<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 2000
REGISTRATION NO. 333-30762
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
INTERPACKET NETWORKS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4899 95-4542908
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1901 MAIN STREET, 2ND FLOOR
SANTA MONICA, CALIFORNIA 90405
(310) 382-3300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JONATHAN GANS
INTERPACKET NETWORKS, INC.
CHIEF EXECUTIVE OFFICER AND PRESIDENT
1901 MAIN STREET, 2ND FLOOR
SANTA MONICA, CALIFORNIA 90405
(310) 382-3300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
CYNTHIA M. DUNNETT, ESQ. KENNETH R. LAMB, ESQ.
Riordan & McKinzie LISA A. FONTENOT, ESQ.
300 South Grand Avenue, Suite 2900 MEG L. FITZPATRICK, ESQ.
Los Angeles, California 90071 Gibson, Dunn & Crutcher LLP
(213) 629-4824 1 Montgomery Street, 26th Floor
San Francisco, California 94104
(415) 393-8200
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS 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 of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If 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 statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE(2)
<S> <C> <C> <C> <C>
Common Stock, $.001 par value.......... 7,475,000 $12.00 $89,700,000 $23,681
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Calculated pursuant to Rule 457(a). $22,770 of this amount was previously
paid with the filing of this Registration Statement of Form S-1 on February
18, 2000. Accordingly, a registration fee of $911 is being paid herewith.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION. DATED APRIL 10, 2000.
PROSPECTUS
6,500,000 Shares
[LOGO]
Common Stock
This is an initial public offering of shares of common stock of InterPacket
Networks, Inc. All of the 6,500,000 shares of common stock are being sold by us.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price per share is estimated to be between $10.00
and $12.00. We have applied to have the common stock approved for quotation on
the Nasdaq National Market under the symbol IPKT.
-------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to InterPacket Networks, Inc., before expenses..... $ $
</TABLE>
InterPacket has granted the underwriters a 30-day option to purchase up to
an additional 975,000 shares of common stock to cover over-allotments.
-------------------
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 4.
-----------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
CHASE H&Q LEHMAN BROTHERS
CIBC WORLD MARKETS
, 2000
<PAGE>
[INSIDE FRONT COVER]
[MAP AND DIAGRAM OF CONTENT DISTRIBUTION VIA SATELLITE]
<PAGE>
[INSIDE COVER GATEFOLD]
[MAP OF THE WORLD WITH SATELLITE COVERAGE AND
COUNTRIES WHERE WE HAVE CUSTOMERS]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Consolidated Financial Information................. 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 28
Management.................................................. 43
Certain Transactions........................................ 52
Principal Stockholders...................................... 56
Description of Capital Stock................................ 58
Shares Eligible for Future Sale............................. 60
Underwriting................................................ 62
Legal Matters............................................... 64
Experts..................................................... 64
Additional Information...................................... 64
Index to Consolidated Financial Statements.................. F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE
FINANCIAL STATEMENTS, CAREFULLY BEFORE MAKING AN INVESTMENT DECISION.
INTERPACKET NETWORKS, INC.
OVERVIEW
We operate a satellite-based, high performance Internet network that
delivers Internet services to international Internet service providers, or ISPs,
and other businesses in more than 90 countries. Our proprietary network design
integrates the broadcast capabilities of satellites with Internet networking
technologies to offer our customers an expandable, or scalable, solution to the
constraints of the public Internet infrastructure. Our global network's open
technical architecture enables us to provide multiple categories of Internet
services, including global high bandwidth, or broadband, connectivity to the
Internet backbone, enhanced Internet services, such as Internet telephony, and
Internet content distribution, such as newsfeeds and streaming media. From
December 31, 1998 to December 31, 1999, we increased the number of our customers
from 69 to 343, and as of March 27, 2000 we had over 500 customers worldwide.
Strain on the worldwide Internet infrastructure is increasing, especially
outside the U.S., as the number of Internet users grows and as their bandwidth
needs expand. International Data Corporation estimates that the number of active
Internet users worldwide will grow from approximately 261 million in 1999, of
which approximately 59% resided outside of the U.S., to approximately
623 million by the end of 2003, of which approximately 68% will reside outside
of the U.S. Despite an anticipated expansion in the number of Internet users
worldwide, advances in the global telecommunications infrastructure and the
public Internet have failed to keep pace with user demand. When connecting to
and navigating the Internet, international ISPs and their subscribers suffer
numerous problems caused by limited access to the Internet backbone, poor
telecommunications infrastructure and low bandwidth availability. These
difficulties are likely to increase as demand grows for rich Internet content,
such as streaming audio and video.
THE INTERPACKET SOLUTION
Our satellite-based Internet network overlays the public Internet around the
world and offers solutions to the limitations of the current global Internet
infrastructure. Our network currently incorporates nine geostationary
satellites, uplinked from six strategically located earth-based satellite
transmission stations, or teleports, and allows for the rapid delivery of
Internet connectivity services worldwide. ESPRESSO and ESPRESSO BIZKIT, our
branded satellite-based Internet connectivity services, supplement or bypass
local and international telecommunications connections, enabling our ISP
customers to deliver a more reliable, higher quality of Internet service to
their subscribers. Our enhanced Internet services, including ESPRESSO VOICE, our
Internet telephony service, are complementary to the broadband access we provide
to our international ISP customers and create additional revenue opportunities.
The broadcast capabilities of our satellite network create an efficient,
reliable means for Internet content distributors to transmit bandwidth-intensive
forms of rich, Web-based content simultaneously to multiple locations, known as
multicasting, around the world. We currently broadcast ESPRESSO NEWS, our
aggregated newsfeed, and we recently entered into agreements with iBEAM
Broadcasting Corporation and RealNetworks, Inc., leading Internet broadcast
networks, to deliver streaming content around the world.
Our satellite-based Internet network and services feature:
- Scalable, proprietary and global network design
- High quality, branded service
- Rapid provisioning
- Enhanced Internet services
- Multicasting content delivery
- Customer-focused network management and support
1
<PAGE>
OUR STRATEGY
Our goal is to become the leading provider of global satellite Internet
connectivity and services by building the world's largest, premier quality and
cost-efficient satellite-based Internet network. We also intend to capitalize on
our proprietary network design, our network's broadcast capabilities and the
global reach of our satellite coverage to offer content delivery to Internet
content distributors. To achieve this goal we intend to:
- Increase our global customer base
- Capitalize on our early entrant status
- Broaden our Internet service offerings
- Provide turnkey solutions to the emerging Internet content industry
- Expand our network infrastructure
- Develop our strategic and business relationships
-------------------
Our headquarters are located at 1901 Main Street, 2nd Floor, Santa Monica,
CA 90405, and our telephone number is (310) 382-3300.
-------------------
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by InterPacket Networks,
Inc........................................ 6,500,000 shares
Common stock to be outstanding after the
offering................................... 40,400,333 shares
Use of proceeds.............................. Primarily to acquire satellite and fiber
optic capacity, increase sales and marketing
personnel and activities, increase working
capital and for other general corporate
purposes.
Proposed Nasdaq National Market symbol....... IPKT
</TABLE>
The number of shares outstanding is based on shares outstanding as of
March 27, 2000. This number reflects the conversion of our 3,000,000 shares of
preferred stock into common stock upon completion of the offering and takes into
account our 2.2 for 1 stock split but excludes 6,963,163 shares of common stock
issuable upon exercise of options outstanding, at a weighted average exercise
price of $2.50, and 3,854,941 shares of common stock reserved for future option
grants under our stock option plans.
2
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Please see Note 2 of notes to our consolidated financial statements
appearing at the end of this prospectus for an explanation of the determination
of the number of shares used in computing per share data. The Actual column
reflects balance sheet data on a historical basis, without any adjustments to
reflect subsequent events or anticipated events and gives effect to our 2.2 for
1 stock split. The Pro Forma column reflects the issuance of 6,600,000 shares of
common stock upon conversion of our outstanding preferred stock on completion of
the offering. The Pro Forma As Adjusted column reflects the issuance of
6,600,000 shares upon this conversion and the receipt of the estimated proceeds
from our sale of 6,500,000 shares of common stock at an assumed initial public
offering price of $11 per share, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us. In 1998, 64% of our
total revenue and in 1999, 20% of our total revenue was derived from the sale of
traditional telecom services to one company, STAR Telecommunications, Inc. We do
not expect to generate any meaningful revenues in 2000 from traditional telecom
services.
Due to the costs associated with the development and expansion of our
network and the Internet services we now offer, we experienced net losses of
approximately $1.3 million in 1998 and $10.9 million in 1999. As of December 31,
1999 we had a deficit of $12.1 million.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Network services.......................................... $ 583 $ 4,115 $ 10,789
Traditional telecom services.............................. 1,176 7,295 2,685
------ ------- --------
Total revenue........................................... 1,759 11,410 13,474
Income (loss) from operations............................... 158 (1,416) (10,057)
------ ------- --------
Net income (loss)........................................... $ 89 $(1,328) $(10,890)
====== ======= ========
Basic and diluted income (loss) per common share............ $ 0.01 $ (0.07) $ (0.48)
====== ======= ========
Weighted average number of common shares (basic and
diluted).................................................. 15,950 18,506 22,862
====== ======= ========
Pro forma basic and diluted loss per common share
(unaudited)............................................... $ (0.46)
========
Weighted average number of common shares used to compute pro
forma loss per common share (unaudited)................... 23,767
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................................ $15,948 $15,948 $81,443
Total assets................................................ 64,291 64,291 129,786
Capital leases of satellite transponders, net of current
portion................................................... 38,669 38,669 38,669
Mandatorily redeemable preferred stock...................... 14,824 -- --
Deficit..................................................... (12,126) (12,126) (12,126)
Stockholders' equity........................................ 2,392 17,216 82,711
</TABLE>
Unless otherwise indicated, all information in this prospectus
- reflects our 2.2 for 1 stock split which will occur prior to the
completion of this offering;
- reflects the conversion of our preferred stock into common stock upon
completion of the offering; and
- assumes that the underwriters' over-allotment option is not exercised.
3
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER INFORMATION IN
THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. THE
RISKS AND UNCERTAINTIES DISCUSSED BELOW, WHILE COMPRISING THE RISKS WE CURRENTLY
BELIEVE TO BE MATERIAL, MAY NOT BE THE ONLY ONES THAT WE FACE. ADDITIONAL RISKS
AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL
MAY ALSO HARM OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS AND UNCERTAINTIES
ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD
BE HARMED. IN THIS EVENT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE,
AND YOU MAY LOSE SOME OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY AND OUR SHIFT TO OFFERING INTERNET SERVICES MAKES
IT DIFFICULT FOR YOU TO ACCURATELY EVALUATE OUR PROSPECTS.
Due to our limited operating history, and our shift to offering Internet
services, our past results may not be meaningful and you should not rely on them
as indicators of our future performance. In 1998, 64% of our total revenue was
derived from the sale of traditional telecom services. In 1999, 20% of our total
revenue was derived from the sale of traditional telecom services, with the
balance from sales of network services. We do not expect to generate any
meaningful revenues in 2000 from traditional telecom services. We confront all
of the challenges and uncertainties encountered by growing, early-stage
companies, particularly companies in the new and rapidly evolving international
market for Internet connectivity and services. These challenges and
uncertainties include our ability to:
- expand our international ISP customer base;
- increase the services purchased from us by our customers and the revenue
we receive from each customer;
- satisfy the changing needs of our existing and future international ISP
customers;
- acquire, develop and market new Internet services;
- respond to the changing needs of the Internet content delivery market;
- upgrade and expand our network infrastructure;
- develop our strategic and business relationships;
- capitalize on our early entrant status; and
- recruit and retain key personnel.
BECAUSE WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUING LOSSES FOR
THE FORESEEABLE FUTURE, OUR FUTURE PROFITABILITY IS UNCERTAIN.
Since our inception we have incurred substantial losses. Because we expect
our losses to increase as we expand our operations, we do not believe that we
will achieve profitability in the foreseeable future. While we had net income of
approximately $89,000 in 1997, we experienced net losses of approximately
$1.3 million in 1998 and $10.9 million in 1999. We experienced negative cash
flows from operations of approximately $13,000 in 1997 and $6.9 million in 1999,
though, in 1998 cash flow provided by operations was approximately
$0.4 million. As of December 31, 1999, we had a deficit of $12.1 million. We
expect our losses and negative cash flow to continue and increase as we intend
to substantially expand our network and Internet service offerings and increase
our staff.
We expect that our expenses, particularly costs relating to acquiring
additional satellite transponder space and our selling, general and
administrative expenses, will increase both in absolute dollars and as a
percentage of our revenues as we grow. If our revenue fails to grow at
anticipated rates or if our operating
4
<PAGE>
expenses increase without a commensurate increase in our revenue, our losses
will significantly increase and our financial results could be harmed.
Additionally, if we are not successful in raising funds in this offering, we
will have to take certain steps, such as delaying the acceptance of services
under our fixed fee contracts or renegotiating certain long-term contracted
obligations, to reduce our regular capital needs.
OUR PROFIT MARGIN AND OVERALL REVENUE WILL SUFFER IF WE DO NOT CONTINUE TO
EXPAND OUR CUSTOMER BASE.
Our success depends primarily on the continued growth of our customer base,
the retention of current customers and our ability to expand the number of
Internet services we offer so that revenue per customer and overall revenue
increase. Our customer contracts may be terminated without penalty at any time.
If we are unable to maintain and expand our customer base our profit margin and
overall revenue will suffer. Our ability to attract new customers and, to a
lesser degree, maintain current customers, as well as our ability to increase
the amount of revenue we receive from each customer, depends on a variety of
factors, including:
- continued growth in demand by international ISPs for Internet backbone
connectivity;
- our ability to provide adequate bandwidth to all of our customers;
- our ability to provide additional services across our network;
- our ability to broadcast content around the world;
- in each country in which we operate, the presence of a regulatory
environment that does not unduly impede our plans in that country;
- our ability to develop our strategic and business relationships;
- our success in establishing and maintaining business relationships with
content distributors, Internet backbone operators and regional satellite
owners; and
- the reliability and cost-effectiveness of our services.
IF WE ARE UNABLE TO MAINTAIN, EXPAND AND ADAPT OUR NETWORK INFRASTRUCTURE, THE
DEMAND FOR OUR SERVICES MAY DECREASE.
We must continue to expand and adapt our network as the number of our
international ISP customers grows, as users place increasing demands on our
network, and as other requirements change. As we grow our customer base, we may
not be able to provide our customers with the increasing levels of data
transmission capacity that they may require for a number of reasons, such as our
possible inability to raise the funds needed to develop the network
infrastructure to maintain adequate transmission speeds and the lack of
additional network availability from third-party suppliers of satellite and
fiber optic cable transmission capacity. Our failure to achieve or maintain high
capacity transmissions could significantly reduce demand for our services and
decrease our revenue.
IF WE FAIL TO ACCURATELY PREDICT OUR SATELLITE BANDWIDTH REQUIREMENTS AND
EFFECTIVELY MANAGE OUR FIXED COSTS, OUR EXPENSES WILL GROW MORE RAPIDLY THAN OUR
REVENUES AND OUR OPERATING RESULTS WILL SUFFER.
If we do not obtain adequate satellite bandwidth capacity on acceptable
terms and realize corresponding customer volume for this bandwidth, it is
unlikely that we will achieve positive gross profit. We purchase this bandwidth
capacity based on our projected future needs on a fixed-price basis far in
advance of the sale of our services that utilize the bandwidth. Substantially
all of this bandwidth capacity can be purchased only on a long-term basis. We
sell our services on the basis of actual usage and total bandwidth capacity used
by our customers changes from month to month and is difficult to predict. If our
sales fail to match our projections, we could be subject to periods of excess
satellite capacity, which could seriously harm our business. As a result, we
must obtain enough bandwidth to meet our projected
5
<PAGE>
customer needs, and we must realize adequate volume from our customers to
support and justify the bandwidth capacity and expense. If demand from existing
or potential customers exceeds our capacity, the quality of our service may
suffer or we may be unable to capitalize on potential business opportunities. If
that happens, we may lose existing or potential customers and our operating
results would suffer.
THE QUALITY OF OUR SERVICES AND OUR ABILITY TO PROVIDE THEM DEPENDS LARGELY ON
THIRD PARTIES, INCLUDING SATELLITE OPERATORS, AND IF THEY DO NOT PERFORM AS
EXPECTED, THE QUALITY OF OUR SERVICES AND OUR REPUTATION WILL SUFFER, AND WE MAY
LOSE CUSTOMERS.
We depend on third parties to provide us satellite transmission capabilities
that are essential to our network infrastructure. Our business will suffer if
our satellite availability or security is materially interrupted, the cost of
transponder space increases materially, one of our key satellite providers
terminates its contract with us or additional transponder space is not available
on acceptable terms or at all. For example, we rely heavily on Satmex 5 for
satellite coverage of Latin America. Any temporary or permanent loss of capacity
on this satellite could severely harm our operations. PanAmSat International
Systems, Inc., Satelites Mexicanos, Loral SpaceCom Corporation, British
Telecommunications plc and an affiliate of General Electric Company currently
provide us with our satellite transmission capabilities. We also depend on, and
face similar challenges with, our terrestrial fiber optic cable service
providers and the Internet access providers that we use to access the Internet
backbone. UUNET Technologies, Inc., Exodus Communications, Inc., AboveNet
Communications, Inc. and Singapore Telecommunications are our significant
terrestrial fiber optic cable service and Internet access providers. Our
customers depend on our ability to provide continuous service, and our ability
to provide this service is primarily dependent on these third party service
providers. As a result, if any service being provided to us by any of these
third party service providers is interrupted or otherwise not delivered as
expected, our reputation could be harmed and our customers could cease
purchasing services from us. Our satellite and fiber optic cable network is
subject to interruption from numerous forces, including:
- satellite or other telecommunications failure;
- human error;
- sunspots and solar activity and natural disasters, such as fire,
earthquakes and floods;
- power loss; or
- sabotage or vandalism.
RAPID GROWTH IN OUR OPERATIONS AND INFRASTRUCTURE IS PLACING A SIGNIFICANT
STRAIN ON OUR RESOURCES, AND THE FAILURE TO MANAGE THIS GROWTH EFFECTIVELY COULD
IMPAIR THE EXPANSION OF OUR BUSINESS.
We intend to grow and increase our business by expanding our global network
through, among other things, additional leases of satellite and fiber optic
cable capacity and related equipment. If we are unable to manage growth
effectively, we may lose customers or fail to attract new customers and our
business and financial results will suffer. The successful implementation of our
expansion plans will involve significant planning and resources and these plans
may be delayed or never completed. To successfully carry out our expansion
plans, we must:
- enter into additional leases with favorable terms for capacity on
satellite systems and fiber optic cables;
- successfully implement, market and sell connectivity, enhanced Internet
services and content distribution and other services that we develop;
- negotiate competitive arrangements with Internet backbone providers; and
- develop relationships with strategic and other business partners.
6
<PAGE>
Problems associated with our expansion plans could severely harm us, such
as:
- shortage of transponder space on geostationary satellites;
- regulatory environments in the countries in which we operate that unduly
impede our plans;
- disruptions to operations arising from relocation of our facilities;
- failure to retain or to timely hire necessary employees, including sales
and technical personnel; and
- failure to accurately predict customer demand for existing and future
services and applications.
In addition, our costs will increase as we expand. These increased costs
include:
- implementing multiple and redundant satellite and telecommunications
connections;
- expenses associated with hiring, training and managing new employees;
- increasing marketing and sales efforts; and
- purchasing new equipment.
Many of these costs are fixed in the long-term and if our expansion plans
are not successful, our future operating results could be seriously harmed. We
may not be able to successfully implement and maintain our operational and
financial systems, or successfully obtain, integrate and utilize the employees,
facilities, third-party vendors and equipment, or management, operational and
financial resources necessary to manage a developing and expanding business in
our rapidly evolving and increasingly competitive industry.
WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FUNDS TO GROW OUR BUSINESS.
Our business may suffer if we require additional funding and we are not able
to obtain it. We expect to incur significant expenditures as part of our
expansion plans. We intend to enter into arrangements to secure additional
satellite transponder space and substantial fiber optic capacity. These
arrangements may require us to make substantial initial payments for long-term
capacity that could require us to seek debt or additional equity financing. We
believe that, following this offering, our cash reserves, available borrowings
and funds generated by operations will be adequate to fund our operations for at
least the next 12 months. However, we may require additional funds either during
or after such 12 month period. Future financing may not be available to us or
may only be available on terms that are not favorable to us. Our failure to
generate sufficient cash flows from sales of Internet connectivity and services
or to raise sufficient funds may require us to delay or abandon some or all of
our expansion plans or otherwise forego market opportunities. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of our stockholders could be significantly diluted.
IF OUR SERVICES BECOME SUBJECT TO DOWNWARD PRICING PRESSURES, OUR GROSS MARGINS
WILL DECLINE.
The market for Internet access in the U.S. is subject to downward pricing
pressure caused by a number of factors, including increased competition and
technological advances. Pricing pressures outside of the U.S. in the markets we
serve may develop as international Internet access and services become more
available which will harm our gross margin. Our ESPRESSO Internet access service
is our primary Internet-based service. To operate ESPRESSO, we must lease
substantial satellite transmission capacity, which is relatively fixed in cost
and is generally not susceptible to downward pricing pressure. As a result, we
have little flexibility in lowering the price for our ESPRESSO service. If we
are affected by downward pricing pressure, we cannot assure you that we will be
able to offer our ESPRESSO service at prices that are competitive or profitable.
Our other Internet-based services and applications may also be subject to
varying degrees of downward pricing pressure. This problem is particularly acute
with our ESPRESSO VOICE service. For
7
<PAGE>
example, due to increased competition and global deregulation of
telecommunications services, prices for international long distance calls have
been decreasing. If this downward pricing pressure continues, we cannot assure
you that we will be able to offer ESPRESSO VOICE services at costs competitive
with the traditional voice network services that compete with our telephony
services. To lower our prices for ESPRESSO VOICE, we may have to renegotiate
rates with our local service providers who complete calls for us. We may not be
able to renegotiate these terms favorably enough, or fast enough, to allow us to
profitably offer Internet telephony services.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND IF OUR FUTURE RESULTS ARE
BELOW INVESTOR AND MARKET ANALYST EXPECTATIONS, OUR STOCK PRICE WILL DECLINE.
As we have grown, we have experienced significant fluctuations in our
operating results. Thus, a period to period comparison of our operating results
is not necessarily meaningful and should not be relied upon as an indicator of
future performance. Our operating results in the future may fall below the
expectations of securities analysts and investors. In this event, the trading
price of our common stock will likely decrease significantly. Our future
operating results may continue to fluctuate due to factors including:
- the rate of growth of the Internet, especially outside of the U.S.;
- demand for and market acceptance of our services;
- the level of utilization of our network and our Internet services;
- fluctuations in satellite transponder and telecommunications costs and
availability;
- costs relating to the expansion of our operations;
- fluctuations in bandwidth and the amount of our services used by
customers;
- introductions of new Internet services by us and our competitors;
- changes in our pricing policies and those of our competitors;
- changes in the nature, application or enforcement of regulatory laws and
policies;
- economic conditions, particularly those related to the Internet industry;
and
- the length and variability of our sales cycle.
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to satellite transponder capacity and
personnel. Our future operating results will be particularly sensitive to
fluctuations in revenue because of these and other short-term fixed costs.
PROBLEMS ASSOCIATED WITH OPERATING IN INTERNATIONAL MARKETS COULD PREVENT US
FROM ACHIEVING OR SUSTAINING OUR INTENDED GROWTH.
The majority of our business is derived from ISPs and other businesses
located in foreign countries. Our failure to manage our international operations
effectively would limit the future growth of our business. We face certain
inherent challenges in conducting international operations, such as:
- telecommunications regulatory requirements or trade barriers that may
restrict our ability to deliver Internet services to our customers;
- the imposition of unanticipated fees, taxes and costs by foreign
governments, which could significantly increase our costs;
- political and economic instability disrupting the operations of our ISP
customers;
8
<PAGE>
- protectionist laws and business practices favoring local competition
potentially giving unequal bargaining leverage to competitors; and
- currency fluctuations increasing the cost of our services to our
international customers.
OUR OPERATIONS ARE VULNERABLE TO SECURITY BREACHES THAT COULD HARM THE QUALITY
OF OUR SERVICES.
Despite our design and implementation of a variety of network security
measures, unauthorized access, computer viruses, accidental or intentional
action and other disruptions to our network and those of our providers could
occur. In addition, we may incur significant costs to prevent breaches in
security or to alleviate problems caused by such breaches. Any breaches that may
occur could harm the quality of our services and could result in liability to us
or the loss of existing customers and difficulty in attracting future customers.
WE MAY NOT BE ABLE TO HIRE OR RETAIN KEY EMPLOYEES, WHICH COULD PREVENT US FROM
EFFICIENTLY GROWING AND OPERATING OUR BUSINESS.
The market for highly qualified personnel is intensely competitive. If we
are unable to hire and retain the key personnel we need, we may provide poor
service and have difficulty signing up new customers and maintaining current
customers, which would cause our business to suffer. We are particularly
dependent on our ability to increase significantly the size of our technical
staff and sales and marketing organization with qualified candidates who speak
at least one foreign language. In addition, if, for any reason, our senior
executives do not continue to be active in management, our operations would
suffer. We may lose some of our key personnel and any loss may seriously harm
our business. We do not carry key person life insurance on any of our personnel.
CERTAIN MEMBERS OF OUR MANAGEMENT TEAM HAVE ONLY WORKED WITH US FOR A SHORT TIME
AND FAILURE TO EFFECTIVELY INTEGRATE THEM COULD IMPAIR OUR ABILITY TO IMPLEMENT
OUR STRATEGIES.
We depend on the ability of our management team to effectively execute our
strategies. We recently hired several of our key employees. In July 1999, we
hired our Chief Financial Officer and Senior Vice President--Operations, in
February 2000 we hired our Executive Vice President--Business and Legal Affairs
and in March 2000 we hired our Chief Operating Officer. Because certain members
of our management team have worked together only for a short period of time, we
need to integrate these officers into our operations. To integrate into our
operations, these individuals must spend a significant amount of time learning
our business model and management system, in addition to performing their
regular duties. Accordingly, the integration of new personnel has resulted and
will continue to result in some disruption to our ongoing operations. If we fail
to complete this integration in an efficient manner, our business and financial
results will suffer.
OUR OVERALL STRATEGIC GOALS MAY BE HARMED IF WE DO NOT SUCCESSFULLY COMPLETE AND
INTEGRATE FUTURE ACQUISITIONS INTO OUR OPERATIONS.
The costs and challenges of our potential future acquisitions of key
technologies, applications, operations or companies may harm us. An acquisition
may result in the use of significant amounts of cash, potentially dilutive
issuances of equity securities, incurrence of debt or amortization expenses
related to goodwill and other intangible assets. We face a number of challenges
in any acquisition including:
- difficulties and unanticipated costs arising from the assimilation of the
acquired operations, technologies, products, policies and personnel;
- the diversion of management's attention from other business concerns;
- risks related to entering markets or managing operations in which we have
no or limited direct prior experience;
- our inability to maintain uniform standards and controls; and
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<PAGE>
- the potential loss of key employees of the acquired company.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OR MAY HAVE TO
DEFEND CLAIMS OF THIRD PARTIES RELATING TO THEIR INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD PREVENT US FROM COMPETING EFFECTIVELY.
While the design and configuration of our Internet network is proprietary to
us, we have not patented our intellectual property rights and generally rely on
the protections offered by trade secret law. We generally enter into
confidentiality or licensing agreements with our employees, consultants and
corporate partners, and generally control access to and distribution of our
software, documentation and other proprietary information. Despite our efforts
to protect our intellectual property rights, unauthorized parties may attempt to
copy or otherwise obtain and use our technology or proprietary information.
Policing unauthorized use is difficult, and we cannot be sure that the steps we
have taken will prevent misappropriation of our technology or proprietary
information, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the U.S.
In addition, third parties may claim in the future that we violate their
intellectual property rights. Any successful claim by others that we violate
their intellectual property rights could seriously harm our business by forcing
us to cease using important intellectual property or requiring us to pay
monetary damages. Even if unsuccessful, these claims could harm our business by
damaging our reputation, requiring us to incur legal costs and diverting the
attention of our management personnel away from their normal business
activities.
WE MAY FACE LIABILITY OR ADDITIONAL REGULATION AS A RESULT OF INFORMATION
DISSEMINATED THROUGH OUR NETWORK.
The liability we may face as a result of information disseminated through
our network could have a negative impact on our financial condition. The law
relating to the liability of online services companies and Internet access and
content distributors for information carried on or disseminated through their
networks is currently unsettled. It is possible that claims could be made
against online services companies and Internet access providers under both U.S.
and foreign law for defamation, negligence, copyright or trademark infringement
or under other legal theories. Content distributed by us and our customers may
be regulated or banned. Several private lawsuits seeking to impose liability on
online services companies and Internet access providers are currently pending.
In addition, legislation has been recently passed and continues to be proposed
that imposes liability for or prohibits the transmission over the Internet of
certain types of information. We carry general liability insurance, but it may
not be adequate to compensate or may not cover us in the event we become liable
for information carried on or disseminated through our network.
RISKS RELATED TO OUR INDUSTRY
WE FACE INTENSE COMPETITION FROM MANY OTHER COMPANIES AND IF WE DO NOT RESPOND
TO THIS COMPETITION EFFECTIVELY, OUR REVENUES AND OVERALL MARKET SHARE MAY
SUFFER.
Our business of delivering Internet access to international ISPs via our
network of leased satellite transponder space and fiber optic cable systems is
intensely competitive. If we do not respond to this competition effectively, our
revenues and overall market share may suffer. We expect to face additional
competition from existing and new competitors. Our most common competitor is the
Post, Telephone and Telegraph, or PTT, of the country where each of our
customers is located. We also face competition from our satellite providers,
Loral SpaceCom Corporation and PanAmSat International Systems, Inc., which offer
some services to the international ISP community that are similar to our service
offerings. We must distinguish ourselves in the international ISP marketplace
through our pricing policies, the quality and distinctiveness of our service and
the other Internet applications that we offer. As we sell our ESPRESSO VOICE
services we will compete with the PTTs of the countries where we offer such
services. As a result of our recent acquisition of certain assets and technology
in the United Kingdom and our agreements with iBEAM and RealNetworks we will be
delivering streaming content through our network. Although we
10
<PAGE>
intend to partner with content distributors, the services we provide may also
make us a competitor in this industry. We may be unsuccessful in doing this.
Some of our competitors have certain advantages over us, including:
- substantially greater financial, technical and marketing resources;
- more favorable regulatory treatment;
- lower cost basis arising from satellite, cable or other facility
ownership;
- longer operating histories;
- larger, more established customer bases;
- greater name recognition; and
- more established customer and vendor relationships.
We cannot be certain that we will have the resources or expertise to compete
successfully in the Internet-based services market.
OUR BUSINESS WILL NOT GROW WITHOUT INCREASED USE OF THE INTERNET, ESPECIALLY
OUTSIDE OF THE U.S.
Our success is largely a function of the growth in the use of the Internet,
particularly outside of the U.S., and that growth is uncertain and depends on a
variety of factors. The market for Internet connectivity, especially outside of
the U.S., is new and evolving. As a result, our financial condition may be
harmed if the market fails to develop, or develops more slowly than we expect.
The growth of the market depends on several uncertain events or occurrences,
including:
- the growth of the Internet as a global communications and commerce medium;
- the availability of personal computers in remote locations;
- changes in the nature, application or enforcement of regulatory laws and
policies;
- the use by international ISPs and businesses of the Internet connectivity
solutions we offer; and
- general worldwide economic conditions.
The Internet content delivery market is new and our business will suffer if
these markets do not continue to develop. We cannot be certain that a
sustainable market for content will emerge around the world. If it does not, an
essential aspect of our business strategy, to expand the delivery of Internet
content around the world, may fail.
WE MAY BE UNABLE TO MAINTAIN THE QUALITY OF OUR SERVICES AND MAY LOSE CUSTOMERS
IF THE INTERNET INFRASTRUCTURE PROVES UNRELIABLE.
Our future success depends, in part, upon the reliability of the Internet
infrastructure. To the extent that the number of Internet users increases, the
Internet may be unable to support the demands placed on it, which may cause its
performance or reliability to decline. The Internet has experienced a variety of
outages and other delays as a result of portions of its infrastructure. Any
future outages or delays could harm our ability to provide connectivity to our
customers. Moreover, critical issues concerning the commercial use of the
Internet, including security, cost, ease of use and access, intellectual
property ownership and other legal liability issues, remain unresolved and could
inhibit the growth of Internet usage and harm our business.
THE INTERNATIONAL LEGAL ENVIRONMENT IN WHICH WE OPERATE IS UNCERTAIN AND WE
COULD BE SUBJECTED TO BURDENSOME AND COSTLY REGULATIONS OR CLAIMS, WHICH WOULD
CAUSE OUR BUSINESS TO SUFFER.
Because almost all of our business is conducted outside the U.S. in over 90
countries, we are susceptible to the governmental regulations and legal
uncertainties of foreign countries. Our failure to comply with foreign laws and
regulations could cause us to lose customers, restrict us from entering
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<PAGE>
profitable markets and seriously harm our business. In general, the laws of
countries outside the U.S. governing the Internet and Internet services, to the
extent they exist at all, vary widely, are unclear and in flux and have failed
to keep pace with the rapid advancements in Internet technology and expanding
Internet-based services offered. Partly because of these problems, and our view
that local regulatory compliance is a greater concern for our ISP customers, we
have not, and currently do not intend to, determine conclusively whether we
comply with the requirements of any particular foreign country. Any one or more
of the countries where we conduct business may require us to qualify to do
business in that particular country, or may find that we are liable for certain
taxes or tariffs, that we are otherwise subject to regulation or that we are
prohibited from conducting our business in that country. We cannot assure you
that we are currently in compliance with the legal requirements of any
particular country or all of the countries outside the U.S. in which we conduct
business, that we will be able to comply with any such requirements or that the
requirements will not change in a way that would render the receipt of our
services in a particular country illegal.
Our customers also face many of the governmental and legal uncertainties
that we face and are, or may become, subject to many of the same requirements to
which we may be subject. We make no effort to determine whether our customers
comply with applicable regulations. For example, a PTT in one country threatened
several of our ISP customers with the claim that the receipt of our ESPRESSO
satellite broadcast was illegal. The failure of our customers to comply with
applicable laws and regulations could cause us to lose customers or otherwise
seriously harm our business.
THE INTERNET INDUSTRY OPERATES IN AN UNCERTAIN LEGAL LANDSCAPE AND THE ADOPTION
OR INTERPRETATION OF FUTURE OR EXISTING REGULATIONS COULD HARM OUR BUSINESS.
In the U.S., our business and our network are susceptible to regulation by
federal and state government agencies, including the U.S. Federal Communications
Commission, or the FCC. However, the applicability of existing laws and
regulations to the Internet and Internet services is not always clear.
Furthermore, the laws and regulations regarding the Internet are in a constant
state of flux. The application of new or existing laws or regulations to our
business or our network could prevent or hinder us from providing service, cause
us to lose customers, substantially increase our costs, or otherwise seriously
harm our business. Certain of our services could be open to claims that they are
subject to regulation by the FCC as basic transmission services. A finding that
some of our services are basic transmission services and subject to regulation
could affect the manner in which we provide service to our customers or the
prices we charge for our services, could increase our costs by subjecting us to
surcharges and the like, or could otherwise seriously harm our business.
The Internet and the markets in which we offer our Internet services are
relatively new. Many of the laws and regulations that govern us and the Internet
have yet to be interpreted or enforced. It is likely that in the future many new
laws will take effect that will regulate the Internet and the markets in which
we operate. The applicability to the Internet of existing laws governing issues
such as property ownership, copyrights and other intellectual property issues,
taxation and tariffs, libel, consumer protection, obscenity, pricing and
personal privacy is uncertain. Current and future laws and regulations may:
- decrease the growth of the Internet;
- regulate our business or network in ways that hinder or prevent us from
providing service to our customers;
- regulate our customers in ways that harm our ability to sell our services
to them;
- decrease demand for our services; and
- impose taxes or other costly requirements or otherwise increase the cost
of doing business.
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<PAGE>
WE MAY NOT BE ABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES OR EMERGING
INDUSTRY STANDARDS WHICH COULD MAKE OUR SERVICES OBSOLETE AND UNMARKETABLE.
Our services may become less useful to our customers if we are unable to
respond to technological advances that shape the Internet or alternative
technologies or services become available to them. Keeping pace with
technological advances in our industry may require substantial expenditures and
lead time. In addition, future advances in technology or fundamental changes in
the way Internet access or other Internet services can be delivered may render
our services obsolete or less cost competitive. We may not be able to adequately
respond to or incorporate technological advances on a cost-effective or timely
basis into our business.
RISKS RELATED TO OUR OFFERING
OUR COMMON STOCK PRICE MAY BE VOLATILE AND CAUSE US TO BECOME SUBJECT TO
SECURITIES LITIGATION.
The market price of our common stock may experience fluctuations in response
to a number of factors, including:
- actual or anticipated variations in our results of operations;
- new services introduced by us or our competitors;
- the entry of new competitors into one or more of our lines of business;
- changes in financial estimates by security analysts;
- conditions and trends in the Internet industry;
- potential acquisitions; and
- general market conditions.
The Nasdaq National Market has experienced extreme price and volume
fluctuations, as have other stock markets. Similar market fluctuations have
affected the market prices of equity securities of many Internet and technology
companies. The effects on the stock prices of these companies have often been
unrelated or disproportionate to their operating performance. These broader
market movements may negatively affect the market price of our common stock. Our
stock price may also decline as a result of general economic, political and
market conditions such as recession, interest rate changes or international
currency fluctuations. Class action litigation has often been instituted
following periods of volatility in the market price of a company's securities.
If such litigation were brought against us, it could distract our management and
may require us to incur significant expenses and possibly pay substantial
damages.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF THE STOCK YOU PURCHASE WHICH COULD NEGATIVELY AFFECT THE VALUE OF YOUR
INVESTMENT.
The initial public offering price of our common stock is substantially
higher than the net tangible book value per outstanding share of common stock.
Purchasers of our common stock will incur immediate and substantial dilution of
$8.94 per share in the net tangible book value of our common stock from the
assumed initial public offering price of $11. Additional dilution will occur
upon the exercise of outstanding options.
THE LIQUIDITY OF OUR COMMON STOCK IS UNCERTAIN BECAUSE IT HAS NOT BEEN PUBLICLY
TRADED AND MAY HAVE A LIMITED MARKET WHICH COULD DEPRESS OUR STOCK PRICE.
There has been no public market for our common stock. We cannot predict the
extent to which investor interest in our company will lead to the development of
an active, liquid trading market. In this offering, we intend to sell our common
stock primarily to a limited number of institutional investors, which
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<PAGE>
could limit the development of an active trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price will be
determined by negotiations between InterPacket and the representatives of the
underwriters and may bear no relationship to the price at which our common stock
will trade upon completion of this offering.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK BY OUR EXISTING
STOCKHOLDERS AFTER THIS OFFERING MAY HARM OUR STOCK PRICE.
Sales of a large number of shares of our common stock in the market after
the offering or the perception that sales may occur could cause the market price
of our common stock to drop. See "Shares Eligible for Future Sale" for a more
detailed description of the substantial number of shares of common stock that
will be available for sale in the public market following this offering.
WE HAVE BROAD DISCRETION IN USING THE PROCEEDS OF THIS OFFERING, AND IF WE DO
NOT EFFECTIVELY UTILIZE THE PROCEEDS, OUR MARKET VALUE MAY DECLINE.
Our management will have considerable discretion in the application of the
net proceeds of this offering. The net proceeds may be used for corporate
purposes that do not increase our profitability or market value.
AFTER THE OFFERING, OUR SIGNIFICANT STOCKHOLDERS WILL RETAIN SUBSTANTIAL VOTING
CONTROL WHICH WILL ALLOW THEM TO INFLUENCE THE OUTCOME OF MATTERS SUBMITTED TO
STOCKHOLDERS FOR APPROVAL IN A MANNER THAT MAY BE ADVERSE TO YOUR INTERESTS.
Some of our stockholders own a large enough stake in us to have an influence
on matters presented to the stockholders. Our officers, directors and greater
than 5% stockholders, and their affiliates, will, in the aggregate, own
approximately 70.7% of our outstanding common stock after this offering. If
these parties acted in concert, they could influence, among other things, the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets. This concentration of ownership may delay or
prevent a change in control which could discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of us, or
control the outcome of any other matter submitted to the stockholders for a
vote. As a result, this concentration of ownership may have a negative effect on
our value and the price of our common stock. After the offering, Jeffrey
Sudikoff a founder and our former Chairman of the Board, will own approximately
7.0% of our outstanding common stock. In 1999, he pled guilty to three
violations in 1994 of federal securities laws relating to insider trading and
willfully failing to file a Statement of Changes in Beneficial Ownership of
Securities with the SEC with respect to another company's securities. Mr.
Sudikoff has entered into a voting agreement with us under which a committee
composed of three of our directors has an irrevocable proxy to vote his shares.
ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY, WHICH COULD HARM OUR STOCK PRICE.
Delaware corporate law and our certificate of incorporation that will be in
effect upon the completion of this offering will contain provisions that could
delay, defer or prevent a change in control of our company or our management.
These provisions could also discourage proxy contests and make it more difficult
for you and other stockholders to elect directors and take other corporate
actions. Our certificate of incorporation will authorize the board of directors
to issue preferred stock with rights senior to the common stock without
obtaining prior stockholder approval. As a result, these provisions could limit
the price that investors are willing to pay in the future for shares of our
common stock.
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FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by these forward-looking statements. These
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology, including "may," "will," "should," "expect," "plan,"
"anticipate," "intend," "believe," "estimate," "predict," "potential" or
"continue" or the negative of these 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." 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.
-------------------
ESPRESSO-REGISTERED TRADEMARK-, POWERED BY ESPRESSO-REGISTERED TRADEMARK-
and INTERPACKET-REGISTERED TRADEMARK- are registered trademarks of InterPacket
Networks, Inc. We have a trademark application pending for EUROPACKET-TM- and
ESPRESSO BIZKIT-TM-. This prospectus contains other trade names, trademarks and
service marks of InterPacket and of other companies.
-------------------
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USE OF PROCEEDS
The net proceeds to us from the sale of the shares being offered at an
assumed initial public offering price of $11.00 per share are estimated to be
$65.5 million, after deducting the underwriting discount and estimated offering
expenses payable by us, or $75.5 million if the underwriters' over-allotment
option is exercised in full.
We intend to use approximately $25.0 million of the net proceeds of this
offering to increase the capacity of our existing network through leases for
additional satellite transponder space and fiber optic capacity and the purchase
of fiber optic capacity, with the balance of the proceeds used to increase our
sales and marketing personnel and activities, increase our working capital and
for other general corporate purposes.
We may use a portion of the net proceeds of this offering to acquire or
invest in businesses, products, services or technologies complementary to our
current business, through mergers, acquisitions, joint ventures or otherwise.
However, we have no specific agreements or commitments with respect to these
transactions.
The timing and amount of our actual expenditures will be based on many
factors, including cash flows from operations, the growth of our business and
the availability of attractive acquisitions and investment opportunities. Our
management will retain broad discretion as to the allocation of the net proceeds
of this offering. We intend to invest the net proceeds of this offering in
short-term, interest-bearing investment grade securities pending the above uses.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999 on
an actual, pro forma and pro forma as adjusted basis. All share numbers give
effect to our 2.2 for 1 stock split which will occur prior to completion of the
offering.
The Actual column reflects our capitalization as of December 31, 1999 on a
historical basis, without any adjustments to reflect subsequent events or
anticipated events.
The Pro Forma column reflects conversion of our outstanding shares of
preferred stock into 6,600,000 shares of our common stock upon completion of the
offering.
The Pro Forma As Adjusted column reflects our capitalization as of
December 31, 1999 with the receipt of the estimated net proceeds from our sale
of 6,500,000 shares of common stock at an assumed initial public offering price
of $11 per share and the conversion of our outstanding shares of preferred stock
into 6,600,000 shares of our common stock upon completion of the offering.
None of the columns set forth below reflects the 6,820,000 shares reserved
for issuance under our stock option plans as of December, 31, 1999, of which
5,705,884 shares were subject to outstanding options as of December 31, 1999.
The table below should be read in conjunction with our balance sheet as of
December 31, 1999 and the related notes, which are included at the end of this
prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
ACTUAL (UNAUDITED) (UNAUDITED)
--------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Capital leases of satellite transponders
(includes current maturities)............. $40,807 $40,807 $ 40,807
Mandatorily redeemable preferred stock,
$.001 par value:
Authorized--3,000,000 shares
Issued and outstanding
3,000,000 shares, actual
no shares, as adjusted................ 14,824 -- --
Stockholders' equity (deficit):
Common stock, $.001 par value:
Authorized--50,000,000 shares
Issued and outstanding
26,826,573 shares, actual
33,426,573 shares, pro forma.......... 27 33 40
39,926,573 shares, pro forma as
adjusted
Additional paid-in capital................ 45,109 59,927 125,415
Stockholder receivables................... (35) (35) (35)
Deferred compensation..................... (30,585) (30,585) (30,585)
Other comprehensive income................ 2 2 2
Deficit................................... (12,126) (12,126) (12,126)
------- ------- --------
Stockholders' equity.................... 2,392 17,216 82,711
------- ------- --------
Total capitalization.................. $58,023 $58,023 $123,518
======= ======= ========
</TABLE>
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DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $16.8 million or $0.50 per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets reduced by
the amount of our total liabilities and divided by the total number of shares of
common stock outstanding, assuming conversion of our outstanding preferred
stock. Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of common stock in
this offering and the pro forma net tangible book value per share of common
stock immediately after the completion of this offering. After giving effect to
the sale of 6,500,000 shares of common stock offered by us at an assumed initial
public offering price of $11 per share, and after deducting the underwriting
discount and estimated offering expenses payable by us, our pro forma net
tangible book value at December 31, 1999 would have been approximately
$82.3 million or $2.06 per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $1.56 per share to existing
stockholders and an immediate dilution of $8.94 per share to new investors
purchasing common stock in this offering. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 11.00
Pro forma net tangible book value per share before the
offering.................................................. $ 0.50
Increase per share attributable to new investors............ 1.56
--------
Pro forma net tangible book value per share after the
offering.................................................. 2.06
--------
Pro forma net tangible book value dilution per share to new
investors................................................. $ 8.94
========
</TABLE>
The following table summarizes on a pro forma basis, after giving effect to
this offering, as of December 31, 1999, the differences between the existing
stockholders and new investors with respect to the number of shares of common
stock purchased from us, the total consideration paid to us and the average
price per share paid (based upon an assumed initial public offering price of
$11.00 per share and before deducting the underwriting discounts and commissions
and our estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 33,426,573 83.7% $ 26,886,746 27.3% $ 0.80
New investors.......................... 6,500,000 16.3 71,500,000 72.7 11.00
---------- ------------
Totals................................. 39,926,573 100.0% $ 98,386,746 100.0% $ 2.46
========== ====== ============ ======
</TABLE>
The preceding tables assume conversion of the preferred stock and no
exercise of the underwriters' over-allotment option and exclude 6,820,000 shares
of common stock reserved for issuance under our stock option plans, of which
5,705,884 were subject to outstanding options as of December 31, 1999 at a
weighted average exercise price of $1.54 per share. To the extent these options
are exercised, there will be further dilution to new investors. See
"Management--Option Plans" and Notes 7 and 13 of our notes to consolidated
financial statements appearing at the end of this prospectus.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should read the selected consolidated financial information set forth
below in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes appearing at the end of this prospectus. The consolidated
statement of operations data and selected consolidated balance sheet data set
forth below for the fiscal years ended December 31, 1997, 1998 and 1999 have
been derived from our audited consolidated financial statements appearing at the
end of this prospectus. The historical results are not necessarily indicative of
results to be expected for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Network services......................... $ -- $ -- $ 583 $ 4,115 $ 10,789
Traditional telecom services............. -- 43 1,176 7,295 2,685
----- ------ ------ ------- --------
Total revenue.......................... -- 43 1,759 11,410 13,474
----- ------ ------ ------- --------
Operating expenses:
Cost of network services................. -- -- 458 5,789 11,285
Cost of traditional telecom services..... -- 14 548 5,023 1,329
Selling and marketing expenses........... -- -- 132 828 2,397
General and administrative expenses...... -- 43 454 1,098 4,686
Non-cash compensation charges............ -- -- -- -- 2,488
Depreciation and amortization............ -- 2 9 88 1,346
----- ------ ------ ------- --------
Total operating expenses............... -- 59 1,601 12,826 23,531
----- ------ ------ ------- --------
Income (loss) from operations.............. -- (16) 158 (1,416) (10,057)
Other income (expense)..................... -- 18 1 20 (832)
----- ------ ------ ------- --------
Income (loss) before provision for income
taxes.................................... -- 2 159 (1,396) (10,889)
Provision (benefit) for income taxes....... -- -- 70 (68) 1
----- ------ ------ ------- --------
Net income (loss).......................... -- 2 89 (1,328) (10,890)
===== ====== ====== ======= ========
Basic and diluted income (loss) per common
share.................................... $ -- $ 0.00 $ 0.01 $ (0.07) $ (0.48)
===== ====== ====== ======= ========
Weighted average number of common shares... -- 8,380 15,950 18,506 22,862
===== ====== ====== ======= ========
Pro forma basic and diluted loss per common
share (unaudited)........................ $ (0.46)
========
Weighted average number of common shares
used to compute pro forma loss per common
share (unaudited)........................ 23,767
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash....................................... $ -- $ 2 $ -- $ 2 $ 15,948
Total assets............................... -- 38 952 3,077 64,291
Capital leases, net of current portion..... -- -- -- -- 38,669
Mandatorily redeemable preferred stock..... -- -- -- -- 14,824
Retained earnings (deficit)................ -- 2 92 (1,236) (12,126)
Stockholders' equity....................... -- 5 168 (905) 2,392
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES APPEARING AT THE END OF THIS PROSPECTUS. OUR
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT EXPECTATIONS
THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. ACTUAL RESULTS AND THE TIMING OF EVENTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS
A RESULT OF A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "PROSPECTUS
SUMMARY," "RISK FACTORS," "USE OF PROCEEDS," "BUSINESS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
We operate a satellite-based, high performance Internet network that
delivers Internet services to international ISPs and other businesses in more
than 90 countries. Our global network's open technical architecture enables us
to provide multiple categories of Internet services:
- global connectivity to the Internet backbone;
- enhanced Internet services, such as Internet telephony; and
- Internet content distribution, such as newsfeeds and streaming media.
We were incorporated in California in August 1995 under the name Territorial
Media, Inc. and we changed our name to InterPacket Group, Inc. in June 1996. In
November 1999, we reincorporated in the State of Delaware under the name
InterPacket Group, Inc. and changed our name to InterPacket Networks, Inc. in
February 2000. In 1997 and most of 1998, we generated most of our revenues
through the sale of traditional telecom services, consisting of traditional
switch-based telephony. At that time our primary customer was STAR
Telecommunications, Inc., an international long distance company. In the third
quarter of 1998, we began to focus our sales and marketing efforts on the
delivery of Internet services and began to offer our ESPRESSO connectivity
product worldwide. While we continued to provide traditional telecom services in
1999, we have stopped actively soliciting customers for this area of our
business and, over time, we have allowed that particular customer base to
gradually decline. For the year ending December 31, 2000 and beyond, we do not
anticipate generating any meaningful revenue from traditional telecom services.
