<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RACKSPACE.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7389 75-2864797
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
------------------------
RACKSPACE.COM, INC.
112 EAST PECAN STREET, SUITE 600
SAN ANTONIO, TEXAS 78205
TELEPHONE: (210) 892-4000
FACSIMILE: (210) 892-4329
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
------------------------------
GRAHAM M. WESTON
CHIEF EXECUTIVE OFFICER
112 EAST PECAN STREET, SUITE 600
SAN ANTONIO, TEXAS 78205
TELEPHONE: (210) 892-4000
FACSIMILE: (210) 892-4329
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
S. MICHAEL DUNN, P.C. JEFFREY A. CHAPMAN, ESQ.
MICHELLE KWAN MONTOYA, ESQ. SHARON M. COOPER, ESQ.
BROBECK, PHLEGER & HARRISON LLP VINSON & ELKINS L.L.P.
301 CONGRESS AVENUE 2001 ROSS AVENUE
SUITE 1200 3700 TRAMMEL CROW CENTER
AUSTIN, TEXAS 78701 DALLAS, TEXAS 75201-2925
TELEPHONE: (512) 477-5495 TELEPHONE: (214) 220-7700
FACSIMILE: (512) 477-5813 FACSIMILE: (214) 220-7716
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: as soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If 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 AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.001 par value per share $65,000,000 $17,160
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell and is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
<PAGE>
Subject to Completion, Dated March 28, 2000
[LOGO]
Shares
Common Stock
This is an initial public offering of common stock of Rackspace.com, Inc. We
anticipate that the initial public offering price will be between $ and
$ per share.
We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "RACK."
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION 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.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price $ $
Underwriting discounts and commissions $ $
Proceeds, before expenses, to Rackspace.com $ $
</TABLE>
The underwriters have the right to purchase up to an additional shares of
common stock from us at the public offering price within 30 days from the date
of this prospectus to cover over-allotments.
Deutsche Banc Alex. Brown Bear, Stearns & Co. Inc.
Thomas Weisel Partners LLC
The date of this prospectus is , 2000
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND THE NOTES
RELATING TO THOSE STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION.
RACKSPACE.COM, INC.
OUR BUSINESS
Rackspace.com is a leading provider of advanced Linux-based Internet hosting
services targeted to small- to medium-sized enterprises worldwide. Advanced
hosting services enable enterprises to establish and maintain their Internet
operations using a dedicated server, networking facilities and technical support
provided by a third party, such as Rackspace.com. We offer our customers
attractively-priced monthly hosting plans, which include server configuration
and deployment, scalable bandwidth options, server maintenance, and installation
and support for select operating system and Internet-based applications. Our
turnkey service offerings are designed to aid our customers in rapidly
implementing their Internet operations. To this end, our service plans can be
configured, priced and ordered through the Rackspace.com Configurator at our Web
site and we guarantee deployment of a new customer's hosting service within 24
hours of order confirmation. Our customers' dedicated servers are housed within
our state-of-the-art data center where we provide around-the-clock monitoring,
security and technical support. Additionally, we enable our customers to rapidly
upgrade their server hardware and add bandwidth to cost-effectively scale their
Internet operations to support their needs as they expand their online
activities. As of March 31, 2000, we managed an installed base of over
servers within our data center for more than customers, with
approximately % of these customers located outside of the United States in
over 50 countries around the world.
We have developed specific expertise in deploying Internet hosting services
based on the Linux operating system, and approximately 80% of our customers have
selected Linux-based hosting services. We believe that many small- to
medium-sized enterprises prefer Linux-based hosting services due to Linux's
reputation for stability and high performance, ease of remote administration and
cost advantages. We also provide and support advanced Internet hosting services
based on Solaris, Windows NT/2000 and other operating systems. In addition, we
have entered into strategic relationships with Red Hat, Perot Systems and Sun
Microsystems, among others, in order to accelerate our market penetration and to
expand our product and service offerings.
OUR MARKET OPPORTUNITY
For small- to medium-sized enterprises, outsourcing to a provider of
advanced Internet hosting services offers a cost-effective means to establish
and maintain dynamic Internet operations. The enterprise pays for the use of the
outsourced server or servers and the services provided to it, including
bandwidth, network monitoring, server maintenance and technical support.
Consequently, the enterprise avoids incurring the up-front capital costs of
purchasing and deploying the server hardware and software and the continuing
costs for maintaining a staff of technical personnel. International Data
Corporation estimates that in the United States the dedicated Web hosting market
will grow from $566.0 million in 1998 to approximately $14.0 billion in 2003.
3
<PAGE>
OUR SOLUTION
Our solution offers our customers:
- monthly end-to-end hosting plans that enable customers to cost-effectively
establish service with us and to adjust their services without long-term
commitment;
- rapid deployment of our services, and after deployment, quick upgrades and
modifications to their advanced Internet hosting configurations;
- scalability to meet our customers' performance and Web traffic
requirements;
- comprehensive Linux-based service offerings based on our broad knowledge
of Linux;
- high levels of customer service and technical support; and
- a state-of-the-art data center, consisting of a "Cisco-Powered" network
with multiple connections to the Internet backbone to help ensure
uninterrupted, quality service.
OUR STRATEGY
Our goal is to become the leading global provider of advanced Linux-based
Internet hosting services by capitalizing on the growth in Internet usage and
e-business and the trend towards outsourcing of hosting services. Our strategy
for accomplishing this objective includes:
- leveraging our expertise in Linux to establish ourselves as the leading
Linux-based hosting services provider;
- building global brand awareness of our company and service offerings
through targeted marketing initiatives;
- capitalizing on international market opportunities to provide advanced
Internet hosting services;
- utilizing strategic relationships with third parties that select, or
influence the selection of, Internet hosting services providers, including
expanding our existing relationships with Red Hat, Perot Systems and Sun
Microsystems, among others;
- expanding our products and enhanced services to address our customers'
needs as their growing Internet operations require more advanced hosting
solutions; and
- continuing to dedicate significant resources to expand and further develop
our customer service and technical support capabilities.
HOLDING COMPANY
Rackspace, Ltd., a Texas limited partnership, was formed on December 29,
1998, to provide advanced Internet hosting services. To establish our initial
business, we acquired substantially all of the assets of Cymitar Technology
Group, Inc., a Texas corporation, in December 1998. In contemplation of this
public offering, we effected a reorganization of our operating structure by
incorporating Rackspace.com, Inc. in Delaware on March 7, 2000 to serve as a
holding company. To complete the holding company restructuring, the holders of
limited partner interests and the general partner interest in Rackspace, Ltd.
have agreed to exchange their respective partnership interests for shares of
common stock in Rackspace.com, Inc. Contemporaneously with that exchange, we
will contribute the general partner interest and limited partner interests in
Rackspace, Ltd. to two wholly-owned subsidiaries.
OUR ADDRESS AND TELEPHONE
Our principal executive offices are located at 112 East Pecan Street, Suite
600, San Antonio, Texas 78205, and our telephone number is (210) 892-4000. Our
World Wide Web address is www.rackspace.com. INFORMATION CONTAINED ON OUR WEB
SITE DOES NOT CONSTITUTE PART OF THIS PROSPECTUS.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Rackspace.com....................... shares
Common stock to be outstanding after this offering.......... shares
Use of proceeds............................................. We intend to use the net proceeds to
fund capital expenditures, including
the purchase of computer and networking
hardware, the establishment of new data
centers, the expansion of our sales and
marketing and product development
activities and potential acquisitions,
and for other general corporate
purposes. See "Use of Proceeds" on page
17 for a more detailed description of
our use of proceeds.
Proposed Nasdaq National Market symbol...................... RACK
</TABLE>
Unless otherwise indicated, all information in this prospectus concerning
the common stock outstanding is based on the number of shares outstanding as of
March 27, 2000, on a pro forma basis to give effect to the completion of the
holding company restructuring as if it had occurred on such date, and excludes:
- 480,833 shares of common stock issuable upon exercise of options granted
to employees outstanding as of March 27, 2000, with a weighted average
exercise price of $2.51 per share;
- 380,952 shares of common stock issuable upon the exercise of warrants
outstanding as of March 27, 2000, which were granted to an investor in a
private equity financing in November 1999, with an exercise price of
$2.10 per share;
- shares reserved for issuance under our 2000 Stock Incentive Plan;
- shares to be sold by us if the underwriters' over-allotment option
is exercised in full, as described in "Underwriting"; and
- 1,952,297 shares of common stock that were issued and sold to investors
including Norwest Venture Partners, Sequoia Capital and Red Hat, plus
shares of common stock issuable upon the exercise of warrants
that were granted to Norwest Venture Partners and Sequoia Capital in a
private equity financing completed in March 2000.
References in this prospectus to "Rackspace.com," "Rackspace," "we," "us"
and "our" refer to Rackspace.com, Inc., a Delaware corporation, and, prior to
the reorganization of our corporate structure, Rackspace, Ltd., a Texas limited
partnership. See "--Holding Company."
5
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth summary financial and operating data for our
predecessor, Cymitar Technology Group, Inc., and our company. You should read
this information together with our financial statements and the notes to those
statements appearing elsewhere in this prospectus. See "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
--------------------------- ---------------------------
PERIOD FROM
DECEMBER 29,
PERIOD FROM 1998
JANUARY 1, (INCEPTION)
YEAR ENDED 1998 THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 28, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues....................................... $ 72,535 $ 166,632 $ 76 $ 1,700,537
Operating expenses:
Cost of revenues................................... 38,895 73,767 -- 513,424
Sales and marketing................................ 648 3,615 -- 1,612,071
General and administrative......................... 47,705 181,260 23 870,155
Product development................................ -- -- -- 52,712
Depreciation and amortization...................... 6,912 12,363 262 261,730
-------- --------- ----- -----------
Total operating expenses........................... 94,160 271,005 285 3,310,092
-------- --------- ----- -----------
Loss from operations (21,625) (104,373) (209) (1,609,555)
Other income (expense)............................... (3,247) (7,767) (66) (43,243)
-------- --------- ----- -----------
Net loss......................................... $(24,872) $(112,140) $(275) $(1,652,798)
======== ========= ===== ===========
</TABLE>
The following table contains a summary of our balance sheet as of
December 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect (1) the completion of the holding company
restructuring through the exchange of all limited partner interests and
the general partner interest of Rackspace, Ltd. for an aggregate of
14,671,425 shares of our common stock, (2) the net proceeds from the sale
of 2,309,440 shares of our as-converted common stock in private placements
consummated by us after December 31, 1999 and (3) payment in full of a
note receivable in the amount of $750,000 in February 2000; and
- on a pro forma as adjusted basis to additionally reflect the net proceeds
to us from the sale of shares of our common stock in this offering
at an assumed initial public offering price of $ per share.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $3,794,784 $16,344,784 $
Working capital........................................... 2,735,337 15,285,337
Total assets.............................................. 5,863,786 18,413,786
Total partners' capital/stockholders' equity.............. 4,643,525 17,193,525
</TABLE>
6
<PAGE>
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW BEFORE YOU
PURCHASE ANY OF OUR COMMON STOCK. WHILE WE HAVE DESCRIBED ALL RISKS AND
UNCERTAINTIES THAT WE BELIEVE ARE MATERIAL TO OUR BUSINESS, OTHER RISKS AND
UNCERTAINTIES THAT AFFECT OUR BUSINESS OPERATIONS MAY ARISE OR BECOME MATERIAL
IN THE FUTURE. IF WE CANNOT ADDRESS THE FOLLOWING RISKS AND UNCERTAINTIES
EFFECTIVELY, WE COULD BE MATERIALLY AND ADVERSELY AFFECTED. IN THIS EVENT, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR A PART
OF YOUR INVESTMENT.
THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS,
INCLUDING THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND ELSEWHERE IN THIS
PROSPECTUS. SEE "FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS."
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS AND PROSPECTS ARE DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED
OPERATING HISTORY AND OUR BUSINESS MODEL IS STILL EVOLVING.
We began offering advanced Internet hosting services in December 1998. As a
result, we have a very short operating history and our business model is still
evolving. We may not be able to successfully implement our business plan or
adapt it to changes in the market. If we are not able to do so, we will be
adversely affected.
BECAUSE WE OPERATE IN A NEW AND EVOLVING MARKET WITH UNCERTAIN PROSPECTS FOR
GROWTH, WE MAY BE UNABLE TO GROW OUR CUSTOMER BASE AND OUR OPERATING RESULTS MAY
SUFFER.
Our market is new and rapidly evolving. Growth in demand for, and acceptance
of, advanced Linux-based Internet hosting services are highly uncertain.
