
based upon the Black Scholes option pricing model, and we recorded this amount
as interest expense for the year ended December 31, 1999.
On October 4, 1999, we sold an aggregate of 2,150,537 shares of common stock
in a private placement to Inktomi Corp, at an aggregate purchase price of
$20,000,000, or $9.30 per share, resulting in proceeds of $19.0 million, net of
a private placement fee of $1.0 million. We also issued to Inktomi a warrant to
purchase 1,075,268 additional shares of our common stock at an exercise price of
$13.95 per share. The warrant has a two year term and includes demand and
piggyback registration rights. The agreement also prohibits Inktomi from
acquiring additional shares of our stock for a period of two years. On
November 24, 1999, Inktomi exercised its warrant in part through a cashless
exercise, and received 397,250 shares of our common stock.
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 our 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.
56
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of December 31, 1999 and after this
offering:
- each shareholder who we know to own beneficially more than five percent of
our common stock;
- each of our directors;
- each of our executive officers;
- each shareholder who is selling shares of our common stock in this
offering; and
- all directors and executive officers as a group.
Except as indicated, and subject to community property laws where
applicable, the persons or institutions named have sole voting and investment
power with respect to all shares of our common stock shown as beneficially owned
by them. Percentages of beneficial ownership indicated are based on 132,089,172
shares of common stock outstanding as of December 31, 1999 and assume no
exercise of the underwriters' over-allotment option in connection with the
selling shareholders. If the underwriters' over-allotment option is exercised in
full, the selling shareholders will sell up to an aggregate of 5,175,000 shares
of common stock and up to 135,539,172 shares of common stock will be outstanding
after the completion of this offering.
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 December 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 and with the
exception of the selling shareholders, each person or entity named below has an
address in care of our principal executive offices.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING OWNED AFTER OFFERING
--------------------- SHARES BEING ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------ ---------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Morgan Stanley Dean Witter
Venture Partners (1)
c/o Morgan Stanley Dean Witter
Venture Partners
1221 Avenue of the Americas
New York, NY 10020...................... 18,598,518 14.1% 1,070,274 17,528,244 12.6%
William J. Harding (1).................... 18,598,518 14.1 1,070,274 17,528,244 12.6
H&Q InterNAP Investors, L.P. (2)
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104................. 14,260,268 10.8 796,428 13,463,840 9.7
TI Ventures, LP (2)
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104................. 14,260,268 10.8 796,428 13,463,840 9.7
Eugene Eidenberg (2)...................... 14,260,268 10.8 796,428 13,463,840 9.7
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING OWNED AFTER OFFERING
--------------------- SHARES BEING ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------ ---------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Oak Investment Partners VIII, L.P. (3)
c/o Oak Investment Partners VIII, L.P.
525 University Avenue, Suite 1300
Palo Alto, CA 94301..................... 12,296,668 9.3% 688,720 11,607,948 8.3%
Fredric W. Harman (3)..................... 12,296,668 9.3 688,720 11,607,948 8.3
Robert J. Lunday, Jr. (4)................. 11,744,914 8.9 -- 11,744,914 8.4
Vulcan Ventures Incorporated (5)
110 - 100(th) Avenue Northeast, Suite
550
Bellevue, WA 98004...................... 9,952,142 7.5 547,439 9,404,703 6.7
Kevin L. Ober (5)......................... 9,952,142 7.5 547,439 9,404,703 6.7
Paul E. McBride (6)....................... 5,379,608 4.0 192,535 5,187,073 3.7
Anthony C. Naughtin (7)................... 4,602,760 3.4 158,985 4,443,775 3.1
Christopher D. Wheeler (8)................ 4,584,760 3.4 158,986 4,425,774 3.2
Robert D. Shurtleff, Jr. (9).............. 1,888,296 1.4 57,280 1,831,016 1.3
Charles M. Ortega (10).................... 330,000 * -- 330,000 *
All directors and executive officers as a
group
(10 persons)(11)........................ 75,385,366 53.1 3,670,647 70,583,160 47.3
SELLING SHAREHOLDERS:
Bocinsky Family L.L.C..................... 580,000 * 33,512 546,479 *
Stacy Burk................................ 904 * 52 852 *
Dennis Cuccia............................. 101,094 * 5,842 95,252 *
Peter Cuccia.............................. 35,098 * 2,029 33,069 *
The Cuccia Limited Trust.................. 80,000 * 4,623 75,377 *
Thomas J. Cuccia.......................... 55,692 * 3,219 52,473 *
Thomas J. Cuccia & Victoria Adams-Cuccia
JT TEN.................................. 61,406 * 3,549 57,857 *
Doll Technology Affiliates Fund, LP....... 275,612 * 14,400 261,212 *
Doll Technology Investment Fund........... 4,684,302 3.5 240,000 4,444,302 3.3
Doll Technology Side Fund, LP............. 179,422 * 10,000 169,422 *
Donna Hayataka............................ 1,204 * 70 1,134 *
Tim Hinderliter........................... 855,664 * 30,379 825,285 *
Thomas S. Huseby.......................... 106,224 * 6,139 100,085 *
Kirlan I.................................. 1,666,666 1.3 96,324 1,570,342 1.2
Alan D. Norman (12)....................... 171,312 * 9,901 161,411 *
Phoenix Leasing Incorporated.............. 149,360 * 8,632 140,728 *
Joe Pruskowski............................ 342,620 * 19,802 322,818 *
PS Capital Holdings, LP................... 3,333,334 2.5 192,649 3,140,685 2.3
PS Capital Ventures, LP................... 1,851,852 1.4 107,027 1,744,825 1.3
Ophir Ronen............................... 809,350 * 30,379 778,971 *
Mark Smith................................ 186,666 * 10,789 175,877 *
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) Shares beneficially owned prior to this offering consists of 1,560,000
shares held by Morgan Stanley Venture Investors III, L.P., 710,834 shares
held by The Morgan Stanley Venture Partners Entrepreneur Fund, L.P. and
16,247,684 shares held by Morgan Stanley Venture Partners III, L.P. and
80,000 shares issuable upon the exercise of options held by Mr. Harding
exercisable within 60 days of December 31, 1999. The institutional managing
member of the general partner of Morgan Stanley
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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.
Shares being offered consists of 90,160 shares being offered by Morgan
Stanley Ventures Investors III, LP, 41,082 shares being offered by Morgan
Stanley Venture Partners Entrepreneur Fund, LP and 939,032 shares being
offered by Morgan Stanley Venture Partners III, LP.
(2) Shares beneficially owned prior to this offering consists of 7,103,916
shares held by H&Q InterNAP Investors, L.P., 6,676,352 shares held by TI
Ventures, LP, 296,667 shares issuable upon exercise of vested options that
are held by Mr. Eugene Eidenberg and 183,333 shares issuable upon exercise
of options held by Mr. Eidenberg that are exercisable within 60 days of
December 31, 1999 but subject to repurchase 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.
Shares being offered consists of 410,569 shares being offered by H&Q
InterNAP Investors, L.P. and 385,859 shares being offered by TI Ventures,
LP.
(3) Shares beneficially owned prior to this offering consists of 11,984,552
shares held by Oak Investment Partners VIII, L.P., 232,116 shares held by
Oak VIII Affiliates Fund L.P. and 80,000 shares issuable upon the exercise
of options held by Mr. Harman exercisable within 60 days of December 31,
1999. 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.
Shares being offered consists of 675,635 shares being offered by Oak
Investment Partners VIII, L.P. and 13,085 shares being offered by Oak VIII
Affiliates Fund L.P.
(4) Includes 10,000,000 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, 80,000 shares issuable upon the
exercise of options exercisable within 60 days of December 31, 1999, and
9,500 shares issuable upon exercise of warrants exercisable within 60 days
of December 31, 1999.
(5) Shares beneficially owned prior to this offering consists of 9,472,142
shares held by Vulcan Ventures Incorporated, 216,667 shares held by
Mr. Kevin L. Ober and 183,333 shares held by Mr. Ober that are subject to
repurchase by InterNAP under terms set forth in a notice of grant of stock
option and 80,000 shares issuable upon the exercise of options held by
Mr. Ober exercisable within 60 days of December 31, 1999. 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) Shares beneficially owned prior to this offering includes 500,000 shares
held by the McBride Trust, 221,712 shares held by Mr. McBride FBO Emily A.
McBride UTMA, 221,712 shares held by Mr. McBride FBO Seth L. McBride UTMA,
221,712 shares held by Mr. McBride's wife in her own name, and 2,750,856
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.
Shares being offered consists of 158,958 shares being offered by
Mr. McBride, 7,949 shares being offered by the McBride Trust, 12,814 shares
being offered by Mr. McBride as custodian for the
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Emily A. McBride UTMA, and 12,814 shares being offered by Mr. McBride as
custodian for the Seth L. McBride UTMA.
(7) Shares beneficially owned prior to this offering includes 1,800,000 shares
held by Crossroads Associates LLC, 6,000 shares held by Mr. Naughtin as
Trustee of the Eric Weaver Gift Protection Trust, 6,000 shares held by
Mr. Naughtin as Trustee of the Hugh Naughtin Gift Protection Trust, 6,000
shares held by Mr. Naughtin as Trustee of the Rose Naughtin Gift Protection
Trust and 2,750,856 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. Naugthin disclaims beneficial ownership with
respect to the 18,000 shares held in trust for the benefit of his niece and
nephews.
Shares being offered consists of 156,046 shares being offered by
Mr. Naughtin and 2,939 shares being offered by Crossroads Associates, LLC.
(8) Shares beneficially owned prior to this offering includes 2,750,856 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, and
183,390 held by the CDW Limited Partnership.
Shares being offered consists of 127,189 shares being offered by
Mr. Wheeler and 31,797 shares being offered by the CDW Limited Partnership.
(9) Shares beneficially owned prior to this offering includes 650,700 shares
issuable upon exercise of warrants exercisable within 60 days of
December 31, 1999 and 80,000 shares issuable upon the exercise of options
held by Mr. Shurtleff exercisable within 60 days of December 31, 1999.
(10) Includes 75,000 shares issuable upon exercise of options exercisable within
60 days of December 31, 1999.
(11) Includes 955,000 shares subject to options and warrants, which are
exercisable within 60 days of December 31, 1999, but does not give effect to
the exercise of options by Messrs. Naughtin, McBride and Wheeler held on
8,252,568 shares held by Robert J. Lunday, Jr.
(12) Mr. Norman is our Vice President of Corporate Development.
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DESCRIPTION OF CAPITAL STOCK
We have authorized capital stock consisting of 500,000,000 shares of common
stock, $.001 par value per share, and 10,000,000 shares of preferred stock,
$.001 par value per share. 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 December 31, 1999, we had 132,089,172 shares of our common stock
outstanding. The holders of our 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 our
common stock.
PREFERRED STOCK
We have authorized 10,000,000 shares of undesignated preferred stock. There
are no shares of preferred stock outstanding. The board has the authority,
without further action by shareholders, to issue the 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 our common stock. The issuance of preferred stock
could adversely affect the voting power of holders of our 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 our common stock. The issuance of preferred stock could have the
effect of delaying, deferring or preventing a change in control over our board
of directors or senior management. We have no present plans to issue any shares
of preferred stock.
WARRANTS
As of December 31, 1999, warrants to purchase an aggregate of 1,186,180
shares of common stock were outstanding at an exercise price of $.30 per share,
warrants to purchase an aggregate of 200,000 shares of common stock were
outstanding at an exercise price of $10.00 per share and warrants to purchase an
aggregate of 537,634 shares of common stock were outstanding at an exercise
price of $13.95 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.
REGISTRATION RIGHTS
After this offering and giving effect to the sale by the selling
shareholders of 4,500,000 shares of common stock, other than the shares of
common stock held by Inktomi, the holders of 99,892,918 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. 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
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<PAGE>
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, beginning March 28, 2000, 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 102,440,706 of the
registrable shares, provided the reasonably expected aggregate offering price
will equal or exceed $5,000,000 and subject to certain other conditions and
limitation. 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.
In addition, Inktomi holds rights in connection with 2,547,788 shares of
common stock and a warrant to purchase 537,634 shares of common stock that
require us to register its shares for future sale under certain circumstances.
Commencing March 28, 2000, if Inktomi requests that we file a registration
statement, we must use our best efforts to cause such shares to be registered as
long as the aggregate offering price is not less than $5,000,000 and subject to
certain additional conditions and limitations. We are not obligated to effect
more than one of these Inktomi-initiated registrations. If we deliver notice to
Inktomi within 30 days after any registration request of our intent to file a
registration statement within 90 days, then Inktomi will be permitted to
participate in such registration on the same terms as our other existing holders
of registration rights. Furthermore, Inktomi may require us to file two
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 AND WASHINGTON LAW
Our board of directors, without shareholder approval, has authority under
our amended and restated articles of incorporation to issue preferred stock with
rights superior to the rights of the holders of our common stock. As a result,
our board could issue preferred stock quickly and easily, which could adversely
affect the rights of holders of our 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. Our amended and restated articles of
incorporation provide for the division of our board of directors into three
classes, as nearly as equal in number as possible. The directors in each class
serve for a term of up to three years and one class is elected each year by our
shareholders. The Class I term expires at the annual meeting of shareholders to
be held in 2000; the Class II term expires at the annual meeting of shareholders
to be held in 2001; and the Class III term expires 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
of our board of directors.
SHAREHOLDER MEETINGS. Our bylaws, as amended, provide that, except as
otherwise required by law or by our amended and restated articles of
incorporation, special meetings of the shareholders can only be called pursuant
to a resolution adopted by our board of directors, our 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
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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 and are 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 of our board of
directors or senior management.
TRANSFER AGENT
The transfer agent and registrar for the shares of our common stock is
American Stock Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
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 135,089,172
shares of common stock, after the issuance of 3,000,000 shares of common stock
offered in this prospectus and no exercise of options or warrants after
December 31, 1999. Of these shares, the shares sold in this offering, together
with the 21,875,996 shares previously registered by us, will be freely tradable
without restriction or further registration under the Securities Act. However,
if these shares are purchased by "affiliates," as that term is defined in
Rule 144 under the Securities Act, sales of these shares would be subject to
certain limitations and restrictions described below.
Except for the 19,000,000 shares sold in our initial public offering, we
issued and sold the remaining 110,187,180 shares of common stock held by
existing shareholders as of December 31, 1999, in reliance on exemptions from
the registration requirements of the Securities Act. Of these shares, 88,766,274
shares are subject to 180-day lock-up agreements entered into in connection with
our initial public offering which expire March 28, 2000. In addition, 72,113,563
shares will be subject to lock-up agreements entered into by our officers and
directors and the selling shareholders in connection with this offering and
which will expire 90 days from the date of this prospectus. Upon expiration of
the 180-day lock-up agreements on March 28, 2000, 33,573,617 shares that are not
subject to the 90-day lock-up agreements will become eligible for sale, subject
in most cases to the limitations of Rule 144. Upon expiration of the 90-day
lock-up agreements, 72,113,563 shares will become eligible for sale, subject in
most cases to the limitations of Rule 144.
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 December 31, 1999, there were a total of 1,923,814 shares of common
stock that could be issued upon exercise of outstanding warrants, of which
1,922,248 are subject to lock-up agreements. As of December 31, 1999, there were
a total of 15,470,942 shares of common stock subject to outstanding options
under our stock plans, 2,154,232 of which were vested. However, all of these
shares are subject to the 180-day lock-up agreements. The officers, directors
and certain of our shareholders have agreed not to sell or otherwise dispose of
any of their shares for a period ending on March 28, 2000. In addition, our
officers and directors and the selling shareholders have agreed not to sell or
otherwise dispose of any of their shares of a period ending 90 days from the
date of this prospectus. Morgan Stanley & Co. Incorporated, however, may in its
sole discretion, at any time and in most cases without notice to anyone, release
all or any portion of the shares subject to the 180-day and the 90-day lock-up
agreements.
RULE 144
In general, under Rule 144 as currently in effect, 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 our common stock then outstanding, which
will equal approximately 1,350,892 shares immediately after the effective
date of this offering; or
- the average weekly trading volume of our 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.
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REGISTRATION RIGHTS
The holders of 100,516,892 shares of our common stock and of warrants
exercisable for 1,923,814 shares of our common stock will, under certain
circumstances, have rights to require us to register their shares for future
sale. See "Description of Capital Stock - Registration Rights" for more
information about registration rights in our shares of stock.
LOCK-UP AGREEMENTS
In connection with our initial public offering, all officers and directors
and certain holders of common stock, options and warrants to purchase common
stock 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 warrants or other
rights to purchase common stock for a period ending March 28, 2000 without the
prior written consent of Morgan Stanley & Co. Incorporated. In addition, in
connection with this offering, our officers and directors and the selling
shareholders have agreed pursuant to 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 warrants or
other rights to purchase common stock for a period ending 90 days from the date
of this prospectus.
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UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation,
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC, and
Salomon Smith Barney Inc. are acting as representatives, have severally agreed
to purchase, and we and the selling shareholders have agreed to sell to them an
aggregate of 7,500,000 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.......................................
Salomon Smith Barney Inc....................................
----------
Total................................................... 7,500,000
==========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and the selling shareholders and subject to prior sale. The
shares of common stock will be sold by the underwriters at a price established
by the pricing committee of our board of directors. The underwriting agreement
provides that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock offered by this prospectus 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 of the
underwriters.
Pursuant to the underwriting agreement, we and the selling shareholders have
granted to the underwriters an option, exercisable for 30 days from the date of
this prospectus, to purchase up to an aggregate of 1,125,000 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
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price to the public would be $ , the total underwriters' discounts and
commissions would be $ and the total net proceeds to us would be $ .
We, our executive officers, directors and the selling shareholders have
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, each of us will not, during the
period ending 90 days from the date of this prospectus:
- 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
whether 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 of shares to the underwriters of the shares of common stock under
the underwriting agreement;
- transactions by any person other than InterNAP relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares of common stock;
- transfers of any shares of the common stock by an individual 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
a member or members of his or her immediate family; or
- transfers by a corporation or a partnership of shares of common stock as a
distribution to partners or shareholders of the corporation or
partnership.
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 12.6% of the common stock (12.5% 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."
From time to time, certain of the underwriters have provided, and may
continue to provide, investment banking services to us.
We, the selling shareholders and the underwriters have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act.
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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 92,592
shares of our common stock. Certain legal matters will be passed upon for the
underwriters by Morrison & Foerster LLP, San Francisco, California.
EXPERTS
The financial statements of InterNAP Network Services Corporation as of
December 31, 1998 and 1999, and for each of the three years in the period ended
December 31, 1999, 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.
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.
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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>
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, 1998 and 1999 and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Seattle, Washington
January 22, 2000
F-2
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 275 $155,184
Short-term investments.................................... -- 50,168
Accounts receivable, net of allowance of $65, and $206,
respectively............................................ 766 4,084
Prepaid expenses and other assets......................... 280 1,144
------- --------
Total current assets.................................. 1,321 210,580
Property and equipment, net................................. 5,828 28,811
Patents and trademarks, net................................. 48 142
Investments................................................. -- 5,050
Deposits and other assets, net.............................. 290 963
------- --------
Total assets.......................................... $ 7,487 $245,546
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 2,603 $ 7,278
Accrued liabilities....................................... 713 4,209
Deferred revenue.......................................... 284 22
Note payable, current portion............................. -- 1,021
Line of credit............................................ 650 1,525
Capital lease obligations, current portion................ 1,331 6,613
------- --------
Total current liabilities............................. 5,581 20,668
Note payable, less current portion.......................... -- 2,861
Capital lease obligations, less current portion............. 2,342 11,517
------- --------
Total liabilities..................................... 7,923 35,046
------- --------
Commitments and contingencies
Shareholders' equity (deficit):
Convertible preferred stock, $.001 par value, authorized
100,139 and 10,000 shares, respectively; 39,291 and no
shares issued and outstanding, respectively; aggregate
liquidation preference of $8,466 and $0, respectively... 39 --
Common stock, $.001 par value, authorized 100,000 and
500,000 shares, respectively; 6,673, and 132,089 shares
issued and outstanding, respectively.................... 7 132
Additional paid-in capital................................ 9,553 287,054
Deferred stock compensation............................... (494) (17,228)
Accumulated deficit....................................... (9,541) (59,458)
------- --------
Total shareholders' equity (deficit).................. (436) 210,500
------- --------
Total liabilities and shareholders' equity
(deficit)......................................... $ 7,487 $245,546
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... $ 1,045 $ 1,957 $ 12,520
------- ------- --------
Costs and expenses:
Cost of network and customer support...................... 1,092 3,216 27,412
Product development....................................... 389 754 3,919
Sales and marketing....................................... 261 2,822 17,523
General and administrative................................ 713 1,910 8,328
Amortization of deferred stock compensation............... -- 205 7,569
------- ------- --------
Total operating costs and expenses.................... 2,455 8,907 64,751
------- ------- --------
Loss from operations...................................... (1,410) (6,950) (52,231)
Other income (expense):
Interest income........................................... 36 169 3,388
Interest and financing expense............................ (235) (90) (1,074)
Loss on disposal of assets................................ -- (102) --
------- ------- --------
Net loss.............................................. $(1,609) $(6,973) $(49,917)
======= ======= ========
Basic and diluted net loss per share........................ $ (.24) $ (1.04) $ (1.31)
======= ======= ========
Weighted average shares used in computing basic and diluted
net loss per share........................................ 6,666 6,673 37,994
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FROM JANUARY 1, 1997 TO DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
CLASS A AND PREFERRED COMMON
B UNIT STOCK STOCK
------------------- ------------------- ------------------- ADDITIONAL
PAR PAR PAR PAID-IN
UNITS VALUE SHARES VALUE SHARES VALUE CAPITAL
-------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997................... 12,000 $12 -- $-- -- $ -- $ 990
Exchange of Class A Units for common stock
at an exchange ratio of 1:1.667........... (4,000) (4) -- -- 6,666 7 (3)
Exchange of Class B Units for Series A
preferred stock at an exchange ratio of
1:1.667................................... (8,000) (8) 13,333 13 -- -- (5)
Convertible notes payable and accrued
interest converted to Series B preferred
stock..................................... -- -- 1,855 2 -- -- 555
Value ascribed to bridge financing
warrants.................................. -- -- -- -- -- -- 124
Issuance of Series B preferred stock, net of
issuance costs of $47..................... -- -- 19,203 19 -- -- 5,695
Net loss.................................... -- -- -- -- -- -- --
------ --- ------- --- ------- ---- --------
Balances, December 31, 1997................. -- -- 34,391 34 6,666 7 7,356
Issuance of Series B preferred stock, net of
issuance costs of $21..................... -- -- 4,667 4 -- -- 1,374
Issuance of common stock to an employee..... -- -- -- -- 7 -- 1
Value ascribed to lease financing
warrants.................................. -- -- -- -- -- -- 54
Exercise of warrants to purchase Series B
preferred stock........................... -- -- 233 1 -- -- 69
Deferred compensation related to grants of
stock options............................. -- -- -- -- -- -- 699
Amortization of deferred stock
compensation.............................. -- -- -- -- -- -- --
Net Loss.................................... -- -- -- -- -- -- --
------ --- ------- --- ------- ---- --------
Balances, December 31, 1998................. -- -- 39,291 39 6,673 7 9,553
Issuances of Series C preferred stock, net
of issuance costs of $85.................. -- -- 59,260 60 -- -- 31,850
Issuance of common stock, net of issuance
costs of $17,866.......................... -- -- -- -- 24,000 24 220,616
Exercise of warrants to purchase Series B
preferred stock........................... -- -- 402 -- -- -- 120
Exercise of employee stock options.......... -- -- -- -- 2,065 2 76
Deferred compensation related to grants of
stock options............................. -- -- -- -- -- -- 24,303
Amortization of deferred stock
compensation.............................. -- -- -- -- -- -- --
Value ascribed to standby credit facility
warrants.................................. -- -- -- -- -- -- 536
Conversion of preferred stock to common
stock..................................... -- -- (98,953) (99) 98,953 99 --
Cashless exercise of warrants to purchase
common stock.............................. -- -- -- -- 398 -- --
Net loss.................................... -- -- -- -- -- -- --
------ --- ------- --- ------- ---- --------
Balances, December 31, 1999................. -- $-- -- $-- 132,089 $132 $287,054
====== === ======= === ======= ==== ========
<CAPTION>
DEFERRED
STOCK ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------- ------------ --------
<S> <C> <C> <C>
Balances, January 1, 1997................... $ -- $ (959) $ 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) (1,609)
-------- -------- --------
Balances, December 31, 1997................. -- (2,568) 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............................. (699) -- --
Amortization of deferred stock
compensation.............................. 205 -- 205
Net Loss.................................... -- (6,973) (6,973)
-------- -------- --------
Balances, December 31, 1998................. (494) (9,541) (436)
Issuances of Series C preferred stock, net
of issuance costs of $85.................. -- -- 31,910
Issuance of common stock, net of issuance
costs of $17,866.......................... -- -- 220,640
Exercise of warrants to purchase Series B
preferred stock........................... -- -- 120
Exercise of employee stock options.......... -- -- 78
Deferred compensation related to grants of
stock options............................. (24,303) -- --
Amortization of deferred stock
compensation.............................. 7,569 -- 7,569
Value ascribed to standby credit facility
warrants.................................. -- -- 536
Conversion of preferred stock to common
stock..................................... -- -- --
Cashless exercise of warrants to purchase
common stock.............................. -- -- --
Net loss.................................... -- (49,917) (49,917)
-------- -------- --------
Balances, December 31, 1999................. $(17,228) $(59,458) $210,500
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,609) $(6,973) $(49,917)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 297 725 4,808
Loss on disposal of assets.............................. -- 102 --
Non-cash interest and financing expense................. 146 7 553
Provision for doubtful accounts......................... 27 140 212
Non-cash compensation expense........................... -- 205 7,569
Changes in operating assets and liabilities:
Accounts receivable..................................... (224) (678) (3,531)
Prepaid expenses and other assets....................... 38 (391) (1,762)
Accounts payable........................................ 82 721 6,016
Deferred revenue........................................ 84 200 (262)
Accrued liabilities..................................... 37 619 2,496
------- ------- --------
Net cash used in operating activities................. (1,122) (5,323) (33,818)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (93) (794) (12,905)
Deposits on property and equipment........................ -- (58) --
Purchase of investments................................... -- -- (65,214)
Redemption of investments................................. -- -- 9,995
Payments for patents and trademarks....................... (48) (3) 104
------- ------- --------
Net cash used in investing activities................. (141) (855) (68,020)
------- ------- --------
Cash flows from financing activities:
Proceeds from shareholder loan and line of credit......... 180 -- 1,100
Repayment of shareholder loan and line of credit.......... (180) -- (1,100)
Issuance of notes payable................................. -- -- 4,237
Principal payments on note payable........................ (34) (34) (355)
Net increase (decrease) in line of credit................. -- 650 875
Payments on capital lease obligations..................... (327) (534) (2,186)
Proceeds from equipment leaseback financing............... -- 153 428
Proceeds from exercise of stock options................... -- -- 78
Proceeds from issuance of convertible notes payable....... 660 -- --
Principal payments on convertible note payable............ (125) -- --
Proceeds from issuance of and exercise of warrants to
purchase preferred stock, net of issuance costs......... 5,714 1,448 32,030
Proceeds from issuance of common stock, net of issuance
costs................................................... -- -- 221,640
------- ------- --------
Net cash provided by financing activities............. 5,888 1,683 256,747
------- ------- --------
Net increase (decrease) in cash and cash equivalents........ 4,625 (4,495) 154,909
Cash and cash equivalents at beginning of period............ 145 4,770 275
------- ------- --------
Cash and cash equivalents at end of period.................. $ 4,770 $ 275 $155,184
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized........ $ 103 $ 82 $ 413
======= ======= ========
Purchase of property and equipment financed with capital
leases.................................................. $ 260 $ 3,606 $ 15,857
======= ======= ========
Purchase of property and equipment included in accounts
payable................................................. $ -- $ 1,537 $ 196
======= ======= ========
Conversion of convertible notes to Series B preferred
stock................................................... $ 535 $ -- $ --
======= ======= ========
Conversion of preferred stock to common stock............. $ -- $ -- $ 99
======= ======= ========
Value ascribed to warrants................................ $ 124 $ 54 $ 536
======= ======= ========
Accrued private placement fee............................. $ -- $ -- $ 1,000
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
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 amended in January and October 1999 to change the amount of
authorized common and preferred stock. In December 1999, the Company
incorporated a wholly-owned subsidiary in the United Kingdom, InterNAP Network
Services U.K. Limited, however there was no activity in the subsidiary through
December 31, 1999. In December 1999, a 100% stock dividend was declared on the
Company's common stock to be paid in January 2000. Accordingly, the number of
shares disclosed in the financial statements and related notes have been
adjusted to reflect the latest amendment and stock dividend 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 facilities ("P-NAP
facilities") 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.
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, 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 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). 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
investments are based on quoted market prices. The carrying value of those
investments approximates their fair value. At December 31, 1999, investments
consisted of commercial paper and government securities.
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.
F-7
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
The Company had no customers representing over 10% of its 1999 revenues or
10% of its accounts receivable at December 31, 1999. The Company had two
significant customers representing approximately 13.6% and 9.6% of 1998 revenues
and 9.9% and 11.0% of accounts receivable at December 31, 1998. 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. During 1997, the Company had a significant customer
representing 18.1% of revenues. In addition, a significant customer that
represented 20.8% of 1997 revenues 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.
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 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 or investments.
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 three to seven 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 facility, 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-NAP facilities
when the P-NAP facilities require an extended period of time to ready them for
their intended use. During 1998 and 1999, the Company capitalized approximately
$78,000 and $177,000 of labor costs and $34,000 and $108,000 of interest costs,
respectively, related to the construction of several P-NAP facilities. 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.
F-8
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 and 1999,
the Company capitalized approximately $76,000 and $230,000 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. At December 31, 1998 and 1999, $47,797
and $142,154 of capitalized patent and trademark costs, net of accumulated
amortization of $3,698 and $9,872, are included in the Company's financial
statements.
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 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. The value
ascribed to the warrants is based on the Black-Scholes option pricing model. The
portion of the proceeds allocated to the warrants 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 and 1999,
$46,934 and $29,469 of deferred financing costs, net of accumulated amortization
of $7,525 and $24,990, are included in deposits and other assets, net.
F-9
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 first day of each month
either on a usage or a flat-rate basis. The usage based billing relates to the
month prior to the month in which the billing occurs, whereas certain flat rate
billings relate to the month in which the billing occurs. 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 which for the years ended December 31, 1997, 1998 and 1999
amounted to approximately $389,000, $708,000 and $3,079,000, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as they are incurred. Advertising
expense for 1997, 1998 and 1999 was $16,000, $63,000 and $1,790,000,
respectively.
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. The Company has excluded all outstanding 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-10
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss....................................... $ (1,609) $ (6,973) $(49,917)
-------- -------- --------
Basic and diluted:
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share................. 6,666 6,673 37,994
-------- -------- --------
Basic and diluted net loss per share......... $ (.24) $ (1.04) $ (1.31)
======== ======== ========
Antidilutive securities not included in
diluted net loss per share calculation:
Convertible preferred stock................ 34,391 39,291 --
Options to purchase common stock........... -- 6,823 15,441
Warrants to purchase common and Series B
preferred stock.......................... 1,572 1,588 1,924
Unvested shares of common stock subject to
repurchase............................... -- -- 54
-------- -------- --------
35,963 47,702 17,419
======== ======== ========
</TABLE>
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.
F-11
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the impact of
SAB 101 would have no material effect on the financial position or results of
operations of the Company.
2. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Network equipment.......................................... $1,150 $ 4,665
Network equipment under capital lease...................... 4,465 20,095
Furniture, equipment and software.......................... 424 6,717
Furniture, equipment and software under capital lease...... 142 1,164
Leasehold improvements..................................... 688 2,009
------ -------
6,869 34,650
Less: Accumulated depreciation and amortization ($952 and
$4,851 related to capital leases at December 31, 1998 and
1999, respectively)...................................... (1,041) (5,839)
------ -------
Property and equipment, net................................ $5,828 $28,811
====== =======
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1997,
1998 and 1999 amounted to $297,000, $721,000 and $4,798,000, 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,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Compensation payable........................................ $567 $2,729
Taxes payable............................................... 95 49
Private placement fee....................................... -- 1,000
Other....................................................... 51 431
---- ------
$713 $4,209
==== ======
</TABLE>
4. FINANCING ARRANGEMENTS:
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
F-12
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. FINANCING ARRANGEMENTS: (CONTINUED)
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 1,571,158 shares of Series B preferred stock
at a price of $.30 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.
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.
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 was collateralized by
the assets of the Company and interest was payable at prime plus 1%. The Line
required interest only payments monthly and matured in May 1999. At
December 31, 1998, the Company had $650,000 outstanding on the Line.
During July 1999, the Company amended the 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 1.0% (9.5% at December 31, 1999)
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. During 1999,
the Company refinanced $650,000 outstanding under the New Line and borrowed an
additional $875,000 under the New Line during 1999.
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.
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 7.5% plus an index rate based on
the yield of 4-year U.S. Treasury Notes (13.7% at December 31, 1999). Loans
under the $1,500,000 sublimit require monthly principal and interest payments
over a term of 36 months. This
F-13
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. FINANCING ARRANGEMENTS: (CONTINUED)
facility bears interest at 7.9% plus an index rate based on the yield of 3-year
U.S. Treasury Notes (14.0% at December 31, 1999). Borrowings under each sublimit
must be prior to May 1, 2000. During 1999, the Company borrowed approximately
$3,882,000, net of principal repayments of $355,000, pursuant to this
arrangement. Amounts borrowed are collateralized by the property and equipment
purchased and require monthly payments of principle and interest.
On September 23, 1999, the Company signed a standby loan facility agreement
with seven shareholders that matured upon closing of the Company's initial
public offering. This facility allowed the Company to draw up to $10,000,000
prior to the earlier of maturity or December 31, 1999, with interest at prime
plus 2% and principal and interest due on the earlier of six months from the
first draw or maturity. The Company did not draw any amounts on the standby
credit facility. In connection with the standby credit facility, the Company
issued warrants to purchase 200,000 shares of common stock with exercise prices
of $10.00 per share. The estimated fair value ascribed to the warrants was
$536,000 based upon the Black-Scholes option pricing model, and has been
reflected as interest expense for the year ended December 31, 1999.
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, 1999 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
2000........................................................ $ 7,435
2001........................................................ 7,072
2002........................................................ 4,771
2003........................................................ 44
-------
Total minimum lease payments.......................... 19,322
Less: amount representing interest.......................... (1,192)
-------
Present value of minimum lease payments..................... 18,130
Less: current portion....................................... (6,613)
-------
Capital lease obligations, less current portion............. $11,517
=======
</TABLE>
In November 1999, the Company amended an existing lease credit facility with
a vendor which increased the available line by $17,500,000 through
November 2000. Approximately $11,000,000 was available under this facility at
December 31, 1999.
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.