REVENUE
We have derived revenue from two sources, the sale of high performance
Internet-based network services, including connectivity and multi-point
newsfeeds, and the sale of traditional telecom services. Revenue from network
services is derived from monthly fees payable by international ISPs for the
delivery of services. The amount of these fees varies, depending on the level of
bandwidth contracted for our customers and the nature of the other Internet
services that we deliver to them. Our international ISP customers are billed for
connectivity services and those fees are generally collected on a monthly basis,
in advance. Revenue is recognized in the month that our network services are
provided. Our ESPRESSO VOICE services will be billed to the customer monthly,
based on minutes of use, after the month of usage with revenue recognized at the
time of usage. To date, we have not been subject to any material currency or
collection risk from our network services business, as most of our customers are
billed in U.S. dollars prior to the delivery of services. Our risk of collection
will increase in future periods to the extent we increase revenue from
international telephony services, as these services are billed after delivery
based on minutes of use. We also believe that our currency risk will increase if
we begin to accept payment for our network services in foreign currencies. In
1999, we derived a significant majority of our revenue through the sale of
network services and in 2000, we anticipate that substantially all of our
revenue will be derived from this business area.
20
<PAGE>
In 1997 and 1998, we derived a majority of our revenue from the sale of
traditional telecom services transmitted over a traditional switched-based
network. Traditional telecom services are billed on a monthly basis after the
month of usage based on minutes carried over our network. Revenue is recognized
at the time of customer usage. In recent periods, we have greatly reduced the
delivery of traditional telecom services and expect revenue from such services
to decline significantly in future periods. We also intend to provide all of our
future telephony services over our network and the Internet, via our ESPRESSO
VOICE service.
In providing our network application services, we are dependent on
uninterrupted satellite service which is currently provided by five vendors. In
the past, we experienced one significant interruption in satellite transmission
service for which we did not receive reimbursement from the provider. In
connection with this transmission failure, we refunded approximately $20,000 to
our customers. An extended period of disruption could harm our financial
position and results of operations.
COST OF NETWORK SERVICES
Our cost of network services consists primarily of leasing costs
attributable to satellite transponder space, teleports, equipment, expenses
attributable to leased fiber optic cable lines and Internet backbone
interconnection costs. The life of our satellite transponder space leases
accounted for in cost of network services ranges from one to five years and is
typically less than one year for our fiber optic cable lines. We anticipate an
increase in network services expenses in future periods as we expand our
Internet services.
COST OF TRADITIONAL TELECOM SERVICES
Cost of traditional telecom services consists primarily of the
rate-per-minute charges of the telecommunications vendors that terminate our
switch-based telephone traffic for us. We do not anticipate incurring any
meaningful traditional telecom services expenses for the year ending
December 31, 2000 and beyond, as we convert our remaining switch-based telecom
business to ESPRESSO VOICE.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses consist of salaries, commissions and related
expenses for personnel engaged primarily in sales, marketing, customer service,
professional service expenses and travel and trade show expenses. We anticipate
that selling and marketing expenses will increase in future periods, both in
absolute dollars and as a percentage of revenues, as we add sales staff and
increase our presence internationally through, among other things, the
establishment of sales offices abroad.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist of salaries and related expenses
for executive, administrative and operational personnel and other general
corporate expenses. We expect general and administrative expenses to increase,
both in absolute dollars and as a percentage of revenues, in future periods as
we expand our executive and support staff and incur additional costs relative to
the growth of our business.
NON-CASH COMPENSATION CHARGES
Non-cash compensation charges consist of the amortization of deferred stock
compensation resulting from the grant of stock options or purchase of shares of
stock at exercise or sale prices subsequently deemed to be less than the fair
value of the common stock on the grant date as well as charges relating to the
accelerated vesting of stock options. This amount is included as a reduction of
stockholders' equity and is amortized ratably over the vesting period of the
individual options, generally three years. In 1999, the non-cash compensation
charge was $2.5 million and we expect it to be $10.4 million in each of 2000 and
2001 and $9.8 million in 2002, based on options issued prior to December 31,
1999.
21
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization is generated primarily from our leased
satellite transponders, high speed routers and other equipment and peripherals
necessary to provide our customers with our network services. With a portion of
the proceeds of this offering we intend to purchase indefeasible rights of use
on transoceanic fiber optic cable systems. We also intend to enter into
additional long-term leases for satellite transponder space and we will account
for these leases as capital items. Thus, we expect depreciation to increase
significantly, both in absolute dollars and as a percentage of revenue, in
future periods.
OTHER INCOME (EXPENSE)
Other income consists of earnings on our cash and cash equivalents. Other
expense consists primarily of interest expense on our capitalized satellite
transponder space leases. We anticipate that our interest expense will continue
to increase as we lease additional satellite transponder space.
We intend to continue investment in our network and personnel to support the
growth and expansion of our business, and we do not expect to be profitable in
the foreseeable future.
RESULTS OF OPERATIONS
The following table sets forth our statement of operations data as a
percentage of revenue for the periods indicated. This information should be read
in conjunction with the consolidated financial statements and notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Network services.................................... 33% 36% 80%
Traditional telecom services........................ 67 64 20
---- ----- -----
Total revenue..................................... 100% 100% 100%
Operating expenses:
Cost of network services............................ 26 51 84
Cost of traditional telecom services................ 31 44 10
Selling and marketing expenses...................... 8 7 18
General and administrative expenses................. 26 10 35
Non-cash compensation charges....................... -- -- 18
Depreciation and amortization....................... 1 1 10
Total operating expenses.......................... 91 112 175
Income (loss) from operations....................... 9 (12) (75)
Other income (expense)................................ -- -- (6)
Income (loss) before provision for income taxes....... 9 (12) (81)
Provision (benefit) for income taxes.................. 4 (1) --
Net income (loss)..................................... 5% (12)% (81)%
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE
Network services revenue increased 162% from $4.1 million in 1998 to
$10.8 million in 1999. Revenue from traditional telecom services decreased 63%
from $7.3 million in 1998 to $2.7 million in 1999. Our network services revenue
increased due to growth in the number of new ISP customers, as well as an
increase in sales to existing ISP customers as a result of bandwith upgrades.
Revenue from the sale of traditional telecom services declined as we continued
to de-emphasize traditional switch-based
22
<PAGE>
telephone services and focus our sales efforts almost entirely on network
services. In 2000 and beyond, we do not anticipate generating meaningful revenue
from traditional telecom services.
OPERATING EXPENSES
COST OF NETWORK SERVICES. Cost of network services increased 95% from
$5.8 million in 1998 to $11.3 million in 1999 but decreased as a percentage of
network services revenue from 141% in 1998 to 105% in 1999. This absolute
increase was due to investments in our network infrastructure, particularly
increased satellite transponder space and fiber optic capacity, to support
current and anticipated future growth in revenue. We expect our cost of network
services to continue to grow, as we plan to aggressively pursue the expansion of
our Internet services to new customers and markets.
COST OF TRADITIONAL TELECOM SERVICES. Cost of traditional telecom services
decreased 74% from $5.0 million in 1998 to $1.3 million in 1999 and decreased as
a percentage of traditional telecom services revenue from 69% in 1998 to 49% in
1999. The absolute reduction in expenses was a result of deemphasizing
traditional telecom services.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
189% from $828,000 in 1998 to $2.4 million in 1999. As a percentage of revenues,
selling and marketing expenses increased from 7% to 18% period to period. These
expenses increased primarily as a result of increased staffing levels in all
areas of our company, and increased sales and marketing efforts to grow our
network services.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 327% from $1.1 million in 1998 to $4.7 million in 1999. As a
percentage of revenues, general and administrative expenses increased from 10%
to 35% period to period, primarily due to our increase in staff and additional
facility costs.
NON-CASH COMPENSATION CHARGE. Non-cash compensation charge was
$2.5 million in 1999. We did not have a non-cash compensation charge in 1998.
The remaining deferred compensation of $30.6 million will be amortized ratably
over the vesting period of the individual options which is generally three
years.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
1,438% from $88,000 in 1998 to $1.3 million in 1999. This increase was primarily
due to the depreciation of equipment needed to accommodate our growing customer
base including capital leases for satellite transponder space. We expect
depreciation to increase in absolute dollars and as a percentage of revenues as
we further develop and expand our network by acquiring transoceanic fiber optic
cable lines and enter into long term leases for satellite transponder space that
we intend to account for as capital items.
OTHER INCOME (EXPENSE). Other income (expense) decreased from net other
income of $20,000 in 1998 to a net other expense of $832,000 in 1999. This
increase in net expense was primarily due to an increase in interest expense of
$943,000 relating to increased acquisitions of capital assets, partially offset
by an increase in interest income of $183,000.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE
Revenue from network services increased 606% from $583,000 in 1997 to
$4.1 million in 1998. Revenue from traditional telecom services increased 520%
from $1.2 million in 1997 to $7.3 million in 1998. Revenue from network services
increased primarily due to growth in the number of new international ISP
customers. Revenue from traditional telecom services grew due to the addition of
new international destinations during the latter part of 1997 and throughout
1998.
23
<PAGE>
OPERATING EXPENSES
COST OF NETWORK SERVICES. Cost of network services increased 1,164% from
$458,000 in 1997, to $5.8 million in 1998. This increase was due to investments
in our network infrastructure to support current and anticipated future growth
in network services revenue.
COST OF TRADITIONAL TELECOM SERVICES. Cost of traditional telecom services
increased 817% from $548,000 in 1997 to $5.0 million in 1998. This increase was
due primarily to our purchasing telecom services from third parties to enable us
to offer telecom services to specific high volume international destinations
through the latter part of 1997 and through the first three quarters of 1998.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
529% from $132,000 in 1997 to $828,000 in 1998. As a percentage of revenue,
selling and marketing expenses remained relatively constant at approximately 7%
of revenue from period to period. These expenses increased primarily as a result
of increased staffing levels in all areas of our company and increased sales and
marketing efforts coinciding with the growth of our network services.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 142% from $454,000 in 1997 to $1.1 million in 1998, primarily as a
result of increased staffing levels in all areas of our company coinciding with
the growth in revenues. As a percentage of revenue, general and administrative
expenses decreased from 26% in 1997 to 10% in 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 833%
from $9,000 in 1997 to $88,000 in 1998. This increase is primarily due to the
depreciation of equipment needed to accommodate the increase in our growing
customer base for network services.
OTHER INCOME (EXPENSE). Net other income increased $19,000 from a net other
income of approximately $1,000 in 1997 to $20,000 in 1998. The increase is
primarily due to a $22,000 increase in interest income from investing funds
raised from private placements of common stock.
24
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for the eight quarters ended December 31, 1999. This unaudited quarterly
information has been derived from our unaudited financial statements and, in the
opinion of our management, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods covered. The quarterly data should be read in conjunction with our
consolidated financial statements and related notes. The operating results for
any quarter are not necessarily indicative of the operating results for any
future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Network services................. $ 508 $ 690 $1,404 $ 1,513 $ 1,916 $ 2,149 $ 2,997 $ 3,727
Traditional telecom services..... 484 1,288 3,479 2,044 1,160 752 513 260
------ ------ ------ ------- ------- ------- ------- -------
Total revenue.................. 992 1,978 4,883 3,557 3,076 2,901 3,510 3,987
------ ------ ------ ------- ------- ------- ------- -------
Operating expenses:
Cost of network services......... 564 1,005 1,803 2,417 2,456 2,800 2,792 3,237
Cost of traditional telecom
services....................... 341 833 2,138 1,711 900 204 72 153
Selling and marketing expenses... 93 149 305 281 357 486 606 948
General and administrative
expenses....................... 143 235 255 465 511 641 1,535 1,999
Non-cash compensation charges.... -- -- -- -- -- 145 171 2,172
Depreciation and amortization.... 6 16 27 39 44 68 351 883
------ ------ ------ ------- ------- ------- ------- -------
Total operating expenses....... 1,147 2,238 4,528 4,913 4,268 4,344 5,527 9,392
------ ------ ------ ------- ------- ------- ------- -------
Income (loss) from operations...... (155) (260) 355 (1,356) (1,192) (1,443) (2,017) (5,405)
Other income (expense)............. 5 5 3 7 8 26 (250) (617)
Provision (benefit) for income
taxes............................ (60) (8) 51 (51) -- -- -- --
------ ------ ------ ------- ------- ------- ------- -------
Net income (loss).................. $ (90) $ (247) $ 307 $(1,298) $(1,184) $(1,417) $(2,267) $(6,022)
====== ====== ====== ======= ======= ======= ======= =======
</TABLE>
25
<PAGE>
The following table sets forth certain selected items from our unaudited
quarterly statements of operations as a percentage of revenue for the quarters
indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Network services.................. 51% 35% 29% 43% 62% 74% 85% 93%
Traditional telecom services...... 49 65 71 57 38 26 15 7
--- --- --- --- ---- ---- ---- ----
Total revenue................... 100% 100% 100% 100% 100% 100% 100% 100%
Operating expenses:
Cost of network services.......... 57 51 37 68 80 97 80 81
Cost of traditional telecom
services........................ 34 42 44 48 29 7 2 4
Selling and marketing expenses.... 9 8 6 8 12 17 17 24
General and administrative
expenses........................ 14 12 5 13 17 22 44 50
Non-cash compensation charge...... -- -- -- -- -- 5 5 54
Depreciation and amortization..... 1 1 1 1 1 2 10 22
Total operating expenses........ 116 113 93 138 139 150 157 236
Income (loss) from operations....... (16) (13) 7 (38) (39) (50) (57) (136)
Other income (expense).............. 1 0 0 0 0 1 (7) (15)
Provision (benefit) for income
taxes............................. (6) 0 1 (1) 0 0 0 0
Net income (loss)................... (9)% (12)% 6% (36)% (38)% (49)% (65)% (151)%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of common stock and preferred stock, which through December 31, 1999,
totaled approximately $26.8 million. Net cash provided by financing activities
was $25.4 million in 1999, and $255,000 in 1998. Net cash provided by financing
activities in 1999 resulted primarily from the sale of $4.5 million of our
common stock through our private placement of shares in April and $6.7 million
in September and from the sale of $14.8 million of our preferred stock through
our private placement of shares in November. Net cash provided by financing
activities in 1998 consisted primarily of proceeds from the sale of common stock
to individual investors for $250,000.
Net cash used in operating activities was approximately $6.9 million in
1999, compared to cash provided by operations of $438,000 in 1998. Net cash used
in operating activities in 1999 resulted primarily from the net operating loss.
Net cash used in investing activities was $2.6 million in 1999, and $691,000
in 1998. Net cash used in investing activities for each of these periods
resulted primarily from purchases of property and equipment.
As of December 31, 1999 we had $15.9 million of cash. As of that date, our
principal commitments consisted of obligations outstanding under capital and
operating leases for satellite transponder space and related facilities, for
which we have contractual commitments of $18.0 million for the next 12 months.
We anticipate a substantial increase in our lease commitments and our cash
needs, consistent with the anticipated growth in operations and infrastructure,
including additional satellite transponder space and the acquisition of fiber
optic cable capacity.
We have also committed to lease three additional transponders on one
existing satellite under leases that start on August 15, 2000, May 15, 2001 and
November 15, 2001 and continue through the end of their useful lives, which is
expected to be October 2013. Estimated future payments under these commitments
are approximately $56.5 million, of which $569,000 will be paid during 2000.
26
<PAGE>
We anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future and that our operating expenses
will be a material use of our cash resources. Also, we anticipate substantial
expenditures and use of cash resources in our efforts to expand our
international ISP customer base.
We currently anticipate that the net proceeds of this offering, together
with funds on hand, will be sufficient to meet our anticipated needs for working
capital and capital expenditures through at least the next 12 months. We intend
to use approximately $25.0 million of the net proceeds of this offering to
increase the capacity of our existing network through leases for additional
satellite transponder space and fiber optic capacity with the balance of the
proceeds used to increase our sales and marketing personnel and activities,
increase our working capital and for other general corporate purposes. If the
offering is not completed and we decide to continue with our operating plan, we
will have to seek capital in the private marketplace, which, if available at
all, may be at lower valuations than would be available in the public market. We
may also need to raise additional funds prior to the expiration of such period
if, for example, we pursue acquisitions or experience operating losses that
exceed our current expectations. In any event, we cannot be certain that
additional financing will be available to use on favorable terms when required,
or at all. Alternatively, if we are not successful in raising funds through this
offering or a transaction in the private marketplace, we will have to take
certain steps, such as delaying the acceptance of services under our fixed fee
contracts, renegotiating certain long-term contracted obligations and reducing
the number of our employees, to reduce our regular capital needs. Under this
restricted operating plan, we believe that funds on hand will be sufficient to
meet our anticipated needs for working capital and capital expenditures through
at least the next 12 months if the offering is not completed.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We provide services primarily to customers located outside of the U.S. Thus,
our financial results could be impacted by foreign currency exchange rates and
market conditions abroad. As all of our services are paid for in U.S. dollars, a
strong dollar could make the cost of our services more expensive than the
services of non-U.S. based providers in foreign markets. We have not used
derivative instruments to hedge our foreign exchange risks though we may choose
to do so in the future. Our interest income is sensitive to changes in U.S.
interest rates but we do not believe that we are subject to any material market
risk exposure.
27
<PAGE>
BUSINESS
OVERVIEW
We operate a satellite-based, high performance Internet network that
delivers Internet services to international ISPs and other businesses in more
than 90 countries. Our proprietary network design integrates the broadcast
capabilities of satellites with Internet networking technologies to offer our
customers an expandable, or scalable, solution to the constraints of the public
Internet infrastructure. Our global network's open technical architecture
enables us to provide multiple categories of Internet services, including:
- global high bandwidth, or broadband, connectivity to the Internet
backbone;
- enhanced Internet services, such as Internet telephony; and
- Internet content distribution, such as newsfeeds and streaming media.
From December 31, 1998 to December 31, 1999, we increased the number of our
customers from 69 to 343 and as of March 27, 2000 we had over 500 customers
worldwide.
INDUSTRY BACKGROUND
THE EXPANSION OF THE INTERNET
Strain on the worldwide Internet infrastructure is increasing, especially
outside the U.S., as the number of Internet users grows and as their bandwidth
needs expand. Connectivity provides access to the Internet and, once
established, avails Internet users of a variety of services, including Web site
browsing, content downloading, personal and business messaging, e-commerce,
Internet telephony and streaming audio and video broadcasting. International
Data Corporation estimates that the number of active Internet users worldwide
will grow from approximately 261 million in 1999, of which approximately 59%
resided outside of the U.S., to approximately 623 million by the end of 2003, of
which approximately 68% will reside outside of the U.S. Once online, users
quickly become more selective, demanding faster, more reliable access, a broad
choice of Internet-based services from their ISPs and richer, more interactive
Web sites. Despite an anticipated expansion in the number of Internet users
worldwide, advances in the global telecommunications infrastructure and the
public Internet have failed to keep pace with user demand. When connecting to
and navigating the Internet, international ISPs and their subscribers suffer
numerous problems caused by limited access to the Internet backbone, poor
telecommunications infrastructure and low bandwidth availability. These
difficulties are likely to increase as demand grows for rich Internet content,
such as streaming audio and video.
28
<PAGE>
The table below sets forth the estimated worldwide growth in active Internet
users from 1999 to 2003 on a region-by-region basis based on International Data
Corporation estimates:
ESTIMATED WORLDWIDE GROWTH OF ACTIVE INTERNET USERS
1999 - 2003
(IN MILLIONS OF USERS)
<TABLE>
<CAPTION>
COMPOUND
ANNUAL
1999 2003 GROWTH
------------------- ------------------- RATE
REGION TOTAL % TOTAL % 1999-2003
- ------ -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Western Europe..................................... 90.3 34.5% 223.6 35.9% 25.6%
Asia and Pacific Rim............................... 41.1 15.7 137.5 22.1 35.2
Latin America (includes Mexico).................... 7.1 2.7 19.1 3.1 28.3
Eastern Europe, Africa, Middle East................ 3.7 1.4 19.7 3.2 52.4
North America (U.S. and Canada).................... 119.3 45.7 223.4 35.8 17.0
------ ----- ------ ----- -----
Total............................................ 261.5 100.0% 623.3 100.0 24.3%
</TABLE>
GLOBAL INFRASTRUCTURE CHALLENGES
The Internet relies on the global telecommunications infrastructure to
deliver an increasing variety of business applications and media. At the same
time, the swift growth of the Internet outside the U.S. and Europe is
constrained by the inadequacy of its infrastructure. In many parts of the world,
fiber-based Internet service is unavailable and other terrestrial connections
may be unreliable or in short supply due to the quality and availability of
local PTT facilities. For many of our customers, PTTs are their sole source of
telecommunications services. ISPs in many international markets must overcome
bottlenecks such as limited access to the Internet backbone, poor network
architecture and telecommunications infrastructure and a relative lack of
bandwidth provisioning from the local telecommunications provider. Network
performance may also be adversely affected by the inherent asymmetry of Web
traffic, where most of the bandwidth required is for the receipt of Web pages
from the Internet by the user. Network performance may be further diminished by
the necessity of routing data across multiple hops, or links, through multiple
networks. These shortcomings can severely impact the network performance of an
ISP and the quality of service that it provides to its subscribers.
Even in the U.S. and Europe, where broadband connectivity is more widely
available than in the rest of the world, the public Internet infrastructure
nevertheless requires multiple hops between routers to get from one point to
another reducing the quality and efficiency of the network. The Internet's
current infrastructure is poorly designed to efficiently transmit to other
countries increasingly bandwidth-intensive Internet content, such as
broadcast-style programming, streaming media, large graphics and animation. Web
site owners, traditional entertainment and media companies, Internet media
companies and creators of new online applications are making greater demands on
the public Internet infrastructure with the transmission of graphics,
high-definition images, video and audio streaming, animation and software
downloads.
Companies that provide Internet content and store it in servers close to end
users, known as edge servers, provide only part of the solution to the public
Internet limitations. Content distributors need a means to deliver data to their
servers in an efficient manner. Repeatedly sending individual point-to-point
transmissions to thousands of servers around the world is a costly and
inefficient use of bandwidth and has the potential to significantly increase
Internet infrastructure congestion.
FACILITATING THE CONTINUED GROWTH OF THE INTERNET
A number of Internet companies have attempted to address the international
architectural limitations of the Internet and the demand for bandwidth-intensive
Internet content. Caching, or the frequent storage
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of commonly accessed Internet data and images in a server closer to the end
user, offers a hardware and software solution to reduce transmission costs and
delays. Outsourced Web server management by content hosting companies enables
Web sites to increase server reliability by establishing servers on multiple
points on the Internet. Terrestrial broadband services are being advanced by
traditional telecommunications companies and Internet backbone providers in an
effort to address the last mile limitation for Internet users.
Ultimately, none of these solutions sufficiently address the inherent
limitation of the infrastructure abroad. Caching requires expensive hardware and
software and does not address the need of Web site owners to continually deliver
their high performance Internet content reliably across the many interconnecting
networks that comprise the Internet. Web hosting is not designed to avoid
transmission disruption difficulties encountered as data and content traverse
the public Internet to the end user. Last mile solutions must rely on
terrestrial network connections and do not avoid congestion or degradation of
quality that arise as transmissions pass through various infrastructure
intersections across the Internet.
Conversely, satellites deliver Internet services and broadcast content in a
simultaneous, point-to-multipoint manner to locations throughout the world.
Satellite-based networks overlay the public Internet around the world, reducing
hops, which:
- avoids bottlenecks;
- improves broadcast quality;
- lowers distribution costs; and
- expands the availability of content to Internet users worldwide.
When comprehensively managed in a network that intelligently integrates
satellite and Internet protocol technologies, satellites are able to reach
remote places inadequately served by local telecommunications infrastructures
and can make broadband connectivity and the resulting flow of e-commerce, rich
content, and broadcast programming globally available.
THE INTERPACKET SOLUTION
Our satellite-based Internet network overlays the public Internet around the
world and offers solutions to many of the limitations of the current global
Internet infrastructure. Our network currently incorporates nine geostationary
satellites, uplinked from six strategically located earth-based satellite
transmission stations, or teleports, and allows for the rapid delivery of
Internet connectivity services worldwide. ESPRESSO, and ESPRESSO BIZKIT, our
branded satellite-based Internet connectivity services, supplement or bypass
local and international telecommunications connections, enabling our ISP
customers to deliver a more reliable, higher quality of Internet service to
their subscribers. Our enhanced Internet services, including ESPRESSO VOICE, our
Internet telephony service, are complementary to the broadband access we provide
to our international ISP customers and create additional revenue opportunities.
The broadcast capabilities of our satellite network create an efficient,
reliable means for Internet content distributors to transmit bandwidth-intensive
forms of rich, Web-based content simultaneously to multiple locations, known as
multicasting, around the world. We currently broadcast ESPRESSO NEWS, our
aggregated newsfeed, and we recently entered into agreements with iBEAM and
RealNetworks, leading Internet broadcast networks, to deliver streaming content
around the world.
Our satellite-based Internet network and services feature:
SCALABLE, PROPRIETARY AND GLOBAL NETWORK DESIGN. Our network incorporates a
proprietary design to integrate the broadcast capabilities of satellites with
Internet networking technologies to connect our international ISP customers to
the Internet backbone. Our network currently incorporates nine geostationary
satellites, uplinked from six strategically located teleports, which enable the
transmission of
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data from terrestrial to satellite-based networks. The design of our network is
scalable, allowing us to rapidly and cost-effectively add satellite and fiber
optic cable capacity in response to our customers' Internet needs.
HIGH QUALITY, BRANDED SERVICE. ESPRESSO, our primary Internet connectivity
service, provides a high quality, direct connection to the Internet backbone.
ESPRESSO supplements or bypasses the Internet connections available to
international ISPs from their local telecommunications providers. This reduces
reliance on local Internet infrastructure and enables our ISP customers to
deliver more reliable, higher quality Internet services to their subscribers. We
believe ESPRESSO is a well known brand name in the international ISP
marketplace.
RAPID PROVISIONING. The simplex, or receive only, format of ESPRESSO allows
us to activate our new customers quickly and helps our customers avoid the costs
and delays of acquiring transmission facilities and regulatory approvals. Our
network and our customer service group deliver rapid provisioning of initial
Internet connectivity and subsequent bandwidth upgrades to our customers. This
system allows our ISP customers to avoid making the significant capital
investments necessary to establish and maintain fixed levels of bandwidth. Thus,
our ISP customers are afforded a cost-effective, pay-as-they-grow means to
increase the level of access and Internet services that they offer to their
subscribers.
ENHANCED INTERNET SERVICES. The broadband capacity of our network
facilitates the delivery of complementary Internet-based services to our ISP
customers. ESPRESSO VOICE enables our customers to route phone-to-phone calls
over our network in a cost-effective manner. Our ESPRESSO BIZKIT service
provides a direct-to-business Internet service through our ISP customers and
eliminates last mile connectivity issues for their business customers. We
recently initiated a managed co-location service with the introduction of
ESPRESSO COLO, contracting with Exodus Communications, Inc. and AboveNet
Communications, Inc. to deliver Web-hosting services to our ISP customers.
MULTICASTING CONTENT DELIVERY. The point-to-multipoint broadcast
capabilities of our satellite-based Internet network creates an efficient,
reliable means for Internet content distributors to transmit streaming forms of
Web-based content simultaneously to multiple locations across the globe. Our
network is designed to enable content distributors to deliver streaming audio
and video content to Internet users worldwide. We recently began multicasting
ESPRESSO NEWS, our aggregated newsfeed, to customers in Western Europe,
including the United Kingdom.
CUSTOMER-FOCUSED NETWORK MANAGEMENT AND SUPPORT. Our experienced network
management team is able to customize sophisticated Internet solutions to meet
the needs of growing international ISPs. We are able to proactively manage
operations and solutions and can help our customers operate more efficiently in
an ever-changing Internet marketplace. Our network operations centers in Santa
Monica and London allow our technical staff to actively monitor the status and
performance of our network and customers on a 24 hour, seven day a week basis.
OUR STRATEGY
Our goal is to become the leading provider of global satellite Internet
services by building the world's largest, premier quality and cost-efficient
satellite-based Internet network. We also intend to capitalize on our
proprietary network design, our network's broadcast capabilities, and the global
reach of our satellite coverage to offer content delivery to Internet content
distributors. To achieve this goal we intend to:
INCREASE OUR GLOBAL CUSTOMER BASE. We had over 500 customers worldwide as
of March 27, 2000. We intend to increase our customer base by growing our sales
force and aggressively marketing our Internet services through a variety of
marketing activities, such as direct marketing and participation at trade shows.
We believe that heightened recognition of our ESPRESSO brand and the high
quality of our Internet services among ISPs internationally will continue to
facilitate additional growth among new
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international ISP customers and establish us as the leading provider of global
satellite Internet connectivity, enhanced Internet services and content
distribution.
CAPITALIZE ON OUR EARLY ENTRANT STATUS. We have aggressively deployed our
network in over 90 countries and have developed an international reputation for
providing high quality Internet connectivity and related services abroad using
our satellite overlay network. Our international sales and marketing force of
approximately 45 individuals, many of whom are multilingual, leverages our
experience as one of the first providers of satellite-based Internet services
internationally and facilitates our entry into new countries and the development
of new business relationships. We intend to continue to capitalize upon our
reputation and experience as a leading provider of satellite-based Internet
services to the international ISP community.
BROADEN OUR INTERNET SERVICE OFFERINGS. We intend to continue to develop
additional Internet services and solutions that provide revenue-generating
opportunities. We plan to introduce caching, Internet applications delivery and
virtual private network services later this year. As the demand for additional
Internet services by our customers increases, their needs can be satisfied by
our network. We intend to continue to develop services that provide our ISP
customers with cost savings and with the Internet services they need to satisfy
the demands of their Internet users. The expansion of our Internet services also
serves to maintain the loyalty of our customers.
PROVIDE TURNKEY SOLUTIONS TO THE EMERGING INTERNET CONTENT INDUSTRY. We
intend to capitalize on the many advantages of our Internet network to become a
leading global supplier of managed satellite-based network services to the
emerging content distribution industry. Our network serves as an overlay to the
public Internet around the world, offering content distributors a turnkey
solution to the many distribution difficulties caused by the congestion and
inadequate bandwidth capacities of the international Internet infrastructure. We
hope to exploit this advantage and offer iBEAM, RealNetworks and our future
content distributor customers an efficient and cost-effective means to broadcast
their Internet products to ISPs, businesses and other users around the world.
EXPAND OUR NETWORK INFRASTRUCTURE. We believe the increasing worldwide need
for Internet connectivity, services and rich content on demand will lead to a
greater need for our network. We intend to support and continue to assure the
quality and availability of our services with the acquisition of additional
satellite and fiber optic cable capacity. We will continue to pursue a strategy
of connecting to U.S. Internet backbone operators, regional satellite owners
abroad and operators of Internet exchange points to add regional and
intraregional links and make our Internet network more globally pervasive. We
have also recently begun to expand our points of presence domestically and have
entered into agreements to install satellite dishes and servers at data centers,
peering points and other locations throughout the U.S. and Western Europe. We
believe that the sophistication of our satellite-based Internet network will
provide us a competitive advantage as the global Internet infrastructure expands
and evolves.
DEVELOP OUR STRATEGIC AND BUSINESS RELATIONSHIPS. We have entered into a
strategic relationships with iBEAM and RealNetworks. We expect that these
relationships will enable us to derive revenue from the emerging content
distribution industry. We intend to pursue additional strategic and business
relationships to accelerate market acceptance of our services and increase our
global brand recognition. We believe that these relationships will facilitate
our efforts to become the world's premier satellite-based Internet network.
INTERPACKET SERVICES
CONNECTIVITY
ESPRESSO. Our ESPRESSO connectivity service allows international ISPs to
use our global network of interconnected geostationary satellites and fiber
optic cable facilities to download content from the Internet at any time at
speeds ranging from 64 kilobits per second to 45 megabits per second. ESPRESSO'S
simplex,
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or receive-only, format offers advantages over more traditional leased line
connections, which are typically unable to accommodate asymmetrical bandwidth
requirements of the Internet. An international ISP may link to our network and
receive ESPRESSO service with the customer's existing Internet links, regardless
of the provider of those links. While we also offer duplex service, or two-way
transmission, our customers typically choose the simplex format of ESPRESSO as
it does not require transmission equipment and may be activated quickly.
Transmission equipment is more expensive than receive-only equipment and
typically requires a local transmission license, which can often be
time-consuming and costly to obtain.
We assign every ESPRESSO customer a committed information rate, or
guaranteed transmission throughput, according to their capacity needs and
budget. The committed information rate acts as our guarantee that the customer
will be able to access the U.S. Internet backbone at that data rate on a
24 hour a day, seven day a week basis. The monthly cost of an ESPRESSO link
varies depending upon the committed information rate and further varies from
continent to continent based on facility costs, the particular satellite that we
use and the competition within the local market. The customer equipment for
ESPRESSO primarily includes a receive-only satellite dish and can be installed
and operational within several hours.
Most existing terrestrial networks normally require a number of hops to
reach the Internet backbone, which increases latency, or delay, and potential
data loss and lowers the quality of service. ESPRESSO is a direct connection to
the Internet backbone, with only a single hop between the Internet backbone and
our ISP customer. Our technical ability to provide guaranteed bandwidth and the
ability to configure the connection for any desired degree of asymmetry are
attractive features of our ESPRESSO service that are not generally available
from traditional telecommunications service providers.
ESPRESSO BIZKIT. We currently partner with over 40 of our ISP customers who
market our ESPRESSO BIZKIT application to their business customers seeking
significant download capacity. ESPRESSO BIZKIT is a high-speed receive-only
satellite service that allows the business subscriber to download data directly
from the Internet backbone via our network, eliminating connectivity and latency
issues in the last mile of terrestrial land lines. We believe that our ESPRESSO
BIZKIT application is an opportunity to expand our customer base to the
international corporate user market.
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ENHANCED INTERNET SERVICES
ESPRESSO VOICE. Through ESPRESSO VOICE, our voice over Internet protocol,
or VoIP, service, we are able to provide high-quality communication services to
PTTs, ISPs and other international communications service providers. We can
provide our customers with a method to transmit carrier-grade quality voice
calls over our network at substantially lower costs than over traditional,
switch-based networks. We offer ESPRESSO VOICE in three configurations and
market them according to their capabilities and relative advantages available to
particular customers. In order to employ our ESPRESSO VOICE service, a customer
generally would need our full duplex ESPRESSO service and an
InterPacket-provided router. Many of our ISP customers that use our simplex
ESPRESSO connectivity service may also be able to offer their customers our
ESPRESSO VOICE service by routing outgoing calls through existing dedicated
Internet connections, though the transmission quality of such a call will not be
as high as a call transmitted over full duplex ESPRESSO service or over
traditional phone lines. We recently entered into an agreement to license a
personal computer-to-phone software application from Telic Communications, Inc.,
a technology company that offers VoIP software solutions. We intend to offer
this service to our international ISP customers to allow their end users to make
long distance telephone calls from their computers over our network.
ESPRESSO COLO. We provide on-site service and monitoring on behalf of our
international ISP customers of all equipment co-located through ESPRESSO COLO.
Co-location enables a customer to install its Web-servers and related equipment
at facilities, known as Internet data centers, owned and operated by another
company. We lease space from AboveNet and Exodus Communications to house the Web
servers of our ISP customers and their subscribers.
ESPRESSO NEWS. In September 1999, we completed our acquisition from Level 3
Communications Limited of certain assets and technology necessary to broadcast
ESPRESSO NEWS, our service that aggregates and multicasts USENET newsgroup
content to our ISP customers. This service eliminates the costs and bandwidth
requirements that would otherwise be necessary for the ISPs to access USENET
content directly.
CONTENT DISTRIBUTION. In January 2000, we entered into an agreement with
iBEAM. Under this non-exclusive agreement, we will deliver streaming content for
iBEAM customers via our global satellite broadcast network to iBEAM servers
located on our network in Asia, Europe, Latin America, Africa and the Middle
East. After iBEAM's use of our network reaches a minimum threshold level we will
receive a discounted fee based on usage, as well as a percentage of iBEAM's
revenue for our delivery of streaming content. We are in the process of
finalizing all network integration testing with iBEAM and plan to begin to
install iBEAM servers on our network over the course of the next quarter.
In March 2000, we entered into an agreement with RealNetworks. This
non-exclusive agreement calls for the development by RealNetworks Professional
Services for us of a proprietary streaming media system that will allow us to
multicast live and on-demand streaming content across our network. Under the
agreement we will also work with Real Broadcast Network, or RBN, to fully
interconnect our network with the RBN network. Additionally, our agreement with
RealNetworks allows us to resell RBN's Internet broadcast services and provides
RBN with content distribution capabilities via our satellite network.
RealNetworks Professional Services has initiated development efforts on our
streaming media system and we believe our network will be enabled with this
software by the third quarter of 2000.
We intend to enter into additional revenue sharing agreements with other
Internet content distribution companies.
OPERATIONS AND INFRASTRUCTURE
We provide our international Internet connectivity services through our
network of nine leased geostationary satellite and terrestrial fiber optic cable
interconnections to the Internet backbone.
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SATELLITE NETWORK
The following table shows the satellites where we have leased capacity and
the percentage of our monthly revenue by satellite at March 27, 2000.
OUR SATELLITE COVERAGE
<TABLE>
<CAPTION>
PERCENTAGE OF
MONTHLY
REVENUE
SATELLITE REGION COVERED AT MARCH 27, 2000
- --------- --------------------------------------------- ------------------
<S> <C> <C>
Satmex 5................. South America, most of North America 39%
Orion 1.................. Portions of Europe 1
GE-1E.................... Portions of Europe and North Africa 9
PanAmSat 2............... Portions of Asia and the Pacific Rim 2
PanAmSat 3............... Portions of Europe and Africa 13
PanAmSat 4............... Most of Europe and Africa, portions of Asia 13
PanAmSat 5............... Most of North and South America --
PanAmSat 8............... Portions of Asia and the Pacific Rim 12
TELSTAR 10............... Portions of Asia, the Pacific Rim and Africa 11
--------------------------------------------- -----------------
100%
</TABLE>
We have long-term contracts with our satellite providers, with expiration
dates varying from 2002 to 2011. In general, a provider may terminate one of
these contracts only under limited circumstances, such as satellite failure or
material breach of contract. We are required to pay monthly lease charges per
satellite ranging from $300 to $360,000 for the bandwidth capacity we use under
the terms of these satellite contracts. Our contracts for satellite services are
with PanAmSat International Systems, Inc., Satelites Mexicanos (Satmex), Loral
SpaceCom Corporation (Orion and TELSTAR), British Telecommunications plc
(PanAmSat 8), and an affiliate of General Electric Company.
We have also committed to lease three additional transponders on one
existing satellite under leases that start on August 15, 2000, May 15, 2001 and
November 15, 2001 and continue through the end of their useful lives, which is
expected to be October 2013. Estimated future payments under these commitments
are approximately $56.5 million.
TERRESTRIAL NETWORK
Our hubs are located in the primary telephony buildings in Los Angeles, at
the One Wilshire Building, in New York, at 60 Hudson Street, in London, at
Telehouse, and in Singapore, at Singapore Telecom's Telepark. Locating in these
premier telecommunications facilities enables us to have superior operational
environments for our equipment. We are also able to interconnect to many
backbone providers and major telecommunications carriers with a presence in
these buildings at a relatively low cost. In Los Angeles, we are locating much
of our equipment at the new Exodus facility in El Segundo, California to provide
site redundancy to One Wilshire. We also locate some of our equipment supporting
our Napa Valley uplink, and San Francisco Bay area connections, at the AboveNet
facility in San Jose, California.
We connect to the Internet backbone via transit and peering arrangements at
several locations through several major providers. In Los Angeles, New York and
London we have arrangements with UUNET Technologies, Inc. for redundant transit
ports with capacity up to 45 Mbps. In Los Angeles, we have arrangements with
Exodus for transit to 100 Mbps, while at our Napa Valley uplink we have
arrangements with AboveNet for transit to 100 Mbps. In Singapore, we have 45
Mbps of dedicated transit provided by AboveNet, via Singapore Telecom. This
Singapore presence will be expanded in 2000 to include a dedicated,
point-to-point fiber optic cable connection between Singapore and Los Angeles.
In London, we have installed a 45 Mbps trans-Atlantic circuit connecting 60
Hudson Street, NY to Telehouse,
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London. Diverse access to the UUNET backbone, via the transit arrangements in
both New York and London, is available in London via this link.
We have currently established a presence at two public peering points
outside the U.S. at the London Internet Exchange, or LINX, and the Singapore
Internet Exchange, or STIX, enabling us to more efficiently route Internet data.
We recently began to expand our points of presence domestically and have
entered into agreements to install satellite dishes and servers at data centers,
peering points and other locations throughout the United States and Western
Europe. We also recently entered into an agreement to purchase Inktomi
Corporation's Traffic Server Software with its Media-IXT option, which will
allow us to improve our network's efficiency and improve its ability to cache
both static and streaming Web content.
Our London-New York connection enables us to expand the variety of services
that we can offer to customers in many geographic areas. In the United Kingdom,
we intend to offer terrestrial frame relay and other leased line connections
which utilize our hybrid fiber-satellite infrastructure. We can also provide
terrestrial connections in Europe by extending our fiber optic network to the
continent.
Our Singapore-Los Angeles connection, which we expect to be completed by
mid-2000, will allow us to expand the use of regional satellites in Asia, which
are more plentiful and less expensive than satellite capacity crossing the
Pacific Ocean.
We currently maintain two network operations centers, the primary center at
our headquarters in Santa Monica, California and the second at our offices in
London, England. At our network operations centers our technical staff is able
to oversee the status of the entire network, including our international
satellite links, routers, and customer nodes. Our staff monitors the performance
and capacity utilization of each customer's link, makes any necessary
adjustments regarding the quality of service and equipment configuration of the
customer, troubleshoots problems and maintains the global network.
We expect to open our third network operations center in Singapore in the
second quarter of 2000. With personnel in Los Angeles, London, and Singapore,
our network operations centers will provide around-the-clock, local time-of-day
coverage to all of our customers worldwide. The network operations centers in
Santa Monica and London currently share coverage to ensure network monitoring
24 hours a day, seven days a week.
We had long-lived assets in foreign countries of approximately $37,000 in
1997, $280,000 in 1998 and $1.4 million in 1999.
SALES AND MARKETING
Our sales and marketing objective is to achieve broad market penetration and
increase brand name recognition for our ESPRESSO services. Our sales and
marketing efforts are directed primarily towards international ISPs because they
typically represent the largest consumers of bandwidth in each marketplace and
have the technical expertise to understand and take full advantage of our
network applications and service offerings. As we introduce additional services,
we intend to expand the focus of our sales and marketing efforts to include not
only the international ISPs that we currently target, but also other
foreign-based business customers. For example, with the recent introduction of
one of our latest services, ESPRESSO VOICE, we have expanded our sales and
marketing efforts beyond international ISPs to also include PTTs and other
international communications service providers. ESPRESSO NEWS provides us with
an additional base of ISP customers to which we hope to cross-market our
services. Additionally, these customers are located in a region that, due to the
generally high quality of its Internet infrastructure, was previously difficult
for us to penetrate.
To date, we have generated the majority of our sales from customers located
in emerging and developing markets around the globe. Emerging markets in areas
such as Latin America, Africa, and Asia offer excellent opportunities for our
expansion of ESPRESSO because Internet access across the existing
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terrestrial network through the local PTTs is usually very expensive and
generally of a poor quality. Even in developed countries, where a significant
number of rural and regional centers do not have fiber optic cable capacity
devoted to Internet services, there are meaningful opportunities to sell our
ESPRESSO connectivity and other services. Also, for an ISP with multiple points
of presence, or POPs, across a country or region, the cost of linking those POPs
with high-speed domestic leased lines can be very expensive. In these instances,
ESPRESSO can be a cost-effective solution to providing unlimited download
bandwidth to a network of POPs connected by small bandwidth leased lines.
ESPRESSO may also be used in a duplex format by an ISP to service its Internet
subscribers and avoid the high cost of leasing lines from international
telecommunications companies.
We have built an international sales and marketing force that speaks over
20 languages including Spanish, French, Chinese, Portuguese and Arabic. As of
March 27, 2000, our sales and marketing department consisted of approximately 45
individuals, including several dedicated to enhanced services. We strive to
attract and retain high quality, motivated sales representatives who are from
the country or region they serve. We look for sales and marketing personnel that
have strong Internet backgrounds and ensure that they have knowledge of
potential applications of our ESPRESSO services to meet the critical needs of
targeted ISPs, PTTs, other international communications service providers and
businesses. Our sales and marketing department is divided into regional teams
that focus on the following areas: Latin America/Caribbean, Africa/Middle East,
Europe and Asia/Pacific. Sales leads are generated primarily from the following:
- researching the ISPs operating in a particular territory and making the
initial contact via email or voice;
- favorable word-of-mouth from other customers;
- telecommunications conventions and shows; and
- vendors with customers that have Internet requirements.
In addition, we have a growing network of more than 25 independent sales
agents around the world. In November 1998, we formed a joint venture in India,
which obtained one of the first ISP licenses to operate in Delhi, India. We have
a sales office in London and recently opened sales offices in Brazil and
Argentina. We believe that these countries offer attractive markets for our
services.
CUSTOMERS
Our customers are predominantly international ISPs. The vast majority of our
customers are located in emerging and developing markets around the world. Our
Internet-based services and applications are designed to meet the needs of
international ISPs looking to upgrade to the quality of service provided over
our network.
The following chart represents on an area-by-area basis our current
distribution of signed customers and the percentage of monthly revenue for
customers by region at March 27, 2000:
<TABLE>
<CAPTION>
PERCENTAGE OF
MONTHLY
REVENUE
REGION NUMBER OF CUSTOMERS AT MARCH 27, 2000
- ------ ------------------- -----------------
<S> <C> <C>
Latin America/Caribbean.................... 185 40%
Africa/Middle East......................... 157 36
Asia/Pacific Rim........................... 117 14
Europe..................................... 94 10
Other...................................... 8 --
--- ---
Total.................................... 561 100%
</TABLE>
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We believe that none of our customers purchasing Internet-based services
accounted for more than 4% of our network services revenue for the year ended
December 31, 1998 or 1999. In the year ended December 31, 1998, STAR
Telecommunications accounted for approximately 80% of our total revenue and
approximately 25% of our total revenue in 1999. The majority of revenues
received from STAR Telecommunications were derived from the sale of traditional
telecom services transmitted over a switch-based network. We expect revenue from
STAR Telecommunications to be insignificant in current and future periods.
See Note 11 of notes to our consolidated financial statements which sets
forth the amount of domestic and foreign revenues that we earned in 1997, 1998
and 1999.
COMPETITION
We compete with many companies providing Internet connectivity and enhanced
Internet services around the world. Some of these competitors have advantages
over us, including greater financial, technical and marketing resources, lower
operating costs, longer operating histories, greater name recognition and more
established relationships in the Internet industry.
Our most common competitor in the Internet access market is the local PTT of
the country where our customer is located. Teleglobe, the former PTT of Canada,
operates globally and recently announced a global service intended to compete
with our services. Loral SpaceCom Corporation, through its Cyberstar subsidiary,
and PanAmSat, Inc., satellite system operators and vendors of ours, have their
own Internet services which they offer over their satellites. We also compete
with NetSat Express. In the content distribution market, we compete with Cidera,
Inc. In addition, some U.S. based companies that have teleports are also
starting to offer their own services to selected regions and may expand
globally.
On a regional basis, there are competitors who operate via satellite but
only to select areas. Examples of such providers are Impsat Latin America and
IHUG in Australia. There are also global providers such as UUNET, who offer
services based primarily terrestrially-based POPs located in the country to
which they are marketing their services. Other large ISPs and virtually all PTTs
also offer terrestrial-based connectivity which may be in competition with our
services.
If we successfully expand our ESPRESSO VOICE telephony applications, we will
be competing with many companies providing VoIP services as well as traditional
circuit-switch telephony services around the world. Our largest competitors in
this market would be the telecommunications carriers that operate the
international long distance networks over which traditional circuit-switch
telephony services are carried, such as AT&T, MCI WorldCom, Sprint and numerous
foreign telecommunications carriers. We will also compete directly with many
other Internet telephony service providers, such as ITXC Corp., OzEmail (which
was recently acquired by MCI WorldCom), Net2Phone, Inc. and iBasis, Inc. Smaller
competitors, such as Impsat and Infonet Services Corp. may also compete with us
in certain markets. In addition, a number of other companies have started or are
planning to start VoIP operations and are likely to compete with us in the near
future.
As a result of our recent acquisition of our ESPRESSO NEWS service and our
agreements with iBEAM and RealNetworks, we will be distributing content through
our network. Although we intend to partner with content distributors, the
services we provide may also put us in competition with these parties.
GOVERNMENT REGULATION
U.S. GOVERNMENT REGULATION OF THE INTERNET AND INTERNET TELEPHONY
We currently characterize our services as "information" or "enhanced"
services, rather than as basic telecommunications services. As such, we believe
that our services are not currently subject to regulation by the FCC. We cannot
assure you that the FCC will not apply regulation to Internet-based services
such as ours in the future. Any change in the characterization of our services
as information services or in the
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FCC's regulation of information services could affect how we provide our
services or the costs of providing our services which may harm our business.
To date, the FCC has not made any ruling or other definitive pronouncement
that Internet phone-to-phone telephony is a basic or enhanced service. However,
on April 10, 1998, the FCC issued a report to Congress discussing its
implementation of certain universal service provisions contained in the 1996
amendments to the Communications Act of 1934. In its report, the FCC stated that
it would undertake an examination of whether phone-to-phone Internet telephony
should be considered an information service or a telecommunications service. The
FCC noted that certain forms of phone-to-phone Internet telephony appeared to
lack the characteristics of an information service and to have the same
functionality as non-Internet protocol telecommunications services and could be
subject to federal regulation such as regulations governing universal service
funding and excise taxes. If the FCC determines that Internet telephony is
subject to regulation as a telecommunications service, it may subject providers
of Internet telephony services to traditional common carrier regulation and
require them to make universal service contributions and pay access charges. It
is also possible that the FCC will adopt a regulatory framework specific to
Internet telephony providers, different than that applied to traditional common
carriers. Finally, Congressional dissatisfaction with the FCC's conclusions
regarding Internet telephony could result in legislation requiring the FCC to
impose greater or lesser regulation.
Previously, the FCC expressly found that at least one kind of data
communications service using the frame relay protocol should be regulated as a
basic telecommunications service. This means that any service provider that is
providing voice over frame relay service could be classified as a
telecommunications common carrier and therefore subject to regulation, including
being required to contribute to universal service subsidies. Any determination
by the FCC that the simple transmission of voice over Internet protocols
constitutes a basic telecommunications service similar to frame relay could harm
our business.
The FCC has raised the issue of whether some local carriers can assess
interstate access charges on information service providers, including ISPs.
Currently, providers of traditional, regulated telephone service pay charges to
local telephone companies that substantially increase their cost of service. In
particular, if a carrier routes a long distance call on another carrier's
network, it must pay access charges to the carrier that delivers the call.
Information service providers, including ISPs, do not pay these access charges,
which in part has enabled them to provide long distance service at cost savings
over traditional telephone carriers. This advantage might be eliminated or
mooted by future FCC actions. Several incumbent local exchange carriers have
asked the FCC to rule that they may impose access charges on ISPs, and those
requests could be renewed in the future. Also, the FCC is in the process of
making further changes to the access charge system, which could result in
significant reductions in access charge levels as early as mid-2000. If access
charges are moved to, or at least much closer to, cost-based levels, the
advantage derived by ISPs from the access charge exemption will be mitigated,
which would increase our cost of doing business.