Businesses may not recognize the benefits of outsourcing their Internet hosting
needs or they may find it less expensive, more secure or otherwise preferable to
host their Internet sites internally. Internet technologies, such as e-commerce
applications, which require advanced hosting may not grow as rapidly as we
expect. If the market for advanced Linux-based Internet hosting services fails
to grow or grows more slowly than we anticipate, we will be adversely affected.
Growth in the demand for our products and services may be inhibited and we may
be unable to sustain growth in our customer base for a number of reasons, such
as:
- our inability to market our products and services in a cost-effective
manner to new customers;
- the inability of customers to differentiate the services we offer from
those of our competitors;
- the termination of our customer contracts, which are subject to renewal on
a monthly basis;
- our inability to strengthen awareness of our brand; and
- reliability, quality or compatibility problems with our services.
IF THE LINUX OPERATING SYSTEM DOES NOT CONTINUE TO GAIN MARKET ACCEPTANCE, WE
LIKELY WOULD BE UNABLE TO SUSTAIN OUR REVENUE GROWTH AND OUR BUSINESS WOULD
SUFFER.
The vast majority of our customers elect to base their servers on the Linux
operating system. The Linux operating system has only recently gained broad
market acceptance. Our success depends on the continued adoption of Linux,
particularly by small- and medium-sized enterprises. If this does not occur, our
business will be adversely affected.
7
<PAGE>
IF THE NETWORK PROVIDERS UPON WHICH WE RELY FAIL TO PROVIDE ADEQUATE
RELIABILITY, CAPACITY OR PERFORMANCE FOR OUR NETWORK, WE COULD LOSE CUSTOMERS
AND OUR OPERATING RESULTS COULD SUFFER.
Our success partly depends upon the capacity, reliability and performance of
our network infrastructure, which relies on the services of Internet backbone
providers, consisting of Intermedia, Qwest, SBC Communications, Time Warner
Telecom and UUNET. We depend on these companies to provide uninterrupted and
error-free service through their telecommunications networks. Some of these
providers also are our competitors. As our customers' usage of
telecommunications capacity increases, we will need to make additional
investments in our bandwidth capacity to maintain adequate data transmission
speeds, the availability of which may be limited or the cost of which may be on
terms unacceptable to us. If capacity is not available to us as our customers'
usage increases, our network may not be able to achieve or maintain sufficiently
high data transmission capacity, reliability or performance. In addition, our
business would suffer if our network suppliers increased the prices for their
services and we were unable to pass along the increased costs to our customers.
Any failure on our part or the part of our third-party suppliers to achieve or
maintain high data transmission capacity, reliability or performance could
significantly reduce customer demand for our services and damage our business.
WE COULD EXPERIENCE SYSTEM FAILURES, WHICH COULD HARM OUR BUSINESS AND
REPUTATION.
To succeed, we must be able to operate our data centers and maintain the
operation of our Web site around the clock without interruption or a material
decline in service. Our operations depend upon our ability to protect our
network infrastructure, equipment and customer files against damage from human
error, fire, earthquakes, hurricanes, floods, power loss, telecommunications
failures, physical and electronic break-ins, sabotage, intentional acts of
vandalism and similar events. Our servers and other network equipment are
located in our sole data center in San Antonio, Texas. We do not have a
comprehensive disaster recovery plan and the occurrence of a natural disaster or
other unanticipated problems at our data center could result in interruptions in
the services that we provide to our customers and in the operation of our Web
site.
We have experienced interruptions in service and at our Web site in the
past. We have experienced partial system failures due to routing problems, hard
drive failures, database corruption and other computer failures. A future
interruption could result in substantial customer dissatisfaction or loss and
could necessitate future customer refunds. Our network is subject to various
points of failure, and a problem with our routers, switches or other equipment
could cause an interruption in the services we provide to some or all of our
customers. Any future interruptions could:
- cause our customers to seek damages for losses incurred;
- require us to replace existing equipment or add redundant facilities;
- damage our reputation as a reliable provider of hosting services;
- cause existing customers to cancel or elect to not renew their contracts;
or
- make it more difficult for us to attract new customers.
Any of these results could adversely affect our business.
OUR BUSINESS AND REPUTATION WILL SUFFER IF WE DO NOT PREVENT SECURITY BREACHES.
A fundamental requirement for online business transactions and services is
the secure transmission of confidential information over public communications
networks. Unauthorized access, computer viruses, accidents, fraudulent service
plan orders, intentional misconduct by computer "hackers" and other disruptions
can occur. In addition, we may incur significant costs to prevent breaches in
security or to alleviate problems caused by breaches. We rely on third-party
suppliers to protect our equipment
8
<PAGE>
and hardware against breaches in security. We cannot be certain that they will
provide adequate security. While we have experienced no material security
breaches in the past, any breaches that may occur could result in liability to
us, loss of existing customers, harm to our reputation, the deterrence of future
customers or an increase in our costs.
IF WE ARE UNABLE TO EXPAND OUR NETWORK INFRASTRUCTURE TO MEET INCREASING DEMAND,
WE COULD LOSE CUSTOMERS AND OUR OPERATING RESULTS COULD SUFFER.
We must continue to expand and adapt our network infrastructure to
accommodate an increasing number of customers, larger amounts of information
that they wish to transmit and changing customer requirements. We will
continually need to address the challenge of scaling our network operations to
meet increasing Internet hosting demands while maintaining acceptable
performance levels. The expansion of our existing data center and the
establishment of new data centers will require substantial financial,
operational and management resources. If we are required to expand our network
significantly and rapidly, additional stress will be placed upon our network
hardware, traffic management systems and hosting facilities, as well as our
financial, operational and management resources. Due to the limited deployment
of our services to date, the ability of our network to support a substantially
larger number of customers at high transmission speeds is unknown.
THE FORMATION OF STRATEGIC RELATIONSHIPS IS AN IMPORTANT STRATEGY, AND IF WE
FAIL TO ESTABLISH THESE RELATIONSHIPS, OR IF THESE RELATIONSHIPS ARE TERMINATED
OR DO NOT FUNCTION AS WE INTEND, OUR BUSINESS MAY SUFFER.
In an effort to enhance our sales, support, sourcing and other business
functions, we form strategic relationships with select partners. We have formed
strategic relationships with Red Hat, Perot Systems and Sun Microsystems. If
these or any future strategic relationships are terminated or impaired, our
ability to execute our business plan could be impeded. Some of our strategic
partners may also provide services that compete with our own, which could
increase competitive pressures on our business.
WE HAVE A HISTORY OF OPERATING LOSSES, AND WE ANTICIPATE THAT WE WILL CONTINUE
TO INCUR SIGNIFICANT OPERATING LOSSES FOR THE FORESEEABLE FUTURE.
We have experienced operating losses and negative cash flows from operations
in each quarterly and annual period since we commenced our hosting operations in
December 1998. For the year ended December 31, 1999, we experienced a net loss
of $1.7 million. We expect our operating expenses to increase significantly as
we continue to expand our business. We believe that we will need to
significantly increase our current staff levels across all areas of our business
over the next 12 months. In addition, we expect to incur significant expenses to
establish new data centers, support and improve our operational and financial
systems, pursue additional channel partners, fund greater levels of research and
development and broaden our customer service and support capabilities. We cannot
assure you that we will ever be profitable on a quarterly or annual basis, or
that if we achieve profitability, it will be sustainable.
WE OPERATE IN AN EXTREMELY COMPETITIVE MARKET, AND OUR BUSINESS WOULD BE
ADVERSELY AFFECTED IF WE ARE UNABLE TO COMPETE EFFECTIVELY.
The market for advanced Internet hosting and colocation services is highly
competitive. There are few barriers to entry preventing new competitors from
entering this market. We expect that we will face additional competition from
our existing competitors as well as new market entrants in the future. Many of
our current and potential competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater brand recognition and
9
<PAGE>
more established relationships in the industry than we do. As a result, some of
these competitors may be able to:
- develop and expand their network infrastructures and service offerings
more rapidly;
- adapt to new or emerging technologies and changes in customer requirements
more quickly;
- take advantage of acquisition and other opportunities more readily;
- devote greater resources to the marketing and sales of their services; and
- adopt more aggressive pricing policies.
In addition, some of our competitors have entered, and will likely continue
to enter, into joint ventures or other arrangements to provide additional
services competitive with those provided by us. We believe that the market in
which we compete is likely to experience consolidation in the near future, which
could result in increased price competition, the formation of strategic
relationships across complementary industries, including relationships with our
suppliers and channel partners that could limit our access to critical supplies,
and other factors that could adversely affect our business.
In an effort to gain market share, we expect that competitors will offer
hosting services similar to ours at prices lower than ours or with incentives
not matched by us. In addition, some of our competitors may be able to provide
customers with additional benefits that could reduce the overall costs of their
services relative to ours. We may not be able to reduce the pricing of our
services or offer incentives in response to the actions of our competitors
without an adverse impact on our business.
For more information about the competition we face in our market, please see
"Business--Competition."
WE MAY NOT BE ABLE TO SUCCESSFULLY GROW OUR BUSINESS IF WE ARE UNABLE TO ATTRACT
AND RETAIN ADDITIONAL HIGHLY SKILLED PERSONNEL.
Our success depends on our ability to attract, integrate, motivate, train
and retain highly skilled technical personnel and other employees. In
particular, we need to attract experienced information technology professionals.
We face intense competition for these people and we expect competition to remain
intense as the technology industry continues to grow. Even if we expend
significant resources to recruit, train and retain qualified personnel, we may
not be successful in our efforts.
We also must expand our direct and indirect sales operations to increase
market awareness of our services and generate increased revenues. We plan to
increase our sales force significantly in 2000. Newly-hired employees will
require training and it will take time for them to achieve full productivity. We
cannot assure you that we will be able to hire enough qualified individuals in
the future or that newly-hired employees will achieve necessary levels of
productivity. In that event, we would be unable to effectively expand our
business and address market opportunities, which would adversely affect our
future operating results.
FAILURE OF OUR OPERATING AND FINANCIAL SYSTEMS TO KEEP PACE WITH THE ANTICIPATED
GROWTH IN OUR BUSINESS COULD RESULT IN CUSTOMER DISSATISFACTION, OPERATING
INEFFICIENCIES AND LOST REVENUE OPPORTUNITIES.
The rapid growth of our business and our service offerings has placed, and
is likely to continue to place, a significant strain on our operating and
financial resources. Our future performance will partly depend on our ability to
manage our growth effectively, which will require that we further develop our
operating and financial system capabilities and controls. We are in the process
of implementing new billing and other management information systems. If our
information systems are unable to support the demands placed on them by the
rapid growth in our business, we may be forced to implement new
10
<PAGE>
systems which would be disruptive to our business. If we fail to improve our
operational systems or to expand our customer service capabilities to keep pace
with the growth of our business, we could experience customer dissatisfaction,
cost inefficiencies and lost revenue opportunities, which could harm our
operating results. We may not be able to successfully implement these systems
when needed or they may not perform reliably.
OUR GROWTH DEPENDS ON OUR ABILITY TO EXPAND DATA CENTER CAPACITY TO MEET
ANTICIPATED DEMAND.
Continuing to expand data center capacity is critical to achieving our
business strategy. This expansion will include adding new hardware and software,
and further contemplates the opening of additional data centers in the United
States, Europe and Asia. Our ability to do so successfully depends on:
- anticipating and planning for future demand levels;
- having access to sufficient capital; and
- locating and securing satisfactory data center sites and implementing the
build-out of these sites,
all of which may require significant lead time. If we cannot expand capacity
effectively, our growth will suffer and we may not be able to adequately meet
the needs of our customers, which could result in the loss of customers.
WE MAY NOT BE ABLE TO DELIVER OUR SERVICES AND OUR BUSINESS MAY SUFFER IF OUR
THIRD-PARTY SUPPLIERS DO NOT PROVIDE US WITH KEY COMPONENTS OF OUR NETWORK
INFRASTRUCTURE.
We depend on other companies to supply key components of our network
infrastructure. Any failure to obtain needed products or services in a timely
fashion or at an acceptable cost could adversely affect our business. We buy
servers, routers and switches on an as-needed basis and therefore do not carry
significant inventories of these items. We also have no guaranteed supply
arrangements with our vendors. If this equipment were to become unavailable or
available only on terms that are not acceptable to us, we would be forced to
find alternative providers of this equipment. The inability to obtain equipment
from our existing suppliers on terms acceptable to us would require us to expend
time and money to select and obtain new equipment, and to train our personnel to
use different equipment and deploy alternative components, which could adversely
affect our business.
DISRUPTION OF OUR SERVICES CAUSED BY UNKNOWN SOFTWARE DEFECTS COULD HARM OUR
BUSINESS AND REPUTATION.