F-14
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES: (CONTINUED)
As of December 31, 1999, the Company has net operating loss carryforwards of
approximately $50,300,000, expiring through 2019. 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,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards......................... $ 2,680 $ 19,117
Allowance for doubtful accounts.......................... 24 78
Accrued compensation..................................... -- 402
Other.................................................... -- 4
------- --------
2,704 19,601
Deferred income tax liabilities:
Property and equipment................................... (58) (775)
------- --------
2,646 18,826
Valuation allowance...................................... (2,646) (18,826)
------- --------
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, net of the federal tax benefit, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal income tax benefit at statutory rates......... (34%) (34%) (34%)
State income tax benefit at statutory rates........... (3%) (4%)
Non-taxable LLC losses................................ 25% -- --
Change in valuation allowance......................... 9% 37% 38%
---- ---- ----
Effective tax rate.................................... --% --% --%
==== ==== ====
</TABLE>
F-15
<PAGE>
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. Effective January 1, 2000, the
Company began matching 50% of employee contributions, up to a maximum of 6% of
each employee's gross wages.
8. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company has entered into leasing arrangements relating to office space
and P-NAP facility rental space which are classified as operating. Future
minimum lease payments on non-cancelable operating leases are as follows at
December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
2000........................................................ $ 4,038
2001........................................................ 4,172
2002........................................................ 3,855
2003........................................................ 3,199
2004........................................................ 874
Thereafter.................................................. 878
-------
$17,016
=======
</TABLE>
Rent expense was approximately, $111,000, $571,000 and $3,381,000 for the
years ended December 31, 1997, 1998 and 1999, respectively.
SERVICE COMMITMENTS
The Company has entered into service commitment contracts with backbone
service providers to provide interconnection services. Minimum payments under
these service commitments are as follows at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
2000........................................................ $ 3,300
2001........................................................ 12,880
2002........................................................ 9,868
-------
$26,048
=======
</TABLE>
9. SHAREHOLDERS' EQUITY (DEFICIT):
In January and October 1999, the articles of incorporation were amended to
change the authorized amount of common and preferred stock. In December 1999, a
100% share dividend was declared on the Company's common stock to be distributed
in January 2000. Accordingly, the disclosures in the financial
F-16
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)
statements and related notes have been adjusted to reflect the October 1999
amendment to the Articles of Incorporation and the stock dividend for all
periods presented.
CONVERTIBLE PREFERRED STOCK
At December 31, 1998, preferred stock consisted of the following (in
thousands):
<TABLE>
<CAPTION>
ADDITIONAL COMMON STOCK
SHARES ISSUED AND PAID-IN CAPITAL RESERVED FOR LIQUIDATION
SERIES DESIGNATED OUTSTANDING PAR VALUE (NET) CONVERSION PREFERENCE
- ------ ---------- ----------- --------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
A 13,333 13,333 $13 $ 987 13,333 $ 680
B 27,546 25,958 26 7,693 25,958 7,786
C 59,260 -- -- -- -- --
------- ------ --- ------ ------ ------
100,139 39,291 $39 $8,680 39,291 $8,466
======= ====== === ====== ====== ======
</TABLE>
In February 1999, the Company sold 59,259,260 shares of Series C preferred
stock at a price of $.54 per share, resulting in gross proceeds of approximately
$32,000,000, prior to deducting issuance costs. In addition, during 1999 several
warrant holders exercised warrants to purchase 402,008 shares of Series B
preferred stock, resulting in net proceeds to the Company of $120,303. Upon the
closing of the Company's initial public offering on October 4, 1999, all shares
of preferred stock outstanding converted into 98,953,050 shares of common stock.
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 to the Articles of Incorporation in
January 1999, the number of shares authorized for preferred stock was increased
to 100,139,230 shares. As a result of the amendment to the Articles of
Incorporation in October 1999, the number of shares authorized for preferred
stock was decreased to 10,000,000.
COMMON STOCK
As a result of the January 1999 amendment, the number of shares of common
stock authorized was increased to 100,000,000 from 70,000,000. In July 1999, the
Board of Directors increased the authorized shares of common stock to
300,000,000 and, in October 1999 upon the closing of the Company's initial
public offering, the authorized shares of common stock were increased to
500,000,000 shares.
On September 29, 1999, the Company sold 19,000,000 shares of its common
stock in an initial public offering at a price of $10.00 per share for net
proceeds of $176,700,000. On October 1, 1999, the underwriters exercised their
over-allotment option, resulting in the sale of an additional 2,850,000 shares
of common stock at $10.00 per share for additional net proceeds of $26,505,000.
Concurrent with the closing of its initial public offering, the Company sold
2,150,537 shares of common stock to Inktomi Corporation for $9.30 per share,
resulting in proceeds of $19,000,000, net of a private placement fee of
$1,000,000. In conjunction with this investment, the Company issued a warrant to
purchase 1,075,268 shares of common stock at an exercise price of $13.95 per
share. The warrant has a two-year term and includes demand and piggyback
registration rights. The agreement also prohibits Inktomi from acquiring
additional shares of the Company's common stock for a period of two years. The
F-17
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)
Company intends to complete a joint technical and marketing agreement with
Inktomi. On November 24, 1999, Inktomi exercised 50% of these warrants through a
cashless exercise, resulting in the issuance of 397,250 shares of common stock
to Inktomi.
CLASS A AND B UNITS
During 1996, conducting business as an LLC, the Company issued 4,000,000
Class A units to its founding members upon incorporation and subsequently sold
8,000,000 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 AND COMMON STOCK
During 1997, the Company issued warrants to purchase up to 1,571,518 shares
of Series B preferred stock at $.30 per share in conjunction with its bridge
financing. During 1998, the Company issued warrants to purchase up to 250,002
shares of Series B preferred stock at $.30 per share in connection with various
lease financings. The warrants to purchase Series B preferred stock converted to
warrants to purchase common stock upon the closing of the Company's initial
public offering. Outstanding warrants to purchase shares of common stock at
December 31, 1999, including the warrants issued to Inktomi and in connection
with the standby loan agreements, are as follows (shares in thousands):
<TABLE>
<CAPTION>
YEAR OF EXERCISE
EXPIRATION PRICE SHARES
- ---------- -------- --------
<S> <C> <C>
2001........................................................ $13.95 538
2002........................................................ .30 936
2004........................................................ 10.00 200
2008........................................................ .30 250
-----
1,924
=====
</TABLE>
10. STOCK OPTION PLANS:
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 8,070,000 and were increased to
10,070,000 in January 1999.
During June 1999, the Company's Board of Directors adopted the 1999 Equity
Incentive Plan (the "1999 Plan") which provides for the issuance of incentive
stock options ("ISOs") and nonqualified stock options to eligible individuals
responsible for the management, growth and financial success of the Company. As
of December 31, 1999, 13,000,000 shares of common stock have been reserved for
the 1999 Plan. The terms of the 1999 Plan are the same as the 1998 Plan with
respect to ISO treatment and vesting. During the year ended December 31, 1999,
the Company granted an additional 2,937,000 options under the 1998 Plan and
7,677,500 options under the 1999 Plan. As of December 31, 1999, 7,345,442 and
7,615,500 options were outstanding under the 1998 Plan and 1999 Plan,
respectively, net of exercises and cancellations.
F-18
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS: (CONTINUED)
During July 1999, the Company adopted the 1999 Non-Employee Director's 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 1,000,000
shares of the Company's common stock have been reserved for issuance under the
Director Plan. Under the terms of the Director Plan, 480,000 fully vested
options were granted to existing directors on the effective date of the
Company's initial public offering with an exercise price of $10.00 per share,
all of which remained outstanding at December 31, 1999. Subsequent to the
Company's initial public offering, initial grants, which are fully vested as of
the date of the grant, of 80,000 shares of the Company's common stock are to be
made under the Director Plan to all non-employee directors 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 20,000 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.
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 and 1999 under all of the Company's stock option
plans is as follows (there was no activity in 1997) (shares in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
-------- --------------
<S> <C> <C>
Granted................................................ 6,823 $ .05
Exercised.............................................. -- --
Canceled............................................... -- --
------
Balance, December 31, 1998............................. 6,823 $ .05
Granted................................................ 11,095 $5.59
Exercised.............................................. (2,065) $ .04
Cancelled.............................................. (412) $3.92
------
Balance, December 31, 1999............................. 15,441 $3.93
======
</TABLE>
Options granted during 1998 include 800,000 non-qualified options granted to
members of the Board of Directors ("Directors' Options") which are immediately
exercisable, and upon exercise, are subject to
F-19
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS: (CONTINUED)
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, 1999:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING (EXCLUDING OPTIONS WHICH SHARES
- ---------------------------------------------------- WOULD BE SUBJECT TO THE
WEIGHTED COMPANY'S RIGHT OF REPURCHASE)
AVERAGE -------------------------------
REMAINING WEIGHTED
NUMBER OF CONTRACTUAL LIFE NUMBER OF AVERAGE
EXERCISE PRICES SHARES (IN YEARS) SHARES EXERCISE PRICES
- --------------- ---------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
$.03--$.03 2,076,068 8.49 437,794 $ .03
$.08--$.08 2,542,374 8.85 515,189 $ .08
$.22--$.22 690,000 9.10 30,000 $ .22
$.40--$.40 2,037,000 9.24 7,500 $ .40
$2.00--$2.00 3,440,000 9.41 -- --
$2.50--$4.00 2,188,000 9.59 1,875 $ 4.00
$5.00--$10.00 1,865,000 9.73 480,000 $10.00
$28.75--$28.75 104,000 9.76 -- --
$44.00--$44.00 212,000 9.84 -- --
$70.06--$70.06 286,500 9.94 140,000 $70.06
---------- ---------
$.03--$70.06 15,440,942 9.24 1,612,358 $ 9.10
========== =========
</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 and in 1999 prior to the Company's initial public offering 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% and 6.75%; volatility of 0%
and 0%; and an expected life of 6 and 5 years, respectively. The fair value of
options granted in 1999 subsequent to the Company's initial public offering was
estimated at the date of grant using the Black-Scholes option pricing model
assuming no expected dividends and the following weighted average assumptions:
risk free interest rate of 6.75%; volatility of 80%; and an expected life of
5 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 years ended December 31, 1998 and 1999 would
have been approximately $6,985,000 and $60,372,000 and $1.05 and $1.59,
respectively.
During 1998 and 1999, options to purchase 6,823,498 and 9,854,000 shares of
the Company's common stock, with a weighted-average exercise price of $.05 and
$3.09 per share and a weighted-average option fair value of $.12 and $3.69 per
share, were granted, respectively, with an exercise price below the estimated
market value at the date of grant.
F-20
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS: (CONTINUED)
DEFERRED STOCK COMPENSATION
During 1998, the Company issued stock options to certain employees under the
1998 and 1999 Plans 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, 1999, the Company has recorded
deferred stock compensation related to these options in the total amount of
$25,002,000, of which $205,000 and $7,569,000 has been amortized to expense
during 1998 and 1999, respectively. The weighted average exercise price of the
6,823,498 options granted in 1998 to purchase common stock was $.05 and the
weighted average fair value per share was $.15 during 1998. The weighted average
exercise price of the 11,094,500 options granted in 1999 to purchase common
stock was $5.59 and the weighted average fair value per share was $7.78.
EMPLOYEE STOCK PURCHASE PLAN
A total of 3,000,000 shares of common stock have been reserved for issuance
under the Company's 1999 Employee Stock 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 3,000,000 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 the Company through payroll deductions. The purchase plan is
implemented by offering rights to eligible employees. Under the purchase plan,
the Company may specify offerings with a duration of not more than 27 months,
and may specify shorter purchase periods within each offering. The first
offering began on September 29, 1999 and will terminate on June 30, 2001.
Purchase dates occur each December 31 and June 30.
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 is 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 ends automatically on termination of
their employment with the Company or one of its subsidiaries.
F-21
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by InterNAP Network Services
Corporation ("InterNAP") 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........................................ $164,870
NASD filing fee............................................. 30,500
Nasdaq National Market listing fee.......................... 17,500
Printing and engraving costs................................ 200,000
Legal fees and expenses..................................... 200,000
Accounting fees and expenses................................ 90,000
Blue Sky fees and expenses.................................. 2,500
Transfer Agent and Registrar fees........................... 20,000
Miscellaneous expenses...................................... 34,630
--------
Total................................................. $760,000
========
</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 3.1 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 indemnification agreements provide
InterNAP's directors and certain of its officers with indemnification to the
maximum extent permitted by the WBCA.
The Underwriting Agreement (Exhibit 1.1 hereto) 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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, InterNAP has 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 InterNAP believes that each transaction was exempt from the
II-1
<PAGE>
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 InterNAP, through their relationships with InterNAP.
Since January 1, 1997 InterNAP has 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 3,574,360 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 $1,787.00. InterNAP Network Services, L.L.C. was
dissolved on October 27, 1997 and reincorporated in the State of Washington as a
C corporation. These Class A Units were converted into shares of common stock at
an exchange ratio of 1 to 1.667.
On May 1, 1996, we issued 4,000,000 Class B Units in InterNAP Network
Services, L.L.C. to Robert J. Lunday, Jr., one of our directors, 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 4,000,000 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 25,725,116 shares of Series B preferred stock to 36 investors,
including H&Q InterNAP Investors, L.P., TI Ventures, L.P. and Vulcan Ventures
Incorporated, three of our principal shareholders, at an aggregate purchase
price of $7,717,534 or $.30 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 443,276
shares of Series B preferred stock.
On January 28, 1999 and February 26, 1999, we sold an aggregate of
59,259,260 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, L.P. and Vulcan Ventures Incorporated, five of our principal
shareholders, at an aggregate purchase price of $32,000,000 or $.54 per share.
From May 1, 1996 to December 1998, we issued warrants to 12 private
investors to purchase an aggregate of 1,588,184 shares of Series B preferred
stock at a weighted average exercise price of $.30.
In May and September 1998, we issued warrants to First Portland Corporation
and Phoenix Leasing Incorporated, to purchase an aggregate of 233,336 shares of
Series B preferred stock at a weighted average exercise price of $.30.
From July 22, 1998, the date of the first issuance of options under our 1998
Stock Option Plan, through December 31, 1999, we granted stock options to
purchase an aggregate of 9,760,498 shares of common stock, with exercise prices
ranging from $.03 to $.40 per share, to employees and directors pursuant to our
1998 Stock Option Plan. Of these options, options for an aggregate of
2,065,000 shares have been exercised, options for an aggregate of
1,672,357 shares are exercisable, options for an aggregate of 350,056 shares
have been cancelled and options for an aggregate of 7,345,442 shares remain
outstanding. Pursuant to our 1999 Equity Incentive Plan, as of December 31, 1999
we have granted stock options to purchase 7,707,500 shares of our common stock,
with exercise prices ranging from $2.00 to $70.0625 per share to employees,
consultants and directors of which 62,000 have been cancelled and 1,875 are
exercisable and options for an aggregate of 7,645,500 remain outstanding.
II-2
<PAGE>
On September 23, 1999, we issued warrants to seven shareholders, including a
director of the Company, to purchase an aggregate of 200,000 shares of common
stock with an exercise price equal to $10.00 per share.
On October 4, 1999, we sold an aggregate of 2,150,538 shares of common stock
in a private placement to Inktomi Corp, at an aggregate purchase price of
$20,000,000, or $9.30 per share. We also issued to Inktomi a warrant to purchase
1,075,268 additional shares of our common stock at an exercise price of $13.95
per share. The warrant has a two year term and includes demand and piggyback
registration rights. The agreement also prohibits Inktomi from acquiring
additional shares of our stock for a period of two years.
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.
3.2 Bylaws of InterNAP.
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 Employee Stock Purchase Plan.
10.4* 1999 Employee Stock Purchase Plan.
10.5* 1999 Stock Option/Stock Issuance Plan.
10.6* Form of 1998 Stock Option Agreement.
10.7 Amended 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.
10.10 Lease Agreement, dated June 1, 1996, between Registrant and
Sixth & Virginia Properties, as amended by Lease
Modification No. 1, dated May 1, 1998, as amended by Lease
Modification No. 2 dated September 1, 1998, as amended by
Lease Modification No. 3, dated December 20, 1999.
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 Kingsbrook.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
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
October 4, 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 Letter Agreement dated September 7, 1999 between Richard R.
Cotton and the Company.
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.
10.28 Warrant, dated December 22, 1999, issued to S.L. Partners,
Inc.
10.29 Form of Warrant issued to Paul Canniff, David Cornfield,
Robert J. Lunday, Jr., Dan Newell, Richard Saada, Robert D.
Shurtleff, Jr. and Todd Warren.
21.1 List of Subsidiaries.
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>
- ------------------------
* Incorporated by reference to Registration Statement on Form S-1, File
No. 333-84035
II-4
<PAGE>
(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.
</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 referred 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 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
of 1933, 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.
We hereby undertake that, for purposes of determining any liability under
the Securities Act of 1933, each filing of our annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement 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.
We hereby undertake to deliver or cause to be delivered with the prospectus,
to each person to whom the prospectus is sent or given, the latest annual
report, to security holders that is incorporated by reference in the prospectus
and furnished pursuant to and meeting the requirements of Rule 14a-3 or
Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim
financial information required to be presented by Article 3 of Regulation S-X is
not set forth in the prospectus, to deliver, or cause to be delivered to each
person to whom the prospectus is sent or given, the latest quarterly report that
is specifically incorporated by reference in the prospectus to provide such
interim financial information.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
InterNAP Network Services Corporation has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereinto duly
authorized, in the City of Seattle, State of Washington, on the 26th day of
January, 2000.
<TABLE>
<S> <C> <C>
INTERNAP NETWORK SERVICES CORPORATION
By: /s/ ANTHONY C. NAUGHTIN
-----------------------------------------
Anthony C. Naughtin
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
Each person whose individual signature appears below hereby authorizes and
appoints Anthony C. Naughtin and Paul E. McBride, and each of them, with full
power of substitution and resubstitution and full power to act without the
other, as his true and lawful attorney-in-fact and agent to act in his name,
place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file, any and all
amendments to this registration statement, including any and all post-effective
amendments and amendments thereto and any registration statement relating to the
same offering as this registration statement that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing, ratifying and confirming all that said
attorneys-in-fact and agents or any of them or their or his substitute or
substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ANTHONY C. NAUGHTIN Chief Executive Officer and
------------------------------------------- President (Principal January 26, 2000
Anthony C. Naughtin Executive Officer)
Vice President and Chief
/s/ PAUL E. MCBRIDE Financial Officer
------------------------------------------- (Principal Finance and January 26, 2000
Paul E. McBride Accounting Officer)
/s/ EUGENE EIDENBERG
------------------------------------------- Chairman of the Board January 26, 2000
Eugene Eidenberg
/s/ WILLIAM J. HARDING
------------------------------------------- Director January 26, 2000
William J. Harding
/s/ FREDERIC W. HARMAN
------------------------------------------- Director January 26, 2000
Frederic W. Harman
/s/ ROBERT J. LUNDAY, JR.
------------------------------------------- Director January 26, 2000
Robert J. Lunday, Jr.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ KEVIN L. OBER
------------------------------------------- Director January 26, 2000
Kevin L. Ober
/s/ ROBERT D. SHURTLEFF, JR.
------------------------------------------- Director January 26, 2000
Robert D. Shurtleff, Jr.
</TABLE>
II-7
<PAGE>
SCHEDULE 1.1
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
January 22, 2000 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
January 22, 2000
S-1
<PAGE>
SCHEDULE 1.2
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO CHARGES
BEGINNING OF COSTS AND TO OTHER BALANCE AT END
DESCRIPTION FISCAL PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF 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
Year Ended December 31, 1999
Allowance for doubtful accounts.... 65 212 -- 71 206
Tax valuation allowance............ 2,646 -- 16,180 -- 18,826
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Articles of Incorporation of InterNAP.
3.2 Bylaws of InterNAP.
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 Employee Stock Purchase Plan.
10.4* 1999 Employee Stock Purchase Plan.
10.5* 1999 Stock Option/Stock Issuance Plan.
10.6* Form of 1998 Stock Option Agreement.
10.7 Amended 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.
10.10 Lease Agreement, dated June 1, 1996, between Registrant and
Sixth & Virginia Properties, as amended by Lease
Modification No. 1, dated May 1, 1998, as amended by Lease
Modification No. 2 dated September 1, 1998, as amended by
Lease Modification No. 3, dated December 20, 1999.
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 Kingsbrook.
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
October 4, 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
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 Letter Agreement dated September 7, 1999 between Richard R.
Cotton and the Company.
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.
10.28 Warrant, dated December 22, 1999, issued to S.L. Partners,
Inc.
10.29 Form of Warrant issued to Paul Canniff, David Cornfield,
Robert J. Lunday, Jr., Dan Newell, Richard Saada, Robert D.
Shurtleff, Jr. and Todd Warren.
21.1 List of Subsidiaries.
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>
- ------------------------
* Incorporated by reference to Registration Statement on Form S-1, File
No. 333-84035
<PAGE>
[FORM OF UNDERWRITING AGREEMENT]
____________________, 2000
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Donaldson, Lufkin & Jenrette Securities Corporation
Hambrecht & Quist LLC
Salomon Smith Barney Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
InterNAP Network Services Corporation, a Washington corporation (the
"COMPANY"), proposes to issue and sell to the several Underwriters named in
Schedule II hereto (the "UNDERWRITERS"), and certain shareholders of the Company
(the "SELLING SHAREHOLDERS") named in Schedule I hereto severally propose to
sell to the several Underwriters, an aggregate of [__________] shares of the
Company's common stock, $.001 par value per share (the "FIRM SHARES"), of which
[__________] shares are to be issued and sold by the Company and
[__________] shares are to be sold by the Selling Shareholders, each Selling
Shareholder selling the number of Firm Shares set forth opposite such Selling
Shareholder's name in Schedule I hereto.
Additionally, the Company proposes to issue and sell, and the Selling
Shareholders propose to sell, to the several Underwriters not more than an
additional [__________] shares of the Company's Common Stock, $.001 par value
per share (the "ADDITIONAL SHARES"), if and to the extent that you, as Managers
of the offering, shall have determined to exercise, on behalf of the
Underwriters, the right to purchase such shares of common stock granted to the
Underwriters in Section 3 hereof. Of any such Additional Shares, 40% are to be
issued and sold by the Company and 60% are to be sold by the Selling
Shareholders, each Selling Shareholder selling a number of Additional Shares
that bears the same proportion to the total number of Additional Shares to be
sold, as the number of Firm Shares set forth in Schedule I hereto opposite the
name of such Selling Shareholder bears to the total number of Firm Shares to be
sold. The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "SHARES." The shares of the Company's Common Stock, $.001
par value per share, to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "COMMON STOCK." The
Company and the Selling Shareholders are hereinafter sometimes collectively
referred to as the "SELLERS."
1
<PAGE>
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect; and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
(ii) the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder (the "RULES"); and (iii) the Prospectus does not contain and, as
amended or supplemented, if applicable, will not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph do not apply to statements or omissions in the Registration
Statement or the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(c) The Company has been duly organized, is validly existing as a
corporation under the laws of the State of Washington, has the corporate power
and authority to own its property and to conduct its business as described in
the Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not have
a material adverse effect on the Company [and its subsidiaries, taken as a
whole].
(d) [Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good
2
<PAGE>
standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole; all of the issued shares of capital stock of
each subsidiary of the Company have been duly and validly authorized and issued,
are fully paid and non-assessable and are owned directly by the Company, free
and clear of all liens, encumbrances, equities or claims.]
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock (including the Shares to be sold by
the Selling Shareholders) outstanding prior to the issuance of the Shares that
are to be sold by the Company have been duly authorized and are validly issued,
fully paid and non-assessable.
(h) The Shares to be sold by the Company have been duly authorized
and, when issued and delivered in accordance with the terms of this Agreement,
will be validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene any
provision of applicable law or the articles of incorporation, as amended, or
bylaws, as amended, of the Company or any agreement or other instrument binding
upon the Company [or any of its subsidiaries] that is material to the Company
[and its subsidiaries, taken as a whole], or any judgment, order or decree of
any governmental body, agency or court having jurisdiction over the Company [or
any subsidiary], and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except such
as may be required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares and the clearance of such
offering with the National Association of Securities Dealers, Inc.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company [and its subsidiaries, taken as a whole,] from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement).
(k) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened to which the Company [or any of its
subsidiaries] is a party or to which any of the properties of the Company [or
any of its subsidiaries] is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
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(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) [The Company is not, and after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus will not be, required to register as an "investment company" as
such term is defined in the Investment Company Act of 1940, as amended.]
(n) The Company [and its subsidiaries] (i) is [are] in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) has [have] received all permits,
licenses or other approvals required of it under applicable Environmental Laws
to conduct its business [their respective businesses], and (iii) is [are] in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company [and
its subsidiaries, taken as a whole].
(o) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any permit, license or approval, any related constraints on operating
activities and any potential liabilities to third parties) which would, singly
or in the aggregate, have a material adverse effect on the Company [and its
subsidiaries, taken as a whole].
(p) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such securities
with the Shares registered pursuant to the Registration Statement.
(q) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
(r) The Company has reviewed its operations and the disclosures and
surveys of any third parties with which the Company has a material relationship
to evaluate the extent to which the business or operations of the Company will
be affected by the Year 2000 Problem. As a result of such review, the Company
has no reason to believe, and does not believe, that the Year 2000 Problem will
have a material adverse effect on the Company. The "Year 2000 Problem" as used
herein means any significant risk that the computer hardware or software used in
the receipt, transmission, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical systems of
any kind will not, in the case of dates or time
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periods occurring after December 31, 1999, function at least as effectively as
in the case of dates or time periods occurring prior to January 1, 2000.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each of
the Selling Shareholders represents and warrants to and agrees with each of the
Underwriters that:
(a) This Agreement has been duly authorized, executed and delivered
by or on behalf of such Selling Shareholder.
(b) The execution and delivery by such Selling Shareholder of, and
the performance by such Selling Shareholder of its obligations under, this
Agreement, the Custody Agreement signed by such Selling Shareholder and
[_______________], as Custodian, relating to the deposit of the Shares to be
sold by such Selling Shareholder (the "CUSTODY AGREEMENT") and the Power of
Attorney appointing certain individuals as such Selling Shareholder's
attorneys-in-fact to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement (the "POWER OF ATTORNEY")
will not contravene any provision of applicable law, or the articles of
incorporation or bylaws of such Selling Shareholder (if such Selling Shareholder
is a corporation), or any agreement or other instrument binding upon such
Selling Shareholder or any judgment, order or decree of any governmental body,
agency or court having jurisdiction over such Selling Shareholder, and no
consent, approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by such Selling
Shareholder of its obligations under this Agreement or the Custody Agreement or
Power of Attorney of such Selling Shareholder, except such as may be required by
the securities or Blue Sky laws of the various states in connection with the
offer and sale of the Shares.
(c) Such Selling Shareholder has, and on the Closing Date will have,
valid title to the Shares to be sold by such Selling Shareholder and the legal
right and power, and all authorization and approval required by law, to enter
into this Agreement, the Custody Agreement and the Power of Attorney and to
sell, transfer and deliver the Shares to be sold by such Selling Shareholder.
(d) The Shares to be sold by such Selling Shareholder pursuant to
this Agreement have been duly authorized and are validly issued, fully paid and
non-assessable.
(e) The Custody Agreement and the Power of Attorney have been duly
authorized, executed and delivered by such Selling Shareholder and are valid and
binding agreements of such Selling Shareholder.
(f) Delivery of the Shares to be sold by such Selling Shareholder
pursuant to this Agreement will pass title to such Shares free and clear of any
security interests, claims, liens, equities and other encumbrances.
(g) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
(ii) the Registration Statement and the Prospectus comply and,
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<PAGE>
as amended or supplemented, if applicable, will comply in all material respects
with the Securities Act and the applicable rules and regulations of the
Commission thereunder; and (iii) the Prospectus does not contain and, as amended
or supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in this
paragraph 2(g) do not apply to statements or omissions in the Registration
Statement or the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
3. AGREEMENTS TO SELL AND PURCHASE. Each Seller, severally and not
jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from such Seller at $[_____] a share (the "PURCHASE
PRICE") the number of Firm Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
number of Firm Shares to be sold by such Seller as the number of Firm Shares set
forth in Schedule II hereto opposite the name of such Underwriter bears to the
total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, each Seller agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to
[__________] Additional Shares at the Purchase Price. If you, on behalf of the
Underwriters, elect to exercise such option, you shall so notify the Company in
writing not later than 30 days after the date of this Agreement, which notice
shall specify the number of Additional Shares to be purchased by the
Underwriters and the date on which such shares are to be purchased. Such date
may be the same as the Closing Date (as defined below) but not earlier than the
Closing Date nor later than ten business days after the date of such notice.
Additional Shares may be purchased as provided in Section 5 hereof solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. If any Additional Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased, as the number of Firm Shares set forth in Schedule II
hereto opposite the name of such Underwriter bears to the total number of Firm
Shares to be purchased.
Each Seller hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period ending 90 days after the date of the Prospectus, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase,
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 (ii) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clauses (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to
(A) the Shares to be sold hereunder, (B) the issuance by the Company of shares
of Common Stock upon the exercise
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<PAGE>
of an option or warrant or the conversion of a security outstanding on the date
hereof of which the Underwriters have been advised in writing, (C) any
securities issued, granted or exercised under the Company's employee benefit
plans, or (D) transactions by any person other than the Company relating to
shares of Common Stock or other securities acquired in open market transactions
after the completion of the offering of the Shares. In addition, each Selling
Shareholder, agrees that, without the prior written consent of Morgan Stanley &
Co. Incorporated on behalf of the Underwriters, it will not, during the period
ending 90 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.
4. TERMS OF PUBLIC OFFERING. The Sellers are advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at
$[_____] a share (the "PUBLIC OFFERING PRICE") and to certain dealers selected
by you at a price that represents a concession not in excess of $[_____] a share
under the Public Offering Price, and that any Underwriter may allow, and such
dealers may reallow, a concession, not in excess of $[_____] a share, to any
Underwriter or to certain other dealers.
5. PAYMENT AND DELIVERY. Payment for the Firm Shares to be sold by each
Seller shall be made to such Seller in Federal or other funds immediately
available in New York City against delivery of such Firm Shares for the
respective accounts of the several Underwriters at 10:00 a.m., New York City
time, on [_______________], 2000, or at such other time on the same or such
other date, not later than [_______________], 2000, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to
as the "CLOSING DATE."
Payment for any Additional Shares shall be made to the Company in Federal
or other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at
10:00 a.m., New York City time, on the date specified in the notice described in
Section 3 or at such other time on the same or on such other date, in any event
not later than [_______________], 2000, as shall be designated in writing by
you. The time and date of such payment are hereinafter referred to as the
"OPTION CLOSING DATE."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Sellers to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration
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<PAGE>
Statement shall have become effective not later than [__________] (New York City
time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction of
the possible change, in the rating accorded any of the Company's securities
by any "nationally recognized statistical rating organization," as such
term is defined for purposes of Rule 436(g)(2) under the Securities Act;
and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company [and
its subsidiaries, taken as a whole,] from that set forth in the Prospectus
(exclusive of any amendments or supplements thereto subsequent to the date
of this Agreement) that, in your judgment, is material and adverse and that
makes it, in your judgment, impracticable to market the Shares on the terms
and in the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by the Chief Executive Officer
and Chief Financial Officer of the Company, to the effect set forth in
Section 6(a)(i) above and to the effect that the representations and warranties
of the Company contained in this Agreement are true and correct as of the
Closing Date and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date. The officers signing and delivering
such certificate may rely upon the best of their knowledge as to proceedings
threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Cooley Godward LLP, outside counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Company has been duly organized, is validly existing
as a corporation under the laws of the State of Washington, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
[and its subsidiaries, taken as a whole];
(ii) [each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of the jurisdiction of its
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<PAGE>
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole;]
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iv) the shares of Common Stock (including the Shares to be
sold by the Selling Shareholders) outstanding prior to the issuance of the
Shares to be sold by the Company have been duly authorized and are validly
issued, fully paid and non-assessable;
(v) [all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and issued,
are fully paid and non-assessable and are owned directly by the Company,
free and clear of all liens, encumbrances, equities or claims;]
(vi) the Shares to be sold by the Company have been duly
authorized and, when issued and delivered in accordance with the terms of
this Agreement, will be validly issued, fully paid and non-assessable, and
the issuance of such Shares will not be subject to any preemptive or
similar rights;
(vii) this Agreement has been duly authorized, executed and
delivered by the Company;
(viii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law (other than applicable state
securities and Blue Sky laws, as to which such counsel need not express an
opinion) or the articles of incorporation, as amended, or bylaws, as
amended, of the Company or, to the best of such counsel's knowledge, any
agreement or other instrument binding upon the Company [or any of its
subsidiaries] that is material to the Company [and its subsidiaries, taken
as a whole], or, to the best of such counsel's knowledge, any judgment,
order or decree of any governmental body, agency or court having
jurisdiction over the Company [or any of its subsidiaries], and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company
of its obligations under this Agreement, except such as have been obtained
under the Securities Act and such as may be required by the securities or
Blue Sky laws of the various states in connection with the offer and sale
of the Shares;
(ix) the statements (A) in the Prospectus under the captions
["_______________," "_______________," "Risk Factors --Significant
Shareholders and Current Management Will Control Approximately 52% of Our
Common Stock After this Offering, and These Parties may Have Conflicts of
Interest," "Business --
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Customers," "Management -- Employment Agreements," "-- Incentive Stock
Plans," "-- Limitations on Directors' and Executive Officers' Liability and
Indemnification," "--Future Sales of Our Common Stock by our Existing
Shareholders Could Cause Our Stock Price To Fall," "Certain Transactions,"]
"Description of Capital Stock" and "Underwriters" and (B) in the
Registration Statement in Items 14 and 15, in each case insofar as such
statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein;
(x) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company [or any of its
subsidiaries] is a party or to which any of the properties of the Company
[or any of its subsidiaries] is subject that are required to be described
in the Registration Statement or the Prospectus and are not so described or
of any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement that are not
described or filed as required;
(xi) [the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds thereof
as described in the Prospectus, will not be required to register as an
"investment company" as such term is defined in the Investment Company Act
of 1940, as amended;]
(xii) the Company [and its subsidiaries] (A) is [are] in
compliance with any and all applicable Environmental Laws, (B) has [have]
received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct its business [their respective
businesses], and (C) is [are] in compliance with all terms and conditions
of any such permit, license or approval, except where such noncompliance
with Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals would not, singly or in the aggregate, have
a material adverse effect on the Company [and its subsidiaries, taken as a
whole]; and
(xiii) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and schedules and
other financial and statistical data included therein as to which such
counsel need not express any opinion) comply as to form in all material
respects with the Securities Act and the applicable rules and regulations
of the Commission thereunder, (B) has no reason to believe that (except for
financial statements and schedules and other financial and statistical data
as to which such counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the Registration
Statement became effective contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (C) has no
reason to believe that (except for financial statements and schedules and
other financial and statistical data as to which such counsel need not
express any belief) the Prospectus contains any untrue statement of a
material fact or omits to state a material fact necessary
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in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of [Selling Shareholders' Counsel], counsel for the Selling
Shareholders, dated the Closing Date, to the effect that:
(i) this Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Shareholders;
(ii) the execution and delivery by each Selling Shareholder of,
and the performance by such Selling Shareholder of its obligations under,
this Agreement and the Custody Agreement and Powers of Attorney of such
Selling Shareholder will not contravene any provision of applicable law, or
the articles of incorporation or bylaws of such Selling Shareholder (if
such Selling Shareholder is a corporation), or, to the best of such
counsel's knowledge, any agreement or other instrument binding upon such
Selling Shareholder or, to the best of such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over such Selling Shareholder, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by such Selling Shareholder of its
obligations under this Agreement or the Custody Agreement or Power of
Attorney of such Selling Shareholder, except such as may be required by the
securities or Blue Sky laws of the various states in connection with offer
and sale of the Shares;
(iii) each of the Selling Shareholders has valid title to the
Shares to be sold by such Selling Shareholder and the legal right and
power, and all authorization and approval required by law, to enter into
this Agreement and the Custody Agreement and Power of Attorney of such
Selling Shareholder and to sell, transfer and deliver the Shares to be sold
by such Selling Shareholder;
(iv) the Custody Agreement and the Power of Attorney of each
Selling Shareholder have been duly authorized, executed and delivered by
such Selling Shareholder and are valid and binding agreements of such
Selling Shareholder;
(v) delivery of the Shares to be sold by each Selling
Shareholder pursuant to this Agreement will pass title to such Shares free
and clear of any security interests, claims, liens, equities and other
encumbrances; and
(vi) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and schedules and
other financial and statistical data included therein as to which such
counsel need not express any opinion) comply as to form in all material
respects with the Securities Act and the applicable rules and regulations
of the Commission thereunder, (B) has no reason to believe that (except for
financial statements and schedules and other financial and statistical data
as to which such counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the Registration
Statement became effective contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
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<PAGE>
therein or necessary to make the statements therein not misleading, and
(C) has no reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which such counsel
need not express any belief) the Prospectus contains any untrue statement
of a material fact or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(e) The Underwriters shall have received on the Closing Date an
opinion of Morrison & Foerster LLP, counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in Sections 6(c)(vi), 6(c)(vii),
6(c)(ix) (but only as to the statements in the Prospectus under "Description of
Capital Stock" and "Underwriters") and 6(c)(xiii) above.