Efforts have been made to enact legislation that would either regulate or
exempt from regulation other aspects of services provided over the Internet. In
addition, Congress has adopted legislation that regulates, with respect to the
Internet, freedom of expression, user privacy, pricing, advertising,
intellectual property rights, taxation, Internet spamming, database privacy,
gambling, pornography and child protection, Internet fraud and privacy. We
cannot assure you that Internet-based services such as ours will not be
regulated in the future. In addition, increased regulation of the Internet may
slow its growth for a number of reasons, including by increasing the cost of
doing business over the Internet or other costly technical requirements, which
could seriously harm our business. In addition, legislation has been enacted
that prohibits or imposes liability for the transmission of some types of
information on the Internet, including sexually explicit and gambling
information. We could also be harmed by federal and state laws and regulations
relating to the liability of online services companies and Internet access
providers for information carried on or disseminated through their networks.
Several private lawsuits seeking to impose
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such liability upon online services companies and Internet access providers are
currently pending. Congress has enacted legislation that limits liability for
online copyright infringement. That latter law includes exemptions which enable
ISPs to avoid copyright infringement if they merely transmit material produced
and requested by others. It is possible that other laws and regulations could be
enacted in the future that would place liability more directly on ISPs. The
imposition of potential liability on us and other Internet access providers for
information carried on or disseminated through their systems could require us to
implement measures to reduce our exposure to such liability, which may in turn
require us to expend substantial resources or to discontinue service offerings.
Any costs incurred as a result of such liability or asserted liability could
cause our business and prospects to suffer.
INTERNATIONAL GOVERNMENT REGULATION OF THE INTERNET AND INTERNET TELEPHONY
The regulatory treatment of the Internet and Internet telephony from country
to country varies widely and constantly changes. Some countries currently impose
little or no regulation on Internet telephony, as in the U.S. Conversely, other
countries that prohibit or limit competition for traditional voice telephony
services may not permit Internet telephony or strictly limit the terms under
which it may be provided. Still other countries regulate Internet telephony like
traditional voice telephony services or determine on a case-by-case basis
whether to regulate Internet telephony as a voice service or as another
telecommunications service. Finally, in many countries, Internet telephony has
not yet been addressed by legislation or the regulatory authorities.
In some of the countries in which we provide services, the regulatory
processes are not as transparent as in the U.S. and Europe. Changes in the
regulatory regimes of these countries that have the effect of limiting or
prohibiting Internet telephony, or that impose new or additional regulatory
requirements on providers of such services, may result in our being unable to
provide service to one or more countries. That result could negatively affect
our Internet telephony business, financial condition and results of operations.
In addition, as we expand into additional foreign countries, such countries
may assert that we are required to qualify to do business in the particular
foreign country, that we are otherwise subject to regulation, or that we are
prohibited from conducting our business in that country. Our failure to qualify
as a foreign corporation in a jurisdiction in which we are required to do so, or
to comply with foreign laws and regulations, could seriously harm our business,
including by subjecting us to taxes and penalties or by precluding us from, or
limiting us in, enforcing contracts in such jurisdictions. Likewise, our
customers may be or become subject to requirements to qualify to do business in
a particular foreign country, to otherwise comply with regulations, or to cease
from conducting business in that country. We cannot be certain that our
customers currently comply with regulatory or other legal requirements in their
respective countries, that they will be able to comply with existing or future
requirements, or that they will continue to comply with any requirements.
Finally, we may be subject to statutory or other legal requirements in foreign
countries regarding the protection of individual privacy and online data,
including the requirements of the European Union Directive on the Protection of
Individuals With Regard to the Processing of Personal Data and on the Free
Movement of Such Data. Our customers may be subject to the same laws and
requirements. Our failure or the failure of our customers to comply with these
requirements could harm our business.
CERTAIN OTHER U.S. REGULATIONS AFFECTING OUR SERVICES
STATE REGULATION. The proliferation of recent Internet use has prompted
state legislators and regulators to consider the adoption of laws and
regulations to govern Internet usage. It is possible that state legislatures and
regulators will attempt to regulate the Internet in the future, either by
regulating transactions or by restricting the content of the available
information and services. While state public utility commissions generally have
declined to directly regulate enhanced or information services, some states have
continued to regulate particular aspects of enhanced services in limited
circumstances, such as
40
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where they are provided by local telecommunications carriers. Moreover, the
public utility commissions of several states continue to consider potential
regulation of such services. For example, some states have initiated proceedings
to consider regulating intrastate Internet telephony services. Enactment of such
legislation or adoption of such regulations could cause our business and
prospects to suffer.
Another area of adverse potential state regulation concerns taxes. In
October 1998, the U.S. Congress enacted a three-year moratorium on new state and
local taxes on the Internet, meaning those not generally imposed or actually
enforced prior to October 1, 1998, as well as on taxes that discriminate against
commerce through the Internet. Congress is presently studying and has solicited
recommendations that could serve as the basis for additional legislation. Future
laws or regulatory changes that lead to state taxation of Internet transactions
could harm our business.
One issue of growing importance revolves around contract law. The Internet
has also spawned a number of other state legal and regulatory issues, such as
whether and how provisions of the Uniform Commercial Code and various state
codes apply to transactions carried out on the Internet and how to decide which
jurisdiction's laws apply to a particular transaction. It is not possible to
predict how federal or state law will evolve to address new transactional
circumstances created by Internet commerce or whether the evolution of such laws
will cause our business and prospects to suffer.
State legislators and regulators have also sought to restrict the
transmission or limit access to certain materials on the Internet. For example,
in the past several years, various state legislators have sought to limit or
prohibit:
- certain communications between adults and minors;
- anonymous and pseudonymous use of the Internet; and
- on-line gambling.
Enforcement of such limitations or prohibitions in some states could affect
transmission in other states. State laws and regulations that restrict access to
such materials on the Internet could inadvertently block access to other
permissible sites. We cannot predict the impact, if any, that any future laws or
regulatory changes in this area may have on our business.
Some states have also sought to impose tort liability or criminal penalties
on certain conduct involving the Internet, such as the use of "hate" speech,
invasion of privacy, and fraud. The adoption of such laws could adversely impact
the transmission of non-offensive material on the Internet and, to that extent,
could harm our business.
LOCAL REGULATION. Although local jurisdictions generally have not sought to
regulate the Internet and related services, it is possible that such
jurisdictions will seek to impose regulations in the future. In particular,
local jurisdictions may attempt to tax various aspects of Internet access or
services, such as transactions handled through the Internet or subscriber
access, as a way of generating municipal revenue. Our networks may also be
subject to numerous local regulations such as building codes and licensing.
These regulations vary from city to city and county to county. The imposition of
local taxes and other regulatory burdens by local jurisdictions could cause our
business and prospects to suffer.
INTELLECTUAL PROPERTY
Our intellectual property consists of our trademarks, domain names, trade
secrets and other proprietary rights. ESPRESSO, POWERED BY ESPRESSO and
INTERPACKET are our registered U.S. trademarks. We have trademark applications
pending for EUROPACKET and ESPRESSO BIZKIT. In addition, we consider the design
and configuration of our Internet network to be proprietary to us. While we have
not patented any aspect of this design and configuration, we generally rely only
on the protection offered by trade secret law. Our intellectual property plays
an important role in our marketing strategy and our competitive position, and we
seek to protect it.
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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 party to
any material legal proceedings.
EMPLOYEES
As of March 27, 2000, we had approximately 140 full-time employees. None of
our employees is represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good.
FACILITIES
Our corporate offices are currently located in Santa Monica, California,
where we lease approximately 9,600 square feet under a lease that expires in
December 2003. Due to the expansion of our workforce and network operations
center we have entered into a lease for approximately 28,500 square feet in
another office building in Santa Monica expiring in 2006. We plan to relocate
our entire office and operations to this new location during the second quarter
of 2000. In addition, we lease approximately 2,800 square feet in Guildford,
Surrey, England for our UK operations under leases that expire in December 2003
and we are temporarily leasing space in Singapore for our Far East operations
under a lease that expires on April 30, 2000 and expect to enter into a
long-term lease for these operations.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following is a list of our executive officers, key employees and
directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- -------- -----------------------------------------------------------
<S> <C> <C>
Jonathan L. Gans....................... 41 Chief Executive Officer, President and Director
Norman J. Pattiz....................... 57 Chairman of the Board
James E. Kolsrud....................... 55 Chief Operating Officer and Director
Peter S. Zimble........................ 32 Executive Vice President
Julie M. Spira......................... 42 Executive Vice President--Sales
Timothy F. Sylvester................... 41 Executive Vice President--Business and Legal Affairs
Allen J. Sciarillo..................... 35 Chief Financial Officer
Jon Mansey............................. 34 Chief Science Officer
Kenneth R. Halloway.................... 37 Senior Vice President--Business Development
Timothy M. Jackson..................... 36 Senior Vice President--Operations
Jeffrey C. Barbakow.................... 55 Director
Brent N. Cohen......................... 41 Director
Lawrence D. Lenihan, Jr................ 35 Director
</TABLE>
JONATHAN L. GANS is a founder of InterPacket and has been our Chief
Executive Officer and a director since its formation in August 1995. Mr. Gans
was also appointed President in February 2000. Mr. Gans served as our Chairman
of the Board from July 1999 to November 1999. From 1992 until the time of its
sale to The Thomson Corporation in September 1997, Mr. Gans served as Chairman
and Chief Executive Officer of de Forest Research, an intellectual property
consulting firm serving the entertainment industry. From 1991 to July 1996, he
was Chief Financial Officer of Film Finances, Inc., a provider of completion
guaranty services to the film and television production industries. Mr. Gans is
a former attorney with the law firm of Skadden, Arps, Slate, Meagher & Flom and
a former Vice President of Corporate Finance with the investment banking firm of
Drexel Burnham Lambert.
NORMAN J. PATTIZ has served as a director of InterPacket since June 1999,
and our Chairman of the Board since March of 2000. Mr. Pattiz has been serving
as the Chairman of Westwood One, America's largest radio network, since February
1994 and served as its Chief Executive Officer from its inception until January
1994. Founded by Mr. Pattiz in 1976, Westwood One is the parent company of NBC
Radio Networks, the Mutual Broadcasting System, Metro Networks, and distributes
CBS Radio and CNN. Mr. Pattiz serves on the Board of Trustees of the Museum of
Television & Radio, The Hollywood Radio & Television Society, The Broadcast
Education Association and The Communications Board of UCLA. He also serves as a
Commissioner on the State of California's "Commission on Building for the 21(st)
Century."
JAMES E. KOLSRUD became our Chief Operating Officer of InterPacket in March
2000. Mr. Kolsrud is a founder of InterPacket and has been a director since its
formation in August 1995. In addition, Mr. Kolsrud served as an Executive Vice
President--Operations and Engineering of Star Telecommunications, Inc. from
September 1996 to February 2000. From March 1995 to September 1996, Mr. Kolsrud
was an international telecommunications consultant. Prior to March 1995,
Mr. Kolsrud was Vice President of Corporate Engineering and Administration of
IDB Communications Group, Inc., an international communications company.
PETER S. ZIMBLE is a founder of InterPacket. He has been our Executive Vice
President since February 2000 and prior to that our President since formation.
Mr. Zimble also served as a Director from August 1995 until February 2000. From
January 1995 to August 1995, Mr. Zimble served as Vice President--General
Manager at Internet Holdings Group, an Internet investment concern. From
March 1994 to December 1994, Mr. Zimble served as Director of Business
Development at IDB Communications where he oversaw the technical and sales
growth of IDB's Digital Services Group which
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operated a domestic audio distribution network. Mr. Zimble also served as Vice
President of Sonnet Communications from November 1992 to March 1994, which
operated a domestic network designed for the distribution of digital audio radio
commercials.
JULIE M. SPIRA has been our Executive Vice President--Sales since
June 1997. From January 1996 until she joined InterPacket, Ms. Spira served as
Vice President of Broadcast Sales of Xing Technology and was responsible for the
sales and marketing of Internet broadcast services to U.S. content distributors.
From 1987 to 1995, Ms. Spira served as Vice President of Broadcast Sales for IDB
Communications, overseeing the sales of satellite transmission services to radio
broadcasters and networks worldwide.
TIMOTHY F. SYLVESTER has been our Executive Vice President--Business and
Legal Affairs since February 2000. From 1998 until he joined InterPacket, he was
an equity principal at Riordan & McKinzie, a law firm in Los Angeles,
California. From 1996 to 1997, he was a non-equity principal and from 1989 to
1996, Mr. Sylvester was an associate at Riordan & McKinzie.
ALLEN J. SCIARILLO has served as our Chief Financial Officer since
July 1999. From October 1997 to June 1999, Mr. Sciarillo was Chief Financial
Officer of RSL Com USA, Inc., a division of RSL Com Ltd., a global
facilities-based telecommunications carrier. Prior to joining RSL,
Mr. Sciarillo was Vice President and Controller of Hospitality Worldwide
Services, Inc. from July 1996 to October 1997 and Controller of WCT
Communications, a long distance telephony services provider, from December 1993
to June 1996. Mr. Sciarillo began his career at Deloitte & Touche, where he
later served as a senior auditor.
JON MANSEY has been our Chief Science Officer since October 1997 and has
been in charge of the architecture of our network systems since that time.
Previously, he held the position of Chief Engineer for the Los Angeles office of
Solid State Logic, a U.K. based pro-audio systems company where he worked
closely with recording studio technology across the music, television, and film
production industries.
KENNETH R. HALLOWAY has been our Senior Vice President--Business Development
since February 2000. He was our Vice President--Finance from August 1998 to
July 1999, and our Vice President--Business Affairs from July 1999 to
February 2000. From 1986 to October 1997, Mr. Halloway was Chief Financial
Officer at Moviestore/Active Entertainment, a film production and distribution
company.
TIMOTHY M. JACKSON has been our Senior Vice President--Operations since
July 1999. From January 1999 until he joined InterPacket, Mr. Jackson was Vice
President of Broadcast Service for McKibben Communications, a satellite
communications facility. From July 1994 to December 1998 Mr. Jackson served as
Director of Technical Operations for Discovery Networks International, a
division of Discovery Communications, Inc., and was responsible for the
technical development of Discovery Channel's worldwide distribution network.
JEFFREY C. BARBAKOW has been a director of InterPacket since February 1999.
In addition, Mr. Barbakow has served as the Chairman of the Board and Chief
Executive Officer of Tenet Healthcare Corporation, since June 1993. Prior to
joining Tenet Healthcare, Mr. Barbakow served as a Managing Director of
Donaldson, Lufkin & Jenrette Securities Corporation from September 1991 to
June 1993. Additionally, from October 1988 to November 1990 Mr. Barbakow served
as Chairman, Chief Executive Officer and President of Metro-Goldwyn-Mayer/United
Artists Communications Co.
BRENT N. COHEN has been a director of InterPacket since February 2000. In
February 2000, Mr. Cohen became President and Chief Executive Officer of US
SEARCH.com Inc., a leading Internet-based provider of public record information.
From November 1998 to the present, Mr. Cohen has served on numerous advisory
boards of Internet start-ups, and he possesses extensive experience in
high-technology, international and financial fields. From July 1987 to
October 1998, he held various senior management positions at Packard Bell
Electronics Inc., now Packard Bell NEC, a manufacturer of personal computers,
including President-Consumer and International, Chief Operating Officer and
Chief Financial Officer. Mr. Cohen currently serves as a director of US
SEARCH.com Inc. and Tag-It Pacific Group.
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LAWRENCE D. LENIHAN, JR. has been a director of InterPacket since
November 1999. Mr. Lenihan is a Managing Director of Pequot Capital Management,
Inc., an investment fund firm. He joined the predecessor to this firm,
Dawson-Samberg Capital Management, in 1996. He is also a Managing Member of the
General Partner of Pequot Private Equity Fund II, L.P. Prior to joining Pequot,
Mr. Lenihan was a principal at Broadview Associates, LLC from 1993 to 1996.
Prior to joining Broadview, Mr. Lenihan held several positions at IBM, most
recently as the leader of an interactive multimedia software product business.
He currently serves as a director of Digital General Systems, Inc. and
Mediaplex, Inc.
All directors are elected to hold office until our next annual meeting of
stockholders and until their successors have been elected. Officers are elected
at the first board of directors meeting following the stockholders' meeting at
which the directors are elected and serve at the discretion of the board of
directors. There are no family relationships among any of our directors or
executive officers. Under our certificate of incorporation, the holders of our
preferred stock are entitled to elect one member to our board of directors.
Mr. Lenihan is the designee of the holders of our preferred stock. Upon the
completion of this offering, all shares of preferred stock will automatically
convert into common stock and our certificate of incorporation will be amended
to delete this election right of holders of our preferred stock.
BOARD COMMITTEES
The board of directors has established an audit committee to review the
results and scope of the annual audit and the services provided by our
independent accountants. The current members of our audit committee are Jeffrey
C. Barbakow, Lawrence D. Lenihan, Jr. and Brent N. Cohen.
The board of directors has also established a compensation committee that
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 of our employees. The compensation committee also
administers our 1998 Stock Option Plan. The current members of the compensation
committee are Norman J. Pattiz and Lawrence D. Lenihan, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Except as set forth below, none of the members of our compensation committee
has ever been an officer or employee of InterPacket. None of our executive
officers serves as a member of the board of directors or compensation committee
of any other entity that has one or more executive officers serving as a member
of our board of directors or compensation committee. From June 1999 to
December 1999, Jonathan L. Gans, our Chief Executive Officer and President, was
a member of the compensation committee.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation from us for
their service as members of the board of directors. Non-employee directors are
eligible to receive stock options pursuant to our 1999 Director Stock Option
Plan and they are reimbursed for travel and lodging expenses in connection with
attendance at board and committee meetings. As of March 27, 2000, options to
purchase a total of 979,000 shares had been granted to our non-employee
directors under this plan. From November 1999 until his resignation in March
2000, we paid Peter Hirshberg an annual salary of $175,000 for serving as our
Chairman of the Board on a full-time basis. Mr. Pattiz, who currently serves as
our Chairman of the Board, is not an employee and receives no cash compensation
from us for this service. Mr. Pattiz received a grant under our 1999 Director
Stock Option Plan of 275,000 options at $6.82 share, subject to three year
vesting, in connection with his appointment as Chairman of the Board.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
We have entered into employment agreements with Jonathan L. Gans, our Chief
Executive Officer and President, Julie M. Spira, our Executive Vice
President--Sales, and Timothy F. Sylvester, our
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Executive Vice President--Business and Legal Affairs. The compensation, dates of
employment and other material terms under the employment agreements are as
follows:
- Mr. Gans is paid an annual base salary of $324,500, which will increase no
less than 10% per year. He is also entitled to receive a minimum annual
bonus of $100,000. The initial term of his employment began on July 1,
1999 and continues until June 30, 2002. If Mr. Gans' employment is
terminated by us without cause or if he terminates his employment with us
for good reason the employment agreement provides for the continued
payment of Mr. Gans' salary, the greater of his minimum guaranteed bonus,
the actual bonus paid to him during the preceding year, and the average of
the actual bonuses paid to him during the two preceding years, and health
and certain other benefits for a period of time equal to the greater of
the remainder of the employment agreement's term or if the term of the
employment agreement has less than one year remaining at the time of
termination, then such remaining amount of time plus 12 months.
- Ms. Spira will be paid an annual base salary of $270,000 during 2000 and
$300,000 during 2001. She is also entitled to receive an annual bonus
between $25,000 and $90,000 based on our performance. The initial term of
her employment began on January 1, 1999 and continues until December 31,
2001. If Ms. Spira's employment is terminated without cause by us or if
she terminates her employment with us for good reason the employment
agreement provides for the continued payment of Ms. Spira's salary, the
greater of her minimum guaranteed bonus, the actual bonus paid to her
during the preceding year, and the average of the actual bonuses paid to
her during the two preceding years, and health and other benefits for a
period of time equal to the greater of the remainder of the employment
agreement's term or if the term of the employment agreement has less than
one year remaining at the time of termination, then such remaining amount
of time plus 12 months.
- Mr. Sylvester is paid an annual base salary of $150,000. He is also
entitled to receive an annual bonus of $50,000 if we achieve certain
performance targets. The initial term of his employment continues until
January 31, 2003. If Mr. Sylvester's employment is terminated without
cause by us or if he terminates his employment with us for good reason the
employment agreement provides for the continued payment of
Mr. Sylvester's salary to him, the greater of the actual bonus paid to him
during the preceding year and the average of the actual bonus paid to him
during the two preceding years, if any, and health and other benefits for
a period of time equal to the greater of the remainder of the employment
agreement's term or if the term of the employment agreement has less than
one year remaining at the time of termination, then such remaining amount
of time plus 12 months. For Mr. Sylvester only, termination for good
reason includes InterPacket's requirement that he relocate his place of
work outside of Los Angeles County.
Generally, an employee may terminate the employment agreement for good
reason if:
- we breach any material term of the employment agreement for a period of
30 days after we receive written notice to cure this breach;
- if we assign to the employee duties and responsibilities substantially
inconsistent with the employee's described duties and responsibilities, if
another employee assumes the relevant employee's duties, or if we
substantially decrease the employee's responsibilities or authority; or
- upon a change in control.
A change in control means the happening of any of the following:
- if any person becomes the beneficial owner of 50% or more of the voting
power of our outstanding securities;
- the sale of all or substantially all of our assets;
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- our merger with or into another corporation in which we are not the
surviving corporation, or our stockholders immediately before such merger
are the owners of less than 50% of the combined voting power of
InterPacket and such other corporation immediately after such merger; or
- the election of the board of directors where the incumbent directors
immediately before such election or consent do not constitute a majority
of the board of directors immediately after such election.
Each of the employment agreements provides that the employment agreement
shall be extended by an additional period of one year unless either party to the
employment agreement gives written notice to the other of its intent to
terminate the employment agreement not less than 30 days before expiration of
the employment agreement's initial term, and that if the employee's employment
is terminated by us without cause or if such employee terminates employment with
us for good reason, all of such employee's options granted under any of our
option plans will immediately vest and the exercise period for these options
will be extended for an additional two year period.
All of the employment agreements:
- impose restrictions relating to the disclosure of confidential information
during the term of the agreement and for periods of up to two years
thereafter,
- prohibit the employee during the term of the agreement from competing with
InterPacket, and
- prohibit the employee from soliciting any customer or supplier of
InterPacket during the term of the agreement and for periods of time
ranging from one to six months thereafter.
In the event of a change of control, all of the unvested options granted to
Jonathan Gans, Peter Zimble, Julie Spira and Timothy Sylvester and all unvested
options granted to Ken Halloway and Allen Sciarillo upon their respective dates
of hire under the 1998 Stock Option Plan will immediately vest and will be
exercisable for a period of two years from the date of the change of control.
Furthermore, if we are acquired by another company and if Messrs. Halloway's or
Sciarillo's employment with the acquiror is terminated without cause or for good
reason within 18 months of the acquisition or if the acquiring company does not
grant substitute or replacement options to Messrs. Halloway or Sciarillo, then
all other unvested options granted to Messrs. Halloway or Sciarillo under the
1998 Stock Option Plan after their respective dates of hire will vest and will
be exercisable for a period of two years from the date of the change of control.
EXECUTIVE COMPENSATION
The following table sets forth the compensation received for services
rendered to InterPacket by our Chief Executive Officer and all other executive
officers whose salary and bonus exceeded $100,000 for the year ended
December 31, 1999.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------------ -------------------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)
- --------------------------- -------- ------------------------- -------- --------------- -------------------------
<S> <C> <C> <C> <C> <C>
Jonathan L. Gans ........ 1999 221,267 100,000 -- 660,000
Chief Executive Officer
and President(1)
Peter S. Zimble ......... 1999 136,041 50,000 -- 242,000
Executive Vice
President(2)
Julie M. Spira .......... 1999 241,225 60,000 11,310(3) 132,000
Executive Vice
President--Sales and
Marketing
Kenneth R. Halloway ..... 1999 81,458 20,000 -- 132,000
Senior Vice President--
Business Development
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION($)
- --------------------------- -------------------------
<S> <C>
Jonathan L. Gans ........ --
Chief Executive Officer
and President(1)
Peter S. Zimble ......... --
Executive Vice
President(2)
Julie M. Spira .......... --
Executive Vice
President--Sales and
Marketing
Kenneth R. Halloway ..... --
Senior Vice President--
Business Development
</TABLE>
- -------------------
(1) Mr. Gans, who became President in February 2000, did not serve as President
during 1999.
(2) Mr. Zimble served as President during 1999 and became Executive Vice
President in February 2000.
(3) Includes commission compensation paid to Ms. Spira.
OPTION GRANTS
The following table provides summary information regarding stock options
granted during the year ended December 31, 1999 to our Chief Executive Officer
and all other executive officers whose salary and bonus exceeded $100,000 for
the year ended December 31, 1999. We granted options to purchase an aggregate of
4,379,650 shares to some of our directors, officers and employees under our 1998
Stock Option Plan and 1999 Director Stock Option Plan during 1999. See "Option
Plans." 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 stock options that expire in March 2009 vest and become exercisable
over a period of three years. The stock options that expire in December 2009
vest and become exercisable over a period of four years. The potential
realizable value amount set forth in the table is calculated assuming the
options appreciate at the assumed offering price of $11.00 per share for the
entire term of the option and that the option is exercised at the exercise price
and sold on the last day of its term at the appreciated price. All options
listed have a term of ten years. Stock price appreciation of 5% and 10% is
assumed pursuant to the rules of the Securities and Exchange Commission. There
can be no assurance that the actual stock price will appreciate over the
ten-year option term at the assumed 5% or 10% levels or at all. Unless the
market price of our common stock appreciates over the option term, no value will
be realized from the option grants made to the named executive officers. In
December 1999, Mr. Gans was granted an option to purchase 220,000 shares of our
common stock at an exercise price equal to the initial public offering share
price. The potential realizable value of this option grant has also been
calculated based on an assumed offering price of $11 per share.
48
<PAGE>
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------ POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED EXERCISE TERM
OPTIONS IN PRICE EXPIRATION --------------------------
NAME GRANTED(#) 1999(%) ($/SHARE) DATE 5% 10%
- ---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jonathan L. Gans.............. 220,000 5.0 1.02 03/01/09 $3,717,525 $6,052,457
220,000 5.0 2.27 12/16/09 3,442,525 5,777,457
220,000 5.0 11.00 12/16/09 1,521,925 3,856,857
Peter S. Zimble............... 132,000 3.0 1.02 03/01/09 2,230,515 3,631,474
110,000 2.5 2.27 12/16/09 1,721,262 2,888,728
Julie M. Spira................ 55,000 1.3 1.02 03/01/09 929,381 1,513,114
77,000 1.8 2.27 12/16/09 1,204,884 2,022,110
Kenneth R. Halloway........... 22,000 0.5 1.02 3/01/09 371,752 605,245
110,000 2.5 2.27 12/16/09 1,721,262 2,888,728
</TABLE>
OPTION EXERCISES AND HOLDINGS
The following table provides summary information as of December 31, 1999
concerning the shares of common stock represented by outstanding stock options
held by our Chief Executive Officer and all other executive officers whose
salary and bonus exceeded $100,000 for the year ended December 31, 1999. Except
for Mr. Halloway, no options were exercised by the named executive officers
during 1999. In December 1999, Mr. Halloway exercised options to purchase 8,800
shares at an exercise price of $0.27 per share. The value of unexercised
in-the-money options is based on an assumed offering price of $11 per share for
our common stock.
1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999
------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jonathan L. Gans....................... 220,000 880,000 $2,345,000 $6,435,000
Peter S. Zimble........................ 102,667 359,332 1,091,000 3,511,000
Julie M. Spira......................... 183,334 278,665 1,962,500 2,775,750
Kenneth R. Halloway.................... 35,200 220,000 371,700 2,112,500
</TABLE>
OPTION PLANS
1998 STOCK OPTION PLAN. In January 1998, we adopted our 1998 Stock Option
Plan and in 2000 we amended and restated the 1998 plan. We have reserved a total
of 10,120,000 shares of common stock for issuance under the plan. As of
March 27, 2000, options to purchase a total of 7,405,750 shares of common stock,
with a weighted average exercise price of $2.13, had been granted, of which
909,691 have been canceled, and 511,896 have been exercised. If an outstanding
option expires or terminates unexercised or in the event that any shares of
common stock acquired pursuant to the plan are reacquired by us, then the shares
subject to that option or shares that are reacquired by us will again be
available for issuance under the 1998 plan.
49
<PAGE>
The 1998 plan provides for the granting of incentive stock options and
nonqualified stock options to officers, key employees and consultants of
InterPacket or any of its subsidiaries and members of our board of directors.
The 1998 plan will terminate when all shares which may be issued under it have
been issued; however, our board of directors may terminate it earlier. Each
option granted under the 1998 plan will terminate as determined by the
compensation committee or our board of directors at the time of its grant, but
no later than ten years from the date the option is granted, subject to earlier
termination in the case of the termination of the grantee's employment or other
relationship with us.
The compensation committee or our board of directors administers the 1998
plan and determines dates on which options are granted and the terms and
conditions of the options granted, consistent with the 1998 plan, including the
number of shares subject to an option, the exercise price, and the term and
exercisability of the options. In addition, the committee may amend the 1998
plan as it deems advisable, so long as any amendment does not adversely affect
any outstanding options without the consent of the optionee.
Generally, the options are nontransferable and vest based on a chronological
vesting schedule. Payment of the purchase price of options may be made in cash
or other consideration as determined by the committee.
In connection with a change in control of our company, if outstanding
options are substituted by our acquiror, then 50% of the unvested shares of each
optionholder will accelerate and vest if the optionholder's employment is
terminated other than for cause. Alternatively, if our acquiror does not offer
substitute options to optionholders, then 50% of the unvested shares of each
optionholder will accelerate and vest on the consummation of the change in
control.
1999 DIRECTOR STOCK OPTION PLAN. In 1999 we adopted our 1999 Director Stock
Option Plan and in 2000 we amended and restated this 1999 plan. We have reserved
a total of 1,210,000 shares of common stock for issuance under the 1999 plan. As
of March 27, 2000, options to purchase 979,000 shares of common stock, with a
weighted average exercise price of $3.54 had been granted. None of these options
have been exercised.
The 1999 plan provides for the granting of options to non-employee directors
of InterPacket. The 1999 plan will terminate in June 2009, unless our board of
directors terminates it earlier. Each option granted under the 1999 plan will
terminate ten years from the date the option is granted, subject to earlier
termination upon the termination of the grantee's term as director.
The board of directors, the Chairman of the Board or an individual
designated by the board of directors or the Chairman may be responsible for its
administration. Currently, our board of directors administers the 1999 plan.
Each non-employee director who was a member of the board of directors on the
date the 1999 plan became effective in June 1999 was granted options to purchase
22,000 shares of common stock. Additionally, each non-employee director who was
or became a member of the board of directors on or after January 26, 2000, the
date the 1999 plan was amended and restated, received an option to purchase
165,000 shares of common stock. Additional grants of options may be made to
non-employee directors at any time under the 1999 plan. The exercise price of an
option shall equal the fair market value of our common stock on the date of
grant. Except as may be set forth in the option agreement between the
non-employee director and us or as otherwise determined by the plan
administrator, the options vest and become exercisable pro rata in equal annual
installments over the three year period commencing on the first anniversary of
the date of grant, provided that the individual has remained in continuous
service as a director of InterPacket or one of its subsidiaries for the 12
months prior to each such anniversary and is a non-employee director on the
applicable anniversary date. The options to purchase shares of common stock
granted in June 1999 are subject to a one year vesting schedule, provided that
the directors who received such options continue to serve as members of the
board of directors through that period. The options are generally
nontransferable but may be transferred to family members or a trust established
for the benefit of the director or such director's family members
50
<PAGE>
with the approval of the administrator of this plan and payment of the exercise
price may be made in cash or other consideration. In addition, the board of
directors may amend the 1999 plan as it deems advisable, so long as any
amendment does not adversely affect any outstanding options without the consent
of the optionee. In the event of a change of control, dissolution or
liquidation, each outstanding option shall vest and become exercisable.
RECENT ISSUANCES OF STOCK OPTIONS
From January 1, 2000 through March 27, 2000, we granted to some of our
employees and directors options to purchase a total of 1,312,300 shares of
common stock at an exercise price of $2.27 per share, options to purchase
262,900 shares of common stock at an exercise price of $3.64 per share and
options to purchase 537,900 shares of common stock at an exercise price of $6.82
per share.
INDEMNIFICATION AND LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
Our bylaws provide that we will indemnify our directors and officers and may
indemnify our other employees and agents to the fullest extent permitted by law,
except for proceedings initiated by these persons without authorization from our
board of directors. We have entered into indemnification agreements providing
for indemnification to the fullest extent permitted by law with each of our
directors and executive officers.
In addition, our certificate of incorporation provides that our directors
will not be personally liable to us or our stockholders for monetary damages for
any breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derives an improper personal
benefit.
Our charter documents also provide that if Delaware law is amended further
eliminating or limiting the personal liability of directors, then the liability
of a director shall be eliminated or limited to the fullest extent permitted by
the amended Delaware law. These provisions do not affect a director's
responsibilities under any other law, including the federal securities laws or
state or federal environmental laws.
51
<PAGE>
CERTAIN TRANSACTIONS
SALES OF SECURITIES
Since January 1997, we have issued and sold the following securities to the
following related parties:
In June 1997, we issued and sold 3,704,800 shares of our common stock to
Peter Zimble for a total purchase price of $70,000. Mr. Zimble paid us $35,000
in cash for these shares and borrowed the $35,000 balance from us. No interest
is being paid on the outstanding balance and InterPacket can require Mr. Zimble
to repay the outstanding balance at any time.
In April 1999, we issued and sold a total of 4,419,500 shares of our common
stock at $1.02 per share. The following table lists the number of shares of
common stock purchased in this financing by our officers, directors and greater
than 5% stockholders and the value of the shares based on an assumed initial
public offering price of $11 per share.
<TABLE>
<CAPTION>
VALUE BASED ON ASSUMED
NUMBER $11 PER SHARE INITIAL
INVESTORS OF SHARES PUBLIC OFFERING PRICE
- --------- --------- ----------------------
<S> <C> <C>
Jeffrey C. Barbakow............................ 977,776 $10,755,536
Brett Messing.................................. 488,888 5,377,768
Jeffrey P. Sudikoff............................ 293,334 3,226,674
Jonathan L. Gans............................... 146,665 1,613,315
James E. Kolsrud............................... 110,000 1,210,000
Julie M. Spira................................. 48,888 537,768
Brent Cohen(1)................................. 48,888 537,768
Kenneth R. Halloway............................ 24,442 268,862
Timothy F. Sylvester........................... 9,776 107,536
</TABLE>
- -------------------
(1) Represents shares of common stock held by June Investments, LLC. Mr. Cohen
is a managing member of June Investments.
In August 1999, Jeffrey Sudikoff exercised options to purchase 132,000
shares of common stock. An option to purchase 22,000 of these shares at $0.57
per share was granted to Mr. Sudikoff in September 1998 and an option to
purchase the remaining 110,000 shares at $1.02 per share was granted to
Mr. Sudikoff in March 1999. These options were granted under our 1998 plan and
were granted to him in his capacity as an officer and Chairman of the Board of
InterPacket, positions he held at that time. In June 1999, Mr. Sudikoff resigned
as a director and as Chairman of the Board and was replaced as an officer and
our board of directors accelerated the vesting of these options.
In September 1999, we issued and sold a total of 3,258,074 shares of our
common stock at $2.05 per share. The following table lists the number of shares
of common stock purchased in this financing by our
52
<PAGE>
officers, directors and greater than 5% stockholders and the value of the shares
based on an assumed initial public offering price of $11 per share.
<TABLE>
<CAPTION>
VALUE BASED ON ASSUMED
NUMBER $11 PER SHARE INITIAL
INVESTORS OF SHARES PUBLIC OFFERING PRICE
- --------- --------- ----------------------
<S> <C> <C>
Gotel Investments Ltd.......................... 594,000 $6,534,000
Norman J. Pattiz............................... 488,890 5,377,790
Jeffrey C. Barbakow............................ 488,888 5,377,768
Brett Messing.................................. 488,888 5,377,768
Jeffrey P. Sudikoff............................ 220,000 2,420,000
Julie M. Spira................................. 48,888 537,768
Jonathan L. Gans............................... 24,444 268,884
Kenneth R. Halloway............................ 12,221 134,431
Timothy F. Sylvester........................... 12,221 134,431
Allen J. Sciarillo............................. 11,000 121,000
</TABLE>
On November 12, 1999, we issued and sold an aggregate of 3,000,000 shares of
our preferred stock at $5.00 per share. All of these shares of preferred stock
will automatically convert into 6,600,000 shares of our common stock upon the
completion of this offering. We issued and sold the shares to the following
parties in the following amounts:
<TABLE>
<CAPTION>
VALUE BASED ON ASSUMED
$11 PER SHARE INITIAL
INVESTOR SHARES PURCHASED PUBLIC OFFERING PRICE
- -------- ---------------- ----------------------
<S> <C> <C>
Pequot Private Equity Fund II, L.P....... 1,800,000 $43,560,000
Intel Corporation........................ 800,000 19,360,000
BayStar Capital.......................... 200,000 4,840,000
Access Technology Partners, L.P.......... 160,000 3,872,000
Persons affiliated with Chase H&Q........ 40,000 968,000
</TABLE>
The preferred shares were sold under a purchase agreement containing customary
company and investor representations and warranties. The agreement also contains
customary covenants limiting our ability to take some actions and obligating us
to take others. These covenants will terminate upon the completion of the sale
of the common stock being offered by this prospectus. We agreed with the
investors to indemnify each other for any breach of any of the foregoing
provisions.
On November 12, 1999, we entered into an investor rights agreement under
which we extended registration rights to all of the purchasers of our preferred
stock and to, among others, Messrs. Gans, Zimble, Kolsrud, Barbakow and Pattiz
and Ms. Spira, who, along with the holders of preferred stock, hold a combined
total of 23,794,423 shares of our common stock, after giving effect to the
conversion of our outstanding shares of preferred stock. Under this agreement,
the holders of the preferred stock or the common stock issued upon their
conversion have certain limited rights of first offer on future sales of any
shares of our capital stock. For a description of the registration rights under
this agreement, see "Description of Capital Stock--Registration Rights."
On February 1, 2000, we issued and sold 132,000 shares of our common stock
to Timothy F. Sylvester. The purchase price for these shares was paid by
Mr. Sylvester in the form of a cash payment of $150,000 and the delivery of a
promissory note in the amount of $150,000. The note has a term of three years,
bears annual interest at the applicable rate under U.S. Treasury regulations, is
secured by the shares purchased and is otherwise full recourse against Mr.
Sylvester.
We believe that the transactions identified above that involved us were made
on terms no less favorable to us than we could have been obtained from
disinterested third parties.
53
<PAGE>
OTHER TRANSACTIONS
Since inception, we have provided traditional telecom services to STAR
Telecommunications, Inc. James E. Kolsrud, an executive officer, director and
greater than 5% stockholder of InterPacket, was also an Executive Vice President
of STAR. We received revenues from STAR of approximately $1.4 million in 1997,
$9.1 million in 1998 and $3.4 million in 1999. We purchased services from STAR
in the amount of approximately $21,000 in 1997, $641,000 in 1998 and $993,000 in
1999. During 1998, STAR paid us $75,000 as a one-time payment to obtain a lower
per-minute rate for a circuit to a particular country. We paid this amount to
another related party in order to buy-out a royalty interest in the revenues
generated from this circuit. We believe that these transactions were made on
terms no less favorable to us than we could have obtained from disinterested
third parties.
We lease our offices from KMK Capital Corp. under a lease that began on
January 1, 1999 and expires in December 2003. KMK Capital Corp. is the manager
of 1901 Main Street LLC, which is affiliated with Mr. Sudikoff. We currently
lease approximately 9,600 square feet for approximately $24,500 per month. This
rent increases 4% annually. We made total lease payments of $284,634 to KMK
Capital in 1999. We plan to relocate our offices to another office building in
Santa Monica during the second quarter of 2000. In 1997 and 1998, we leased our
offices at a different building, which was also managed by KMK Capital Corp.,
and made lease payments of $22,650 in 1997 and $71,096 in 1998. We believe that
these leases were made on terms no less favorable to us than we could have
obtained from disinterested third parties.
Mr. Sudikoff is one of our four founders and, until June 1999, he served as
the Chairman of our Board and as one of our officers. Mr. Sudikoff is a greater
than 5% stockholder of InterPacket. On February 19, 1999, Mr. Sudikoff pleaded
guilty to three violations of the federal securities laws relating to insider
trading and willfully failing to file a Statement of Changes in Beneficial
Ownership of Securities with the SEC in 1994 with respect to the securities of
another company. On December 3, 1999 he was sentenced to community confinement
for a period of one year and one day. Mr. Sudikoff also agreed to pay a fine of
$3 million in connection with these matters. On August 6, 1999, Mr. Sudikoff
agreed to settle the related civil action brought by the Securities and Exchange
Commission whereby he consented to a ban on serving as an officer or director of
a publicly traded issuer for 12 years, agreed not to violate the federal
securities laws in the future, agreed to disgorge $652,566, including interest,
and to pay a fine of $200,000.
On November 12, 1999, Mr. Sudikoff entered into a voting agreement and
irrevocable proxy with us under which he
- relinquished all voting rights on all of his shares of common stock;
- granted an irrevocable proxy on these shares to a voting committee
established by our board of directors currently composed of
Messrs. Barbakow, Lenihan and Cohen which, by resolution of our board, has
been directed to vote the shares in the same manner as those shares held
by our stockholders who are not our affiliates;
- agreed not to participate in our strategic planning, business or
operations in any manner; and
- agreed not to attend any of our board of directors meetings.
Under the agreement, Mr. Sudikoff retains dispositive powers with respect to
these shares. This agreement will terminate on the earlier of
- on November 1, 2004;
- transfer of Mr. Sudikoff's shares in accordance with the agreement;
- upon a change of control; and
54
<PAGE>
- when, following InterPacket's initial public offering, for a period of 180
days, Mr. Sudikoff's holdings constitute less than 2% of InterPacket's
voting stock.
Prior to our formation in August 1995, Mr. Sudikoff was the Chairman of the
Board and CEO of IDB. James Kolsrud, Julie Spira and Peter Zimble were employed
by IDB at that time. Peter Zimble is Mr. Sudikoff's first cousin.
We loaned Peter Zimble $42,280 in 1998. On June 1, 1999, we signed a note
agreement with Mr. Zimble for the balance of this loan, $34,000. Under the terms
of that note, Mr. Zimble agreed to pay us interest on the unpaid principal at
the rate of six percent per annum. The first interest payment was payable on
October 7, 1999 and the outstanding principal amount and all accrued and unpaid
interest is due on September 7, 2000.
In our April 1999 offering discussed above, we sold 97,777 shares of our
common stock to each of the Patricia E. Cohen Zimble Trust and Kenneth H.
Zimble. Patricia E. Cohen Zimble, the beneficiary of the trust, is Peter
Zimble's mother, and Kenneth H. Zimble is Peter Zimble's father.
On July 21, 1999, Brett and Marla Messing acquired an option to purchase
1,144,000 shares of common stock at a purchase price of $2.27 per share from
Gotel Investments Ltd. Gotel is a greater than 5% stockholder of InterPacket. As
this option is presently exercisable, Mr. Messing is also a greater than 5%
stockholder of ours. Mr. Messing is an affiliate of Riverhorse Investments,
which is owned by Mr. Sudikoff.
As of March 6, 2000, we entered into a consulting services agreement with
Peter Hirshberg in connection with his resignation as our Chairman of the Board.
Mr. Hirshberg had been serving as our Chairman of the Board on a full-time basis
since November 1999, for which we paid him an annual salary of $175,000. Under
this agreement, Mr. Hirshberg agreed to provide full-time consulting services to
us including consulting services related to marketing. Mr. Hirshberg will be
paid approximately $14,600 per month. The term of this agreement commenced as of
March 6, 2000 and continues through June 6, 2000, at which time Mr. Hirshberg
will become a part-time consultant for a period of at least four months.
Thereafter, Mr. Hirshberg's consulting agreement may be extended through
June 6, 2003 with the mutual agreement of both parties. This agreement prohibits
Mr. Hirshberg from disclosing confidential information, competing with us or
soliciting our employees, customers and suppliers for limited periods of time.
As of March 6, 2000, we also entered into a separation agreement and mutual
release with Mr. Hirshberg. Under this agreement, Mr. Hirshberg relinquished his
right to purchase 660,000 shares pursuant to stock options and agreed to a new
vesting schedule with respect to certain other options that he holds. Under this
new vesting schedule, options to purchase 220,000 shares are immediately
exercisable, options to purchase 220,000 shares vest on June 6, 2000, if he has
performed under the consulting agreement and options to purchase 26,400 shares
will vest on the commencement of the extension of the consulting agreement
described above. Additionally, an option to purchase 193,600 shares will be
granted to Mr. Hirshberg and will vest monthly from October 2000 through June
2003 if he and InterPacket agree to extend his consulting agreement beyond
October 2000.
We have entered into indemnification agreements with each of our directors
and executive officers under which we agree to indemnify these individuals to
the fullest extent permitted by Delaware law. We have entered into employment
agreements with three of our executive officers. We also have two stock option
plans under which we have granted and will grant options to purchase our common
stock to our officers and directors. See "Management--Employment Agreements,"
"--Option Plans" and "--Indemnification and Limitation of Liability of Directors
and Officers" for a more detailed description of these matters.
We intend that all future transactions between us and our officers,
directors, principal stockholders and other affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested outside directors on the board of directors, and will be on terms
no less favorable to us than could be obtained from disinterested third parties.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of March 27, 2000, and as adjusted
to reflect the sale of the common stock offered in this offering, the
simultaneous conversion of all outstanding shares of our preferred stock into
common stock and our 2.2 for 1 stock split by:
- each stockholder known by us to own beneficially more than 5% of our
common stock;
- each director;
- our Chief Executive Officer and all other executive officers whose salary
and bonuses exceeded $100,000 for the year ended December 31, 1999; and
- all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership held by that
person, shares of common stock subject to options held by that person that are
currently exercisable or will become exercisable within 60 days after March 27,
2000 are deemed outstanding, while these shares are not deemed outstanding for
computing percentage ownership of any other person. Unless otherwise indicated
in the footnotes below, the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. The address for those
individuals for which an address is not otherwise indicated is: c/o InterPacket
Networks, Inc., 1901 Main Street, 2nd Floor, Santa Monica, CA 90405. The
percentages of beneficial ownership assume no exercise of the underwriters'
over-allotment option.
<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK
SHARES OF BENEFICIALLY
COMMON STOCK OWNED
BENEFICIALLY -------------------
OWNED BEFORE AFTER
------------ -------- --------
<S> <C> <C> <C>
FIVE PERCENT STOCKHOLDERS
Pequot Private Equity Fund II, L.P. (1) .................... 3,960,000 11.7% 9.8%
500 Nyala Farm Road, Westport, CT 06880
Gotel Investments Ltd. (2) ................................. 2,794,000 8.2 6.9
c/o Walter Stresemann, 16 rue de la Pelisserie
1211 Geneva 3, Switzerland
Intel Corporation (3) ...................................... 1,760,000 5.2 4.4
2200 Mission College Boulevard
Santa Clara, CA 95052
Jeffrey P. Sudikoff (4) .................................... 2,845,334 8.4 7.0
P.O. Box 34127
Los Angeles, CA 90034
Brett Messing (5) .......................................... 2,121,776 6.3 5.3
1901 Main Street, Third Floor
Santa Monica, CA 90405
DIRECTORS AND EXECUTIVE OFFICERS
Jonathan L. Gans (6)........................................ 4,864,446 14.2 12.0
Norman J. Pattiz............................................ 488,890 1.4 1.2
James E. Kolsrud(7)......................................... 4,524,669 13.3 11.2
Peter S. Zimble (8)......................................... 4,546,667 13.4 11.2
Julie M. Spira (9).......................................... 519,450 1.5 1.3
Kenneth R. Halloway (10).................................... 87,997 * *
Jeffrey C. Barbakow (11).................................... 1,466,665 4.3 3.6
Lawrence D. Lenihan, Jr. (12)............................... 3,960,000 11.7 9.8
Brent N. Cohen (13)......................................... 48,888 * *
All directors and executive officers as a group 20,650,672 60.9% 51.1%
(12 persons) (14).........................................
</TABLE>
56
<PAGE>
(1) Represents shares issuable upon conversion of 1,800,000 shares of preferred
stock upon completion of this offering. Pequot Private Equity Fund II, L.P.
is managed by Pequot Capital Management, Inc. Pequot Capital Management,
Inc. holds voting and dispositive power for all shares of preferred stock
held by Pequot Private Equity Fund II, L.P. The individuals who currently
possess this power on behalf of Pequot Capital Management, Inc. are Arthur
J. Somberg, Lawrence D. Lenihan, Jr. and Gerald A. Poch.
(2) The board of directors of Gotel holds voting and dispositive power for all
shares of common stock held by Gotel. Gotel's board of directors is
compromised of Walter Stresemann and Gregory Elias. Gotel has granted Brett
Messing a presently exercisable option to acquire 1,144,000 shares of
common stock that it owns. See footnote 5.
(3) Represents shares issuable upon conversion of 800,000 shares of preferred
stock upon completion of this offering.
(4) Under the terms of his voting agreement, Mr. Sudikoff relinquished all
voting power with respect to these shares via an irrevocable proxy granted
to a committee of independent directors of InterPacket under this
agreement, but continues to have sole dispositive power over these shares.
This voting agreement expires under certain circumstances. See "Certain
Transactions--Other Transactions."
(5) Includes 1,144,000 shares that may be acquired upon exercise of the option
from Gotel. See footnote 2.
(6) Includes 293,337 shares of common stock subject to options that are
exercisable or will become exercisable within 60 days of March 27, 2000.
(7) Includes 14,669 shares of common stock subject to options that are
exercisable or will become exercisable within 60 days of March 27, 2000.
(8) Includes 146,667 shares of common stock subject to options that are
exercisable or will become exercisable within 60 days of March 27, 2000.
(9) Includes 18,334 shares of common stock subject to options that are
exercisable or will become exercisable within 60 days of March 27, 2000.
(10) Includes 7,334 shares of common stock subject to options that are
exercisable or will become exercisable within 60 days of March 27, 2000.
(11) Does not include 2,845,334 shares owned by Mr. Sudikoff over which
Mr. Barbakow shares voting power as a member of the voting committee
pursuant to a voting agreement to which Mr. Sudikoff is a party. See
footnote 4 and "Certain Transactions--Other Transactions."
(12) Represents shares issuable upon conversion of 1,800,000 shares of
preferred stock upon completion of this offering held by Pequot Private
Equity Fund II, L.P. which is controlled by Pequot Capital Management,
Inc. See footnote 1. Mr. Lenihan is a managing director of Pequot Capital
Management, Inc. Mr. Lenihan disclaims beneficial ownership of the shares
attributed to Pequot Capital Management, Inc. Does not include
2,845,334 shares owned by Mr. Sudikoff over which Mr. Lenihan shares
voting power as a member of the voting committee pursuant to a voting
agreement to which Mr. Sudikoff is a party. See footnote 4 and "Certain
Transactions--Other Transactions."
(13) Represents shares of common stock held by June Investments, LLC.
Mr. Cohen is a managing member of June Investments. Does not include
2,845,334 shares owned by Mr. Sudikoff over which Mr. Cohen shares voting
power as a member of the voting committee pursuant to a voting agreement
to which Mr. Sudikoff is a party. See footnote 4 and "Certain
Transactions--Other Transactions."