Our service offerings depend on complex software, including software
licensed from third parties. Complex software often contains defects,
particularly when first introduced or when new versions are released. We may not
discover software defects that affect our services until after the software is
deployed. Although we have not experienced any material software defects to
date, it is possible that defects may occur in the future. These defects could
cause service interruptions, which could damage our reputation, increase our
service costs, cause us to lose revenues, delay market acceptance or divert our
development resources.
PROVIDING SERVICES TO CUSTOMERS WITH MISSION-CRITICAL INTERNET SITES AND
WEB-BASED APPLICATIONS COULD POTENTIALLY EXPOSE US TO LAWSUITS FOR CUSTOMERS'
LOST PROFITS OR DAMAGES.
Because our advanced Internet hosting services are critical to many of our
customers' businesses, any significant disruption in our services could result
in lost profits or other indirect or consequential damages to our customers. Our
customers are required to sign server order forms which incorporate our standard
terms and conditions. Although these terms disclaim our liability for any
indirect or consequential damages, a customer could still bring a lawsuit
against us claiming lost profits or other
11
<PAGE>
consequential damages as the result of a service interruption or other Internet
site or application problems that the customer may ascribe to us. We cannot
assure you that a court would enforce any limitations on our liability, and the
outcome of any lawsuit would depend on the specific facts of the case and legal
and policy considerations. In such cases, we could be liable for substantial
damage awards. Such damages might exceed our liability insurance by unknown but
significant amounts, which could seriously impair our financial condition and
adversely affect our business.
WE HAVE MANY INTERNATIONAL CUSTOMERS, AND, AS A RESULT, OUR BUSINESS MAY BE
ADVERSELY AFFECTED BY POLITICAL AND ECONOMIC CONDITIONS IN FOREIGN MARKETS.
In 1999, 33.4% of our revenues were derived from customers located outside
of North America. A key element of our strategy is to expand our customer base
internationally and successfully operate data centers in foreign markets.
Because our international sales are denominated in U.S. dollars, currency
fluctuations may deter foreign customers from purchasing our services. In
addition, we face risks in servicing customers in foreign markets, such as:
- different Internet access fees;
- different technology standards;
- different privacy, censorship and service provider liability standards and
regulations; and
- less protective intellectual property laws.
Any of these risks could adversely affect our ability to operate or expand
internationally, which would limit our ability to grow our business.
OUR LIMITED ABILITY OR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY
ADVERSELY AFFECT OUR ABILITY TO COMPETE.
Third parties may infringe or misappropriate our technology or proprietary
rights, which could have an adverse effect on our business. We rely on a
combination of copyright, trademark, service mark and trade secret laws to
protect our intellectual property. We also have internally developed tools and
procedures that are important to our business for which we have no protection.
Our competitors or potential competitors may independently develop technologies
that are equivalent or superior to the technology upon which we rely. We have
entered into contractual arrangements with our employees and generally with
contractors, suppliers, distributors and some of our key customers in order to
limit access to, and any disclosure of, our proprietary information. However,
these measures may not be sufficient to protect our intellectual property. We
may need to take legal action to protect our intellectual property rights, which
could be costly and divert the attention of our technical and management
personnel.
WE MAY BE ACCUSED OF INFRINGING THE PROPRIETARY RIGHTS OF OTHERS, WHICH COULD
SUBJECT US TO COSTLY AND TIME-CONSUMING LITIGATION.
In addition to the technologies we develop or have developed, we license
some technologies from third parties and may license additional technologies in
the future. Although we have not been accused of infringing the proprietary
rights of others in the past, we could become subject to infringement actions
based upon our internally-developed technologies or technologies licensed from
third parties. Any of these claims, with or without merit, could subject us to
costly litigation and divert the attention of our technical and management
personnel. In addition, third parties may change the terms of their license
agreements in ways that would prevent us from using technologies licensed from
them on commercially reasonable terms or that could prevent us from using them
at all. We may not be able to replace those technologies with technologies that
have the same features or functionality on commercially reasonable terms or at
all.
12
<PAGE>
OUR BUSINESS COULD BE HARMED IF OUR MANAGEMENT TEAM, WHICH HAS WORKED TOGETHER
FOR ONLY A BRIEF TIME, IS UNABLE TO WORK TOGETHER EFFECTIVELY, OR IF WE LOSE THE
SERVICES OF KEY PERSONNEL.
We recently hired key employees and officers, including our Vice President,
Sales and Marketing who joined us in November 1999, our Vice President, Channel
Sales and Strategic Alliances who joined us in December 1999 and our Vice
President, Operations who joined us in November 1999. As a result, our
management team has worked together for only a brief time.
We depend on the continued service of our key technical, sales and senior
management personnel, including Graham M. Weston, our Chief Executive Officer,
Morris A. Miller, our President and Chief Operating Officer, and our founders,
Patrick R. Condon, Dirk J. Elmendorf and Richard K. Yoo. Following this
offering, we will not maintain key-person insurance on any of our key employees,
other than Mr. Weston. In addition, we do not have employment agreements with
any of our key employees, other than Messrs. Condon, Elmendorf and Yoo. The
terms of the employment agreements with Messrs. Condon, Elmendorf and Yoo are
limited and if any key personnel are unable or unwilling to continue in their
present positions, our ability to develop, introduce and sell our services could
be significantly impaired.
OUR HOLDING COMPANY STRUCTURE COULD LIMIT OUR ABILITY TO PAY DIVIDENDS OR MAKE
DEBT PAYMENTS.
We are a holding company with no operations of our own. Therefore, if our
subsidiaries are unable to pay dividends or make distributions to us, we would
be unable to make dividend payments to our stockholders or pay any future
indebtedness. We do not anticipate paying cash dividends in the foreseeable
future.
OUR QUARTERLY AND ANNUAL RESULTS MAY FLUCTUATE, WHICH COULD RESULT IN
FLUCTUATIONS IN THE PRICE OF OUR COMMON STOCK.
Our operating results may fluctuate significantly in the future on a
quarterly and annual basis. Because of these fluctuations, comparisons of our
operating results from period to period are not necessarily meaningful and
should not be relied upon as an indicator of future performance. We expect to
continue to experience significant fluctuations as a result of a variety of
factors, many of which are outside of our control, including:
- the frequency of new customer installations;
- our retention of existing customers;
- fluctuations in data communications costs;
- timing and magnitude of capital expenditures;
- costs relating to the expansion of our operations;
- changes in our pricing policies or those of our competitors; and
- economic conditions specific to the hosting industry, as well as general
economic conditions.
We plan to increase our operating expenses to develop our business. If our
revenues do not increase as quickly as our expenses, our operating results will
suffer. For these and other reasons, in future periods our operating results may
fall below the expectations of securities analysts or investors, which could
negatively affect the market price of our common stock.
WE HAVE ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN
ACQUISITION OF OUR COMPANY.
Certain provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could have the effect of delaying, deferring or
preventing an acquisition of our company. For
13
<PAGE>
example, our board of directors will be divided into three classes to serve
staggered three-year terms, our stockholders will be unable to take action by
written consent and our stockholders will be limited in their ability to make
proposals at stockholder meetings. For more information about these provisions,
you should read "Description of Capital Stock."
WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH,
AND WE MAY NOT BE ABLE TO OBTAIN IT ON TERMS ACCEPTABLE TO US, IF AT ALL.
We believe that our existing capital resources, including the anticipated
proceeds of this offering, will enable us to maintain our current and planned
operations for at least the next 12 months. However, we may require additional
funds during or after that 12-month period. Any required financing may not be
available or may be available only on terms that are not favorable to us.
Further, if additional funds are raised through the issuance of additional
equity securities, the percentage ownership of our stockholders would be
diluted. Any new equity securities may have rights, preferences or privileges
senior to those of our common stock.
RISKS RELATED TO OUR INDUSTRY
WE MAY NOT BE ABLE TO ADAPT TO EVOLVING TECHNOLOGIES AND CUSTOMER DEMANDS, WHICH
COULD CAUSE OUR BUSINESS TO SUFFER.
Our market is characterized by rapidly changing technology, evolving
industry standards and frequent new product announcements. These characteristics
are magnified by the recent growth of the Internet and the intense competition
in our industry. We also are subject to risks from technological changes in the
way Internet hosting solutions are marketed and delivered. To be successful, we
must adapt to our rapidly changing market by continually improving the
performance, features and reliability of our services and modifying our business
strategies accordingly. We could also incur substantial costs if we need to
modify our services or infrastructure in order to adapt to these changes. Our
business would suffer if we fail to respond to these changes in a timely and
cost-effective manner.
OUR BUSINESS WILL SUFFER IF INTERNET USAGE DOES NOT CONTINUE TO INCREASE, IF THE
INTERNET FAILS TO PERFORM RELIABLY OR IF THE INTERNET PROVES NOT TO BE SECURE.
Use of the Internet for retrieving, sharing and transferring information
among businesses, consumers, suppliers and partners is increasing rapidly. Our
success depends on continued growth in the use of the Internet, and we would be
adversely affected if Internet use does not continue to grow, particularly among
small- to medium-sized enterprises. Internet use and growth may be inhibited for
a number of reasons, such as:
- inadequate network infrastructure;
- concerns about the security of confidential information;
- concerns about acts of sabotage, vandalism and other similar events such
as the events that adversely impacted the Web sites of Yahoo! and eBay in
February 2000;
- uncertainty of legal and regulatory issues concerning the use of the
Internet;
- adoption of onerous laws or governmental regulations; and
- lack of availability of cost-effective, reliable, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth, or its performance and
reliability may decline. For example, Web sites have experienced interruptions
in service as a result of outages or acts of sabotage, vandalism or other
similar events. If these outages or delays occur frequently, use of the Internet
as a commercial or
14
<PAGE>
business medium could in the future grow more slowly or decline, which would
adversely affect our business. In addition, because a number of our services
include the transmission of confidential information, we could be materially and
adversely affected if Internet users significantly reduce their use of the
Internet due to security or privacy concerns.
REGULATORY AND LEGAL UNCERTAINTIES COULD RESULT IN SIGNIFICANT COSTS OR
POTENTIAL LIABILITY, OR OTHERWISE HARM OUR BUSINESS.
Laws and regulations directly applicable to commerce or communications over
the Internet are becoming increasingly prevalent. However, many laws affecting
the Internet remain largely unsettled. The adoption or modification of laws or
regulations relating to the Internet could adversely affect our business,
especially if they impose direct costs on us or if they curtail the growth of
the Internet. If liability for materials carried on or disseminated through Web
sites on the Internet is imposed on hosting services providers, we would be
required to implement measures to reduce our exposure to liability. These
measures could require us to expend substantial resources or discontinue
offering affected services. In addition, liability issues, including as a result
of lawsuits, legislation and legislative proposals, could divert management's
attention, result in unanticipated expenses and harm our business. If
legislation in the U.S. or abroad is adopted that makes transacting business
over the Internet less favorable, our business would suffer. See
"Business--Government Regulation."
RISKS RELATED TO THIS OFFERING
WE HAVE BROAD DISCRETION IN HOW WE MAY USE THE PROCEEDS FROM THIS OFFERING AND
OUR USE OF THESE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.
We have not allocated the entire net proceeds from this offering for
specific purposes. Accordingly, our management will have significant flexibility
in applying the net proceeds of this offering and you will not have the
opportunity, as part of your investment decision, to assess whether the proceeds
are being used appropriately. The net proceeds of this offering may be used for
corporate purposes that do not improve our results of operations or increase our
market value.
OUR PRINCIPAL STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS WILL OWN
APPROXIMATELY % OF OUR COMMON STOCK FOLLOWING THIS OFFERING, WHICH MAY ALLOW
THEM TO EXERT INFLUENCE OVER US OR TO PREVENT A CHANGE OF CONTROL.
After this offering, our principal stockholders, directors and executive
officers will beneficially own, in the aggregate, approximately % of our
outstanding common stock. These stockholders, acting together, will be able to
exercise significant influence over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may also delay or prevent a change
in our control even if beneficial to our stockholders.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS
OUR STOCK PRICE.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock after this offering could cause
our stock price to fall. In addition, the sale of shares by our stockholders
could impair our ability to raise capital through our sale of newly-issued
stock. You should read "Shares Eligible for Future Sale" for a more complete
discussion of shares that may be sold in the public market in the future.
15
<PAGE>
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK; OUR COMMON STOCK MAY
EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS AND ANY VOLATILITY IN OUR STOCK
PRICE COULD RESULT IN CLAIMS AGAINST US.
Prior to this offering, investors could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. The initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters. The market price of our common stock may decline below the initial
public offering price after this offering.