With respect to Section 6(c)(xiii) above, Cooley Godward LLP and Morrison &
Foerster LLP and with respect to Section 6(d)(vi) above, [Selling Shareholders'
Counsel], may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification, except as
specified. With respect to subparagraphs (ii), (v), (viii), (x) and (xii) of
Section 6(c) above, as they relate to any subsidiary of the Company, Cooley
Godward LLP may rely upon an opinion or opinions of local counsel for any such
subsidiary; PROVIDED that (A) each such counsel for the subsidiaries is
satisfactory to your counsel, (B) a copy of each opinion so relied upon is
delivered to you and is in form and substance satisfactory to your counsel, and
(C) Cooley Godward LLP shall state in their opinion that they are justified in
relying on each such other opinion. With respect to Section 6(d) above, [Selling
Shareholders' Counsel] may rely upon an opinion or opinions of counsel for any
individual Selling Shareholder and, with respect to factual matters and to the
extent such counsel deems appropriate, upon the representations of each Selling
Shareholder contained herein and in the Custody Agreement and Power of Attorney
of such Selling Shareholder and in other documents and instruments; PROVIDED
that (A) each such counsel for the individual Selling Shareholder is
satisfactory to your counsel, (B) a copy of each opinion so relied upon is
delivered to you and is in form and substance satisfactory to your counsel,
(C) copies of such Custody Agreements and Powers of Attorney and of any such
other documents and instruments shall be delivered to you and shall be in form
and substance satisfactory to your counsel, and (D) [Selling Shareholders'
Counsel] shall state in their opinion that they are justified in relying on each
such other opinion.
The opinions of Cooley Godward LLP described in Section 6(c) above (and any
opinions of local counsel for any subsidiary of the Company referred to in the
immediately preceding paragraph) and of [Selling Shareholders' Counsel]
described in Section 6(d) above (and any opinions of counsel for any Selling
Shareholder referred to in the immediately preceding paragraph) shall be
rendered to the Underwriters at the request of the Company or one or more of the
Selling Shareholders, as the case may be, and shall so state therein.
(f) The Underwriters shall have received, on each of the date hereof
and the Closing Date and the Option Closing, as the case may be, a letter dated
the Closing Date, in form and substance satisfactory to the Underwriters, from
PricewaterhouseCoopers LLP, independent accountants, containing statements and
information of the type ordinarily included in accountants' "comfort letters"
to underwriters with respect to the financial statements and certain
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financial information contained in the Registration Statement and the
Prospectus; PROVIDED that the letter delivered on the Closing Date shall use a
"cut-off" date not earlier than the date hereof.
(g) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and directors
of the Company relating to sales and certain other dispositions of shares of
Common Stock or certain other securities, delivered to you on or before the date
hereof, shall be in full force and effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the delivery to you on the Option Closing Date of such
documents as you may reasonably request with respect to the existence of the
Company, the due authorization and issuance of the Additional Shares and other
matters related to the issuance of the Additional Shares.
7. COVENANTS OF THE COMPANY. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, six signed copies of the
Registration Statement (including exhibits thereto) and for delivery to each
other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) and to furnish to you in New York City, without charge, prior
to 10:00 a.m. New York City time on the business day next succeeding the date of
this Agreement and during the period mentioned in Section 7(c) below, as many
copies of the Prospectus and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to which
you reasonably object, and to file with the Commission within the applicable
period specified in Rule 424(b) under the Securities Act any prospectus required
to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event shall occur or condition exist as a result of
which it is necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if, in the opinion of counsel for
the Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the Commission and
furnish, at its own expense, to the Underwriters and to the dealers (whose names
and addresses you will furnish to the Company) to which Shares may have been
sold by you on behalf of the Underwriters and to any other dealers upon request,
either amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law.
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<PAGE>
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-month
period ending [_______________], 2001 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
8. EXPENSES. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, the Sellers agree to
pay or cause to be paid all expenses incident to the performance of their
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel, the Company's accountants and counsel for the
Selling Shareholders in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified; (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon; (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 7(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum; (iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association of
Securities Dealers, Inc.; (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to listing the Shares on the
Nasdaq National market; (vi) the cost of printing certificates representing the
Shares; (vii) the costs and charges of any transfer agent, registrar or
depositary; (viii) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the marketing of
the offering of the Shares, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and the
cost of any aircraft chartered in connection with the road show; and (ix) all
other costs and expenses incident to the performance of the obligations of the
Company hereunder for which provision is not otherwise made in this Section. It
is understood, however, that except as provided in this Section, Section 9
entitled "Indemnity and Contribution," and the last paragraph of Section 11
below, the Underwriters will pay all of their costs and expenses, including fees
and disbursements of their counsel, stock transfer taxes payable on resale of
any of the Shares by them and any advertising expenses connected with any offers
they may make.
The provisions of this Section shall not supersede or otherwise affect any
agreement that the Sellers may otherwise have for the allocation of such
expenses among themselves.
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<PAGE>
9. INDEMNITY AND CONTRIBUTION.
(a) The Sellers [jointly and] severally agree to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein; PROVIDED, HOWEVER, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities, unless such failure is the result of
noncompliance by the Company with Section 7(a) hereof.
(b) Each Selling Shareholder agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only with reference to information relating to such Selling Shareholder
furnished in writing by or on behalf of such Selling Shareholder expressly for
use in the Registration Statement, any preliminary prospectus, the Prospectus or
any amendments or supplements thereto.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Selling Shareholders, the directors of the
Company, the officers of the Company who sign the Registration Statement and
each person, if any, who controls the Company or any Selling Shareholder within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act from and against any and all losses, claims, damages and
15
<PAGE>
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only with reference to information relating to such Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Sections 9(a) or 9(b), such person (the "INDEMNIFIED PARTY")
shall promptly notify the person against whom such indemnity may be sought (the
"INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (A) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all Underwriters and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, (B) the fees and expenses of
more than one separate firm (in addition to any local counsel) for the Company,
its directors, its officers who sign the Registration Statement and each person,
if any, who controls the Company within the meaning of either such Section, and
(C) the fees and expenses of more than one separate firm (in addition to any
local counsel) for all Selling Shareholders and all persons, if any, who control
any Selling Shareholder within the meaning of either such Section, and that all
such fees and expenses shall be reimbursed as they are incurred. In the case of
any such separate firm for the Underwriters and such control persons of any
Underwriters, such firm shall be designated in writing by Morgan Stanley & Co.
Incorporated. In the case of any such separate firm for the Company, and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company. In the case of any such separate firm for
the Selling Shareholders and such control persons of any Selling Shareholders,
such firm shall be designated in writing by the persons named as
attorneys-in-fact for the Selling Shareholders under the Powers of Attorney.
The indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment. Notwithstanding the foregoing sentence, if at
any time an indemnified party shall have requested an indemnifying
16
<PAGE>
party to reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (1) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (2) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
(e) To the extent the indemnification provided for in Sections 9(a),
9(b) or 9(c) is unavailable to an indemnified party or insufficient in respect
of any losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the indemnifying parties on the one hand and the
indemnified party or parties on the other hand from the offering of the Shares
or (ii) if the allocation provided by clause 9(e)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause 9(e)(i) above but also the relative
fault of the indemnifying parties on the one hand and the indemnified party or
parties on the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand in connection
with the offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by each Seller and the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in the
table on the cover of the Prospectus, bear to the aggregate Public Offering
Price of the Shares. The relative fault of the Sellers on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Sellers or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 9 are several in proportion to the respective number of
Shares they have purchased hereunder, and not joint.
(f) The Sellers and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 9 were determined by PRO
RATA allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 9(e). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 9, no Underwriter shall be required to contribute
17
<PAGE>
any amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 9 are not
exclusive and shall not limit any rights or remedies that may otherwise be
available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this
Section 9 and the representations, warranties and other statements of the
Company and the Selling Shareholders contained in this Agreement shall remain
operative and in full force and effect regardless of (i) any termination of this
Agreement, (ii) any investigation made by or on behalf of any Underwriter or any
person controlling any Underwriter, any Selling Shareholder or any person
controlling any Selling Shareholder, or the Company, its officers or directors
or any person controlling the Company, and (iii) acceptance of and payment for
any of the Shares.
10. TERMINATION. This Agreement shall be subject to termination by notice
given by you to the Company, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date (i) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 10(a)(i) through 10(a)(iv), such event, singly
or together with any other such event, makes it, in your judgment, impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus.
11. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Shares that it
has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule II bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; PROVIDED that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 11 by an amount in excess of one-ninth of
such number of Shares without the
18
<PAGE>
written consent of such Underwriter. If, on the Closing Date, any Underwriter
or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you, the Company and the Selling Shareholders for
the purchase of such Firm Shares are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Shareholders. In any
such case either you or the relevant Sellers shall have the right to postpone
the Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and in the Prospectus or
in any other documents or arrangements may be effected. If, on the Option
Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase
Additional Shares and the aggregate number of Additional Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased, the non-defaulting Underwriters shall have
the option to (i) terminate their obligation hereunder to purchase Additional
Shares or (ii) purchase not less than the number of Additional Shares that such
non-defaulting Underwriters would have been obligated to purchase in the absence
of such default. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of any Seller to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason any Seller shall be unable to perform its obligations under this
Agreement, the Sellers will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
12. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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14. HEADINGS. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
InterNAP Network Services Corporation
By:
----------------------------------------
Name:
Title:
The Selling Shareholders
named in Schedule I hereto, acting severally
By:
----------------------------------------
Name:
Title: Attorney-in-Fact
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Donaldson, Lufkin & Jenrette Securities Corporation
Hambrecht & Quist LLC
Salomon Smith Barney Inc.
Acting severally on behalf of themselves
and the several Underwriters named
in Schedule II hereto.
By: Morgan Stanley & Co. Incorporated
By:
--------------------------------------
Name:
Title:
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<PAGE>
SCHEDULE I
Number of
---------
Selling Shareholder Firm Shares
------------------- -----------
To Be Sold
----------
Total
<PAGE>
SCHEDULE II
Underwriter Number of Firm Shares To
----------- ------------------------
Be Purchased
------------
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Donaldson, Lufkin & Jenrette Securities Corporation
Hambrecht & Quist LLC.
Salomon Smith Barney Inc.
---------
Total
<PAGE>
EXHIBIT A
[FORM OF LOCK-UP LETTER]
_______________, 2000
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Donaldson, Lufkin & Jenrette Securities Corporation
Hambrecht & Quist LLC
Salomon Smith Barney Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 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 90 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 clause (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 immediate family, (d) if
the undersigned is a corporation or a partnership, transfers of
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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 or (e) the sale of any Shares pursuant to the terms of
Section 3 of that certain Shareholders Agreement, dated October 1, 1997, between
the undersigned, the Company and the Founders, as that term is defined in such
Shareholders Agreement; PROVIDED, HOWEVER, that prior to any such transfer in
clause (c), (d) or (e) 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 90 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>
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
INTERNAP NETWORK SERVICES CORPORATION
I.
NAME
The name of this Corporation (hereinafter called the "Corporation") is
INTERNAP NETWORK SERVICES CORPORATION.
II.
AUTHORIZED SHARES
2.1 This Corporation is authorized to issue 510,000,000 shares of
stock in the aggregate. Such shares shall be divided into two classes as
follows:
(a) 500,000,000 shares of common stock ("Common Stock").
(b) 10,000,000 shares of preferred stock ("Preferred Stock").
Holders of Common Stock are entitled to one vote per share on any matter on
which holders of Common Stock are entitled to vote. On dissolution of the
Corporation, after any preferential amount with respect to the Preferred Stock
has been paid or set aside, the holders of Common Stock and the holders of any
series of Preferred Stock entitled to participate further in the distribution of
assets are entitled to receive the net assets of the Corporation.
2.2 The Board of Directors is authorized, subject to limitations
prescribed by the Washington Business Corporation Act (the "Act") and by the
provisions of this Article II, to provide for the issuance of shares of
Preferred Stock in series, to establish from time to time the number of shares
to be included in each series and to determine the designations, relative
rights, preferences and limitations of the shares of each series. The authority
of the Board of Directors with respect to each series includes determination of
the following:
2.2.1 The number of shares in and the distinguishing designation
of that series;
2.2.2 Whether shares of that series shall have full, special,
conditional, limited or no voting rights, except to the extent otherwise
provided by the Act;
2.2.3 Whether shares of that series shall be convertible and the
terms and conditions of the conversion, including provision for
adjustment of the conversion rate in circumstances determined by the
Board of Directors;
2.2.4 Whether shares of that series shall be redeemable and the
terms and conditions of redemption, including the date or dates upon or
after which they shall be redeemable and the amount per share payable in
case of redemption, which amount may vary under different conditions or
at different redemption dates;
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2.2.5 The dividend rate, if any, on shares of that series, the
manner of calculating any dividends and the preference of any dividends;
2.2.6 The rights of shares of that series in the event of
voluntary or involuntary dissolution of the Corporation and the rights of
priority of that series relative to the Common Stock and any other series
of Preferred Stock on the distribution of assets on dissolution; and
2.2.7 Any other rights, preferences and limitations of that
series that are permitted by the Act.
Within any limits stated in these Articles or in the resolution of the
Board of Directors establishing a series, the Board of Directors, after the
issuance of shares of a series, may amend the resolution establishing the series
to decrease (but not below the number of shares of such series then outstanding)
the number of shares of that series, and the number of shares constituting the
decrease shall thereafter constitute authorized but undesignated shares, and the
Board of Directors may amend the rights and preferences of the shares of any
series that has been established but is wholly unissued.
The authority herein granted to the Board of Directors to determine the
relative rights and preferences of the Preferred Stock shall be limited to
unissued shares, and no power shall exist to alter or change the rights and
preferences of any shares that have been issued.
2.3 The Board of Directors shall have the authority to issue shares of
the capital stock of this Corporation and the certificates therefor subject to
such transfer restrictions and other limitations as it may deem necessary to
promote compliance with applicable federal and state securities laws, and to
regulate the transfer thereof in such manner as may be calculated to promote
such compliance or to further any other reasonable purpose.
2.4 At any time when the Corporation is subject to the reporting
requirements of Section 13 or Section 15(d) of the Securities Exchange Act of
1934, as amended, special meetings of the shareholders for any purpose or
purposes may be called only by the Board of Directors or the Chairman of the
Board (if one be appointed) or the Chief Executive Officer.
III.
DIRECTORS
3.1 The number of directors of the Corporation and the manner in which
such directors are to be elected shall be as set forth in the Bylaws.
3.2 Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, the
directors shall be divided into three classes designated as Class I, Class II
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of
Directors. At the first annual meeting of shareholders following the
adoption and filing of these Articles of Incorporation, the term of office of
the Class I directors shall expire and Class I directors shall be elected for
a full term of three years. At the second annual meeting of shareholders
following the
2
<PAGE>
adoption and filing of these Amended and Restated Articles of Incorporation,
the term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three years. At the third
annual meeting of shareholders following the adoption and filing of these
Amended and Restated Articles of Incorporation, the term of office of the
Class III directors shall expire and Class III directors shall be elected for
a full term of three years. At each succeeding annual meeting of
shareholders, directors shall be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this section, each
director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal. Neither the Board of Directors nor any
individual director may be removed without cause. Subject to any limitation
imposed by law, any individual director or directors may be removed with cause
by the holders of a majority of the voting power of the corporation entitled to
vote at an election of directors. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
3.3 In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors shall have the power to make, adopt, amend or
repeal the Bylaws, or adopt new Bylaws for this Corporation, by a resolution
adopted by a majority of the directors.
3.4 Vacancies in the Board of Directors may be filled by a majority of
the remaining directors, though less than a quorum, or by a sole remaining
director. The shareholders may elect a director at any time to fill any vacancy
not filled by the directors.
IV.
SHAREHOLDER RIGHTS
4.1 No shareholder of this Corporation shall have, solely by reason of
being a shareholder, any preemptive or preferential right or subscription right
to any stock of this Corporation or to any obligations convertible into stock of
this Corporation, or to any warrant or option for the purchase thereof, except
to the extent provided by resolution or resolutions of the Board of Directors
establishing a series of Preferred Stock or by written agreement with this
Corporation.
4.2 In any election for directors of the Corporation, a holder of
shares of any class or series of stock then entitled to vote has the right to
vote in person or by proxy the number of shares of stock held thereby for as
many persons as there are directors to be elected. No cumulative voting for
directors shall be permitted.
4.3 The approval of any plan of merger, plan of share exchange, sale,
lease, exchange or other disposition of all, or substantially all, of the
Corporation's property otherwise than in the usual and regular course of
business, or proposal to dissolve, shall require the affirmative vote of the
holders of not less than a majority of all outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of directors of
the Corporation. At any time when the corporation is subject to the reporting
requirements of Section 13 or Section 15(d) of the Securities Exchange Act of
1934, as amended, pursuant to the authority granted under RCW
3
<PAGE>
23B.10.030, RCW 23B.11.030, RCW 23B.12.020, and RCW 23B.14.020, the vote of
shareholders of this Corporation required in order to approve amendments to
the Articles of Incorporation, a plan of merger or share exchange, the sale,
lease, exchange, or other disposition of all or substantially all of the
property of the Corporation not in the usual and regular course of business,
or dissolution of the Corporation shall be a majority of all of the votes
entitled to be cast by each voting group, regardless of whether or not the
corporation is a "public company," as that term is defined in Section
23B.01.400 of the Act.
V.
INDEMNIFICATION AND LIABILITY OF OFFICERS AND DIRECTORS
5.1 The Corporation may indemnify, in the manner and to the full
extent permitted by law, any person (or the estate of any person) who was or is
a party to, or is threatened to be made a party to any threatened, pending or
complete action, suit or proceeding, whether or not by or in the right of the
Corporation, and whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise. The Corporation may, to the full extent
permitted by law, purchase and maintain insurance on behalf of any such person
against any liability which may be asserted against such person. To the full
extent permitted by law, the indemnification provided herein shall include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, and, in the manner provided by law, any such expenses may be paid by
the corporation in advance of the final disposition of such action, suit or
proceeding. The indemnification provided herein shall not be deemed to limit
the right of the Corporation to indemnify any other person for any such expenses
to the full extent permitted by law, nor shall it be deemed exclusive of any
other rights to which any person seeking indemnification from the Corporation
may be entitled under any agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
5.2 No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for his conduct as a
director, except for (i) acts or omissions that involve intentional misconduct
or a knowing violation of law by the director, (ii) approval of distributions or
loans in violation of RCW 23B.08.310, or (iii) any transaction from which the
director will personally receive a benefit in money, property or services to
which the director is not legally entitled. If the Act is hereafter amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Act, as so
amended. Any amendment to or repeal of this Article shall not adversely affect
any right or protection of a director of the Corporation for or with respect to
any acts or omissions of such director occurring prior to such amendment or
repeal.
4
<PAGE>
VI.
OTHER MATTERS
6.1 Except as otherwise provided in these Articles, as amended from
time to time, the Corporation reserves the right to amend, alter, change or
repeal any provisions contained in these Articles in any manner now or hereafter
prescribed or permitted by statute.
6.2 The Corporation shall have authority to correct clerical errors in
any documents filed with the Secretary of State of Washington, including these
Articles or any amendments hereto, without the necessity of special shareholder
approval of such corrections.
The undersigned has signed these Amended and Restated Articles of
Incorporation on October 1, 1999.
INTERNAP NETWORK SERVICES CORPORATION
/s/ Paul E. McBride
-------------------
Paul E. McBride
Secretary
5
<PAGE>
CERTIFICATE
The undersigned, as Secretary of InterNAP Network Services Corporation,
hereby certifies that the accompanying Amended and Restated Articles of
Incorporation were adopted by the Board of Directors on July 22, 1999 and by the
shareholders on August 23, 1999.
Dated: October 1, 1999
INTERNAP NETWORK SERVICES CORPORATION
/s/ Paul E. McBride
----------------------
Paul E. McBride
Secretary
<PAGE>
BYLAWS OF
INTERNAP NETWORK SERVICES CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1 OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 Principal Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Registered Office and Registered Agent . . . . . . . . . . . . . . . . . .1
1.3 Other Offices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE 2 SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.1 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.2 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.3 Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
(a) Notice of Special Meeting . . . . . . . . . . . . . . . . . . . . . .3
(b) Proposed Articles of Amendment or Dissolution . . . . . . . . . . . .3
(c) Proposed Merger, Consolidation, Exchange, Sale, Lease or
Disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
(d) Declaration of Mailing. . . . . . . . . . . . . . . . . . . . . . . .3
(e) Waiver of Notice. . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.4 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.5 Voting of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.6 Adjourned Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.7 Record Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.8 Record of Shareholders Entitled to Vote. . . . . . . . . . . . . . . . . .4
2.9 Telephonic Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.10 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.11 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
ARTICLE 3 BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . .6
3.1 Management Responsibility. . . . . . . . . . . . . . . . . . . . . . . . .6
3.2 Number of Directors, Qualification . . . . . . . . . . . . . . . . . . . .6
3.3 Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.4 Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.5 Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.6 Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.7 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
i.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
3.8 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.9 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.10 Notice of Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.11 Quorum of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.12 Presumption of Assent. . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.13 Action by Directors Without a Meeting. . . . . . . . . . . . . . . . . . .8
3.14 Telephonic Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.15 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.16 Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
ARTICLE 4 OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
4.1 Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
4.2 Qualification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
4.3 Officers Designated. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
(a) Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . 10
(b) President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(c) Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(d) Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(e) Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . 11
(f) Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.4 Delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.5 Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.6 Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.7 Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.8 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 5 EXECUTION OF CORPORATION INSTRUMENTS AND VOTING OF SECURITIES
OWNED BY THE CORPORATION. . . . . . . . . . . . . . . . . . . . . . 12
5.1 Execution of Corporate Instruments . . . . . . . . . . . . . . . . . . . 12
5.2 Voting of Securities Owned by the Corporation. . . . . . . . . . . . . . 12
ARTICLE 6 STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.1 Form and Execution of Certificates . . . . . . . . . . . . . . . . . . . 12
ii.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
6.2 Lost Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.3 Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.4 Registered Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . 13
6.5 Execution of Other Securities. . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 7 BOOKS AND RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.1 Books of Accounts, Minutes and Share Register. . . . . . . . . . . . . . 14
7.2 Copies of Resolutions. . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 8 FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 9 CORPORATE SEAL. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 10 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.1 Right to Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 15
10.2 Right of Indemnitee to Bring Suit. . . . . . . . . . . . . . . . . . . . 16
10.3 Nonexclusivity of Rights . . . . . . . . . . . . . . . . . . . . . . . . 16
10.4 Insurance, Contracts and Funding . . . . . . . . . . . . . . . . . . . . 17
10.5 Indemnification of Employees and Agents of the Corporation . . . . . . . 17
10.6 Persons Serving Other Entities . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 11 AMENDMENT OF BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
iii.
<PAGE>
BYLAWS OF
INTERNAP NETWORK SERVICES CORPORATION
These BYLAWS are promulgated pursuant to the Washington Business
Corporation Act, as set forth in Title 23B of the Revised Code of Washington.
ARTICLE 1
OFFICES
1.1 PRINCIPAL OFFICE. The principal office of the Corporation shall be
located at the principal place of business or such other place as the Board of
Directors may designate.
1.2 REGISTERED OFFICE AND REGISTERED AGENT. The registered office of the
Corporation shall be located in the State of Washington at such place as may be
fixed from time to time by the Board of Directors upon filing of such notices as
may be required by law, and the registered agent shall have a business office
identical with such registered office. Any change in the registered agent or
registered office shall be effective upon filing such change with the office of
the Secretary of State of the State of Washington.
1.3 OTHER OFFICES. The Corporation shall also have and maintain an office
or principal place of business at such place as may be fixed by the Board of
Directors, and may also have offices at such other places, both within and
without the State of Washington, as the Board of Directors may from time to time
determine or the business of the Corporation may require.
ARTICLE 2
SHAREHOLDERS
2.1 ANNUAL MEETING
(a) The annual meeting of the shareholders of the Corporation for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year on a date and at a time
and place to be set by the Board of Directors.
(b) At an annual meeting of the shareholders, only such business
shall be conducted as shall have been properly brought before the meeting.
To be properly brought before an annual meeting, business must be: (i)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (ii) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or (iii)
otherwise properly brought before the meeting by a shareholder. For business
to be properly brought before an annual meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to the Secretary
of the Corporation. To be timely, a shareholder's notice must be delivered to
or mailed and received at the principal executive offices of the Corporation
not later than the close of business on the ninetieth (90th) day nor earlier
than the close of business on the
1.
<PAGE>
one hundred twentieth (120th) day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that no
annual meeting was held in the previous year or the date of the annual
meeting has been changed by more than thirty (30) days from the date
contemplated at the time of the previous year's proxy statement, notice by
the shareholder to be timely must be so received not earlier than the close
of business on the ninetieth (90th) day prior to such annual meeting and not
later than the close of business on the later of the sixtieth (60th) day
prior to such annual meeting or, in the event public announcement of the date
of such annual meeting is first made by the Corporation fewer than seventy
(70) days prior to the date of such annual meeting, the close of business on
the tenth (10th) day following the day on which public announcement of the
date of such meeting is first made by the Corporation. A shareholder's
notice to the Secretary shall set forth as to each matter the shareholder
proposes to bring before the annual meeting: (A) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (B) the name and address, as
they appear on the Corporation's books, of the shareholder proposing such
business, (C) the class and number of shares of the Corporation which are
beneficially owned by the shareholder, (D) any material interest of the
shareholder in such business and (E) any other information that is required
to be provided by the shareholder pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity
as a proponent to a shareholder proposal. Notwithstanding the foregoing, in
order to include information with respect to a shareholder proposal in the
proxy statement and form of proxy for a shareholders' meeting, shareholders
must provide notice as required by the regulations promulgated under the 1934
Act. Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (b). The chairman of the annual
meeting shall, if the facts warrant, determine and declare at the meeting
that business was not properly brought before the meeting and in accordance
with the provisions of this paragraph (b), and, if he should so determine, he
shall so declare at the meeting that any such business not properly brought
before the meeting shall not be transacted.
2.2 SPECIAL MEETINGS. Special meetings of the shareholders for any
purpose or purposes may be called at any time by a majority of the Board of
Directors or by the Chairperson of the Board (if one be elected) or by the
Chief Executive Officer. The Board of Directors may designate any place as
the place of any special meeting called by the Chairperson, the Chief
Executive Officer or the Board.
2.3 NOTICE OF MEETINGS. Except as otherwise provided in Subsections
2.3(b) and 2.3(c) below, the Secretary, Assistant Secretary, or any transfer
agent of the Corporation shall deliver, either personally or by mail, private
carrier, telegraph or teletype, or telephone, wire or wireless equipment
which transmits a facsimile of the notice, not less than ten (10) nor more
than sixty (60) days before the date of any meeting of shareholders, written
notice stating the place, day, and time of the meeting to each shareholder of
record entitled to vote at such meeting. If mailed in the United States,
such notice shall be deemed to be delivered when deposited in the United
States mail, with first-class postage thereon prepaid, addressed to the
shareholder at his address as it appears on the Corporation's record of
shareholders. If mailed outside the United States, such notice shall be
deemed to be delivered five (5) days after being deposited in the mail, with
first-class airmail postage thereon, return receipt requested, addressed to
the shareholder at the shareholder's address as it appears on the
Corporation's record of shareholders.
2.
<PAGE>
(a) NOTICE OF SPECIAL MEETING. In the case of a special meeting,
the written notice shall also state with reasonable clarity the purpose or
purposes for which the meeting is called and the actions sought to be
approved at the meeting. No business other than that specified in the notice
may be transacted at a special meeting.
(b) PROPOSED ARTICLES OF AMENDMENT OR DISSOLUTION. If the
business to be conducted at any meeting includes any proposed amendment to
the Articles of Incorporation or the proposed voluntary dissolution of the
Corporation, then the written notice shall be given not less than twenty (20)
nor more than sixty (60) days before the meeting date and shall state that
the purpose or one of the purposes is to consider the advisability thereof,
and, in the case of a proposed amendment, shall be accompanied by a copy of
the amendment.
(c) PROPOSED MERGER, CONSOLIDATION, EXCHANGE, SALE, LEASE OR
DISPOSITION. If the business to be conducted at any meeting includes any
proposed plan of merger or share exchange, or any sale, lease, exchange, or
other disposition of all or substantially all of the Corporation's property
otherwise than in the usual or regular course of its business, then the
written notice shall state that the purpose or one of the purposes is to
consider the proposed plan of merger or share exchange, sale, lease, or
disposition, as the case may be, shall describe the proposed action with
reasonable clarity, and, if required by law, shall be accompanied by a copy
or a detailed summary thereof; and written notice shall be given to each
shareholder of record, whether or not entitled to vote at such meeting, not
less than twenty (20) nor more than sixty (60) days before such meeting, in
the manner provided in Section 2.3 above.
(d) DECLARATION OF MAILING. A declaration of the mailing or other
means of giving any notice of any shareholders' meeting, executed by the
Secretary, Assistant Secretary, or any transfer agent of the Corporation
giving the notice, shall be prima facie evidence of the giving of such
notice.
(e) WAIVER OF NOTICE. Notice of any shareholders' meeting may be
waived in writing by any shareholder at any time, either before or after the
meeting. Except as provided below, the waiver must be signed by the
shareholder entitled to the notice, and be delivered to the Corporation for
inclusion in the minutes or filing with the corporate records. A
shareholder's attendance at a meeting waives objection to lack of notice, or
defective notice, unless the shareholder at the beginning of the meeting
objects to holding the meeting or transacting business at the meeting.
2.4 QUORUM. A quorum shall exist at any meeting of shareholders if a
majority of the shares entitled to vote is represented in person or by proxy.
Shares entitled to vote as a separate voting group may take action on a
matter at a meeting only if a quorum of those shares exists with respect to
that matter. The shareholders present at a duly organized meeting may
continue to transact business at such meeting and at any adjournment of such
meeting (unless a new record date is or must be set for the adjourned
meeting), notwithstanding the withdrawal of enough shareholders from either
meeting to leave less than a quorum. Once a share is represented for any
purpose at a meeting other than solely to object to holding the meeting or
transacting business at the meeting, it is deemed present for quorum purposes
for the remainder of the meeting and for any adjournment of that meeting
unless a new record date is or must be set for the adjourned meeting.
3.
<PAGE>
2.5 VOTING OF SHARES. Except as otherwise provided in the Articles of
Incorporation or these Bylaws, every shareholder of record shall have the
right at every shareholders' meeting to one vote for every share standing in
his name on the books of the Corporation. If a quorum exists, action on a
matter, other than the election of directors, is approved by a voting group
if the votes cast within the voting group favoring the action exceed the
votes cast within the voting group opposing the action, unless a greater
number is required by the Articles of Incorporation or the Washington
Business Corporation Act.
2.6 ADJOURNED MEETINGS. A majority of the shares represented at a
meeting, even if less than a quorum, may adjourn the meeting from time to
time without further notice. When a meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
However, if a new record date for the adjourned meeting is or must be fixed
in accordance with the Washington Business Corporation Act, notice of the
adjourned meeting must be given to persons who are shareholders as of the new
record date. At any adjourned meeting, the Corporation may transact any
business which might have been transacted at the original meeting.
2.7 RECORD DATE. For the purpose of determining shareholders entitled
to notice of or to vote at any meeting of shareholders, or any adjournment
thereof, or entitled to receive payment of any dividend, the Board of
Directors may fix in advance a record date for any such determination of
shareholders, such date to be not more than seventy (70) days and, in the
case of a meeting of shareholders, not less than ten (10) days prior to the
meeting or action requiring such determination of shareholders. If no record
date is fixed for the determination of shareholders entitled to notice of or
to vote at a meeting of shareholders, or shareholders entitled to receive
payment of a dividend, the day before the date on which notice of the meeting
is mailed or the date on which the resolution of the Board of Directors
declaring such dividend is adopted, as the case may be, shall be the record
date for such determination of shareholders. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof, unless the Board of Directors fixes a new record date, which it must
do if the meeting is adjourned more than one hundred twenty (120) days after
the date is fixed for the original meeting.
2.8 RECORD OF SHAREHOLDERS ENTITLED TO VOTE. After fixing a record
date for a shareholders' meeting, the Corporation shall prepare an
alphabetical list of the names of all shareholders on the record date who are
entitled to notice of the shareholders' meeting. The list shall be arranged
by voting group, and within each voting group by class or series of shares,
and show the address of and number of shares held by each shareholder. A
shareholder, shareholder's agent, or a shareholder's attorney may inspect the
shareholders list, beginning ten days prior to the shareholders' meeting and
continuing through the meeting, at the Corporation's principal office or at a
place identified in the meeting notice in the city where the meeting will be
held during regular business hours and at the shareholder's expense. The
shareholders list shall be kept open for inspection during such meeting or
any adjournment. Failure to comply with the requirements of this section
shall not affect the validity of any action taken at such meeting.
2.9 TELEPHONIC MEETINGS. Shareholders may participate in a meeting by
means of a conference telephone or other communications equipment by which
all persons participating in
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the meeting can hear each other during the meeting, and participation by such
means shall constitute presence in person at a meeting.