(14) Includes the shares described in notes 6 through 13 above.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 250,000,000 shares of common stock, $.001 par
value, and 3,000,000 shares of preferred stock, $.001 par value.
COMMON STOCK
We currently have approximately 70 holders of our common stock. The holders
of common stock are entitled to one vote per share on all matters to be voted
upon by stockholders. After the holders of preferred stock, holders of common
stock are entitled to receive ratably such dividends as may be declared by our
board of directors out of funds legally available for that purpose. In the event
of our liquidation, dissolution or winding up, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and liquidation preferences of outstanding shares of preferred stock. The common
stock has no preemptive, conversion, subscription or other similar rights. All
outstanding shares of common stock are fully paid and non-assessable, and the
shares of common stock to be issued upon completion of this offering will be
fully paid and non-assessable.
PREFERRED STOCK
We currently have nine holders of our preferred stock. Upon the closing of
this offering, all outstanding shares of preferred stock will be converted into
6,600,000 shares of common stock. See Note 8 of notes to our consolidated
financial statements for a description of the currently outstanding preferred
stock. Following this conversion, our certificate of incorporation will be
amended and restated to delete all references to these shares of preferred
stock. Under the restated certificate of incorporation, our board of directors
has the authority, without further action by our stockholders, to issue up to
3,000,000 shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, qualifications and restrictions granted to or imposed
upon the preferred stock, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, liquidation preference and sinking fund
terms, any or all of which may be greater than the rights of the common stock.
The issuance of preferred stock could negatively affect the voting power of
holders of common stock and reduce the likelihood that common stockholders will
receive dividend payments and payments upon liquidation. The issuance could have
the effect of decreasing the market price of the common stock. The issuance of
preferred stock also could have the effect of delaying, deterring or preventing
a change in our control.
REGISTRATION RIGHTS
Under an investor rights agreement dated as of November 12, 1999, some of
our officers and directors and several of our investors, holding an aggregate of
23,794,423 shares of our common stock assuming conversion of our preferred
stock, have registration rights pertaining to the securities they hold. If we
propose to register any of our securities under the Securities Act for our own
account or the account of any of our stockholders other than these holders of
registrable shares, holders of these registrable shares are entitled to notice
of the registration and entitled to include registrable shares in that offering,
provided that the underwriters of that offering have the right to limit the
number of shares included in the registration. In addition, commencing 180 days
after the effective date of the registration statement of which this prospectus
is a part, we may be required to prepare and file a registration statement under
the Securities Act at our expense if requested to do so by the holders of at
least 30% of the shares of common stock issued upon the conversion of the
preferred stock, provided the anticipated total offering price will exceed
$5,000,000, excluding underwriting discounts and commissions. We are required to
use our best efforts to complete the registration. We are not obligated to
undertake more than two stockholder-initiated registrations. Further, under some
conditions, holders of the shares of common stock issued upon the conversion of
the preferred stock may require us to file registration statements on Form S-3
with respect
58
<PAGE>
to these securities, though we are not required to complete any registrations on
Form S-3 unless the total price to the public is $1,000,000 or more.
We are required to bear substantially all costs incurred in these
registrations, other than underwriting discounts and commissions. The
registration rights described above could result in substantial future expenses
for us and adversely affect any future equity or debt offerings by us.
ANTI-TAKEOVER PROVISIONS
DELAWARE LAW
We are governed by the provisions of Section 203 of the Delaware Law. In
general, Section 203 prohibits a public Delaware corporation from engaging in a
business combination, including mergers, asset sales or other transactions
financially benefiting the stockholder, with an interested stockholder, unless
the business combination is approved in a prescribed manner. An interested
stockholder is a person who, together with affiliates and associates, has owned
within three years 15% or more of the corporation's voting stock. The statute
could have the effect of delaying, deferring or preventing a change in control
of our company.
CHARTER PROVISIONS
Upon the completion of this offering, our certificate of incorporation will
authorize our board of directors to issue preferred stock with rights senior to
those of common stock without stockholder approval. This provision could delay
or discourage some transactions involving an actual or potential change in
control of us or our management, including transactions in which stockholders
might otherwise receive a premium for their shares over then current prices, and
may limit the ability of stockholders to remove current management or approve
transactions that stockholders may deem to be in their best interests and could
adversely affect the price of our common stock.
THE NASDAQ STOCK MARKET'S NATIONAL MARKET
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the trading symbol IPKT.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is U.S. Stock Transfer
Corporation. U.S. Stock's mailing address is 1815 South Brand Boulevard,
Glendale, CA 91204, and its telephone number is (818) 502-1404.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market
could lower prevailing market prices. As described below, substantially all
currently outstanding shares will not be available for sale immediately after
this offering. Sales of substantial amounts of our common stock in the public
market after the restrictions lapse could harm the prevailing market price and
impair our ability to raise equity capital in the future.
Upon completion of the offering, we will have approximately 40,400,333
outstanding shares of common stock. We will also have options outstanding to
purchase approximately 6,963,163 shares of common stock, of which 838,671 are
vested and exercisable as of March 27, 2000. Of the shares then outstanding, the
6,500,000 shares to be sold in this offering, plus any shares issued upon
exercise of the underwriters' over-allotment option, will be freely tradable
without restriction under the Securities Act, unless purchased by our affiliates
as that term is defined in Rule 144 under the Securities Act. In general,
affiliates include officers, directors or greater than 10% stockholders.
The remaining 33,900,333 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of these shares for sale, could adversely affect the market
price of the common stock.
Our directors, officers and significant securityholders will enter into
lock-up agreements in connection with this offering generally providing that
they will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of our common stock or any securities exercisable for or
convertible into our common stock owned by them for a period of 180 days after
the date of this prospectus without the prior written consent of Chase
Securities Inc. and Lehman Brothers. Taking into account the lock-up agreements,
and assuming Chase Securities Inc. and Lehman Brothers do not release
securityholders from these agreements, the number of shares that will be
available for sale in the public market under the provisions of Rule 144, 144(k)
and 701 will be:
- Beginning on the effective date of this prospectus, only the shares sold
in this offering will be immediately available for sale in the public
market.
- Beginning 180 days after the effective date of this prospectus,
approximately 27,021,670 shares will be eligible for sale.
In general, under Rule 144, after the expiration of the lock-up agreements,
a person who has beneficially owned restricted securities 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:
- one percent of the number of shares of common stock outstanding at that
time, which will equal approximately 404,000 shares immediately after the
offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice and the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at any
time during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell these
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701 permits our employees, officers, directors or consultants who
purchased shares pursuant to a written compensatory plan or contract to resell
these shares in reliance upon Rule 144 but without compliance with specific
restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares
under
60
<PAGE>
Rule 144 without complying with the holding period requirement and that
non-affiliates may sell these shares in reliance on Rule 144 without complying
with the holding period, public information, volume limitation or notice
provisions of Rule 144.
Following the closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act covering shares of common stock
subject to outstanding options and reserved for issuance under our 1998 Stock
Option Plan and 1999 Director Stock Option Plan. Based on the number of shares
subject to outstanding options as of March 27, 2000 and currently reserved for
issuance under these plans, this registration statement would cover
approximately 10,766,800 shares. This registration statement will automatically
become effective upon filing. Accordingly, subject to the exercise of these
options, shares registered under this registration statement will be available
for sale in the open market immediately after the expiration of the 180 day
lock-up period.
61
<PAGE>
UNDERWRITING
Chase Securities Inc., Lehman Brothers and CIBC World Markets Corp. are the
representatives of the underwriters. Subject to the terms and conditions of the
underwriting agreement, the underwriters named below, through their
representatives, have severally agreed to purchase from us, and we have agreed
to sell them, the number of shares of common stock listed opposite the name of
each underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Chase Securities Inc........................................
Lehman Brothers.............................................
CIBC World Markets Corp.....................................
---------
Total................................................... 6,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain certificates,
opinions and letters from us, our counsel and the independent auditors. The
nature of the underwriters' obligation is such that they are committed to
purchase all of the shares of common stock offered by this prospectus if they
purchase any shares.
The following table summarizes the per share and total underwriting
discounts and commissions we will pay to the underwriters in connection with
this offering:
<TABLE>
<CAPTION>
TOTAL
------------------------------------------
PER WITHOUT WITH
SHARE OVER-ALLOTMENT OVER-ALLOTMENT
-------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions.....
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $1 million.
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price listed on the cover page of this
prospectus and to certain dealers at this price less a concession not in excess
of $ per share under the public offering price. The underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to certain other dealers. After the initial public offering of the
shares, the offering price and other selling terms may be changed by the
representatives of underwriters.
We have granted to the underwriters an option, exercisable no later than
30 days after the date of this prospectus, to purchase up to 975,000 additional
shares of common stock at the initial public offering price, less the
underwriting discounts and commissions listed on the cover page of this
prospectus. To the extent that the underwriters exercise this option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares as the number of shares of common stock to
be purchased by it shown in the table above bears to the total number of shares
of common stock offered in this offering. We will be obligated to sell shares to
the underwriters to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of common stock offered by us.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
62
<PAGE>
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect of these liabilities.
Substantially all of our stockholders, including all of our executive
officers and directors, have agreed that they will not, without the prior
written consent of Chase Securities Inc. and Lehman Brothers, offer, sell, or
otherwise dispose of any shares of common stock, options or warrants to acquire
shares of common stock or securities exchangeable for or convertible into shares
of common stock owned by them for a period of 180 days following the date of
this prospectus. We have agreed that we will not, without the prior written
consent of Chase Securities Inc. and Lehman Brothers offer, sell or otherwise
dispose of any shares of common stock, options or warrants to acquire shares of
common stock or securities exchangeable for or convertible into shares of common
stock for a period of 180 days following the date of this prospectus, except
that we may issue shares upon the exercise of options granted prior to the date
hereof, and may grant additional options under our stock option plans. Without
the prior written consent of Chase Securities Inc. and Lehman Brothers, any
additional options granted shall not be exercisable during this 180-day period.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
this offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with this
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on The
Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
Prior to the offering, there has been no public market for our common stock.
The initial public offering price for the common stock will be determined by
negotiation among us and the representatives. Among the factors to be considered
in determining the initial public offering price will be the prevailing market
and economic conditions, our revenues and earnings, market valuations of other
companies engaged in activities similar to our business operations, estimates of
our business potential and prospects, the present state of our business
operations, our management and other factors deemed relevant. The estimated
initial public offering price range set forth on the cover of this preliminary
prospectus is subject to change as a result of market conditions or other
factors.
At our request, the underwriters have reserved for sale at the initial
public offering price, 390,000 shares of common stock offered by this prospectus
for certain parties, including our directors, officers, employees, business
associates and related persons. There can be no assurance that any of the
reserved shares will be purchased. The number of shares of common stock
available for sale to the general public in this offering will be reduced to the
extent these individuals purchase the reserved shares. Any reserved shares which
are not so purchased will be offered by the underwriters to the general public
on the same basis as other shares offered by this prospectus.
In connection with this offering, certain underwriters and selling group
members, if any, who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.
63
<PAGE>
Chase Securities Inc. and persons associated with Chase Securities Inc.
beneficially own 1,366,642 shares of our common stock.
A person associated with CIBC World Markets Corp. beneficially owns
78,218 shares of our common stock.
LEGAL MATTERS
The validity of the common stock offered under this prospectus will be
passed upon for InterPacket by Riordan & McKinzie, A Professional Law
Corporation, Los Angeles, California. Certain principals of Riordan & McKinzie
own an aggregate of 417,995 shares of InterPacket's common stock. Certain legal
matters raised in connection with this offering will be passed upon for the
underwriters by Gibson, Dunn & Crutcher LLP, San Francisco, California.
EXPERTS
The consolidated financial statements and schedule of InterPacket
Networks, Inc. and Subsidiary 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 and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered in this offering. This prospectus does not contain all of
the information contained in the registration statement and the exhibits and
schedule filed with the registration statement. For further information with
respect to InterPacket and the common stock offered in this offering, we refer
you to the registration statement and the exhibits and schedules filed as part
of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document referred to are
not necessarily complete. If a contract or document has been filed as an exhibit
to the registration statement we refer you to the copy of the contract or
document that we have filed as an exhibit to the registration statement.
Our registration statement, including exhibits and schedules attached to our
registration statement, may be inspected without charge at the Securities and
Exchange Commission's public reference facilities in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission'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. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of the public reference facilities. You may also obtain copies of all or any
part of our registration statement from such offices after payment of fees
prescribed by the Securities and Exchange Commission. The Securities and
Exchange Commission maintains a worldwide website that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at
HTTP://WWW.SEC.GOV.
64
<PAGE>
INTERPACKET NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Income for the years ended December 31,
1997, 1998 and 1999....................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE>
After the stock split discussed in Note 9 to InterPacket Networks, Inc.'s
consolidated financial statements is effective, we expect to be in a position to
render the following audit report.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 11, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InterPacket Networks, Inc.:
We have audited the accompanying consolidated balance sheets of InterPacket
Networks, Inc. (a Delaware corporation) and subsidiary as of December 31, 1998
and 1999, and the related consolidated statements of operations, stockholders'
equity (deficit) and comprehensive income and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InterPacket Networks, Inc.
and subsidiary as of December 31, 1998 and 1999, and the results of their
operations and their 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.
F-2
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
ASSETS
<TABLE>
<CAPTION>
PRO-FORMA
(SEE NOTE 8)
1998 1999 1999
---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash.................................................. $ 1,855 $15,948,294 $15,948,294
Accounts receivable, net of allowance of
$16,600 and $140,200 at December 31, 1998
and 1999, respectively.............................. 369,742 1,333,914 1,333,914
Accounts receivable from related parties,
net of allowance of $63,400 at
December 31, 1998................................... 1,308,844 206,274 206,274
Inventory............................................. 161,047 1,063,090 1,063,090
Advances to stockholder and employees................. 42,280 68,485 68,485
Deposits.............................................. 116,778 5,000 5,000
Prepaid expenses and other assets..................... 64,263 161,396 161,396
---------- ----------- -----------
Total current assets............................ 2,064,809 18,786,453 18,786,453
---------- ----------- -----------
Property and Equipment:
Operating equipment................................... 681,462 2,319,687 2,319,687
Computer equipment.................................... 90,367 442,726 442,726
Furniture and fixtures................................ 9,124 76,836 76,836
Satellite transponders under capital leases........... -- 41,456,658 41,456,658
---------- ----------- -----------
780,953 44,295,907 44,295,907
Less--Accumulated depreciation........................ (98,929) (1,422,989) (1,422,989)
---------- ----------- -----------
682,024 42,872,918 42,872,918
---------- ----------- -----------
Deposits.............................................. 330,378 1,570,457 1,570,457
Deposits to related parties........................... -- 26,344 26,344
Intangible assets, net of amortization of $22,433..... -- 426,228 426,228
Other assets.......................................... -- 608,179 608,179
---------- ----------- -----------
Total assets.................................... $3,077,211 $64,290,579 $64,290,579
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PRO-FORMA
(SEE NOTE 8)
1998 1999 1999
---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current Liabilities:
Bank overdraft............................................ $ 373,213 $ -- $ --
Accounts payable.......................................... 1,172,434 1,773,932 1,773,932
Accrued expenses.......................................... 931,807 1,804,938 1,804,938
Accounts payable and accrued expenses from related
parties................................................. 288,749 54,938 54,938
Deferred revenue.......................................... 681,671 1,831,711 1,831,711
Current portion of capital leases......................... -- 2,138,068 2,138,068
Customer deposits......................................... 352,657 751,835 751,835
Deposits from related party............................... 181,970 49,756 49,756
---------- ----------- -----------
Total current liabilities........................... 3,982,501 8,405,178 8,405,178
---------- ----------- -----------
Capital Leases of Satellite Transponders, net of Current
Portion................................................... -- 38,669,292 38,669,292
---------- ----------- -----------
Mandatorily Redeemable Preferred Stock--$.001 par value:
Authorized--3,000,000 shares
Issued and outstanding--3,000,000 shares at December 31,
1999.................................................... -- 14,823,800 --
---------- ----------- -----------
Commitments and Contingencies (Note 4)
Stockholders' Equity (Deficit):
Common stock--$.001 par value:
Authorized--50,000,000 shares
Issued and outstanding--18,757,895 and 26,826,573
shares at December 31, 1998 and 1999 and 33,426,573
in pro forma 1999..................................... 18,758 26,827 33,427
Additional paid-in capital................................ 347,498 45,109,986 59,927,186
Stockholder receivables................................... (35,158) (35,158) (35,158)
Deferred compensation..................................... -- (30,585,462) (30,585,462)
Other comprehensive income................................ -- 2,173 2,173
Deficit................................................... (1,236,388) (12,126,057) (12,126,057)
---------- ----------- -----------
Stockholders' equity (deficit)...................... (905,290) 2,392,309 17,216,109
---------- ----------- -----------
Total liabilities and stockholders' equity
(deficit)......................................... $3,077,211 $64,290,579 $64,290,579
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Network services..................................... $ 406,895 $ 2,283,701 $ 10,051,114
Revenue from related parties--network services....... 175,924 1,831,233 738,362
Revenue from related parties--traditional telecom
services........................................... 1,176,330 7,294,757 2,684,751
---------- ----------- ------------
Total revenue.................................. 1,759,149 11,409,691 13,474,227
Operating Expenses:
Cost of network services............................. 452,748 5,284,329 10,346,284
Cost of traditional telecom services................. 531,834 4,749,765 1,273,645
Cost from related parties............................ 21,246 777,724 993,292
Selling and marketing expenses (excluding non-cash
compensation of $101,118 in 1999).................. 131,714 828,120 2,396,857
General and administrative expenses (excluding
non-cash compensation of $2,387,287 in 1999)....... 429,435 1,017,567 4,297,178
General and administrative expenses
from related parties............................... 24,565 80,480 389,075
Non-cash compensation charges........................ -- -- 2,488,405
Depreciation and amortization........................ 9,390 87,569 1,346,493
---------- ----------- ------------
Total operating expenses....................... 1,600,932 12,825,554 23,531,229
---------- ----------- ------------
Income (Loss) from Operations.......................... 158,217 (1,415,863) (10,057,002)
Other Income (Expense):
Interest income...................................... 902 22,886 205,792
Interest expense..................................... (129) (110) (942,990)
Other................................................ -- (2,824) (94,669)
---------- ----------- ------------
773 19,952 (831,867)
---------- ----------- ------------
Income (Loss) before Provision for
Income Taxes......................................... 158,990 (1,395,911) (10,888,869)
Provision (Benefit) for Income Taxes................... 69,613 (68,013) 800
---------- ----------- ------------
Net Income (Loss)...................................... $ 89,377 $(1,327,898) $(10,889,669)
========== =========== ============
Basic and diluted income (loss) per common share....... $ 0.01 $ (0.07) $ (0.48)
========== =========== ============
Weighted average number of common shares............... 15,950,000 18,506,000 22,862,000
========== =========== ============
Pro forma basic and diluted loss per common share
(unaudited).......................................... $ (0.46)
============
Weighted average number of common shares used to
compute pro forma loss per common share
(unaudited).......................................... 23,767,000
============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK OTHER RETAINED
--------------------- ADDITIONAL STOCKHOLDER DEFERRED COMPREHENSIVE EARNINGS
SHARES AMOUNT PAID-IN CAPITAL RECEIVABLES COMPENSATION INCOME (DEFICIT)
---------- -------- --------------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, at December 31,
1996...................... 13,895,200 $13,895 $ (10,737) $ (158) $ -- $ -- $ 2,133
Issuance of common stock.... 3,924,800 3,925 71,075 (40,000) -- -- --
Stockholder contributions... -- -- 38,098 -- -- --
Net income.................. -- -- -- -- -- -- 89,377
---------- ------- ----------- -------- ------------ ------ ------------
Balance, at December 31,
1997...................... 17,820,000 17,820 98,436 (40,158) -- -- 91,510
Issuance of common stock.... 937,895 938 249,062 -- -- -- --
Repayment of stockholder
note...................... -- -- -- 5,000 -- -- --
Net loss.................... -- -- -- -- -- -- (1,327,898)
---------- ------- ----------- -------- ------------ ------ ------------
Balance, at December 31,
1998...................... 18,757,895 18,758 347,498 (35,158) -- -- (1,236,388)
Issuance of common stock.... 7,898,544 7,899 11,552,264 -- -- --
Compensation expense
relating to issuance of
common stock.............. -- -- 1,775,954 -- -- --
Exercise of stock options... 170,134 170 136,357 -- -- -- --
Compensation expense
relating to stock
options................... -- -- 31,297,913 -- (30,585,462) -- --
Comprehensive income:
Net loss.................. -- -- -- -- -- -- (10,889,669)
Cumulative translation
adjustment.............. -- -- -- -- -- 2,173 --
Comprehensive loss.......... -- -- -- -- -- -- --
---------- ------- ----------- -------- ------------ ------ ------------
Balance, at December 31,
1999...................... 26,826,573 $26,827 $45,109,986 $(35,158) $(30,585,462) $2,173 $(12,126,057)
========== ======= =========== ======== ============ ====== ============
<CAPTION>
TOTAL
------------
<S> <C>
Balance, at December 31,
1996...................... $ 5,133
Issuance of common stock.... 35,000
Stockholder contributions... 38,098
Net income.................. 89,377
------------
Balance, at December 31,
1997...................... 167,608
Issuance of common stock.... 250,000
Repayment of stockholder
note...................... 5,000
Net loss.................... (1,327,898)
------------
Balance, at December 31,
1998...................... (905,290)
Issuance of common stock.... 11,560,163
Compensation expense
relating to issuance of
common stock.............. 1,775,954
Exercise of stock options... 136,527
Compensation expense
relating to stock
options................... 712,451
Comprehensive income:
Net loss.................. (10,889,669)
Cumulative translation
adjustment.............. 2,173
------------
Comprehensive loss.......... (10,887,496)
------------
Balance, at December 31,
1999...................... $ 2,392,309
============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
--------- ----------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)......................................... $ 89,377 $(1,327,898) $(10,889,669)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Compensation expense relating to stock options.......... -- -- 712,451
Compensation expense relating to issuance of common
stock................................................. -- -- 1,775,954
Depreciation and amortization expense................... 9,390 87,569 1,346,493
Bad debt expense........................................ -- 80,000 183,574
Deferred income taxes................................... 68,813 (68,813) --
Decrease (increase) in assets, net of acquisition:
Accounts receivable................................... (61,032) (325,292) (1,119,207)
Accounts receivable from related parties.............. (804,352) (563,910) 1,102,570
Inventory............................................. -- (161,047) (902,043)
Advances to stockholder and employees................. -- (42,280) (26,205)
Deposits.............................................. -- (326,568) (1,266,423)
Prepaid expenses and other assets..................... (4,110) (180,741) 19,647
Increase (decrease) in liabilities, net of acquisition:
Bank overdraft........................................ 330,424 42,789 (373,213)
Accounts payable...................................... 79,451 1,092,983 601,498
Accrued expenses...................................... 154,908 776,899 810,577
Accounts payable and accrued expenses from related
parties............................................. 17,516 271,233 (233,811)
Deferred revenue...................................... 50,560 615,621 1,128,449
Deposits.............................................. 55,800 285,357 399,178
Deposits from related party........................... -- 181,970 (132,214)
--------- ----------- ------------
Net cash provided by (used in) operating
activities........................................ (13,255) 437,872 (6,862,394)
--------- ----------- ------------
Cash Flows from Investing Activities:
Capital expenditures...................................... (55,621) (691,017) (1,956,353)
Payment for acquisition................................... -- -- (500,000)
Other assets.............................................. -- -- (125,373)
--------- ----------- ------------
Net cash used in investing activities............... (55,621) (691,017) (2,581,726)
--------- ----------- ------------
Cash Flows from Financing Activities:
Issuance of common stock.................................. 66,760 250,000 11,696,690
Issuance of preferred stock............................... -- -- 14,823,800
Repayment of stockholder note............................. -- 5,000 --
Repayment of capital lease obligations.................... -- -- (649,298)
Initial public offering costs included in other assets.... -- -- (482,806)
--------- ----------- ------------
Net cash provided by financing activities........... 66,760 255,000 25,388,386
--------- ----------- ------------
Effect of exchange rate changes on cash..................... -- -- 2,173
Increase (decrease) in cash................................. (2,116) 1,855 15,946,439
Cash, beginning of period................................... 2,116 -- 1,855
--------- ----------- ------------
Cash, end of period......................................... $ -- $ 1,855 $ 15,948,294
========= =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. NATURE OF BUSINESS
InterPacket Networks, Inc. (the "Company" or "InterPacket") is a Delaware
corporation in the business of providing a satellite-based broadband Internet
network that delivers high-speed Internet services to international Internet
service providers and other businesses. The Company's proprietary network design
integrates the broadcast capabilities of satellites with Internet network
technologies to offer its international customers a scalable solution to the
contraints of the public Internet infrastructure. Effective December 1999, the
Company discontinued traditional telephony services to focus on its Internet
business.
On September 23, 1999, IPG Acquisition Inc. was incorporated in the State of
Delaware. On November 5, 1999, InterPacket Group, Inc. and IPG Acquisition Inc.
merged to become InterPacket Group, Inc., a Delaware corporation. On February
18, 2000, the Company changed its name to InterPacket Networks, Inc., which has
been retroactively reflected in the accompanying consolidated financial
statements.
In September 1998, the Company established InterPacket (UK) Limited, a
wholly owned subsidiary in the United Kingdom, to expand operations in Europe.
In November 1998, the Company entered into a joint venture with Internet
Promoters India Limited ("IPIL") to provide Internet services in India. The
Company owns 49 percent of the equity of IPIL and accounts for the investment
under the equity method. The remaining 51 percent is owned by an Indian company
with the name of Internet Promoters India Limited. IPIL has not yet generated
revenue and its operations through December 31, 1999 are immaterial.
On September 28, 1999, the Company completed the acquisition of certain
assets and technology from a subsidiary of Level 3 Communications Limited, for a
cash price of approximately $500,000 (see Note 10).
The Company faces risks normally associated with early stage enterprises
including the need to raise additional capital to fund future operations and
expansion. There can be no assurance that the Company will be successful in
raising the needed capital. Also, should the Company be successful in obtaining
capital, there can be no assurances that profitable operations can be achieved.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
InterPacket and its wholly-owned subsidiary. All material intercompany
transactions have been eliminated.
REVENUE RECOGNITION
The Company records revenue for Internet service during the month of service
and for long distance telecommunications sales at the time of customer usage.
Deferred revenue consists of advance billings for the following month's services
or prepayments from new customers not yet in service. Included in accounts
receivable and deferred revenue as of December 31, 1998 and 1999 are $409,475
and $794,217, respectively, of billed but unearned revenues.
Revenue from the sale of customer equipment for the years ended
December 31, 1997, 1998 and 1999 was $101,000, $150,000 and $1,051,000,
respectively, and is included in network services. Installation fees for this
equipment was immaterial during 1997 and 1998 and approximately $37,000 in 1999.
Revenue on equipment and installation is recognized when the customer is
activated.
F-8
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF SERVICES
Cost of services represent direct charges from vendors that the Company
incurs to deliver service to its customers. These include access fees, leasing
costs for satellite facilities, teleports, Internet connectivity and the
rate-per-minute charges from other carriers that terminate traffic on behalf of
the Company.
TRANSLATION OF FOREIGN CURRENCIES
Management determined that the functional currency of its foreign subsidiary
is the local currency. Balance sheets prepared in their functional currencies
are translated to the reporting currency, the United States dollar, at exchange
rates in effect at the end of the accounting period except for stockholders'
equity accounts which are translated at rates in effect when these balances were
originally recorded. Revenue and expense accounts are translated at a weighted
average of exchange rates during the period. The cumulative effect of
translation is included in other comprehensive income in the accompanying
consolidated balance sheets.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires that comprehensive income, which is the total of net income and all
other non-owner changes in equity, be displayed in the financial statements. The
adoption of SFAS No. 130 had no impact on total stockholders' equity. The
components of the Company's comprehensive income as presented in the
consolidated statements of stockholders' equity (deficit) and comprehensive
income include net income and unrealized gains and losses from currency
translation.
BASIC AND DILUTED INCOME (LOSS) PER SHARE
In accordance with SFAS No. 128, "Computation of Earnings Per Share," basic
earnings per share is computed by dividing the net earnings available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing the net earnings for the period by the weighted average number of
common and common equivalent shares outstanding during the period.
Common equivalent shares, consisting of incremental common shares issuable
upon the exercise of stock options and the conversion of the preferred shares
are excluded from the diluted earnings per share calculation as their effect is
anti-dilutive.
F-9
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A summary of the shares used to compute net income (loss) per share and pro
forma net loss per share is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares used to
compute basic net income (loss) per
common share............................ 15,950,000 18,506,000 22,862,000
Effect of dilutive securities............. -- -- --
---------- ---------- ----------
Weighted average common shares used to
compute diluted income (loss) per common
share................................... 15,950,000 18,506,000 22,862,000
========== ==========
Conversion of preferred stock............. 905,000
----------
Weighted average number of common shares
used to compute pro forma loss per
common share............................ 23,767,000
==========
</TABLE>
Pro forma loss per common share gives effect to the conversion of 3,000,000
shares of preferred stock into common stock upon the effectiveness of the
initial public offering.
INVENTORY
Inventory represents purchased communications equipment which the Company
resells to its customers. The inventory is carried at the lower of cost or
market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation of property and
equipment is computed using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Operating equipment.............................. 5 years
Computer equipment............................... 3 years
Furniture and fixtures........................... 5 years
Equipment under capital leases................... 11 to 13 years
</TABLE>
Replacements and betterments, renewals and extraordinary repairs that extend
the life of the asset are capitalized; other repairs and maintenance are
expensed. The cost and accumulated depreciation applicable to assets sold or
retired are removed from the accounts and any gain or loss on disposition is
recognized in other income or expense.
Included in the Company's balance sheets at December 31, 1998 and 1999 are
approximately $280,000 and $42.9 million, respectively, of equipment which is
located outside of the United States.
F-10
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPOSITS
Deposits represent payments made to satellite operators and long distance
providers to secure lower rates. These deposits are refunded or applied against
future services.
INTANGIBLE ASSETS
Intangible assets represent the excess of cost over the fair market value of
net tangible assets acquired and are amortized using the straight-line method
over a five-year period. The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
intangible assets might warrant revision or that the remaining balance of the
intangible assets and other long-lived assets may not be recoverable. When
factors indicate that the intangible assets and other long-lived assets should
be evaluated for possible impairment, the Company uses an estimate of
undiscounted future net cash flows over the remaining life of the assets to
determine if impairment has incurred. Assets are grouped at the lowest level for
which there are identifiable cash flows that are largely independent from other
asset groups. The Company uses discounted future expected net cash flows to
determine the amount of impairment loss.
OTHER ASSETS
Other assets include capitalized initial public offering costs of $482,806
and the investment in IPIL which is being accounted for under the equity method.
STATEMENTS OF CASH FLOWS
During the periods ended December 31, 1997 and 1998, no cash was paid for
interest. During 1999, the Company paid $784,807 in interest charges. For the
same periods, cash paid for income taxes amounted to $1,600, $800 and $5,724,
respectively.
Non-cash investing and financing activities are as follows for the years
ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- -----------
<S> <C> <C> <C>
Issuance of common stock for notes............ $40,000 $ -- $ --
Conversion of debt to equity.................. $ 6,338 $ -- $ --
Assets acquired under capital leases.......... $ -- $ -- $41,456,658
</TABLE>
These non-cash transactions are excluded from the statements of cash flows.
CONCENTRATIONS OF RISK
As of December 31, 1999, the Company had cash account balances of
approximately $15.1 million at financial institutions which were in excess of
federally-insured amounts.
The Company provided carrier grade telephony service to a single customer
who accounted for a substantial portion of the overall revenue of the Company.
The Company's largest customer accounted for 76 percent and 12 percent of gross
accounts receivable at December 31, 1998 and 1999, respectively. The Company's
largest customer represented 77 percent, 80 percent and 25 percent of revenue
during the
F-11
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years ended December 31, 1997, 1998 and 1999. The Company's largest customer is
a related party (see Note 3).
For the year ended December 31, 1999, 73 percent of total revenue and
91 percent of revenue from network services were generated outside the United
States.
Purchases from the four largest vendors for the years ended December 31,
1997 and 1998 amounted to 88 percent and 59 percent, respectively. Purchases
from the two largest vendors (PanAmSat and Satmex) for the year ended
December 31, 1999 amounted to 47 percent of total purchases.
In providing its network application services, the Company is dependent on
uninterrupted satellite service which is currently provided by five vendors. The
Company also relies predominantly on one vendor for uplink services. The Company
has experienced one significant interruption in satellite transmission service
for which it did not receive reimbursement from the provider. In connection with
this transmission failure, the Company had to refund approximately $20,000 to
its customers. An extended period of disruption could have a material adverse
effect on the Company's financial position and results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash, receivables, payables and accrued
liabilities approximate their fair value because of the short maturities of
these instruments. The carrying value of the Company's capital leases
approximate their fair values because the interest rates are comparable to those
available to the Company on similar terms.
3. RELATED PARTY TRANSACTIONS
A significant stockholder and member of the board of directors of the
Company is an executive at STAR Telecommunications, Inc. ("STAR"). The Company
provided long distance telephone and network services to STAR which accounted
for approximately 77 percent, 80 percent and 25 percent of the Company's revenue
for the years ended December 31, 1997, 1998 and 1999, respectively. During the
year ended December 31, 1998, STAR paid the Company $75,000 as a one-time
payment to obtain a lower per-minute rate for a specific circuit to a particular
country. The Company then paid this amount to another related party to buy out a
royalty interest in the revenue generated from such circuit, thereby reducing
the per-minute rate. The pricing of related party transactions was determined by
management.
F-12
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. RELATED PARTY TRANSACTIONS (CONTINUED)
The following table summarizes related party transactions:
<TABLE>
<CAPTION>
COMPANY
COMPANIES OWNED BY
OWNED BY OR LOANS TO DIRECTOR,
CONSULTING RELATED TO EXECUTIVES EXECUTIVE
FEES TO FORMER AND OFFICER AND
TOTAL STAR CHAIRMAN CHAIRMAN EMPLOYEES STOCKHOLDER
---------- ---------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
For the year ended December 31, 1997:
Revenue--network services...................... $ 175,924 $ 175,924 $ -- $ -- $ -- $ --
Revenue--traditional telecom services.......... 1,176,330 1,176,330 -- -- -- --
Cost of services............................... 21,246 21,246 -- -- -- --
General and administrative expenses............ 24,565 -- -- 24,565 -- --
For the year ended December 31, 1998:
Revenue--network services...................... 1,831,233 1,825,233 -- 6,000 -- --
Revenue--traditional telecom services.......... 7,294,757 7,294,757 -- -- -- --
Cost of services............................... 777,724 640,941 -- 136,783 -- --
General and administrative expenses............ 80,480 -- -- 80,480 -- --
For the year ended December 31, 1999:
Revenue--network services...................... 738,362 734,362 -- 4,000 -- --
Revenue--traditional telecom services.......... 2,684,751 2,684,751 -- -- -- --
Cost of network services....................... 938,292 938,292 -- -- -- --
Cost of traditional telecom services........... 55,000 55,000 -- -- -- --
General and administrative expenses............ 389,075 -- 43,750 315,841 -- 29,484
At December 31, 1998:
Accounts receivable............................ 1,308,844 1,281,003 -- 27,841 -- --
Advances to stockholder and employees.......... 42,280 -- -- -- 42,280 --
Accounts payable and accrued expenses.......... 288,749 287,801 -- 948 -- --
Customer deposits.............................. 181,970 181,970 -- -- -- --
At December 31, 1999:
Accounts receivable............................ 206,274 204,374 -- 1,900 -- --
Advances to stockholder and employees.......... 68,485 -- -- -- 68,485 --
Deposits....................................... 26,344 4,920 -- 21,424 -- --
Accounts payable and accrued expenses.......... 54,938 39,000 8,750 7,188 -- --
Customer deposits.............................. 49,756 49,756 -- -- -- --
</TABLE>
F-13
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. COMMITMENTS AND CONTINGENCIES
The Company has leases for satellite transponder space and related facilities
under various agreements expiring through 2011. At December 31, 1999, the
minimum aggregate payments under the capital leases of satellite transponders
and non-cancelable operating leases are summarized as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES TOTAL
-------------- ---------------- ------------
<S> <C> <C> <C>
Year Ending December 31,
2000............................... $ 5,870,548 $12,174,662 $ 18,045,210
2001............................... 5,802,000 10,590,441 16,392,441
2002............................... 5,802,000 8,777,266 14,579,266
2003............................... 5,802,000 6,611,840 12,413,840
2004............................... 5,802,000 2,894,250 8,696,250
Thereafter......................... 37,628,000 12,669,972 50,297,972
------------ ----------- ------------
66,706,548 $53,718,431 $120,424,979
=========== ============
Less: Amount representing
interest......................... (25,899,188)
------------
40,807,360
Less: Current portion.............. (2,138,068)
------------
$ 38,669,292
============
</TABLE>
The Company has also committed to lease three additional transponders on one
existing satellite under leases that start on August 15, 2000, May 15, 2001 and
November 15, 2001. We have committed to leasing these transponders through the
end of their useful lives which is expected to be October 2013. Estimated future
payments under these commitments are approximately $56.5 million.
The Company has capital and operating leases of satellite transponders. The
leases provide for monthly payments ranging from $300 to approximately $360,000
per month over periods of 1 year to 12 years. Some of these leases require
security deposits and many may be extended upon timely notification. In case of
a satellite failure other than from a "force majeure," as defined, generally the
Company will receive a refund or suspension of its monthly payments. Most
agreements require early termination penalties including one year's fee, the net
present value of the remaining unpaid lease payments at a predetermined discount
rate, or the remaining lease payments through the end of the lease term. Some of
the agreements will provide for a refund to the Company if a space segment is
subsequently leased to another company.
Office space and office equipment rent expense for the years ended
December 31, 1997, 1998 and 1999 was $22,650, $71,096 and $284,634,
respectively. Rental for leased lines, satellite access and related facilities
for the years ended December 31, 1997, 1998 and 1999 amounted to $317,551,
$6,281,302 and $10,433,321, respectively.
F-14
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has employment agreements with three executives. The agreements
provide for a continuation of salary in the event of termination without cause.
Also, stock options will vest immediately upon certain events. The Company has
also committed to issue 220,000 stock options to the chief executive officer at
the initial public offering price.
5. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," under which deferred assets and liabilities are
provided on differences between financial reporting and taxable income using
enacted tax rates. Deferred income tax expenses are based on the changes in
deferred income tax assets or liabilities from period to period.
Under SFAS No. 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods. A
valuation allowance is recognized if based on the weight of available evidence,
it is more likely than not that some portion or all of the deferred tax asset
will not be realized. The net deferred tax asset of $3,884,019 at December 31,
1999 has been fully reserved.
The components of the net deferred taxes at December 31, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax asset:
Net operating loss................................. $ 35,246 $ 5,830,352
Cash to accrual.................................... 480,388 2,158,807
--------- -----------
515,634 7,989,159
Deferred tax liability:
Depreciation....................................... (34,721) (3,036,996)
Cash to accrual.................................... -- (1,068,144)
--------- -----------
(34,721) (4,105,140)
--------- -----------
480,913 3,884,019
Less--valuation reserve.............................. (480,913) (3,884,019)
--------- -----------
Net deferred taxes................................... $ -- $ --
========= ===========
</TABLE>
F-15
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. INCOME TAXES (CONTINUED)
The provision for income taxes for the years ended December 31, 1997, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal taxes................................. $ -- $ -- $ --
State taxes................................... 800 800 800
-------- -------- --------
800 800 800
-------- -------- --------
Deferred:
Federal taxes................................. 58,542 (58,542) --
State taxes................................... 10,271 (10,271) --
-------- -------- --------
68,813 (68,813) --
-------- -------- --------
Provision (benefit) for income taxes............ $ 69,613 $(68,013) $ 800
======== ======== ========
</TABLE>
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended December 31, 1997, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- -----------
<S> <C> <C> <C>
Income taxes at the statutory federal rate........... $54,057 $(474,610) $(3,702,215)
State income taxes, net of federal income tax
effect............................................. 9,276 (77,390) (619,439)
Permanent differences................................ 739 5,130 924,510
Change in valuation reserve.......................... -- 480,913 3,403,106
Other................................................ 5,541 (2,056) (5,162)
------- --------- -----------
$69,613 $ (68,013) $ 800
======= ========= ===========
</TABLE>
The Company has net operating loss carryforwards of approximately $13
million for Federal and State income tax purposes, which will expire through
2019 and 2004, respectively.
6. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1999 consist of the following:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Payroll and related costs.............................. $114,516 $ 383,746
Network costs.......................................... 774,291 835,453
Other.................................................. 43,000 585,739
-------- ----------
$931,807 $1,804,938
======== ==========
</TABLE>
7. STOCK OPTIONS
On January 1, 1998, the Company adopted the 1998 Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options to purchase up to
6,380,000 shares of common stock and terminates in ten years. Options vest over
a period as determined by the Board of Directors, generally
F-16
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. STOCK OPTIONS (CONTINUED)
three years and expire in ten years. The option price is determined by the Board
of Directors but may not be less than the fair market value of the stock on the
date of grant, except for participants who are 10 percent stockholders of the
Company, for which the price may not be less than 110 percent of the fair market
value.
On June 14, 1999, the Company adopted the 1999 Director Stock Option Plan
(the "Directors Plan"). The Plan provides for the granting of stock options to
purchase up to 440,000 shares of common stock and terminates in ten years. Each
year all non-employee directors shall be granted options to purchase 22,000
shares of common stock. Options vest and become exercisable on the first
anniversary of the date of grant, provided that the individual has remained in
continuous service as a director of InterPacket for the preceding twelve-month
period. Options also vest and become exercisable upon a change in control, as
defined. The option price shall equal the fair market value of the stock on the
date of grant.
The Company has elected to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation," for disclosure purposes only and applies Accounting Principle
Board (APB) Opinion No. 25 and related interpretations in accounting for its
employee stock options.
The following is a summary of the Company's outstanding options and activity
for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------------------- --------------------
WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Options outstanding, at
beginning of year.................................. -- $ -- 1,672,000 $ 0.40
Granted............................................ 1,672,000 0.40 1,661,000 1.54
Granted below current market prices................ -- -- 2,718,650 2.14
Exercised.......................................... -- -- (170,136) 0.80
Canceled........................................... -- -- (175,630) 0.60
--------- ----- --------- ------
Options outstanding, at
end of year........................................ 1,672,000 $0.40 5,705,884 $ 1.54
========= ===== ========= ======
Options exercisable at end of year................... -- -- 730,400 $ 0.35
========= ===== ========= ======
Weighted average fair value of options granted during
the period......................................... $0.10 $ 0.36
===== ======
Weighted average fair value of options granted during
the period below their current market prices....... $15.12
======
</TABLE>
F-17
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. STOCK OPTIONS (CONTINUED)
The following table summarizes information about the options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
RANGE OF WEIGHTED AVERAGE ------------------------------
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.23 673,200 8.1 years $0.23 441,465 $0.23
0.27-0.57 781,734 8.7 years 0.54 288,935 0.53
1.02-2.05 3,216,950 9.8 years 1.82 -- --
2.27 1,034,000 9.9 years 2.27 -- --
----------- ---------- --------- ----- ------- -----
$ 0.23-2.27 5,705,884 9.5 years $1.54 730,400 $0.35
=========== ========== ========= ===== ======= =====
</TABLE>
As permitted by SFAS No. 123, the Company continues to apply the accounting
rules of APB No. 25 governing the recognition of compensation expense from its
stock option plan. Such accounting rules measure compensation expense on the
first date at which both the number of shares and the exercise price are known.
Under the Company's plan, this would typically be the grant date. The Company
generally issues its stock options with an exercise price based on the fair
market value of the Company's stock at the date of grant as determined by the
board of directors. The Company also issued certain stock options to Company
executives and employees at exercises prices below their current market prices.
The related compensation charges of $31,297,913 are amortized over the three
year vesting periods of the related options.
Under the provisions of SFAS No. 123, equity instruments granted to
non-employees are excluded from the pro forma disclosure requirements and are
recorded as compensation expense at fair value in the accompanying statements of
operations. The Company issued no options to non-employees during the periods
presented. During 1999, the Company changed the vesting term for the former
chairman of the board and another former employee which resulted in additional
compensation expense of $145,000 and $95,538, respectively.
Had the Company applied the fair value based method of accounting to all
grants of stock options, under SFAS No. 123, the Company would have recorded
additional compensation expense as follows for the years ended December 31, 1998
and 1999, respectively:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Additional compensation expense............................. $ 25,572 $ 161,578
Net loss:
As reported............................................... 1,327,898 10,889,669
Pro forma................................................. 1,353,470 11,051,247
Net loss per share:
As reported............................................... 0.07 0.48
Pro forma................................................. 0.07 0.48
</TABLE>
These pro forma amounts were determined by estimating the fair value of each
option on its grant date using the Black-Scholes option-pricing model.
Assumptions of 5.4 percent and 5.49 percent for the risk free interest rate, 5
years for expected life, no volatility and no expected dividends were applied to
all grants.
F-18
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. MANDATORILY REDEEMABLE PREFERRED STOCK
On November 12, 1999, the Company entered into a Series A Convertible
Preferred Stock Purchase Agreement to issue 3 million shares of convertible
preferred stock at $5.00 per share. The preferred stockholders have certain
registration and preemptive rights; as well as preferential rights upon
dissolution of the Company. In the event of a liquidation or dissolution of the
Company (as defined), the preferred stockholders are guaranteed to receive such
funds to allow them an internal rate of return of 35 percent annually from the
original date of issuance. Each preferred share is convertible into 2.2 shares
of common stock if requested by the majority of the preferred stockholders or
upon a public offering at not less than $3.18 per share and which raises a
minimum of $25 million. The conversion ratio is subject to adjustment in certain
circumstances such as upon future sale of Company shares at a price below $2.27
per share for common stock. The preferred stockholders may request redemption at
the initial purchase price after November 12, 2003. See Note 2 for pro forma
weighted average number of common shares used to compute pro forma loss per
common share.
9. CAPITAL STOCK
On April 9, 1998, the Company sold 937,895 shares of common stock to an
investor for $250,000.
On April 14, 1999, the Company sold 4,419,500 shares of common stock through
a private placement for $4,519,928. The Company sold 1,307,772 of these shares
to employees and directors of the Company. In August 1999, the Company sold
74,307 additional shares for $75,997.
In September and October of 1999, the Company sold 3,258,074 shares of
common stock in a private placement for net proceeds of $6,664,242. The Company
sold 1,325,376 of these shares to employees and directors of the Company. In
December 1999, the Company sold 146,663 shares of common stock to an existing
stockholder for net proceeds of $299,996.
On September 3, 1997, the Board of Directors authorized an increase to the
authorized number of common shares from 10,000 to 10 million and effected a
1,000-for-1 stock split of the Company's issued and outstanding shares. This
increase became effective March 31, 1998. On June 1, 1999, the Board of
Directors approved a 2-for-1 stock split, which became effective July 7, 1999
and on March 29, 2000 the Board of Directors approved an additional 2.2 for 1
stock split. The stock splits have been retroactively reflected in the
accompanying consolidated financial statements for all periods presented. On
February 24, 1999, the Board of Directors approved an increase in the authorized
common shares to 50 million. Approximately 17.2 million of the common shares
have certain registration rights pertaining to these securities.
10. ACQUISITION
On September 28, 1999, the Company acquired certain assets and technology
from a subsidiary of Level 3 Communications Limited for $500,000. The
acquisition has been accounted for by the purchase method of accounting and,
accordingly, the results of operations of SatinNet Limited for the period from
September 28, 1999 are included in the accompanying consolidated financial
statements. In connection with this purchase, the Company recorded approximately
$449,000 of intangible assets which are being amortized over a five-year period.
F-19
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
10. ACQUISITION (CONTINUED)
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had taken place on January 1,
1998:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------ ------------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenue..................................... $11,571 $13,600
Net loss.................................... $ 1,541 $11,058
Net loss per common share................... $ 0.08 $ 0.48
</TABLE>
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
11. BUSINESS SEGMENTS
During 1997, 1998 and 1999, the Company had two business segments, network
services and traditional telecom services. The network services segment derives
revenues from the sale of Internet-based network services, including
connectivity and multi-point newsfeeds.
The traditional telecom services segment provides traditional switched based
wholesale long distance service, primarily to STAR Telecommunications, Inc., an
international long distance company.
The accounting policies of the segments are the same as those described in
the significant accounting policies, however, the Company evaluates performance
based on gross margin before depreciation and amortization expense. The Company
does not internally analyze these segments below revenue less direct operating
expenses, therefore selling, general and administrative expenses and
depreciation expense is not allocated to any specific segment. The Company has
no intercompany sales among the network services
F-20
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. BUSINESS SEGMENTS (CONTINUED)
and the traditional telecom services segments. All capital leases relate to the
network services segment. Reportable segment information for the years ended
December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
TRADITIONAL
NETWORK TELECOM UNALLOCATED
SERVICES SERVICES CORPORATE ASSETS TOTAL
----------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
December 31, 1997:
Revenue................................... $ 582,819 $1,176,330 $ -- $ 1,759,149
Gross margin before depreciation and
amortization............................ 124,926 628,395 -- 753,321
December 31, 1998:
Revenue................................... 4,114,934 7,294,757 -- 11,409,691
Gross margin before depreciation and
amortization............................ (1,674,316) 2,272,189 -- 597,873
Segment assets............................ 1,263,428 1,762,319 51,464 3,077,211
December 31, 1999:
Revenue................................... 10,789,476 2,684,751 -- 13,474,227
Gross margin before depreciation and
amortization............................ (495,100) 1,356,106 -- 861,006
Segment assets............................ 48,094,028 179,772 16,016,779 64,290,579
</TABLE>
Information regarding the Company's domestic and foreign revenues are as
follows:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN TOTAL
---------- ---------- -----------
<S> <C> <C> <C>
Fiscal 1997.............................................. $ 867,349 $ 891,800 $ 1,759,149
Fiscal 1998.............................................. 2,886,231 8,523,460 11,409,691
Fiscal 1999.............................................. 3,688,006 9,786,221 13,474,227
</TABLE>
No individual foreign country represented more than 10 percent of revenue or
long-lived assets for any of the periods presented.
12. SUBSEQUENT EVENTS
In January 2000, the Company entered into a renewable one-year agreement
with another entity to provide Internet content to the Company's customers.
InterPacket will receive a percentage of the revenue earned by this provider and
discounted usage fees after a minimum threshold level is reached.
On January 26, 2000, the Board increased the authorized number of shares
available for grant under the 1998 Stock Option Plan to 10.1 million and
increased the authorized number of shares available for grant under the 1999
Director Stock Option Plan to 1,210,000. The Board also amended the option terms
of several executives to accelerate vesting with an extended exercise period
under specified circumstances such as a change in control. The amended 1998
Stock Option Plan provides that upon a change in control 50 percent of the
unvested options outstanding immediately prior to such change accelerate and
become
F-21
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
12. SUBSEQUENT EVENTS (CONTINUED)
fully vested, unless the employee is provided with replacement options. The
vesting periods were extended to three years for new options issued under the
1999 Director Stock Option Plan and to four years for new options issued under
the 1998 Stock Option Plan. The Board also approved to increase the authorized
number of common shares to 250 million and to adopt a 401(k) plan for the
benefit of the Company's employees.