Fluctuations in market price and volume are particularly common among
securities of Internet and other technology companies. The market price of our
common stock may fluctuate significantly in response to the following factors,
some of which are beyond our control:
- variations in quarterly operating results;
- changes in market valuations of Internet and other technology companies;
- our announcement of significant contracts, strategic partnerships,
acquisitions, joint ventures or capital commitments;
- additions or departures of key personnel;
- future sales of common stock; and
- changes in financial estimates by securities analysts.
In the past, securities class action litigation often has been brought
against a company following periods of volatility in the market price of its
common stock. We may be the target of similar litigation in the future.
Securities litigation could result in substantial costs and divert management's
attention and resources.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus contains forward-looking statements. These statements
include, among others, statements relating to expenditure levels, the adequacy
of capital resources and plans for expansion of our marketing and sales efforts,
risk factors, use of proceeds, liquidity, strategy, sales and technology and
network operations. These statements may be found under "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Forward-looking statements are typically
identified by the use of terms such as "may," "will," "expect," "intend,"
"anticipate," "estimate" and similar words, although some forward-looking
statements are expressed differently. You should be aware that our actual
results could differ materially from those contained in the forward-looking
statements due to a number of factors, including without limitation, changes in
external competitive market factors, changes in our business strategy or an
inability to execute our strategy, unanticipated changes in the hosting industry
or in the economy in general and changes in use of the Internet, particularly by
small- and medium-sized enterprises. We cannot guarantee future results, levels
of activity, performance or achievements. You should also consider carefully the
statements under "Risk Factors" and other sections of this prospectus, which
address additional factors that could cause our actual results to differ from
those set forth in the forward-looking statements. We undertake no obligation to
update this prospectus with respect to new information, future events or
otherwise.
16
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of shares of our common
stock in this offering will be approximately $ million, at an assumed
initial public offering price of $ per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us. If the underwriters' over-allotment option is exercised in full, we
estimate that the net proceeds will be approximately $ million.
We intend to use approximately $ million of the net proceeds of this
offering to fund capital expenditures associated with the purchase of computer
and networking hardware. We also intend to use $ to establish a data center
presence in London in the second quarter of 2000, and, in the next 18 months, to
establish a data center presence in Asia and a second data center presence in
the U.S. We expect to use the balance of the net proceeds for the expansion of
our sales and marketing and product development activities, working capital and
other general corporate purposes. In addition, we may use some of the net
proceeds for strategic investments and acquisitions; however, we have no current
agreements or commitments with respect to any acquisition or investments of this
type. Our management will have significant flexibility in applying the net
proceeds of this offering and may spend the proceeds from this offering in ways
that the stockholders may not deem desirable.
The timing and amount of our actual expenditures will be based on many
factors, including cash flows from operations and the growth of our business.
Until we use the net proceeds of this offering for the above purposes, we intend
to invest the funds in short-term, investment-grade, interest-bearing
securities. We cannot predict whether the proceeds invested will yield a
favorable return.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock since
inception. We intend to retain any future earnings for developing and expanding
our business and do not anticipate paying any cash dividends in the foreseeable
future.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect (1) the completion of the holding company
restructuring through the exchange of all limited partner interests and
the general partner interest of Rackspace, Ltd. for an aggregate of
14,671,425 shares of our common stock, (2) the net proceeds from the sale
of 2,309,440 shares of our as-converted common stock in private placements
consummated after December 31, 1999 and (3) payment in full of a note
receivable in the amount of $750,000 in February 2000; and
- on a pro forma as adjusted basis to additionally reflect the net proceeds
to us from the sale of shares of our common stock in this offering at an
assumed initial public offering price of $ per share, and the
application of the net proceeds from this offering.
This information should be read in conjunction with our financial statements
and notes relating to these statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents................................ $3,794,784 $16,344,784 $
========== =========== =======
Partners' capital........................................ 5,393,525
Note receivable for issuance of partnership interest..... (750,000) --
Stockholders' equity:
Preferred stock, $.001 par value, 30,000,000 shares
authorized, no shares issued and outstanding, actual,
pro forma and pro forma as adjusted.................. --
Common stock, $.001 par value, 170,000,000 shares
authorized, no shares issued and outstanding, actual;
16,980,865 shares issued and outstanding, pro forma;
shares issued and outstanding, pro forma as
adjusted............................................. 16,981
Additional paid-in capital............................... 17,176,544
---------- ----------- -------
Total partners' capital/stockholders' equity........... 4,643,525 17,193,525
---------- ----------- -------
Total capitalization................................. $4,643,525 $17,193,525 $
========== =========== =======
</TABLE>
The share information set forth above excludes:
- 480,833 shares issuable upon the exercise of stock options granted to
employees outstanding as of March 27, 2000, with a weighted average
exercise price of $2.51 per share;
- 380,952 shares of common stock issuable upon the exercise of warrants
outstanding as of March 27, 2000, which were granted to investors in a
private equity financing in November 1999, with an exercise price of $2.10
per share;
- shares of common stock issuable upon the exercise of warrants
outstanding to Norwest Venture Partners and Sequoia Capital which were
granted in a private equity financing completed in March 2000; and
- additional shares of common stock reserved for future issuance under
the 2000 Stock Incentive Plan.
See "Management--2000 Stock Incentive Plan," "Description of Capital Stock"
and Note 7 of Notes to our financial statements.
18
<PAGE>
DILUTION
Our pro forma net tangible book value at December 31, 1999 was
$17.1 million, or $1.01 per share of common stock. Pro forma net tangible book
value per share represents the amount of our tangible net assets, which is
defined as total assets less intangible assets, less total liabilities, divided
by the pro forma number of shares of common stock outstanding as of
December 31, 1999, after giving effect to (1) the completion of the holding
company restructuring through the exchange of all limited partner interests and
the general partner interest of Rackspace, Ltd. for an aggregate of 14,671,425
shares of our common stock, (2) the net proceeds from the sale of
2,309,440 shares of our as-converted common stock in private placements
consummated after December 31, 1999 and (3) payment in full of a note receivable
in the amount of $750,000 in February 2000.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares 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 our sale of shares of common stock in this offering at an
assumed initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by us and the application of the estimated net proceeds from the
offering, our adjusted pro forma net tangible book value at December 31, 1999
would have been $ million, or $ per share. This amount represents an
immediate increase in pro forma net tangible book value to our existing
stockholders of $ per share and an immediate dilution to new investors of
$ per share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at December
31, 1999................................................ $
Increase in pro forma net tangible book value per share
attributable to new investors...........................
-------
Pro forma net tangible book value per share after this
offering..................................................
-------
Dilution per share to new investors......................... $
=======
</TABLE>
If the underwriters exercise their over-allotment option in full, our
adjusted pro forma net tangible book value at December 31, 1999 would have been
$ million, or $ per share, representing an immediate increase in
pro forma net tangible book value to our existing stockholders of $ per
share and an immediate dilution to new investors of $ per share.
The following table summarizes, as of December 31, 1999 and after giving
effect to the pro forma adjustments described above, the differences between the
number of shares of common stock purchased from us, the aggregate cash
consideration paid to us and the average price per share paid by our existing
stockholders and by new investors purchasing shares of common stock in this
offering. The calculation below is based on an assumed initial public offering
price of $ per share, before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 16,980,865 % $18,846,598 % $1.11
New investors........................ % %
---------- ----- ----------- -----
Total.......................... 100% $ 100%
========== ===== =========== =====
</TABLE>
The tables and calculations above assume no exercise of outstanding options.
At March 27, 2000, there were 480,833 shares of common stock issuable upon
exercise of options granted to employees outstanding with a weighted average
exercise price of $2.51 per share and shares reserved for future issuance
under our 2000 Stock Incentive Plan. In addition, at March 27, 2000, there were
380,952 shares of common stock issuable upon the exercise of warrants granted to
an investor in a private equity financing in November 1999, with an exercise
price of $2.10 per share. Also, we issued warrants to purchase an aggregate of
shares to Norwest Venture Partners and Sequoia Capital in a private equity
financing completed in March 2000.
To the extent that these options and warrants are exercised, there will be
further dilution to new investors. See "Management--2000 Stock Incentive Plan."
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included in this
prospectus. The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" as of December 31, 1998 and 1999 and
for the period from December 29, 1998 to December 31, 1998 and the year ended
December 31, 1999, are derived from the financial statements of
Rackspace, Ltd., and the "Statement of Operations Data" for the year ended
December 31, 1997 and the period from January 1, 1998 to December 28, 1998 are
derived from the financial statements of Cymitar Technology Group, Inc., which
financial statements have been audited by KPMG LLP, independent certified public
accountants. All of these financial statements and their respective auditors'
reports are included elsewhere in this prospectus.
The pro forma information regarding net loss per share and weighted average
shares outstanding set forth below gives effect to the exchange of all limited
partner interests and the general partner interest of Rackspace, Ltd. for shares
of our common stock for all periods presented. See our financial statements and
the notes to these statements appearing elsewhere in this prospectus for the
determination of the number of shares used in computing historical and pro forma
basic and diluted net loss per share.
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
--------------------------- ----------------------------
PERIOD FROM
PERIOD FROM DECEMBER 29,
JANUARY 1, 1998
1998 (INCEPTION)
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 28, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues....................................... $ 72,535 $ 166,632 $ 76 $ 1,700,537
Operating expenses:
Cost of revenues................................... 38,895 73,767 -- 513,424
Sales and marketing................................ 648 3,615 -- 1,612,071
General and administrative......................... 47,705 181,260 23 870,155
Product development................................ -- -- -- 52,712
Depreciation and amortization...................... 6,912 12,363 262 261,730
-------- --------- ------ -----------
Total operating expenses........................... 94,160 271,005 285 3,310,092
-------- --------- ------ -----------
Loss from operations............................. (21,625) (104,373) (209) (1,609,555)
Other income (expense)............................... (3,247) (7,767) (66) (43,243)
-------- --------- ------ -----------
Net loss......................................... $(24,872) $(112,140) $ (275) $(1,652,798)
======== ========= ====== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
EARNINGS PER SHARE CALCULATION:
Net loss.............................................. $(1,652,798)
===========
Basic and diluted net loss per share.................. $ (0.15)
===========
Weighted average shares outstanding used in pro forma
basic and diluted per share calculation.............. 10,733,098
===========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1998 1999
-------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $150,000 $3,794,784
Working capital........................................... 154,232 2,735,337
Total assets.............................................. 343,161 5,863,786
Total partners' capital................................... 192,094 4,643,525
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF RACKSPACE.COM, INC. SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING, BUT NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "FORWARD-LOOKING STATEMENTS AND
ASSOCIATED RISKS," "BUSINESS" AND OTHER SECTIONS OF THIS PROSPECTUS.
OVERVIEW
We provide advanced Linux-based Internet hosting services primarily targeted
to small- to medium-sized enterprises worldwide. Through our advanced hosting
services, we enable our customers to outsource their Internet operations while
allowing them to rapidly upgrade their dedicated server hardware and add
bandwidth to support their needs as they expand. Our service offerings are
productized as end-to-end turnkey solutions that can be configured, priced and
ordered at our Web site. All of our service packages include a built-to-order
Internet server which we guarantee will be deployed within 24 hours after order
confirmation and which is housed within our state-of-the-art data center with
around-the-clock monitoring, security and technical support. As of March 31,
2000, we managed an installed base of over servers within our data center for
more than customers, with approximately % of these customers located
outside of the United States in over 50 countries around the world.
Since inception, we have incurred net losses and experienced negative cash
flow from operations. We intend to continue to invest significant resources to
enhance our brand identity and aggressively build our customer base worldwide.
In addition, we intend to establish additional data centers and expand our
network infrastructure, including our customer service and technical support
capabilities. As a result, we expect to continue to operate at a net loss and to
experience negative cash flows for the foreseeable future. Our ability to
achieve profitability and positive cash flow from operations will be dependent
upon our ability to expand significantly the number of customers for our
services, to retain our customers, to maintain our current prices and to achieve
operating efficiencies over a larger subscriber base.
CORPORATE RESTRUCTURING
Our company, Rackspace.com, Inc., is a newly-formed Delaware corporation
that will serve as the successor-in-interest to the business currently conducted
by Rackspace, Ltd., a Texas limited partnership. Prior to the completion of this
offering, the holders of limited partner interests and the general partner
interest in Rackspace, Ltd., as well as holders of options to acquire limited
partner interests in Rackspace, Ltd., will exchange their equity interests in
Rackspace, Ltd. for shares of our common stock or options, as the case may be.
Our operations will continue to be largely conducted by Rackspace, Ltd., with
two newly-formed, wholly-owned limited liability companies of
Rackspace.com, Inc. serving as its sole limited partner and sole general
partner, respectively. Rackspace, Ltd. originally was formed in December 1998 to
acquire substantially all of the assets of Cymitar Technology Group, Inc., a
Texas corporation that provided information technology consulting services to
companies in the San Antonio region. The asset acquisition was completed on
December 29, 1998.