2.10 PROXIES. At all meetings of shareholders, a shareholder may vote
by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Such proxy shall be filed with the secretary of the
Corporation before or at the time of the meeting. No proxy shall be valid
after eleven (11) months from the date of its execution, unless otherwise
provided in the proxy.
2.11 ORGANIZATION
(a) At every meeting of shareholders, the Chairperson of the Board
of Directors, or, if a Chairperson has not been appointed or is absent, the
Chief Executive Officer, or, if the Chief Executive Officer is absent, a
chairman of the meeting chosen by a majority in interest of the shareholders
entitled to vote, present in person or by proxy, shall act as chairman. The
Secretary, or, in his absence, an Assistant Secretary directed to do so by
the Chief Executive Officer, shall act as secretary of the meeting.
(b) The Board of Directors of the Corporation shall be entitled to
make such rules or regulations for the conduct of meetings of shareholders as
it shall deem necessary, appropriate or convenient. Subject to such rules
and regulations of the Board of Directors, if any, the chairman of the
meeting shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of
such chairman, are necessary, appropriate or convenient for the proper
conduct of the meeting, including, without limitation, establishing an agenda
or order of business for the meeting, rules and procedures for maintaining
order at the meeting and the safety of those present, limitations on
participation in such meeting to shareholders of record of the Corporation
and their duly authorized and constituted proxies and such other persons as
the chairman shall permit, restrictions on entry to the meeting after the
time fixed for the commencement thereof, limitations on the time allotted to
questions or comments by participants and regulation of the opening and
closing of the polls for balloting on matters which are to be voted on by
ballot. Unless and to the extent determined by the Board of Directors or the
chairman of the meeting, meetings of shareholders shall not be required to be
held in accordance with rules of parliamentary procedure.
ARTICLE 3
BOARD OF DIRECTORS
3.1 MANAGEMENT RESPONSIBILITY. All corporate powers shall be exercised
by or under the authority of, and the business and affairs of the Corporation
shall be managed under the direction of, the Board of Directors, except as
may be otherwise provided in the Articles of Incorporation or the Washington
Business Corporation Act.
3.2 NUMBER OF DIRECTORS, QUALIFICATION. The authorized number of
directors of the Corporation shall be not less than five (5) nor more than
nine (9), the specific number to be set by resolution of the Board of
Directors. Directors need not be shareholders. No reduction of the
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authorized number of directors shall have the effect of removing any director
before that director's term of office expires.
3.3 ELECTION. At the first annual meeting of shareholders and at each
annual meeting thereafter, the shareholders shall elect directors to hold
office at the annual meeting. If, for any reason, the directors shall not
have been elected at an annual meeting, they may be elected at a special
meeting of shareholders called for that purpose in accordance with these
Bylaws. Despite the expiration of a director's term, the director continues
to serve until the director's successor shall have been elected and qualified
or until there is a decrease in the number of directors.
3.4 VACANCIES. Any vacancy occurring in the Board of Directors
(whether caused by resignation, death, an increase in the number of
directors, or otherwise) may be filled the Board of Directors or the
shareholders if not filled by the Board. If the directors in office
constitute fewer than a quorum of the Board, they may fill the vacancy by the
affirmative vote of a majority of all the directors in office. A director
elected to fill any vacancy shall hold office until the next shareholders
meeting at which directors are elected.
3.5 REMOVAL. One or more members of the Board of Directors (including
the entire Board) may be removed, with cause, at a meeting of shareholders
called expressly for that purpose. A director may be removed only if the
number of votes cast to remove the director exceeds the number of votes cast
not to remove the director. Neither the Board of Directors nor any individual
director may be removed without cause.
3.6 RESIGNATION. Any director may resign at any time by delivering his
written resignation to the Secretary, such resignation to specify whether it
will be effective at a particular time, upon receipt by the Secretary or at
the pleasure of the Board of Directors. If no such specification is made, it
shall be deemed effective at the pleasure of the Board of Directors. When
one or more directors shall resign from the Board of Directors, effective at
a future date, a majority of the directors then in office, including those
who have so resigned, shall have power to fill such vacancy or vacancies, the
vote thereon to take effect when such resignation or resignations shall
become effective, and each Director so chosen shall hold office for the
unexpired portion of the term of the Director whose place shall be vacated
and until his successor shall have been duly elected and qualified.
3.7 ANNUAL MEETING. The first meeting of each newly elected Board of
Directors shall be known as the annual meeting thereof and shall be held
without notice immediately after the annual shareholders' meeting or any
special shareholders' meeting at which a Board is elected. Said meeting
shall be held at the same place as such shareholders' meeting unless some
other place shall be specified by resolution of the Board of Directors.
3.8 REGULAR MEETINGS. Regular meetings of the Board of Directors or of
any committee designated by the Board may be held at such place and such day
and hour as shall from time to time be fixed by resolution of the Board or
committee, without other notice than the delivery of such resolution as
provided in Section 3.10 below.
3.9 SPECIAL MEETINGS. Special meetings of the Board of Directors or
any committee designated by the Board may be called by the Chief Executive
Officer or the Chairperson of the
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Board (if one be elected) or any director or committee member, to be held at
such place and such day and hour as specified by the person or persons
calling the meeting.
3.10 NOTICE OF MEETING. Notice of the date, time, and place of all
special meetings of the Board of Directors or any committee designated by the
Board shall be given by the Secretary, or by the person calling the meeting,
by mail, private carrier, telegram, facsimile transmission, or personal
communication over the telephone or otherwise, provided such notice is
received at least two (2) days prior to the day upon which the meeting is to
be held.
No notice of any regular meeting need be given if the time and
place thereof shall have been fixed by resolution of the Board of Directors
or any committee designated by the Board and a copy of such resolution has
been delivered by mail, private carrier, telegram or facsimile transmission
to every director or committee member and is received at least two (2) days
before the first meeting held in pursuance thereof.
Notice of any meeting of the Board of Directors or any committee
designated by the Board need not be given to any director or committee member
if it is waived in a writing signed by the director entitled to the notice,
whether before or after such meeting is held.
A director's attendance at or participation in a meeting waives any
required notice to the director of the meeting unless the director at the
beginning of the meeting, or promptly upon the director's arrival, objects to
holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting. Neither the
business to be transacted at, nor the purpose of, any regular or special
meeting of the Board of Directors or any committee designated by the Board
need be specified in the notice or waiver of notice of such meeting unless
required by the Articles of Incorporation or these Bylaws.
Any meeting of the Board of Directors or any committee designated
by the Board shall be a legal meeting without any notice thereof having been
given if all of the directors or committee members have received valid notice
thereof, are present without objecting, or waive notice thereof in a writing
signed by the director and delivered to the Corporation for inclusion in the
minutes or filing with the corporate records, or any combination thereof.
3.11 QUORUM OF DIRECTORS. A majority of the number of directors fixed
by or in the manner provided by these Bylaws shall constitute a quorum for
the transaction of business. If a quorum is present when a vote is taken,
the affirmative vote of a majority of directors present is the act of the
Board of Directors unless the Articles of Incorporation or these Bylaws
require the vote of a greater number of directors.
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting to another time and place. If the meeting is
adjourned for more than forty-eight (48) hours, then notice of the time and
place of the adjourned meeting shall be given before the adjourned meeting
takes place, in the manner specified in Section 3.10 of these Bylaws, to the
directors who were not present at the time of the adjournment.
3.12 PRESUMPTION OF ASSENT. Any director who is present at any meeting
of the Board of Directors at which action on any corporate matter is taken
shall be presumed to have assented to the action taken unless (a) the
director objects at the beginning of the meeting, or promptly
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upon the director's arrival, to holding the meeting or transacting business
at the meeting; (b) the director's dissent or abstention from the action
taken is entered in the minutes of the meeting; or (c) the director delivers
written notice of dissent or abstention to the presiding officer of the
meeting before the adjournment thereof or to the Corporation within a
reasonable time after adjournment of the meeting. Such right to dissent or
abstain shall not be available to any director who voted in favor of such
action.
3.13 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required by law
to be taken or which may be taken at a meeting of the Board of Directors or
of a committee thereof may be taken without a meeting if one or more written
consents, setting forth the action so taken, shall be signed by all of the
directors or all of the members of the committee, as the case may be, either
before or after the action taken and delivered to the Corporation for
inclusion in the minutes or filing with the corporate records. Such consent
shall have the same effect as a unanimous vote at a meeting duly held upon
proper notice on the date of the last signature thereto, unless the consent
specifies a later effective date.
3.14 TELEPHONIC MEETINGS. Members of the Board of Directors or any
committee designated by the Board may participate in a meeting of the Board
or committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other during the meeting. Participation by such means shall constitute
presence in person at a meeting.
3.15 COMPENSATION. By resolution of the Board of Directors, the
directors and committee members may be paid their expenses, if any, or a
fixed sum or a stated salary as a director or committee member for attendance
at each meeting of the Board or of such committee as the case may be. No
such payment shall preclude any director or committee member from serving the
Corporation in any other capacity and receiving compensation therefor.
3.16 COMMITTEES. The Board of Directors, by resolution adopted by a
majority of the full Board, may from time to time designate from among its
members one or more committees, each of which must have two (2) or more
members and, to the extent provided in such resolution, shall have and may
exercise all the authority of the Board of Directors, except that no such
committee shall have the authority to:
(a) authorize or approve a distribution except according to a
general formula or method prescribed by the Board of Directors;
(b) approve or propose to shareholders action that the Washington
Business Corporation Act requires to be approved by shareholders;
(c) fill vacancies on the Board of Directors or on any of its
committees;
(d) adopt any amendment to the Articles of Incorporation;
(e) adopt, amend or repeal these Bylaws;
(f) approve a plan of merger; or
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(g) authorize or approve the issuance or sale or contract for sale
of shares, or determine the designation and relative rights, preferences and
limitations of a class or series of shares, except that the Board of
Directors may authorize a committee, or a senior executive officer of the
Corporation, to do so within limits specifically prescribed by the Board of
Directors.
Meetings of such committees shall be governed by the same
procedures as govern the meetings of the Board of Directors. All committees
so appointed shall keep regular minutes of their meetings and shall cause
them to be recorded in books kept for that purpose at the office of the
Corporation.
ARTICLE 4
OFFICERS
4.1 APPOINTMENT. The officers of the Corporation shall be appointed
annually by the Board of Directors at its annual meeting held after the
annual meeting of the shareholders. If the appointment of officers is not
held at such meeting, such appointment shall be held as soon thereafter as a
Board meeting conveniently may be held. Except in the case of death,
resignation or removal, each officer shall hold office at the pleasure of the
Board of Directors until the next annual meeting of the Board and until his
successor is appointed and qualified.
4.2 QUALIFICATION. None of the officers of the Corporation need be a
director, except as specified below. Any two or more of the corporate
offices may be held by the same person.
4.3 OFFICERS DESIGNATED. The officers of the Corporation shall be a
Chief Executive Officer, a President, one or more Vice Presidents (the number
thereof to be determined by the Board of Directors), a Secretary, a Chief
Financial Officer and a Treasurer, each of whom shall be elected by the Board
of Directors. Such other officers and assistant officers as may be deemed
necessary may be appointed by the Board of Directors.
The Board of Directors may, in its discretion, appoint a
Chairperson of the Board of Directors; and, if a Chairperson has been
appointed, the Chairperson shall, when present, preside at all meetings of
the Board of Directors and the shareholders and shall have such other powers
commonly incident to his office and as the Board may prescribe.
(a) CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be
the chief executive officer of the corporation and, subject to the direction
and control of the Board, shall supervise and control all of the assets,
business, and affairs of the corporation. The Chief Executive Officer shall
vote the shares owned by the corporation in other corporations, domestic or
foreign, unless otherwise prescribed by resolution of the Board. In general,
the Chief Executive Officer shall perform all duties incident to the office
of Chief Executive Officer and such other duties as may be prescribed by the
Board from time to time.
The Chief Executive Officer shall, unless a Chairperson of the
Board of Directors has been appointed and is present, preside at all meetings
of the shareholders and the Board of Directors.
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(b) PRESIDENT. The President shall report to the Chief Executive
Officer. In the absence of the Chief Executive Officer or his inability to
act, the President, if any, shall perform all the duties of the Chief
Executive Officer and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the Chief Executive Officer; provided
that no such President shall assume the authority to preside as Chairperson
of meetings of the Board unless such President is a member of the Board. In
general, the President shall perform all duties incident to the office of
President and such other duties as may be prescribed by the Board from time
to time.
(c) VICE PRESIDENTS. In the absence of the President or his
inability to act, the Vice Presidents, if any, in order of their rank as
fixed by the Board of Directors or, if not ranked a Vice President designated
by the Board shall perform all the duties of the President and when so acting
shall have all the powers of, and be subject to all the restrictions upon,
the President; provided that no such Vice President shall assume the
authority to preside as Chairperson of meetings of the Board unless such Vice
President is a member of the Board. The Vice Presidents shall have such
other powers and perform such other duties as from time to time may be
respectively prescribed for them by the Board, these Bylaws or the President.
(d) SECRETARY. The Secretary shall attend all meetings of the
shareholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the Corporation. The Secretary
shall give notice in conformity with these Bylaws of all meetings of the
shareholders and of all meetings of the Board of Directors and any committee
thereof requiring notice. The Secretary shall perform all other duties given
him in these Bylaws and other duties commonly incident to his office and
shall also perform such other duties and have such other powers, as the Board
of Directors shall designate from time to time. The President may direct any
Assistant Secretary to assume and perform the duties of the Secretary in the
absence or disability of the Secretary, and each Assistant Secretary shall
perform other duties commonly incident to his office and shall also perform
such other duties and have such other powers as the Board of Directors or the
President shall designate from time to time.
(e) CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
keep or cause to be kept the books of account of the Corporation in a
thorough and proper manner and shall render statements of the financial
affairs of the Corporation in such form and as often as required by the Board
of Directors or the President. The Chief Financial Officer, subject to the
order of the Board of Directors, shall have the custody of all funds and
securities of the Corporation. The Chief Financial Officer shall perform
other duties commonly incident to his office and shall also perform such
other duties and have such other powers as the Board of Directors or the
President shall designate from time to time. The President may direct the
Treasurer or any Assistant Treasurer, or the Controller or any Assistant
Controller to assume and perform the duties of the Chief Financial Officer in
the absence or disability of the Chief Financial Officer, and each Treasurer
and Assistant Treasurer and each Controller and Assistant Controller shall
perform other duties commonly incident to his office and shall also perform
such other duties and have such other powers as the Board of Directors or the
President shall designate from time to time.
(f) TREASURER. Subject to the direction and control of the Board
of Directors, the Treasurer shall have charge and custody of and be
responsible for all funds and securities of
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the Corporation; and, at the expiration of his term of office, he shall turn
over to his successor all property of the Corporation in his possession.
In the absence of the Treasurer, an Assistant Treasurer may perform
the duties of the Treasurer.
4.4 DELEGATION. In case of the absence or inability to act of any
officer of the Corporation and of any person herein authorized to act in his
place, the Board of Directors may from time to time delegate the powers or
duties of such officer to any other officer or director or other person whom
it may select.
4.5 RESIGNATION. Any officer may resign at any time by delivering
written notice to the Corporation. Any such resignation shall take effect
when the notice is delivered unless the notice specifies a later date.
Unless otherwise specified in the notice, acceptance of such resignation by
the Corporation shall not be necessary to make it effective. Any resignation
shall be without prejudice to the rights, if any, of the Corporation under
any contract to which the officer is a party.
4.6 REMOVAL. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board at any time with or without cause.
Election or appointment of an officer or agent shall not of itself create
contract rights.
4.7 VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification, creation of a new office, or any other cause may
be filled by the Board of Directors for the unexpired portion of the term or
for a new term established by the Board.
4.8 COMPENSATION. Compensation, if any, for officers and other agents
and employees of the Corporation shall be determined by the Board of
Directors, or by the Chief Executive Officer to the extent such authority may
be delegated to him by the Board. No officer shall be prevented from
receiving compensation in such capacity by reason of the fact that he is also
a director of the Corporation.
ARTICLE 5
EXECUTION OF CORPORATION INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
5.1 EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in
its discretion, determine the method and designate the signatory officer or
officers, or other person or persons, to execute on behalf of the Corporation
any corporate instrument or document, or to sign on behalf of the Corporation
the corporate name without limitation, or to enter into contracts on behalf
of the Corporation, except where otherwise provided by law or these Bylaws,
and such execution or signature shall be binding upon the Corporation.
All checks and drafts drawn on banks or other depositaries on funds
to the credit of the Corporation or in special accounts of the Corporation
shall be signed by such person or persons as the Board of Directors shall
authorize so to do.
11.
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Unless authorized or ratified by the Board of Directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the Corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or for any amount.
5.2 VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other
securities of other corporations owned or held by the Corporation for itself,
or for other parties in any capacity, shall be voted, and all proxies with
respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such
authorization, by the Chairperson of the Board of Directors, the Chief
Executive Officer, the President or any Vice President.
ARTICLE 6
STOCK
6.1 FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of
stock of the Corporation shall be in such form as is consistent with the
Articles of Incorporation and applicable law. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by or in the name
of the Corporation by the Chairperson of the Board of Directors, the Chief
Executive Officer, the President or any Vice President and by the Treasurer
or Assistant Treasurer or the Secretary or Assistant Secretary, certifying
the number of shares owned by him in the Corporation. Any or all of the
signatures on the certificate may be facsimiles. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued with
the same effect as if he were such officer, transfer agent, or registrar at
the date of issue. Each certificate shall state upon the face or back
thereof, in full or in summary, all of the powers, designations, preferences,
and rights, and the limitations or restrictions of the shares authorized to
be issued or shall, except as otherwise required by law, set forth on the
face or back a statement that the Corporation will furnish without charge to
each shareholder who so requests the powers, designations, preferences and
relative, participating, optional, or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights. Within a reasonable time after the
issuance or transfer of uncertificated stock, the Corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to this section
or otherwise required by law or with respect to this section a statement that
the Corporation will furnish without charge to each shareholder who so
requests the powers, designations, preferences and relative paticipating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Except as otherwise expressly provided by law, the rights and
obligations of the holders of certificates representing stock of the same
class and series shall be identical.
6.2 LOST CERTIFICATES. A new certificate or certificates shall be
issued in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock
to be lost, stolen, or destroyed. The corporation may require, as a
condition precedent to
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the issuance of a new certificate or certificates, the owner of such lost,
stolen, or destroyed certificate or certificates, or his legal
representative, to agree to indemnify the Corporation in such manner as it
shall require or to give the Corporation a surety bond in such form and
amount as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen, or destroyed.
6.3 TRANSFERS
(a) Transfers of record of shares of stock of the Corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform any
agreement with any number of shareholders of any one or more classes of stock
of the Corporation to restrict the transfer of shares of stock of the
Corporation of any one or more classes owned by such shareholders in any
manner not prohibited by the Act.
6.4 REGISTERED SHAREHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Washington.
6.5 EXECUTION OF OTHER SECURITIES. All bonds, debentures and other
corporate securities of the Corporation, other than stock certificates
(covered in Section 6.1), may be signed by the Chairperson of the Board of
Directors, the Chief Executive Officer, the President or any Vice President,
or such other person as may be authorized by the Board of Directors, and the
corporate seal impressed thereon or a facsimile of such seal imprinted
thereon and attested by the signature of the Secretary or an Assistant
Secretary, or the Chief Financial Officer or Treasurer or an Assistant
Treasurer; PROVIDED, HOWEVER, that where any such bond, debenture or other
corporate security shall be authenticated by the manual signature, or where
permissible facsimile signature, of a trustee under an indenture pursuant to
which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such
bond, debenture or other corporate security may be the imprinted facsimile of
the signatures of such persons. Interest coupons appertaining to any such
bond, debenture or other corporate security, authenticated by a trustee as
aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the
Corporation or such other person as may be authorized by the Board of
Directors, or bear imprinted thereon the facsimile signature of such person.
In case any officer who shall have signed or attested any bond, debenture or
other corporate security, or whose facsimile signature shall appear thereon
or on any such interest coupon, shall have ceased to be such officer before
the bond, debenture or other corporate security so signed or attested shall
have been delivered, such bond, debenture or other corporate security
nevertheless may be adopted by the Corporation and issued and delivered as
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the Corporation.
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Except as otherwise specifically provided in these Bylaws, no
shares of stock shall be transferred on the books of the Corporation until
the outstanding certificate therefor has been surrendered to the Corporation.
All certificates surrendered to the Corporation for transfer shall be
cancelled, and no new certificate shall be issued until the former
certificate for a like number of shares shall have been surrendered and
cancelled, except that in case of a lost, destroyed, or mutilated certificate
a new one may be issued therefor upon such terms (including indemnity to the
Corporation) as the Board of Directors may prescribe.
ARTICLE 7
BOOKS AND RECORDS
7.1 BOOKS OF ACCOUNTS, MINUTES AND SHARE REGISTER. The corporation
shall keep as permanent records minutes of all meetings of its shareholders
and Board of Directors, a record of all actions taken by the shareholders or
Board of Directors without a meeting, and a record of all actions taken by a
committee of the Board of Directors exercising the authority of the Board of
Directors on behalf of the Corporation. The corporation shall maintain
appropriate accounting records. The corporation or its agent shall maintain
a record of its shareholders, in a form that permits preparation of a list of
the names and addresses of all shareholders, in alphabetical order by class
of shares showing the number and class of shares held by each. The
corporation shall keep a copy of the following records at its principal
office: the Articles or Restated Articles of Incorporation and all amendments
to them currently in effect; the Bylaws or Restated Bylaws and all amendments
to them currently in effect; the minutes of all shareholders' meetings, and
records of all actions taken by shareholders without a meeting, for the past
three years; its financial statements for the past three years, including
balance sheets showing in reasonable detail the financial condition of the
Corporation as of the close of each fiscal year, and an income statement
showing the results of its operations during each fiscal year prepared on the
basis of generally accepted accounting principles or, if not, prepared on a
basis explained therein; all written communications to shareholders generally
within the past three years; a list of the names and business addresses of
its current directors and officers; and its most recent annual report
delivered to the Secretary of State of Washington.
7.2 COPIES OF RESOLUTIONS. Any person dealing with the Corporation may
rely upon a copy of any of the records of the proceedings, resolutions, or
votes of the Board of Directors or shareholders, when certified by the Chief
Executive Officer, the President or Secretary.
ARTICLE 8
FISCAL YEAR
The fiscal year of the Corporation shall be set by resolution of the
Board of Directors.
ARTICLE 9
CORPORATE SEAL
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The Board of Directors may adopt a corporate seal for the Corporation
which shall have inscribed thereon the name of the Corporation, the year and
state of incorporation and the words "corporate seal".
ARTICLE 10
INDEMNIFICATION
10.1 RIGHT TO INDEMNIFICATION. Each individual (hereinafter an
"indemnitee") who was or is made a party or is threatened to be made a party
to or is otherwise involved (including, without limitation, as a witness) in
any actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative and whether formal or informal (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director or
officer of the Corporation or that, while serving as a director or officer of
the Corporation, he or she is or was also serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation or of a foreign or domestic
partnership, joint venture, trust, employee benefit plan or other enterprise,
whether the basis of the proceeding is alleged action in an official capacity
as such a director, officer, employee, partner, trustee, or agent or in any
other capacity while serving as such director, officer, employee, partner,
trustee, or agent, shall be indemnified and held harmless by the Corporation
to the full extent permitted by applicable law as then in effect, against all
expense, liability and loss (including, without limitation, attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts to be paid in
settlement) incurred or suffered by such indemnitee in connection therewith,
and such indemnification shall continue as to an indemnitee who has ceased to
be a director, officer, employee, partner, trustee, or agent and shall inure
to the benefit of the indemnitee's heirs, executors and administrators;
provided, however, that no indemnification shall be provided to any such
indemnitee if the Corporation is prohibited by the Washington Business
Corporation Act or other applicable law as then in effect from paying such
indemnification; and provided, further, that except as provided in Section
10.2 of this Article with respect to proceedings seeking to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized or ratified by the
Board of Directors. The right to indemnification conferred in this Section
10.1 shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any proceeding in advance of
its final disposition (hereinafter an "advancement of expenses"). Any
advancement of expenses shall be made only upon delivery to the Corporation
of a written undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such
expenses under this Section 10.1 and upon delivery to the Corporation of a
written affirmation (hereinafter an "affirmation") by the indemnitee of his
or her good faith belief that such indemnitee has met the standard of conduct
necessary for indemnification by the Corporation pursuant to this Article.
10.2 RIGHT OF INDEMNITEE TO BRING SUIT. If a written claim for
indemnification under Section 10.1 of this Article is not paid in full by the
Corporation within ninety (90) days after the Corporation's receipt thereof,
except in the case of a claim for an advancement of expenses, in which case
the applicable period shall be twenty (20) days, the indemnitee may at any
time
15.
<PAGE>
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim. If successful, in whole or in part, in any such suit or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the indemnitee shall be entitled to be paid also
the expenses of prosecuting or defending such suit. The indemnitee shall be
presumed to be entitled to indemnification under this Article upon submission
of a written claim (and, in an action brought to enforce a claim for an
advancement of expenses, where the required undertaking and affirmation have
been tendered to the Corporation) and thereafter the Corporation shall have
the burden of proof to overcome the presumption that the indemnitee is so
entitled. Neither the failure of the Corporation (including the Board of
Directors, independent legal counsel or the shareholders) to have made a
determination prior to the commencement of such suit that indemnification of
the indemnitee is proper in the circumstances nor an actual determination by
the Corporation (including the Board of Directors, independent legal counsel
or the shareholders) that the indemnitee is not entitled to indemnification
shall be a defense to the suit or create a presumption that the indemnitee is
not so entitled.
10.3 NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the
advancement of expenses conferred in this Article X shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, provision of the Articles of Incorporation or Bylaws of the
Corporation, general or specific action of the Board of Directors, contract
or otherwise.
10.4 INSURANCE, CONTRACTS AND FUNDING. The corporation may maintain
insurance, at its expense, to protect itself and any individual who is or was
a director, officer, employee or agent of the Corporation or who, while a
director, officer, employee or agent of the Corporation, is or was serving at
the request of the Corporation as a agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against any expense, liability or loss asserted against or
incurred by the individual in that capacity or arising from the individual's
status as a director, officer, employee or agent, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the Washington Business Corporation Act.
The corporation may enter into contracts with any director, officer, employee
or agent of the Corporation in furtherance of the provisions of this Article
and may create a trust fund, grant a security interest or use other means
(including, without limitation, a letter of credit) to ensure the payment of
such amounts as may be necessary to effect indemnification as provided in
this Article.
10.5 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The
corporation may, by action of the Board of Directors, grant rights to
indemnification and advancement of expenses to employees and agents of the
Corporation with the same scope and effect as the provisions of this Article
with respect to the indemnification and advancement of expenses of directors
and officers of the Corporation or pursuant to rights granted pursuant to, or
provided by, the Washington Business Corporation Act or otherwise.
10.6 PERSONS SERVING OTHER ENTITIES. Any individual who is or was a
director, officer or employee of the Corporation who, while a director,
officer or employee of the Corporation, is or was serving (a) as a director
or officer of another foreign or domestic corporation of which a majority of
the shares entitled to vote in the election of its directors is held by the
Corporation, (b) as a trustee of an employee benefit plan and the duties of
the director or officer to the
16.
<PAGE>
Corporation also impose duties on, or otherwise involve services by, the
director or officer to the plan or to participants in or beneficiaries of the
plan or (c) in an executive or management capacity in a foreign or domestic
partnership, joint venture, trust or other enterprise of which the
Corporation or a wholly owned subsidiary of the Corporation is a general
partner or has a majority ownership or interest shall be deemed to be so
serving at the request of the Corporation and entitled to indemnification and
advancement of expenses under this Article.
ARTICLE 11
AMENDMENT OF BYLAWS
11.1 These Bylaws may be altered, amended or repealed and new Bylaws may
be adopted by the Board, except that the Board may not repeal or amend any
Bylaw that the shareholders have expressly provided, in amending or repealing
such Bylaw, may not be amended or repealed by the Board. The shareholders
may also alter, amend and repeal these Bylaws or adopt new Bylaws. All
Bylaws made by the Board may be amended, repealed, altered or modified by the
shareholders.
The foregoing Bylaws were read, approved, and duly adopted by the Board
of Directors, of InterNAP Network Services Corporation, on the 22nd day of
July 1999, and the Secretary of the Corporation was empowered to authenticate
such Bylaws by his signature below.
/s/ Paul E. McBride
---------------------
Paul E. McBride
Secretary
17.
<PAGE>
[LETTERHEAD]
January 27, 2000
InterNAP Network Services Corporation
601 Union Street, Suite 1000
Seattle, WA 98101
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by InterNAP Network Services Corporation (the "Company") of a
Registration Statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission") covering an underwritten
public offering of up to eight million six hundred twenty-five thousand
(8,625,000) shares of Common Stock (the "Common Stock").
In connection with this opinion, we have examined and relied upon the
Registration Statement and related Prospectus, the Company's Articles of
Incorporation, as amended, and Bylaws, as currently in effect, and the
originals or copies certified to our satisfaction of such records, documents,
certificates, memoranda and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the Registration
Statement and related Prospectus, will be validly issued, fully paid and
non-assessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included on the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ Christopher W. Wright
-------------------------------------
Christopher W. Wright
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
AMENDED 1999 EQUITY INCENTIVE PLAN
ADOPTED JUNE 19, 1999
APPROVED BY SHAREHOLDERS AUGUST 23, 1999
AS AMENDED BY THE BOARD OF DIRECTORS ON DECEMBER 9, 1999
TERMINATION DATE: JUNE 18, 2009
1. PURPOSES.
(a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive
Stock Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.
(b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a
means by which eligible recipients of Stock Awards may be given an opportunity
to benefit from increases in value of the Common Stock through the granting of
the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory
Stock Options, (iii) stock bonuses and (iv) rights to acquire restricted stock.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to
retain the services of the group of persons eligible to receive Stock Awards, to
secure and retain the services of new members of this group and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation
of the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CAUSE" shall have such meaning as is defined in the
Optionholder's employment or consulting agreement with the Company. If the
Optionholder does not have an employment or consulting agreement with the
Company, or if such agreement does not define the term "cause," then the term
"cause" shall mean: (i) misconduct or dishonesty that materially adversely
affects the Company, including without limitation (A) an act materially in
conflict with the financial interests of the Corporation, (B) an act that could
damage the reputation or customer relations of the Company, (C) an act that
could subject the Company to liability, (D) an act constituting sexual
harassment or other violation of the civil rights of coworkers, (E) failure to
obey any lawful instruction of the Board or any officer of the Company and (F)
failure to comply with, or perform any duty required under, the terms of any
confidentiality, inventions or non-competition agreement the Optionholder may
have with the Company, or (ii) acts constituting
1.
<PAGE>
the unauthorized disclosure of any of the trade secrets or confidential
information of the Company, unfair competition with the Company or the
inducement of any customer of the Company to breach any contract with the
Company. The right to exercise any Option shall be suspended automatically
during the pendency of any investigation by the Board or its designee, and/or
any negotiations by the Board or its designee and the Optionholder, regarding
any actual or alleged act or omission by the Optionholder of the type
described in this section.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of one or more members of the Board
appointed by the Board in accordance with subsection 3(c).
(f) "COMMON STOCK" means the common stock of the Company.
(g) "COMPANY" means InterNAP Network Services Corporation, a
Washington corporation.
(h) "CONSULTANT" means any person, including an advisor, (i) engaged
by the Company or an Affiliate to render consulting or advisory services and who
is compensated for such services or (ii) who is a member of the Board of
Directors of an Affiliate. However, the term "Consultant" shall not include
either Directors who are not compensated by the Company for their services as
Directors or Directors who are merely paid a director's fee by the Company for
their services as Directors.
(i) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director will not
constitute an interruption of Continuous Service. The Board or the chief
executive officer of the Company, in that party's sole discretion, may determine
whether Continuous Service shall be considered interrupted in the case of any
leave of absence approved by that party, including sick leave, military leave or
any other personal leave.
(j) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to shareholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.
(k) "DIRECTOR" means a member of the Board of Directors of the
Company.
(l) "DISABILITY" means (i) before the Listing Date, the inability of a
person, in the opinion of a qualified physician acceptable to the Company, to
perform the major duties of that person's position with the Company or an
Affiliate of the Company because of the sickness or
2.
<PAGE>
injury of the person and (ii) after the Listing Date, the permanent and total
disability of a person within the meaning of Section 22(e)(3) of the Code.
(m) "EMPLOYEE" means any person employed by the Company or an
Affiliate. Mere service as a Director or payment of a director's fee by the
Company or an Affiliate shall not be sufficient to constitute "employment" by
the Company or an Affiliate.
(n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(o) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or traded on the NASDAQ National Market or the NASDAQ SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Common Stock) on the day of determination, as reported in THE
WALL STREET JOURNAL or such other source as the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
(iii) Prior to the Listing Date, the value of the Common Stock
shall be determined in a manner consistent with Section 260.140.50 of Title 10
of the California Code of Regulations.
(p) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(q) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system if
such securities exchange or interdealer quotation system has been certified in
accordance with the provisions of Section 25100(o) of the California Corporate
Securities Law of 1968.
(r) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or a subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or a subsidiary for services rendered as a consultant or in any capacity other
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
3.
<PAGE>
(s) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(t) "OFFICER" means (i) before the Listing Date, any person designated
by the Company as an officer and (ii) on and after the Listing Date, a person
who is an officer of the Company within the meaning of Section 16 of the
Exchange Act and the rules and regulations promulgated thereunder.
(u) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option granted pursuant to the Plan.
(v) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of
the Plan.
(w) "OPTIONHOLDER" means a person to whom an Option is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Option.
(x) "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within the
meaning of Treasury Regulations promulgated under Section 162(m) of the Code),
is not a former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(y) "PARTICIPANT" means a person to whom a Stock Award is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Stock Award.
(z) "PLAN" means this InterNAP Network Services Corporation 1999
Equity Incentive Plan.
(aa) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act
or any successor to Rule 16b-3, as in effect from time to time.
(bb) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(cc) "STOCK AWARD" means any right granted under the Plan, including an
Option, a stock bonus and a right to acquire restricted stock.
(dd) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to
the terms and conditions of the Plan.
4.
<PAGE>
(ee) "TEN PERCENT SHAREHOLDER" means a person who owns (or is deemed to
own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan
unless and until the Board delegates administration to a Committee, as provided
in subsection 3(c). Any interpretation of the Plan by the Board and any
decision by the Board under the Plan shall be final and binding on all persons.
(b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons
eligible under the Plan shall be granted Stock Awards; when and how each Stock
Award shall be granted; what type or combination of types of Stock Award shall
be granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive Common Stock pursuant to a Stock Award; and the number of shares of
Common Stock with respect to which a Stock Award shall be granted to each such
person.
(ii) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in Section
12.
(iv) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) DELEGATION TO COMMITTEE.
(i) GENERAL. The Board may delegate administration of the Plan
to a Committee or Committees of one (1) or more members of the Board, and the
term "Committee" shall apply to any person or persons to whom such authority has
been delegated. If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board, including the power to delegate to a
subcommittee any of the administrative powers the Committee is authorized to
exercise (and references in this Plan to the Board shall thereafter be to the
Committee or subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and revest
in the Board the administration of the Plan.