Effective February 1, 2000, the Company signed an employment agreement with
a new executive. The agreement provides for the continuation of salary in the
event of termination without cause. This executive was allowed to purchase
132,000 shares of common stock at $2.27 per share. The compensation charge
related to this stock purchase is estimated at $1.5 million.
13. EVENTS SUBSEQUENT TO THE AUDITORS' REPORT (UNAUDITED)
In March 2000, the Company entered into a software license and consulting
agreement for development of software that enables live and on-demand streaming
media delivery over the InterPacket network. The project is estimated to cost
$2.4 million dollars and out of pocket expenses plus a per copy license fee.
The Company has entered into new leases for satellite transponder space and
related facilities under various agreements expiring through March 2005
resulting in aggregate lease payments of approximately $19.1 million.
Through March 27, 2000, the Company has granted an additional 1,312,300
stock options at $2.27, 262,900 stock options at $3.64 and 537,900 stock options
at $6.82. The estimated compensation charge related to the option grants will be
approximately $15.6 million over a three to four-year vesting period assuming a
$11 offering price. Also, 341,760 stock options were exercised and 734,061 stock
options were canceled.
As of March 6, 2000, the Company entered into a separation agreement and
mutual release with an executive of the Company. Under this agreement, the
executive relinquished his right to purchase 660,000 shares pursuant to stock
options. He also agreed to a new vesting schedule with respect to certain other
options that he holds. Under that schedule, options to purchase 220,000 shares
are immediately exercisable; options to purchase 220,000 shares will vest on
June 6, 2000, if he has performed under a consulting agreement and options to
purchase 26,400 shares will vest on the commencement of an extension to his
consulting agreement. Additionally, an option to purchase 193,600 shares will
vest monthly from October 2000 through June 2003 if he and InterPacket agree to
extend his consulting agreement beyond October 2000.
F-22
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of InterPacket Networks, Inc. and
Subsidiary:
We have audited in accordance with auditing standards generally accepted in
the United States the consolidated financial statements of InterPacket
Networks, Inc. and subsidiary as of December 31, 1998 and 1999 and for the three
years in the period ended December 31, 1999, included in this Registration
Statement on Form S-1, and have issued our report thereon dated February 11,
2000. Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule of valuation
and qualifying accounts is the responsibility of the Company's management and is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 11, 2000
F-23
<PAGE>
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING AT END OF
OF PERIOD PROVISION WRITE-OFF PERIOD
---------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1997................. $ -- $ -- $ -- $ --
Year ended December 31, 1998................. $ -- $ 16,600 $ -- $ 16,600
Year ended December 31, 1999................. $ 16,600 $ 183,600 $ (60,000) $ 140,200
Deferred tax valuation allowance
Year ended December 31, 1997................. $ -- $ -- $ -- $ --
Year ended December 31, 1998................. $ -- $ (480,913) $ -- $ (480,913)
Year ended December 31, 1999................. $(480,913) $(3,403,106) $ -- $(3,884,019)
Receivable from related party
Year ended December 31, 1997................. $ -- $ -- $ -- $ --
Year ended December 31, 1998................. $ -- $ 63,400 $ -- $ 63,400
Year ended December 31, 1999................. $ 63,400 $ -- $ (63,400) $ --
</TABLE>
F-24
<PAGE>
[INSIDE BACK COVER]
[POWERED BY ESPRESSO-REGISTERED TRADEMARK-
GRAPHIC AND DESIGN]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,500,000 Shares
[LOGO]
Common Stock
-----------------
PROSPECTUS
-----------------
CHASE H&Q LEHMAN BROTHERS
CIBC WORLD MARKETS
-----------------
, 2000
-----------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is current only as of
the date of this prospectus.
Until , 2000 (25 days after the date of this prospectus), all
dealers that buy, sell or trade in the securities in this offering, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) we expect to incur in connection with
our sale and distribution of the securities being registered. All of the amounts
shown are estimated except the registration fee of the SEC and the NASD filing
fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- ----------
<S> <C>
SEC registration fee........................................ $ 23,681
NASD filing fee............................................. 9,470
Blue sky fees and expenses.................................. 5,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 400,000
Transfer agent and registrar fees........................... 15,000
Miscellaneous............................................... 96,849
----------
Total..................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation provides that our directors shall not be
personally liable to InterPacket or our stockholders for monetary damages for
any breach of fiduciary duty as a director, to the fullest extent permitted by
law, except to the extent such exemption from liability is not permitted under
the General Corporation Law of the State of Delaware (the "GCL"). Further, our
bylaws provide that we shall, to the maximum extent permitted by law, indemnify
our directors and officers and may indemnify our employees and other agents.
Subsection (a) of Section 145 of the GCL empowers a corporation to indemnify
any director or officer, or former director or officer, who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation), against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding provided that such director or officer acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, provided
that such director or officer had no cause to believe his or her conduct was
unlawful.
Subsection (b) of Section 145 of the GCL empowers a corporation to indemnify
any director or officer, or former director or officer, who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person acted in any of the capacities set forth
above, against expenses actually and reasonably incurred in connection with the
defense or settlement of such action or suit, provided that such director or
officer acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
may be made in respect of any claim, issue or matter as to which such director
or officer shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
was brought shall determine that despite the adjudication of liability such
director or officer is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
II-1
<PAGE>
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the corporation shall have power to purchase and maintain
insurance on behalf of a director or officer of the corporation against any
liability asserted against him or her or incurred by him or her in any such
capacity or arising out of his or her status as such whether or not the
corporation would have the power to indemnify him or her against such
liabilities under Section 145.
We have also entered into indemnification agreements with each of our
directors and officers. The indemnification agreements may require us, among
other things, to indemnify our directors and officers against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms.
Reference is also made to our Underwriting Agreement contained in
Exhibit 1.1 hereto, which indemnifies our directors and officers against certain
liabilities.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling InterPacket pursuant to
the foregoing provisions, we have been informed that, in the opinion of the SEC,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1997, we have granted or issued and sold the following
unregistered securities:
(a) In June 1997, we issued and sold 3,704,800 shares of our common stock
to Peter S. Zimble for an aggregate purchase price of $70,000.
(b) In September 1997, we issued and sold 220,000 shares of our common stock
to Julie M. Spira for an aggregate purchase price of $5,000.
(c) In April 1998, we issued and sold a total of 937,895 shares of our
common stock to Joseph T. Arsenio and the Delaware Charter Guarantee &
Trust Co., as trustee for Joseph T. Arsenio, for an aggregate purchase
price of $250,000.
(d) In April 1999, we issued and sold a total of 4,419,500 shares of our
common stock to certain accredited investors for an aggregate purchase
price of $4,519,928.
(e) In August 1999, we issued and sold 74,307 shares of our common stock to
Joseph T. Arsenio for an aggregate purchase price of $75,997.
(f) In September 1999, we issued and sold a total of 3,258,074 shares of
our common stock to certain accredited investors for an aggregate
purchase price of $6,664,242.
(g) In November 1999, we issued and sold a total of 3,000,000 shares of our
Series A Preferred Stock to certain accredited investors for an aggregate
purchase price of $15,000,000. The preferred stock will convert
automatically into 6,600,000 shares of common stock once this
Registration Statement is declared effective.
(h) In December 1999, we issued and sold a total of 146,663 shares of our
shares of our common stock to Joseph T. Arsenio and Delaware Charter
Guarantee & Trust Co., as trustee for Joseph T. Arsenio, and as trustee
for Meredith M. Arsenio, for an aggregate purchase price of $299,996.
II-2
<PAGE>
(i) In February 2000, we issued and sold a total of 132,000 shares of our
common stock to Timothy F. Sylvester for a purchase price of $300,000.
(j) Through March 27, 2000, we have granted options to purchase an
aggregate of 8,384,750 shares of our common stock, at a weighted average
exercise price of $2.30, to directors, officers and employees pursuant to
our 1998 Stock Option Plan and our 1999 Director Stock Option Plan.
The issuances of the securities in the transactions above were exempt from
registration under the Securities Act pursuant to (1) Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering, where the purchasers represented their
intention to acquire the securities for investment only and not with a view to
distribution and received or had access to adequate information about
InterPacket or (2) Rule 701 promulgated under the Securities Act as transactions
pursuant to a compensatory benefit plan or a written contract relating to
compensation. No underwriting discounts or commissions were paid in connection
with these sales, appropriate legends were affixed to the stock certificates
issued in these transactions and there was no general solicitation or
advertising.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation, as currently in effect.*
3.2 Bylaws, as currently in effect.*
5.1 Opinion of Riordan & McKinzie, a Professional Law
Corporation.
9.1 Voting Agreement and Irrevocable Proxy dated as of November
12, 1999 between InterPacket Networks, Inc. and Jeffrey
Sudikoff.*
10.1 Amended and Restated 1998 Stock Option Plan of InterPacket
Networks, Inc.*
10.2 Form of Incentive Stock Option Agreement under the Amended
and Restated 1998 Stock Option Plan of InterPacket Networks,
Inc.*
10.3 Form of Nonqualified Stock Option Agreement under the
Amended and Restated 1998 Stock Option Plan of InterPacket
Networks, Inc.*
10.4 Amended and Restated 1999 Director Stock Option Plan of
InterPacket Networks, Inc.*
10.5 Form of Nonqualified Stock Option Agreement under the
Amended and Restated 1999 Director Stock Option Plan of
InterPacket Networks, Inc.*
10.6 Employment Agreement dated as of July 1, 1999 by and between
Jonathan L. Gans and InterPacket Networks, Inc.*
10.7 Promissory Note dated June 1, 1999 by Peter Zimble in favor
of InterPacket Networks, Inc.
10.8 Sublease dated as of February 1, 2000 by and between Rysher
Entertainment, Inc. and InterPacket Networks, Inc.
10.9 Consent to Sublease MGM Plaza dated as of March 17, 2000 by
and between Colorado Place Partners, LLC, Rysher
Entertainment, Inc. and InterPacket Networks, Inc.
10.10 Employment Agreement dated as of January 1, 1999 by and
between Julie M. Spira and InterPacket Networks, Inc.*
10.11 Employment Agreement dated as of February 1, 2000 by and
between Timothy F. Sylvester and InterPacket Networks, Inc.*
10.12 Secured Promissory Note dated as of February 1, 2000 by
Timothy F. Sylvester in favor of InterPacket Networks, Inc.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.13 Series A Convertible Preferred Stock Agreement dated as of
November 12, 1999 among InterPacket Networks, Inc. and each
of the entities listed on the Schedule of Purchasers
attached thereto as Exhibit A.*
10.14 Form of Indemnification Agreement between InterPacket
Networks, Inc. and each director and executive officer.*
10.15 Standard Office Lease--Gross dated as of January 1, 1999 by
and between 1901 Main Street Partners, LLC and InterPacket
Networks, Inc.*
10.16 Contract dated as of September 1, 1999 by and between
Satelites Mexicanos, S.A. DE C.V. and InterPacket Networks,
Inc.*+
10.17 Form of Stock Subscription Agreement used in InterPacket
Networks, Inc.'s April and September 1999 private offerings.
10.18 Investor Rights Agreement dated as of November 12, 1999
among InterPacket Networks, Inc. and certain stockholders.*
10.19 Agreement dated as of January 19, 2000 by and between
InterPacket Networks, Inc. and iBEAM Broadcasting
Corporation.+
10.20 Software License and Consulting Services Agreement dated as
of March 20, 2000 by and between InterPacket Networks, Inc.
and RealNetworks, Inc.+
10.21 Separation Agreement and Release dated as of March 6, 2000
by and between InterPacket Networks, Inc. and Peter
Hirshberg.
10.22 Consulting Services Agreement dated as of March 6, 2000 by
and between InterPacket Networks, Inc. and Peter Hirshberg.
21 Subsidiaries.*
23.1 Consent of Riordan & McKinzie (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24 Powers of Attorney.*
27 Financial Data Schedule.*
99.1 Consent of International Data Corporation.
</TABLE>
- ------------------------
* Previously filed by InterPacket Networks, Inc. with the SEC on February 18,
2000 as an exhibit to this Registration Statement on Form S-1.
+ Certain portions of this exhibit have been omitted from the copy filed as
part of InterPacket Networks, Inc.'s Registration Statement and are the
subject of a request for confidentiality.
(B) FINANCIAL STATEMENT SCHEDULES
The following schedule is filed as part of this Registration Statement:
Schedule II--InterPacket Networks, Inc.--Valuation and Qualifying Accounts.
All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of any schedule, or because
the information required is included in the financial statements or the notes
thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore,
II-4
<PAGE>
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
the registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Santa Monica,
State of California, on the 7th day of April 2000.
<TABLE>
<S> <C> <C>
INTERPACKET NETWORKS, INC.
By: /s/ JONATHAN L. GANS
-----------------------------------------
Jonathan L. Gans
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act, 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>
Chief Executive Officer,
/s/ JONATHAN L. GANS President and Director
------------------------------------------- (Principal Executive April 7, 2000
Jonathan L. Gans Officer)
/s/ ALLEN J. SCIARILLO Chief Financial Officer
------------------------------------------- (Principal Financial and April 7, 2000
Allen J. Sciarillo Chief Accounting Officer)
*
------------------------------------------- Chairman of the Board April 7, 2000
Norman J. Pattiz and Director
*
------------------------------------------- Director April 7, 2000
Jeffrey C. Barbakow
*
------------------------------------------- Director April 7, 2000
Brent Cohen
*
------------------------------------------- Director April 7, 2000
James E. Kolsrud
/s/ LAWRENCE D. LENIHAN, JR.
------------------------------------------- Director April 7, 2000
Lawrence D. Lenihan, Jr.
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JONATHAN L. GANS
--------------------------------------
Jonathan L. Gans
ATTORNEY-IN-FACT
</TABLE>
<PAGE>
INTERPACKET NETWORKS, INC.
6,500,000 Shares(1)
Common Stock
UNDERWRITING AGREEMENT
----------------------
April __, 2000
CHASE SECURITIES INC.
LEHMAN BROTHERS
CIBC WORLD MARKETS CORP.
c/o Chase Securities Inc.
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
InterPacket Networks, Inc., a Delaware corporation (herein called the
Company), proposes to issue and sell 6,500,000 shares of its authorized but
unissued Common Stock, $.001 par value (herein called the Common Stock) (said
6,500,000 shares of Common Stock being herein called the Underwritten Stock).
The Company proposes to grant to the Underwriters (as hereinafter defined) an
option to purchase up to 975,000 additional shares of Common Stock (herein
called the Option Stock and with the Underwritten Stock herein collectively
called the Stock). The Common Stock is more fully described in the Registration
Statement and the Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the Underwriters, which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act for
it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities
and Exchange Commission (herein called the Commission) a registration
statement on Form S-1 (No. 333-30762), including the related preliminary
prospectus, for the registration under the Securities Act of 1933, as amended
(herein called the Securities Act), of the Stock. Copies of such registration
statement and of each amendment thereto, if any, including the related
- ---------------------------------------
(1) Plus an option to purchase from the Company up to 975,000 additional
shares to cover overallotments.
<PAGE>
preliminary prospectus (meeting the requirements of Rule 430A of the rules
and regulations of the Commission) heretofore filed by the Company with the
Commission have been delivered to you.
The term Registration Statement as used in this Agreement shall mean such
registration statement, including all exhibits and financial statements thereto,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) Registration Statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) Registration
Statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in the
Registration Statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement and the Prospectus and as being conducted, and is
duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary, except
where the failure to be so qualified would not have a material adverse effect on
the business, properties, financial condition, prospects, or results of
operations of the Company and its subsidiaries, taken as a whole (herein called
a Material Adverse Effect).
(ii) The authorized capital stock of the Company consists of
3,000,000 shares of Preferred Stock, $.001 par value, of which 3,000,000 shares
are outstanding, and 250,000,000 shares of Common Stock, $.00l par value, of
which there are outstanding shares (excluding the Stock being sold by the
Company). Proper corporate proceedings have
2
<PAGE>
been taken validly to authorize such authorized capital stock. All of the
outstanding shares of such capital stock have been duly and validly issued
and are fully paid and nonassessable. The Company has reserved an aggregate
of ______ shares of Common Stock for issuance under the Company's stock
option plans (herein called the Option Plans), of which options to purchase
______shares of Common Stock have been granted and are outstanding. No other
shares of capital stock, or options, warrants or other rights to acquire
capital stock of the Company are outstanding.
(iii) All of the issued and outstanding capital stock of each
subsidiary of the Company has been duly authorized and validly issued and is
fully paid and nonassessable, and is owned by the Company free and clear of all
liens, encumbrances and security interests, and no options, warrants or other
rights to purchase, agreements or other obligations to issue or other rights to
convert any obligations into shares of capital stock or ownership interests in
any such subsidiary are outstanding.
(iv) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition,
prospects or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any transaction
not referred to in the Registration Statement and the Prospectus that is
material to the Company and its subsidiaries, taken as a whole.
(v) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply, in all material respects,
with the provisions of the Securities Act and the rules and regulations of the
Commission thereunder. On the Effective Date, the Registration Statement did not
contain any untrue statement of a material fact and did not omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading; and, as of its date the Prospectus did not
and, on the Closing Date and any later date on which Option Stock is to be
purchased, will not, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that none of the representations and warranties in this
subparagraph (v) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in conformity
with information herein or otherwise furnished in writing to the Company by or
on behalf of the Underwriters for use in the Registration Statement or the
Prospectus.
(vi) The Stock to be issued and sold by the Company is duly and
validly authorized, and when issued and sold to the Underwriters as provided
herein, will be duly and validly issued, fully paid and nonassessable and
conforms to the description thereof in the Prospectus. No further approval or
authority of the stockholders or the Board of Directors of the Company will be
required for the issuance and sale of the Stock as contemplated herein. No
preemptive rights of, or rights of refusal in favor of, stockholders exist with
respect to the Stock, or the issue and sale thereof, pursuant to the Certificate
of Incorporation or Bylaws of the
3
<PAGE>
Company and there are no contractual preemptive rights, rights of first refusal
or rights of co-sale between the Company and any stockholders that exist and
have not been waived with respect to the issue and sale of the Stock. The form
of certificate for the Stock conforms to the legal requirements of the State of
Delaware.
(vii) All holders of securities of the Company having rights to
the registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have included such
securities in the Registration Statement, have waived such rights or such rights
have expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement. Except as described in the
Prospectus, 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 owned or to be owned by such person or to require the
Company to include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the Securities Act.
Except as described in the Prospectus, there are no outstanding commitments of
sale or liens related to or entitling any person to purchase or otherwise to
acquire any shares of the capital stock of, or other ownership interest in, the
Company.
(viii) Prior to the Closing Date, the Stock to be issued and sold
by the Company will be authorized for listing on the Nasdaq National Market upon
official notice of issuance.
(ix) The Registration Statement has been declared effective under
the Securities Act and, to the Company's knowledge, (A) no stop order suspending
the effectiveness of the Registration Statement or suspending or preventing the
use of the Prospectus is in effect and (B) no proceedings for that purpose have
been instituted or are pending or threatened by the Commission.
(x) There are no franchises, contracts, leases, documents or
legal proceedings, pending or threatened, of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement, which are not so described and filed as
required.
(xi) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or Bylaws, or similar governing
documents, as the case may be. To the knowledge of the Company, neither the
Company nor any of its subsidiaries is in violation or breach of, or in default
under (nor has any event occurred that with notice or lapse of time, or both,
would be a violation or breach of, or a default under) the performance of any
obligation, agreement or condition contained in any agreement or instrument to
which the Company any of its subsidiaries is a party or by which it or any of
its properties or assets are bound or affected (except for such violations,
breaches or defaults as would not have a Material Adverse Effect). Neither the
Company nor any of its subsidiaries is in violation of any U.S. federal, state,
local or foreign law, statute, regulation or ordinance, or any order, writ,
injunction or decree, of any jurisdiction, court or governmental instrumentality
applicable to its businesses and operations having jurisdiction over the Company
or any of its subsidiaries or any of its
4
<PAGE>
respective properties, assets or operations (except for such violations as would
not have a Material Adverse Effect).
(xii) The Underwriting Agreement has been duly authorized,
executed and delivered by the Company and is the legal, valid and binding
obligation of the Company enforceable against it in accordance with its terms,
except as enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and by general equitable principles, and as rights to indemnity or
contribution hereunder may be limited by federal or state securities laws or the
public policy underlying such laws.
(xiii) The issue and sale by the Company of the shares of Stock
as contemplated by the Underwriting Agreement will not conflict with, or result
in a breach of, the Certificate of Incorporation or Bylaws or similar governing
documents of the Company or any of its subsidiaries or any agreement or
instrument to which the Company or any of its subsidiaries is a party, or any
applicable law or regulation, or any applicable order, writ, injunction or
decree, of any jurisdiction, court or governmental instrumentality.
(xiv) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation of the
transactions contemplated in the Underwriting Agreement, except such as have
been obtained under the Securities Act and such as may be required under state
securities or blue sky laws in connection with the purchase and distribution of
the Stock by the Underwriters.
(xv) The Company and each of its subsidiaries has such permits,
licenses, registrations, franchises and authorizations of U.S. or foreign
governmental or regulatory authorities or third parties (herein called Permits),
including, without limitation, under any applicable federal export and import
laws, as are necessary to own, lease and operate its properties and assets and
to conduct its businesses or operations as they are currently conducted and as
described in the Prospectus (except for such Permits which, individually or in
the aggregate, the failure of which to hold would not have a Material Adverse
Effect). To the knowledge of the Company, the Company and each of its
subsidiaries is in compliance with such Permits, and no event has occurred that
allows, or after notice or lapse of time, or both would allow, revocation or
termination thereof or result in any other material impairment of the rights of
the holder of any such Permits.
(xvi) Neither the Company nor any of its subsidiaries is
conducting, or intends to conduct, its business in a manner in which it would
become, an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
(xvii) The Company and each of its subsidiaries is insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as is reasonable and prudent for the business in which it is
engaged.
(xviii) Arthur Andersen LLP (herein called Arthur Andersen), the
accounting firm that has audited and certified the required annual financial
statements and
5
<PAGE>
supporting schedules filed or to be filed with the Commission as part of the
Registration Statement and the Prospectus, is an independent public accounting
firm with respect to the Company as required by the Securities Act and the rules
and regulations of the Commission thereunder.
(xix) The consolidated financial statements of the Company,
together with related notes and schedules of the Company included in the
Registration Statement and the Prospectus, are accurate and present fairly the
financial position, results of operations and cash flows of the Company as
consolidated with its subsidiaries at the indicated dates and for the indicated
periods. Such financial statements have been prepared in accordance with
generally accepted accounting principles (herein called GAAP) consistently
applied throughout the periods involved, and all adjustments necessary for a
fair presentation of results for such periods have been made and any unaudited
financial statements have been prepared on a basis substantially consistent
(other than for accompanying notes) with that of the audited operating financial
statements included in the Registration Statement and the Prospectus. The
summary and selected financial and operating data included in the Registration
Statement and the Prospectus present fairly the information shown therein and
have been prepared on a basis consistent with the audited and any unaudited
financial statements, as the case may be, included therein.
(xx) No labor dispute with the employees of the Company or any of
its subsidiaries exists, or to the Company's knowledge, is imminent. No
collective bargaining agreement exists with any of the Company's employees and,
to the Company's knowledge, no such agreement is imminent.
(xxi) The Company has good and marketable title to all of the
owned properties and assets reflected in the financial statements (or as
described in the Registration Statement) filed with the Commission as part of
the Registration Statement, free and clear of any lien, mortgage, pledge, charge
or encumbrance of any kind except those reflected in such financial statements
(or as described in the Registration Statement) or which materially impair the
Company's use thereof or materially detract from the value of the Company and
its subsidiaries, taken as a whole. All leases to which the Company is party are
valid and binding obligations of the Company and no default by the Company has
occurred or is continuing thereunder which could reasonably be expected to
result in a Material Adverse Effect, and the Company enjoys peaceful and
undisturbed possession in all material respects under all such leases to which
it is a party as lessee.
(xxii) The Company and each of its subsidiaries owns or has valid
licenses to use, the patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names (collectively, Patents and Proprietary Rights)
currently employed by it in connection with the business it now operates as
necessary to conduct its business. Except as disclosed in the Registration
Statement and Prospectus, neither the Company nor any of its subsidiaries has
received any written notice of, and the Company has no knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
Patent or Proprietary Rights (except for such infringements or conflicts as
would not have a Material Adverse Effect).
6
<PAGE>
(xxiii) The Company has timely filed, or has obtained an
extension for, all U.S. federal, state, local and foreign income tax returns
which have been required to be filed and have paid all taxes indicated by said
returns and all assessments received by them or any of them to the extent that
such taxes have become due and are not being contested in good faith except
where the failure to file such returns and pay such taxes would not have a
Material Adverse Effect. All tax liabilities (including those being contested in
good faith) for the periods covered by the financial statements of the Company
that are included in the Registration Statement have been adequately provided
for in such financial statements.
(xxiv) Other than as provided to the Underwriters under this
Agreement, neither the Company nor any of its subsidiaries has incurred any
liability for finder's or broker's fees or agent's commissions in connection
with the execution and delivery of this Agreement or the transactions hereby
contemplated.
(xxv) The Company and each of its subsidiaries maintains a system
of internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
asset accountability, (iii) access to assets is permitted only in accordance
with management's general or specific authorization, and (iv) the recorded
accountability for inventory is compared with the existing inventory at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxvi) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the National
Association of Securities Dealers, Inc. (herein called the NASD) or such
additional steps as may be necessary to qualify the Stock for public offering by
the Underwriters under state securities or blue sky laws) has been obtained or
made and is in full force and effect.
(xxvii) The Company has not taken, directly or indirectly, any
action designated to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Stock.
(xxviii) The statements in the Prospectus under the heading
"Certain Transactions" set forth all existing agreements, arrangements,
understandings or transactions, or currently proposed agreements, arrangements,
understandings or transactions between or among the Company, on the one hand,
and any officer, director or stockholder of the Company, or with any partner,
affiliate or associate of any of the foregoing persons or entities, on the other
hand, required to be set forth or described thereunder.
(xxix) There are no matters relating to the Company's Year 2000
compliance that (i) are of a character required to be described or referred to
in the Registration
7
<PAGE>
Statement or Prospectus by the Securities Act or the rules and regulations of
the Commission thereunder.
(xxx) The Company has not at any time since its inception (i)
made any unlawful contribution to any candidate for foreign office or failed to
disclose fully any contribution in violation of law, or (ii) made any payment to
any foreign or U.S. federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
(xxxi) Neither the Company nor any of its subsidiaries has
distributed and neither will distribute prior to the later of (i) the Closing
Date, or any date on which Option Stock is to be purchased, as the case may be,
and (ii) completion of the distribution of the Stock, any offering material
other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Securities Act.
(xxxii) The Company is in compliance in all material respects
with all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company would have any liability; the Company has not incurred and
does not expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would cause
the loss of such qualification.
(xxxiii) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be disclosed in
the Prospectus, the Company has not (i) issued or granted any securities, (ii)
incurred any liability or obligation, direct or contingent, other than
liabilities and obligations which were incurred in the ordinary course of
business, (iii) entered into any transaction not in the ordinary course of
business or (iv) declared or paid any dividend on its capital stock.
(xxxiv) Neither the Company nor any of its subsidiaries has
sustained, since the date of the latest audited financial statements included in
the Prospectus, any material (taking the Company and its subsidiaries as a
whole) loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since such date, there has not been any
change in the capital stock, or any development involving a prospective material
adverse change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole, otherwise than as set forth or contemplated in
the Prospectus.
8
<PAGE>
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
6,500,000 shares of the Underwritten Stock to the several Underwriters and each
of the Underwriters agrees to purchase from the Company the respective aggregate
number of shares of Underwritten Stock set forth opposite its name in Schedule
I. The price at which such shares of Underwritten Stock shall be sold by the
Company and purchased by the several Underwriters shall be $___ per share. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
PROVIDED, HOWEVER, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company to any
non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
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(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to 975,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of
the Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth under the caption entitled
"Underwriting" in the Registration Statement, any Preliminary Prospectus and the
Prospectus relating to the Stock filed by the Company (insofar as such
information relates to the Underwriters) constitutes the only information
furnished by the Underwriters to the Company for inclusion in the Registration
Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of
the respective Underwriters represent and warrant to the Company that the
statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 A.M., Pacific Standard Time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Riordan & McKinzie, 300 South Grand Avenue, Suite 2900, Los
Angeles, California, at 7:00 a.m., Pacific Standard Time, on the fourth business
day after the date of this Agreement, or at such time on such other day, not
later than seven full business days after such fourth business day, as shall be
agreed upon in writing by the Company and you. The date and hour of such
delivery and payment (which may be postponed as provided in Section 3(b) hereof)
are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., Pacific Standard Time, on the date two business days preceding
the Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Riordan & McKinzie, 300 South
Grand Avenue, Suite 2900, Los Angeles, California, at 7:00 a.m., Pacific
Standard Time, on the third business day after the exercise of such option.
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<PAGE>
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order by one or more certified or official bank check or
checks or by one or more wire transfers in same day funds. Such payment shall be
made upon delivery of certificates for the Stock to you for the respective
accounts of the several Underwriters against receipt therefor signed by you.
Certificates for the Stock to be delivered to you shall be registered in such
name or names and shall be in such denominations as you may request at least one
business day before the Closing Date, in the case of Underwritten Stock, and at
least one business day prior to the purchase thereof, in the case of the Option
Stock. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of Lewco Securities
Corporation, 2 Broadway, New York, New York 10004 on the business day prior to
the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York
time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check or wire transfer shall
not have been received by you on the Closing Date or any later date on which
Option Stock is purchased for the account of such Underwriter. Any such payment
by you shall not relieve such Underwriter from any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also
11
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deliver to you, for distribution to the Underwriters, a sufficient number of
additional conformed copies of each of the foregoing (but without exhibits) so
that one copy of each may be distributed to each Underwriter, (ii) as promptly
as possible deliver to you and send to the several Underwriters, at such office
or offices as you may designate, as many copies of the Prospectus as you may
reasonably request, and (iii) thereafter from time to time during the period in
which a prospectus is required by law to be delivered by an Underwriter or
dealer, likewise send to the Underwriters as many additional copies of the
Prospectus and as many copies of any supplement to the Prospectus and of any
amended prospectus, filed by the Company with the Commission, as you may
reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; PROVIDED, HOWEVER, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports, and other documents as are or
may be required to continue such qualifications in effect for so long a period
as you may reasonably request for distribution of the Stock.
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2<PAGE>
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the NASD of the Registration Statement, any Preliminary
Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies
of any Preliminary Prospectus and of the several documents required by paragraph
(c) of this Section 6 to be so furnished, (iii) the printing of this Agreement
and related documents delivered to the Underwriters, (iv) the preparation,
printing and filing of all supplements and amendments to the Prospectus referred
to in paragraph (d) of this Section 6, (v) the furnishing to you and the
Underwriters of the reports and information referred to in paragraph (g) of this
Section 6 and (vi) the printing and issuance of stock certificates, including
the transfer agent's fees.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements (including
reasonable counsel fees and disbursements and cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or their counsel in
qualifying the Stock under state securities or blue sky laws.
(k) The Company hereby agrees that, without the prior written consent
of Chase Securities Inc. and Lehman Brothers on behalf of the Underwriters, the
Company will not, for a period of 180 days following the commencement of the
public offering of the Stock by the Underwriters, directly or indirectly, (i)
sell, offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement or similar arrangement that transfers, in whole or in
part, any of the economic consequences or ownership of Common Stock, whether any
such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Stock to be sold to the
Underwriters pursuant to this Agreement, (B) shares of Common Stock issued by
the Company upon the exercise of options granted under the Option Plans, all as
described in the footnote to the table under the caption "Capitalization" in the
Preliminary Prospectus, and (C) options to purchase Common Stock granted under
the Option Plans.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall
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occur as a result of which in your opinion the market price for the Stock has
been or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of, and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(m) The Company is familiar with the Investment Company Act of 1940,
as amended, and will conduct its affairs in such a manner to ensure that the
Company is not and, upon receipt and pending application of the net proceeds
from the sale of the Stock to be sold by the Company in the manner described in
the Prospectus, will not be an "investment company" or a company "controlled" by
an "investment company" within the meaning of the Investment Company Act of
1940, as amended, and the rules and regulations thereunder.
(n) The Company will comply with the Securities Act and the rules and
regulations of the Commission thereunder, and the Exchange Act and the rules and
regulations of the Commission thereunder, so as to permit the completion of the
distribution of the Stock as contemplated in this Agreement and the Prospectus.
(o) The Company shall apply the net proceeds of its sale of the Stock
as set forth in the Prospectus under the heading "Use of Proceeds."
(p) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of its
Common Stock.
(q) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Exchange Act, or the common law or otherwise, and the
Company agrees to reimburse each such Underwriter and controlling person for any
legal or other expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
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<PAGE>
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and shall reimburse
each Underwriter and each such officer, employee or controlling person promptly
upon demand for any legal or other expenses reasonably incurred by that
Underwriter, officer, employee or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred; PROVIDED, HOWEVER,
that (1) the indemnity agreements of the Company contained in this paragraph (a)
shall not apply to any such losses, claims, damages, liabilities or expenses if
such statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of any Underwriter for use in any Preliminary Prospectus
or the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto and (2) the indemnity agreement contained in this paragraph
(a) with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of
the Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 2 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, from and against any and all losses, claims, damages
or liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Securities Act, the Exchange Act, or the
common law or otherwise and to reimburse each of them for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or
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(ii) any untrue statement or alleged untrue statement of a material fact
contained in the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment thereof or supplement thereto) or
the omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of such
indemnifying Underwriter for use in the Registration Statement or the Prospectus
or any such amendment thereof or supplement thereto. The indemnity agreement of
each Underwriter contained in this paragraph (b) shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Stock.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; PROVIDED, HOWEVER, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense; provided that, the indemnifying party or
parties shall not be obligated with respect to all indemnified parties to pay,
reimburse any indemnified party or parties or otherwise be liable for the fees
and disbursements of more than one counsel under this Section 7 in conducting
and/or participating in such defense; unless there
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exists a potential conflict of interest between such counsel and any indemnified
party. If, within a reasonable time after receipt of the Notice, an indemnifying
party gives a Notice of Defense and the counsel chosen by the indemnifying party
or parties is reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under paragraphs (a) through
(c) of this Section 7 for any legal or other expenses subsequently incurred by
the indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso to
the preceding sentence and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b)) of this Section 7, other than if unavailable by its terms,
then each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in paragraph
(a) or (b) of this Section 7 (i) in such proportion as is appropriate to reflect
the relative benefits received by each indemnifying party from the offering of
the Stock or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of each indemnifying party in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, or actions in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Underwriters shall be deemed
to be in the same respective proportions as the total net proceeds from the
offering of the Stock received by the Company and the total underwriting
discount received by the Underwriters, as set forth in the table on the cover
page of the Prospectus, bear to the aggregate public offering price of the
Stock. Relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by each indemnifying party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent
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misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this paragraph
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
8. TERMINATION. This Agreement may be terminated by you at any time prior
to the Closing Date by giving written notice to the Company if after the date of
this Agreement trading in the Common Stock shall have been suspended, or if
there shall have occurred (i) the engagement in major hostilities or an
escalation of major hostilities by the United States or the declaration of war
or a national emergency by the United States on or after the date hereof, (ii)
any outbreak of hostilities or other national or international calamity or
crisis or change in economic or political conditions if the effect of such
outbreak, calamity, crisis or change in economic or political conditions in the
financial markets of the United States would, in the Underwriters' reasonable
judgment, make the offering or delivery of the Stock impracticable, (iii)
suspension of trading in securities generally or a material adverse decline in
value of securities generally on the New York Stock Exchange, the American Stock
Exchange, The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially and adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; PROVIDED, HOWEVER, that in the event of any such
termination the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
18
<PAGE>
Company under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several
Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing, and the
form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by counsel for the Underwriters.
(c) You shall have received from Riordan & McKinzie, counsel for the
Company, from Kelly Drye and Warrant, U.S. regulatory counsel for the Company,
and from Simmons & Simmons, English counsel for the Company, opinions, addressed
to the Underwriters and dated the Closing Date, covering the matters set forth
in Annex A, Annex B and Annex C hereto, respectively, and if Option Stock is
purchased at any date after the Closing Date, additional opinions from each such
counsel, addressed to the Underwriters and dated such later date, confirming
that the statements expressed as of the Closing Date in such opinions remain
valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not
19
<PAGE>
disclosed in the Registration Statement and the Prospectus, (vi) there are not
any franchises, contracts, leases or other documents which are required to be
filed as exhibits to the Registration Statement which have not been filed as
required, (vii) the representations and warranties of the Company herein are
true and correct in all material respects as of the Closing Date or any later
date on which Option Stock is to be purchased, as the case may be, and (viii)
there has not been any material change in the market for securities in general
or in political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to make a
public offering of the Stock, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the Chief Executive Officer and
the Chief Financial Officer of the Company, stating that the respective signers
of said certificate have carefully examined the Registration Statement in the
form in which it originally became effective and the Prospectus contained
therein and any supplements or amendments thereto, and that the statements
included in clauses (i) through (vii) of paragraph (d) of this Section 9 are
true and correct.
(f) You shall have received from Arthur Andersen LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder and
based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the Original
Letter), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company or any of its subsidiaries which, in your
sole judgment, makes it impractical or inadvisable to proceed with the public
offering of the Stock or the purchase of the Option Stock as contemplated by the
Prospectus. The Original Letter from Arthur Andersen LLP shall be addressed to
or for the use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Securities Act and the applicable published rules and regulations
of the Commission, (ii) set forth their opinion with respect to their
examination of the consolidated balance sheet of the Company as of December 31,
1999 and related consolidated statements of operations, stockholders' equity,
and cash flows for the 12 months ended December 31, 1999, (iii) and (iii)
address other matters agreed upon by Arthur Andersen LLP and you.
20
<PAGE>
(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(h) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(i) On or prior to the Closing Date, you shall have received from all
directors, officers, and stockholders agreements, in form reasonably
satisfactory to Chase Securities Inc. and Lehman Brothers, stating that without
the prior written consent of Chase Securities Inc. and Lehman Brothers on behalf
of the Underwriters, such person or entity will not, for a period of 180 days
following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make
any short sale, pledge, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences or ownership of
Common Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Gibson, Dunn & Crutcher LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; PROVIDED,
HOWEVER, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the transactions
contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
21
<PAGE>
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; PROVIDED,
HOWEVER, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other obligations
under Section 7 of this Agreement, the Company hereby agrees to reimburse on a
quarterly basis the Underwriters for all reasonable legal and other expenses
incurred in connection with investigating or defending any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to
the benefit of the Company and the several Underwriters and, with respect to the
provisions of Section 7 hereof, the several parties (in addition to the Company
and the several Underwriters) indemnified under the provisions of said Section
7, and their respective personal representatives, successors and assigns.
Nothing in this Agreement is intended or shall be construed to give to any other
person, firm or corporation any legal or equitable remedy or claim under or in
respect of this Agreement or any provision herein contained. The term
"successors and assigns" as herein used shall not include any purchaser, as such
purchaser, of any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Chase Securities Inc., c/o Chase H&Q, One
Bush Street, San Francisco, California 94104 with a copy to Gibson, Dunn &
Crutcher LLP, One Montgomery Street, Telesis Tower, San Francisco, California
94104, Attention: Kenneth R. Lamb, Esq. and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 1901 Main Street, 2nd Floor, Santa
Monica, California 90405, Attention: Jonathan Gans, Chief Executive Officer with
a copy to: Riordan & McKinzie, 300 South Grand Avenue, Suite 2900, Los Angeles,
California 90071, Attention: Cynthia M. Dunnett, Esq. All notices given by
telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or their respective directors or officers, and (c) delivery and
payment for the Stock under this Agreement; PROVIDED, HOWEVER, that if this
22
<PAGE>
Agreement is terminated prior to the Closing Date, the provisions of paragraph
(k) of Section 6 hereof shall be of no further force or effect.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
23
<PAGE>
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
INTERPACKET NETWORKS, INC.
By
---------------------------------
Jonathan Gans
Chief Executive Officer
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
CHASE SECURITIES INC.
LEHMAN BROTHERS
CIBC WORLD MARKETS CORP.
By Chase Securities Inc.
By
----------------------------------
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I
hereto.
24
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Shares
Underwriters to be Purchased
------------ ----------------
<S> <C>
Chase Securities Inc....................................
Lehman Brothers.........................................
CIBC World Markets Corp.................................
TOTAL.......................................... 6,500,000
</TABLE>
<PAGE>
March 31, 2000
InterPacket Networks, Inc.
1901 Main Street, 2nd Floor
Santa Monica, CA 90405
Ladies and Gentlemen:
We have acted as counsel to InterPacket Networks, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of the sale in an
underwritten public offering of authorized but unissued shares of the Company's
common stock, $.001 par value per share (the "Common Stock"). This opinion is
delivered to you in connection with the Registration Statement on Form S-1,
Registration No. 333-30762, as amended to date (the "Registration Statement"),
for the aforementioned sale, filed with the Securities and Exchange Commission
(the "Commission") under the 1933 Act.
In rendering the opinion set forth herein, we have made such
investigations of fact and law, and examined such documents and instruments, or
copies thereof established to our satisfaction to be true and correct copies
thereof, as we have deemed necessary under the circumstances.
Based upon the foregoing and such other examination of law and fact as
we have deemed necessary, and in reliance thereon, we are of the opinion that,
subject to such proceedings as are now contemplated being duly taken and
completed by you prior to the issuance of the Common Stock, the issuance of an
appropriate order by the Commission declaring the Registration Statement, as
amended, effective, and the compliance with applicable state securities and
"blue sky" laws, the Common Stock has been duly authorized and will, upon
<PAGE>
InterPacket Networks, Inc.
March 31, 2000
Page 2
sale and delivery thereof and receipt by the Company of full payment therefor as
set forth in the Registration Statement, be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus which is a part of the Registration Statement.
Very truly yours,
/s/ Riordan & McKinzie
----------------------
<PAGE>
PROMISSORY NOTE
$34,000.00
Santa Monica, California
June 1, 1999
For value received, I promise to pay to Interpacket Group, Inc. or order, at
1901 Main St., Santa Monica, California 90405, the sum of Thirty-Four
Thousand Dollars ($34,000.00), with interest from September 7, 1999, on
unpaid principal at the rate of six per cent (6%) per annum until fully paid.
I shall make interest only payments of One Hundred Seventy ($170.00) on the
7th day of each month, from the 7th day of October, 1999, through the 7th day
of September 2000. so long as I am employed by Interpacket Group, Inc., such
monthly interest payments shall be made by a payroll deduction in the amount
thereof from my regular salary scheduled to be paid on or about the 7th day
of each month. Principal plus all accrued and unpaid interest on such
principal shall be due and payable on the 7th day of September 2000. This
note may be prepaid in whole or in part, without penalty, at my option. Each
payment shall be credited first on interest then due and the remainder on
principal; and interest shall thereupon cease upon the principal so credited.
Should interest not be so paid it shall thereafter bear like interest as the
principal, but such unpaid interest so compounded shall not exceed an amount
equal to simple interest on the unpaid principal at the maximum rate
permitted by law. Should default be made in payment of any installment of
principal or interest when due the whole sum of principal and interest shall
become immediately due at the option of the holder of this note. Principal
and interest are payable in lawful money of the United States
/ s / Peter Zimble
----------------------
Peter Zimble
<PAGE>
EXHIBIT 10.8
AGREEMENT OF SUBLEASE
BETWEEN
RYSHER ENTERTAINMENT, INC.,
A DELAWARE CORPORATION,
AS SUBLANDLORD,
AND
INTERPACKET GROUP, INC.,
A DELAWARE CORPORATION,
AS SUBTENANT
Dated: February 1, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Subleasing of the Subleased Premises...................................................................1
2. Sublease Term..........................................................................................1
3. Rent...................................................................................................2
4. Parking................................................................................................4
5. Subordination to and Incorporation of Terms of Master Lease............................................4
6. Use of the Subleased Premises..........................................................................8
7. Subtenant's Insurance..................................................................................8
8. Condition of the Subleased Premises; Alterations.......................................................8
9. Assignment and Subletting.............................................................................10
10. Quiet Enjoyment.......................................................................................10
11. Time Limits...........................................................................................10
12. Brokers and Finders...................................................................................10
13. Rent Abatement........................................................................................11
14. Indemnification.......................................................................................11
15. Right of Entry........................................................................................11
16. Notices...............................................................................................12
17. Authority.............................................................................................13
18. Cancellation of Master Lease..........................................................................13
19. Letter of Credit and Temporary Security Deposit.......................................................14
20. Definition of Sublandlord.............................................................................15
21. No Leasehold Mortgages................................................................................16
22. Signage...............................................................................................16
23. Representations by Sublandlord........................................................................16
24. Consent of Landlord...................................................................................16
25. Landlord Estoppel Certificate.........................................................................16
26. Roof Related Rights...................................................................................17
27. Entire Agreement......................................................................................17
</TABLE>
EXHIBITS
EXHIBIT A - SUBLEASED PREMISES
EXHIBIT B - FORM OF MEMORANDUM OF SUBLEASE COMMENCEMENT DATE
EXHIBIT C - EXCLUDED PROVISIONS OF MASTER LEASE
EXHIBIT D - FORM OF LETTER OF CREDIT
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Additional Rent.................................................................................................3
AS IS...........................................................................................................8
Base Year.......................................................................................................3
Basic Rent......................................................................................................2
Building........................................................................................................1
Dedicated HVAC.................................................................................................17
Landlord........................................................................................................1
L-C Amount.....................................................................................................14
L-C Security Deposit...........................................................................................14
Lobby...........................................................................................................9
Master Lease....................................................................................................1
Passenger Elevator..............................................................................................7
Premises........................................................................................................1
Removal Costs...................................................................................................9
Sublandlord.....................................................................................................1
Sublease........................................................................................................1
Sublease Commencement Date......................................................................................1
Sublease Expiration Date........................................................................................1
Sublease Term...................................................................................................1
Subleased Premises..............................................................................................1
Subtenant.......................................................................................................1
Subtenant's Share...............................................................................................3
</TABLE>
<PAGE>
SUBLEASE
THIS SUBLEASE (the "Sublease") is entered into as of February 1, 2000,
by and between RYSHER ENTERTAINMENT, INC., a Delaware corporation (the
"Sublandlord"), and INTERPACKET GROUP, INC., a Delaware corporation (the
"Subtenant").
R E C I T A L S :
-----------------
A. Maguire Thomas Partners-Colorado Place, a California general
partnership, as landlord ("Landlord"), and Sublandlord, as tenant, entered into
that certain Office Lease (the "Master Lease"), dated May 31, 1996, whereby
Landlord leased to Sublandlord and Sublandlord leased from Landlord certain
space (the "Premises") in the building located at 2401 Colorado Avenue, Santa
Monica, California (the "Building").
B. Sublandlord now desires to sublease to Subtenant and Subtenant
desires to sublease from Sublandlord approximately 28,500 rentable square feet
of space located on the second (2nd) floor of the Building, as more particularly
set forth in Exhibit A, attached hereto (the "Subleased Premises") upon the
terms and conditions set forth in this Sublease.
C. All initially capitalized terms not specifically defined in this
Sublease shall have the meaning ascribed to such terms in the Master Lease.
A G R E E M E N T :
-------------------
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows.
1. SUBLEASING OF THE SUBLEASED PREMISES.
Sublandlord hereby subleases to the Subtenant and Subtenant hereby
leases and hires from Sublandlord the Subleased Premises upon and subject to the
terms and conditions hereinafter set forth. Sublandlord and Subtenant agree that
the rentable area of the Subleased Premises for purposes of this Sublease and
any and all calculations hereunder or in connection herewith shall be deemed to
be 28,500 rentable square feet.
The parties hereby acknowledge and agree that the rentable square footage of the
Subleased Premises, as set forth in this Section 1.1, shall not be subject to
remeasurement or modification.
2. SUBLEASE TERM. Unless sooner terminated as provided for herein, this
Sublease is for the term (the "Sublease Term") commencing upon the date that
Sublandlord delivers the Subleased Premises to Subtenant pursuant to Section 8.1
below (the "Sublease Commencement Date"), which Sublease Commencement Date is
anticipated to be between February 15, 2000 and
<PAGE>
March 1, 2000. The term of this Sublease shall expire on October 25, 2006
("Sublease Expiration Date"). Following the Sublease Commencement Date,
Sublandlord may, at its option, deliver to Subtenant a Memorandum of Sublease
Commencement Date in the form attached hereto as Exhibit B which shall confirm
the Sublease Commencement Date and Subtenant shall execute and deliver such
memorandum to Sublandlord within five (5) business days following receipt
thereof. Notwithstanding anything to the contrary set forth in this Sublease or
in the Master Lease, Sublandlord shall not be subject to any liability in the
event Sublandlord fails to tender possession of the Subleased Premises to
Subtenant hereunder, nor shall Sublandlord be liable for any damage or injury
resulting from delay incident to failure to tender possession of the Subleased
Premises to Subtenant in a timely manner, but in such case Subtenant shall not
be obligated to pay rent until possession of the Subleased Premises is tendered
to Subtenant. Notwithstanding anything to the contrary set forth in this
Sublease, if the Sublease Commencement Date does not occur by April 1, 2000 (the
"Outside Date"), Subtenant, as its sole remedy, may terminate this Sublease by
giving Sublandlord written notice of termination on or before April 6, 2000, and
in such event, this Sublease shall be deemed null and void and of no further
force and effect and Sublandlord shall promptly refund any sums previously
advanced by Subtenant under this Sublease and the parties hereto shall have no
further responsibilities or obligations to each other with respect to this
Sublease.
3. RENT.
3.1 BASIC RENT. Commencing on the Sublease Commencement Date, Subtenant
shall pay to Sublandlord annual basic rental (the "Basic Rent") in the amounts
set forth below, in monthly installments, in advance, on the first (1st) day of
each calendar month during the Sublease Term, without demand, offset, abatement
or deduction of any kind, except as expressly provided otherwise in this
Sublease.
<TABLE>
<CAPTION>
MONTHLY BASIC RENT PER
RENTABLE
SUBLEASE MONTH ANNUAL BASIC RENT MONTHLY BASIC RENT SQUARE FOOT
-------------- ----------------- ------------------ -----------
<S> <C> <C> <C>
1-12 $820,800.00 $68,400.00 $2.40
13-24 $974,700.00 $81,225.00 $2.85
25-36 $1,005,480.00 $83,790.00 $2.94
37-48 $1,036,260.00 $86,355.00 $3.03
49-60 $1,067,040.00 $88,920.00 $3.12
61-72 $1,097,820.00 $91,485.00 $3.21
73-Sublease $1,132,020.00 $94,335.00 $3.31
Expiration Date
</TABLE>
For purposes of the foregoing Basic Rent schedule, the first
(1st) "Sublease Month" shall mean the period commencing on the Sublease
Commencement Date and ending on the day immediately preceding the first (1st)
monthly anniversary of the Sublease
-2-
<PAGE>
Commencement Date, and thereafter each succeeding Sublease Month shall
commence on the next monthly anniversary of the Sublease Commencement Date,
provided that the last Sublease Month shall end on the Sublease Expiration
Date. The Basic Rent payable for the first (1st) full month of the Sublease
Term shall be payable by Subtenant to Sublandlord concurrently with
Subtenant's execution and delivery of this Sublease to Sublandlord.