COMPARABILITY OF RESULTS
We began focusing our efforts on our advanced Internet hosting services in
December 1998. Prior to that time, our predecessor, Cymitar Technology Group,
Inc., was engaged in activities primarily
21
<PAGE>
unrelated to our current operations and, accordingly, comparisons of operating
results for the year ended December 31, 1997 and the period ended December 28,
1998 with our operating results for the year ended December 31, 1999 are not
meaningful and have not been made.
REVENUES
We derive our revenues primarily from recurring monthly subscriptions for
our advanced Internet hosting services, which include the provision of an
Internet server, deployment of that server in our data center, an allocated
amount of bandwidth, monitoring, security and technical support provided on an
around-the-clock, or "24X7," basis. In addition, we derive revenues from:
- one-time set-up fees for initial installations;
- sales of upgrades for server system hardware and software;
- charges assessed for bandwidth usage in excess of the allocated amount
under customers' subscription agreements;
- other enhanced services that we offer to customers separately from their
subscription agreements;
- managed colocation services; and
- system management services that are not included in subscription plan
packages.
Monthly subscriptions are invoiced at the outset of the first month's
subscription and on approximately the same day in each successive month that the
subscription is renewed. Set-up fees also are invoiced at the outset of the
monthly subscription. Upgrades, excess bandwidth usage and technical services
are invoiced with the following month's subscription payment.
Because subscription revenues are prepaid on the first day of the monthly
subscription period and because the first day of each subscription period varies
from customer to customer, we defer a pro rata portion of each month's billings
to the following month. Therefore, we recognize only the revenue earned during
the time period in question. Deferred revenue is recorded at the end of each
quarter to reflect invoices billed during the last month of the quarter but not
recognized as revenue during that quarter. Other fees and charges are recognized
at the time the related services and products are provided to the customer.
In 1999, 33.4% of our revenues were derived from customers located outside
of North America. All of our sales to date have been denominated in U.S.
dollars. We believe that a significant portion of our revenues will continue to
be derived from customers outside of the U.S. as our services, and in
particular, our Linux-based services, receive a high level of acceptance in
international markets.
OPERATING EXPENSES
Our operating expenses are comprised of:
- cost of revenues, which consists primarily of the cost of contracting for
lines from telecommunication providers to supply our customers with
bandwidth, as well as compensation and related expense for customer
service and technical support and costs of operating our data center;
- sales and marketing, which consists primarily of print and Internet
advertising expenses, compensation for sales and marketing personnel and
public relations and other marketing expenses;
- general and administrative, which consists primarily of corporate
compensation and related expenses, professional fees and occupancy costs;
22
<PAGE>
- product development, which consists of employee-related expenses and other
expenses dedicated towards the development of new service and product
offerings for our customers; and
- depreciation and amortization, which consists of depreciation of all of
our physical assets and amortization of costs for licensed software and
goodwill.
STOCK-BASED COMPENSATION EXPENSE
Commencing with the quarter ending March 31, 2000, we will incur additional
operating expense in connection with the grant of options to acquire interests
in our company that were made to employees in the first quarter of 2000. As a
result of these option grants, we have recorded deferred stock compensation of
approximately $ million as of March 31, 2000, representing the difference
between the deemed fair value of the equity interests subject to these options
and the exercise price at the date of grant. The difference will be amortized
over the vesting period of the applicable options, generally three years, which
will result in amortization expense of $ in the quarter ending March 31,
2000 and will be amortized thereafter in the amount of approximately $ per
quarter. This amortization of deferred stock compensation will be recorded in
our financial statements as "Stock-based compensation expense."
RESULTS OF OPERATIONS
The following table sets forth selected financial data for 1999 set forth as
a percentage of revenues in 1999.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................................ 100.0%
Operating expenses:
Cost of revenues........................................ 30.2
Sales and marketing..................................... 94.8
General and administrative.............................. 51.2
Product development..................................... 3.1
Depreciation and amortization........................... 15.4
-----
Total operating expenses.............................. 194.7
-----
Loss from operations................................ (94.7)
Other income (expense).................................... (2.5)
-----
Net loss............................................ (97.2)%
=====
</TABLE>
REVENUES. Revenues in 1999 were $1.7 million. These revenues were derived
from customers for our advanced Internet hosting services in 1999. We increased
our customer base from 57 at January 31, 1999 to 524 at December 31, 1999. We
anticipate that revenue growth in future periods will be derived from new
customers of our services as well as service plan upgrades by our existing
customers.
COST OF REVENUES. Cost of revenues was $513,000 in 1999, representing 30.2%
of revenues. Bandwidth costs represented the majority of this amount, with
customer service and technical support personnel-related expenses and data
center-related and other expenses representing the balance. We anticipate that
cost of revenues will increase in both dollar amount and, in the near term, as a
percentage of revenues as we establish additional data centers and enter into
additional bandwidth contracts to offer hosting services in advance of customer
demand for those services. However, in the long term, cost of revenues as a
percentage of revenues should eventually stabilize if we are able to
23
<PAGE>
achieve greater economies of scale by serving a larger customer base through our
network infrastructure and data centers.
SALES AND MARKETING. Sales and marketing expense was $1.6 million in 1999,
representing 94.8% of revenues. Advertising, public relations and trade
show-related marketing expenditures represented the majority of this amount,
with compensation and related expenses of our sales and marketing personnel
representing the balance. Because we intend to significantly expand our sales
and marketing activities in future periods, sales and marketing expense will
continue to increase in dollar amount, and may in the short term increase as a
percentage of revenues as we develop and expand our marketing initiatives.
GENERAL AND ADMINISTRATIVE. General and administrative expense was $870,000
in 1999, representing 51.2% of revenues. We expect that general and
administrative expense will increase in dollar amount in future periods as we
expand our international operations, but we anticipate that it will decline as a
percentage of revenues to the extent that we are able to achieve a larger
customer base for our services.
PRODUCT DEVELOPMENT. Product development expense was $53,000 in 1999,
representing 3.1% of revenues. We anticipate that product development expense
will increase in both dollar amount and as a percentage of revenues in the
future as a result of our increased emphasis on developing new network and
hosting services for our customer base.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$262,000 in 1999, representing 15.4% of revenues. Depreciation and amortization
expense related to server hardware and network equipment represented the
majority of this amount. We anticipate depreciation and amortization expense to
increase in dollar amount as we add new Internet servers to our installed base
and establish additional data centers.
OTHER INCOME (EXPENSE). Other income (expense) was ($43,000) in 1999,
representing 2.5% of revenues. Other income (expense) consisted of interest
expense on a note that was converted to equity in the fourth quarter as well as
other net interest expense. We anticipate that income included in other income
(expense) will increase in amount during the second half of 2000 as a result of
interest income from interest-bearing investments that are made with the
proceeds of this offering.
INCOME TAXES. No provision for federal income taxes has been recorded as we
have incurred net operating losses from inception through December 31, 1999 as
our operations have been conducted as a limited partnership prior to this
offering. Consequently, we have not accumulated a net operating loss that may be
used to offset future taxable income.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth unaudited statement of operations data for
each of the four quarters in 1999, as well as the percentage of our revenues
represented by each item. This data has been derived from unaudited interim
financial statements prepared on the same basis as the audited financial
statements contained in this prospectus. The interim financial statements
include all adjustments, consisting of normal recurring adjustments, that we
consider necessary for a fair presentation of this information when considered
in conjunction with our financial statements and
24
<PAGE>
notes appearing elsewhere in this prospectus. The operating results for any
quarter should not be considered indicative of the results for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................. $125,507 $ 263,483 $ 508,750 $ 802,797
Operating expenses:
Cost of revenues............................. 31,232 100,789 104,222 277,181
Sales and marketing.......................... 78,414 253,942 410,300 869,415
General and administrative................... 80,774 156,736 171,393 461,252
Product development.......................... 7,724 9,960 9,960 25,068
Depreciation and amortization................ 20,513 43,235 75,354 122,628
-------- --------- --------- ----------
Total operating expenses................... 218,657 564,662 771,229 1,755,544
-------- --------- --------- ----------
Loss from operations..................... (93,150) (301,179) (262,479) (952,747)
Other income (expense)......................... (3,682) (10,022) (19,528) (10,011)
-------- --------- --------- ----------
Net loss................................. $(96,832) $(311,201) $(282,007) $ (962,758)
======== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUES:
Total revenues................................... 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of revenues............................... 24.9 38.3 20.5 34.5
Sales and marketing............................ 62.5 96.4 80.6 108.3
General and administrative..................... 64.4 59.5 33.7 57.5
Product development............................ 6.2 3.8 2.0 3.1
Depreciation and amortization.................. 16.3 16.4 14.8 15.3
------- -------- ------- --------
Total operating expenses..................... 174.2 214.3 151.6 218.7
------- -------- ------- --------
Loss from operations....................... (74.2) (114.3) (51.6) (118.7)
Other income (expense)........................... (2.9) (3.8) (3.8) (1.2)
------- -------- ------- --------
Net loss................................... (77.2)% (118.1)% (55.4)% (119.9)%
======= ======== ======= ========
</TABLE>
REVENUES. Revenues increased 109.9% during the quarter ended June 30, 1999,
93.1% during the quarter ended September 30, 1999, and 57.8% during the quarter
ended December 31, 1999, in each case as compared to the preceding quarter, as a
result of significant increases in our customer base during each quarter.
COST OF REVENUES. Cost of revenues increased in each quarter and fluctuated
as a percentage of revenues. Fluctuations in cost of revenues as a percentage of
revenues primarily were attributable to our purchase of additional bandwidth
capacity in advance of customer subscriptions for our hosting services. As
utilization of bandwidth increases, cost of revenues as a percentage of revenues
will tend to decline until we purchase additional bandwidth to support
customers' use of our services at which time the percentage will increase,
reflecting the reduced utilization of our bandwidth as a percentage of our total
available bandwidth. Additionally, cost of revenues should generally increase as
a percentage of revenues as we expand our customer service and technical support
teams in order to support future growth in our customer base.
25
<PAGE>
SALES AND MARKETING. Sales and marketing expense increased significantly
during each quarter of 1999 as we increased our sales and marketing staff as
well as increased advertising and promotional expenditures during the year.
Additionally, sales and marketing expenditures increased as a percentage of
revenues to 108.3% during the quarter ended December 31, 1999 from 80.6% during
the quarter ended September 30, 1999 as the result of higher spending on
targeted print and Internet advertising.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
each quarter during 1999 as we significantly increased our general and
administrative staffing. The increase in general and administrative expense from
the quarter ended September 30, 1999 to the quarter ended December 31, 1999 was
primarily the result of increases in recruiting fees and employee-related
expenses in that quarter.
PRODUCT DEVELOPMENT. Product development expense increased from the quarter
ended September 30, 1999 to the quarter ended December 31, 1999 as the result of
our increased emphasis on the development of new products and services.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased each quarter during 1999 as the result of additions to our data center
infrastructure and the acquisition of new server equipment, which generally
corresponds directly to growth in our customer base. For this reason,
depreciation and amortization expense remained relatively constant as a
percentage of revenues during 1999, ranging from 16.3% of revenues in the
quarter ended March 31, 1999 to 14.8% of revenues in the quarter ended
September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have used cash in our operating and investing activities during all
periods since inception. Cash used in operating and investing activities has
been funded by permanent contributions to capital, primarily in the form of
private placements of equity and debt. During the year ended December 31, 1999,
cash used in operations was $439,000. Net cash used in operating activities was
primarily the result of operating losses and changes in working capital. Net
cash used in investing activities was $1.8 million during the same time period.
Net cash used in investing activities primarily resulted from acquisitions of
server and related computer hardware as well as network equipment. Although we
have plans to invest significantly in property and equipment and recently have
made a deposit toward the purchase of $500,000 of networking equipment, we have
no further material commitments for such items at this time. Net cash flow
provided by financing activities during the year ended December 31, 1999 was
$5.9 million. As part of our cash flows from financing activities, during the
quarter ended December 31, 1999 $1.6 million of debt was converted to equity and
an additional $4.5 million was raised in a private placement of equity. As of
December 31, 1999, we had $3.8 million in cash and cash equivalents.
Since December 31, 1999, we have raised gross proceeds of $12.6 million
through private placements of 2,309,440 limited partner interests in Rackspace,
Ltd. to a group of investors and the repayment of a $750,000 note that was
issued to us in the November 1999 equity financing. Investors in these
financings included Norwest Venture Partners, Sequoia Capital and Red Hat. As of
December 31, 1999, we had $16.3 million in cash and cash equivalents, as
determined on a pro forma basis to reflect the consummation of these
transactions.