5.
<PAGE>
(ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED.
At such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Section 162(m) of the Code, and/or solely of two or more Non-
Employee Directors, in accordance with Rule 16b-3. Within the scope of such
authority, the Board or the Committee may (1) delegate to a committee of one or
more members of the Board who are not Outside Directors the authority to grant
Stock Awards to eligible persons who are either (a) not then Covered Employees
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award or (b) not persons with respect to whom
the Company wishes to comply with Section 162(m) of the Code and/or) (2)
delegate to a committee of one or more members of the Board who are not Non-
Employee Directors the authority to grant Stock Awards to eligible persons who
are not then subject to Section 16 of the Exchange Act.
4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 11 relating
to adjustments upon changes in Common Stock, the Common Stock that may be issued
pursuant to Stock Awards shall not exceed in the aggregate six million five
hundred thousand (6,500,000) shares of Common Stock. As of the first nine (9)
anniversaries of the effective date of the Plan, the number of shares of Common
Stock that may be issued pursuant to Stock Awards will automatically be
increased by the lesser of (i) three and one-half percent (3 1/2%) of the total
number of shares of Common Stock outstanding on such anniversary date, or (ii)
six million five hundred thousand (6,500,000) shares.
(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award
shall for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full, the shares of Common Stock not acquired under
such Stock Award shall revert to and again become available for issuance under
the Plan.
(c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan
may be unissued shares or reacquired shares, bought on the market or otherwise.
(d) SHARE RESERVE LIMITATION. Prior to the Listing Date and to the
extent then required by Section 260.140.45 of Title 10 of the California Code of
Regulations, the total number of shares of Common Stock issuable upon exercise
of all outstanding Options and the total number of shares of Common Stock
provided for under any stock bonus or similar plan of the Company shall not
exceed the applicable percentage as calculated in accordance with the conditions
and exclusions of Section 260.140.45 of Title 10 of the California Code of
Regulations, based on the shares of Common Stock of the Company that are
outstanding at the time the calculation is made.
5. ELIGIBILITY.
(a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options
may be granted only to Employees. Stock Awards other than Incentive Stock
Options may be granted to Employees, Directors and Consultants.
6.
<PAGE>
(b) TEN PERCENT SHAREHOLDERS.
(i) A Ten Percent Shareholder shall not be granted an Incentive
Stock Option unless the exercise price of such Option is at least one hundred
ten percent (110%) of the Fair Market Value of the Common Stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the date of grant.
(ii) Prior to the Listing Date, a Ten Percent Shareholder shall
not be granted a Nonstatutory Stock Option unless the exercise price of such
Option is at least (i) one hundred ten percent (110%) of the Fair Market Value
of the Common Stock at the date of grant or (ii) such lower percentage of the
Fair Market Value of the Common Stock at the date of grant as is permitted by
Section 260.140.41 of Title 10 of the California Code of Regulations at the time
of the grant of the Option.
(iii) Prior to the Listing Date, a Ten Percent Shareholder shall
not be granted a restricted stock award unless the purchase price of the
restricted stock is at least (i) one hundred percent (100%) of the Fair Market
Value of the Common Stock at the date of grant or (ii) such lower percentage of
the Fair Market Value of the Common Stock at the date of grant as is permitted
by Section 260.140.41 of Title 10 of the California Code of Regulations at the
time of the grant of the Option.
(c) SECTION 162(m) LIMITATION. Subject to the provisions of Section
11 relating to adjustments upon changes in the shares of Common Stock, no
Employee shall be eligible to be granted Options covering more than three
million (3,000,000) shares of Common Stock during any calendar year. This
subsection 5(c) shall not apply prior to the Listing Date and, following the
Listing Date, this subsection 5(c) shall not apply until (i) the earliest of:
(1) the first material modification of the Plan (including any increase in the
number of shares of Common Stock reserved for issuance under the Plan in
accordance with Section 4); (2) the issuance of all of the shares of Common
Stock reserved for issuance under the Plan; (3) the expiration of the Plan; or
(4) the first meeting of shareholders at which Directors are to be elected that
occurs after the close of the third calendar year following the calendar year in
which occurred the first registration of an equity security under Section 12 of
the Exchange Act; or (ii) such other date required by Section 162(m) of the Code
and the rules and regulations promulgated thereunder.
(d) CONSULTANTS.
(i) Prior to the Listing Date, a Consultant shall not be
eligible for the grant of a Stock Award if, at the time of grant, either the
offer or the sale of the Company's securities to such Consultant is not exempt
under Rule 701 of the Securities Act ("Rule 701") because of the nature of the
services that the Consultant is providing to the Company, or because the
Consultant is not a natural person, or as otherwise provided by Rule 701, unless
the Company determines that such grant need not comply with the requirements of
Rule 701 and will satisfy another exemption under the Securities Act as well as
comply with the securities laws of all other relevant jurisdictions.
7.
<PAGE>
(ii) From and after the Listing Date, a Consultant shall not be
eligible for the grant of a Stock Award if, at the time of grant, a Form S-8
Registration Statement under the Securities Act ("Form S-8") is not available to
register either the offer or the sale of the Company's securities to such
Consultant because of the nature of the services that the Consultant is
providing to the Company, or because the Consultant is not a natural person, or
as otherwise provided by the rules governing the use of Form S-8, unless the
Company determines both (i) that such grant (A) shall be registered in another
manner under the Securities Act (E.G., on a Form S-3 Registration Statement) or
(B) does not require registration under the Securities Act in order to comply
with the requirements of the Securities Act, if applicable, and (ii) that such
grant complies with the securities laws of all other relevant jurisdictions.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and, if certificates are issued, a separate certificate or certificates
will be issued for shares of Common Stock purchased on exercise of each type of
Option. The provisions of separate Options need not be identical, but each
Option shall include (through incorporation of provisions hereof by reference in
the Option or otherwise) the substance of each of the following provisions:
(a) TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Shareholders, no Option granted prior to the Listing Date shall be
exercisable after the expiration of ten (10) years from the date it was granted,
and no Incentive Stock Option granted on or after the Listing Date shall be
exercisable after the expiration of ten (10) years from the date it was granted.
(b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Shareholders, the exercise
price of each Incentive Stock Option shall be not less than one hundred percent
(100%) of the Fair Market Value of the Common Stock subject to the Option on the
date the Option is granted. Notwithstanding the foregoing, an Incentive Stock
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
(c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Shareholders, the exercise
price of each Nonstatutory Stock Option granted prior to the Listing Date shall
be not less than eighty-five percent (85%) of the Fair Market Value of the
Common Stock subject to the Option on the date the Option is granted. The
exercise price of each Nonstatutory Stock Option granted on or after the Listing
Date shall be not less than eighty-five percent (85%) of the Fair Market Value
of the Common Stock subject to the Option on the date the Option is granted.
Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with
an exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Code.
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(d) CONSIDERATION. The purchase price of Common Stock acquired
pursuant to an Option shall be paid, to the extent permitted by applicable
statutes and regulations, either (i) in cash at the time the Option is exercised
or (ii) at the discretion of the Board at the time of the grant of the Option
(or subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to
the Company of other Common Stock, (2) according to a deferred payment or other
similar arrangement with the Optionholder (including an arrangement involving a
promissory note issued by the Optionholder) or (3) in any other form of legal
consideration that may be acceptable to the Board; provided, however, that at
any time that the Company is incorporated in Delaware, payment of the Common
Stock's "par value," as defined in the Delaware General Corporation Law, shall
not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding the foregoing, the Optionholder may,
by delivering written notice to the Company, in a form satisfactory to the
Company, designate a third party who, in the event of the death of the
Optionholder, shall thereafter be entitled to exercise the Option.
(f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory
Stock Option granted prior to the Listing Date shall not be transferable except
by will or by the laws of descent and distribution and, to the extent provided
in the Option Agreement, to such further extent as permitted by Section
260.140.41(d) of Title 10 of the California Code of Regulations at the time of
the grant of the Option, and shall be exercisable during the lifetime of the
Optionholder only by the Optionholder. A Nonstatutory Stock Option granted on
or after the Listing Date shall be transferable to the extent provided in the
Option Agreement. If the Nonstatutory Stock Option does not provide for
transferability, then the Nonstatutory Stock Option shall not be transferable
except by will or by the laws of descent and distribution and shall be
exercisable during the lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing, the Optionholder may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionholder, shall thereafter be
entitled to exercise the Option.
(g) VESTING GENERALLY. The total number of shares of Common Stock
subject to an Option may, but need not, vest and therefore become exercisable in
periodic installments that may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(g) are subject to any Option provisions
governing the minimum number of shares of Common Stock as to which an Option may
be exercised.
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(h) MINIMUM VESTING PRIOR TO THE LISTING DATE. Notwithstanding the
foregoing subsection 6(g), to the extent that the following restrictions on
vesting are required by Section 260.140.41(f) of Title 10 of the California Code
of Regulations at the time of the grant of the Option, then:
(i) Options granted prior to the Listing Date to an Employee
who is not an Officer, Director or Consultant shall provide for vesting of the
total number of shares of Common Stock at a rate of at least twenty percent
(20%) per year over five (5) years from the date the Option was granted, subject
to reasonable conditions such as continued employment; and
(ii) Options granted prior to the Listing Date to Officers,
Directors or Consultants may be made fully exercisable, subject to reasonable
conditions such as continued employment, at any time or during any period
established by the Company.
(i) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability or for Cause), the Optionholder may exercise his or her Option (to
the extent that the Optionholder was entitled to exercise such Option as of the
date of termination) but only within such period of time ending on the earlier
of (i) the date three (3) months following the termination of the Optionholder's
Continuous Service (or such longer or shorter period specified in the Option
Agreement, which period shall not be less than thirty (30) days for Options
granted prior to the Listing Date unless such termination is for cause), or (ii)
the expiration of the term of the Option as set forth in the Option Agreement.
If, after termination, the Optionholder does not exercise his or her Option
within the time specified in the Option Agreement, the Option shall terminate.
In the event an Optionholder's Continuous Service terminates for Cause, then his
or her Option shall terminate immediately upon such event.
(j) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement
may also provide that if the exercise of the Option following the termination of
the Optionholder's Continuous Service (other than upon the Optionholder's death
or Disability or for Cause) would be prohibited at any time solely because the
issuance of shares of Common Stock would violate the registration requirements
under the Securities Act, then the Option shall terminate on the earlier of (i)
the expiration of the term of the Option set forth in subsection 6(a) or (ii)
the expiration of a period of three (3) months after the termination of the
Optionholder's Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements.
(k) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise such Option as of the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period specified in
the Option Agreement, which period shall not be less than six (6) months for
Options granted prior to the Listing Date) or (ii) the expiration of the term of
the Option as set forth in the Option
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Agreement. If, after termination, the Optionholder does not exercise his or
her Option within the time specified herein, the Option shall terminate.
(l) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's
Continuous Service terminates as a result of the Optionholder's death or (ii)
the Optionholder dies within the period (if any) specified in the Option
Agreement after the termination of the Optionholder's Continuous Service for a
reason other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise such Option as of the date of death) by
the Optionholder's estate, by a person who acquired the right to exercise the
Option by bequest or inheritance or by a person designated to exercise the
option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but
only within the period ending on the earlier of (1) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement, which period shall not be less than six (6) months for
Options granted prior to the Listing Date) or (2) the expiration of the term of
such Option as set forth in the Option Agreement. If, after death, the Option
is not exercised within the time specified herein, the Option shall terminate.
(m) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares of Common Stock subject to the Option prior to the full vesting of
the Option. Subject to the "Repurchase Limitation" in subsection 10(h), any
unvested shares of Common Stock so purchased may be subject to a repurchase
option in favor of the Company or to any other restriction the Board determines
to be appropriate.
(n) RIGHT OF REPURCHASE. Subject to the "Repurchase Limitation" in
subsection 10(h), the Option may, but need not, include a provision whereby the
Company may elect, prior to the Listing Date, to repurchase all or any part of
the vested shares of Common Stock acquired by the Optionholder pursuant to the
exercise of the Option.
(o) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to exercise
a right of first refusal following receipt of notice from the Optionholder of
the intent to transfer all or any part of the shares of Common Stock received
upon the exercise of the Option. Except as expressly provided in this
subsection 6(o), such right of first refusal shall otherwise comply with any
applicable provisions of the Bylaws of the Company.
(p) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board to make or not to make grants of Options hereunder, the Board shall have
the authority (but not an obligation) to include as part of any Option Agreement
a provision entitling the Optionholder to a further Option (a "Re-Load Option")
in the event the Optionholder exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Any such Re-Load Option shall (i) provide for a number of shares of Common Stock
equal to the number of shares of Common Stock surrendered as part or all of the
exercise price of such Option; (ii) have an expiration date which is the same as
the expiration date of the
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Option the exercise of which gave rise to such Re-Load Option; and (iii) have
an exercise price which is equal to one hundred percent (100%) of the Fair
Market Value of the Common Stock subject to the Re-Load Option on the date of
exercise of the original Option. Notwithstanding the foregoing, a Re-Load
Option shall be subject to the same exercise price and term provisions
heretofore described for Options under the Plan.
Any such Re-Load Option may be an Incentive Stock Option or a
Nonstatutory Stock Option, as the Board may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollar ($100,000) annual limitation on the exercisability of Incentive Stock
Options described in subsection 10(d) and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares of Common Stock under
subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options
under subsection 5(c) and shall be subject to such other terms and conditions as
the Board may determine which are not inconsistent with the express provisions
of the Plan regarding the terms of Options.
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such
form and shall contain such terms and conditions as the Board shall deem
appropriate. The terms and conditions of stock bonus agreements may change from
time to time, and the terms and conditions of separate stock bonus agreements
need not be identical, but each stock bonus agreement shall include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions:
(i) CONSIDERATION. A stock bonus may be awarded in
consideration for past services actually rendered to the Company or an Affiliate
for its benefit.
(ii) VESTING. Subject to the "Repurchase Limitation" in
subsection 10(h), shares of Common Stock awarded under the stock bonus agreement
may, but need not, be subject to a share repurchase option in favor of the
Company in accordance with a vesting schedule to be determined by the Board.
(iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject
to the "Repurchase Limitation" in subsection 10(h), in the event a Participant's
Continuous Service terminates, the Company may reacquire any or all of the
shares of Common Stock held by the Participant which have not vested as of the
date of termination under the terms of the stock bonus agreement.
(iv) TRANSFERABILITY. For a stock bonus award made before the
Listing Date, rights to acquire shares of Common Stock under the stock bonus
agreement shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Participant
only by the Participant. For a stock bonus award made on or after the Listing
Date, rights to acquire shares of Common Stock under the stock bonus agreement
shall be transferable by the Participant only upon such terms and conditions as
are set
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forth in the stock bonus agreement, as the Board shall determine in its
discretion, so long as Common Stock awarded under the stock bonus agreement
remains subject to the terms of the stock bonus agreement.
(b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. The terms and conditions of the restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate restricted stock purchase agreements need not be identical, but each
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:
(i) PURCHASE PRICE. Subject to the provisions of subsection
5(b) regarding Ten Percent Shareholders, the purchase price under each
restricted stock purchase agreement shall be such amount as the Board shall
determine and designate in such restricted stock purchase agreement. For
restricted stock awards made prior to the Listing Date, the purchase price shall
not be less than eighty-five percent (85%) of the Common Stock's Fair Market
Value on the date such award is made or at the time the purchase is consummated.
For restricted stock awards made on or after the Listing Date, the purchase
price shall not be less than eighty-five percent (85%) of the Common Stock's
Fair Market Value on the date such award is made or at the time the purchase is
consummated.
(ii) CONSIDERATION. The purchase price of Common Stock acquired
pursuant to the restricted stock purchase agreement shall be paid either: (i)
in cash at the time of purchase; (ii) at the discretion of the Board, according
to a deferred payment or other similar arrangement with the Participant; or
(iii) in any other form of legal consideration that may be acceptable to the
Board in its discretion; provided, however, that at any time that the Company is
incorporated in Delaware, then payment of the Common Stock's "par value," as
defined in the Delaware General Corporation Law, shall not be made by deferred
payment.
(iii) VESTING. Subject to the "Repurchase Limitation" in
subsection 10(h), shares of Common Stock acquired under the restricted stock
purchase agreement may, but need not, be subject to a share repurchase option in
favor of the Company in accordance with a vesting schedule to be determined by
the Board.
(iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject
to the "Repurchase Limitation" in subsection 10(h), in the event a Participant's
Continuous Service terminates, the Company may repurchase or otherwise reacquire
any or all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the restricted stock
purchase agreement.
(v) TRANSFERABILITY. For a restricted stock award made before
the Listing Date, rights to acquire shares of Common Stock under the restricted
stock purchase agreement shall not be transferable except by will or by the laws
of descent and distribution and shall be exercisable during the lifetime of the
Participant only by the Participant. For a restricted stock award made on or
after the Listing Date, rights to acquire shares of Common Stock under the
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restricted stock purchase agreement shall be transferable by the Participant
only upon such terms and conditions as are set forth in the restricted stock
purchase agreement, as the Board shall determine in its discretion, so long as
Common Stock awarded under the restricted stock purchase agreement remains
subject to the terms of the restricted stock purchase agreement.
8. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Stock Awards and to issue and sell shares
of Common Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award. If, after reasonable efforts, the Company is unable to obtain
from any such regulatory commission or agency the authority which counsel for
the Company deems necessary for the lawful issuance and sale of Common Stock
under the Plan, the Company shall be relieved from any liability for failure to
issue and sell Common Stock upon exercise of such Stock Awards unless and until
such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.
10. MISCELLANEOUS.
(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have
the power to accelerate the time at which a Stock Award may first be exercised
or the time during which a Stock Award or any part thereof will vest in
accordance with the Plan, notwithstanding the provisions in the Stock Award
stating the time at which it may first be exercised or the time during which it
will vest.
(b) SHAREHOLDER RIGHTS. No Participant shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any shares
of Common Stock subject to such Stock Award unless and until such Participant
has satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant any right to continue to serve the Company or an Affiliate in
the capacity in effect at the time the Stock Award was granted or shall affect
the right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service of a
Consultant pursuant to the terms of such Consultant's agreement with the Company
or an
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Affiliate or (iii) the service of a Director pursuant to the Bylaws of the
Company or an Affiliate, and any applicable provisions of the corporate law of
the state in which the Company or the Affiliate is incorporated, as the case may
be.
(d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that
the aggregate Fair Market Value (determined at the time of grant) of Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by any Optionholder during any calendar year (under all plans of the
Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the
Options or portions thereof which exceed such limit (according to the order in
which they were granted) shall be treated as Nonstatutory Stock Options.
(e) INVESTMENT ASSURANCES. The Company may require a Participant, as
a condition of exercising or acquiring Common Stock under any Stock Award, (i)
to give written assurances satisfactory to the Company as to the Participant's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (ii) to
give written assurances satisfactory to the Company stating that the Participant
is acquiring Common Stock subject to the Stock Award for the Participant's own
account and not with any present intention of selling or otherwise distributing
the Common Stock. The foregoing requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (iii) the issuance of the shares
of Common Stock upon the exercise or acquisition of Common Stock under the Stock
Award has been registered under a then currently effective registration
statement under the Securities Act or (iv) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the Common Stock.
(f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a
Stock Award Agreement, the Participant may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of Common
Stock under a Stock Award by any of the following means (in addition to the
Company's right to withhold from any compensation paid to the Participant by the
Company) or by a combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares of Common Stock from the shares of
Common Stock otherwise issuable to the Participant as a result of the exercise
or acquisition of Common Stock under the Stock Award in an amount not to exceed
the minimum amount of tax required to be withheld by law; or (iii) delivering to
the Company owned and unencumbered shares of Common Stock. Notwithstanding the
foregoing, the Company shall not be authorized to withhold shares of Common
Stock at rates in excess of the minimum statutory withholding rates for federal
and state tax purposes, including payroll taxes.
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(g) INFORMATION OBLIGATION. Prior to the Listing Date, to the extent
required by Section 260.140.46 of Title 10 of the California Code of
Regulations, the Company shall deliver financial statements to Participants at
least annually. This subsection 10(g) shall not apply to key Employees whose
duties in connection with the Company assure them access to equivalent
information.
(h) REPURCHASE LIMITATION. The terms of any repurchase option shall
be specified in the Stock Award and may be either at Fair Market Value at the
time of repurchase or at not less than the original purchase price. To the
extent required by Section 260.140.41 and Section 260.140.42 of Title 10 of the
California Code of Regulations at the time a Stock Award is made, any repurchase
option contained in a Stock Award granted prior to the Listing Date to a person
who is not an Officer, Director or Consultant shall be upon the terms described
below:
(i) FAIR MARKET VALUE. If the repurchase option gives the
Company the right to repurchase the shares of Common Stock upon termination of
employment at not less than the Fair Market Value of the shares of Common Stock
to be purchased on the date of termination of Continuous Service, then (i) the
right to repurchase shall be exercised for cash or cancellation of purchase
money indebtedness for the shares of Common Stock within ninety (90) days of
termination of Continuous Service (or in the case of shares of Common Stock
issued upon exercise of Stock Awards after such date of termination, within
ninety (90) days after the date of the exercise) or such longer period as may be
agreed to by the Company and the Participant (for example, for purposes of
satisfying the requirements of Section 1202(c)(3) of the Code regarding
"qualified small business stock") and (ii) the right terminates when the shares
of Common Stock become publicly traded.
(ii) ORIGINAL PURCHASE PRICE. If the repurchase option gives
the Company the right to repurchase the shares of Common Stock upon termination
of Continuous Service at the original purchase price, then (i) the right to
repurchase at the original purchase price shall lapse at the rate of at least
twenty percent (20%) of the shares of Common Stock per year over five (5) years
from the date the Stock Award is granted (without respect to the date the Stock
Award was exercised or became exercisable) and (ii) the right to repurchase
shall be exercised for cash or cancellation of purchase money indebtedness for
the shares of Common Stock within ninety (90) days of termination of Continuous
Service (or in the case of shares of Common Stock issued upon exercise of
Options after such date of termination, within ninety (90) days after the date
of the exercise) or such longer period as may be agreed to by the Company and
the Participant (for example, for purposes of satisfying the requirements of
Section 1202(c)(3) of the Code regarding "qualified small business stock").
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common
Stock subject to the Plan, or subject to any Stock Award, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es)
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and maximum number of securities subject to the Plan pursuant to subsection
4(a) and the maximum number of securities subject to award to any person
pursuant to subsection 5(c), and the outstanding Stock Awards will be
appropriately adjusted in the class(es) and number of securities and price per
share of Common Stock subject to such outstanding Stock Awards. The Board
shall make such adjustments, and its determination shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company
shall not be treated as a transaction "without receipt of consideration" by
the Company.)
(b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or
liquidation of the Company, then all outstanding Stock Awards shall terminate
immediately prior to such event.
(c) CERTAIN CHANGES IN CONTROL. In the event of (i) a sale, lease or
other disposition of all or substantially all of the assets of the Company, (ii)
a merger or consolidation in which the Company is not the surviving corporation
or (iii) a reverse merger in which the Company is the surviving corporation but
the shares of Common Stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise (collectively, a "Change in Control"), then any
surviving corporation or acquiring corporation may assume or continue any Stock
Awards outstanding under the Plan or may substitute similar stock awards
(including an award to acquire the same consideration paid to the shareholders
in the transaction described in this subsection 11(c)) for those outstanding
under the Plan. In the event any surviving corporation or acquiring corporation
refuses to assume or continue such Stock Awards or to substitute similar stock
awards for those outstanding under the Plan, then with respect to Stock Awards
held by Participants whose Continuous Service has not terminated, the vesting of
such Stock Awards (and, if applicable, the time during which such Stock Awards
may be exercised) shall be accelerated in full, and the Stock Awards shall
terminate if not exercised (if applicable) at or prior to such event. With
respect to any other Stock Awards outstanding under the Plan, such Stock Awards
shall terminate if not exercised (if applicable) prior to such event.
(d) TERMINATION OF SERVICE FOLLOWING A CHANGE IN CONTROL. Unless
otherwise specified in the applicable Stock Award Agreement, in the event of the
occurrence of a Change in Control and provided that a Participant's Stock Award
remains in effect following such Change in Control or is assumed, continued or
substituted for any similar stock award in connection with the Change in
Control, then, if such Participant's Continuous Service is terminated by the
Company without Cause within thirteen (13) months following the effective date
of the Change in Control, all Stock Awards held by such Participant (or any
substituted stock awards) shall, as of the date of such termination of
Continuous Service, vest in full and become fully exercisable (if applicable) to
the extent not previously vested or exercisable. Such Stock Awards shall remain
exercisable until they expire in accordance with their terms.
(e) SECURITIES ACQUISITION. After the Listing Date, in the event of an
acquisition by any person, entity or group within the meaning of Section 13(d)
or 14(d) of the Exchange Act, or any comparable successor provisions (excluding
any employee benefit plan, or related trust, sponsored or maintained by the
Company or an Affiliate) of the beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act, or comparable successor rule) of
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securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of Directors, then with
respect to Stock Awards held by Participants whose Continuous Service has not
terminated, the vesting of such Stock Awards (and, if applicable, the time
during which such Stock Awards may be exercised) shall be accelerated in full.
Such Stock Awards shall remain exercisable until they expire in accordance with
their terms.
(f) PARACHUTE PAYMENTS. If any payment or benefit Optionholder would
receive in connection with a Change in Control from the Company or otherwise
("Payment") would (i) constitute a "parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and
(ii) but for this sentence, be subject to the excise tax imposed by Section 4999
of the Code (the "Excise Tax"), then such Payment shall be reduced to the
Reduced Amount. The "Reduced Amount" shall be either (x) the largest portion of
the Payment that would result in no portion of the Payment being subject to the
Excise Tax or (y) the largest portion, up to and including the total, of the
Payment, whichever amount, after taking into account all applicable federal,
state and local employment taxes, income taxes, and the Excise Tax (all computed
at the highest applicable marginal rate), results in Optionholder's receipt, on
an after-tax basis, of the greater amount of the Payment notwithstanding that
all or some portion of the Payment may be subject to the Excise Tax. If a
reduction in payments or benefits constituting "parachute payments" is necessary
so that the Payment equals the Reduced Amount, reduction shall occur in the
following order unless the Optionholder elects in writing a different order
(PROVIDED, HOWEVER, that such election shall be subject to Company approval if
made on or after the effective date of the Change of Control): reduction of
cash payments; cancellation of accelerated vesting of stock awards; reduction of
employee benefits. In the event that acceleration of vesting of stock award
compensation is to be reduced, such acceleration of vesting shall be cancelled
in the reverse order of the date of grant of the Optionholder's stock awards
unless the Optionholder elects in writing a different order for cancellation.
The accounting firm engaged by the Company for general audit purposes as
of the day prior to the effective date of the Change in Control shall perform
the foregoing calculations. If the accounting firm so engaged by the Company is
serving as accountant or auditor for the individual, entity or group effecting
the Change in Control, the Company shall appoint a nationally recognized
accounting firm to make the determinations required hereunder. The Company
shall bear all expenses with respect to the determinations by such accounting
firm required to be made hereunder.
The accounting firm engaged to make the determinations hereunder shall
provide its calculations, together with detailed supporting documentation, to
the Company and Optionholder within fifteen (15) calendar days after the date on
which Optionholder's right to a Payment arises (if requested at that time by the
Company or Optionholder) or at such other time as requested by the Company or
Optionholder. If the accounting firm determines that no Excise Tax is payable
with respect to a Payment, either before or after the application of the Reduced
Amount, it shall furnish the Company and Optionholder with an opinion reasonably
acceptable to Optionholder that no Excise Tax will be imposed with respect to
such Payment. Any good faith determination
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of the accounting firm made hereunder shall be final, binding and conclusive
upon the Company and Optionholder.
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time,
may amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in Common Stock, no amendment shall be effective unless
approved by the shareholders of the Company to the extent shareholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any NASDAQ or securities exchange listing requirements.
(b) SHAREHOLDER APPROVAL. The Board may, in its sole discretion,
submit any other amendment to the Plan for shareholder approval, including, but
not limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.
(c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the
Board may amend the Plan in any respect the Board deems necessary or advisable
to provide eligible Employees with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
(d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted
before amendment of the Plan shall not be impaired by any amendment of the Plan
unless (i) the Company requests the consent of the Participant and (ii) the
Participant consents in writing.
(e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time
to time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate on the day before the
tenth (10th) anniversary of the date the Plan is adopted by the Board or
approved by the shareholders of the Company, whichever is earlier. No Stock
Awards may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan
shall not impair rights and obligations under any Stock Award granted while the
Plan is in effect except with the written consent of the Participant.
19.
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14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Stock
Award shall be exercised (or, in the case of a stock bonus, shall be granted)
unless and until the Plan has been approved by the shareholders of the Company,
which approval shall be within twelve (12) months before or after the date the
Plan is adopted by the Board.
15. CHOICE OF LAW.
The law of the State of Washington shall govern all questions concerning
the construction, validity and interpretation of this Plan, without regard to
such state's conflict of laws rules.
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EXHIBIT 10.10
AGREEMENT TO LEASE
This Agreement ("Lease"), as of the 1st day of June, 1996 is by and between
SIXTH & VIRGINIA PROPERTIES, a Washington General Partnership, hereinafter
called "Owner," and InterNAP Network Services, L.L.C., a Washington Limited
Liability corporation, hereinafter called "Tenant."
1. NONSTANDARD PROVISIONS
The following constitute the nonstandard provisions of this Lease and are
referred to elsewhere herein.
a. FLOOR OF THE WESTIN BUILDING ON WHICH PREMISES ARE LOCATED:
8
b. AGREED FLOOR AREA OF PREMISES:
Five thousand eight hundred fifty four (5854) square feet that
includes an allowance for core and/or common areas used by Tenant.
c. THE TERM OF THIS LEASE (hereinafter "Lease Term") shall be Five (5)
years and shall commence on the 1st day of June, 1996, and end on the
31st day of May, 2001.
d. MONTHLY BASE RENT:
June 1, 1996 - May 31, 1997 $8781
June 1, 1997 - May 31, 1998 $9269
June 1, 1998 - May 31, 1999 $9757
June 1, 1999 - May 31, 2000 $10,245
June 1, 2000 - May 31, 2001 $10,732
e. RENT PER DAY during any occupancy prior to commencement of Lease Term:
none
f. Reimbursement to Owner for Special Improvements:
Total tenant improvement costs and utility upgrades are projected to
cost $137,775.00. Owner and Tenant agree to split the cost of such
improvements described in exhibit C. Tenant agrees to pay interest at
10% per annum on any amounts paid for by Owner. One half of the Tenant
Improvement balance held by the Owner plus any accrued interest at 10%
per annum will be paid on the first day of the second year of the
lease. The remaining balance plus accrued interest at 10% per annum
will be paid on the first day of the third year.
g. USE PERMITTED ON PREMISES:
Internet communications facilities and general office use.
h. TENANT'S ADDRESS FOR NOTICES IF OTHER THAN PREMISES:
none
i. TENANT'S BILLING ADDRESS IF OTHER THAN PREMISES:
n/a
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j. PARKING:
During the Lease Term, Owner shall provide Tenant with unreserved parking
space for five (5) automobiles in The Westin Building Garage. The space
shall be made available during periods of typical office use from 7:00 a.m.
to 6:00 p.m. five days per week, Monday through Friday, and at other times
for the person to whom such space is regularly rented who wishes to work in
building.
Tenant shall pay in advance the charge established by Owner for said
spaces, in addition to rent hereunder. If Tenant fails to timely pay such
charge, Owner may by written notice to Tenant elect either to proceed as
provided in Article 14 or to cease to provide the foregoing parking spaces.
Upon initial occupancy of Garage, the charge for these spaces shall be
$138.00 per month (including tax). From time to time during this Lease, the
charge for spaces shall be increased to the then-prevailing rate for
similar service in the immediate area.
Owner shall maintain the right to pass on to Tenant all applicable parking
taxes.
k. RELOCATION OF PREMISES:
Owner shall have the right to relocate the Premises in Building on the
following terms and conditions:
1) The floor area of the new location shall be approximately the same as
the floor area of the original location;
2) Tenant will be reimbursed for all reasonable expenses incurred in
connection with the relocation, including but not limited to the net
cost of putting the new Premises in the same condition as the original
location, moving, signage, telephone & computer equipment relocation
and reasonable quantities of new stationery;
3) Owner shall give Tenant at least Ninety (90) days written notice of
relocation.
l. SECURITY DEPOSIT:
Concurrently with the execution of this Lease, Tenant shall deliver to
Owner a sum equal to Seventeen Thousand Five Hundred Sixty two Dollars
($17,562.00), this as security for the performance by Tenant of every
covenant and condition of this Lease. Upon payment of deposit, Tenant shall
request and Owner shall deliver to Tenant a written receipt therefor.
Deposit may be commingled with other funds of Owner and shall bear no
interest. If Tenant shall default with respect to any covenant or condition
of this Lease, including but not limited to the payment of rent, Owner may
apply the whole or any part of deposit to the payment of any sum in default
or any other sum which Owner may be required to spend by reason of Tenant's
default. Should Tenant comply with all of the covenants and conditions of
this Lease, deposit shall be returned to Tenant (or, at the option of
Owner, to the last assignee of Tenant's interest in this Lease) at the
expiration of the term hereof. Tenant shall not move into Premises until
said deposit has been paid to Owner.
m. SIGNAGE:
Owner will provide signage, according to building standards, to Tenant with
Tenant's business name at Three (3) separate locations:
1) Main Lobby Directory - Sixth Avenue
2) Third Floor Lobby Directory - Skybridge entrance from Garage
3) Elevator Lobby Directory on Tenant's floor
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n. HOLDING OVER:
If Tenant shall continue its occupancy of the Premises after the
expiration of the Lease Term, the occupancy shall not be deemed to
extend or renew the term of this Lease, and such occupancy shall
constitute a tenancy from month to month, subject to all of the terms
of this Lease, except the term, and except that the Rent for each
month of continued occupancy shall be double the Rent for the last
full month of the Lease Term. Tenant shall also be liable for Owner's
incidental and consequential damages sustained by virtue of Tenant's
holding.
o. SQUARE FOOTAGE ADJUSTMENT:
Owner and Tenant agree that reasonable attempts have been made to
determine the correct square footage used in this Lease. Owner grants
Tenant the option to remeasure and challenge the new premises square
footage calculation at Tenant's expense. If Tenant's square footage
calculation differs from the number used in this Lease, Owner will
remeasure at Owner's expense to determine which calculation is
correct. Owner and Tenant agree that any challenge of the square
footage calculation must be carried out within one month of the
commencement date. After that time, Owner and Tenant agree to mutually
waive any and all rights, claims, or liabilities against each other as
it relates to the calculation of square footages to determine rents
and other costs in this Lease.
p. MEET-ME ROOM ACCESS
Tenant shall have the right to share usage of the 19th floor Meet-Me
Room and associated wiring conduit. Owner shall supervise the
maintenance of the room by tenant-users and shall use all reasonable
means to ensure this facility is always available to Tenant. Tenant
agrees to abide by the regulations set jointly by owners and
tenant-users or, should its practices conflict with those regulations,
to vacate immediately upon written request. As in Article 7, Owner
shall not be liable for damages nor shall the rental herein be abated
for failure to furnish or interruption in service in this facility.