3.2 ADDITIONAL RENT. In addition to the Basic Rent, Subtenant covenants
and agrees to pay to Sublandlord as additional rent (the "Additional Rent"), in
addition to and in the same manner as the Basic Rent, the following:
(i) beginning on the Sublease Commencement Date and monthly
thereafter throughout the Sublease Term, Operating Expenses and Real Property
Taxes in accordance with the terms of Article 5 of the Master Lease, provided
that for purposes of such calculation (a) the rentable square footage of the
Subleased Premises shall be used, (b) Subtenant shall only be obligated to pay
for increases in Operating Expenses and Real Property Taxes over the Operating
Expenses and Real Property Taxes applicable to the calendar year 2000 (the "Base
Year"), (c) "Subtenant's Share," as that term is defined hereinbelow, of actual,
annual calculations of Operating Expenses and Real Property Taxes made by
Landlord (including those with respect to the Base Year), as evidenced by the
statements delivered by Landlord pursuant to Section 5.3 of the Master Lease,
setting forth the amounts payable by Sublandlord to Landlord under the Master
Lease, copies of which statements shall be delivered by Sublandlord to
Subtenant, and (d) Subtenant's Share of Operating Expense and Real Property Tax
estimates made by Landlord pursuant to Section 5.3 of the Master Lease, provided
that Subtenant shall only be obligated to pay Subtenant's Share of the such
estimates to the extent they exceed the Operating Expenses and Real Property
Taxes applicable to the Base Year;
(ii) within five (5) business days after delivery to Subtenant of a
notice of Additional Rent due, which notice shall include a copy of the
applicable bill or escalation statement or other evidence, if any, that
Additional Rent is due, the amount of any and all other costs, charges or
expenses (other than Basic Rent payable by Sublandlord under the Master Lease)
attributable to the Subleased Premises payable by Sublandlord to Landlord
pursuant to the provisions of the Master Lease;
(iii) commencing on the Sublease Commencement Date and monthly
thereafter throughout the Sublease Term, the rent for the parking passes
provided to Subtenant as provided in Section 4 hereof; and
(iv) from time to time as may be applicable, the amount of any
other costs, charges or expenses billed to Sublandlord by Landlord for
reimbursement to Landlord pursuant to the Master Lease for special construction
services or other special services to the extent such items have been
specifically requested by Subtenant in a written notice to Landlord, such
amounts being due from Subtenant to Sublandlord at least five (5) business days
before such amounts are due to Landlord pursuant to the Master Lease, but in no
event more than ten (10) business days after Sublandlord delivers to Subtenant
the applicable statement or bill from Landlord.
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(v) "Subtenant's Share" for purposes of this Sublease shall mean a
fraction, the numerator of which is the rentable square footage of the Subleased
Premises and the denominator of which is 61,279, being the rentable square
footage of the Premises for purposes of this Sublease.
3.3 PRORATION. Rent for any partial month or year during which the
Sublease Commencement Date occurs or the termination or expiration of this
Sublease occurs shall be prorated based on the actual number of days elapsed in
such month or year.
3.4 PLACE FOR PAYMENT OF RENT. All Basic Rent and Additional Rent
payments shall be made in lawful money of the United States of America and shall
be paid to the Sublandlord at the address set forth in Section 16 of this
Sublease, or to such other party or address as Sublandlord may designate in
writing to Subtenant.
4. PARKING. Subtenant shall have the rights and obligations to rent parking
passes as set forth in Section 26 of the Master Lease, provided that (i) the
number of unreserved and reserved parking passes which Subtenant is required, or
may elect, to rent, as applicable, shall be based upon the rentable square
footage of the Subleased Premises, not the Rentable Area in the Premises, (ii)
the phrase at the end of Section 26.1 of the Master Lease, on page 30 thereof,
which reads: "... provided, however, Tenant shall not be obligated to rent any
parking passes during the first six (6) months following the Commencement Date"
shall not apply to this Sublease, (iii) the last sentence of Section 26.2 of the
Master Lease, on page 31 thereof, shall not apply to this Sublease, and (iv)
with respect to Section 26.4 of the Master Lease, Subtenant shall be entitled to
rent abatement for Subtenant's parking rent as set forth in the last sentence of
said Section 26.4 to the extent that Sublandlord actually receives parking rent
abatement for the parking passes and spaces rented by Subtenant, but such
parking rent abatement shall be for the months of the Term under the Master
Lease as set forth therein and shall be without regard to whether Subtenant has
rented such passes and spaces continuously for the prior six (6) months.
Notwithstanding any contrary provision in this Sublease, Subtenant shall rent a
minimum of forty-three (43) parking passes and be entitled to rent up to one
hundred (100) parking passes. Up to ten percent (10%) of all such parking passes
may be for reserved parking spaces and the balance of such parking passes shall
be for unreserved parking spaces. The rates currently being paid by Sublandlord
pursuant to the Master Lease for parking passes in the Building are: One Hundred
Twenty Five and 90/100 Dollars ($125.90) per unreserved parking pass per month,
and One Hundred Fifty Eight and 30/100 Dollars ($158.30) per reserved parking
pass per month. Sublandlord agrees to use commercially reasonable efforts, but
without cost to Sublandlord, to attempt to cause Landlord to rent additional
parking passes to Subtenant, if requested by Subtenant and subject to their
availability.
5. SUBORDINATION TO AND INCORPORATION OF TERMS OF MASTER LEASE.
5.1 SUBORDINATION. This Sublease is in all respects subject and
subordinate to the terms and conditions of the Master Lease and to the matters
to which the Master Lease is subordinate; the Sublease shall also be subject to
and Subtenant accepts the Sublease also subject to any amendments, modifications
or supplements to the Master Lease hereafter made, provided that Sublandlord
shall not enter into any amendment, modification or supplement of the Master
Lease that would (i) prevent or adversely affect the use by the Subtenant of the
Subleased
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Premises in accordance with the terms hereof, (ii) increase the obligations of
the Subtenant or decrease its rights hereunder, or (iii) shorten the term hereof
or increase the rent required to be paid by the Subtenant hereunder, unless
expressly approved in writing by Subtenant. Except as otherwise expressly
provided in this Sublease, the Subtenant assumes and shall keep, observe and
perform every term, provision, covenant and condition on Sublandlord's part to
be kept, observed and performed pursuant to the Master Lease, insofar as such
pertain to the Subleased Premises, for the Sublease Term. The Subtenant hereby
agrees that it will conduct itself and its operations, and cause its agents,
contractors, servants, employees, partners, invitees and any subtenants and
licensees to conduct themselves and their operations, so as not to cause
Landlord or Sublandlord to be in default under the Master Lease.
5.2 INCORPORATION OF TERMS OF MASTER LEASE. Subtenant hereby
acknowledges that it has read and is familiar with the provisions of the Master
Lease and agrees that this Sublease is subordinate to and subject to the Master
Lease. Except as otherwise expressly provided in this Sublease, the terms,
provisions, covenants, stipulations, conditions, rights, obligations, remedies
and agreements contained in the Master Lease are incorporated herein by
reference and are made a part hereof, and shall, as between the Sublandlord and
the Subtenant (as if the Sublandlord were the landlord under the Master Lease
and the Subtenant were the tenant under the Master Lease) constitute the terms
of this Sublease except to the extent that they are inapplicable to,
inconsistent with, or modified by the terms of this Sublease. All waivers of
claims against or exculpations of Landlord contained in the Master Lease shall
run in favor of both Landlord and Sublandlord. Notwithstanding the foregoing, as
between the Sublandlord and the Subtenant, the provisions of the Master Lease
set forth on Exhibit C attached hereto and made a part hereof shall not apply
and shall be of no force or effect with respect to this Sublease.
5.3 ESTATE GRANTED; PROVISION OF SERVICES.
5.3.1 ESTATE GRANTED. Subtenant's estate shall in all respects be
limited to, and be construed in a manner consistent with, the estate granted to
Sublandlord by Landlord.
5.3.2 PROVISION OF SERVICES. The Subtenant agrees that,
notwithstanding anything to the contrary in this Sublease or in the Master
Lease, (i) the Sublandlord shall not be required to keep, observe or perform any
of the Landlord's obligations under the Master Lease, including, without
limitation, to provide any of the services or make any of the repairs or
restorations that the Landlord has agreed to provide or make or cause to be
provided or made under the Master Lease, and Sublandlord's sole obligation with
respect thereto shall be to use reasonable efforts to cause the Landlord to
provide such services and make such repairs or restorations as are required to
be provided or made under the Master Lease, and (ii) any and all requests for
any special or additional services furnished at the expense of Sublandlord under
the Master Lease shall be made only with Sublandlord's prior written consent,
which shall not be unreasonably withheld or delayed, and Sublandlord shall
reasonably cooperate with Subtenant in such requests. Notwithstanding any
contrary provision contained in this Sublease, Sublandlord shall not be liable
under any circumstances for consequential damages (including, but not limited
to, damage or injury to, or interference with, the conduct of Subtenant's
business [and any loss of revenue or profits therefrom]). Subtenant shall pay
all costs and expenses incurred by Sublandlord in connection with (a) any such
requests and (b) the provision by Landlord of any such special or additional
services. The Subtenant shall not make any claim against Sublandlord
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for any damage which may arise and Subtenant's obligations hereunder shall not
be impaired by reason of (I) the failure of Landlord to keep, observe or perform
its obligations pursuant to the Master Lease, or (II) the acts or omissions of
Landlord, its agents, contractors, servants, employees, invitees or licensees.
Notwithstanding any contrary provision of this Sublease, in the event that
Landlord fails to perform its obligations under the Master Lease, Sublandlord
agrees that upon receipt of written notice from Subtenant it shall use
commercially reasonable efforts to attempt to cause Landlord to comply with the
terms of the Master Lease, provided that Sublandlord shall in no event be
required to initiate any litigation against Landlord in connection therewith. In
the event that Landlord continues its failure to perform pursuant to the Master
Lease and Subtenant notifies Sublandlord in writing that Subtenant desires to
initiate litigation against Landlord with respect thereto, then Sublandlord
shall promptly assign to Subtenant any of its rights under the Master Lease to
enforce the applicable terms of the Master Lease against Landlord. Thereafter
Subtenant may initiate and maintain a lawsuit against Landlord to enforce the
applicable terms of the Master Lease, at Subtenant's sole cost and expense,
provided that Subtenant shall indemnify, defend, protect, and hold harmless
Sublandlord from and against any and all loss, cost, claim, damage, expense and
liability (including, without limitation, reasonable attorneys' fees, costs, and
disbursements) incurred in connection with or arising from any such direct
action by Subtenant. Notwithstanding any contrary provision in this Sublease,
but subject to the approval of the Landlord, Subtenant shall have the right at
any time to take any action required to be taken, but not timely taken, by
Sublandlord under the Master Lease that may be necessary to prevent a default by
Sublandlord under the terms of the Master Lease.
5.4 SUBLANDLORD COVENANTS. Sublandlord covenants to perform its
obligations under the Master Lease (subject to the obligations of Subtenant as
set forth in this Sublease). Furthermore, Sublandlord covenants not to take any
action or do or perform any act or fail to perform any act which would result in
the failure or breach of any of the covenants, agreements, terms, provisions or
conditions of the Master Lease on the part of the tenant thereunder (subject to
the obligations of Subtenant as set forth in this Sublease). Sublandlord shall
indemnify, defend, protect, and hold Subtenant harmless from and against, any
and all losses, costs, claims, damages, expenses and liabilities (including,
without limitation, reasonable attorneys' fees, costs and disbursements),
arising from any default by Sublandlord in the performance of any of
Sublandlord's obligations under this Sublease or the Master Lease (subject to
the obligations of Subtenant as set forth in this Sublease). Sublandlord
represents and agrees that: (i) subject to Section 5.5 below, Sublandlord has
delivered to Subtenant a current copy of the Master Lease and there are no other
agreements between Sublandlord and Landlord relating to the Subleased Premises
which will adversely affect or diminish the rights of Subtenant or impose any
greater obligations on Subtenant than as expressly stated therein; (ii) as of
the date of this Sublease, the Master Lease is in full force and effect, and
Sublandlord is not now, and as of the Sublease Commencement Date will not be, in
default thereunder; (iii) the provisions of the Master Lease shall not be
waived, modified, amended or surrendered by Sublandlord in any manner so as to
prevent or adversely affect the use by Subtenant of the Subleased Premises in
accordance with the terms of this Sublease, nor as to impose any greater
obligations on Subtenant than as imposed hereunder, without the prior written
consent of Subtenant in each instance; and (iv) Sublandlord has no actual
knowledge of any claim by Landlord that Sublandlord is in default or breach of
any of the provisions of the Master Lease as of the date of this Sublease.
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5.5 RIGHT TO USE PASSENGER ELEVATORS.
5.5.1 Notwithstanding anything to the contrary in this Sublease or
in the Master Lease, Subtenant shall be entitled to use the passenger elevator
bank (the "Passenger Elevator") servicing the second (2nd) floor of the Building
for the sending and receipt of mail, small packages by Federal Express, UPS or
other courier, or deliveries that require the use of two-wheeled handcarts. A
delivery must not consume more than fifty percent (50%) of the elevator,
including delivery person(s). Each delivery must be expedited in and out of the
Passenger Elevator so as not to interrupt normal passenger elevator operation.
5.5.2 Sublandlord shall be responsible for the purchase of (i) one
(1) set of elevator pads and elevator pad hooks in all three (3) Passenger
Elevators, which shall be approved and installed by Landlord's contractor and
(ii) 1/4 inch masonite sufficient to cover the floor of the Passenger Elevator.
Storage, installation, removal and maintenance of the pads and masonite are the
responsibility and cost of the Subtenant. Elevator pads must be utilized
whenever damage to the elevator could be caused based on the nature of items
being moved.
5.5.3 Deliveries, which are not deliveries and removals described
in Sections 5.5.4 and 5.5.5, or deliveries using four-wheeled carts or that
delay normal Passenger Elevator use are prohibited from utilizing the ground
floor elevator lobby of the Building. Such deliveries, which may not consume
more than fifty percent (50%) of the Passenger Elevator including delivery
person(s), and shall not exceed more than six (6) in any business day, must
occur through the use of the 2425 Colorado Avenue loading dock and freight
elevator, and may occur at any time during normal business hours. Materials must
be transported via the 2425 Colorado Avenue freight elevator through the P-3
level of the parking garage and directly up to the Subleased Premises via the
Passenger Elevator.
5.5.4 Deliveries and removals for the purposes of Subtenant's
refurbishing and/or alterations of the Subleased Premises (construction) shall
be made through the use of the 2425 Colorado Avenue loading dock and freight
elevator. Materials must be transported via the 2425 Colorado Avenue freight
elevator through the P-3 level of the parking garage and directly up to the
Subleased Premises via the Passenger Elevator. Such deliveries/removals shall
occur on the weekend between 9:00 a.m. Saturday and 6:00 a.m. Monday morning and
between 7:00 p.m. and 6:00 a.m., Monday through Friday, and shall be
pre-scheduled with the Building Management Office at least two days prior to
need. A Security Officer must be present to run the elevator during these
periods at a cost of $25.00 per hour (minimum of 4 hours). Cost of said security
officer is the responsibility of Subtenant. Only one (1) Passenger Elevator may
be utilized and must be padded before use. Subtenant must protect the floor of
the Passenger Elevator, and any other areas that could be damaged during the
refurbishment of the space, with 1/4 inch masonite. Subtenant shall cause the
Passenger Elevator and any other affected areas to be cleaned in a first-class
manner after each use at Subtenant's cost.
5.5.5 Deliveries and removals for the purpose of Subtenant's move
into or out of the Subleased Premises and deliveries and removals not covered by
Sections 5.5.1 or 5.5.3, shall be made through the use of the 2425 Colorado
Avenue loading dock and freight elevator. Materials must be transported via the
2425 Colorado Avenue freight elevator through
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the P-3 level of the parking garage and directly up to the Subleased Premises
via the Passenger Elevator. Such deliveries or removals shall occur on the
weekend between 9:00 a.m. Saturday and 6:00 a.m. Monday morning and between 7:00
p.m. and 6:00 a.m., Monday through Friday and must be pre-scheduled with the
Building Management Office at least two days prior to need. A Security Officer
must be present to run the elevator during these periods at a cost of $25.00 per
hour (minimum of 4 hours). Cost of said Security Officer is the responsibility
of Subtenant. Only one (1) Passenger Elevator may be utilized and must be padded
before use. Subtenant must protect the floor of the Passenger Elevator, and any
other areas that could be damaged during Subtenant's move into or out of the
Subleased Premises or during any delivery or removal of furniture or equipment
items, with 1/4 inch masonite. Subtenant shall cause the Passenger Elevator and
any other affected areas to be cleaned in a first-class manner after each use at
Subtenant's cost. Notwithstanding anything to the contrary in this paragraph,
any deliveries or removals covered by this Section, which can be completed
within a period of time not to exceed thirty (30) minutes shall be prescheduled
by 4:00 p.m. the same day, and Subtenant shall not be charged for any security
services.
5.5.6 Subtenant shall not cause elevator lobbies, doorways or corridors
to be blocked from normal occupant usage during deliveries, refurbishing of the
Subleased Premises, or moves into or out of the Subleased Premises.
5.5.7 Any damage to the elevators and surrounding area caused by
Subtenant's use will be repaired by the Building Management Office and charged
back to Sublandlord, who shall not pass on the charge(s) to Subtenant unless
such damage is caused by the gross negligence or willful misconduct of
Subtenant.
5.5.8 If Subtenant violates the provisions set forth in Sections 5.5.1
and 5.5.3, Landlord shall provide Subtenant with written notice and fifteen (15)
days thereafter in which to cure said violation. If Subtenant fails to cure such
violation within the specified cure period, Landlord shall have the right to
cause all deliveries described in Section 5.5.3 to be made after hours.
6. USE OF THE SUBLEASED PREMISES. The Subtenant covenants not to use the
Subleased Premises for any purpose other than any lawful business use permitted
by the terms of the Master Lease and in a manner consistent in all respects with
the provisions of the Master Lease.
7. SUBTENANT'S INSURANCE. Notwithstanding anything in the Master Lease or
this Sublease to the contrary, Subtenant shall cause Subtenant's insurance, as
required to be carried pursuant to the terms of the Master Lease, to name
Landlord and Sublandlord as additional insureds.
8. CONDITION OF THE SUBLEASED PREMISES; ALTERATIONS.
8.1 CONDITION OF SUBLEASED PREMISES. Prior to the Sublease Commencement
Date, Sublandlord shall remove all debris from the Subleased Premises and shall
deliver the Subleased Premises to Subtenant in a broom clean condition. Subject
to the foregoing, Subtenant has examined the Subleased Premises, is familiar
with the physical condition thereof and agrees (except as may be specifically
set forth in this Sublease) to take the same "AS IS" in
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the condition in which it exists as of the date of execution hereof. Subtenant
hereby acknowledges that Sublandlord has made no representations or warranties
with respect to the condition of the Subleased Premises, including, without
limitation the suitability of the Subleased Premises for Subtenant's intended
use, and that Sublandlord shall not, nor or at any time in the future, be
required to make any expenditures whatsoever with respect to the Subleased
Premises, except as otherwise specifically provided herein. Sublandlord and
Subtenant agree that the presently existing receptionist desk in the elevator
vestibule lobby within the Premises (the "Lobby") shall remain in place, and
Subtenant shall have the right to have a receptionist work at such desk. In no
event will Subtenant be permitted to place any other desk or table in the Lobby
for use by Subtenant's receptionist. The Lobby shall be kept in its present size
and configuration, and shall be used by Edmunds.com, Inc., a New York
corporation (or any other third party who may occupy the portion of the Premises
which excludes the Subleased Premises) and its employees and invitees to access
the portion of the Premises which excludes the Subleased Premises (the
"Non-Subleased Premises").
8.2 ALTERATIONS. Subtenant shall have the right to make Alterations to
the Subleased Premises, (i) without Sublandlord's consent but upon prior written
notice to Sublandlord, and (ii) subject to Landlord's approval and any other
requirements of the Master Lease. With respect to any amounts required to be
paid to Landlord pursuant to the Master Lease in connection with any proposed
Alterations to the Subleased Premises by Subtenant, including, without
limitation, amounts required to be paid under Section 8.2 thereof, such amounts
shall be payable by Subtenant not later than five (5) business days following
Sublandlord's delivery of written request therefor to Subtenant, which request
shall include copies of the invoices from Landlord to Sublandlord. Sublandlord
shall not be entitled to reimbursement from Subtenant for any costs, fees or
expenses incurred by Sublandlord in connection with its own independent review
of any Alterations proposed by Subtenant.
8.3 OWNERSHIP AND REMOVAL OF ALTERATIONS. In connection with the
provisions of and the rights of Landlord under the Master Lease, during the term
of this Sublease, Subtenant shall retain ownership of the Alterations made by
Subtenant to the Subleased Premises from and after the date of execution hereof.
Subtenant shall only be required to remove Alterations made by Subtenant to the
Subleased Premises upon the expiration or termination of this Sublease to the
extent required by Landlord in accordance with the terms of the Master Lease,
and in such event Subtenant shall remove such Alterations prior to the
expiration or earlier termination of the Sublease Term, at Subtenant's sole
cost, and restore the applicable portion of the Subleased Premises to its
condition which existed as of the Sublease Commencement Date, reasonable wear
and tear excepted, in accordance with the terms of the Master Lease. In the
event that Subtenant fails to complete such work prior to the expiration or
earlier termination of the Sublease Term, then Sublandlord shall have the right
to perform such work, at Subtenant's cost, and Subtenant shall pay Sublandlord
the amount incurred by Sublandlord therefor (the "REMOVAL COSTS") within five
(5) days of Subtenant's receipt of an invoice. If Subtenant fails to timely pay
Sublandlord the Removal Costs, then Sublandlord shall have the right to draw
upon the "L-C," as that term is defined in Section 19.1 below, in addition to
Sublandlord's other rights and remedies under this Sublease.
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9. ASSIGNMENT AND SUBLETTING.
9.1 CONSENT REQUIRED. Subtenant shall not, directly or indirectly, by
operation of law or otherwise, sell, assign, encumber, pledge, or otherwise
transfer or hypothecate all or any part of the Subleased Premises or Subtenant's
leasehold estate hereunder, or sublet or otherwise permit the occupancy of the
Subleased Premises or any portion thereof (any of the foregoing being referred
to herein as a "Transfer"), without the prior written consent of Sublandlord and
Landlord (in accordance with the provisions of Article 14 of the Master Lease,
it being expressly agreed as between Sublandlord and Subtenant that the
provisions of Section 14.1(b) of the Master Lease shall be applicable as between
Sublandlord and Subtenant under this Sublease) in each instance; any such
Transfer shall be subject to all of the rights of the Landlord under said
Article 14 and, except as otherwise specifically provided for or modified
herein, such rights shall apply equally to Sublandlord. Subtenant agrees that
any consent to any Transfer of this Sublease or the Subleased Premises shall not
be deemed to be a consent to any other Transfer and shall not thereby release or
discharge Subtenant of its obligations or liabilities hereunder. Any assignment
or subletting for which Sublandlord's consent is required hereunder made without
such consent shall be void. Sublandlord agrees to use commercially reasonable
efforts to attempt to cause Landlord to consent to a proposed Transfer of this
Sublease, provided that (i) Subtenant pays any costs incurred by Sublandlord
with respect thereto, and (ii) Sublandlord shall in no event be required to
initiate any litigation against Landlord in connection therewith.
9.2 PROFITS. With respect to Section 14.5(a) of the Master Lease
(incorporated into this Sublease by reference), Subtenant shall pay to
Sublandlord, within five (5) days after receipt of Profits by Subtenant, as
Additional Rent, fifty percent (50%) of any Profits received by Subtenant in
connection with a sub-sublease or assignment of this Sublease (other than to an
Affiliate or Successor of InterPacket Group, Inc., a Delaware corporation,
unless Sublandlord is required to pay Profits to Landlord under the Master Lease
in connection with the Transfer to such Affiliate or Successor).
10. QUIET ENJOYMENT. With respect to Article 25 of the Master Lease
(incorporated into this Sublease by reference), Subtenant's right to quiet
enjoyment of the Subleased Premises shall in any event be subject to Landlord's
rights under the Master Lease.
11. TIME LIMITS. As between Sublandlord and Subtenant, and except as
provided elsewhere in this Sublease, the time limits set forth in the Master
Lease for the giving of notices, making demands, performance of any act,
condition or covenant, or the exercise of any right, remedy or option, shall be
extended or shortened for the purpose of this Sublease in each instance by five
(5) business days, as appropriate (or as otherwise reasonably appropriate if
such time limit is less than five (5) business days), so that notices may be
given, demands made, or any act, condition or covenant performed, or any right,
remedy or option hereunder exercised, by Sublandlord or Subtenant, as the case
may be, within the time limits relating thereto contained in the Master Lease.
12. BROKERS AND FINDERS. In connection with the transaction contemplated by
this Sublease, each party hereby represents and warrants that it has not had,
and shall not have, any dealings with any third party to whom the payment of any
broker's fee, finder's fee, commission
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or other similar compensation shall or may become due or payable, other than
CRESA Partners LLC and Coldwell Banker Commercial (the "Brokers"). Sublandlord
and the Subtenant shall each indemnify, defend and hold the other harmless from
and against any and all loss, cost, damage, liability, claim or expense
(including, without limitation, reasonable attorneys' fees, charges and
disbursements), by reason of a breach of the foregoing provisions or by reason
of any claim of or liability to any broker, finder or like agent who shall claim
to have dealt with Sublandlord or Subtenant, respectively, in connection with
this transaction and this Sublease, except with respect to the Brokers as
provided above. The provisions of this Section shall survive the termination of
this Sublease.
13. RENT ABATEMENT. With respect to Article 6 of the Master Lease
(incorporated by reference into this Sublease), Subtenant shall be entitled to
rent abatement or a rent reduction under this Sublease with respect to the
Subleased Premises, subject to the provisions of said Article 6 of the Master
lease, but only for the time period that Sublandlord receives rent abatement
from Landlord for the Subleased Premises or a portion thereof. The sentence in
Article 6 of the Master Lease which relates to Paragraph 4.3(a) of the Master
Lease, and the penultimate sentence of said Article 6, shall not apply to this
Sublease.
14. INDEMNIFICATION. Neither Sublandlord nor its agents shall be liable to
Subtenant, its employees, agents, contractors and licensees for, and Subtenant
shall indemnify, defend, protect, and hold Sublandlord harmless from and
against, any and all losses, costs, claims, damages, expenses and liabilities
(including, without limitation, reasonable attorneys' fees, costs and
disbursements), incurred in connection with or arising from (i) any injury to
Subtenant or to any other person or for any damage to or loss (by theft or
otherwise) of any of Subtenant's property and/or the property of any other
person, irrespective of the cause of such injury, damage or loss, (ii) any
default by Subtenant in the observance or performance of any of the terms,
covenants, conditions or agreements of this Sublease on Subtenant's part to be
observed or performed, (iii) the use or occupancy or manner of use or occupancy
of the Subleased Premises by Subtenant or any person claiming through or under
Subtenant, (iv) the condition of the Subleased Premises, or (v) any acts,
omissions or negligence of Subtenant, its agents, employees, or licensees, in or
about the Subleased Premises, and any acts, omissions or negligence of
Subtenant's visitors within the Premises, either prior to, during, or after the
expiration of the Sublease Term. Sublandlord shall, however, be responsible for
any of the foregoing to the extent caused by or due to the negligence or willful
misconduct of Sublandlord or its agents.
In connection with any matter covered by an indemnity set forth in this
Section 14 or incorporated into this Sublease by reference to the Master Lease,
the indemnified party shall promptly give the indemnifying party written notice
of any such matter which may be covered by such indemnity provisions, and the
indemnifying party shall have the opportunity to defend any claims relating
thereto with counsel reasonably satisfactory to the indemnified party.
15. RIGHT OF ENTRY. Sublandlord and its agents and representatives shall
have the right, at all reasonable times, upon reasonable prior notice to
Subtenant, but in such manner as to cause as little disturbance to Subtenant as
reasonably practicable, to enter the Subleased Premises for purposes of
inspection, to post notices of non-responsibility, and to protect the interest
of Sublandlord in the Subleased Premises. No such entry shall be construed under
any circumstances as a forcible or unlawful entry into, or a detainer of, the
Subleased Premises, or an
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eviction of Subtenant, and Subtenant hereby waives any claim against Sublandlord
or its agents or representatives for damages for any injury or inconvenience to
or interference with, Subtenant's business or quiet enjoyment of the Subleased
Premises, except to the extent covered by Sublandlord's indemnity of Subtenant
pursuant to Section 16.3 of the Master Lease (as incorporated by reference into
this Sublease).
16. NOTICES. All notices, requests, demands and other communications which
are required or may be given pursuant to the terms of this Sublease shall be
given in accordance with Section 33.6 of the Master Lease at the following
addresses:
If to the Sublandlord:
Rysher Entertainment, Inc.
2401 Colorado Avenue
Second Floor
Santa Monica, California 90404
Attention: Mr. Tim Helfet
With a copy to:
Allen, Matkins, Leck, Gamble & Mallory LLP
1999 Avenue of the Stars
Suite 1800
Los Angeles, California 90067
Attention: Anton N. Natsis, Esq.
If to Subtenant:
InterPacket Group, Inc.
1901 Main Street
Santa Monica, California 90405
Attention: Mr. Allen Sciarillo, Chief Financial Officer
(Prior to Sublease Commencement Date)
or
InterPacket Group, Inc.
2401 Colorado Avenue
Second Floor
Santa Monica, California 90404
Attention: Mr. Allen Sciarillo, Chief Financial Officer
(After Sublease Commencement Date)
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<PAGE>
with a copy to:
Gorry & Meyer L.L.P.
2029 Century Park East, Suite 400
Los Angeles, California 90067
Attention: David C. Meyer, Esq.
Promptly upon receipt by Sublandlord, Sublandlord shall
provide Subtenant with copies of all written notices, requests, demands or other
communications relating to the Subleased Premises or the Subtenant given by
Landlord to Sublandlord pursuant to the terms of the Master Lease.
17. AUTHORITY. Subtenant represents that (1) Subtenant is a corporation duly
organized and validly existing under the laws of the State of Delaware, (2)
Subtenant has full power and authority to enter into this Sublease, and (3) each
person signing on behalf of Subtenant is authorized to do so.
18. CANCELLATION OF MASTER LEASE. In the event of the cancellation or
termination of the Master Lease for any reason whatsoever or of the involuntary
surrender of the Master Lease by operation of law prior to the expiration date
of this Sublease, Subtenant agrees to make full and complete attornment to the
Landlord under the Master Lease for the balance of the term of this Sublease and
upon the then executory terms hereof at the option of the Landlord at any time
during Subtenant's occupancy of the Subleased Premises, which attornment shall
be evidenced by an agreement in form and substance reasonably satisfactory to
Landlord, provided that in no event shall Landlord (i) be liable for any
previous act or omission of Sublandlord under this Sublease, (ii) be subject to
any defense or offset previously accrued in favor of Subtenant against
Sublandlord, or (iii) be bound by any pervious modification of the Sublease made
without Landlord's written consent, or by any previous prepayment by the
Subtenant of more than one month's rent. Subtenant agrees to execute and deliver
such an agreement at any time within ten (10) business days after request of the
Landlord, and Subtenant waives the provisions of any law now or hereafter in
effect which may give Subtenant any right or election to terminate this Sublease
or to surrender possession of the Subleased Premises in the event any proceeding
is brought by the Landlord under the Master Lease to terminate the Master Lease.
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<PAGE>
19. LETTER OF CREDIT AND TEMPORARY SECURITY DEPOSIT.
19.1 DELIVERY AND FORM OF LETTER OF CREDIT. Subtenant shall deliver to
Sublandlord, within ten (10) days following Subtenant's execution and delivery
of this Sublease to Sublandlord, an unconditional, clean, irrevocable letter of
credit (the "L-C") in the initial amount (the "L-C Amount") of Four Hundred
Eighty-Seven Thousand Three Hundred Fifty and No/100 Dollars ($487,350.00),
which L-C shall be issued by a money-center bank (a bank which accepts deposits,
maintains accounts, has a local Los Angeles office which will negotiate a letter
of credit, and whose deposits are insured by the FDIC) reasonably acceptable to
Sublandlord, and which L-C shall be in form and content as set forth in Exhibit
D attached hereto. Subtenant shall pay all expenses, points and/or fees incurred
by Subtenant in obtaining the L-C.
19.2 APPLICATION OF THE L-C. The L-C shall be held by Sublandlord as
security for the faithful performance by Subtenant of all the terms,
covenants, and conditions of this Sublease to be kept and performed by
Subtenant during the Sublease Term. The L-C shall not be mortgaged, assigned
or encumbered in any manner whatsoever by Subtenant without the prior written
consent of Sublandlord. If Subtenant defaults with respect to any provisions
of this Sublease, including, but not limited to, the provisions relating to
the payment of Rent, and fails to cure such default within the applicable
cure period set forth in this Sublease, or if Subtenant fails to renew the
L-C at least thirty (30) days before its expiration, then Sublandlord may,
but shall not be required to, draw upon all or any portion of the L-C for
payment of any Rent or any other sum in default, or for the payment of any
amount that Sublandlord may reasonably spend or may become obligated to spend
by reason of Subtenant's default, or to compensate Sublandlord for any other
loss or damage that Sublandlord may suffer by reason of Subtenant's default.
The use, application or retention of the L-C, or any portion thereof, by
Sublandlord shall not (a) prevent Sublandlord from exercising any other right
or remedy provided by this Sublease or by law, it being intended that
Sublandlord shall not first be required to proceed against the L-C, nor (b)
operate as a limitation on any recovery to which Sublandlord may otherwise be
entitled. Any amount of the L-C which is drawn upon by Sublandlord, but is
not used or applied by Sublandlord, shall be held by Sublandlord and deemed a
security deposit (the "L-C Security Deposit"). If any portion of the L-C is
drawn upon, Subtenant shall, within five (5) days after written demand
therefor, either (i) deposit cash with Sublandlord (which cash shall be
applied by Sublandlord to the L-C Security Deposit) in an amount sufficient
to cause the sum of the L-C Security Deposit and the amount of the remaining
L-C to be equivalent to the amount of the L-C then required under this
Sublease or (ii) reinstate the L-C to the amount then required under this
Sublease, and if any portion of the L-C Security Deposit is used or applied,
Subtenant shall, within five (5) days after written demand therefor, deposit
cash with Sublandlord (which cash shall be applied by Sublandlord to the L-C
Security Deposit) in an amount sufficient to restore the L-C Security Deposit
to the amount then required under this Sublease, and Subtenant's failure to
do so shall be a default under this Sublease. Subtenant acknowledges that
Sublandlord has the right to transfer its interest in the Master Lease and
this Sublease and Subtenant agrees that in the event of any such transfer,
Sublandlord shall have the right to transfer or assign the L-C Security
Deposit and/or the L-C to the transferee, and in the event of such transfer,
Subtenant shall look solely to such transferee for the return of the L-C
Security Deposit and/or the L-C. If Subtenant has not previously been in
default under the Sublease beyond the applicable cure period provided in this
Sublease, and provided that Subtenant is not then in default under the
Sublease beyond the applicable cure period provided in this Sublease, then
the L-C Amount shall be reduced,
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<PAGE>
commencing on the third (3rd) anniversary of the Sublease Commencement Date
and on each anniversary of the Sublease Commencement Date thereafter, by an
amount equal to Ninety-Seven Thousand Four Hundred Seventy and No/100 Dollars
($97,470.00). If Subtenant shall fully and faithfully perform every provision
of this Sublease to be performed by it, the L-C Security Deposit and/or the
L-C, or any balance thereof, shall be returned to Subtenant within thirty
(30) days following either the expiration of the Sublease Term or the earlier
termination of this Sublease for any reason other than a default by Subtenant.
19.3 CASH AS SECURITY DEPOSIT. In lieu of the L-C, Subtenant shall have
the right at any time to deliver cash to Sublandlord (the "SECURITY DEPOSIT") in
the amount then required for the L-C, in which event the Security Deposit shall
be held by Sublandlord as security for the faithful performance by Subtenant of
all of the terms, covenants, and conditions of this Sublease to be kept and
performed by Subtenant during the Sublease Term. If Subtenant defaults with
respect to any provisions of this Sublease, including, but not limited to, the
provisions relating to the payment of Rent, and fails to cure such default
within the applicable cure period set forth in this Sublease, then Sublandlord
may, but shall not be required to, use, apply or retain all or any part of the
Security Deposit for the payment of any Rent or any other sum in default, or for
the payment of any amount that Sublandlord may spend or become obligated to
spend by reason of Subtenant's default, or to compensate Sublandlord for any
other loss or damage that Sublandlord may suffer by reason of Subtenant's
default. If any portion of the Security Deposit is so used or applied, Subtenant
shall, within five (5) days after written demand therefor, deposit cash with
Sublandlord in an amount sufficient to restore the Security Deposit to its
original amount, and Subtenant's failure to do so shall be a default under this
Sublease. If Subtenant shall fully and faithfully perform every provision of
this Sublease to be performed by it, the Security Deposit, or any balance
thereof, shall be returned to Subtenant within thirty (30) days following either
the expiration of the Sublease Term or the earlier termination of this Sublease
for any reason other than a default by Subtenant. Sublandlord shall deposit the
Security Deposit in an interest bearing account selected by Sublandlord, in its
sole discretion, and Subtenant shall be entitled to the interest on the Security
Deposit.
19.4 TEMPORARY SECURITY DEPOSIT. Notwithstanding any contrary provision
of this Section 19, in the event that Subtenant does not deliver the L-C to
Sublandlord concurrently with Subtenant's execution and delivery of this
Sublease to Sublandlord, then concurrently with Subtenant's execution and
delivery of this Sublease to Sublandlord, Subtenant shall deliver to
Sublandlord, as a security deposit, cash in the amount of Two Hundred Thousand
and No/100 Dollars ($200,000.00), which shall temporarily satisfy the Security
Deposit requirement set forth in Section 19.3 above and shall be held and used
by Sublandlord in accordance with said Section 19.3, provided that Tenant shall
not be entitled to any interest on such temporary security deposit. Upon
delivery to Sublandlord of the L-C, Sublandlord shall promptly return such
temporary security deposit to Subtenant. Notwithstanding the foregoing, if
Subtenant fails to deliver the L-C to Sublandlord within ten (10) days following
Subtenant's execution and delivery of this Sublease to Sublandlord, then
Subtenant shall, within such time period, deliver the balance of the Security
Deposit required under Section 19.3 above to Sublandlord, or Subtenant shall be
in material default under this Sublease.
20. DEFINITION OF SUBLANDLORD. The term "Sublandlord" as used in this
Sublease, so far as covenants or obligations on the part of Sublandlord are
concerned, shall be limited to mean
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<PAGE>
and include only the Sublandlord, at the time in question, of this Sublease. In
the event of any transfer of such interest, Sublandlord herein named (and in
case of any subsequent transfer or conveyance, the then sublandlord) shall be
automatically freed and relieved from and after the date of such transfer of all
liability for the performance of any covenant or obligation on the part of
Sublandlord contained in this Sublease thereafter to be performed. Without
further agreement, the transferee of such Sublease shall be deemed to have
assumed and agreed to observe and perform any and all obligations of Sublandlord
hereunder, during the period that it is the sublandlord under this Sublease.
Sublandlord may transfer its interest in the Master Lease and this Sublease
without the consent of Subtenant and such transfer or subsequent transfer shall
not be deemed a violation on Sublandlord's part of any term or condition of this
Sublease.
21. NO LEASEHOLD MORTGAGES. Sublandlord represents that there are no
currently existing leasehold mortgages encumbering its leasehold interest in the
Premises.
22. SIGNAGE. With respect to Section 29.1 of the Master Lease (incorporated
by reference into this Sublease), and notwithstanding any contrary provision
thereof, subject to Landlord's approval, during the Sublease Term Subtenant
shall have the right, at its own expense, to designate three (3) names (a
department or individual) for placement on the directory board monument in the
elevator lobby on the ground floor of the Building and one (1) such name per
thousand rentable square feet in the Subleased Premises for placement on the
directory board for the P-1 level elevator lobby of the Building. In addition,
with respect to Section 29.2 of the Master Lease (incorporated by reference into
this Sublease), subject to Landlord's and Sublandlord's approval, Subtenant
shall be permitted to install, at its own expense, appropriate signage
containing Subtenant's name on the wall immediately adjacent to the entrance
doors to the Premises (the "ENTRANCE SIGN"), provided that the Entrance Sign
shall be consistent in size and aesthetics with the entrance sign of the
subtenant subleasing the Non-Subleased Premises, but subject in any event to
Landlord's approval.
23. REPRESENTATIONS BY SUBLANDLORD. Sublandlord represents to Subtenant that
the Master Lease is in full force and effect as of the date hereof, and that, to
the actual knowledge of Sublandlord as of the date hereof, neither Sublandlord
nor Landlord is in default under the Master Lease. Sublandlord further
represents that Landlord installed the initial tenant improvements in the
Premises in accordance with Landlord's Improvement Letter attached to the Master
Lease as Exhibit D, and Sublandlord has not installed any Alterations in the
Subleased Premises.
24. CONSENT OF LANDLORD. The validity of this Sublease shall be subject to
the Landlord's prior written consent hereto pursuant to the terms of the Master
Lease, and if Landlord's consent shall not be obtained and a copy thereof
delivered to Subtenant within thirty (30) days of the date hereof, either
Sublandlord or Subtenant shall have the option to cancel this Sublease by notice
to the non-terminating party within forty (40) days from the date hereof.
25. LANDLORD ESTOPPEL CERTIFICATE. Sublandlord shall within five (5) days
after the full execution and delivery of this Sublease by Sublandlord and
Subtenant request from Landlord a written statement containing the information
set forth in Section 33.15 of the Master Lease.
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<PAGE>
26. ROOF RELATED RIGHTS.
26.1 HVAC UNITS ON ROOF. Sublandlord and Subtenant acknowledge that
there are HVAC units ("Dedicated HVAC") currently in place on the roof of the
Building which service all or a portion of the Premises, in addition to the
building standard HVAC. Such Dedicated HVAC units are maintained and repaired by
the Landlord, and the cost therefor, along with the charges for Subtenant's
share of the use of such Dedicated HVAC units, shall be payable by Subtenant in
accordance with the provisions of SECTION 3.2 above.
26.2 SATELLITE DISHES. Sublandlord acknowledges that Subtenant may
negotiate directly with Landlord for the right to install satellite dishes on
the roof of the Building. Sublandlord and Subtenant acknowledge and agree that
Subtenant's right to install, operate, and maintain the satellite dishes on the
roof of the Building is not a condition to the effectiveness of this Sublease.
Sublandlord shall have no liability or responsibility with respect to any such
satellite dishes or Subtenant's use of the Building roof for such purpose and
Subtenant shall be solely responsible for all costs incurred in connection with
the installation, operation, maintenance, repair, replacement, and removal of
Subtenant's satellite dishes.
27. ENTIRE AGREEMENT. This Sublease sets forth the entire agreement between
the parties and there are no other agreements or understandings of any kind or
nature between the parties with respect to the subject matter, except as set
forth herein. This Sublease may not be modified, altered, or amended, other than
by an agreement in writing, signed by the party against whom enforcement of said
agreement is sought.
IN WITNESS WHEREOF, the parties have duly executed this Sublease as of
the date first above written.
SUBLANDLORD:
RYSHER ENTERTAINMENT, INC.,
a Delaware corporation
By: [ILLEGIBLE]
_________________________________________
Its: President and CEO
________________________________________
SUBTENANT:
INTERPACKET GROUP, INC.,
a Delaware corporation
By: /s/ Peter Hirshberg
_________________________________________
Its: Chairman
________________________________________
By: /s/ Steven J. Miller
_________________________________________
Its: Secretary
________________________________________
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<PAGE>
EXHIBIT A
SUBLEASED PREMISES
[Diagram of subleased premises]
<PAGE>
EXHIBIT B
MEMORANDUM OF SUBLEASE COMMENCEMENT DATE
THIS MEMORANDUM is made and entered into as of ____________ __, 2000,
by and between RYSHER ENTERTAINMENT, INC., a Delaware corporation
("Sublandlord"), and INTERPACKET GROUP, INC., a Delaware corporation
("Subtenant"), with respect to that certain Agreement of Sublease dated as of
____________, 2000 (the "Sublease"), between Sublandlord and Subtenant.
The term of the Sublease commenced on ___________, 2000 with respect to
the Subleased Premises, which date is defined in Section 2 of the Sublease as
the Sublease Commencement Date. The Sublease Term shall expire on October 25,
2006, unless sooner terminated pursuant to the Sublease.
IN WITNESS WHEREOF, Sublandlord and Subtenant have executed this
Memorandum as of the date set forth in the first paragraph hereof.
SUBLANDLORD:
RYSHER ENTERTAINMENT, INC.,
a Delaware corporation
By:__________________________________________
Its:_________________________________________
SUBTENANT:
INTERPACKET GROUP, INC.,
a Delaware corporation
By:__________________________________________
Its:_________________________________________
EXHIBIT B
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<PAGE>
EXHIBIT C
EXCLUDED PROVISIONS OF MASTER LEASE
<TABLE>
<S> <C>
Lease Summary Date, Landlord, Tenant, Premises, Term, Basic Rent
(Net), Parking Passes, Expansion Options, Allowance
and Other Provisions.
Section 1, second sentence Description of Premises
Section 2.2, the phrase in the ninth (9th) line Landlord's Warranty
beginning with "provided that Landlord..." and
ending in the twelfth (12th) line thereof with
"Article 5"
Article 3 Term
Section 4.1 Initial Basic Rent
Section 4.2 Adjustment of Basic Rent
Section 4.3 Rent Abatement
Section 5.2(b), the penultimate sentence Landlord's representation re assessment of Project
Section 8.1(c), last sentence Application of Landlord's Improvement Letter to
Master Lease
Section 8.3, the penultimate sentence Ownership of Tenant Improvements
Section 14.4(e) Recognition Agreement
Article 17 Definition of Landlord
Article 18 Subordination
Article 27 Brokers
Article 28 Rules and Regulations
Section 29.3 Identity
Article 30 Option to Lease Additional Premises
Article 31 Right of First Offer
</TABLE>
EXHIBIT C
-1-
<PAGE>
<TABLE>
<S> <C>
Article 32 Appraisal; Fair Market Rental Rate
Section 33.6 (the notice addresses only) Notices
Section 33.14 (the fourth (4th) sentence Applicable Laws
through the end of the Section only)
Section 33.18 Partner Liability
Section 33.19 (the first (1st) sentence only) Hazardous Materials
Section 33.20 Guaranty
Exhibit "A" Floor Plan
Exhibit "B," other than Section 6 thereof Area Definitions
Exhibit "C" Memorandum of Lease Commencement
Exhibit "D" Landlord's Improvement Letter
Exhibit "F" Form of Non-Disturbance Agreement
Exhibit "H" Monument Signage
Exhibit "I" Guaranty of Lease
Exhibit "L" First Premises Unit Description
</TABLE>
EXHIBIT C
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<PAGE>
EXHIBIT D
FORM OF LETTER OF CREDIT
(Letterhead of a money center bank
acceptable to the Landlord)
__________ __, 2000
Rysher Entertainment, Inc.
2401 Colorado Avenue
Second Floor
Santa Monica, California 90404
Attention: Mr. Tim Helfet
Ladies and Gentlemen:
We hereby establish our Irrevocable Letter of Credit and authorize you
to draw on us at sight for the account of InterPacket Group, Inc., a Delaware
corporation, the aggregate amount of Four Hundred Eighty-Seven Thousand Three
Hundred Fifty and No/100 Dollars ($487,350.00).
Funds under this Letter of Credit are available to the beneficiary
hereof as follows:
Any or all of the sums hereunder may be drawn down at any time and from
time to time from and after the date hereof by Rysher Entertainment, Inc.
("Beneficiary") when accompanied by this Letter of Credit and a written
statement signed by a representative of Beneficiary, certifying that such moneys
are due and owing to Beneficiary as a result of a default by InterPacket Group,
Inc., under that certain sublease for premises located at 2401 Colorado Avenue,
Santa Monica, California, by and between Beneficiary, as sublandlord, and
InterPacket Group, Inc., as subtenant ("Sublease"), and a sight draft executed
and endorsed by a representative of Beneficiary.
This Letter of Credit is transferable in its entirety at no cost of
Beneficiary or the transferee. Should a transfer be desired, such transfer will
be subject to the return to us of this advice, together with written
instructions.
The amount of each draft must be endorsed on the reverse hereof by the
negotiating bank. We hereby agree that this Letter of Credit shall be duly
honored upon presentation and delivery of the certification specified above.
This Letter of Credit shall expire on ______________.
Notwithstanding the above expiration date of this Letter of Credit, the
term of this Letter of Credit shall be automatically renewed for successive,
additional one (1) year periods unless, at least thirty (30) days prior to any
such date of expiration, the undersigned shall give written notice to
Beneficiary, by certified mail, return receipt requested and at the address set
forth above or at such other address as may be given to the undersigned by
Beneficiary, that this Letter of Credit will not be renewed.
EXHIBIT D
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<PAGE>
This Letter of Credit is governed by the Uniform Customs and Practice
for Documentary Credits (1993 Revision), International Chamber of Commerce
Publication 500.
Very truly yours,
(Name of Issuing Bank)
By:__________________________________
EXHIBIT D
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<PAGE>
EXHIBIT 10.9
CONSENT TO SUBLEASE
MGM PLAZA
(InterPacket Group, Inc.)
1. COLORADO PLACE PARTNERS, LLC, a Delaware limited liability company
("LANDLORD")(successor-in-interest to Maguire Thomas Partners - Colorado
Place), and RYSHER ENTERTAINMENT, INC., a Delaware corporation ("TENANT") are
parties to an Office Lease dated as of May 31, 1996 (the "LEASE") for
Premises in an office building located in Santa Monica, California, commonly
known as 2401 Colorado Avenue. All capitalized terms defined in the Lease
shall have the same meanings when used herein except as otherwise provided.
2. Tenant has asked Landlord to consent (the "CONSENT") to the
subletting, pursuant to the sublease (the "SUBLEASE") attached hereto as
EXHIBIT "A," of approximately 28,500 square feet of the Premises to
InterPacket Group, Inc., a Delaware corporation ("SUBTENANT").
3. Landlord hereby consents to the subletting of approximately 28,500
square feet of the Premises as depicted in Exhibit "A" attached to the
Sublease, by Tenant to Subtenant pursuant to the terms of the Sublease to the
extent and only to the extent that the Sublease does not enlarge Tenant's
rights under the Lease, give Subtenant any right not granted under the Lease,
or increase Landlord's responsibilities or obligations under the Lease, and
subject to the following terms and conditions:
(a) Nothing herein contained shall be construed to modify, waive,
impair or affect any of the convenants and agreements contained in the Lease
(except as may be herein expressly provided), including without limitation
any of the convenants or agreements contained in Article 14 of the Lease with
respect to assignment and subletting and/or Article 16 of the Lease with
respect to Tenant's indemnity obligations, or to waive any breach of Tenant
in the due keeping, performance or observance thereof. Without limiting the
foregoing, Landlord acknowledges that, pursuant to Section 5.5 of the
Sublease, Subtenant has certain rights and obligations regarding use of
passenger elevators, to which Landlord hereby specifically consents. Tenant
and Subtenant acknowledge that the subleased Premises do not have direct
access to the Building's freight elevators.
(b) Tenant shall be and remain liable and responsible for the due
keeping, performance and observance throughout the term of the Lease, of all
of the covenants, and agreements therein set forth on the part of Tenant to
be kept, performed and observed, including without limitation the obligation
for the payment of the fixed rent, additional rent and all other sums now
and/or hereinafter becoming payable thereunder, expressly including as such
additional rent, any and all charges for any property, material, labor,
utility or other services
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<PAGE>
furnished or rendered by Landlord in or in connection with the Premises
demised by the Lease, whether for, or at the request of, Tenant or Subtenant.