We believe that our cash balances as of December 31, 1999, the cash received
from the private placements of our equity completed in the first quarter of
2000, and the proceeds from this offering will be adequate to meet our funding
requirements over the next 12 months. However, after such time, we may require
additional external financing for working capital and capital expenditures. We
anticipate that further expansion of our operations will cause us to incur
negative cash flows on a short-term basis, and therefore require us to use our
cash and other liquid resources to support our
26
<PAGE>
growth. Our operating and investing activities on a long-term basis may require
us to obtain additional equity or debt financing. Although we have no present
understandings or commitments with respect to any acquisition of other
businesses, products, services or technologies, we intend to evaluate potential
acquisitions from time to time. In order to consummate potential acquisitions,
we may need additional equity or debt financing in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133), which will be effective for the fiscal year ending
December 31, 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including derivative instruments
embedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. Although we have not evaluated the impact of
FAS 133, we believe the adoption of FAS 133 will not have a material effect on
our financial position, results of operations or cash flows as we have not
entered into any derivative contracts.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to interest rate risk primarily through our portfolio of cash
equivalents. We do not believe that we have significant exposure to market risks
associated with changing interest rates as of December 31, 1999 because our
intention is to maintain relatively liquid investments. We do not use derivative
financial instruments in our operations.
27
<PAGE>
BUSINESS
Rackspace.com is a leading provider of advanced Linux-based Internet hosting
services targeted to small- to medium-sized enterprises worldwide. We offer our
customers attractively-priced monthly Internet hosting plans that are
productized as end-to-end turnkey solutions that can be configured, priced and
ordered through the Rackspace.com Configurator at our Web site. Our service
offerings are designed to aid our customers in rapidly implementing their
Internet strategies and e-business initiatives. All of our service packages
include a dedicated, built-to-order Internet server with pre-installed operating
system software and select Internet-based applications, and high bandwidth
connections to the Internet. Dedicated servers utilized by our customers are
housed within our state-of-the-art data center where we provide around-the-clock
monitoring, security and technical support. We guarantee deployment of a new
customer's Internet hosting service within 24 hours of order confirmation.
Additionally, we enable our customers to cost-effectively scale their Internet
operations to support their growing needs by adding bandwidth and rapidly
upgrading their server hardware. We have developed specific expertise in
deploying Internet hosting services based on the Linux operating system, and
approximately 80% of our customers have selected Linux-based hosting services.
We believe that customers select the Linux platform due to its reputation for
stability and high performance, ease of remote administration and cost
advantages. We also provide and support advanced Internet hosting services based
on Solaris, Windows NT/2000 and other operating systems.
We offer flexible, cost-effective Internet hosting solutions that can be
customized and rapidly deployed to meet our customers' specific requirements. We
seek to educate small- to medium-sized enterprises worldwide about the benefits
of outsourced Internet hosting and to accelerate their purchasing decisions
through targeted marketing and our direct and channel sales efforts. In
addition, we have entered into strategic relationships with Red Hat, Perot
Systems and Sun Microsystems, among others, in order to accelerate our market
penetration and to expand our product and service offerings. As of March 31,
2000, we managed an installed base of over servers within our data center
for more than customers, with approximately % of these customers located
outside of the United States in over 50 countries around the world.
INDUSTRY BACKGROUND
THE NEED FOR A WEB PRESENCE
The Internet has emerged as a global communications medium and traffic on
the World Wide Web continues to explode. International Data Corporation, or IDC,
estimates that the number of Web users worldwide will grow from 144.0 million in
1998 to 602.4 million in 2003. The Internet also has developed into a critical
resource for business. According to IDC, worldwide business-to-business
e-commerce is expected to grow from approximately $44.5 billion in 1998 to
approximately $1.4 trillion in 2003, representing a 100% compound annual growth
rate. To successfully develop an online presence into a competitive advantage,
companies seek to rapidly introduce sophisticated Internet services to improve
communications with customers, suppliers, employees and business partners and to
attract the growing worldwide consumer audience that increasingly uses the
Internet to purchase goods and services. According to IDC, in 2003, businesses
worldwide will spend approximately $1.5 trillion in technology and
non-technology investments to maintain and support the Internet infrastructure.
OUTSOURCING OF INTERNET HOSTING SERVICES
A large number of enterprises initially created their Web sites for
brochure-style marketing and information purposes. Today, enterprises are adding
transaction functionality, e-commerce and other complex applications to their
Internet operations in an effort to derive substantial revenues from their
online activities. The economics of outsourcing hosting services is compelling
for many enterprises. We believe that the costs associated with outsourcing a
small- to medium-sized enterprise's hosting needs
28
<PAGE>
are a small fraction of the costs involved in establishing in-house hosting
capabilities. In addition, outsourcing of Internet hosting services provides
enterprises with the following benefits:
- high-speed and reliable bandwidth;
- the ability to rapidly adopt evolving Internet technologies and
architectures;
- rapid and efficient scaling of e-commerce and Internet application
initiatives;
- access to qualified and experienced information technology personnel;
- the ability to maintain primary focus on their core business operations;
- cost-effective advanced hosting solutions; and
- reduced risk of hardware obsolescence.
Internet hosting services have traditionally been provided in three forms:
- SHARED-SERVER HOSTING. In shared-server hosting, two or more enterprises
share a third party's Internet server, network connections, software and
bandwidth. This method of hosting provides a low-cost means for an
enterprise to maintain an Internet presence. Shared-server hosting is
attractive for enterprises that maintain Web sites with primarily
brochure-style content, as shared-server hosting provides limited storage
and processing capabilities, does not offer high bandwidth scalability and
poses security risks caused by multiple parties having access to a single
server.
- COLOCATION HOSTING. Enterprises that own their own Internet servers and
software can use colocation hosting to house their servers within an
Internet hosting company's shared data center. The enterprise retains
responsibility for the installation, management, upgrading and security of
its Internet operations. For this reason, colocation generally is a
feasible option for enterprises that operate a large number of servers and
maintain a staff of technical support personnel within close proximity of
the data center.
- ADVANCED HOSTING. In advanced hosting, enterprises are provided a complete
outsourced Internet hosting solution housed at the Internet hosting
company's data center. Advanced hosting includes provision of the Internet
server, software, network equipment and services and technical support. In
addition, advanced hosting often includes other value-added services such
as server clustering and load balancing, private networking options and
security management solutions.
THE OPPORTUNITY TO PROVIDE INTERNET HOSTING FOR SMALL- TO MEDIUM-SIZED
ENTERPRISES
According to a report by eMarketer, an online market research firm, there
were approximately 7.5 million businesses in the U.S. in 1999, of which 99.5%
were categorized as small- to medium-sized firms, I.E., firms with less than
1,000 employees. In addition, according to eMarketer, in 1998:
- only 28.0% of small businesses and 54.3% of medium-sized businesses were
connected to the Internet;
- only 4.2% of small businesses and 32.8% of medium-sized businesses
maintained an active Web site; and
- only 1.8% of small businesses and 13.3% of medium-sized businesses
conducted business online.
As these small- to medium-sized enterprises increase their activities in the
digital marketplace, Internet hosting services should experience significant
increased demand. To date, the market for Internet hosting services targeted to
small- to medium-sized enterprises has been largely underserved. Neither
shared-server nor colocation hosting effectively addresses these enterprises'
needs for dynamic, but cost-effective, Internet operations, yet this market
represents a significant opportunity. IDC estimates that, of an approximately
$13.0 billion colocation and dedicated Web hosting market that will exist in the
U.S. in 2003, small- to medium-sized enterprises will represent 90.1%, or
$11.7 billion, of the total.
29
<PAGE>
LINUX AND THE WEB
In assessing their needs for a reliable and cost-effective infrastructure to
support their Internet operations, many enterprises choose to implement hardware
and software products that use an open source platform, such as the Linux
operating system. The term "open source" refers to software which can be copied,
modified and distributed without payment of licensing or associated fees and
with few restrictions on use. As an open source platform, the source code for
the Linux operating system can be downloaded from the Internet and software
developers can write and sell applications based on the Linux software without
obligation to pay fees or royalties to any third party. The Linux code itself is
continuously maintained and improved by large communities of developers who
share information, code and suggestions. Additionally, the open source platform
for Linux allows end users to customize the Linux source code to meet their
specific requirements. The Linux platform offers companies several important
benefits, including:
- STABLE AND HIGH PERFORMANCE CHARACTERISTICS. The Linux operating system
has established a reputation as a stable platform that is designed to run
in continuous mode without interruption.
- COST-EFFECTIVE IMPLEMENTATION. Unlike proprietary operating systems, the
operating system for Linux is free to anyone and many core software
products, such as Linux database software, e-mail and Internet server
applications, also are available at no charge.
- GREATER INTEROPERABILITY. Due to Linux's growing popularity, equipment
manufacturers and software developers increasingly introduce products that
are compatible with the Linux platform, which, in turn, provides
enterprises with greater flexibility in selecting the most appropriate
hardware and software for their needs, including from leading vendors such
as IBM, Intel, Oracle, Red Hat and Sun Microsystems.
- REMOTE ADMINISTRATION CAPABILITY. The Linux operating system can be
administered through simple, quickly transmitted instructions, thereby
enabling operators to rapidly administer changes to the server from a
remote site over a modem without physically handling the server.
Linux has emerged as the leading operating system for the Internet. In an
April 1999 Web server survey conducted by Internet Operating System Counter
(leb.net/hzo/ioscount), which polls Web sites for operating system information,
Linux-based operating systems represented 31% of all Web server installations,
making Linux the most commonly used operating system for Web servers. According
to IDC, revenue or paid shipments of Linux grew faster than any other server
operating environment between 1997 and 1998, and again between 1998 and 1999.
THE MARKET OPPORTUNITY
For small- to medium-sized enterprises, the outsourcing of their hosting
needs to a provider of advanced Internet hosting services offers a
cost-effective means to establish and maintain dynamic Internet operations.
Advanced Internet hosting involves the dedication of a server, or series of
connected servers, to a single customer's Internet operations on an outsourced
basis. The customer pays for the use of the outsourced server or servers and the
services provided to it, including bandwidth, network monitoring, server
maintenance and technical support, without incurring the up-front capital cost
for purchasing and deploying the server hardware and software and the continuing
costs for maintaining a staff of technical personnel. IDC estimates that in the
United States the dedicated Web hosting market will grow from $566.0 million in
1998 to approximately $14.0 billion in 2003.
THE RACKSPACE.COM SOLUTION
We provide advanced Internet hosting services that offer enterprises a
cost-effective outsourcing solution to deploy and maintain their Internet
servers within a secure, state-of-the-art data center that provides
around-the-clock monitoring, security and technical support. Our month-to-month
service plans allow small- to medium-sized enterprises to rapidly establish
their online presence efficiently and
30
<PAGE>
effectively. Our service plans also provide our customers with a flexible means
to scale their Internet server and bandwidth requirements to accommodate rapid
changes in demand or pursue new e-business initiatives. Our solutions provide
our customers with the following benefits:
- FLEXIBLE, COST-EFFECTIVE SOLUTION. We offer end-to-end services that
provide a complete outsourced advanced hosting solution at a fraction of
the cost typically associated with the purchase of a server and network
hardware and its deployment within a data center. A purchase of a service
plan typically begins with the prospective customer using the
Rackspace.com Configurator on our Web site to custom configure, price and
order an Internet server and bandwidth package. We offer our services
under month-to-month contracts that permit the customer to adjust its
services without a long-term commitment. The short-term nature of the
customer's commitment can accelerate the customer's initial decision to
outsource its advanced hosting needs to us. Our month-to-month programs
also make it easy for a customer to increase the performance of its single
server or server cluster without incurring disposition fees or continuing
payment obligations on the prior server.
- RAPID DEPLOYMENT. We have designed our hosting solutions to support rapid
deployment, quick upgrades and fast modifications. We guarantee our new
customers that we will configure and launch their Internet servers in our
data center within 24 hours of order confirmation. Additionally, we are
able to increase a customer's bandwidth upon request, and we typically
complete hardware upgrades within 24 hours. In e-commerce, where rapid
time to market is a competitive advantage, our rapid deployment
capabilities enable our customers to move with confidence in establishing
and expanding their Internet operations.
- SCALABLE PRODUCT OFFERINGS. We offer our customers hosting solutions that
scale to meet their performance and Web traffic needs. Through this
scalability, our services minimize the costs and capital risks involved in
projecting future Internet hosting needs, including server obsolescence,
bandwidth oversizing and Web site outages.
- LINUX EXPERTISE. Managing the deployment of business-critical Internet
applications requires an in-depth understanding of the underlying
software, hardware and network technologies. We believe that we are the
leading provider of advanced Internet hosting services that uses Linux as
the primary operating system for the vast majority of its dedicated
servers. We have broad knowledge of the Linux operating system and
Linux-based applications. We use this expertise to offer comprehensive
services, including installation, configuration and stress testing of
hardware and software, content back-ups and system upgrades.