For Meet-Me Room usage, Tenant shall pay a one-time usage fee of Five
Hundred Dollars ($500.00) no later than Thirty (30) days following
Commencement Date and a recurring monthly charge of $50.00 per DSX
panel installed within the room.
q. CABLE RIGHT OF WAY
Owner gives to Tenant the right of way to install cable from the
Premises to the "Meet Me Room" on the 19th floor. Such installation is
at Tenant's expense and subject to limitations and exclusions
presented within Lease. Such installation must be coordinated with and
approved by The Westin Building Engineer. Cabling to areas of the
building other than the Meet-Me Room shall be governed by the same
terms and conditions set forth above but shall additionally be subject
to monthly recurring charges as established by Owner for all other
cable run by users throughout the building.
r. CLASS "A" ENTRY
Tenant acknowledges owners requirement for the premises to have an
entry that is compatible with the Class "A" image of the building.
Tenant shall cooperate with Owner in developing an entry plan that
meets Owner's need for appearance and Tenant's need for privacy and
control. Owner agrees that the common areas of the floor specifically
the lobby and restrooms will be renovated within a reasonable time
consistent with the class A image.
s. OPTION TO EXTEND:
Provided that Tenant is not in default hereunder at the time of the
exercise of the Option to Extend and/or at the commencement of the
extended term, Tenant shall have the option to extend the term of this
lease beyond the Initial Term for an additional period of Five (5)
years (the "Extended Term") subject to expansion rights of a full
floor tenant on the 7th or 9th floors. In this event however tenant
shall first have the option to renew this lease by taking the entire
eighth floor. The option provided hereunder shall be exercised, if at
all, only by
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4
written notice to Owner not later than August 31, 2000. The same
terms and conditions applicable to the Initial Term of this Lease
shall apply during the Extended Term, except that the monthly
Rent shall be an amount equal to the product of (1) the agreed
floor area of the Premises multiplied by (2) the monthly rent per
rentable square foot established by Owner, in its reasonable
judgment, for new leases in the Building for substantially
equivalent size and located space as of the date of Tenant's
exercise of its Option to Extend.
t. EQUIPMENT AND FIXTURES:
Owner and Tenant agree that the premises contains the following
mechanical systems: specialized HVAC system to include two (2)
twenty (20) ton Liebert floor mounted air conditioning units and
associated piping; specialized fire protection system consisting
of a halon system and hydraulic preaction valve; and a domestic
water backup system for the HVAC units. These systems are to be
considered fixtures which Tenant shall take possession of and
have the right to use. Tenant shall be responsible for
maintaining the systems and preserving their functionality
through out their normal life cycle. Should any of the components
of these systems fail and require replacement, Tenant shall at
its option and its expense, replace necessary components or
restructure the system to eliminate the unwanted component in a
manner approved by the Building Engineer. If Tenant elects to
replace components at substantial capital cost, it shall have the
option to designate such components as trade fixtures which
Tenant will then be entitled to remove upon expiration of this
Lease and vacation of the Premises.
2 EXHIBITS
The following Drawings and Special Provisions are attached hereto as
exhibits and made a part of this Lease:
Exhibit A -- Floor plan of the Westin Building, herein called
"Building."
Exhibit B -- Site plan showing relation and location of Building
and Westin Building Garage.
Exhibit C -- Details of Premises Approved by Owner and Tenant.
3 PREMISES
Owner hereby leases to Tenant, and Tenant hereby leases of Owner, upon the
terms and conditions herein set forth, those certain Premises, described in
Article 1(a) and (b) and shown outlined in red on the standard floor plan
attached hereto marked "Exhibit A" and made a part hereof in that certain
Building, known as the Westin Building situated in the City of Seattle,
County of King, State of Washington, at Sixth Avenue and Virginia Street,
and located on the following real property:
Lots 11 and 12 (less portion for street), Block 15 of Addition to town
of Seattle, as laid off by Heirs of Sarah A. Bell, deceased (commonly
known as Heirs of Sarah A. Bell's Addition to the City of Seattle), as
per plat recorded in Volume I of plats, page 103, records of King
County, Washington.
The areas so leased are hereinafter called "Premises."
4 RENT
Tenant covenants and agrees to pay Owner the monthly rent which is set
forth in Article 1(d) to be adjusted as provided elsewhere in this Lease,
in United States currency in advance on or before the first day of each
calendar month during said term, at the office of Owner in Building or at
such other place as Owner may from time to time designate in writing. It is
agreed that since collection of any amount past due imposes an
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5
administrative cost on Owner, in addition to all other sums that may be
charged by Owner hereunder, Tenant shall pay to Owner a sum equal to Five
Cents ($0.05) for every Dollar not paid when due.
5 USE
Premises may be used only for the purpose set forth in Article 1(g) and for
no other purpose or purposes without the written consent of Owner. No use
shall be made of Premises, nor act done in or about Premises, which is
unlawful, or which may increase the existing rate of insurance upon
Building. Tenant shall not commit or allow to be committed any waste upon
Premises, or any public or private nuisance or other act or thing which
disturbs the quiet enjoyment of any other tenant in Building, nor shall
Tenant, without the written consent of Owner, use any apparatus, machinery
or device in or about Premises that shall cause any substantial noise or
vibration. If any of Tenant's office machines and equipment should disturb
the quiet enjoyment of any other tenant in Building, then Tenant shall
provide adequate insulation or take such other action as may be necessary
to eliminate the disturbance. Tenant shall observe such reasonable rules
and regulations as may be adopted by Owner for the safety, care and
cleanliness of Premises or Building and the preservation of good order
therein.
6 POSSESSION
In the event of Owner's inability to deliver possession of Premises ready
for occupancy at the commencement of the Lease Term, Owner shall not be
liable for any damage caused thereby, except as otherwise expressly stated
herein, nor shall this Lease become void or voidable, nor shall the Lease
Term be extended, but in such event, no rental shall be payable by Tenant
to Owner for any portion of the Lease Term prior to actual delivery to
Tenant of possession of Premises ready for occupancy by Tenant unless
Tenant shall have failed to meet its obligations under Article 23 or unless
the term of this Lease does not commence on or before July 1, 1996 without
fault on the part of Tenant in which event Tenant's sole remedy shall be to
cancel the Lease by giving thirty (30) days written notice of its said
election to Owner. If Tenant, with Owner's permission, enters into
possession of Premises prior to commencement of the Lease Term, all of the
terms and conditions of this Lease shall apply during such prior period,
except that rental shall be the amount set forth in article 1(e) for each
calendar day during such prior period.
7 SERVICES PROVIDED BY OWNER
Owner shall, at its sole cost and expense, maintain Premises and the public
and common areas of Building, such as lobbies, stairs, landscaping,
corridors and restrooms, together with the Westin Building Garage, in
reasonably good order and condition except for damage occasioned by the act
of Tenant.
Owner, at its sole cost, shall furnish Premises from 7:00 a.m. to 6:00 p.m.
Monday through Friday (exclusive of holidays), hereinafter called "Standard
Work Week," with electricity for lighting and the operating of office
machines, heat and air conditioning as may be reasonably required for the
occupation of Premises, and shall provide elevator service, lighting
replacement, toilet room supplies, window washing with reasonable
frequency, and daily janitorial service on the basis of a Standard Work
Week during the times and in the manner that such janitorial services are
customarily furnished in general office buildings in the area. Owner shall
not be liable for damages, nor shall the rental herein reserved be abated,
for failure to furnish or delay in furnishing any of the foregoing
services, when such failure or delay is caused by accident or conditions
beyond the control of Owner, or by labor disturbances or labor disputes of
any character, or by inability to secure fuel, supplies, machinery,
equipment or labor after reasonable efforts to do so, or by the making of
improvements or necessary repairs to Premises or Building, nor shall the
temporary failure to furnish any of such services be construed as an
eviction of Tenant or relieve Tenant from the duty of observing and
performing any of the provisions of this Lease.
Tenant acknowledges that the 24-hour nature of its business exceeds the
Standard Work Week described above. Owner shall at Tenant's cost install a
meter in the electrical system supplying Tenant's equipment room, measure
usage and bill Tenant monthly at the same rate, including demand charges,
billed by Seattle City Light plus a monthly billing fee of $10.00.
Additionally, Tenant shall pay for all other expenses incurred by Owner as
a result of Tenant using Premises in excess of Standard Work Week.
8 REPAIRS AND ALTERATIONS
Tenant agrees by taking possession of the Premises that Premises are then
in a tenantable and good condition, that Tenant will take good care of
Premises, and the same will not be altered or in any way changed without
the written consent of Owner. Tenant hereby waives any right to make
repairs at Owner's
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6
expense. Tenant shall not make changes to locks on doors or add, disturb,
or in any way change any plumbing or wiring without first obtaining
written consent of Owner. All damages or injury done to the Premises by
Tenant, or by any persons who may be in or upon Premises with the consent
of Tenant, shall be paid for by Tenant and Tenant shall pay for all
damages to Building caused by Tenant's misuse of Premises or the
appurtenances thereto. All other repairs to Premises necessary to maintain
Premises in a tenantable and good condition shall be done by or under the
direction of Owner and at Owner's expense except as otherwise specifically
provided herein. Tenant shall pay for the replacement of Special
Improvements as provided in Article 23 and the replacement of doors or
windows of Premises which are cracked or broken by Tenant, its employees,
agents, or invitees, and Tenant shall not put any curtains, draperies or
other hangings on or beside the windows in Premises without first
obtaining Owner's consent. Owner agrees that it will repaint the interior
of Premises at least once every five years with a color mutually agreed
upon between Tenant and Owner. Owner may make any alterations or
improvements which Owner may deem necessary for the preservation, safety
or improvement of Premises or Building. All alterations, additions and
improvements, except trade fixtures installed by Tenant and which are
removable without damage to Building, shall become the property of Owner.
Tenant shall, at the termination of this Lease by the expiration of time
or otherwise, surrender and deliver up Premises to Owner in as good
condition as when received by Tenant from Owner, reasonable use and wear
and damage by fire or other casualty excepted.
Should Owner be required to make changes or additions to Building or
Westin Building Garage at any time during the term of this Lease as a
result of any law, rule, code or regulation which becomes effective after
the Commencement Date, the Tenant shall pay on demand by Owner, as
additional rent, a monthly charge equal to the area of Premises as stated
in Article 1(b) divided by 350,000 times 1 and 1/3 percent of the cost of
the change or addition. Such additional rent shall commence upon
substantial completion of each such change or addition and shall continue
to the end of the term of this Lease.
9 ENTRY AND INSPECTION
Tenant will permit Owner and its agents to enter into and upon Premises at
all reasonable times for the purpose of inspecting the same or for the
purpose of cleaning, repairing, altering or improving Premises or Building
and when reasonably necessary may close entrances, doors, corridors,
elevators or other facilities without liability to Tenant by reason of
such closure and without such action by Owner being construed as an
eviction of Tenant or relieving the Tenant from the duty of observing and
performing any of the provisions of this Lease. Owner shall have the right
to enter Premises for the purpose of showing Premises to prospective
tenants for a period of 180 days prior to the expiration of the Lease
Term.
10 DAMAGE OR DESTRUCTION
If Premises or Building are damaged by fire, wind, or other such casualty,
the damage shall be repaired by and at the expense of Owner, provided such
repairs (to restore Premises to usable condition) can be made within sixty
(60) days after the occurrence of such damage without the payment of
overtime or other premiums, and until such repairs are completed, the rent
shall be abated in proportion to the part of Premises which is unusable by
Tenant in the conduct of its business (but there shall be no abatement of
rent by reason of any portion of Premises being unusable for a period
equal to one day or less).
If such repairs cannot be made within sixty (60) days, Owner may, at its
option, make them within a reasonable time, and in such event this Lease
shall continue in effect and the rent shall be abated in the manner
provided above. Owner's election to make repairs must be evidenced by
written notice to Tenant within thirty (30) days after the occurrence of
the damage.
If Owner does not elect to make such repairs that cannot be made within
sixty (60) days, then either party may, by written notice to the other,
terminate this Lease. A total destruction of Building shall automatically
terminate this Lease.
11 ADVERTISING
Tenant shall not inscribe any inscription, post, place, or in any manner
display any sign, notice, picture, placard or poster, or any advertising
matter whatsoever, anywhere in or about Premises or Building at places
visible (either directly or indirectly as an outline or shadow on a glass
pane) from any where outside Premises without first obtaining Owner's
written consent thereto.
12 INDEMNITY, LOSS AND WAIVER OF SUBROGATION
Tenant shall defend and indemnify Owner and save it harmless from and
against any and all liability, damages, costs, or expenses, including
attorneys' fees, arising from any act, omission or negligence of Tenant or
the officers, contractors, licensees, agents, servants, employees, guests,
invitees, or visitors of Tenant in or about Building, or arising from any
accident, injury, or damage, howsoever and by
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whomsoever caused, to any person or property, occurring in or about
Premises, provided that the foregoing provision shall not be construed to
make Tenant responsible for loss, damage, liability, or expense resulting
from injuries to third parties caused by the negligence of Owner or of any
officer, contractor, licensee, agent, servant, or employee of Owner. Owner
shall not be responsible for providing security and Tenant hereby releases
Owner from any claim for damage or loss of property that may arise as a
result of vandalism or theft in Building or Westin Building Garage. Owner
and Tenant each release the other from responsibility for, and waive their
entire claim of recovery for (i) any loss or damage to the real or personal
property of either located anywhere in Building and Westin Building Garage,
arising out of or incident to the occurrence of any of the perils which may
be covered by a fire and lightning insurance policy, with extended coverage
endorsement in common use in the Seattle locality or (ii) loss resulting
from business interruption at Premises or loss of rental income from
Building, arising out of or incident to the occurrence of any of the perils
that may be covered by a business interruption insurance policy and by the
loss of rental income insurance policy in common use in the Seattle
locality. To the extent that such risks under (i) and (ii) are in fact
covered by insurance, each party shall cause its insurance carriers to
consent to such waiver and to waive all rights of subrogation against the
other party.
13 LIENS AND INSOLVENCY
Tenant shall keep Premises and Building free from any liens or encumbrances
arising out of any work performed by Tenant, materials furnished by Tenant,
or obligations incurred by Tenant. Owner may terminate this Lease by giving
Tenant notice of its election to do so, if; (i) Tenant files a voluntary
petition in bankruptcy, or for reorganization under the bankruptcy laws, or
is adjudged a bankrupt by a court of competent jurisdiction, (ii) if Tenant
makes an assignment for the benefit of creditors, or if a receiver is
appointed for Tenant's business, or (iii) any other action is taken by or
against Tenant under any State or Federal insolvency or bankruptcy act. No
interest in this Lease or estate hereby created in favor of Tenant shall
pass by operation of law under any such bankruptcy or insolvency act to any
person whomsoever without the prior express written consent of Owner. Any
purported transfer in violation of this Article shall constitute a default
by Tenant.
14 DEFAULT AND RE-ENTRY
Except for a default under the preceding paragraph for which immediate
right of termination is given to Owner, if Tenant fails to pay any
installment of rent when due (plus interest on past due amounts at the
maximum legal rate from the date due) after 3 days written notice, or to
perform any other covenant under this Lease within thirty (30) days after
written notice from Owner stating the nature of the default, Owner may
re-enter and take possession of Premises using all reasonable force to do
so; provided, however, that if the nature of such default other than for
non-payment of rent is such that the same cannot reasonably be cured within
such thirty-day period, Tenant shall not be deemed to be in default if
Tenant shall within such period commence such cure and thereafter
diligently prosecute the same to completion. Notwithstanding such retaking
of possession by Owner, Tenant's liability for the rent provided herein
shall not be extinguished for the balance of the term of this Lease. Upon
such re-entry, Owner may elect either (i) to terminate this Lease, in which
event Tenant shall immediately pay to Owner a sum equal to that by which
the then cash value of the total rent reserved under this Lease for the
balance of the Lease Term exceeds the reasonable rental value of the
Premises for the balance of the Lease Term plus costs incident to releasing
the Premises including, but not limited to remodeling expenses, attorney's
fees and real estate commissions; or (ii) without terminating this Lease,
to relet all or any part of the Premises as the agent of and for the
account of Tenant upon such terms and conditions as Owner may deem
advisable, in which event the rents received on such reletting shall be
applied first to the expenses of reletting and collection, including
necessary renovation and alteration of Premises, reasonable attorney's fees
and real estate commissions paid, and thereafter to payment of all sums due
to or to become due Owner hereunder, and if a sufficient sum shall not be
thus realized to pay such sums and other charges, Tenant shall pay Owner
any deficiency monthly, and Owner may bring an action therefor as such
monthly deficiency shall arise.
In the event of any such retaking of possession of Premises by Owner as
herein provided, Tenant shall remove all personal property located thereon
and, upon failure to do so upon demand of Owner, Owner may, in addition to
any other remedies allowed by law, remove and store the same in any such
place selected by Owner, including but not limited to a public warehouse,
at the expense and risk of Tenant. If Tenant shall fail to pay any sums due
hereunder or the cost of storing any such property after it has been stored
for a period of thirty (30) days or more, Owner may sell any or all such
property at public or private sale and shall apply the proceeds of such
sale first, to the cost of such sale; second, to the payment of the charges
for storage, if any; and third, to the payment of any other sums of money
which may be due from Tenant to Owner under the terms of this Lease, and
the balance, if any, to Tenant.
Tenant hereby waives all claims for damages that may be caused by Owner's
lawfully re-entering and taking possession of Premises or lawfully removing and
storing or selling the property of Tenant as herein
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provided, and will save Owner harmless from loss, costs, or damages
occasioned thereby, and such lawful re-entry shall not be considered or
construed to be a forcible entry.
15 SURRENDER OF POSSESSION
Upon expiration of the term of this Lease, whether by lapse of time or
otherwise, Tenant shall promptly and peacefully surrender Premises to
Owner.
16 COSTS AND ATTORNEYS' FEES
If Tenant or Owner shall bring any action for any relief against the other,
declaratory or otherwise, arising out of this Lease, including any suit by
Owner for the recovery of rent or possession of Premises, the losing party
shall pay the successful party a reasonable sum for attorneys' fees in such
suit, and such attorneys' fees shall be deemed to have accrued on the
commencement of such action.
17 NON-WAIVER
Waiver by Either Party of any breach of any term, covenant or condition
herein contained shall not be deemed to be a waiver of such term, covenant,
or condition, or of any subsequent breach of the same or any other term,
covenant or condition herein contained. The subsequent acceptance of rent
hereunder by Owner shall not be deemed to be a waiver of any preceding
breach by Tenant of any term, covenant, or condition of this Lease, other
than the failure of Tenant to pay the particular rental so accepted
regardless of Owner's knowledge of such preceding breach at the time of
acceptance of such rent.
18 ASSIGNMENT AND SUBLETTING
Tenant shall not assign this Lease or sublet Premises or any part thereof
without first obtaining Owner's written consent, which shall not be
unreasonably withheld. No such assignment or subletting shall relieve
Tenant of Tenant's liability under the Lease, except, if at the time of
such assignment or subletting, Tenant establishes to the reasonable
satisfaction of Owner that such assignee or sublessee is of satisfactory
financial responsibility at least equal to that of Tenant and the
Guarantors at the time Tenant executed the Lease. Consent to any such
assignment or subletting shall not operate as a waiver of the necessity for
a consent to any subsequent assignment, and the terms of such consent shall
be binding upon any person holding by, under or through Tenant. In no event
shall a sublessee of Tenant sublet or assign any interest in this Lease.
In the event of an assignment or subletting that requires Owner's time
and/or expense, Tenant shall reasonably compensate Owner for such expenses.
Notwithstanding anything to the contrary herein, Owner's consent shall not
be required for the following transfers:
a) An assignment, sublease or other transfer of Tenant's interest in the
Lease to any other entity with which Tenant is affiliated or under common
control, provided the Owner is notified not later than ten (10) days after
the effective date of such event;
b) An assignment or transfer of this Lease to any person or entity
acquiring by asset or stock transfer, consolidation, merger, liquidation,
spin-off or reorganization, all or substantially all of the assets of
Tenant; provided, that the assignee or transferee agrees to assume and
perform all obligations of Tenant under this Lease and that immediately
following such acquisition the assignee's or transferees net worth equals
the net worth of Tenant on the date immediately preceding such assignment
or transfer; and provided further that Owner is notified not later than ten
(10) days after the effective date of such event;
c) Any (i) public offering of the stock of Tenant pursuant to the
Securities Act of 1933 and/or the Securities Exchange Act of 1934 as
amended, or (ii) transfer of stock between shareholders of Tenant, or (iii)
sale of additional shares of
8
<PAGE>
9
stock to individuals or entities currently not shareholders of
Tenant; provided, that immediately following such offering,
transfer or sales the net worth of Tenant equals or exceeds the
net worth of Tenant on the date immediately preceding such
offering, transfer or sale or
d) the mortgage, pledge, hypothecation or encumbrance of any
of the stock of Tenant.
19 SUCCESSORS
All of the covenants, agreements, terms and conditions contained
in this Lease shall apply to and be binding upon Owner and Tenant
and their respective heirs, executors, administrators, successors
and assigns.
20 TAX ON RENTAL
If any governmental authority or unit under any present or future
law effective at any time during the term of this Lease shall in
any manner levy a tax on rentals payable under this Lease or on
rentals accruing from use of Premises under this Lease, or a tax
in any form against Owner because of or measured by income
derived from the leasing or rental of Premises, the amount of the
next succeeding month's rent following payment of such tax by
Owner shall be increased by an amount equal to such tax paid by
Owner, and for Tenant's default in paying the rent thus revised,
Owner shall have the same remedies as upon failure to pay rent.
Tenant shall not be liable to pay any amount because of income
tax of a general nature applicable to Owner's various interests
or sources of income. In the event that it shall not be lawful
for Tenant to pay such tax, the rental payable to Owner under
this Lease shall be revised to net Owner the same net rental
after imposition of any such tax as would have been payable to
Owner prior to the imposition of any such tax.
21 PRIORITY
This Lease shall automatically be subordinate to any mortgage or
deed of trust heretofore or hereafter placed upon Building, to
any and all advances made or to be made thereunder, to the
interest on the obligations secured thereby, and to all renewals,
replacements and extensions thereof; provided, however, that in
the event of foreclosure of any such mortgage or deed of trust or
exercise of the power of sale thereunder, Tenant shall attorn to
the purchaser of Building at such foreclosure or sale and
recognize such purchaser as Owner under this Lease if so
requested by such purchaser. If any mortgagee or beneficiary
elects to have this Lease superior to its mortgage or deed of
trust and gives notice of its election to Tenant, then this Lease
shall thereupon become superior to the lien of such mortgage or
deed of trust, whether this Lease is dated or recorded before or
after the mortgage or deed of trust. Within fifteen days of
presentation, Tenant shall execute, acknowledge, and deliver to
Owner (i) any reasonable subordination or nondisturbance
agreement or other instrument that Owner may require to carry out
the provisions of this article, and (ii) any reasonable estoppel
certificate requested by Owner from time to time in the standard
form of any such mortgagee or beneficiary certifying in writing,
if such be true, that Tenant shall be in occupancy, that this
Lease is unmodified and in full force and effect (or if there
have been modifications, that the same is in full force and
effect as modified and stating the modifications) and the dates
to which the rent and other charges shall have been paid, and
that there shall be no rental offsets or claims.
22 CONDEMNATION
If the whole of Premises, or if such portion of either Premises
or the facilities in Building as may be required for the
reasonable use of Premises, shall be taken by virtue of any
condemnation or notice of condemnation or eminent domain
proceeding, or by purchase in lieu thereof, or for public or
quasipublic use, directly or indirectly, this Lease shall
automatically terminate as of the date of such condemnation, or
purchase in lieu of condemnation, or as of the date possession is
taken by the condemning authority, whichever is earlier. Current
rent shall be apportioned as of the date of such termination. In
case of a taking of a part of Premises or a portion of the
facilities in Building not required for the reasonable use of
Premises, then this Lease shall continue in full force and effect
and the rental shall be equitably reduced based on the proportion
by which the rentable area of Premises is reduced, such rent
reduction to be effective on the date of such partial taking. No
award of any partial or entire taking shall be apportioned, and
Tenant hereby assigns to Owner any award which may be made in
such taking or condemnation together with any and all rights of
Tenant now or hereafter arising in or to the same or any part
thereof, provided, however, that nothing herein shall be deemed
to give Owner any interest in, or to require Tenant to assign to
Owner, any award made to Tenant for the taking of personal
property or fixtures belonging to Tenant, for the interruption of
or damage to Tenant's business or for Tenant's moving expenses.
9
<PAGE>
10
23 SPECIAL IMPROVEMENTS
The term "Special Improvements" as used in this Lease refers to all
improvements to Premises, whether provided at the expense of Owner or
Tenant, other than accoustical ceilings, lighting fixtures, air
conditioning grilles, air ducts and temperature controls, draperies,
corridor and demising partitions, and concrete floor ready for pad and
carpet. Tenant shall reimburse Owner for Owner's necessary expense of
repairing or replacing all Special Improvements to maintain Special
Improvements in first-class condition. Tenant shall pay Owner that certain
sum as set forth in Article 1(f) as payment for certain of Special
Improvements made to Premises. In addition, Tenant shall pay Owner for
installation of any additional Special Improvements if they have been
installed by Owner pursuant to Tenant's request. Where Special
Improvements are to be installed by Owner, Tenant shall give Owner written
notice of its final color selection and all other details of its office
layout in sufficient time to permit Owner's completion of all work by the
commencement date hereunder using its normal crews on a regular time
basis, and such notice shall in any event be given not later than fifteen
working days before such commencement date.
24 REAL PROPERTY TAXES
Owner shall pay all real property taxes and assessments that may be levied
against Building and the underlying land. If the amount of such real
property taxes and assessments shall, in any calendar year during the
Lease Term, exceed the amount of real property taxes and assessments
payable for the calendar year 1996, then on the tax payment dates in 1997
and on these dates of each succeeding year, Tenant shall reimburse Owner
for Tenant's proportionate share of such increase based upon the ratio
which area of Premises, as set forth in Article 1(b), bears to 350,000
square feet. Owner shall submit to Tenant, if so requested by Tenant, a
copy of the real property tax statement for the year in which payment is
requested. The foregoing charges constitute additional rent that shall be
deemed to have accrued uniformly during the calendar year in which payment
is due. The final payment under the provision of this Article shall be
prorated based on reasonable projections of the increase through the
termination of this Lease and shall be due thirty days before such
termination.
25 ANNUAL RENT ADJUSTMENT
To partially compensate for the effect of inflation, a portion of the
rental rate (viz. $7.50 per square foot per year) shall be adjusted to
reflect reductions, if any, in the purchasing power of the dollar. Three
separate generic elements of cost (namely: labor, materials and energy)
shall be deemed to be representative of all operational costs. Indices for
measuring changes in the dollar value for each of these cost elements
shall be: janitorial hourly labor rate, Consumer Price Index, and the
average cost per kilowatt-hour of electricity (including without
limitation all demand charges), respectively. Changes in each of these
shall adjust rent as provided below:
Generic Element's Cost
Element of Cost Index Share
--------------- ----- --------------
1. Labor Janitorial rate $3.00
2. Material C.P.I. $3.00
3. Energy Average kwh cost $1.50
The base index for each of these indices shall be established from data
for the month of September of the year preceding the year in which this
Lease commences. Indices for each succeeding year shall be calculated
annually using September experience data, and the ratio that these annual
indices bear to their respective base index shall be reduced by 1.00 then
multiplied by the individual element's cost share as specified in Items 1,
2 and 3 above, and by the area of Premises as set forth in Article 1(b).
Each January 1, following the calendar year in which the Lease becomes
effective, the Monthly Rent in Article 1(d) shall be increased by
one-twelfth (1/12) of the sum of the amounts so determined. No changes in
the rent as specified above shall take place during the calendar year in
which the Lease Term commences.
The janitorial hourly labor rate shall be that as established by the Hotel
Employees Restaurant Employees, Union Local No. 8 for journeymen janitors
including all applicable taxes and fringe benefits payable by employers.
The labor rate to be used as a base index for this Lease shall be $12.72.
The Consumer Price Index to be used shall be the Revised Consumer Price
Index for Urban Wage Earners and Clerical Workers, U.S. City Average,
All-Items Series (1982-1984 = 100), as published by the U.S. Department of
Labor, Bureau of Statistics. If this index is revised or changed (as, for
example, by taking the average index for different years as the base
figure of 100), the base index shall be adjusted accordingly. In the event
such index is discontinued, the index promulgated by the Department of
Labor most closely
10
<PAGE>
11
approximating the above referenced index shall be used as the base index.
The Consumer Price Index to be used as the base index for this Lease shall
be 150.6.
The cost per kilowatt-hour of electricity consumed in the Westin Building
(including seasonal factors and any tax or surcharge that may be imposed),
shall be determined by dividing the total amount billed to Account No.
171001453015 for the supply of electricity consumed primarily during the
month of September by the consumption shown in the billing column entitled
"Consumption kwh/kvarh." The cost to be used as a base index for this Lease
shall be $.036 per kilowatt-hour.
26 NOTICES
All notices under this Lease shall be in writing and delivered in person or
sent by registered or certified mail to Owner at its offices in Building
and to Tenant at Premises, or to such other place as may be set forth in
Article 1(h) or hereafter designated by either party in writing.
27 NAME OF BUILDING
Owner reserves the right in its sole discretion to change the name of
Building from that specified in Article 3.
28 CONSTRUCTION
The titles to articles of this Lease are not a part of this Lease and shall
have no effect upon the construction or interpretation of any part thereof.
This Lease shall be construed and governed by the law of the State of
Washington.
29 TIME OF ESSENCE
Time is of the essence of this Lease.
30 FORCE MAJEUR
In the event either Owner or Tenant shall be delayed or hindered in or
prevented from the performance of any act required hereunder by reason of
strikes, lockouts, labor troubles, inability to procure materials, failure
of power, restrictive governmental laws or regulations, riots,
insurrection, war or any reason of a like nature, not the fault of the
party delayed in performing work or doing acts required under the terms of
this Lease, then performance of such act shall be excused for the period of
such delay, provided that the provisions hereof shall not operate to excuse
Tenant from prompt payment of rent or any other payments required by Tenant
hereunder.
IN WITNESS WHEREOF, Owner and Tenant have signed this Lease on the dates noted
below.
OWNER: TENANT:
SIXTH & VIRGINIA PROPERTIES InterNAP Network Services L.L.C.
A Washington General Partnership A Washington Limited Liability
By Clise Properties, Inc., a Partner Corporation
By /s/ A. M. CLISE By /s/ ANTHONY C. NAUGHTIN
---------------------------------- ----------------------------------
Its President Its President/CEO
-------------------------------- ----------------------------------
Date 6-10-96 Date 6-6-96
-------------------------------- --------------------------------
By Clise Company, a Partner
By Retail Realty, Inc.
By /s/ A. M. CLISE
----------------------------------
Its President
--------------------------------
Date 6-10-96
--------------------------------
11
<PAGE>
12
GUARANTEE
For and in consideration of execution of this Lease, Big Sandy
Telecommunications, Inc., as the primary guarantor of first recourse in the
event that Tenant defaults on any of its obligations under this Lease,
guarantees the performance of all obligations of Tenant and Tenant's Successors
as said obligations exist under all terms and conditions of this Lease and any
modifications thereto. In further consideration of execution of this Lease,
Anthony Naughtin and Paul McBride, as Corporate Officers of Tenant shall be
secondary guarantors of next recourse in the event that Tenant defaults on any
of its obligations under this Lease, and the primary guarantor is unable to
guarantee performance of such obligations on behalf of the Tenant. The
obligations of Anthony Naughtin and Paul McBride as secondary guarantors shall
cease after Tenant completes reimbursement to Owner of Owner's tenant
improvement outlay on the 1st day of the third year of the term of this Lease.
Big Sandy Telecommunications, Inc.'s obligation may be modified or removed as
part of an assignment transaction that Owner must consent to under this Lease.
/s/ ROBERT J. LINDAY, JR., President
-------------------------------------
Big Sandy Telecommunications, Inc.,
/s/ PAUL MCBRIDE
-------------------------------------
Paul McBride
/s/ ANTHONY NAUGHTIN
-------------------------------------
Anthony Naughtin
State of Washington )
County of King )
I certify that I know or have satisfactory evidence that A. M. Clise is the
person who appeared before me and said person acknowledged that he signed this
instrument, on oath stated that he was authorized to execute the instrument and
acknowledged it as the President of CLISE PROPERTIES, INC., a partner of SIXTH &
VIRGINIA PROPERTIES, a Washington general partnership, to be the free and
voluntary act of such party for the uses and purposes mentioned in the
instrument.
Dated 6/10/96
/s/ JENNIFER A. RICHARDS
------------------------------------------------
Notary Public in and for the State of Washington
My appointment expires 2-7-99
Jennifer A. Richards
State of Washington )
County of King )
I certify that I know or have satisfactory evidence that A. M. Clise is the
person who appeared before me and said person acknowledged that he signed this
instrument, on oath stated that he was authorized to execute the instrument and
acknowledged it as the President of RETAIL REALTY, INC., a partner of CLISE
COMPANY, a partnership, for and on behalf of CLISE COMPANY, which in turn is a
partner of SIXTH & VIRGINIA PROPERTIES, a Washington general partnership, to be
the free and voluntary act of such party for the uses and purposes mentioned in
the instrument.