(c) The Sublease shall be subject and subordinate at all times to
the Lease, and to all of the covenants and agreements of the Lease and of
this Consent, and Subtenant shall not do, permit or suffer anything to be
done in, or in connection with, Subtenant's use or occupancy of the portion
of the Premises so sublet which would violate any of such covenants and
agreements. Landlord shall have the right, but not the obligation, to
enforce the provisions of the Sublease, including collection of rent reserved
thereunder.
(d) This Consent shall not be construed as a consent by the
Landlord to, or as permitting, any other or further subletting or any
assignment by either Tenant or Subtenant.
(e) The portion of the Premises so sublet shall (subject to all of
the covenants and agreements of the Lease) be used solely for general office
purposes and the purposes permitted under Article 2 of the Lease.
(f) Upon the expiration or any earlier termination of the term of
the Lease with respect to the portion of the Premises so sublet or in case of
the surrender of the Lease by Tenant to Landlord, the Sublease and the term
and estate thereby granted shall terminate as of the effective date of such
expiration, termination or surrender, and Subtenant shall vacate such portion
of the Premises on such date, unless specifically agreed otherwise in writing
by Landlord. Notwithstanding the foregoing, in the event of termination of
the Lease for any reason, including without limitation a voluntary surrender
by Tenant, or in the event of any reentry or repossession of the Premises by
Landlord, Landlord may, at its option, either (i) terminate the Sublease or
(ii) take over all of the right, title and interest of Tenant, as sublessor,
under the Sublease, in which case Subtenant shall attorn to Landlord, but
that nevertheless Landlord shall not (1) be liable for any previous act or
omission of Tenant under the Sublease, (2) be subject to any defense or
offset previously accrued in favor of the Subtenant against Tenant, or (3) be
bound by any previous modification of the Sublease made without Landlord's
written consent, or by any previous prepayment by Subtenant of more than one
month's rent.
(g) This Consent is expressly conditioned upon compliance by the
Tenant and Subtenant with Article 8 of the Lease, with respect to
alterations, repairs, additions, or improvements in, to or about the Premises.
(h) Tenant and Subtenant have represented that the attached
Sublease is a true and complete copy of the Sublease, and agree that a true
and complete copy of each amendment thereto shall be delivered to Landlord
within ten (10) days after the execution and delivery thereof by the parties
thereto, it being understood that Landlord shall not be deemed to be a party
to said Sublease or any other amendment nor bound by any of the covenants or
agreements thereof, and that neither the execution and delivery of this
Consent, nor the receipt by Landlord of a copy of said Sublease or a copy of
any such amendment, shall be deemed to change any
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<PAGE>
provision of this Consent or to be a consent to, or an approval by Landlord
of any covenants or agreement contained in said Sublease or any such
amendment.
(i) If there are any Profits from the Sublease, as defined in
Section 14.5 of the Lease, Tenant shall pay to Landlord fifty percent (50%)
of such Profits as additional rent pursuant to the terms of the Lease.
(j) Tenant has agreed to give Landlord immediate notice when any
one or more of the following conditions arise:
(1) The Sublease expires or is terminated;
(2) The rent due pursuant to the Sublease is adjusted;
(3) Subtenant renews or extends the term of the Sublease; or
(4) Subtenant subleases additional space.
(k) Except as specifically provided in this Consent, in the event
of any conflict between the Sublease and the Lease, or between the Sublease
and this Consent, the Lease or this Consent, as applicable, shall prevail.
Except as specifically provided in this Consent, in the event of any conflict
between this Consent and the Lease, the Lease shall prevail.
IN WITNESS WHEREOF, the parties have executed this Consent as of the
date set forth below.
Date: March 3, 2000
LANDLORD:
COLORADO PLACE PARTNERS, LLC
a Delaware limited liability company
By: MP-COLORADO PLACE MANAGER I, INC.
a Delaware corporation
Its Manager
By: /s/ John R. Miller
------------------------------
Name: John R. Miller
--------------------------
Title: Senior V-P
-------------------------
Date Signed: 3/17/2000
------------------
[signatures continued on page 4]
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<PAGE>
[signatures continued from page 3]
TENANT:
RYSHER ENTERTAINMENT, INC.,
a Delaware corporation
By: /s/ Tim [ILLEGIBLE]
------------------------------
Name: Tim [ILLEGIBLE]
--------------------------
Title: CEO and President
-------------------------
Date Signed: 3/13/00
------------------
SUBTENANT
INTERPACKET GROUP, INC.,
a Delaware corporation
By: /s/ JONATHAN GANS
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Name: Jonathan Gans
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Title: CEO
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Date Signed: 3/08/00
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EXHIBIT "A"
THE SUBLEASE
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See Exhibit 10.8 filed herewith.
A-1
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STOCK SUBSCRIPTION AGREEMENT
THIS STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is made and entered
into as of _____________, by and between Interpacket Group, Inc., a California
corporation (the "Company"), and _________________ ("Purchaser").
R E C I T A L S:
A. The Company desires to sell to Purchaser, and Purchaser desires to
purchase from the Company, Shares (as hereinafter defined) of the Company,
subject to the terms and conditions set forth in this Agreement.
B. In order to induce the Company to sell the Shares to the Purchaser,
Purchaser agrees to be bound by the terms and conditions set forth below.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants and conditions contained herein, the parties agree as follows:
1. SALES AND PURCHASE OF SHARES. The Company hereby agrees to sell to
Purchaser, subject to the conditions and restrictions contained in this
Agreement, and Purchaser hereby agrees to purchase from the Company, ________
shares (the "Shares") of the Company's common stock, par value $.01 per share
("Common Stock"), at a price of $___ per Share, for an aggregate purchase price
of $_________. Purchaser has delivered to the Company, and the Company hereby
acknowledges receipt of a wire transfer or Purchaser's check in the amount of
the purchase price in exchange for a certificate representing the Shares.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to Purchaser as follows:
(a) ORGANIZATION AND GOOD STANDING. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of California.
(b) VALID ISSUANCE OF SHARES. The Shares, have been duly and validly
authorized for issuance by the Company, and when issued pursuant to the terms
hereof, will be validly and legally issued, fully paid and non-assessable.
(c) AUTHORITY. The Company has full power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated on
its part hereby. The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by all necessary action on the part of the Company. This Agreement
has been duly executed and delivered by the Company and constitutes a legal,
valid and binding agreement thereof, enforceable against the Company in
accordance with its terms, subject to applicable
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bankruptcy, insolvency, moratorium, reorganization or similar laws affecting
creditors' rights generally and subject to general equitable principles
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
warrants to the Company as follows:
(a) PURCHASER'S OWN ACCOUNT. Purchaser is acquiring the Shares for
investment purposes only, for his, her or its own account and not as nominee or
agent for any other person, firm or corporation and not for resale in connection
with any distribution or public offering thereof within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). Purchaser represents
to the Company that he, she or it is an "accredited investor" (as such term is
defined in Rule 501 of Regulation D under the Securities Act) and that, by
reason of his, her or its business and financial experience, has such knowledge,
sophistication and experience in business and financial matters so as to be
capable of evaluating the merits and risks of an investment in the Shares and is
able to bear the economic risk of such investment. In that regard, Purchaser has
accurately completed the "Purchaser Qualification Statement" attached hereto as
Schedule A, verifying his, her or its status as an accredited investor.
(b) ACCESS TO INFORMATION. Purchaser has carefully reviewed the
information set forth in the Company's ___________ Business Plan (the "Business
Plan") and the Company's _________________ projections (the "Projections").
Purchaser (i) is familiar with the business of the Company, (ii) has had an
opportunity to discuss with representatives of the Company the condition of and
prospects for the continued operation and financing of the Company and such
other matters as Purchaser has deemed appropriate in considering whether to
invest in the Shares and has had the opportunity to have his, her or its
questions regarding the information set forth in the Business Plan and/or the
Projections fully and completely answered by the Company, and (iii) has been
provided access to all available information about the Company reasonably
requested by Purchaser.
(c) SHARES NOT REGISTERED. Purchaser understands that the Shares have
not been registered under the Securities Act or registered or qualified under
the securities laws of any state and that Purchaser may not transfer the Shares
unless they are subsequently registered under the Securities Act and registered
or qualified under applicable state securities laws, or unless an exemption is
available which permits transfers without such registration and qualification.
Purchaser further acknowledges and agrees that the certificates evidencing such
shares and each instrument or certificate issued in exchange therefor will bear
a legend indicating all restrictions on transfer.
(d) AUTHORITY. This Agreement, when duly executed and delivered by
Purchaser, shall constitute the legal, valid, binding and enforceable obligation
of Purchaser, enforceable against the Purchaser in accordance with its terms.
2.
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4. MISCELLANEOUS.
(a) MARKET STAND-OFF. Purchaser agrees that such Purchaser will not
sell, transfer or otherwise dispose of any Shares held thereby for a period of
up to one hundred and eighty (180) days following the effective date of any
registration statement filed by the Company under the Securities Act of 1933, as
amended, with respect to the registration by the Company of shares of Common
Stock for offer and sale to the public. Purchaser agrees to execute and deliver
such agreements as may be reasonably requested by the Company or it
underwriter(s) with respect to such offering that are consistent with and give
effect to the restrictions on sale set forth in this Section 4(a). Purchaser
also acknowledges that the Company may impose stop-transfer instructions with
respect to the Shares held by Purchaser until the end of such one hundred eighty
(180) period.
(b) LEGENDS ON CERTIFICATES. Any and all certificates now or
hereafter issued evidencing the Shares shall have endorsed upon them a legend
substantially as follows:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY,
STATING THAT SUCH DISPOSITION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT."
Such certificates shall also bear such legends and shall be subject to such
restrictions on transfer as may be necessary to comply with all applicable state
securities laws and regulations.
(c) FURTHER ASSURANCES. Each party hereto agrees to perform any
further acts and execute and deliver any documents which may be reasonably
necessary to carry out the intent of this Agreement.
(d) NOTICES. Except as otherwise provided herein, all notices,
requests, demands and other communications under this Agreement shall be in
writing, and if by telegram or telecopy, shall be deemed to have been validly
served, given or delivered when sent, or if by personal delivery or messenger or
courier service, or by registered or certified mail, shall be deemed to have
been validly served, given or delivered upon actual delivery, (a) if sent to the
Company at 1901 Main Street, 2nd Floor, Santa Monica, California 90405, fax no.
(310) 382-3310 and (b) if to Purchaser at the address and telecopy number set
forth on the signature page hereof.
3.
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(e) AMENDMENTS. This Agreement may be amended only by a written
agreement executed by both of the parties hereto.
(f) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
(g) DISPUTES. In the event of any dispute among the parties arising
out of this Agreement, the prevailing party shall be entitled to recover from
the nonprevailing party the reasonable expenses of the prevailing party
including, without limitation, reasonable attorneys' fees.
(h) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
and understanding among the parties pertaining to the subject matter hereof and
supersedes any and all prior agreements, whether written or oral, relating
hereto.
(i) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of, and be binding upon, the Company's and the Purchaser's respective
affiliates, successors and/or assigns in the same manner and to the same extent
as if such affiliates, successors and/or assigns were original parties hereto.
(j) HEADINGS. Introductory headings at the beginning of each section
and subsection of this Agreement are solely for the convenience of the parties
and shall not be deemed to be a limitation upon or description of the contents
of any such section and subsection of this Agreement.
(k) COUNTERPARTS. This Agreement may be executed in two counterparts,
each of which shall be deemed an original and both of which, when taken
together, shall constitute one and the same agreement.
4.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
INTERPACKET GROUP, INC.
By:
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Jon Gans
Chief Executive Officer
PURCHASER:
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Print Name
PURCHASER'S ADDRESS:
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Telephone:
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Fax No.:
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5.
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SCHEDULE A
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Name of Purchaser
(Please Print or Type)
PURCHASER
QUALIFICATION STATEMENT(1)
(a) If the Purchaser is an individual, please indicate with an "X"
the manner in which such person qualifies as an "accredited investor" pursuant
to Regulation D promulgated under the Securities Act of 1933, as amended (the
"ACT"):
__________ (1) a natural person whose individual net worth(2) (or joint
net worth with such person's spouse) exceeds $1,000,000; or
__________ (2) a natural person who had an individual income(3) in excess
of $200,000 in each of the two most recent years and who
reasonably expects to have an individual income in excess of
$200,000 in the current year or who had joint income(4) in
excess of $300,000 in each of the two most recent years and
who reasonably expects to have joint income in excess of
$300,000 in the current year; or
__________ (3) a director or executive officer of the Company;
(b) If the Purchaser is an individual, please answer questions 1-3 of
this subparagraph (b):
(1) Occupation of Purchaser:
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(1) For purposes hereof, the "COMPANY" means Interpacket Group, Inc.
(2) For purposes of this item, "net worth" means the excess of total assets
at fair market value, including home and personal property, over total
liabilities, including mortgage debt.
(3) For purposes of this item, "individual income" generally means adjusted
gross income as reported for Federal income tax purposes, less any income
attributable to a spouse or to property owned by a spouse.
(4) For purposes of this item, "joint income" generally means adjusted
gross income as reported for Federal income tax purposes, INCLUDING any income
attributable to a spouse or to property owned by a spouse.
A-1.
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__________ (2) Name of employer:
__________ (3) Business address, if different from mailing address in
Subscription Agreement, of Purchaser:
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(c) If the Purchaser is NOT an individual (i.e., a corporation,
partnership, a limited liability company, trust or other entity), please
indicate with an "X" the manner in which such entity qualifies as an "accredited
investor" pursuant to the Act:
__________ (1) a bank as defined in Section 3(a)(2) of the Act, or a
savings and loan association or other institution as defined
in Section 3(a)(5)(A) of the Act, whether acting in its
individual or fiduciary capacity;
__________ (2) a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934, as amended;
__________ (3) an insurance company as defined in Section 2(13) of the Act;
__________ (4) an investment company registered under the Investment
Company Act of 1940, as amended;
__________ (5) a business development company as defined in Section
2(a)(48) of the Investment Company Act of 1940, as amended;
__________ (6) a Small Business Investment Company licensed by the U.S.
Small Business Administration under Section 301(c) or (d) of
the Small Business Investment Act of 1958, as amended;
__________ (7) a plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or
its political subdivisions, for the benefit of its
employees, if such plan has total assets in excess of
$5,000,000;
(8) an employee benefit plan within the meaning of Title I of
the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), if either
__________ (A) the investment decision is made by a plan fiduciary, as
defined in Section 3(21) of ERISA, which is either a
A-2.
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bank, savings and loan association, insurance company
or registered investment adviser,
__________ (B) the employee benefit plan has total assets in excess of
$5,000,000, or
__________ (C) such a plan is a self-directed plan with investment
decisions made solely by persons that are "accredited
investors;"
__________ (9) a private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940, as
amended;
__________ (10) one of the following entities which was not formed for the
specific purpose of making an investment in the Partnership
and which has total assets in excess of $5,000,000:
(A) an organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended;
(B) a corporation, limited liability company or
partnership; or
(C) a Massachusetts or similar business trust;
__________ (11) a trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring limited partner
interests of the Partnership, whose purchase of the limited
partner interests offered is directed by a sophisticated
person as described in Rule 506(b)(2)(ii) of Regulation D;
or
__________ (12) an entity in which all of the equity owners are "accredited
investors."
(d) If the Purchaser is NOT an individual (i.e., a corporation,
partnership, limited liability company, trust or other entity), please mark
either (1) or (2) of this subparagraph (d) with an "X":
__________ (1) the Purchaser was not organized or reorganized for the
purpose of acquiring Shares; or
__________ (2) if the Purchaser was organized or reorganized for the
purpose of acquiring Shares, the number of stockholders,
partners, members or other owners, direct or indirect, of
the subscriber is ____________ and all such stockholders,
partners or other investors are "accredited investors."
A-3.
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EXHIBIT 10.19
AGREEMENT BETWEEN iBEAM BROADCASTING AND INTERPACKET GROUP
This agreement (the "AGREEMENT"), effective as of January 19, 2000 (the
"EFFECTIVE DATE"), is entered into by INTERPACKET GROUP INC., ("InterPacket")
a Delaware corporation with primary business offices at 1901 Main Street, Santa
Monica, CA 90405 and iBEAM BROADCASTING CORPORATION ("iBEAM"), a Delaware
corporation with primary business offices at 645 Almanor Avenue, Suite 100,
Sunnyvale, CA 94086. (iBEAM and InterPacket individually a "Party" or together
the "Parties").
WHEREAS, InterPacket supplies global satellite Internet services and,
WHEREAS, iBEAM wishes to use InterPacket's services,
WHEREAS, InterPacket and iBEAM mutually accept the terms and conditions set
forth below.
NOW, THEREFORE, for good and valuable consideration exchanged between the
Parties, InterPacket and iBEAM agree as follows:
1. DEFINITIONS
When used in this Agreement, the following terms shall have the following
meanings unless the subject or the context otherwise requires:
A. CONFIDENTIAL INFORMATION. Confidential and trade secret information as set
forth more specifically in Article 15 of this Agreement.
B. DISCLOSING PARTY. A Party that discloses Confidential Information to a
Receiving Party.
C. RECEIVING PARTY. A Party receiving Confidential Information from a
Disclosing Party.
D. MAXCASTER(TRADEMARK): A system of satellite downlink equipment, one or more
computer servers, other communications equipment and appropriate software,
as specified by iBEAM.
E. INTERPACKET NETWORK: All portions of networking owned, operated or provided
as part of the service contemplated herein by InterPacket, including but
not limited to all satellite up-link and downlink equipment provided by
InterPacket, all terrestrial networking supplied by InterPacket to provide
the service contemplated herein and all networking supplied by InterPacket
at each downlink site.
2. SERVICE
2.1 Service: iBEAM will install "head end" servers at the appropriate uplink
facilities within InterPacket's Network and InterPacket agrees to deploy a
minimum number of MaxCasters, as set forth below in Article 2.2, into
InterPacket's international points of presence. InterPacket will provide the use
of multiple teleports and satellite transportation to deliver data streams to
these international points of presence. InterPacket will provide[***]. iBEAM has
the ability to order Dedicated Bandwidth, Burstable Bandwidth and Selectable
Bandwidth [***]subject to availability on InterPacket Network. Any bandwidth
above [***] will be charged at [***].
2.2 Minimum Service Deployment/Requirements:
(A) The deployment of MaxCasters as specified in Article 2.1 above shall
have the following minimum requirements: [***], provided however that
InterPacket shall install MaxCasters only in locations where the point of
presence; i) is multi-homed, ii) uses a Cisco 3000 series router or equivalent
as defined by iBEAM at its sole discretion, iii) is an ISP which has at least
[***] end users which connect to the Internet, iv) has a well maintained, clean
air conditioned machine room with redundant power, and v) has 24x7 technical
support as set forth in Exhibit A. The Effective Date is on or after iBEAM and
InterPacket have agreed on the list of sites and the costs of installation. To
effectuate deployment of MaxCasters iBEAM will pay for such reasonable and
pre-approved expenses as are required to install MaxCasters internationally,
including without limitation, customs, duties and taxes related to the
installation. (B) In the event that an interruption of service occurs as a
result of a failure of InterPacket's network or satellite link, iBEAM will
receive a pro rata credit (the "Allowance") based on the time InterPacket's
network or satellite link is not operational during the service month. Credits
not exceeding 0.5% (one-half of one percent) of the monthly service charge will
be issued only upon request.
2.3 Testing: The Parties will mutually agree on what equipment will be required
for testing. Each Party will provide this equipment, once ascertained [***].
Testing shall in no event extend beyond [***]. If both parties agree that
testing concludes and iBEAM's equipment/service is unable to be implemented,
this Agreement will terminate pursuant to Article 9 without further liability to
either party.
2.4 Network Monitoring: InterPacket will monitor the InterPacket Network and
all points of presence where MaxCasters are installed; such monitoring will be
able to ascertain outages of satellite or such terrestrial/networking capacity
as is provided by InterPacket and use best efforts to repair and/or reroute such
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[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
outages within a minimal amount of time. Such aforementioned efforts will in no
way relieve InterPacket of its Allowance obligations as set forth above in
Article 2.2(B). In no event will InterPacket monitor in any manner whatsoever
the actual MaxCaster or its contents.
2.5 iBEAM acknowledges the importance of InterPacket's relationships with
InterPacket's ISP customers and agrees to rely on InterPacket for all
communication with InterPacket's ISP customers. iBEAM agrees not to contact
InterPacket's ISP customers without the prior written authorization from
InterPacket.
3. SERVICE EXPANSION
[***]
4. OWNERSHIP AND USE AND DAMAGE
4.1 Ownership: Title to and ownership of all iBEAM provided equipment and/or
software and all copies of documentation or instructions thereof and all data
residentany iBEAM equipment, including but not limited to any trademarks,
servicemarks, tradedress, copyrights (whether in literal or non-literal form)
and/or patents shall be and at all times remain with iBEAM, iBEAM's licensors or
its agents or assigns. InterPacket will not reproduce or modify any of the above
specified or any portion thereof. InterPacket shall not rent, sell, lease,
create or have created security interests in any equipment or software provided
by iBEAM, have liens placed on any equipment or software or otherwise transfer
the equipment or software provided by iBEAM or any part thereof or use, or allow
its use for the benefit of any third party.
4.2 Damage to Equipment: Any damage caused to any iBEAM provided equipment
including the MaxCaster, in whole or in part, while under the control of
InterPacket will require InterPacket to pay iBEAM the reasonable costs to
repair or replace the MaxCaster(TRADEMARK) provided damage is caused by the
negligence or intentional act of InterPacket and/or its agents and not
through any defect of iBEAM's Equipment, iBEAM's failure to disclose a
potential problem with the equipment or iBEAM's actions or failure to act.
4.3 Insurance: From the date of the equipment installation at the co-location
space, iBEAM agrees to carry Commercial General Liability with combined single
limits of $1,000,000 for each occurrence and "all risk" property insurance
covering all of iBEAM 's personal property located at the InterPacket
co-location space. iBEAM agrees that it will not pursue any claims against
InterPacket for any liability InterPacket may have under or relating to this
Agreement until iBEAM first makes claims against iBEAM's insurance provider(s)
and such insurance provider(s) finally resolve(s) such claims.
5. RESALE OF SERVICE AND SERVICE EVALUATION
5.1 Resale of Service: InterPacket shall not in any manner resell any iBEAM
service or repackage any ancillary effect of an iBEAM service.
6. PAYMENT
6.1 Revenue Share: [***]
6.2 Payment: Payment for Dedicated Bandwidth will be made in advance. Payment
for Burstable Bandwidth and Selectable Bandwidth services rendered will be made
net thirty (30) days in arrears from receipt of valid invoice for prices as set
forth above.
6.3 Revenue Share Payments: Not more than twenty-five (25) days after the end
of each calendar month iBEAM will produce a report which provides reasonable
detail as to all revenue shares as specified in Article 6.1. Concurrent with the
production of the report iBEAM will tender such payments as are due under
Article 6.1.
6.4 Taxes: InterPacket is responsible for any taxes associated with
InterPacket's percentage of the revenues paid to InterPacket by iBEAM.
6.5 Audit: iBEAM agrees to allow InterPacket to audit the accounts receivable
and other financial information necessary to verify the revenues for which
InterPacket's revenue share is based. iBEAM will make available to InterPacket
and/or its designated accountants such financial records on a quarterly basis
and within one (1) week upon written request from InterPacket.
7. WARRANTIES
7.1 InterPacket will make its best efforts to provide reliable Internet Access,
but makes no warranties or representations of any kind for such services or the
merchantability or fitness of such Internet Access for any particular purpose
whatsoever; except as expressed in section 2.2B of this Agreement. iBEAM agrees
that InterPacket makes no warranty regarding, and InterPacket shall not be
responsible or liable for, any loss or expense resulting from the use or
interrupted use of Internet Access, including, but not limited to, losses
resulting from delays, improper or incomplete delivery of information or email,
computer viruses, interruption of service or damage to equipment. InterPacket
does not guarantee any service provided by any third party carrier (including
but not limited to iBEAM's "upstream" link to InterPacket's hub) and iBEAM
agrees not to hold InterPacket responsible or liable for any loss resulting from
the use or interrupted use of any third party services, including without
limitation any satellite carrier, internet backbone service provider or content
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[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
provider. iBEAM also acknowledges that InterPacket is not responsible for any
breaches of iBEAM's (or any third party accessing through iBEAM) privacy
occurring over the Internet. Any legal action arising out of InterPacket's
services shall be brought within a period of one year of the occurrence or shall
be deemed waived.
7.2 iBEAM DISCLAIMS THAT IT HAS WARRANTED THAT THE CONTENT PROVIDED HEREUNDER
IS UNDER iBEAM'S EDITORIAL CONTROL IN ANY MANNER WHATSOEVER, IS INFRINGING,
VIOLATES ANY THIRD PARTY RIGHTS OF ANY KIND OR THAT IT IS NOT OBSCENE, INDECENT,
OFFENSIVE OR HARMFUL TO MINORS.
8 INDEMNIFICATION
In no event shall either party be liable to the other for consequential or
indirect losses or damages howsoever arising under this Agreement and whether
under contract, tort or otherwise (including, without limitation, third party
claims, loss of profits, loss of customers, or damage to reputation or
goodwill). iBEAM shall indemnify, defend and hold InterPacket harmless from
any and all claims, actions, losses, damages, costs and expenses suffered by
InterPacket as a result of or related to any content that is altered while on
the MaxCaster servers. InterPacket shall indemnify, defend and hold iBEAM
harmless from any and all claims, actions, losses, damages, costs and
expenses suffered by iBEAM as a result of or related to InterPacket's gross
negligence, willful misconduct, status as a telecommunications provider,
InterPacket's communication services or the Network.
9 LIMITATION OF LIABILITY
NEITHER PARTY SHALL BE RESPONSIBLE OR LIABLE WITH RESPECT TO ANY SUBJECT
MATTER OF THIS AGREEMENT OR TERMS AND CONDITIONS RELATED THERETO, TO THE
OTHER OR ANY OTHER THIRD PARTY, UNDER ANY CONTRACT, NEGLIGENCE, STRICT
LIABILITY OR OTHER THEORY(A) FOR ANY MONIES IN EXCESS OF [***], (B) FOR LOSS
OR INACCURACY OF DATA , COST OF PROCUREMENT OF SUBSTITUTE GOODS, SERVICES OR
TECHNOLOGY, OR (C) FOR ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES
INCLUDING, BUT NOT LIMITED TO LOSS OF REVENUES AND LOSS OF PROFITS. AND
NEITHER PARTY SHALL BE RESPONSIBLE FOR ANY MATTER BEYOND ITS REASONABLE
CONTROL.
UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR ANY
OTHER THIRD PARTY FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR
EXEMPLARY DAMAGES, ARISING FROM ANY ACT OR OMISSION, INCLUDING NEGLIGENT ACTS OR
OMISSIONS, OF THAT PARTY, EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES, ARISING FROM ANY PROVISION OF THIS AGREEMENT, SUCH AS, BUT NOT
LIMITED TO LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS.
10.0 TERM AND TERMINATION
10.1 This Agreement shall continue with full force and effect for one (1) year
from the Effective Date (the "Initial Term") and shall thereafter renew for
successive one (1) year terms (each, a "Renewal Term") unless terminated by
either Party for any reason upon ninety (90) days notice prior to the end of the
Initial Term or any Renewal Term, as the case may be, to the other party (the
"Term"). Either Party may terminate this Agreement at any time, effective
immediately, upon written notice to the other Party, if such other Party: (i)
breaches any of its material obligations hereunder and fails to cure such breach
(or to provide evidence, to the other Party's reasonable satisfaction, that it
is working diligently towards curing and will have cured within an agreed-upon
timeframe) within thirty (30) days of receipt of written notice from the other
party; (ii) files a petition in bankruptcy; (iii) fails to meet its minimum
service criteria, as specified in Article 2.2(B) in any two (2) month period;
and/or (iv) makes an assignment for the benefit of its creditors.
Notwithstanding the above, either Party may terminate this Agreement at that
Party's sole convenience with ninety (90) days prior written notice. Any such
termination shall be without any liability to or obligation of the terminating
Party, other than with respect to any damages due as a result of breach of
obligations under this Agreement prior to termination.
10.2 InterPacket may discontinue any or all classes of service at its sole
discretion in the event that (i) InterPacket deems it necessary to protect the
integrity of InterPacket's network, (ii) iBEAM (or any third party accessing
InterPacket's network or the internet through iBEAM) engages in any of the
prohibited activities described in Section 10.3 below or (iii) failure to make
timely payments described in Section 2, or, (iv), any other breach of this
Agreement by iBEAM. If reasonably practical, InterPacket will notify iBEAM prior
to such discontinuation to afford iBEAM the opportunity to remedy any such
problems or defaults. InterPacket's right to discontinue service shall be in
addition to all of its other rights under this contract.
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[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
10.3 It shall be a breach of this Agreement if iBEAM engages in any of the
following behaviors: (1) Any course of action which compromises the performance,
security or integrity of servers or other computers or any other devices or
software connected directly or indirectly to the Internet; (2) Any material
increase in traffic levels for malicious purpose or with the result that the
traffic level causes a substantial degradation of performance or denial of
service to InterPacket, its clients or subsidiaries; (3) Any type of invasion or
unauthorized tampering with system security, password protection or encrypted
information; (4) Infringement of the legal rights of other Internet users,
service providers, content providers and users of InterPacket's Internet access;
(5) Any prohibited or unreasonably excessive use of electronic mail or similar
information delivery system; (6) Any other activity prohibited by applicable law
including, but not limited to, obscenity, defamation, infringement of trademark,
copyright, or telecommunications laws of the United States. If iBEAM operates
software that InterPacket determines may cause hazard, interference, or service
interruption to InterPacket provided equipment or services or the InterPacket
network, iBEAM shall immediately remove the offending software upon notice.
10.4 In the event that this Agreement terminates for any reason the following
Articles shall survive the termination; Articles 5 and 15.
10.5 In the event this Agreement terminates for any reason, InterPacket shall
de-install all iBEAM equipment and send such equipment to iBEAM. iBEAM will
reimburse InterPacket for all reasonable costs associated with de-installation
and shipment of the equipment, including customs, duties and taxes.
11. INTERPRETATION
11.1 Changes: All changes to this Agreement must be in writing, signed by each
Party and reference this Agreement and the Effective Date.
11.2 Order of Precedence: The Terms and Conditions of this Agreement shall take
precedence over those set forth within each Exhibit, Addendum or other written
document, signed by both parties and specified as an addition or change to this
Agreement.
12 WAIVER, REMEDIES CUMULATIVE
12.1 The waiver by either Party of a breach or default by the other Party of any
of the provisions of this Agreement shall not be construed as a waiver of any
succeeding breach or default of the same or any other provisions of this
Agreement and shall not impair the exercise of any rights accruing to it under
this Agreement thereafter; nor shall any delay or omission on the part of either
Party to exercise or, avail itself of any rights accruing to it under this
Agreement operate as a waiver of any breach or default by the other Party of any
of the said provisions.
12.2 All rights and remedies provided in this Agreement are cumulative and are
not exclusive of any rights or remedies provided by law.
13 NOTICES
All communications in connection with this Agreement shall be in writing and
may be given by telecopy or mail to the recipient at the address set out in
this Agreement and sent to the Attention of General Counsel or Chief
Financial Officer.
14 COSTS
Each Party shall bear its own legal, accounting and other costs,
charges and expenses of and incidental to this Agreement.
15 DENIAL OF PARTNERSHIP
Nothing herein contained shall be construed as creating the relationship of
partnership, joint venture, fiduciary relationship or principal and agent
between the parties. Neither Party may pledge or purport to pledge the credit
of the other Party or make or purport to make any representations, warranties
or undertakings for the other Party.
16 FORCE MAJEURE
16.1 Where a Party is unable, wholly or in part, by reason of force majeure, to
carry out any obligations under this Agreement that obligation is suspended so
far as it is affected by force majeure during the continuance thereof.
16.2 In this Agreement, "force majeure" means lightning, fire, earthquake,
storm, flood or other Acts of God, strike, lockout or other interference with
work, war declared or undeclared, blockade, disturbance,, explosion,
governmental or quasi-governmental restraint expropriation prohibition
intervention direction or embargo, unavailability or delay in availability of
equipment or transport, inability or delay in obtaining governmental or
quasi-governmental approvals consents permits licenses authorities or
allocations, and any other cause
<PAGE>
whether of the kind specified above or otherwise which is not reasonably within
the control of the Party affected.
17 ASSIGNMENT
Except for (i) assignment to a successor who acquires substantially all of
the assets, stock and business of iBEAM or InterPacket, (ii) assignment to a
subsidiary company, parent company, or subsidiary of a parent company, or
(iii) assignment, pledge, or transfer by iBEAM of any interest in any
payments to be received by iBEAM hereunder, neither party hereto may assign
this Agreement or any portion thereof without the prior written consent of
the other. Any assignment permitted hereunder or otherwise agreed to by the
other Party hereto will not relieve the assigning party of any obligations
with respect to any covenant, condition, or obligation required to be
performed by the assigning Party under this Agreement.
18 PROMOTION AND PUBLIC ANNOUNCEMENT
18.1 Each Party shall have the right to make public announcements and/or press
releases using the other Party's name provided they have obtained prior written
approval.
19 CONFIDENTIALITY
19.1 Each Party acknowledges that during the contractual relationship created
under the Agreement, situations may arise which require that they be given
access to Confidential Information (as defined more specifically in
Article 15.2) owned by the other Party, its suppliers or customers.
19.2 The Receiving Party of the Confidential Information recognizes that the
Disclosing Party has a proprietary interest in maintaining the confidentiality
of such Confidential Information. Except as required by law, Receiving Party
shall not, during the term of this Agreement and for Three (3) years after the
termination of this Agreement disclose any Confidential Information of the
Disclosing Party to any third party or use any Confidential Information for its
benefit or for the benefit of any third party except as permitted herein, or to
further the purposes of this Agreement. Receiving Party shall take reasonable
precautions to maintain the confidentiality of all Confidential Information, and
in no case lesser precautions that Receiving Party takes with its own similar
Confidential Information. Upon termination of this Agreement for any reason,
each Party shall immediately return or destroy all Confidential Information of
the other Party in its possession or control.
19.3 Confidential Information shall mean all information, whether in tangible
form or communicated orally, which is learned by the Receiving Party in the
course and performance of its obligations under this Agreement: (i) which is
labeled or stamped Confidential (or words to that effect), (ii) which is of the
type that Receiving Party has been informed to be confidential, and (iii)
concerns the Disclosing Party's products, or contents thereof or services
(existing or potential), business affairs, pricing, suppliers, customers, and
distributors, including without limitation, customer usage data, computer
hardware and software (in existence or under development), pending patent
applications, technical, sales and business reports, technical or research
notebooks, and information and data, whether owned by the Disclosing Party or
a third party, relating to the Disclosing Party's commercial activities.
Excluded from the foregoing definition is information which: i) at the time
of disclosure, is, or, after disclosure, becomes generally known or available
to the public other than as a consequence of the Receiving Party breach of
this Agreement; ii) was properly known or otherwise available to the
Receiving Party prior to the disclosure by the Disclosing Party; iii) was
disclosed by a third party to the Receiving Party after the disclosure by the
Disclosing Party if such third party's disclosure neither violates any
obligation of the third party to the Disclosing Party nor is a consequence of
the Receiving Party's breach of this Agreement; iv) the Disclosing Party
authorizes a release.
19.4 The rights and obligations of the parties with respect to confidentiality
shall survive termination of this Agreement.
20. ACTS BY LAW
Neither party shall be under any obligation to perform any service or deliver
any work should such service or delivery constitute a violation of any
applicable law.
21. GOVERNING LAW
This Agreement shall be governed by, and construed and enforced in accordance
with the laws of the State of California, without regards to its choice of
law provisions. The exclusive jurisdiction for any legal proceeding regarding
this Agreement shall be in the courts of the State of California and the
Parties hereto expressly submit to the jurisdiction of said courts.
22. SEVERABILITY
If any provision or provisions of this Agreement shall be held to be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining portions shall not in any way be affected or impaired thereby.
23. INTEGRATION
<PAGE>
This Agreement supersedes and replaces any and all prior agreements,
understandings or arrangements, whether oral or written, heretofore made between
the Parties and relating to the subject matter hereof and constitutes the entire
understanding of the Parties with respect to the subject matter of this
Agreement. This Agreement may not be altered or amended except by an express
written agreement signed by both Parties hereto.
24. ARBITRATION
In the event of a dispute regarding this contract, the parties
shall submit the dispute to arbitration at the American Arbitration Association
in Southern California ("AAA") and the parties agree to abide by AAA rules,
regulations, and decisions.
iBEAM Broadcasting Corporation InterPacket
Signed: /s/ P.B. Desnoes Signed: /s/ Peter S. Zimble
------------------------- --------------------------
Name: P.B. Desnoes Name: Peter S. Zimble
------------------------- --------------------------
Title: CEO Title: President
------------------------- --------------------------
Date: 1/20/00 Date: January 19, 2000
------------------------- --------------------------
<PAGE>
CONFIDENTIAL TREATMENT
EXHIBIT A 24X7 MAINTENANCE
[EXHIBIT A WAS INTENTIONALLY OMITTED BY THE PARTIES ON THE DATE
OF EXECUTION OF THIS AGREEMENT.]
<PAGE>
EXHIBIT 10.20
SOFTWARE LICENSE AND CONSULTING SERVICES AGREEMENT
This Software License and Consulting Services Agreement (the "Agreement") is
entered by and between InterPacket Networks, Inc., a Delaware corporation with
offices at 1901 Main Street, Second Floor, Santa Monica, California 90405
("IPN"), and RealNetworks, Inc., a Washington corporation with offices at 2601
Elliott Avenue, Suite 1000, Seattle, Washington 98121 ("RN"). The Effective Date
of this Agreement is March 20, 2000.
1. DEFINITIONS
"Deliverables" means the Software and other work product resulting from the
Services as specified in the Statement of Work.
"Services" means the consulting and development of Deliverables and
Software, to be provided by RN hereunder, as more fully described in the
Statement of Work.
"Software" means the [***] as specified in the Statement of Work.
"Statement of Work" means the Statement of Work for RealNetworks
Professional Services, attached to this Agreement as Attachment A.
"Streaming Media System" means the IPN system that enables live and
on-demand streaming media delivery over the InterPacket network
infrastructureas specified in the Statement of Work.
2. PROFESSIONAL SERVICES
2.1 SERVICES. RN shall provide the Services set forth in the Statement of
Work and shall deliver to IPN, subject to the license provisions of
Section 4 herein, the Deliverables according to the schedule set forth
in the Statement of Work. All right, title and interest in and to the
Deliverables is owned by, and shall remain with, RN.
2.2 COOPERATION. IPN acknowledges that its timely provision of and RN's
unimpeded reasonable access to equipment, assistance, cooperation,
complete and accurate information and data from IPN officers, agents,
and employees, and suitably configured computer products as specified
in the Statement of Work are essential to performance of any Services
within the timeframe set forth in this Agreement and in the Statement
of Work, and that RN shall not be liable for any deficiency in
performing Services if such deficiency results from IPN's failure to
provide reasonable access, assistance and cooperation. With respect to
the performance of Services, IPN will not direct or supervise RN's
employees at IPN's premises with respect to said individuals' tasks or
responsibilities without RN's express written consent provided that
such individuals will conduct themselves in a professional workman
like manner.
2.3 ACCEPTANCE. Acceptance of Deliverables shall be pursuant to the
applicable Acceptance Criteria specified in the Statement of Work. In
the event IPN fails to notify RN of any difficulties or problems with
the Deliverables within 30 days after delivery to IPN, IPN shall be
deemed to have accepted the Deliverables. Prior to acceptance of such
Deliverables, RN shall have the right to repair or replace the
Deliverables at its discretion. Upon acceptance of such Deliverables,
except with respect to the warranty set forth in Section 10, RN shall
be under no obligation to repair or replace such Deliverables.
3. REAL BROADCAST NETWORK REFERRALS
During the Term, IPN shall participate in a referral program with Real Broadcast
Network ("RBN") referral program as specified in Attachment C.
- ---------------
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
1
<PAGE>
4. SOFTWARE
4.1 SOFTWARE LICENSE. In consideration of the fees specified in the
Statement of Work, RN hereby grants to IPN [***] license to [***]
copies of the Software solely for use [***] as specified in
Attachment A. IPN shall receive licenses to [***] copies of the
Software upon completion of the Custom RealProxy Cache Beta Code
Release as specified in the Statement of Work, and an additional
[***] Software licenses upon completion of the project as specified in
the Statement of Work.
IPN may not modify, enhance, reverse engineer, decompile, dissemble or
make derivative works of the Software or Deliverables. IPN may not
copy (except for archive purposes), license, sublicense, transfer, or
in any way distribute to third parties the Software or Deliverables.
IPN may not use the Software as part of hosting any content owned by
IPN or originating from servers owned, leased or otherwise operated by
IPN, unless IPN receives a hosting license from RN.
4.2 ADDITIONAL SOFTWARE LICENSES. For 1 year after the Effective Date, IPN
may license additional copies of the Software for the fees specified
in Attachment B. All such additional copies shall be licensed to IPN
pursuant to the terms of this Agreement. Such additional copies shall
be promptly provided by RN to IPN contemporaneous with the payment of
the applicable fees.
4.3 DIFFERENT PLATFORMS. In the event IPN wishes to transfer its existing
Software licenses acquired herein to another operating system
platform, such transfer will be without additional charge for such
existing licenses, provided that (i) IPN agrees to pay RN for all
porting, developing and other related fees which may be necessary to
port the Software to such desired operating system platform; and (ii)
applicable license fees shall still apply to additional Software
licenses which IPN may acquire from RN.
5. FEES AND PAYMENT
5.1 PAYMENTS. IPN will pay RN according to the Payment Schedule set forth
in the Statement of Work. By executing this Agreement, IPN confirms
the budget for the work, and the charges and purchases set forth in
the Statement of Work. If IPN wishes to enlarge the scope of the
Services or implement additional features or subtasks, the parties
shall agree upon the costs therefor in advance in writing.
5.2 EXPENSES. IPN will reimburse RN for reasonable incidental expenses and
disbursements incurred by RN related to supplies, media (disks and
CD-ROM costs), travel and related lodging and meals, shipping,
telephone charges, and any other reasonable expenses incurred in the
performance of the Services. RN shall bear sole responsibility for
expenses incurred to acquire the necessary tools to perform the
Services. As of the Effective Date, RN anticipates that the costs as
stated in the SOW shall not change. If RN needs to procure any third
party computer software, hardware, other office supplies or any other
subcontracted services or products to implement, perform, or install
items set forth in Attachment A for which IPN will be charged an
additional fee, and the cost of which will exceed $1000, RN will
notify IPN in advance, and obtain approval for the amount of the
purchase plus any applicable sales tax.
5.3 BILLING. RN will invoice IPN for reasonable expenses and any third
party purchases on a monthly basis. The invoice will include a report
itemizing the reasonable expenses and third party purchases. IPN shall
pay all invoices within 30 days of receipt, and shall not make any
deductions thereto.
5.4 TAXES. The charges do not include taxes or duties. If RN is required
to pay or collect any local, value added goods and services, or any
other similar taxes or duties based on Services provided under this
Agreement, then such taxes and/or duties shall be billed to and paid
by IPN. This shall not apply to taxes based on RN's income
6. CHANGE REQUESTS. IPN's request for any change in Services must be in
writing; this requirement pertains to all such requests including but not
limited to requests for changes in project plans, scope, specifications,
schedule, designs,
- ---------------
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
2
<PAGE>
or requirements. RN shall not be obligated to perform tasks described in
IPN's request until the parties agree in writing to the proposed change.
7. NON-SOLICITATION. Neither party will enter into any separate agreements,
written or oral, with current or former employees or staff of the other
party without such party's express written consent during the term of this
Agreement and for one (1) year from RN's completion of work performed for
IPN by RN under this or other agreements.
8. TERM; TERMINATION
8.1 TERM. This Agreement shall commence as of the Effective Date and shall
remain in effect for one year thereafter, or until terminated earlier
in accordance with this Section 8.
8.2 TERMINATION BY RN. Failure of IPN to make payments to RN in accordance
with this Agreement shall be considered substantial nonperformance and
cause for termination. If IPN fails to make payments when due, RN may,
upon 15 days' written notice to IPN, suspend performance under this
Agreement. Unless RN receives payment in full within seven days of the
date of the notice, the suspension shall take effect without further
notice. In the event of a suspension of services in accordance with
this Section 8.2, RN shall have no liability to IPN for delay or
damage caused IPN because of such suspension of services.
8.3 TERMINATION BY IPN. IPN shall have the right at any time to terminate
this Agreement on twenty-one (21) days' written notice. In the event
of such termination, and provided termination is not as a result of
RN's unremedied breach of this Agreement, IPN shall pay RN then
accrued payments due under the Statement of Work, plus the pro-rated
portion of the next payment, if any, due with respect to items being
worked on up to the time of termination, plus reimbursable expenses.
Should IPN wish to delete specific subtasks, IPN will notify RN
immediately in writing.
8.4 TERMINATION FOR BREACH. Either party may terminate this Agreement upon
seven (7) days' written notice to the other party in the event the
other party materially breaches this Agreement and fails to cure such
breach within fifteen (15) days' written notice from the non-breaching
party.
9. OTHER SOFTWARE
9.1 The Services provided under this Agreement may be in support of IPN's
license to use other computer software programs, owned or distributed
by RN, under a separate software license agreement. The software
license agreement shall govern all use by IPN of such programs.
Neither this Agreement nor any purchase order or similar ordering
document shall include the grant of any license or any other rights
for such programs.
9.2 Any Services acquired from RN shall be bid separately from such
program licenses, and IPN may acquire either Services or such program
licenses without acquiring the other.
9.3 For RN products generally and publicly available (including plug-ins),
RN agrees to make available and license such products to IPN at then
current list prices.
10. WARRANTY. RN represents, warrants and covenants that: (i) any Deliverables,
information or materials developed for, or any advice provided to RN, shall
not rely or in any way be based upon Confidential Information (as defined
in Section 12.1) obtained or derived by RN from sources other than RN
unless RN has received specific authorization in writing to use such
Confidential Information; (ii) RN will not enter into any contracts or
otherwise obligate IPN in any way without IPN's express approval; and (iii)
RN will perform the Services consistent with generally accepted industry
practices. IPN must report any deficiencies in the Services to RN in
writing within [***] of completion of the Services in order to receive
warranty remedies. THE WARRANTY HEREIN IS EXCLUSIVE AND IN LIEU OF ALL
OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. FOR ANY
BREACH OF THE ABOVE WARRANTY, IPN'S EXCLUSIVE REMEDY, AND RN'S ENTIRE
LIABILITY, SHALL BE THE RE-PERFORMANCE OF THE SERVICES. IF RN FAILS OR IS
UNABLE TO RE-PERFORM THE SERVICES AS WARRANTED, IPN SHALL BE ENTITLED TO
RECOVER THE FEES PAID TO RN FOR THE DEFICIENT SERVICES.
- ---------------
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
3
<PAGE>
11. RESPONSIBILITY FOR IPN CONTENT AND SITES; INDEMNIFICATION. Except for the
Services to be provided by RN hereunder, as between IPN and RN, IPN shall
be completely and solely responsible for all matters relating to any
content or material ("Content") owned or used by IPN in connection with any
equipment provided by RN, and in connection with IPN's Internet web site,
intranet, or extranet system (collectively, "Sites"). IPN shall remain
solely responsible and liable for the Content and the Sites, and RN assumes
no responsibility for editing, reviewing, controlling or any other
activities associated with the use or publication of any of the Content,
the operation and maintenance of IPN's Sites, and shall have no liability
to any third party in connection with such activities, whether or not RN
undertakes such responsibilities unless RN acts in a grossly negligent or
malicious manner with respect to such responsibilities. Except as set forth
in the preceding sentence, IPN hereby agrees to indemnify, hold harmless
and defend RN and its employees, contractors and agents from all claims,
damages, costs and expenses, including reasonable attorneys' fees and
litigation expenses, arising out of or in connection with any Content or
the Site. Neither party will be responsible or liable to the other for
content broadcast or distributed by IPN through the referral program.
12. CONFIDENTIALITY
12.1 CONFIDENTIAL INFORMATION. The Parties acknowledge that, in the course
of performing their obligations under this Agreement, a Party (the
"Receiving Party") may obtain information relating to the other Party
(the "Disclosing Party") and its customers which is of a confidential
or proprietary nature ("Confidential Information"). Such Confidential
Information includes, but is not limited to, trade secrets, know-how,
inventions, techniques, processes, pricing, discounts, schedules,
customer lists, contract terms (including the terms of this
Agreement), customer leads, financial information, sales plans,
marketing plans, and any other information labeled or designated as
"Confidential," or information by its nature would reasonably be
presumed to be confidential. For purposes of this Agreement,
Confidential Information does not include any information that the
Receiving Party can prove (a) is in the public domain, (b) was
lawfully in the Receiving Party's possession before the Disclosing
Party disclosed such information, (c) was received by the Receiving
Party from a third party under no duty to maintain the confidentiality
of such information, or (d) was independently developed by the
Receiving Party.
12.2 RESTRICTIONS ON DISCLOSURE. The Receiving Party shall at all times,
both during and after the term of this Agreement, hold the
Confidential Information of the Disclosing Party in the strictest
confidence, and shall not disclose such Confidential Information to
any third party, except to those of its employees, contractors, and
professional advisors (collectively, "Employees") as reasonably
necessary to carry out its obligations under this Agreement, provided
that prior to any disclosure of a Disclosing Party's Confidential
Information to any of its Employees, a Receiving Party shall ensure
that such Employee has executed a nondisclosure and proprietary
information agreement with restrictions on the use of the Disclosing
Party's Confidential Information no less restrictive than those
provided herein which relate to the Disclosing Party. Neither the
Receiving Party nor any Employee shall use such Confidential
Information for any purpose other than as necessary for the
performance of its obligations under this Agreement. In addition, the
Parties shall not disclose the terms of this Agreement to any third
party. Notwithstanding the foregoing, nothing in this Agreement shall
be construed to prohibit any disclosure required by a valid court
order or subpoena, provided that the Party being required to disclose
any Confidential Information gives the Disclosing Party prior written
notice of such disclosure and cooperates with the Disclosing Party in
any proper action taken by the Disclosing Party to contest or limit
the scope of such disclosure. The parties' obligations with respect to
Confidential Information shall continue for five (5) years from the
date of termination or expiration of this Agreement.
12.3 REMEDIES FOR DISCLOSURE. The Parties acknowledge and agree that any
breach of the confidentiality obligations of this Agreement would
cause irreparable harm and, accordingly, that injunctive relief, in
addition to any monetary damages or other remedies that may be
available in law or in equity, is an appropriate remedy to prevent any
threatened or ongoing breach of such obligations.
13. NO ASSIGNMENT. Neither party shall assign, transfer or otherwise dispose of
this Agreement or any rights or duties hereunder without the prior written
consent of the other provided that the sale of all of the stock or assets
4
<PAGE>
of any party or the merger or other transaction resulting in the change in
control of such party shall not require the consent of the other party. If
such sale, merger or other transaction involves a competitor of the party
not being acquired, such party may immediately terminate this Agreement.
14. LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY
INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES, OR DAMAGES FOR
LOSS OF PROFITS, REVENUE, DATA, OR USE, INCURRED BY EITHER PARTY OR ANY
THIRD PARTY, WHETHER IN AN ACTION IN CONTRACT OR TORT, EVEN IF THE OTHER
PARTY OR ANY OTHER PERSON HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. RN'S LIABILITY FOR DAMAGES HEREUNDER SHALL IN NO EVENT EXCEED THE
AMOUNT OF FEES PAID BY IPN UNDER THIS AGREEMENT.
15. INFRINGEMENT INDEMNITY.
15.1 RN agrees to indemnify, hold harmless, and defend IPN from and against
any and all damages, costs, and expenses, including reasonable
attorney's fees, incurred in connection with any third party claim
that the Software infringes any copyright, patent, trademark, trade
secret, or other proprietary right of such third party, provided IPN
promptly notifies RN of the claim, RN has sole control over its
defense or settlement, and IPN provides reasonable assistance in the
defense of same at RN's expense. [***]
15.2 In the event RN receives information concerning an intellectual
property infringement claim relating to the Software that would
interfere with IPN's rights hereunder, RN may at its expense, either:
(i) procure for IPN the right to continue using the alleged infringing
Software; or (ii) replace or modify the Software to make it
non-infringing, and IPN shall thereupon cease use of the alleged
infringing Software. In the event that RN is unable to procure rights
for IPN under (i) or (ii) after exercising reasonable commercial
efforts to do so, then RN may immediately terminate this Agreement,
refund the fee paid by IPN to RN for the infringing Software and IPN
shall cease and desist using or distributing the infringing Software.
This Section states RN's exclusive liability and IPN's exclusive
remedy in the event of infringement.
15.3 IPN agrees to indemnify, hold harmless, and defend RN from and against
any and all damages, costs, and expenses, including reasonable
attorney's fees, incurred in connection with any third party claim
that the Streaming Media System other than the Software infringes any
copyright, patent, trademark, trade secret, or other proprietary right
of such third party, provided RN promptly notifies IPN of the claim,
IPN has sole control over its defense or settlement, and RN provides
reasonable assistance in the defense of same at IPN's expense. [***]
- ---------------
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
5
<PAGE>
16. MISCELLANEOUS. This Agreement and all Attachments attached hereto and
incorporated herein constitute the entire agreement between the parties,
and supersedes any and all agreements, whether written or oral, and may
only be amended or modified by a written instrument signed by both parties.
Any controversy, dispute or question arising out of, in connection with or
in relation to this Agreement or its interpretation, performance or
nonperformance, or any breach thereof, shall be determined by arbitration
in the County of King, State of Washington, in accordance with the rules
then obtaining of the American Arbitration Association. The arbitrator
shall have full discretion to designate which party, if any, is responsible
for cost and expenses of such arbitration. The decision of the arbitrator
shall be final and binding upon the parties hereto and may be entered as a
final decree or judgment in any court of competent jurisdiction. It is
expressly agreed that the terms and conditions of this Agreement and any
Ordering Document supersede the terms of IPN's purchase order.
REALNETWORKS, INC.
By: /s/ Martin Plaehn
-------------------------------------
Print Name: Martin Plaehn
----------------------------
Title: SVP Media Systems
---------------------------------
Accepted and Agreed to
this 20th day of March, 2000.
INTERPACKET NETWORKS, INC.
By: /s/ Timothy F. Sylvester
-------------------------------------
Print Name: Timothy F. Sylvester
----------------------------
Title: EVP, Business and Legal Affairs
---------------------------------
6
<PAGE>
ATTACHMENT A
[GRAPHIC]
- --------------------------------------------------------------------------------
ATTACHMENT A
STATEMENT OF WORK FOR
REALNETWORKS PROFESSIONAL SERVICES
PREPARED FOR INTERPACKET
BY REALNETWORKS PROFESSIONAL SERVICES
MARCH 20, 2000
This document contains proprietary information belonging to RealNetworks,
Inc. No use or disclosure of the information contained herein is permitted
without the prior written consent of RealNetworks, Inc.
7
<PAGE>
(C)2000 RealNetworks, Inc.
All rights reserved.
RealAudio and RealVideo are registered trademarks of RealNetworks, Inc.
in the United States of America and other countries.
Basic Server, Basic Server Plus, Real Broadcast Network,
RBN, RealDeveloper, RealProducer, RealMedia, RealNetworks,
RealPix, RealPlayer, RealPlayer Plus, RealPublisher, RealServer,
RealSystem, RealText, the RealBubble and the RealNetworks Media
Type logotypes are trademarks or registered trademarks of RealNetworks, Inc.
in the United States of America and other countries.
RealFlash is a trademark of Macromedia, Inc. and RealNetworks, Inc.
in the United States of America and other countries.
Macromedia, the Macromedia logo, and Flash are registered trademarks of
Macromedia, Inc. in the United States of America and other countries.
All other trade names, trademarks or registered trademarks are trade names,
trademarks or registered trademarks of their respective companies.
The computer file for this document is
InterPacket SOW v3.doc
[GRAPHIC]
2601 Elliott Avenue
Suite 1000
Seattle, Washington 98121
Phone: (206) 674.2700
Fax: (206) 674.2699
WWW.REAL.COM
8
<PAGE>
1. BACKGROUND
RealNetworks Professional Services (RNps) shall provide to InterPacket the
Deliverables described herein for use by Interpacket in an advanced RealSystem
G2 broadcast network to deliver high quality streaming media services to users
via InterPacket's satellite distribution network ("Streaming Media System"). The
InterPacket streaming media system will include the following capabilities [***]
2. PROJECT SCHEDULE
2.1. PROJECT SCHEDULE
The project is to be accomplished with four (4) critical phases:
<TABLE>
<CAPTION>
-------------- ------------------------------------------------------------ --------------------------------------------
PHASE DELIVERABLE DESCRIPTION SCHEDULE (ESTIMATED COMPLETION)
-------------- ------------------------------------------------------------ --------------------------------------------
<S> <C> <C>
InterPacket Steaming Media System Requirements
Phase 1 Specifications [***]
-------------- ------------------------------------------------------------ --------------------------------------------
Phase 2 [***] [***]
-------------- ------------------------------------------------------------ --------------------------------------------
Phase 3 [***] [***]
-------------- ------------------------------------------------------------ --------------------------------------------
Phase 4 [***] [***]
-------------- ------------------------------------------------------------ --------------------------------------------
</TABLE>
3. STATEMENT OF WORK
An overview of the tasks and functions (statement of work) to be performed by
RealNetworks Professional Services is presented in this section. Upon acceptance
of this statement of work, RNps will begin the software component development
process. Highlights of the major project activities are as follows:
SYSTEM REQUIREMENTS SPECIFICATION
- Creation of System Requirements Specification ("SRS") from which all
Software Design Documents ("SDD") are written
SOFTWARE DESIGN DOCUMENT
- Creation of internal development document from which all code is
written
- ---------------
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
9
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SOFTWARE DEVELOPMENT
- [***]
QA/TEST
- [***]
DOCUMENTATION
- Prepare installation and administration documentation
DEPLOYMENT
- Perform on-site installation and deployment services on a
representative portion of the InterPacket network
- Perform on-site QA tests of the component releases according to the QA
test plan in the InterPacket environment
- Assist in the software/hardware integration with InterPacket hardware
and network systems
- Report any bugs found to RNps development and QA teams for resolution
- Perform knowledge transfer and custom training to InterPacket
representatives
All software component development efforts will be performed at the Real
Networks development facilities in Seattle, Washington, except as may be
required by the terms of this SOW.
3.1. SYSTEM REQUIREMENTS SPECIFICATION (PHASE 1)
RealNetworks Professional Services and IPN will jointly complete the System
Requirements Specification during this phase of the project. The design effort
will require substantial interaction and information exchange between
InterPacket and RNps technical representatives. The tasks will include on-site
and off-site services to perform the analysis, research, design, documentation,
and reviews for delivery of the SRS.
DELIVERABLES
The deliverable for this phase of the project will be the InterPacket System
Requirements Specification which shall be reasonably acceptable to IPN.
CUSTOMER RESPONSIBILITIES
InterPacket will be responsible for the following items in support of the design
and specification phase of the project: [***]
- - InterPacket will provide access to personnel and appropriate
representatives for meetings, telephone conferences and related
communications necessary to complete the design and analysis tasks required
for this phase of the project.
ACCEPTANCE CRITERIA
RealNetworks Professional Services will conduct a review meeting with
InterPacket representatives where the final System Requirements Specifications
will be presented and delivered. The design phase of the project will be
considered complete upon delivery of the final SRS document which document shall
be reasonably acceptable to IPN and consistent with the terms of this SOW. [***]
- ---------------
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
10
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3.2. [***] -
3.3. [***] .
3.4. [***]
3.5. [***]
4. COSTS AND SCHEDULE
The cost for the project includes a fixed fee price for the services to
accomplish the stated scope of work outlined in this proposal. Costs do not
include travel and travel related expenses necessary for the project.
[***]
4.1. PAYMENT SCHEDULE
[***]
4.2. CUSTOM UPGRADE AND SUPPORT
Custom support services for the Software shall be as specified in Exhibit 1 to
this Statement of Work and shall be provided through Real Networks Professional
Services. Custom upgrade services include Software revisions to maintain support
for compatibility with revisions in the standard RealNetworks products
(RealServer, RealPlayer, RealProxy, RealProducer).
[***]
11
- ---------------
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
ATTACHMENT B
ADDITIONAL SOFTWARE LICENSES
InterPacket may acquire licenses for additional copies of the Software for the
license fees payable to RN as specified below:
[***]
This pricing is for bulk unit purchases of Software licenses. Each order for
additional licenses shall be counted separately and may not be accrued with
previous orders.
- ---------------
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
12
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ATTACHMENT C
REAL BROADCAST NETWORK REFERRAL PROGRAM
1.1 REFERRAL PROGRAM
InterPacket and Real Broadcast Network ("RBN") will agree to the referral
program detailed below.
2 INTERPACKET'S RESPONSIBILITIES
a) [***]
HTTP://WWW.REALNETWORKS.COM/RBN
b) InterPacket and RBN will provide a single point of contact for referral
activities as set forth in this Agreement.
3 RBN'S RESPONSIBILITIES
[***]
3.1 INTERCONNECTION AND CONTENT DISTRIBUTION
[***]
3.2 Pricing
[***]
- ---------------
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
13
<PAGE>
EXHIBIT 1 TO THE STATEMENT OF WORK
CUSTOM SOFTWARE UPGRADES AND SUPPORT
TERMS AND CONDITIONS
This Exhibit to the Consulting Services Agreement (the "Agreement") sets forth
the support obligations of RN and related obligations of IPN (the "Customer").
1. DEFINITIONS.
1.1 In addition to the capitalized terms defined elsewhere in this
Addendum, the following terms used herein shall have the meanings ascribed to
them below:
(a) "Error" shall mean any instance in which the Software does
not materially conform to the Documentation and any condition (i) that
precludes one or more functions of the Software from being performed due to
suspected or actual Errors in the Software; or (ii) in which the Customer's
technical support personnel need reasonable assistance or information
regarding the Software; provided, however, that an Error shall not include
any material nonconformance that is due to hardware, software, or other
equipment not referred to in the Documentation as being compatible with the
Software.
(b) "First Level Support" shall consist of accepting and handling end
user calls and troubleshooting to the point of verifying that there is an
Error and that the Error, if any, is in the Software.
(c) "Second Level Support" shall consist of telephone and remote
diagnostic support to the Customer Contact (not directly to end users or
other third parties) with regard to the operation and utilization of the
Software and maintenance modifications, error corrections or bug fixes
necessary to bring the Software into conformance with the Documentation
therefor.
(d) "Customer Contact" shall mean an individual designated in writing
by the Customer who is authorized to contact the Support Center. Customer
may substitute the Customer Contacts at any time upon written notice
thereof to RN.
(e) "Support Center" shall mean the RN facility or facilities from
which support obligations are to be provided hereunder. As of the Effective
Date, RealNetwork's Support Center is located at 2601 Elliott Avenue, Suite
1000, Seattle, Washington 98121.
(f) "Workaround" shall mean: (i) a modification to the Software;
(ii) an alteration to the configuration of the end user's computer or
software; or (iii) a change in the way the end user accomplishes a task
using the Software; any of which may be of a temporary nature, to help
avoid the Error.
(g) "Upgrade" shall mean the modification to the Software to support
updated versions of Gold releases of RealSystem G2 products (e.g.,
RealProducer, RealServer, RealPlayer).
1.2 All other capitalized terms used in this Addendum and not otherwise
defined herein shall have the meanings ascribed to them in the Agreement.
2. CUSTOMER OBLIGATIONS
2.1 The Customer shall be responsible for providing First Level Support
for the Software. RN shall not be required to have direct contact with the
Customer's distributors or end users with regard to Technical Support.
2.2 The Customer shall ascertain the nature of each reported Error, and
the circumstances under which such Error occurs. The Customer shall use
reasonable commercial efforts to provide RN with information, traces, server
access or documentation sufficient for RN to duplicate the Error. Upon RN's
duplication of such Error, the parties shall mutually determine in good faith
the reasonable classification of such Error.
14
<PAGE>
2.3 The Customer shall designate a reasonable number of the Customer
Contacts, not to exceed three (3) individuals at any given time, for
communication with RN's representatives at the Support Center and shall make
reasonable efforts to minimize redundancy in support requests. All the Customer
support requests must be made through a Customer Contact. Each Customer Contact
shall have adequate technical expertise, training and experience to fulfill his
or her responsibilities. The Customer shall immediately provide RN with the
name, title and 24-hour contact information for each Customer Contact.
2.4 The Customer agrees that when requesting support services, it shall
follow the following procedures: (i) the Customer shall first contact the
Support Center through standard support channels. (ii) If the Customer does not
receive a response from the Support Center within the requisite time frame set
forth in Section 3.3 below, it shall escalate issue to appropriate RN management
level. Specific contact information will be provided to the Customer once Custom
Software Support Services are initiated.
3. RN SUPPORT OBLIGATIONS.
3.1 Support Center personnel shall be available for telephone contact
Monday through Friday, 8:00 AM to 5:00 PM Pacific Time, at the Support Center,
exclusive of RN's local holidays. RN shall also provide the Customer with a
means of reporting Errors to RN by electronic mail, voice mail, or telephonic
recording capability. Specific contact information will be provided to the
Customer once Custom Software Support Services are initiated.
3.2 RN will provide Support Services for a one (1) year period. The cost
for Support Services will be invoiced at the beginning of the Support Services
period.
3.3 RN shall provide Second Level Support to the Customer in connection
with the Software as follows: (i) assist the Customer Contacts in determining
the cause of Errors encountered by the Customer or end users in the use of
Software; and (ii) make commercially reasonable efforts to classify and correct
all Errors that a Customer Contact identifies, classifies and reports to RN and
that RN can substantiate. RN shall not be required to correct any Error caused
by any failure to implement any Upgrades to the Software that are provided by RN
to the Customer. RN will provide reasonable response times from having been
alerted of the Error (within two business days) and implement a patch,
Workaround or temporary fix as soon as a reasonable solution is available.
3.4 If the Customer desires to receive on-site technical support at any
of its locations, it shall pay RN based on RN's quoted prices for such support
or consulting services, and shall pay all direct RN expenses associated
therewith, including transportation, accommodations and meals.
3.5 For the avoidance of doubt, RN shall not have any support obligations
with respect to beta versions of Software.
3.6 RN shall deliver an upgrade release of the Software on an as needed
basis and upon completion of RN development of the upgrade release of the
Software to operate with the Gold release of the RealSystem G2 software in use
by the Customer.
15
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EXHIBIT 10.21
SEPARATION AGREEMENT AND RELEASE
THIS SEPARATION AGREEMENT AND RELEASE ("Agreement and Release") is
made and entered into in Santa Monica, California by and between Peter Hirshberg
("Hirshberg"), on the one hand, and InterPacket Networks, Inc., a Delaware
corporation ("InterPacket" or "the Company"), on the other hand, with reference
to the following facts and circumstances. Hirshberg and InterPacket are
sometimes referred to collectively in this Agreement and Release as the
"Parties."
WHEREAS, Hirshberg has voluntary resigned effective March 6, 2000, as
executive Chairman of the Board of Directors of InterPacket and as a member
thereof and has tendered his resignation to InterPacket to that effect;
WHEREAS, InterPacket and Hirshberg each desire to resolve and settle
between them any and all disputes and controversies which have arisen or might
arise as a result of Hirshberg's employment with InterPacket, the termination of
Hirshberg's employment with InterPacket, or any other matter between the
Parties;
NOW, THEREFORE, in consideration of the promises and mutual promises
contained herein, the Parties agree as follows:
1. RELEASE
a. RELEASE OF INTERPACKET. As a material inducement to InterPacket
to enter into this Agreement and Release, and in consideration of the terms and
provisions hereof, Hirshberg, on behalf of himself and any related individuals,
heirs, spouse, executors, administrators, assigns and successors, hereby
irrevocably, unconditionally and fully releases, relieves, acquits and forever
discharges InterPacket and each of its subsidiary companies, assigns, affiliates
and their predecessor and successor organizations, shareholders, partners,
officers, directors, owners, employees, agents, representatives and affiliates
(collectively "Releasees") from any and all past, present or future liabilities,
claims, demands, debts, obligations, rights, damages, costs, expenses,
compensation, actions, judgments, causes of action at law or in equity, of any
nature, whether known or unknown, choate or inchoate, including, but not limited
to, those arising out of Hirshberg's employment or separation of employment with
InterPacket, or those arising out of any prior grant of options to Hirshberg,
which Hirshberg now owns or holds, has at any time heretofore owned, held, or
suspected, or may at any time hereafter own or hold by reason of any act, event
or omission which occurred prior to the Effective Date of this Agreement and
Release, except for those obligations and duties of InterPacket required under
this Agreement and Release and except for Hirshberg's right to indemnification
as a director and officer under InterPacket's charter and the bylaws, to the
extent permitted thereunder.
Without limiting the generality of the foregoing, this Agreement and
Release shall waive and release Releasees from any and all claims arising out of
Hirshberg's employment with InterPacket including, but not limited to: (1) any
claim under the Americans with Disabilities
1
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Act, the California Fair Employment and Housing Act, the Civil Rights Act of
1964, as amended, the Age Discrimination in Employment Act of 1967 or the Older
Workers Benefit Protection Act, the Equal Pay Act, the Employee Retirement
Income Security Act, the Fair Labor Standards Act or any other federal, state or
local laws or ordinances and any common law claims under tort, including claims
arising from defamatory remarks made by any employee of InterPacket; (2) any
other claim of employment discrimination (whether based on federal, state or
local, statutory or decisional law); (3) any claim arising out of the terms and
conditions of Hirshberg's employment with InterPacket; (4) any claim regarding
any claimed employment benefit whether written or oral; (5) any claim arising
out of or relating to any prior grant of options to Hirshberg; and (6) any claim
for attorneys' fees, costs, disbursements and/or the like (collectively referred
to as "Claims").
b. RELEASE OF HIRSHBERG. InterPacket hereby irrevocably,
unconditionally and fully releases, relieves, acquits and forever discharges
Hirshberg, his heirs, executors, successors and assigns, from any and all past,
present or future liabilities, claims, demands, debts, obligations, rights,
damages, costs, expenses, compensation, actions, judgments, causes of action at
law or in equity, of any nature, whether based on a tort, contract or other
theory of recovery, whether known or unknown, choate or inchoate, which
InterPacket now owns or holds, has at any time heretofore owned or held, or may
any time hereafter own or hold by reason of any act, event or omission which
occurred prior to the execution of this Agreement and Release, except for those
obligations and duties required under this Agreement and Release. InterPacket
specifically releases any and all matters, causes or claims relating in any way
to Hirshberg's employment relationship, or the termination of Hirshberg's
employment relationship, with InterPacket.
2. WAIVER. The Parties hereby acknowledge and assume all risks or chances
that the injuries claimed to have resulted from the above-stated matters may
become greater or more extensive than now known, anticipated or expected. The
Parties hereby acknowledge, assume and understand that this Agreement and
Release shall be effective as a full and final release of all claims. The
Parties acknowledge that they are familiar with and have been provided with
separate consideration for that portion of Section 1542 of the Civil Code of the
State of California which provides as follows:
"A general release does not extend to claims which
the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if
known by him must have materially affected his
settlement with debtor."
The Parties waive any right that they have under the above-mentioned
Section 1542 to the fullest extent that they may lawfully waive all such rights
pertaining to the subject matter of this Agreement and Release. In connection
with the above waiver, the Parties are aware that they may hereafter discover
claims or facts in addition to or different from those they now know or believe
to exist with respect to the subject matter of this Agreement and Release.
2
<PAGE>
3. NO CLAIMS. Hirshberg represents and warrants that he has not filed and
will not file any complaints, charges, claims, lawsuits or grievances or actions
of any kind, whether civil or administrative, against Releasees, with any local,
state or federal agency or court. Hirshberg agrees that he will not file,
initiate, prosecute or otherwise pursue the Claims referred to in Section 1
above, or any other claims based upon or in any way related to Hirshberg's
employment, in any administrative, judicial or other forum whatsoever and that
all claims filed by Hirshberg, if any, in any such forum shall be dismissed with
prejudice and without any conditions attached to said dismissal. To the extent
any claims are pursued on behalf of Hirshberg, Hirshberg shall cause such claims
to be dismissed immediately with prejudice.
4. DISCOVERY OF DIFFERENT OR ADDITIONAL FACTS. The Parties acknowledge
that they may hereafter discover facts different from or in addition to those
that they now know or believe to be true in entering into this Agreement and
Release. The Parties expressly agree to assume the risk of the possible
discovery of additional or different facts and agree that this Agreement and
Release shall remain in effect in all respects regardless of such additional or
different facts.
5. ASSIGNMENT. Hirshberg represents that he has not heretofore
transferred or assigned in whole or in part, or purported to have transferred or
assigned in whole or in part, to any person or entity, any Claims described in
Section 1 above, or interest thereof, which is the subject of the release of
this Agreement and Release, and he will not do so on or after the Effective Date
of this Agreement and Release.
6. NO ADMISSIONS. Hirshberg agrees and acknowledges that this Agreement
and Release is not to be construed as an admission of any violation of any
federal, state or local statute, ordinance or regulation, or any violation of
any of InterPacket's policies or procedures, or of any duty allegedly owed by
InterPacket to Hirshberg. Neither this Agreement and Release, nor anything in
this Agreement and Release, shall be construed to be or shall be admissible in
any proceeding as evidence of or an admission by InterPacket, or others released
herein, of any violation of any federal, state or local statute, ordinance or
regulation, or any violation of any of InterPacket's policies or procedures, or
of any duty allegedly owed by InterPacket to Hirshberg. This Agreement and
Release may be introduced, however, in any proceeding to enforce this Agreement
and Release.
7. TIME PERIODS. Hirshberg has been given the opportunity to take a
period of at least twenty-one (21) days within which to consider this Agreement
and Release. If Hirshberg chooses to sign this Agreement and Release before that
time period expires, he does so knowingly and voluntarily. Hirshberg also
understands that he has the right to change his mind and cancel this Agreement
and Release within seven (7) days following the date that he has signed it by
notifying Tim Sylvester, Esq. at InterPacket Networks, Inc., 1901 Main Street,
2nd Floor, Santa Monica, California 90405, facsimile (310) 382-3310, of this
fact in writing within the seven day period. The Effective Date of this
Agreement and Release will be at the end of the seven-day period if no
revocation has been received.
8. CONSIDERATION. In consideration of the agreements contained herein,
eight (8) days after receipt of the executed Agreement and Release by Hirshberg,
without receipt
3
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of a revocation as described in Section 7 above, and after receipt of the
executed Consulting Agreement, Hirshberg will be entitled to the following:
i) options with respect to 100,000 shares of the Company's Common
Stock currently held by Hirshberg at an exercise price of $4.50 shall vest and
become fully exercisable;
ii) options with respect to 100,000 shares of the Company's Common
Stock currently held by Hirshberg at an exercise price of $4.50 shall vest and
become fully exercisable on and after June 6, 2000, so long as Hirshberg
performs consulting services to the Company on a full-time basis pursuant to the
terms of the Consulting Services Agreement dated as of March 6, 2000 by and
between the Company and Hirshberg. A copy of the Consulting Services Agreement
is attached hereto and incorporated herein by reference; and
iii) upon the initial extension of Hirshberg's participation in
Company matters, whether as a consultant or as an officer, director and/or
employee of the Company effective June 7, 2000 through October 6, 2000 ("Initial
Extension"), options with respect to 12,000 shares of the Company's Common Stock
currently held by Hirshberg at an exercise price of $4.50 shall be deemed
granted to Hirshberg effective June 7, 2000, and the remaining 88,000 shares of
the Company's Common Stock currently held by Hirshberg at an exercise price of
$4.50 shall vest in equal monthly installments during the period from October 7,
2000 through June 6, 2003, except that upon the cessation of Hirshberg's
participation in Company matters, whether as a consultant or as an officer,
director and/or employee of the Company, all remaining options shall be canceled
and Hirshberg's interest therein shall terminate and have no further force or
effect.
Hirshberg further acknowledges and agrees that all options held by
Hirshberg as of the date of this Separation and Release, other than those
specified in this Section 8, shall be terminated and shall have no further force
or effect.
Hirshberg accepts the consideration set forth in this Section 8 as
full and complete satisfaction of any and all Claims that he has or may have
against InterPacket.
9. RETURN OF PROPERTY. Hirshberg represents that he will deliver to
InterPacket all property of InterPacket, or any subsidiary or affiliate thereof,
and all documents, computer tapes, computer hardware, PCs and disks, records,
lists, data, drawings, prints, notes and written information (and all copies
thereof), of whatever nature, in his possession, relating to InterPacket, or any
subsidiary or affiliate thereof, or any of their products or services, at the
conclusion of his participation in Company matters, whether as a consultant or
as an officer, director and/or employee of the Company. Hirshberg further
represents that he will deliver to InterPacket, or any subsidiary or affiliate
thereof, all notebooks and other data relating to research or experiments or
other work conducted by Hirshberg while participating in Company matters, at the
conclusion of his participation in Company matters, whether as a consultant or
as an officer, director and/or employee of the Company.
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10. CONFIDENTIALITY. The Parties hereby warrant and agree not to disclose,
disseminate and/or publicize or cause or permit to be disclosed, disseminated
and/or publicized, the fact that this Agreement and Release was entered into
between Hirshberg and InterPacket or any terms of this Agreement and Release,
directly or indirectly, specifically or generally, to any person, corporation,
partnership, association, court, or governmental agency, except to their
respective 1) attorneys, accountants, auditors, spouse, if any, officers,
directors or managers ("Authorized Third Parties"); 2) to a taxing authority if
required by law, pursuant to the federal securities law or if otherwise required
by applicable law; or 3) in response to a lawful order of a court or any
subpoena issued by a state or federal governmental agency. Disclosure of the
terms of the Agreement and Release to anyone other than those exceptions listed
above will be considered a material breach and make the breaching party liable
for any resulting damages to the other party. Any disclosure or publicity of the
terms and conditions of this Agreement and Release by any Authorized Third Party
identified above shall be deemed for the purposes of paying the liquidated
damages provided in Section 11 as a breach by the party informing the Authorized
Third Party of the terms and conditions of this Agreement and Release.
Hirshberg acknowledges that a major and significant consideration on
behalf of InterPacket in entering into this Agreement and Release is the
assurance that there will be no additional publicity generated by Hirshberg
concerning this Agreement and Release and its terms and conditions. To the
extent Hirshberg has, prior to the Effective Date of this Agreement and Release,
revealed and/or publicized the terms of this Agreement and Release to any third
parties, Hirshberg warrants and agrees that he will not make any further
disclosures of and/or further publicize the terms of this Agreement and Release
to any third parties.
As part of this commitment, Hirshberg agrees not to disparage, to make
any disparaging statements or public comment of any type with respect to
InterPacket, or any of its current or former shareholders, officers, directors,
owners, employees, agents and representatives. As part of this commitment,
InterPacket agrees not to disparage, to make any disparaging statements or
public comment of any type with respect to Hirshberg. Hirshberg understands that
this Confidentiality provision constitutes a substantial inducement for
InterPacket to enter into this Agreement and Release.
11. LIQUIDATED DAMAGES. Hirshberg agrees and acknowledges that a
significant consideration on behalf of InterPacket in entering into this
Agreement and Release is the assurance that Hirshberg and any of his Authorized
Third Parties will comply with the confidentiality provision set forth in
Section 10 above. Hirshberg acknowledges and agrees that InterPacket would be
damaged by such a breach of the confidentiality provision, but that it is
impractical and extremely difficult to calculate the extent of such damages.
Hirshberg, therefore, agrees to pay One Hundred Fifty Thousand Dollars
($150,000.00) as liquidated damages, and not as a penalty, for each breach as a
fair and reasonable amount to compensate InterPacket for damages incurred from
such a breach. Accordingly, Hirshberg agrees that if he or his Authorized Third
Parties, as the case may be, violates the confidentiality provision of this
Agreement and Release, that he will pay InterPacket $150,000.00 as liquidated
damages for each such breach.
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12. CONFIDENTIAL INFORMATION. Hirshberg understands and agrees that,
in the course of his employment with InterPacket, he has acquired confidential
information concerning InterPacket, its subsidiaries and affiliates, and their
operations, future plans and methods of doing business, which information he
understands and agrees would be damaging to InterPacket if disclosed to a
competitor or made available to any other person or corporation engaged in a
similar business. Hirshberg understands and agrees that such information has
been divulged to him in confidence and he understands and agrees, in return for
the consideration provided for in Section 8 above, that he will keep such
information secret and confidential.
13. WHO IS BOUND. Hirshberg and InterPacket are bound by this Agreement
and Release. Anyone who succeeds to Hirshberg's or InterPacket's rights and
responsibilities is also bound by this Agreement and Release. This Agreement and
Release is made for the Parties' mutual benefit and to anyone who succeeds to
the rights and responsibilities contained herein.
14. NO INDUCEMENTS. Hirshberg warrants that no promise or inducement for
this Agreement and Release has been made except as herein set forth, that this
Agreement and Release is executed without reliance upon any statement or
representation by any person or parties released, their shareholders, officers,
directors, owners, employees, agents and representatives, concerning any fact
material to Hirshberg's act in releasing Releasees, and that Hirshberg is
legally competent to execute this Agreement and Release and accepts full
responsibility therefor.
15. REPRESENTATIONS. The Parties understand and agree that they understand
the contents, implications and consequences of this Agreement and Release, and
that they agree to the terms of this Agreement and Release and have executed it
voluntarily. The Parties have had an opportunity to discuss the terms of this
Agreement and Release with individuals of their own choosing.
16. ENTIRE AGREEMENT. This Agreement and Release constitutes the entire
agreement between the Parties concerning the subject matter hereof and
supersedes all prior agreements between the Parties. It may not be modified
orally.
17. GOVERNING LAW. This Agreement and Release is made and entered into in
the State of California and shall in all respects be interpreted, enforced and
governed under the laws of said State. The language of all parts of this
Agreement and Release shall in all cases be construed as a whole, according to
its fair meaning, and not strictly for or against either of the Parties.
18. INVALIDITY. Should any provision of this Agreement and Release be
declared to be determined by any court to be illegal or invalid, the validity of
the remaining parts, terms or provisions shall not be affected thereby and said
illegal or invalid part, term or provision shall be deemed not to be a part of
this Agreement and Release.
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19. ATTORNEYS' FEES. In the event of any action, suit, or proceeding
arising from or based on this Agreement brought by either party hereto against
the other, the prevailing party shall be entitled to recover from the other its
reasonable attorneys' fees and disbursements in connection therewith in addition
to the costs of such action, suit or proceeding.
HIRSHBERG ACKNOWLEDGES AND AGREES THAT HE HAS BEEN ADVISED TO CONSULT WITH AN
ATTORNEY PRIOR TO EXECUTING THIS AGREEMENT AND RELEASE; THAT TO THE EXTENT HE
HAS DESIRED, HE HAS AVAILED HIMSELF OF THAT RIGHT; THAT HE HAS CAREFULLY READ
AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS AGREEMENT AND RELEASE; AND THAT HE
IS VOLUNTARILY ENTERING INTO THE AGREEMENTS SET FORTH HEREIN.
IN WITNESS WHEREOF, the undersigned have executed this Agreement and
Release as of the date written freely and voluntarily.
DATED: 3/6/00 InterPacket Networks, Inc.
--------------
By: /s/ Jon Gans
-------------------------------
Name: Jon Gans
Title: Chief Executive Officer
DATED: 3/6/00 ACKNOWLEDGED AND AGREED:
--------------
By: /s/ Peter Hirshberg
-------------------------------
Peter Hirshberg
7
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EXHIBIT 10.22
CONSULTING SERVICES AGREEMENT
This CONSULTING SERVICES AGREEMENT ("Agreement") is entered into
effective as of March 6, 2000, by and between InterPacket Networks, Inc., a
Delaware corporation (the "Company") and Peter Hirshberg ("Consultant").
R E C I T A L S:
A. The Company is engaged in the business of managing a satellite
based broadband Internet network.
B. Consultant was formerly employed at the Company as executive
Chairman of the Board of Directors and as a member thereof until he voluntarily
resigned from both positions effective March 6, 2000.
C. The Company desires to retain the services of Consultant, on an
independent contractor basis, to provide assistance on specific projects,
including and relating to marketing, IPO road show presentations and related
matters, and Consultant desires to be retained to provide such services.
D. The Company and Consultant anticipate that this Agreement will
continue until the projects envisioned by this Agreement are completed.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the promises and mutual agreements
contained herein, the parties agree as follows:
ARTICLE I
GENERAL DUTIES OF CONSULTANT
1.1 APPOINTMENT AND ACCEPTANCE. The Company hereby retains Consultant
on a full-time basis to perform consulting and assistance on specific projects,
including and relating to marketing, IPO road show presentations and related
matters as designated from time to time by the Company (the "Services") and
Consultant hereby agrees to do so, in accordance with the terms and conditions
set forth in this Agreement.
1.2 MANNER OF RENDERING OF SERVICES. Consultant agrees to render the
Services and to devote his full time and attention to discharge his Services.
Consultant shall be responsible for the specific manner and means by which the
Services are carried out. Consultant agrees to devote his best efforts and
skills in rendering the Services and further agrees to furnish the Services to
the Company in a professional manner.
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1.3 NATURE OF CONTRACT. Nothing contained in this Agreement or in the
relationship of the Company and Consultant shall be deemed to constitute a
partnership, joint venture, employer/employee or any other relationship, and
Consultant shall at all times be deemed an independent contractor for purposes
of this Agreement. Consultant's (and his employees and agents, if any) authority
to bind the Company is limited expressly by this Agreement and Consultant (his
employees and agents, if any) has no other express or implied ability or power
to bind the Company.
ARTICLE II
AGREEMENT TERM
2.1 TERM OF AGREEMENT. Unless terminated pursuant to Section 2.2 of
this Agreement, the term of this Agreement shall commence on the effective date
hereof and continue until June 6, 2000. Unless terminated pursuant to Section
2.2 of this Agreement, the term of this Agreement will be automatically extended
("Initial Extension") until October 6, 2000. Thereafter, the term of this
Agreement may be extended at the option of the Company and Consultant for a
period of up to two years and eight months, provided that the Company's
determination with respect to such extensions shall be based on the
determination of the Outside Member of the Board of Directors described in
Section 2.2(g) below.
For the Initial Extension, Consultant will continue to provide
services to the Company on part-time basis. It is the intention of the parties
that Consultant will provide a work statement, to be mutually agreed to by the
parties, setting forth his duties during the Initial Extension and any
additional extension(s), if applicable. The terms and conditions of the Initial
Extension and any additional extension(s) are to be negotiated to the mutual
agreement of the parties at the time of the extension.
2.2 TERMINATION FOR CAUSE. The Company shall have the right to
terminate this Agreement, upon written notice to Consultant, in the event of: a)
the death of Consultant; b) the physical or mental incapacity or disability of
Consultant which renders him unable to perform substantially all of the Services
contemplated by this Agreement for a continuous period of thirty (30) days; c)
the commission of an act of fraud, dishonesty or embezzlement by Consultant; d)
the willful neglect by Consultant in the performance of the Services
contemplated by this Agreement; e) the failure of Consultant to perform the
Services hereunder on a full-time basis during the term of this Agreement; on a
part-time basis during the Initial Extension; and, if applicable, on a mutually
agreed upon basis after the Initial Extension; f) the breach by Consultant of
any of his covenants or obligations under this Agreement; or g) a determination
made by the vote of 75% of the Outside Members of the Board of Directors that
the Company no longer needs the services of Consultant. For purposes of this
Agreement, "Outside Member of the Board of Directors" shall mean any member of
the Board of Directors who is not an executive officer or employee of the
Company.
<PAGE>
ARTICLE III
CONSIDERATION
3.1 CONSULTANT'S FEE. In consideration of the Services to be
performed under this Agreement, Consultant shall be paid a rate of Fourteen
Thousand Five Hundred Eighty Three Dollars and Thirty Three Cents ($14,583.33)
per month. Consultant hereby agrees that he is not entitled to any other
compensation for rendering the Services contemplated hereunder. During the
Initial Extension and any additional extension(s), Consultant shall be paid a
rate of Seventeen Thousand Five Hundred Dollars ($17,500.00) per month for
full-time work or, if Consultant works on a part-time basis, on a pro-rata
basis.
Consultant shall, at the beginning of each month, submit invoices for
Services rendered for the prior month and the Company shall review such invoices
and pay the amount of approved invoices within ten (10) days following the date
they are received by the Company. All such invoices shall state the date such
Services were rendered, the amount of time incurred by Consultant in the
rendering of the Services and provide reasonable detail as to the specific
Services rendered. Such invoices shall be delivered to the Company's Chief
Financial Officer.
3.2 EXPENSES. Consultant shall not be entitled to be reimbursed for
any general and/or administrative expenses or overhead in carrying out
Consultant's duties hereunder. Consultant may submit for the approval of the
Company (which approval will be handled in accordance with the Company's
reimbursement policy) written requests for reimbursements for reasonable and
ordinary out-of-pocket expenses incurred by Consultant on behalf of the Company
that directly relate to the business and affairs of the Company including,
without limitation, all travel, accommodation, meals, entertainment and other
reasonably necessary business expenses, provided that any such request is in
writing and includes reasonable supporting documentation such as invoices or
receipts. Such requests shall be delivered to the Company's Chief Financial
Officer.
In addition, during the term of this Agreement, the Initial Extension
and any additional extension(s), while Consultant is performing Services for the
Company, the Company shall reimburse Consultant for reasonable expenses for
temporary housing, leasing and automobile and periodic air travel to and from
the San Francisco Bay Area up to a maximum of $50,000.00 per year, provided that
any such request is in writing and includes reasonable supporting documentation
such as invoices, receipts or copies of checks.
3.3 RESIDENTIAL LEASE. One month prior to the end of the term of this
Agreement, Consultant shall use reasonable and good faith efforts to sublet his
residential property located at ____________________, California ________
("Property"). Should Consultant be unable to do so, then, provided that such
assignment is permitted, Consultant shall assign and the Company shall assume
such lease and the payment of all amounts due
<PAGE>
thereunder. Consultant shall use his best efforts to obtain any consents
required in connection with the assignment of such lease.
3.4 NO PARTICIPATION IN EMPLOYEE PLANS. Consultant acknowledges and
agrees that neither he nor his employees or agents, if any, are entitled to
participate in any employee welfare or retirement plans or programs of the
Company (including, without limitation, medical insurance, life insurance, paid
leave, vacation, sick leave, pension, profit sharing, disability) and hereby
waives all rights to participate in such plans or programs. Further, Consultant
agrees that he shall not be entitled to the payment of any amounts in lieu of
participation in such plans and programs.
3.5 TAXES. It is understood and agreed that Consultant accepts full
and exclusive liability for the payment of any and all contributions and taxes
imposed by the provisions of the Internal Revenue Code of 1986, as amended, the
Federal Social Security Act, the California Revenue and Taxation Code and the
California Unemployment Insurance law and/or any and all contributions, taxes or
penalties for unemployment insurance or old age retirement benefits, pensions or
annuities, now or hereafter imposed by the government of the United States
and/or the government of any state which are measured by the wages, salaries, or
other remuneration paid to Consultant. Consultant also understands and agrees
that unless otherwise required by law, the Company will not withhold any federal
or state income taxes or deduct any federal or state employment taxes from
amounts paid to Consultant. Consultant shall protect, indemnify, and hold the
Company harmless from and against any and all claims which may be made against
the Company because of Consultant's failure to pay any such taxes and
contributions, including related penalties and interest.
ARTICLE IV
ADDITIONAL OBLIGATIONS OF CONSULTANT
4.1 INSURANCE. Consultant shall at all times, during the performance
of this Agreement, maintain at his own expense, in full force and effect, all
types of insurance which are usually and customarily maintained by independent
contractors performing such Services in this industry.
4.2 SAFETY. Consultant agrees that all Services to be performed
hereunder shall conform to the safety standards, rules, regulations and orders
of the Occupational Safety and Health Administration of the Federal Government
and Division of Industrial Safety, State of California, all other public
authorities having jurisdiction, and the Company's rules and regulations
pertaining to safety and operations.
4.3 INDEMNIFICATION. Consultant shall protect, indemnify, and hold
the Company, its agents and employees, harmless from and against all claims,
demands, and causes of action of any nature arising from any actions,
statements, representations, action or inactions on the part of Consultant, his
employees, agents or subcontractors. Consultant shall, at his own expense,
defend all suits brought against the Company upon claims of every nature
<PAGE>
arising from any actions, statements, representations, action or inactions on
the part of Consultant, his employees, agents or subcontractors.
4.4 USE OF COMPANY EQUIPMENT/FACILITIES. In the event that
Consultant, by rental, loan or otherwise, makes use of any of the Company's
equipment or other facilities, Consultant agrees that any such use shall be at
the sole risk of Consultant and, after Consultant has satisfied himself as to
the condition thereof, Consultant agrees to protect, indemnify, and hold the
Company harmless from and against all claims of every nature arising from the
use thereof. At the end of the term of this Agreement, Consultant will deliver
to Company all property of the Company, or any subsidiary or affiliate thereof,
including computers, computer tapes, records, lists, data, drawings, prints,
notes and written information (and all copies thereof) of whatever nature in his
possession relating to the Company, or any subsidiary or affiliate thereof, or
any of their products or services.
ARTICLE V
COVENANTS
5.1 CONFIDENTIALITY. Consultant acknowledges that, in the performance
of his duties hereunder, he will occupy a position of trust and confidence.
Consultant shall not, except as may be required to perform his duties hereunder
or as required by applicable law, for a period of two (2) years following the
termination of this Agreement or until such information shall have become public
other than by Consultant's unauthorized disclosure, disclose to others or use,
whether directly or indirectly, any Confidential Information regarding the
Company, its subsidiaries and affiliates. "Confidential Information" shall mean
information about the Company, its subsidiaries and affiliates, and their
respective clients and customers, that was learned by Consultant during the
performance of his duties hereunder for the Company, its subsidiaries and
affiliates including, without limitation, any proprietary knowledge, trade
secrets, data, formulae, information, client and customer lists and all papers,
resumes, and records (including computer records) of the documents containing
such Confidential Information. Consultant acknowledges that such Confidential
Information is specialized, unique in nature and of great value to the Company,
its subsidiaries and affiliates, and that such information gives the Company a
competitive advantage. Consultant agrees to deliver or return to the Company, at
the Company's request at any time or upon termination or expiration of his
engagement hereunder or as soon thereafter as possible, (i) all documents,
computer tapes and disks, records, lists, data, drawings, prints, notes and
written information (and all copies thereof) furnished by the Company, its
subsidiaries and affiliates, or prepared by Consultant during the term of this
Agreement, and (ii) all notebooks and other data relating to research or
experiments or other work conducted by Consultant in the scope of employment.
5.2 NONCOMPETITION. During the term of this Agreement, Consultant
shall not, directly or indirectly, without the prior written consent of the
Company, provide consultative services or otherwise provide services to (whether
as an employee or a consultant, with or without pay), own, manage, operate,
join, control, participate in, or be connected with
<PAGE>
(as a stockholder, partner or otherwise), any business, individual, partner,
firm, corporation, or other entity that is then a competitor of the Company, its
subsidiaries or affiliates (each such competitor a "Competitor of the Company");
provided that nothing herein shall prevent Consultant from the beneficial
ownership of up to 5% of the publicly traded securities of any person who may be
deemed to be a Competitor of the Company.
5.3 NON-SOLICITATION OF CUSTOMERS AND SUPPLIERS. During the term of
this Agreement and for a period of six (6) months thereafter, Consultant shall
not, directly or indirectly, influence or attempt to influence customers or
suppliers of the Company, or any of its subsidiaries or affiliates, or to divert
their business to any Competitor of the Company.
5.4 NON-SOLICITATION OF EMPLOYEES. During the term of this Agreement
and for a period of six (6) months thereafter, Consultant agrees that Consultant
shall not, directly or indirectly, cause any person engaged or employed by the
Company or its affiliates (whether part-time or full-time and whether as an
officer, employee, consultant, agent, adviser or independent contractor) (an
"Employee") to voluntarily leave the employ of or engagement with the Company or
its affiliates, as the case may be, or to cease providing the services to or on
behalf of the Company or its affiliates, as the case may be, then provided by
such Employee. Consultant further agrees that, during the same time period, he
will not in any manner seek to engage or employ any such Employee (whether or
not for compensation) as an officer, employee, consultant, agent, adviser or
independent contractor for any person other than the Company.
5.5 WORKS AND PROPERTY. Consultant shall disclose in writing, fully,
and on a timely basis, to the Company, any and all "Works and Property" (as such
term is herein defined) realized in connection with the performance of the
services under this Agreement. Consultant acknowledges and agrees that any and
all Works and Property shall constitute the sole and exclusive property of the
Company and Consultant shall not have any rights thereto and/or any interest
therein. Consultant shall assign, transfer and convey to the Company, without
further consideration, any and all Works and Property in accordance with this
Agreement. For purposes of this Agreement, the term "Works and Property" shall
mean any and all works and property including, but not limited to, all
intellectual properties, ideas, inventions, concepts, products, improvements,
innovations, discoveries, developments, methods, formulas, techniques, software,
know-how and writings which are made, conceived, reduced to practice, developed,
written, contributed to or prepared by Consultant whether or not patentable or
copyrightable and whether made solely by Consultant or jointly with others. All
Works and Properties shall unconditionally be, become, and remain the sole and
exclusive property of the Company or any of its affiliates, successors, or
assignees, as the case may be. Consultant will promptly execute, acknowledge and
deliver all applications, oaths, declarations and further documents and will
provide such additional assistance as the Company or its counsel may deem
necessary or desirable to evidence the Company's title to such Works and
Property. This section does not apply to Works and Property which qualifies as a
non-assignable invention under Section 2870 of the California Labor Code.
5.6 INTANGIBLE PROPERTY. Consultant hereby acknowledges and agrees
that all data, designs, drawings, blue prints, tracings, sketches, plans,
layouts, specifications, models,
<PAGE>
programs, cards, tapes, disks, printouts, writings, manuals, guides, notes and
any and all other memoranda including, without limitation, any and all written
information which may be, or has been, furnished to Consultant or which may be
produced, prepared or designed by Consultant in connection with his duties
hereunder shall be, become and remain the exclusive property of the Company or
any of its affiliates, successors, or assignees, as the case may be. Upon the
termination of this Agreement, all originals, copies and reprints in
Consultant's possession, custody or control shall be promptly surrendered and/or
delivered to the Company, and Consultant shall thereafter make no further use,
either directly or indirectly, of any such material.
5.7 INJUNCTIVE RELIEF. It is expressly agreed that the Company will
or would suffer irreparable injury if Consultant were to disclose Confidential
Information, compete with the Company or solicit customers or suppliers of the
Company in violation of this Section 5, that money damages would be insufficient
to compensate the Company and that the Company would by reason of such
competition or disclosure be entitled to injunctive relief in a court of
appropriate jurisdiction.
<PAGE>
ARTICLE VI
MISCELLANEOUS
6.1 NOTICES. All notices hereunder shall be in writing and shall be
either served by certified or registered mail, air courier, by hand, or by
facsimile, in each case with charges prepaid. Notices shall be deemed effective
when mailed, hand delivered, or faxed. Notices to Consultant shall be given at
the address set forth in the records of the Company for Consultant. Notices to
the Company shall be addressed to its principal place of business, currently
1901 Main Street, 2nd Floor, Santa Monica, California 90405, Fax No. (310)
382-3310, Attn: Timothy F. Sylvester, Esq. This notice provision may be changed
with respect to any party by such party notifying the other of such change in
accordance with the provisions of this Section.
6.2 TRANSFER OR ASSIGNMENT. Consultant shall not assign, transfer,
pledge or hypothecate the rights or obligations under this Agreement, without
the prior written approval of the Company.
6.3 AGREEMENT BINDING. This Agreement shall inure to the benefit of
and be binding upon the respective heirs, successors, personal representatives,
administrators and assigns of the parties hereto.
6.4 ATTORNEYS' FEES. In the event of any action, suit, or proceeding
arising from or based on this Agreement brought by either party hereto against
the other, the prevailing party shall be entitled to recover from the other its
reasonable attorneys' fees and disbursements in connection therewith in addition
to the costs of such action, suit or proceeding.
6.5 GOVERNING LAW. This Agreement shall be governed, interpreted and
enforced in accordance with the laws of the State of California.
6.6 ENTIRE AGREEMENT, MODIFICATION, WAIVER. This Agreement
constitutes the entire agreement between the parties pertaining to the subject
matter contained in it and supersedes all prior and contemporaneous
representations and understandings of the parties. No supplement, modification,
or amendment of this Agreement shall be binding unless executed in writing by
the parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver. No waiver shall be
binding unless executed in writing by the party making the waiver.
6.7 SEVERABILITY. If any one or more covenants, agreements or
provisions herein contained shall be held or determined for any reason
whatsoever to be invalid or unenforceable, either in whole or in part, then such
covenants, agreements or provisions, or portions thereof, shall be null and void
and shall be deemed separable from the remaining
<PAGE>
covenants, agreements or provisions hereof and shall in no way affect the
validity of any of the other provisions hereof.
6.8 SURVIVAL. Termination of this Agreement shall not affect the
continuing obligations of Consultant under Article V (Covenants), or any other
continuing obligations of Consultant under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
"Company" INTERPACKET NETWORKS, INC.
By: /s/ Jon Gans
-------------------------------
Name: Jon Gans
Title: Chief Executive Officer
"Consultant"
By: /s/ Peter Hirshberg
-------------------------------
Peter Hirshberg
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated February 11, 2000 (and to all references to our Firm)
included in or made a part of this registration statement on Form S-1.
ARTHUR ANDERSEN LLP
Los Angeles, California
April 7, 2000
<PAGE>
EXHIBIT 99.1
CONSENT OF INTERNATIONAL DATA CORPORATION
March 27, 2000
We hereby consent to the reference to our company in the prospectus which
is a part of the Registration Statements on Form S-1 of InterPacket Networks,
Inc., as the same may be amended from time to time (the "Registration
Statement'), and to the use of our estimates regarding the number, growth
and location of active Internet users. In giving such consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended (the "Securities
Act'), or the rules and regulations of the Securities and Exchange
Commission thereunder and we do not thereby admit that we are experts with
respect to any part of the Registration Statement under the meaning of the
term "expert' as used in the Securities Act.
INTERNATIONAL DATA CORPORATION
By: /s/ JOHN GRECO
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Name: John Greco
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Title: Sales Manager--Telecom
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