- HIGH LEVEL OF CUSTOMER SERVICE. We believe that our prospective customers
highly value customer service and technical support when selecting a
hosting provider. We form a support team for each customer to serve as a
single point of contact for that customer. Each team is composed of a
support specialist to handle routine inquiries and system specialists who
are available 24 hours a day, seven days a week. Customer service and
standard technical support are provided through e-mail and telephone
inquiries handled by people, rather than by automated call answering
systems.
- GLOBAL DATA CENTER INFRASTRUCTURE. We maintain a data center in our San
Antonio facility that uses Cisco networking equipment and the services of
multiple Internet backbone providers, consisting of Intermedia, Qwest, SBC
Communications, Time Warner Telecom and UUNET. Our data center offers
customers burstable bandwidth, which assures them that we will provide
sufficient bandwidth to address rapid, unexpected or continuing increases
in the demand for data from their housed servers. Our data center provides
around-the-clock monitoring, security and technical support, backup power
supply, and high-speed and redundant network connectivity to help ensure
uninterrupted high performance and data integrity. To further support our
global customer base, we intend to establish data centers in Europe and
Asia and an additional data center in the United States.
31
<PAGE>
STRATEGY
Our goal is to become the leading global provider of advanced Linux-based
Internet hosting services by capitalizing on the growth in Internet usage,
e-commerce and the outsourcing of hosting services. Our strategy for
accomplishing this goal includes the following key elements:
ESTABLISH RACKSPACE.COM AS THE LEADING LINUX HOSTING SOLUTION. Our
technicians have particular expertise in the implementation and support of
Linux-based Internet hosting services. As Linux continues to receive broad
acceptance as the platform of choice for Internet operations, we believe that
enterprises will increasingly view us as the authoritative provider of advanced
hosting solutions using the Linux platform. We intend to continue focusing
significant resources to further develop and expand our technical proficiency in
Linux and firmly establish our position as the authoritative provider of Linux
hosting solutions.
BUILD GLOBAL BRAND AWARENESS. The market for advanced Internet hosting
services is in the early stages of its development and we believe this market is
both unformed and uninformed. Therefore, we believe a significant opportunity
exists for us, as a leader in this industry, to build brand identity as the
premier provider of these services. We intend to inform prospective customers
about the benefits of our services by expanding our involvement in trade shows,
seminars and workshops, and by conducting marketing programs with our channel
partners to develop association of our brand name with their more recognizable
names. In this manner, we believe that we will form greater demand for our
services that, in turn, will broaden our customer base worldwide. We also intend
to generate greater awareness of our brand and service offerings by continuing
to engage in technology tradeshows and conferences, outbound telemarketing,
direct mail advertisements, targeted advertisements on Web sites and searches
directed at hosting services, advertisements in business and technology
publications and regional public relations activities. We will pursue these
efforts in defined regions in which Internet adoption by enterprises occurs at a
rapid pace, such as in North America, Western Europe and select Pacific Rim
locations, including Australia, Hong Kong, Japan, Singapore and Taiwan.
CAPITALIZE ON INTERNATIONAL MARKET OPPORTUNITIES. Customers with principal
offices outside of the United States represented % of our customers as of
March 31, 2000. Because the Internet infrastructure has been rapidly established
in the U.S. and intense competition among bandwidth providers in the U.S. market
has contributed to a relatively lower cost environment than in other countries,
many international enterprises elect to maintain their Internet servers in the
U.S. In addition, because sites maintained by international enterprises are
accessed in significant part by U.S.-based Internet users, the placement of an
Internet server in the U.S. enables rapid delivery of content to these users.
Linux is also a popular platform for international enterprises due to its
ability to be administered through short commands from any remote site over a
modem connected to the Internet. We intend to establish data centers in markets
outside of the U.S., beginning with a data center in London later this year, as
the Internet infrastructure becomes more developed, and pricing among bandwidth
providers becomes more competitive, in those markets. We believe that our
experience in providing advanced Internet hosting services in the U.S., combined
with our technical expertise, brand recognition and focus on Linux, will enable
us to compete favorably with other hosting services providers in local markets
across the world.
UTILIZE STRATEGIC RELATIONSHIPS TO EXPAND MARKET OPPORTUNITIES. A key
element of our sales and marketing strategy involves the formation of strategic
relationships with third parties that select, or influence the selection of,
Internet hosting service providers for end-user enterprises. To this end, we
recently established a strategic relationship with Red Hat for proposed joint
marketing and product development and with Perot Systems to co-market our
services and generate referrals. We will continue to aggressively pursue
relationships with other system integrators, e-business consultants, application
service providers, Web designers and independent software vendors, particularly
Linux software vendors. We believe that these relationships will enable us to
promote greater awareness of our products and services with end-user enterprises
through co-marketing arrangements. We intend to
32
<PAGE>
continue developing relationships with channel partners in key markets around
the world in a collaborative and noncompetitive manner.
OFFER A BROAD RANGE OF PRODUCTS AND SERVICES TO SERVE THE GROWING NEEDS OF
OUR CUSTOMERS. Our advanced Internet hosting services are designed to
accommodate the needs of our customers by enabling continuous upgrades of server
hardware, bandwidth service and server management options to support the needs
of our customers as they progress in the development of their Internet
operations. We intend to further expand the products and services that we offer
to our global customer base. For example, we intend to establish an additional
data center in the U.S. to support redundant data mirroring and remote backup.
Furthermore, we intend to establish and expand our relationships with providers
of products and services that are complementary to our services in order to
offer our customers additional enhanced services. To this end, we have
established strategic relationships with Red Hat proposing to provide product
development and application testing expertise, with Trident Data Systems to
provide advanced security solutions, with Cisco Systems to provide enhanced
networking solutions, with SiteLite to provide advanced database administration
and monitoring services for the Oracle and Microsoft SQL database applications
and with Mercantec and Akopia to provide e-commerce solutions.
LEVERAGE CUSTOMER SERVICE CAPABILITIES. We intend to continue to devote
significant resources to expand and further develop our customer service and
technical support capabilities. We believe that we offer superior customer
service and technical support, which increasingly will be critical factors for
generating new customer referrals, retaining our existing customers and creating
barriers to entry for emerging competitors in our market. We recently launched
the Rackspace.com Wizard at our Web site, which simplifies the process of
setting up a new Internet-domain configuration. We also intend to expand our
online reporting of server performance for our customers so that they can
anticipate the need for a server upgrade or replacement, or an increased
bandwidth service plan, to remain cost-effective in the use of our services as
they grow their online operations.
SERVICES
Our primary service offering consists of productized, end-to-end, turnkey
hosting solutions that are targeted to small- to medium-sized enterprises
enabling them to establish, maintain and expand their Internet operations. Each
advanced Internet hosting solution consists of a custom-built outsourced server
that is housed within our data center. Each outsourced server is dedicated to a
single customer for that customer's Internet hosting use. All of our hosting
service plans also include:
- connectivity to a high-speed network designed with multiple redundant
systems;
- customer-selected operating system software and standard Internet
applications, including e-mail, file transfer protocol and Web server
applications;
- around-the-clock, or 24X7, monitoring, security and technical support;
- remote access administration and management reporting tools;
- sophisticated monitoring and alert notification;
- uninterrupted power supply through a back-up diesel generator that is
capable of supporting the data center's operation should primary power be
unavailable;
- air-conditioned, and humidity- and static-controlled environment; and
- multiple security measures to control physical access to servers within
the data center.
We also offer customers enhanced services separate from our advanced Internet
hosting plans. Please see "--Enhanced Services" below for a description of these
services.
33
<PAGE>
EASE OF DEPLOYMENT OF OUR ADVANCED HOSTING SERVICES
We have made the configuration of a customized Internet server and the
selection of an advanced Internet hosting service package a simple, quick and
automated process. For most of our prospective customers, the process begins
with a visit to our Web site and, in particular, the use of our proprietary
Rackspace.com Configurator. The following is the main screen that a user sees
when accessing the Rackspace.com Configurator for a Linux-based hosting package:
[SCREEN SHOT FROM THE COMPANY'S RACKSPACE.COM CONFIGURATOR WEB PAGE]
As indicated in the pull-down menus shown in the boxes above, a prospective
customer can select from multiple options underlying each category on the
Rackspace.com Configurator set-up page. For example, the customer can select a
microprocessor with performance capability ranging from a single 350 MHz
processor to dual 750 MHz processors. Other hardware specifications,
custom-configured by the customer, include memory requirements, selection of one
or more hard drives and interfaces, and optional selection of a tape drive or a
redundant array of independent disks, commonly referred to as RAID,
configuration. The Rackspace.com Configurator also allows prospective customers
to choose a service plan consistent with their needs. Service options include
the choice of operating system software, bandwidth ranging from two gigabytes to
five terabytes of data transfer per month with bandwidth above that amount
purchased on a burstable, or as-used, basis, one or more Internet addresses,
system management services, and tape backup and rotation services. Upon the
online submission of a selected configuration, the Rackspace.com Configurator
instantly generates a price quote for both the monthly service fee and the
set-up fee. Thus, the prospective customer can readily explore various
alternatives to reach a desired price point as well as illustrate scaling
options.
Following confirmation of an order for a service plan, a Rackspace.com
technician will custom configure the server in our San Antonio facility and then
install the server in our data center. Following performance testing of the
installed server, we notify the customer that its server is ready for
downloading of the customer's software applications. We guarantee that assembly
and deployment will be completed within 24 hours of order confirmation.
Once deployed, our customer service and technical support personnel provide
server management services to support the uninterrupted operation of the server
within our data center. Customer service and technical support include
around-the-clock monitoring, technical support, automated interval checking of
system ports and prompt replacement of defective components without additional
charge.
ENHANCED SERVICES
- PRIVATENET. Our PrivateNet service allows customers with multiple servers
to operate their own private internal network among those servers. This
feature enables these multiple servers to exchange data exclusively among
each other, without transmission over the public Internet. PrivateNet
offers a number of benefits to customers with multiple server
configurations, including (1) enhanced security through the separation of
internal traffic from the public Internet, (2) improved server performance
by separating internal processes, such as database access, from external
processes, such as requests for data received over the Internet, and
(3) reduced cost as there is no charge for bandwidth used for internal
PrivateNet transmissions, in contrast to billable transmissions between
servers and the public Internet.
- THROUGHPUT CLUSTERING. This service provides a higher level of service for
customers with multiple servers. By installing a load-balancing switch
between the Internet backbone connection and a server array, data requests
can be diverted among servers to prevent server overload while providing
redundant storage and processing capability.
- DATABASE MONITORING. Through our relationship with SiteLite, we offer our
customers database administration, monitoring and support services for
Oracle and Microsoft SQL database solutions. Although these enhanced
services are billed by us, SiteLite provides the services
34
<PAGE>
directly to the customer. SiteLite services are offered as an option for
our customers through the Rackspace.com Configurator.
- E-COMMERCE SOLUTIONS. We partner with Mercantec and Akopia to offer our
customers shopping cart, merchant account and credit card processing
features and functions for their Web sites' e-commerce initiatives. These
e-commerce options are offered to our customers through the Rackspace.com
Configurator.
- SECURITY AUDITING SERVICES. Through our partnership with Trident Data
Systems, we offer customized security auditing services to our customers.
As part of these services, we work with Trident to identify, assess and
propose corrections to security vulnerabilities on the customer's server.
In addition, at the customer's request, we work in conjunction with
Trident to implement solutions to address the identified vulnerabilities.
MANAGED COLOCATION SERVICES
Through our managed colocation services, customers can locate their own
Internet servers within our world-class data center, and outsource the
monitoring and technical support of their servers to us. The selection of a
colocation service plan can be made online at our Web site.
PRICING
Our hosting services generally are billed on a monthly basis, with a
one-time initial setup fee charged at the time the server is configured. Our
current customers' monthly service plans range from approximately $200 to $6,500
per month, with the amount varying according to the customer's server
specifications, number of servers, bandwidth requirements and selection of
enhanced services. The sample screen from the Rackspace.com Configurator
presented on page 34 shows typical selections for a small- to medium-sized
enterprise that is commencing Internet operations with a Linux-based server.
To further simplify the purchasing process for our customers, all service
plans, including features and pricing, are described on our Web site. This
enables our customers to evaluate the various service offerings without
contacting one of our sales representatives, which in turn can shorten the sales
cycle, reduce our customer acquisition costs and ultimately enhance customer
satisfaction.