Dated 6/10/96
/s/ JENNIFER A. RICHARDS
------------------------------------------------
Notary Public in and for the State of Washington
My appointment expires 2-7-99
Jennifer A. Richards
12
<PAGE>
13
EXHIBIT A
[Floor Plan]
<PAGE>
14
EXHIBIT B
[Site Plan]
<PAGE>
15
EXHIBIT C
[Floor Plan]
<PAGE>
16
RENT ANALYSIS AND PROPOSAL
<TABLE>
<S><C>
- ------------------------------------------------------------------------------------------------------------------------------------
Statistics
- ------------------------------------------------------------------------------------------------------------------------------------
USF 5,117 Total base rent $ 654,275 Total TI's $ 137,774.83
RSF 5,054 Ave. annual rent $ 130,855 T TI's per RSF $ 23.54
Lease terms (yrs) 5 Ave. monthly rent $ 10,905 Amort per year $ 27,554.97
Ave. rent per RSF $ 20.00 Acceleration rate 0.00% Amort per RSF $ 4.71
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Description Cost Sixth & Virginia InterNAP
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Demo $ 2,800.00 $ 2,800.00
- --------------------------------------------------------------------------------------------------
Construction/permit fees $ 650.00 650.00
- --------------------------------------------------------------------------------------------------
Doors/hardware $ 3,000.00 $ 3,000.00
- --------------------------------------------------------------------------------------------------
Cabinets/shelving $ 1,800.00 $ 1,800.00
- --------------------------------------------------------------------------------------------------
Refiles $ 5,740.00 $ 5,740.00
- --------------------------------------------------------------------------------------------------
Partitions $ 9,976.00 $ 9,976.00
- --------------------------------------------------------------------------------------------------
Ceiling $ 4,068.00 $ 4,068.00
- --------------------------------------------------------------------------------------------------
Carpet $ 6,800.00 $ 6,800.00
- --------------------------------------------------------------------------------------------------
Painting $ 2,800.00 $ 2,800.00
- --------------------------------------------------------------------------------------------------
Draperies $ 2,500.00 $ 2,500.00
- --------------------------------------------------------------------------------------------------
Sprinklers $ 3,000.00 $ 3,000.00
- --------------------------------------------------------------------------------------------------
HVAC - Office $ 14,250.00 $ 3,315.50 $ 10,934.50
- --------------------------------------------------------------------------------------------------
HVAC - Computer room $ 30,465.00 $ 30,465.00
- --------------------------------------------------------------------------------------------------
Electrical $ 12,250.00 $ 4,950.00 $ 7,300.00
- --------------------------------------------------------------------------------------------------
Signage $ 150.00 $ 150.00
- --------------------------------------------------------------------------------------------------
Access floor ramp $ 1,500.00 $ 1,500.00
- --------------------------------------------------------------------------------------------------
Cleanup $ 1,050.00 $ 1,050.00
- --------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------- InterNAP [PIE CHART] Sixth &
Subtotal $ 102,799.00 $ 51,399.50 $ 51,399.50 50% Virginia
- -------------------------------------------------------------------------------------------------- 50%
W/17% $ 17,475.83 $ 17,475.83
- --------------------------------------------------------------------------------------------------
AC Backup $ 12,500.00
- --------------------------------------------------------------------------------------------------
Misc. Electrical $ 5,000.00
- --------------------------------------------------------------------------------------------------
TOTAL $ 120,274.83 $ 66,875.33 $ 68,899.50
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Cost per RSF $ 20.55 $ 11.77 $ 11.77
- --------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 5-Year Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Base $ 20.00 $ 20.00 $ 20.00 $ 20.00 $ 20.00 $ 100.00
TI's $ 2.35 $ 2.35 $ 2.35 $ 2.35 $ 2.35 $ 11.77
Total $ 22.35 $ 22.35 $ 22.35 $ 22.35 $ 22.35 $ 111.77
Net Increase $ -- $ -- $ -- $ -- $ --
RSF 5,854 5,854 5,854 5,854 5,854
Annual Rent 130,855 $ 130,855 $ 130,855 $ 130,855 $ 130,855 $ 654,275.33
Monthly Rent $ 10,905 $ 10,905 $ 10,905 $ 10,905 $ 10,905
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 5-Year Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Base $ 18.00 $ 19.00 $ 20.00 $ 21.00 $ 22.00 $ 100.00
TI's $ --
Total $ 18.00 $ 19.00 $ 20.00 $ 21.00 $ 22.00 $ 100.00
Net Increase $ -- $ 1.00 $ 1.00 $ 1.00 $ 1.00
RSF 5,854 5,854 5,854 5,854 5,854
Annual TI
Payment* $ 41,325 $ 37,881
Annual Rent $ 105,372 $ 152,551 $ 154,961 $ 122,934 $ 128,788 $ 654,606.63
Monthly Rent $ 8,781 $ 9,269 $ 9,757 $ 10,245 $ 10,732
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Lump sum payment at beginning of lease year. TI allowance accrues interest at
10% per year.
Exhibit C 1
<PAGE>
- -------------------------------------------------------------------------------
LEASE MODIFICATION #1
- -------------------------------------------------------------------------------
This Agreement made the 1st day of September, 1998, is by and between SIXTH &
VIRGINIA PROPERTIES, a Washington General Partnership, hereinafter called
"Owner," and InterNAP Network Services Corporation, a Washington Corporation,
hereinafter called "Tenant."
Owner and Tenant have executed a Lease dated the 1st day of June, 1996 and
modified on 1st day of May, 1998. Said Lease is for approximately 5,854 square
feet on the 8th floor, Suite 800 of The Westin Building, hereinafter referred to
as "Building," situated in the City of Seattle, County of King, State of
Washington, located at 2001 Sixth Avenue and located on the following real
property:
Lots 11 and 12 (less portion for street), Block 15 of Addition to town
of Seattle, as laid off by Heirs of Sarah A. Bell, deceased, (commonly
known as Heirs of Sarah A. Bell's Addition to the City of Seattle) as
per plat recorded in Volume 1 of plats, page 103, records of King
County, Washington.
Now, therefore, for valuable consideration Owner and Tenant as parties hereto
agree that the Lease will be modified, effective the 1st day of May, 1998, as
follows:
Article 1(d) shall be modified to read in its entirety as follows:
d. MONTHLY BASE RENT:
Monthly base rent shall be increased by $3,065 as Follows:
May 1, 1998 - May 31, 1999 $12,822.00
June 1, 1999 - May 31, 2000 $13,310.00
June 1, 2000 - May 31, 2001 $13,797.00
EXCEPT to the extent herein revised, amended or modified, all terms, conditions
and provisions of said Lease are hereby affirmed and ratified in all respects.
<TABLE>
<CAPTION>
OWNER: TENANT:
<S> <C>
SIXTH & VIRGINIA PROPERTIES, InterNAP Network Services Corporation
A Washington General Partnership A Washington Corporation
By Clise Properties, Inc., a Partner
By_____________________________ By_____________________________
Its __________________________ Its ___________________________
Date __________________________ Date __________________________
</TABLE>
CLISE COMPANY, a Partner
By Retail Realty, Inc.
By_____________________________
Its __________________________
Date __________________________
<PAGE>
State of Washington
County of King
I certify that I know or have satisfactory evidence that A.M. Clise is the
person who appeared before me and said person acknowledged that he signed this
instrument, on oath stated that he was authorized to execute the instrument and
acknowledged it as the President of CLISE PROPERTIES, INC., a partner of SIXTH &
VIRGINIA PROPERTIES, a Washington general partnership, to be the free and
voluntary act of such party for the uses and purposes mentioned in the
instrument.
Dated______________________
_______________________________________
(Name legibly printed or stamped)
_______________________________________
Notary Public in and for the State of Washington
My appointment expires____________________
State of Washington
County of King
I certify that I know or have satisfactory evidence that A.M. Clise is the
person who appeared before me and said person acknowledged that he signed this
instrument, on oath stated that he was authorized to execute the instrument and
acknowledged it as the President of RETAIL REALTY, INC., a partner of CLISE
COMPANY, a partnership, for and on behalf of CLISE COMPANY, which in turn is a
partner of SIXTH & VIRGINIA PROPERTIES, a Washington general partnership, to be
the free and voluntary act of such party for the uses and purposes mentioned in
the instrument.
Dated______________________
_______________________________________
(Name legibly printed or stamped)
_______________________________________
Notary Public in and for the State of Washington
My appointment expires____________________
2
<PAGE>
- --------------------------------------------------------------------------------
LEASE MODIFICATION #2
- --------------------------------------------------------------------------------
This Agreement made the 1st day of September, 1998, is by and between SIXTH &
VIRGINIA PROPERTIES, a Washington General Partnership, hereinafter called
"Owner," and InterNAP Network Services Corporation, a Washington Corporation,
hereinafter called "Tenant."
Owner and Tenant have executed a Lease dated the 1st day of June, 1996 and
modified on 1st day of May, 1998. Said Lease is for approximately 5,854 square
feet on the 8th floor, Suite 800 of The Westin Building, hereinafter referred to
as "Building," situated in the City of Seattle, County of King, State of
Washington, located at 2001 Sixth Avenue and located on the following real
property:
Lots 11 and 12 (less portion for street), Block 15 of Addition to town
of Seattle, as laid off by Heirs of Sarah A. Bell, deceased, (commonly
known as Heirs of Sarah A. Bell's Addition to the City of Seattle) as
per plat recorded in Volume 1 of plats, page 103, records of King
County, Washington.
Now, therefore, for valuable consideration Owner and Tenant as parties hereto
agree that the Lease will be modified, effective the 1st day of May, 1998, as
follows:
Article 1(d)shall be modified to read in its entirety as follows:
d. MONTHLY BASE RENT:
Monthly base rent shall be increased by $3,065 as Follows:
May 1, 1998 - May 31, 1999 $12,822.00
June 1, 1999 - May 31, 2000 $13,310.00
June 1, 2000 - May 31, 2001 $13,797.00
EXCEPT to the extent herein revised, amended or modified, all terms, conditions
and provisions of said Lease are hereby affirmed and ratified in all respects.
<TABLE>
<CAPTION>
OWNER: TENANT:
<S> <C>
SIXTH & VIRGINIA PROPERTIES, InterNAP Network Services Corporation
A Washington General Partnership A Washington Corporation
By Clise Properties, Inc., a Partner
By___________________________ By___________________________
Its ________________________ Its _________________________
Date ________________________ Date ________________________
</TABLE>
CLISE COMPANY, a Partner
By Retail Realty, Inc.
By___________________________
Its ________________________
Date ________________________
<PAGE>
State of Washington
County of King
I certify that I know or have satisfactory evidence that A.M. Clise is the
person who appeared before me and said person acknowledged that he signed this
instrument, on oath stated that he was authorized to execute the instrument and
acknowledged it as the President of CLISE PROPERTIES, INC., a partner of SIXTH &
VIRGINIA PROPERTIES, a Washington general partnership, to be the free and
voluntary act of such party for the uses and purposes mentioned in the
instrument.
Dated__________________________________
_______________________________________
(Name legibly printed or stamped)
_______________________________________
Notary Public in and for the State of Washington
My appointment expires____________________
State of Washington
County of King
I certify that I know or have satisfactory evidence that A.M. Clise is the
person who appeared before me and said person acknowledged that he signed this
instrument, on oath stated that he was authorized to execute the instrument and
acknowledged it as the President of RETAIL REALTY, INC., a partner of CLISE
COMPANY, a partnership, for and on behalf of CLISE COMPANY, which in turn is a
partner of SIXTH & VIRGINIA PROPERTIES, a Washington general partnership, to be
the free and voluntary act of such party for the uses and purposes mentioned in
the instrument.
Dated__________________________________
_______________________________________
(Name legibly printed or stamped)
_______________________________________
Notary Public in and for the State of Washington
My appointment expires____________________
2
<PAGE>
- -------------------------------------------------------------------------------
LEASE MODIFICATION #3
- -------------------------------------------------------------------------------
This Agreement made the 28th day of December, 1999, is by and between SIXTH &
VIRGINIA PROPERTIES, a Washington General Partnership, hereinafter called
"Owner," and InterNAP Network Services Corporation, a Washington Corporation,
hereinafter called "Tenant."
Owner and Tenant have executed a Lease dated the 1st day of June, 1996,
modified on 1st day of May, 1998, modified on the 1st day of September, 1998.
Said Lease is for approximately 7,216 square feet on the 8th floor, Suite 800
of The Westin Building, hereinafter referred to as "Building," situated in
the City of Seattle, County of King, State of Washington, located at 2001
Sixth Avenue and located on the following real property:
Lots 11 and 12 (less portion for street), Block 15 of Addition to town
of Seattle, as laid off by Heirs of Sarah A. Bell, deceased, (commonly
known as Heirs of Sarah A. Bell's Addition to the City of Seattle) as
per plat recorded in Volume 1 of plats, page 103, records of King
County, Washington.
Owner is constructing or allowing the construction of a new electrical power
vault in the Garage (the "New Vault"), to bring additional electrical power
from the public power utility to the Building and Garage. In connection
therewith, Owner is constructing a new underground tunnel ("New Tunnel") to
connect the new power vault with the Building, and is opening an additional
vertical shaft in the Building ("New Riser"). Owner is also constructing a
new power generation facility in the Garage ("New Generator Plant"), with
connecting busways to the Building. Tenant is desirous of converting a
portion of the Lease Premise to equipment space (approximately 1,464 R sq. ft
as shown on the Attached Exhibit A). Tenant will require additional
electrical, condenser water, and backup power in order to facilitate this
conversion.
Whereas now, therefore, for valuable consideration Owner and Tenant as
parties hereto agree that the Lease will be modified, effective the 1st day
of April, 2000, as follows:
Article 1(d)shall be modified to read in its entirety as follows:
d. MONTHLY BASE RENT:
Monthly base rent shall be increased effective upon the availability of
an additional 150 amps, 480v of electrical power to premises:
April 1, 2000 - May 31, 2000 *Fifteen Thousand Three Hundred Forty
Nine and 00/100 Dollars ($15,349.00)
per month.
June 1, 2000 - May 31, 2001 *Fifteen Thousand Seven Hundred
Thirty Seven and 00/100 Dollars
($15,737.00) per month.
*(Base rent shall remain as-is until
Building Electrical System expansion
is complete, scheduled for early
2000.)
Article 7 shall be modified to read in its entirety as follows:
7 SERVICES PROVIDED BY OWNER
Owner shall, at its sole cost and expense, maintain the Premises
and the public and common areas of the Building, such as lobbies,
stairs, landscaping, corridors and restrooms, together with the
Westin Building Garage, and all structural portions of the
Building, including, but not limited to, roof and foundation as
well
<PAGE>
as common area fire suppression systems, heating, ventilation,
air conditioning, electrical and mechanical systems, in a first
class order and condition, except for damage occasioned by the
act of Tenant. Owner's responsibility to maintain the fire
suppression systems, heating and ventilation, electrical and
mechanical systems on the Premises ends at the demarcation point
where such systems enter the Premises. Tenant agrees to maintain
the fire suppression systems, heating and ventilation, electrical
and mechanical systems within the Premises from the demarcation
point.
Nothwithstanding anything to the contrary in this Article 7,
Owner agrees to allow Tenant to connect to the Premises upon
completion of the New Vault project, an additional One Hundred
Fifty (150) amps of 480V 3 phase from the Building power source.
All costs for the aforementioned installation shall be at
Tenant's expense, and subject to review and approval of final
plans by Owner. Tenant shall remit to Owner, upon completion of
the New Vault project, Forty Five Thousand and 00/100
($45,000.00) Dollars as a reimbursement for Tenant's pro-rata
share of the cost of the New Vault project.
Owner, at its sole cost, shall provide lighting replacement,
toilet room supplies, window washing with reasonable frequency,
and daily janitorial service, during the times and in the manner
that such services are customarily furnished in general office
buildings in the area. Elevator service shall be provided to
Premise on a 24 hour a day, seven day a week basis.
Owner shall not be liable for damages, nor shall the rental
herein reserved be abated, for failure to furnish or delay in
furnishing any of the foregoing services, when such failure or
delay is caused by an event of Force Majeur or by the making of
necessary repairs to the Premises or Building (provided that
Owner has used reasonable efforts not to interfere with or
interrupt the conduct of Tenant's business at the Premises), nor
shall the temporary failure to furnish any of such services due
to such events be construed as an eviction of Tenant or relieve
Tenant from the duty of observing and performing any of the
provisions of this Lease.
NEW:
HVAC (HEATING, VENTILATING, AND AIR CONDITIONING)
Owner grants Tenant the right to install, at Tenant's sole cost,
its own HVAC equipment in Premises. This equipment shall be
considered Tenant's trade fixture. Tenant's HVAC equipment shall
be connected in a manner approved by the Building. Owner
represents and warrants to Tenant that at all times during the
Lease Term, or any extension 1(s), Owner shall have available
for Tenant's heating and ventilation needs at the Premises not
more than 70 tons of HVAC cooling capacity.
Owner shall not be liable for damages, nor shall the rental
herein reserved be abated, for Owner's failure to furnish or
delay in furnishing HVAC cooling, when such failure or delay is
caused by an event of Force Majeur or by the making of necessary
repairs to the Premises or Building (provided that Owner has
used reasonable efforts not to interfere with or interrupt the
conduct of Tenant's business at the Premises), nor shall the
temporary failure to furnish any of such services due to such
events be construed as an eviction of Tenant or relieve Tenant
from the duty of observing and performing any of the provisions
of this Lease.
Tenant shall pay to Owner within thirty (30) days of completion
of the New Vault Project, as additional rent, a sum equal to
Thirty Thousand & 00/100 ($30,000.00). In addition, Tenant shall
pay within ten (10) days of invoice a quarterly fee for Tenant's
pro rata, per ton share of the costs charged to all users of the
cooling tower for Owner's costs and expenses of operating and
<PAGE>
maintaining the cooling tower, including, but not limited to,
chemical treatment, electrical usage and water consumption,
maintenance contracts and security.
ESSENTIAL POWER:
Tenant shall have the right to connect up to a total of One
Hundred Eighty (180) amps, 480V 3 phase Essential Power from
Westin Building Essential Power System (Generator back up). It is
understood that Essential Power will be in place upon completion
of the New Vault and New Generator Plant, scheduled for early
2000. Tenant shall pay to Owner as additional rent a one-time
charge of One Hundred Twelve Thousand Five Hundred and 00/100
($112,500.00) Dollars, for the connections for this One Hundred
Eighty (180) amps of 480v Essential Power, according to the
following schedule:
<TABLE>
<CAPTION>
------ ---------------------------------- ----------------------------------- ----------------------------
DATE PAYMENT DUE AMOUNT DUE PAYMENT FOR:
------ ---------------------------------- ----------------------------------- ----------------------------
------ ---------------------------------- ----------------------------------- ----------------------------
<S> <C> <C> <C>
- Upon completion of New Vault and One Hundred Twelve Thousand Five Connection of One Hundred
New Generator Plant Hundred and 00/100 Dollars Eighty (180) amps, 480 V,
($112,500.00) 3 phase
------ ---------------------------------- ----------------------------------- ----------------------------
</TABLE>
Owner shall not be liable for damages, nor shall the rental
herein reserved be abated, for Owner's failure to furnish or
delay in furnishing Essential Power, when such failure or delay
is caused by an event of Force Majeur or by the making of
necessary repairs to the Premises or Building (provided that
Owner has used reasonable efforts not to interfere with or
interrupt the conduct of Tenant's business at the Premises), nor
shall the temporary failure to furnish any of such services due
to such events be construed as an eviction of Tenant or relieve
Tenant from the duty of observing and performing any of the
provisions of this Lease.
Tenant shall pay any costs associated with connecting the
Essential Power system from the riser to Tenant's Premises, as
well as its pro rata share of any semi-annual maintenance costs,
including maintenance, fuel, security and other costs necessary
for the reliable operations of the Essential Power system.
<PAGE>
EXCEPT to the extent herein revised, amended or modified, all terms, conditions
and provisions of said Lease are hereby affirmed and ratified in all respects.
<TABLE>
<CAPTION>
OWNER: TENANT:
<S> <C>
SIXTH & VIRGINIA PROPERTIES, InterNAP Network Services Corporation
A Washington General Partnership A Washington Corporation
By Clise Properties, Inc., a Partner
By_____________________________ By_____________________________
Its __________________________ Its ___________________________
Date __________________________ Date __________________________
</TABLE>
I certify that I know or have satisfactory evidence that A.M. Clise is the
person who appeared before me and said person acknowledged that he signed this
instrument, on oath stated that he was authorized to execute the instrument and
acknowledged it as the President of CLISE PROPERTIES, INC., a partner of SIXTH &
VIRGINIA PROPERTIES, a Washington general partnership, to be the free and
voluntary act of such party for the uses and purposes mentioned in the
instrument.
Dated______________________
_______________________________________
Jennifer A. Richards
_______________________________________
Notary Public in and for the State of Washington
Residing in Issaquah
My appointment expires: February 7, 2003
<PAGE>
EXHIBIT A
FLOOR PLAN
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
OCTOBER 4, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1 GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
SECTION 2 RESTRICTIONS ON TRANSFER; REGISTRATION. . . . . . . . . . . . . . . .3
2.1 Restrictions On Transfer . . . . . . . . . . . . . . . . . . . . . . . . .3
2.2 Demand Registration. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.3 Piggyback Registrations. . . . . . . . . . . . . . . . . . . . . . . . . .7
2.4 Form S-3 Registration. . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.5 Expenses Of Registration . . . . . . . . . . . . . . . . . . . . . . . . .9
2.6 Obligations Of The Company . . . . . . . . . . . . . . . . . . . . . . . 10
2.7 Termination Of Registration Rights . . . . . . . . . . . . . . . . . . . 11
2.8 Delay Of Registration; Furnishing Information. . . . . . . . . . . . . . 11
2.9 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.10 Assignment Of Registration Rights. . . . . . . . . . . . . . . . . . . . 15
2.11 Amendment Of Registration Rights . . . . . . . . . . . . . . . . . . . . 16
2.12 Limitation On Subsequent Registration Rights . . . . . . . . . . . . . . 16
2.13 "Market Stand-Off" Agreement . . . . . . . . . . . . . . . . . . . . . . 16
2.14 Rule 144 Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 3 COVENANTS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . 17
3.1 Basic Financial Information And Reporting. . . . . . . . . . . . . . . . 17
3.2 Inspection Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.3 Confidentiality Of Records . . . . . . . . . . . . . . . . . . . . . . . 18
3.4 Reservation Of Common Stock. . . . . . . . . . . . . . . . . . . . . . . 19
3.5 Stock Vesting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.6 Board Election Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.7 Employee Confidentiality, Nonraiding and Noncompetition
Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.8 Directors' Liability And Indemnification . . . . . . . . . . . . . . . . 19
3.9 Board Of Directors Approval. . . . . . . . . . . . . . . . . . . . . . . 19
3.10 Real Property Holding Corporation. . . . . . . . . . . . . . . . . . . . 20
3.11 Qualified Small Business Stock . . . . . . . . . . . . . . . . . . . . . 20
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
3.12 Termination Of Covenants . . . . . . . . . . . . . . . . . . . . . . . . 20
3.13 Visitation Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 4 RIGHT TO MAINTAIN INTEREST. . . . . . . . . . . . . . . . . . . . . 21
4.1 Subsequent Offerings . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.2 Exercise Of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.3 Issuance Of Equity Securities To Other Persons . . . . . . . . . . . . . 22
4.4 Termination Of Rights To Maintain Interest . . . . . . . . . . . . . . . 22
4.5 Transfer Of Rights To Maintain Interest. . . . . . . . . . . . . . . . . 22
4.6 Excluded Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 5 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.1 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.2 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.3 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.5 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.6 Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.7 Delays or Omissions. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.8 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.9 Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.10 Titles and Subtitles . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
<PAGE>
INTERNAP NETWORK SERVICES CORPORATION
AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is entered into as of
the 4th day of October, 1999, by and among INTERNAP NETWORK SERVICES
CORPORATION, a Washington corporation (the "Company") and (i) INKTOMI
CORPORATION, a Delaware corporation ("Inktomi"), (ii) S.L. PARTNERS, INC., as
Agent under the Credit Agreement described herein ("S.L. Partners"), (iii)
the holders of the Company's Series C Preferred Stock ("Series C Stock")
listed on EXHIBIT A hereto, (iv) the holders of the Company's Series B
Preferred Stock ("Series B Stock") listed on EXHIBIT B hereto, and (v) 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 (iii) shall be referred to
hereinafter, collectively, as the "Investors" and each individually as an
"Investor." The parties described in clauses (iv) and (v) 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 Inktomi Warrant to purchase shares of Common Stock
pursuant to, and on terms contemplated by, that certain Common Stock and
Warrant Purchase Agreement dated September 17, 1999 (the "Inktomi Agreement");
WHEREAS, the Company proposes to issue to S.L. Partners a warrant (the
"S.L. Warrant") to purchase shares of Common Stock pursuant to, and on terms
contemplated by, that certain Credit Agreement dated September 23, 1999 (the
"Credit Agreement");
WHEREAS, as a condition of entering into the Inktomi Agreement and the
Credit Agreement, Inktomi and S.L. Partners, respectively, have requested
that the Company extend to them 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:
<PAGE>
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.
"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.
"INKTOMI WARRANT" shall mean that certain Common Stock warrant to be
issued to Inktomi by the Company pursuant to the Inktomi Agreement.
"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; (c) Common Stock of the Company issued to Inktomi pursuant to the
Inktomi Agreement and upon exercise of the Inktomi Warrant; and (d) Common
Stock of the Company issued to S.L. Partners pursuant to the S.L. 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
2.
<PAGE>
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.
"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.
"S.L. PARTNERS" shall mean the entity S.L. Partners, Inc. as agent under
the Credit Agreement. "S.L. Partners" shall also refer to any individual
lender under the Credit Agreement to whom rights have been transferred to
purchase Common Stock, or who has acquired Common Stock, pursuant to the S.L.
Warrant; provided that such lender acquires such rights or Common Stock, as
the case may be, in accordance with the terms of the Credit Agreement and the
S.L. Warrant; and provided further that such lender has become subject to
this Agreement in accordance with its terms.
"S.L. WARRANT" shall mean that certain warrant for the purchase of
Common Stock issued to S.L. Partners by the Company pursuant to the Credit
Agreement.
"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.
SECTION 2 RESTRICTIONS ON TRANSFER; REGISTRATION
2.1 RESTRICTIONS ON TRANSFER
(a) Each Holder, Inktomi and S.L. Partners agree not to make any
disposition of all or any portion of the Shares or Registrable Securities
unless and until:
3.
<PAGE>
(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, Inktomi or S.L. Partners, 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, Inktomi or S.L. Partners, 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, Inktomi or S.L. Partners, as the case
may be, which is (A) a partnership to its partners or former partners in
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, Inktomi or S.L. Partners, as the case may be,
provided that such affiliate is an "accredited investor" (as defined in the
Securities Act); (F) S.L. Partners to the lenders under the Credit Agreement
and in accordance with the S.L. Warrant; or (G) any lender under the Credit
Agreement to any family member or a trust for the benefit of such lender or a
family member of such lender; 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.
4.
<PAGE>
(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 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,
5.
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(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,
(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
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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 and S.L. Partners 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 and S.L. Partners an opportunity to include in such registration
statement all or part of such Registrable Securities held by such Holder and
S.L. Partners; provided, however, that neither a Holder nor S.L. Partners
shall be eligible to so participate in such registration if such Holder or
S.L. Partners could have sold such Registrable Securities on an unrestricted
basis pursuant to Rule 144 of the Securities Act during the four-week period
immediately preceding the effectiveness of such registration; provided
further, that such participation right shall not be granted to any Holders or
to S.L. Partners following the fifth anniversary of the closing of the
Initial Offering. S.L. Partners and 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 S.L.
Partners or such Holder. If S.L. Partners or a Holder decides not to include
all of its Registrable Securities in any registration statement thereafter
filed by the Company, S.L. Partners and 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 scurities, 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 S.L. Partners and the Holders of Registrable
Securities. In such event, the right of S.L. Partners and any such Holder to
be included in a registration pursuant to this Section 2.3 shall be
conditioned upon S.L. Partners' or such Holder's participation in such
underwriting and the inclusion of S.L. Partners' or such Holder's Registrable
Securities in the underwriting to the extent provided herein. S.L. Partners
and 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;
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(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), including but not limited to S.L. Partners, 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 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
S.L. Partners or 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;
8.
<PAGE>
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;
(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,
9.
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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
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, Inktomi or S.L. Partners, 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 may reasonably request in order to facilitate
the disposition of Registrable Securities owned by them.
(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, Inktomi or S.L. Partners, 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, Inktomi or S.L. Partners, as the case may be, participating in such
underwriting shall also enter into and perform his, her or its obligations
under such an agreement.
(f) Notify Inktomi, S.L. Partners or each Holder of Registrable
Securities covered by such registration statement at any time when a
prospectus relating thereto is required
10.
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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 (and at the request of S.L.
Partners if already requested by the Holders 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 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 and S.L. Partners
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 or S.L. Partners shall expire
if (a) the Company has completed its Initial Offering and is subject to the
provisions of the Exchange Act, (b) such Holder or S.L. Partners (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 or S.L. Partners (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, S.L. Partners nor any Holder shall have any
right to obtain or seek an injunction restraining or otherwise delaying any
such registration as the result
11.
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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, S.L. Partners or Inktomi, as the case may be, shall furnish
to the Company such information regarding such Holders, S.L. Partners or
Inktomi, the Registrable Securities held by such Holders, S.L. Partners 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, S.L. Partners, Inktomi, the partners, officers,
directors and legal counsel of each Holder, S.L. Partners or Inktomi, any
underwriter (as defined in the Securities Act) for such Holder, S.L. Partners
or Inktomi and each person, if any, who controls such Holder, S.L. Partners,
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, S.L. Partners 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 to an indemnified party 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 such indemnified party.
12.
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(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, S.L. Partners or any
of Inktomi's or S.L. Partners' directors, officers or any person who controls
Inktomi or S.L. Partners, 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, S.L. Partners or any of Inktomi's or S.L. Partners' directors or
officers or any person who controls Inktomi or S.L. Partners, 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, S.L. Partners or any of Inktomi's or
S.L. Partners' 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, 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 indemnifying
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.
(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, S.L. Partners and any other Holder selling
securities under such registration statement or any of S.L. Partners' or such
other Holder's partners, directors or officers or any person who controls
S.L. Partners or such Holder, against any losses, claims, damages or
liabilities (joint or several) to which the Company, S.L. Partners or any
such director, officer, controlling person, underwriter or other such Holder,
or partner, director, officer or controlling person of S.L. Partners or 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, S.L.
13.
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Partners or other Holder, or partner, officer, director, legal counsel or
controlling person of S.L. Partners or 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(c) 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
Inktomi, 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 Inktomi.
(d) To the extent permitted by law, S.L. Partners will, if
Registrable Securities held by S.L. Partners 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 and any other Holder
selling securities under such registration statement or any of Inktomi's or
such other Holder's partners, directors or officers or any person who
controls Inktomi or such Holder, against any losses, claims, damages or
liabilities (joint or several) to which the Company, Inktomi or any such
director, officer, controlling person, underwriter or other such Holder, or
partner, director, officer or controlling person of Inktomi or 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 S.L. Partners under an instrument duly executed by S.L. Partners and
stated to be specifically for use in connection with such registration; and
S.L. Partners will reimburse any legal or other expenses reasonably incurred
by the Company or any such director, officer, legal counsel, controlling
person, underwriter, Inktomi or other Holder, or partner, officer, director,
legal counsel or controlling person of Inktomi or 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(d) 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 S.L. Partners, 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 S.L. Partners.
(e) 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
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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
indemnifying party will not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 2.9.
(f) 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, S.L. Partners or by Inktomi
hereunder exceed the proceeds from the offering received by such Holder, S.L.
Partners or Inktomi.
(g) The obligations of the Company, the Holders, S.L. Partners 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); (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) and
(c) by S.L. Partners to a transferee or assignee of Registrable Securities
which (i) previously holds Registrable Securities or (ii) is a subsidiary,
parent, general partner, limited partner, retired partner or shareholder of
S.L. Partners, or is a family member of an individual lender under the Credit
Agreement or a trust for the benefit of such lender or a family member of
such lender; 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
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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 or S.L.
Partners, as the case may be, under this Section 2 shall require the written
consent of Inktomi or S.L. Partners, as the case may be. 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.
2.13 "MARKET STAND-OFF" AGREEMENT.
(a) Each Holder, Inktomi and S.L. Partners 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, Inktomi and S.L. Partners 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, Inktomi and S.L. Partners 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
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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.
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, Inktomi or S.L. Partners, as the case may
be, own any Registrable Securities, furnish to such Holder, Inktomi and S.L.
Partners 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, S.L. Partners 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, S.L. Partners, 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
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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.
(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.
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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 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
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(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 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
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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.
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
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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 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;
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(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;
(h) shares of Common Stock and the Inktomi Warrant issued to Inktomi
pursuant the Inktomi Agreement and the Common Stock issued on the exercise of
the Inktomi Warrant; and
(i) the S.L. Warrant and shares of Common Stock issued upon exercise
of the S.L. Warrant and on conversion of the loan made pursuant to the Credit
Agreement.
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.
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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.
(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.
24.
<PAGE>
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.
25.
<PAGE>
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: /s/ Paul E. McBride
------------------------------------
Name: Paul E. McBride
----------------------------------
Title: Vice President and Secretary
---------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
INKTOMI CORPORATION
By: /s/ Richard Pierle
------------------------------------
Name: Richard Pierle
----------------------------------
Title: Vice President of Marketing
---------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
SL PARTNERS, INC.
AS AGENT UNDER THE CREDIT AGREEMENT DATED AS OF
SEPTEMBER 23, 1999
By: /s/ Robert D. Shurtleff, Jr.
------------------------------------
Name: Robert D. Shurtleff, Jr.
----------------------------------
Title: Managing Partner
---------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
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: /s/ William J. Harding
-----------------------------------------
Name: William J. Harding
---------------------------------------
Title: Managing Member
--------------------------------------
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: /s/ William J. Harding
-----------------------------------------
Name: William J. Harding
---------------------------------------
Title: Managing Member
--------------------------------------
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: /s/ William J. Harding
-----------------------------------------
Name: William J. Harding
---------------------------------------
Title: Managing Member
--------------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
OAK INVESTMENT PARTNERS VIII, LIMITED
PARTNERSHIP
By: Oak Associates VIII, LLC
Its: General Partner
By: /s/ Fredric W. Harman
------------------------------------
Fredric W. Harman
Managing Member
OAK VIII AFFILIATES FUND, LIMITED PARTNERSHIP
By: Oak VIII Affiliates, LLC
Its: General Partner
By: /s/ Fredric W. Harman
------------------------------------
Fredric W. Harman
Managing Member
FIDELITY INVESTORS II LIMITED PARTNERSHIP
By: Fidelity Investors Management, LLC
Its: General Partner
By: /s/ Donald S. Heaton
------------------------------------
Name: Donald S. Heaton
------------------------------------
Title: Vice President
-----------------------------------
FTT VENTURES LIMITED
By: /s/ Robert Ketterson
------------------------------------
Name: Robert Ketterson
------------------------------------
Title: Vice President
-----------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
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>
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>
-----------------------------------------
VICTORIA ADAMS-CUCCIA
DOLL TECHNOLOGY INVESTMENT FUND
By: /s/ Dixon R. Doll
--------------------------------------
Name: Dixon R. Doll
------------------------------------
Title: Managing Member
-----------------------------------
DOLL TECHNOLOGY AFFILIATES FUND, LP
By: /s/ Dixon R. Doll
--------------------------------------
Name: Dixon R. Doll
------------------------------------
Title: Managing Member
-----------------------------------
DOLL TECHNOLOGY SIDE FUND, LP
By: /s/ Dixon R. Doll
--------------------------------------
Name: Dixon R. Doll
------------------------------------
Title: Managing Member
-----------------------------------
-----------------------------------------
ELIZABETH DUNN
GAK LIMITED
By:
------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
H&Q INTERNAP INVESTORS, L.P.
By: /s/ Jackie Berterretche
-----------------------------------------
Name: Jackie Berterretche
---------------------------------------
Title: Attorney-in-Fact
--------------------------------------
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>
---------------------------------------------
PEGGY PHILLIPS
---------------------------------------------
JOE PRUSKOWSKI
PS CAPITAL VENTURES, LP
By: /s/ Daniel Burstein
------------------------------------------
Name: Daniel Burstein
----------------------------------------
Title: Principal
---------------------------------------
---------------------------------------------
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>
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: /s/ William D. Savoy
-----------------------------------------
Name: William D. Savoy
---------------------------------------
Title: Vice President
--------------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
---------------------------------------------
TODD WARREN
---------------------------------------------
RUSTY WILLIAMS
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
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>
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>
H&Q INTERNAP INVESTORS, L.P.
By: /s/ Jackie Berterretche
-----------------------------------------
Name: Jackie Berterretche
---------------------------------------
Title: Attorney-in-Fact
--------------------------------------
TI VENTURES, LP
By: /s/ Jackie Berterretche
-----------------------------------------
Name: Jackie Berterretche
---------------------------------------
Title: Attorney-in-Fact
--------------------------------------
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>
VULCAN VENTURES INCORPORATED
By: /s/ William D. Savoy
-----------------------------------------
Name: William D. Savoy
---------------------------------------
Title: Vice President
--------------------------------------
ADELSON INVESTORS, LLC
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
GAK LIMITED
By:
-----------------------------------------
Name: Horace Hertz
---------------------------------------
Title: General Partner
--------------------------------------
DOLL TECHNOLOGY INVESTMENT FUND
By: /s/ Dixon R. Doll
-----------------------------------------
Name: Dixon R. Doll
---------------------------------------
Title: Managing Member
--------------------------------------
DOLL TECHNOLOGY AFFILIATES FUND, L.P.
By: /s/ Dixon R. Doll
-----------------------------------------
Name: Dixon R. Doll
---------------------------------------
Title: Managing Member
--------------------------------------
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
DOLL TECHNOLOGY SIDE FUND, L.P.
By: /s/ Dixon R. Doll
-----------------------------------------
Name: Dixon R. Doll
---------------------------------------
Title: Managing Member
--------------------------------------
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>
---------------------------------------------
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>
---------------------------------------------
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>
Name:
---------------------------------------
Title:
--------------------------------------
---------------------------------------------
ALEXANDRIA H. STONE
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
SERIES A PREFERRED SHAREHOLDERS:
/s/ Robert J. Lunday, Jr.
---------------------------------------------
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>
COMMON STOCK SHAREHOLDERS:
---------------------------------------------
ANTHONY C. NAUGTIN
/s/ Christopher D. Wheeler
---------------------------------------------
CHRISTOPHER D. WHEELER
CDW LIMITED PARTNERSHIP
By: CDW Services, Inc.
General Partner
By: /s/ Christopher D. Wheeler
-----------------------------------------
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>
FOUNDERS:
/s/ Robert J. Lunday, Jr.
---------------------------------------------
ROBERT J. LUNDAY, JR.
---------------------------------------------
PAUL E. MCBRIDE
---------------------------------------------
ANTHONY C. NAUGHTIN
/s/ Christopher D. Wheeler
---------------------------------------------
CHRISTOPHER D. WHEELER
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE>
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>
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>
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>
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>
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>
September 7, 1999
Anthony C. Naughtin
Chief Executive Officer
InterNAP Network Services Corporation
Two Union Square
601 Union Street, Suite 1000
Seattle, Washington 98101
Re: Offer of Employment
Dear Tony:
Reference is made to the Offer of Employment letter dated August 27, 1999
("Offer Letter"). This letter sets forth certain other agreements and
clarifications with respect to my employment with InterNAP.
In the event my employment with InterNAP is terminated for reasons other than
(i) my voluntary resignation, (ii) my death or (iii) for Cause (as defined
below) within the twelve month period of the "date of grant" referenced in the
Offer Letter then I will fully and immediately vest in the 50,000 options to
purchase InterNAP stock (at the price per share of $8.00) in which I would have
vested through the first anniversary of the date of grant had my employment with
InterNAP continued through such twelve-month period.
In addition (and without limitation of the immediately preceding paragraph),
in the event my employment with InterNAP is terminated for reasons other than
(i) my voluntary resignation, (ii) my death or (iii) for Cause (as defined
below), I will receive no less than six months severance pay (based upon my
then applicable base salary and expected bonus), and will fully and
immediately vest in such options to purchase InterNAP stock (at the
applicable strike price) to which I would have vested had my employment with
InterNAP continued through such six month period. Furthermore, all health,
life and other insurance/benefits shall continue through such severance
period as though my employment with InterNAP continued.
For purposes of this letter "Cause" shall mean (A) the conviction or a plea of
nolo contendere to a felony involving fraud, dishonesty or moral turpitude, (B)
the commission of a fraud, misappropriation, theft or similar malfeasance
involving the assets of InterNAP, (C) an intentional act materially adverse to
InterNAP.
The strike price applicable my option to purchase the 200,000 shares of
InterNAP stock referred to in the Offer Letter is $8.00 per share.
For the avoidance of doubt, Paragraph 11(e) of the InterNAP Network Services
Corporation 1999 Equity Incentive Plan, takes precedence over Paragraph 11(c).
Very truly yours,
/s/ Richard K. Cotton
ACCEPTED AND AGREED:
INTERNAP NETWORK SERVICES CORPORATION
By: /s/ Anthony C. Naughtin
------------------------
Name: Anthony C. Naughtin
----------------------
Title: President/CEO
---------------------
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
INTERNAP NETWORK SERVICES CORPORATION
WARRANT FOR THE PURCHASE OF STOCK
No. 1999-C2 5,000 Shares
FOR VALUE RECEIVED, INTERNAP NETWORK SERVICES CORPORATION, a Washington
corporation (the "Company"), with its principal office at 601 Union Street,
Suite 1000, Seattle, WA 98101, hereby certifies that S.L. PARTNERS, INC.
("Holder"), as agent under the Credit Agreement dated as of September 23, 1999
(the "Credit Agreement") among the Company, the lenders party thereto (the
"Lenders") and Holder, or Holder's assigns, in consideration for a loan and
other financial accommodations, is entitled, subject to the provisions of this
Warrant, to purchase from the Company, at any time on or before 5:00 p.m.
(Washington Time) December 31, 2004 (the "Expiration Date"), the number set
forth above of fully paid and nonassessable shares of common stock of the
Company (the "Common Stock"), subject to adjustment as hereinafter provided.
Capitalized terms used herein and not otherwise defined shall have the meanings
set forth in the Credit Agreement.
Holder may purchase such number of shares of Common Stock at a purchase
price of $20 per share (as adjusted pursuant to Section 5 hereof).
The shares of Common Stock deliverable upon the exercise of this Warrant,
as adjusted from time to time, are hereinafter sometimes referred to as "Warrant
Shares." The applicable purchase price of the Warrant Shares is sometimes
hereinafter referred to as the "Exercise Price."
The number of shares of Common Stock to be received upon the exercise of
this Warrant and the price to be paid for a share of Common Stock are subject to
adjustment from time to time as hereinafter set forth. The term "Common Stock"
shall mean the aforementioned Common Stock of the Company together with any
other equity securities that may be issued by the Company in addition thereto or
in substitution therefor as provided herein.
<PAGE>
SECTION 1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised in whole or in part on any
business day on or prior to the Expiration Date. This Warrant shall be
exercised, if at all, by presentation and surrender hereof to the Company at its
principal office at the address set forth in the initial paragraph hereof (or at
such other address as the Company may hereafter notify Holder in writing) with
the Purchase Form annexed hereto duly executed and accompanied by proper payment
of the Exercise Price in lawful money of the United States of America in the
form of a check, subject to collection, for the number of Warrant Shares
specified in the Purchase Form. If this Warrant should be exercised in part
only, the Company shall, upon surrender of this Warrant, execute and deliver a
new Warrant evidencing the rights of Holder thereof to purchase the balance of
the Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant and such Purchase Form, together with proper payment of the Exercise
Price, at such office, Holder shall be deemed to be the holder of record of the
Warrant Shares, notwithstanding that the stock transfer books of the Company
shall then be closed or that certificates representing such Warrant Shares shall
not then be actually delivered to Holder. The Company shall pay any and all
documentary stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of the Warrant Shares.
(b) In addition to and without limiting the rights of Holder under
any other terms set forth herein, Holder shall have the right, upon written
request by Holder delivered or transmitted to the Company together with this
Warrant, to exchange this Warrant, in whole or in part on or before the
Expiration Date, for the number of Warrant Shares having an aggregate current
market price on the date of such exchange (determined as provided in
Section 5(b) below) equal to the difference between (a) the aggregate current
market price on the date of such exchange (determined as aforesaid) of a number
of Warrant Shares designated by Holder, and (b) the aggregate Exercise Price
Holder would have paid to the Company to purchase such designated number of
Warrant Shares upon exercise of this Warrant. Upon such exchange, the number of
Warrant Shares purchasable upon exercise of this Warrant shall be reduced by
such designated number of Warrant Shares and, if a balance of purchasable
Warrant Shares remains after such exchange, the Company shall execute and
deliver to Holder a new Warrant evidencing the right to purchase such balance of
Warrant Shares; PROVIDED, that no fractional shares shall be issuable upon such
exchange, and if the number of Warrant Shares determined in accordance with the
foregoing formula is other than a whole number, the Company shall pay Holder an
amount by check, determined in accordance with the provisions of Section 3.
SECTION 2. RESERVATION OF SHARES. The Company hereby agrees that at all
times there shall be reserved for issuance and delivery upon exercise of this
Warrant all shares of its Common Stock of the Company from time to time issuable
upon exercise of this Warrant. All such shares shall be duly authorized and,
when issued upon such exercise in accordance with the terms of this Warrant,
shall be validly issued, fully paid and nonassessable, free and clear of all
liens, security interests, charges and other encumbrances or restrictions on
sale (other than as provided in the Company's Articles of Incorporation and any
restrictions on sale set forth herein or pursuant to applicable federal and
state securities laws) and free and clear of all preemptive rights.
2.
<PAGE>
SECTION 3. FRACTIONAL INTEREST. The Company will not issue a fractional
share of a Warrant Share upon exercise of a Warrant. Instead, the Company will
deliver its check for the current market value of the fractional share. The
current market value of a fraction of a share is determined as follows: multiply
the current market price of a full share by the fraction of a share and round
the result to the nearest cent.
The current market price of a Warrant Share for purposes of this Section 3
is determined as provided in Section 5(b) below.
SECTION 4. ASSIGNMENT OR LOSS OF WARRANT
(a) Except as provided in Section 8, Holder shall be entitled,
without obtaining the consent of the Company, to assign its interest in this
Warrant in whole or in part to any person or persons. Subject to the provisions
of Section 8, upon surrender of this Warrant to the Company or at the office of
its stock transfer agent or warrant agent, with the Assignment Form annexed
hereto duly executed and funds sufficient to pay any transfer tax, the Company
shall, without charge, execute and deliver a new Warrant or Warrants in the name
of the assignee or assignees named in such instrument of assignment (any such
assignee will then be a "Holder" for purposes of this Warrant) and, if Holder's
entire interest is not being assigned, in the name of Holder, and this Warrant
shall promptly be canceled.
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of indemnification satisfactory to the Company, and
upon surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a new Warrant of like tenor and date.
SECTION 5. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number
and kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
beginning of certain events, as follows:
(a) ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If at any time after
the date of this Warrant, the Company:
(1) pays a dividend or makes a distribution on its
Common Stock in shares of its Common Stock;
(2) subdivides its outstanding shares of Common Stock
into a greater number of shares;
(3) combines its outstanding shares of Common Stock
into a smaller number of shares;
(4) makes a distribution on its Common Stock in shares
of its capital stock other than Common Stock; or
3.
<PAGE>
(5) issues by reclassification of its Common Stock any
shares of its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that Holder may receive upon exercise of this Warrant and payment of
the same aggregate consideration the number of shares of capital stock of the
Company which Holder would have owned immediately following such action if
Holder had exercised this Warrant immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
(b) CURRENT MARKET PRICE. The current market price per
share of Common Stock on any date is the average of the Quoted Prices of the
Common Stock for the thirty (30) consecutive trading days commencing forty-five
(45) trading days before the date in question or, if the Common Stock shall not
have been traded for such thirty (30) consecutive trading days, such period of
time up to thirty (30) trading days. The "Quoted Price" of the Common Stock is
the last reported sales price of the Common Stock as reported by the Nasdaq
National Market, or the primary national securities exchange on which the Common
Stock is then quoted; provided, however, that if the Common Stock is neither
traded on the Nasdaq National Market nor on a national securities exchange, the
price referred to above shall be the price reflected on the Nasdaq National
Market, or if the Common Stock is not then traded on the Nasdaq National Market,
the price reflected in the over-the-counter market as reported by the National
Quotation Bureau, Inc. or any organization performing a similar function or, if
the Common Stock is not then traded on the over the counter market as reported
by the National Quotation Bureau, Inc. or any organization performing a similar
function, the price referred to above shall be the fair market value as
determined by the Company's Board of Directors.
(c) MINIMUM ADJUSTMENT. No adjustment in the Exercise Price of
this Section 5 shall be required unless such adjustment would require an
increase or decrease of at least twenty-five cents ($.25) in such Exercise
Price; PROVIDED, HOWEVER, that any adjustments which by reason of this
subsection are not required to be made, shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 5
shall be made to the nearest cent or to the nearest share, as the case may be.
(d) DEFERRAL OF ISSUANCE OR PAYMENT. In any case in which an
event covered by this Section 5 shall require that an adjustment in the Exercise
Price be made effective as of a record date, the Company may elect to defer
until the occurrence of such event (i) issuing to Holder, if this Warrant is
exercised after such record date, the Warrant Shares and other capital stock of
the Company, if any, issuable upon such exercise over and above the Warrant
Shares or other capital stock of the Company, if any, issuable upon such
exercise on the basis of the Exercise Price in effect prior to such adjustment,
and (ii) paying to Holder by check any amount in lieu of the issuance of
fractional shares pursuant to Section 3.
(e) WHEN NO ADJUSTMENT REQUIRED. No adjustment need be made for a
change in the par value or no par value of the Common Stock. To the extent this
Warrant becomes
4.
<PAGE>
exercisable into cash, no adjustment need be made thereafter as to the cash,
and interest will not accrue on the cash.
(f) NOTICE OF CERTAIN ACTIONS. In the event that:
(1) the Company shall authorize the issuance to all
holders of its Common Stock of rights, warrants, options or convertible
securities to subscribe for or purchase shares of its capital stock or of any
other subscription rights, warrants, options or convertible securities; or
(2) the Company shall authorize the distribution to
all holders of its Common Stock of evidences of its indebtedness or assets
(other than dividends paid in or distributions of the Company's capital stock
for which the Exercise Price shall have been adjusted pursuant to subsection (a)
of this Section 5 or cash dividends or cash distributions payable out of
consolidated current or retained earnings as shown on the books of the Company
and paid in the ordinary course of business); or
(3) the Company shall authorize any capital
reorganization or reclassification of the Common Stock (other than a subdivision
or combination of the outstanding Common Stock and other than a change in par
value of the Common Stock) or of any consolidation or merger to which the
Company is a party and for which approval of any stockholders of the Company is
required (other than a consolidation or merger in which the Company is the
continuing corporation and that does not result in any reclassification or
change of the Common Stock outstanding), or of the conveyance or transfer of the
properties and assets of the Company as an entirety or substantially as an
entirety; or
(4) the Company is the subject of a voluntary or
involuntary dissolution, liquidation or winding-up procedure; or
(5) the Company proposes to take any action (other
than actions of the character described in subsection (a) of this Section 5)
that would require an adjustment of the Exercise Price pursuant to this
Section 5;
then the Company shall cause to be mailed by first-class mail to Holder at least
ten (10) days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date as of which the holders of Common Stock
of record to be entitled to receive any such rights, warrants or distributions
are to be determined, or (y) the date on which any such consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities or other property, if any, deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding-up.
(g) NO ADJUSTMENT UPON EXERCISE OF WARRANT. No adjustments shall
be made under any Section herein in connection with the issuance of Warrant
Shares upon exercise of this Warrant.
5.
<PAGE>
SECTION 6. OFFICERS' CERTIFICATE. Whenever the Exercise Price shall be
adjusted as required by the provisions of Section 5, the Company shall forthwith
file in the custody of its Secretary or an Assistant Secretary at its principal
office an officers' certificate showing the adjusted Exercise Price determined
as herein provided, setting forth in reasonable detail the facts requiring such
adjustment and the manner of computing such adjustment. Each such officers'
certificate shall be signed by the chairperson, president or chief financial
officer of the Company and by the secretary or any assistant secretary of the
Company. Each such officers' certificate shall be made available at all
reasonable times for inspection by Holder.
SECTION 7. 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 notice of the Reorganization in accordance with
Section 5 above and that the Holder shall have the right immediately prior to
the Reorganization to exercise this Warrant.
SECTION 8. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. This
Warrant may not be exercised and neither this Warrant nor any of the Warrant
Shares, nor any interest in either, may be offered, sold, assigned, pledged,
hypothecated, encumbered or in any other manner transferred or disposed of, in
whole or in part, except in compliance with applicable United States federal and
state securities and blue sky laws and the terms and conditions hereof. Each
Warrant shall bear a legend in substantially the same form as the legend set
forth on the first page of this Warrant. Each certificate for Warrant Shares
issued upon exercise of this Warrant, unless at the time of exercise such
Warrant Shares are acquired pursuant to a registration statement that has been
declared effective under the Act and applicable blue sky laws, shall bear a
legend substantially in the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE
TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER
TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE
WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
Any certificate for any Warrant Shares issued at any time in exchange or
substitution for any certificate for any Warrant Shares bearing such legend
(except a new certificate for any Warrant Shares issued after the acquisition of
such Warrant Shares pursuant to a registration statement that has been declared
effective under the Act) shall also bear such legend unless, in the opinion of
counsel for the Company, the Warrant Shares represented thereby need no longer
be subject to
6.
<PAGE>
the restriction contained herein. The provision of this Section 8 shall be
binding upon all subsequent holders of certificates for Warrant Shares bearing
the above legend and all subsequent holders of this Warrant, if any.
Notwithstanding the foregoing no registration statement or opinion of
counsel shall be required in connection with (i) the transfer by the Holder of
this Warrant as provided in Section 4.1(d) or Section 6.9 of the Credit
Agreement, all such transfers being permitted without obtaining the consent of
the Company or (ii) the transfer by a Holder of this Warrant or the Warrant
Shares to any family member or any trust for the benefit of such Holder or any
family member of such Holder.
SECTION 9. MODIFICATION AND WAIVER. Neither this Warrant nor any term
hereof may be changed, waived, discharged or terminated other than by an
instrument in writing signed by the Company and by Holder.
SECTION 10. NOTICES. Any notice, request or other document required or
permitted to be given or delivered to Holder or the Company shall be delivered
or shall be sent by certified mail, postage prepaid, to 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.
SECTION 11. 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, without
regard to its conflicts of laws principles.
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be signed
by its duly authorized officer and to be dated as of December 22, 1999.
INTERNAP NETWORK SERVICES CORPORATION
By: \s\ Paul E. McBride
--------------------------------------------
Paul E. McBride, Vice President of Finance
and Administration
7.
<PAGE>
PURCHASE FORM
Dated ___________, _____
The undersigned hereby irrevocably elects to exercise the within Warrant
No. 1999-C2 to purchase ______ shares of _______________ Stock and hereby makes
payment of $_____________ in payment of the exercise price thereof.
SL PARTNERS, INC.
By:
------------------------------------
Print Name:
----------------------------
Title:
---------------------------------
8.
<PAGE>
ASSIGNMENT FORM
Dated _________, _____
FOR VALUE RECEIVED, SL PARTNERS, INC. hereby sells, assigns and transfers unto
______________________________________________________________ (the "Assignee"),
(please type or print in block letters)
________________________________________________________________________________
(insert address)
its right to purchase up to _______ shares of ________________ Stock represented
by this Warrant No. 1999-C2 and does hereby irrevocably constitute and appoint
____________________________ attorney, to transfer the same on the books of the
Company, with full power of substitution in the premises.
SL PARTNERS, INC.
By:
------------------------------------
Print Name:
----------------------------
Title:
---------------------------------
9.
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
INTERNAP NETWORK SERVICES CORPORATION
WARRANT FOR THE PURCHASE OF STOCK
No. 1999-C_ _______ Shares
FOR VALUE RECEIVED, INTERNAP NETWORK SERVICES CORPORATION, a Washington
corporation (the "Company"), with its principal office at 601 Union Street,
Suite 1000, Seattle, WA 98101, hereby certifies that _______________ ("Holder"),
as a lender under the Credit Agreement dated as of September 23, 1999 (the
"Credit Agreement") among the Company, the lenders party thereto (the "Lenders")
and S.L. Partners, Inc., as agent for such Lenders, or Holder's assigns, in
consideration for a loan and other financial accommodations, is entitled,
subject to the provisions of this Warrant, to purchase from the Company, at any
time on or before 5:00 p.m. (Washington Time) December 31, 2004 (the "Expiration
Date"), the number set forth above of fully paid and nonassessable shares of
common stock of the Company (the "Common Stock"), subject to adjustment as
hereinafter provided. Capitalized terms used herein and not otherwise defined
shall have the meanings set forth in the Credit Agreement.
Holder may purchase such number of shares of Common Stock at a purchase
price of $20 per share (as adjusted pursuant to Section 5 hereof).
The shares of Common Stock deliverable upon the exercise of this Warrant,
as adjusted from time to time, are hereinafter sometimes referred to as "Warrant
Shares." The applicable purchase price of the Warrant Shares is sometimes
hereinafter referred to as the "Exercise Price."
The number of shares of Common Stock to be received upon the exercise of
this Warrant and the price to be paid for a share of Common Stock are subject to
adjustment from time to time as hereinafter set forth. The term "Common Stock"
shall mean the aforementioned Common Stock of the Company together with any
other equity securities that may be issued by the Company in addition thereto or
in substitution therefor as provided herein.
<PAGE>
SECTION 1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised in whole or in part on any
business day on or prior to the Expiration Date. This Warrant shall be
exercised, if at all, by presentation and surrender hereof to the Company at its
principal office at the address set forth in the initial paragraph hereof (or at
such other address as the Company may hereafter notify Holder in writing) with
the Purchase Form annexed hereto duly executed and accompanied by proper payment
of the Exercise Price in lawful money of the United States of America in the
form of a check, subject to collection, for the number of Warrant Shares
specified in the Purchase Form. If this Warrant should be exercised in part
only, the Company shall, upon surrender of this Warrant, execute and deliver a
new Warrant evidencing the rights of Holder thereof to purchase the balance of
the Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant and such Purchase Form, together with proper payment of the Exercise
Price, at such office, Holder shall be deemed to be the holder of record of the
Warrant Shares, notwithstanding that the stock transfer books of the Company
shall then be closed or that certificates representing such Warrant Shares shall
not then be actually delivered to Holder. The Company shall pay any and all
documentary stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of the Warrant Shares.
(b) In addition to and without limiting the rights of Holder under
any other terms set forth herein, Holder shall have the right, upon written
request by Holder delivered or transmitted to the Company together with this
Warrant, to exchange this Warrant, in whole or in part on or before the
Expiration Date, for the number of Warrant Shares having an aggregate current
market price on the date of such exchange (determined as provided in
Section 5(b) below) equal to the difference between (a) the aggregate current
market price on the date of such exchange (determined as aforesaid) of a number
of Warrant Shares designated by Holder, and (b) the aggregate Exercise Price
Holder would have paid to the Company to purchase such designated number of
Warrant Shares upon exercise of this Warrant. Upon such exchange, the number of
Warrant Shares purchasable upon exercise of this Warrant shall be reduced by
such designated number of Warrant Shares and, if a balance of purchasable
Warrant Shares remains after such exchange, the Company shall execute and
deliver to Holder a new Warrant evidencing the right to purchase such balance of
Warrant Shares; PROVIDED, that no fractional shares shall be issuable upon such
exchange, and if the number of Warrant Shares determined in accordance with the
foregoing formula is other than a whole number, the Company shall pay Holder an
amount by check, determined in accordance with the provisions of Section 3.
SECTION 2. RESERVATION OF SHARES. The Company hereby agrees that at all
times there shall be reserved for issuance and delivery upon exercise of this
Warrant all shares of its Common Stock of the Company from time to time issuable
upon exercise of this Warrant. All such shares shall be duly authorized and,
when issued upon such exercise in accordance with the terms of this Warrant,
shall be validly issued, fully paid and nonassessable, free and clear of all
liens, security interests, charges and other encumbrances or restrictions on
sale (other than as provided in the Company's Articles of Incorporation and any
restrictions on sale set forth herein or pursuant to applicable federal and
state securities laws) and free and clear of all preemptive rights.
2.
<PAGE>
SECTION 3. FRACTIONAL INTEREST. The Company will not issue a fractional
share of a Warrant Share upon exercise of a Warrant. Instead, the Company will
deliver its check for the current market value of the fractional share. The
current market value of a fraction of a share is determined as follows: multiply
the current market price of a full share by the fraction of a share and round
the result to the nearest cent.
The current market price of a Warrant Share for purposes of this Section 3
is determined as provided in Section 5(b) below.
SECTION 4. ASSIGNMENT OR LOSS OF WARRANT
(a) Except as provided in Section 8, Holder shall be entitled,
without obtaining the consent of the Company, to assign its interest in this
Warrant in whole or in part to any person or persons. Subject to the provisions
of Section 8, upon surrender of this Warrant to the Company or at the office of
its stock transfer agent or warrant agent, with the Assignment Form annexed
hereto duly executed and funds sufficient to pay any transfer tax, the Company
shall, without charge, execute and deliver a new Warrant or Warrants in the name
of the assignee or assignees named in such instrument of assignment (any such
assignee will then be a "Holder" for purposes of this Warrant) and, if Holder's
entire interest is not being assigned, in the name of Holder, and this Warrant
shall promptly be canceled.
(b) Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of indemnification satisfactory to the Company, and
upon surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a new Warrant of like tenor and date.
SECTION 5. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number
and kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
beginning of certain events, as follows:
(a) ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If at any time after
the date of this Warrant, the Company:
(1) pays a dividend or makes a distribution on its
Common Stock in shares of its Common Stock;
(2) subdivides its outstanding shares of Common Stock
into a greater number of shares;
(3) combines its outstanding shares of Common Stock
into a smaller number of shares;
(4) makes a distribution on its Common Stock in shares
of its capital stock other than Common Stock; or
3.
<PAGE>
(5) issues by reclassification of its Common Stock any
shares of its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that Holder may receive upon exercise of this Warrant and payment of
the same aggregate consideration the number of shares of capital stock of the
Company which Holder would have owned immediately following such action if
Holder had exercised this Warrant immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
(b) CURRENT MARKET PRICE. The current market price per share of
Common Stock on any date is the average of the Quoted Prices of the Common Stock
for the thirty (30) consecutive trading days commencing forty-five (45) trading
days before the date in question or, if the Common Stock shall not have been
traded for such thirty (30) consecutive trading days, such period of time up to
thirty (30) trading days. The "Quoted Price" of the Common Stock is the last
reported sales price of the Common Stock as reported by the Nasdaq National
Market, or the primary national securities exchange on which the Common Stock is
then quoted; provided, however, that if the Common Stock is neither traded on
the Nasdaq National Market nor on a national securities exchange, the price
referred to above shall be the price reflected on the Nasdaq National Market, or
if the Common Stock is not then traded on the Nasdaq National Market, the price
reflected in the over-the-counter market as reported by the National Quotation
Bureau, Inc. or any organization performing a similar function or, if the Common
Stock is not then traded on the over the counter market as reported by the
National Quotation Bureau, Inc. or any organization performing a similar
function, the price referred to above shall be the fair market value as
determined by the Company's Board of Directors.
(c) MINIMUM ADJUSTMENT. No adjustment in the Exercise Price of
this Section 5 shall be required unless such adjustment would require an
increase or decrease of at least twenty-five cents ($.25) in such Exercise
Price; PROVIDED, HOWEVER, that any adjustments which by reason of this
subsection are not required to be made, shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 5
shall be made to the nearest cent or to the nearest share, as the case may be.
(d) DEFERRAL OF ISSUANCE OR PAYMENT. In any case in which an
event covered by this Section 5 shall require that an adjustment in the Exercise
Price be made effective as of a record date, the Company may elect to defer
until the occurrence of such event (i) issuing to Holder, if this Warrant is
exercised after such record date, the Warrant Shares and other capital stock of
the Company, if any, issuable upon such exercise over and above the Warrant
Shares or other capital stock of the Company, if any, issuable upon such
exercise on the basis of the Exercise Price in effect prior to such adjustment,
and (ii) paying to Holder by check any amount in lieu of the issuance of
fractional shares pursuant to Section 3.
(e) WHEN NO ADJUSTMENT REQUIRED. No adjustment need be made for a
change in the par value or no par value of the Common Stock. To the extent this
Warrant becomes
4.
<PAGE>
exercisable into cash, no adjustment need be made thereafter as to the cash,
and interest will not accrue on the cash.
(f) NOTICE OF CERTAIN ACTIONS. In the event that:
(1) the Company shall authorize the issuance to all
holders of its Common Stock of rights, warrants, options or convertible
securities to subscribe for or purchase shares of its capital stock or of any
other subscription rights, warrants, options or convertible securities; or
(2) the Company shall authorize the distribution to
all holders of its Common Stock of evidences of its indebtedness or assets
(other than dividends paid in or distributions of the Company's capital stock
for which the Exercise Price shall have been adjusted pursuant to subsection (a)
of this Section 5 or cash dividends or cash distributions payable out of
consolidated current or retained earnings as shown on the books of the Company
and paid in the ordinary course of business); or
(3) the Company shall authorize any capital
reorganization or reclassification of the Common Stock (other than a subdivision
or combination of the outstanding Common Stock and other than a change in par
value of the Common Stock) or of any consolidation or merger to which the
Company is a party and for which approval of any stockholders of the Company is
required (other than a consolidation or merger in which the Company is the
continuing corporation and that does not result in any reclassification or
change of the Common Stock outstanding), or of the conveyance or transfer of the
properties and assets of the Company as an entirety or substantially as an
entirety; or
(4) the Company is the subject of a voluntary or
involuntary dissolution, liquidation or winding-up procedure; or
(5) the Company proposes to take any action (other
than actions of the character described in subsection (a) of this Section 5)
that would require an adjustment of the Exercise Price pursuant to this
Section 5;
then the Company shall cause to be mailed by first-class mail to Holder at least
ten (10) days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date as of which the holders of Common Stock
of record to be entitled to receive any such rights, warrants or distributions
are to be determined, or (y) the date on which any such consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities or other property, if any, deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding-up.
(g) NO ADJUSTMENT UPON EXERCISE OF WARRANT. No adjustments shall
be made under any Section herein in connection with the issuance of Warrant
Shares upon exercise of this Warrant.
5.
<PAGE>
SECTION 6. OFFICERS' CERTIFICATE. Whenever the Exercise Price shall be
adjusted as required by the provisions of Section 5, the Company shall forthwith
file in the custody of its Secretary or an Assistant Secretary at its principal
office an officers' certificate showing the adjusted Exercise Price determined
as herein provided, setting forth in reasonable detail the facts requiring such
adjustment and the manner of computing such adjustment. Each such officers'
certificate shall be signed by the chairperson, president or chief financial
officer of the Company and by the secretary or any assistant secretary of the
Company. Each such officers' certificate shall be made available at all
reasonable times for inspection by Holder.
SECTION 7. 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 notice of the Reorganization in accordance with
Section 5 above and that the Holder shall have the right immediately prior to
the Reorganization to exercise this Warrant.
SECTION 8. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. This
Warrant may not be exercised and neither this Warrant nor any of the Warrant
Shares, nor any interest in either, may be offered, sold, assigned, pledged,
hypothecated, encumbered or in any other manner transferred or disposed of, in
whole or in part, except in compliance with applicable United States federal and
state securities and blue sky laws and the terms and conditions hereof. Each
Warrant shall bear a legend in substantially the same form as the legend set
forth on the first page of this Warrant. Each certificate for Warrant Shares
issued upon exercise of this Warrant, unless at the time of exercise such
Warrant Shares are acquired pursuant to a registration statement that has been
declared effective under the Act and applicable blue sky laws, shall bear a
legend substantially in the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE
TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER
TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE
WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
Any certificate for any Warrant Shares issued at any time in exchange or
substitution for any certificate for any Warrant Shares bearing such legend
(except a new certificate for any Warrant Shares issued after the acquisition of
such Warrant Shares pursuant to a registration statement that has been declared
effective under the Act) shall also bear such legend unless, in the opinion of
counsel for the Company, the Warrant Shares represented thereby need no longer
be subject to
6.
<PAGE>
the restriction contained herein. The provision of this Section 8 shall be
binding upon all subsequent holders of certificates for Warrant Shares bearing
the above legend and all subsequent holders of this Warrant, if any.
Notwithstanding the foregoing no registration statement or opinion of
counsel shall be required in connection with (i) the transfer by the Holder of
this Warrant as provided in Section 4.1(d) or Section 6.9 of the Credit
Agreement, all such transfers being permitted without obtaining the consent of
the Company or (ii) the transfer by a Holder of this Warrant or the Warrant
Shares to any family member or any trust for the benefit of such Holder or any
family member of such Holder.
SECTION 9. MODIFICATION AND WAIVER. Neither this Warrant nor any term
hereof may be changed, waived, discharged or terminated other than by an
instrument in writing signed by the Company and by Holder.
SECTION 10. NOTICES. Any notice, request or other document required or
permitted to be given or delivered to Holder or the Company shall be delivered
or shall be sent by certified mail, postage prepaid, to 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.
SECTION 11. 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, without
regard to its conflicts of laws principles.
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be signed
by its duly authorized officer and to be dated as of December 22, 1999.
INTERNAP NETWORK SERVICES CORPORATION
By:
----------------------------------------------
Paul E. McBride, Vice President of Finance
and Administration
7.
<PAGE>
PURCHASE FORM
Dated ___________, _____
The undersigned hereby irrevocably elects to exercise the within Warrant
No. 1999-C_ to purchase ______ shares of _______________ Stock and hereby makes
payment of $_____________ in payment of the exercise price thereof.
------------------------------------
8.
<PAGE>
ASSIGNMENT FORM
Dated _________, _____
FOR VALUE RECEIVED, _____________ hereby sells, assigns and transfers unto
______________________________________________________________ (the "Assignee"),
(please type or print in block letters)
________________________________________________________________________________
(insert address)
its right to purchase up to _______ shares of ________________ Stock represented
by this Warrant No. 1999-C_ and does hereby irrevocably constitute and appoint
____________________________ attorney, to transfer the same on the books of the
Company, with full power of substitution in the premises.
------------------------------------
9.
<PAGE>
SUBSIDIARIES
InterNAP Network Services U.K. Limited
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated January 22, 2000 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.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
January 26, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 155,184
<SECURITIES> 55,218
<RECEIVABLES> 4,290
<ALLOWANCES> 206
<INVENTORY> 0
<CURRENT-ASSETS> 210,580
<PP&E> 34,650
<DEPRECIATION> 5,839
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<CURRENT-LIABILITIES> 20,668
<BONDS> 23,537
0
0
<COMMON> 132
<OTHER-SE> 210,368
<TOTAL-LIABILITY-AND-EQUITY> 245,546
<SALES> 0
<TOTAL-REVENUES> 12,520
<CGS> 0
<TOTAL-COSTS> 64,751
<OTHER-EXPENSES> (2,314)
<LOSS-PROVISION> 212
<INTEREST-EXPENSE> 1,074
<INCOME-PRETAX> (49,917)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,917)
<EPS-BASIC> (1.31)
<EPS-DILUTED> (1.31)
</TABLE>