CUSTOMERS
We provide our services to end-user businesses, system integrators, Web site
development firms and other organizations. Our customers are located in over 50
countries around the world, including in North America, Europe and select
Pacific Rim locations. As of March 31, 2000, our data center housed over
Internet servers for more than customers. Our customers are comprised
primarily of small- to medium-sized enterprises. As a result, our top 10
customers, in the aggregate, represented less than 15% of our revenues in 1999,
and no single customer represented more than 3% of our revenues in 1999.
STRATEGIC RELATIONSHIPS
- RED HAT. In March 2000, we executed a memorandum of understanding with Red
Hat for a proposed joint marketing arrangement. The joint marketing
proposal contemplates that we will jointly promote our respective products
and services by entering into a "Premier Partner" relationship, which will
allow each party to place its marks and information about its products and
services on the other party's Web site. As a Premier Partner of Red Hat,
we will have prominent placement as an advanced hosting vendor within the
Open Source Marketplace to be launched by Red Hat later this year. In
addition, the proposal contemplates that Red Hat will distribute
Rackspace.com information with its version 7.0 software, which is
scheduled for release later this year. We also propose to enter into a
strategic alliance agreement with Red Hat under which we will agree with
Red Hat to jointly promote each other's products and
35
<PAGE>
services through non-Internet marketing initiatives. The proposed
arrangement contemplates our payment of an upfront fee and customer
referral fees to Red Hat. In addition, Red Hat invested $2.0 million in
our March 2000 private placement.
- PEROT SYSTEMS. In March 2000, we entered into a distribution agreement
with Perot Systems. This agreement provides for (1) customer referrals for
our services by Perot Systems, (2) the establishment of a hot-link between
the parties' Web sites, (3) the placement of the Rackspace.com
Configurator on Perot Systems' primary Web site and (4) the creation of a
joint marketing program. We have agreed to pay Perot Systems a fee based
upon revenues derived by us under this agreement.
- SUN MICROSYSTEMS. We serve as an Embedded Solutions Provider of the
Microelectronics Division of Sun Microsystems. Under this arrangement, we
custom build servers and provide advanced hosting solutions based on Sun's
Solaris platform. As Solaris is an established platform for many
enterprise applications, we believe that this relationship will complement
our ability to support our customers' needs as they expand their
implementation of enterprise applications in Internet-based internal
networks, or intranets.
- OTHER STRATEGIC RELATIONSHIPS. In addition, we have developed strategic
relationships with Trident Data Systems, Mercantec, SiteLite and Akopia to
provide enhanced products and services to our customers. For further
information, see the section above captioned "--Services--Enhanced
Services."
MARKETING AND SALES
Our marketing efforts are intended to build awareness of our services,
create channel partner interest and generate end-user demand. Our marketing
activities include participation in technology trade shows and conferences,
outbound telemarketing, direct mail advertisements, targeted advertisements on
Web sites and searches that are directed at hosting services, advertisements in
business and technology publications and regional public relations activities.
Additionally, we intend to leverage our current and future strategic
relationships through co-marketing and cross-selling campaigns. Our current
arrangements with Red Hat, Perot Systems and Sun Microsystems contemplate
co-marketing activities that we anticipate will be rolled-out over the next
12 months.
As part of our marketing and sales efforts, our Rackspace.com Configurator
enables our prospective customers to configure, price and order our services
online. The Rackspace.com Configurator complements our marketing efforts by
supporting our channel partners as well as our end users when they have
questions concerning our services or want to begin service. We believe that the
Rackspace.com Configurator enables our channel partners and customers to
investigate and choose various configuration options and prices in real time.
We employ both a direct and indirect sales model to generate sales of our
advanced Internet hosting services. Direct sales are conducted by sales
representatives in our San Antonio, Austin, Silicon Valley and London sales
offices who field calls generated from referrals and our marketing activities.
As of March 31, 2000, our direct sales force consisted of sales
representatives. We intend to expand both our outside and inside sales forces as
well as our telemarketing activities over the next six months. We also receive
direct sales through our Web site via the Rackspace.com Configurator.
Our indirect sales efforts focus on the establishment of relationships with
channel partners, including:
- independent software vendors, such as Red Hat;
- information technology service providers, including Perot Systems and
other international and regional system integrators and e-business
consultants;
- hardware manufacturers, such as Sun Microsystems;
36
<PAGE>
- application service providers; and
- Web site designers and developers.
Because we focus on offering advanced Internet hosting services and,
therefore, do not provide application development or system integration
services, we believe we are not perceived by our channel partners as competitive
to them. Typically, these relationships are collaborative, with our channel
partners focusing on hardware design and manufacturing, software development,
Web site design, development and system integration, while we address the
hardware deployment and hosting of the end user's Internet operations. As of
March 31, 2000, we have established relationships with channel partners.
We believe that a significant percentage of our customers will select our
services due to a referral from an existing customer or channel partner.
Accordingly, we intend to continue to focus significant resources to offer
superior customer service and technical support to attain high levels of
customer satisfaction which we believe will lead to future referrals. We believe
that referrals, combined with our marketing efforts to establish the
Rackspace.com brand, will enable us to attract a significant number of new
customers for our hosting services.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
We believe a critical element of our customer service is providing a high
level of responsiveness and technical expertise within our customer service and
technical support organizations. To this end, each customer is assigned a
customer support team that consists of a support specialist and several systems
specialists. The support specialist generally addresses routine inquiries
concerning billing, network performance, server upgrade status and similar
items. Inquiries that are more technically oriented are referred to a systems
specialist. In addition, we recently introduced the Rackspace.com Wizard at our
Web site. Through use of the Wizard, a channel partner or customer can analyze
the configuration of the server system used by the customer to assist the
customer in setting up user accounts, adding new Web sites and expanding domain
name server entries.
All systems are monitored and maintained on a 24X7 basis. Monitoring
includes the transmission of test signals to each server in five-minute
intervals to assure that the server is responding to incoming data requests. In
many instances we proactively remedy performance issues before they develop into
problems for our customers. Furthermore, we provide customer service and
technical assistance on a 24X7 basis via telephone and e-mail. Due to the broad
scope of our international operations, we maintain a customer service and
technical support staff that is proficient in several languages, including
Dutch, French, German and Spanish. We strive to respond within 15 minutes or
less to reports of business-critical incidents and to less critical incidents
within a two-hour period on an internally-prioritized basis.
Our customer care system provides support personnel with timely online
information regarding the status of all set-up and support activities.
Additionally, support personnel have access to information regarding the sales
history and current sales activities for each customer account. This integration
of support and sales systems enables us to allocate resources with a full
knowledge of both new business opportunities and any customer support issues. We
believe that this system will support substantially greater economies of scale
and quality of service across our customer service and technical support
department.
DATA CENTER AND NETWORK INFRASTRUCTURE
We currently operate a highly secure, fault-tolerant data center consisting
of up to approximately 12,000 dedicated square feet ready for expansion. This
data center can support up to 10,000 servers in a 24X7 hosted environment. Our
network is certified as a Cisco-powered network and, accordingly, most of our
networking equipment is supplied by Cisco Systems. We believe that our current
location is an advantageous site for our data center due to the general lack of
earthquake activity and other
37
<PAGE>
natural calamities affecting the local region. We intend to establish a data
center presence in London in the second quarter of 2000 to further support our
customers in Europe.
The security controls, physical infrastructure and network of our data
center have been designed to support the rigorous requirements of a robust
Internet-serving platform, including:
- high levels of physical security measures to prevent unauthorized access
to the data center;
- redundant and diverse systems to maintain electrical power, air
conditioning and network operation; and
- high performance Internet connectivity.
DATA CENTER SECURITY
We maintain three levels of physical security to restrict unauthorized
access to the data center. First, the perimeter of our building is secured with
a passkey protection system. Security guards are stationed on a 24X7 basis on
the ground floor of our building to control use of the elevators and to
investigate suspicious activities. Surveillance cameras are also positioned to
enable security guards to monitor data center visits. Second, the elevator to
the data center floor, along with the doors at the elevator landing, are
controlled by additional passkey systems. Finally, the data center uses a
biometric hand scanner identification system to limit entrants to people who
have received pre-authorization to access the data center.
REDUNDANT SYSTEMS
Operation of servers in our data center is supported by multiple and diverse
redundant systems. The primary utility power is supported by an on-site diesel
generator which can generate sufficient power to maintain uninterrupted
operation of the data center until primary power is restored. Our air
conditioning system also has redundant back-up units. Cabling is run diversely
within the data center to overcome problems that may occur due to mechanical
failure and electrical interference. Multiple fiber transport connections enter
our facility at different building penetration points to prevent network outages
caused by construction or other events that are outside of our control.
Additionally, we use five Internet backbone providers to help ensure that
servers housed within our data center will remain connected to the Internet
should any one primary supplier fail to maintain connectivity. We also intend to
establish an additional data center in the U.S. to expand our available capacity
and maintain a redundant data site that is geographically distant from our
primary data center in San Antonio.
HIGH PERFORMANCE INTERNET CONNECTIVITY
We designed our network to provide high throughput and low latency by
deploying high performance routing and switching equipment from Cisco Systems.
With one OC-3 and two OC-12 fiber connections, our data center provides
approximately 1.5 gigabits per second of available transport connectivity. We
attempt to maintain low utilization rates to reduce congestion and to absorb
bursts of traffic that our customers' applications may produce. As our San
Antonio data center is located near the half-way mark between the major U.S.
public peering points on the West Coast and East Coast, we have access to both
peering points without being dependent on either of them to route our traffic.
Additionally, since we have five Internet backbone providers, we often are able
to route traffic to the closest backbone termination point that is available to
us without traversing congested public exchange points.
COMPETITION
The markets in which we operate are highly competitive, and competition is
increasing because few apparent substantial barriers to entry exist in the
Internet hosting and colocation markets. Although it is impossible to quantify
our relative competitive position in our market, many of our competitors have
substantially greater financial, technical and marketing resources, larger
customer bases, longer
38
<PAGE>
operating histories, greater name recognition and more established relationships
in the industry than we have. We expect that we will face competition from
existing competitors as well as new market entrants in the future. The primary
competitive factors in our market are:
- quality of service, including network capability, scalability, reliability
and functionality;
- customer service and technical support;
- variety of services and products offered;
- technical expertise in developing advanced Internet hosting solutions;
- price;
- brand name recognition;
- Internet system engineering and technical expertise;
- timing of introductions of value-added services and products;
- network security;
- financial resources; and
- conformity with industry standards.
Our current and potential competitors vary by size and service offerings and
by geographic region. These competitors may elect to partner with each other or
with focused companies like us to deliver service on Linux or other popular
operating system platforms. They include:
- other providers of advanced Internet hosting services, including Data
Return, Digex, GTE Internetworking, MCI WorldCom (including UUNET) and
USWeb/CKS Group;
- Internet and application hosting service providers, such as Critical Path,
Interliant, Navisite, USINTERNETWORKING and Verio;
- colocation providers, including AboveNet, Digital Island, Exodus,
GlobalCenter and Globix;
- local, regional and international Internet service providers, such as
AppliedTheory, Concentric, EarthLink and PSINet;
- original equipment manufacturers of servers that have recently introduced
hosting services for purchasers of their server products, including Dell
and Intel;
- local, regional and international telecommunications companies, such as
AT&T, British Telecommunications, Cable & Wireless, Qwest, Nippon
Telegraph and Telephone and Telecom Italia, and the regional Bell
operating companies, including Bell Atlantic and U S WEST; and
- system integrators and large information technology outsourcing companies,
such as Andersen Consulting, EDS, IBM, Oracle and PricewaterhouseCoopers.
We believe that our expertise and primary focus on providing advanced
Internet hosting services based on the Linux platform enable us to differentiate
ourselves from our competitors. We also believe that our emphasis on customer
service, rapid deployment, technical support, and our ability to maintain a
service delivery infrastructure that is designed to parallel or surpass the
performance provided by Internet backbone providers and other telecommunications
carriers will further differentiate us from our competitors. Additionally, we
focus our marketing and sales methodologies on enabling customers to
custom-configure a server that best addresses their short-term needs and to
deploy that server within our data center within 24 hours, which ultimately
enhances overall customer satisfaction with our services.
INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in our data, applications and
39
<PAGE>
services. We have no patented technology that would bar competitors from our
market. We are in the process of filing federal and international registrations
for the trademark "Rackspace.com." In addition, "PrivateNet," "Leader in Linux,"
"Rackspace.com Configurator" and "Rackspace.com Wizard" are unregistered
trademarks of our company.
GOVERNMENT REGULATION
As a provider of advanced Internet hosting services, we are not currently
subject to direct federal, state or local government regulation, other than
regulations applicable to businesses generally. We could also, under some
circumstances, become subject to foreign laws and regulations.
To date, the number of laws and regulations with direct applicability to
Internet-related products and services has been relatively limited. Congress
enacted the "Digital Millennium Copyright Act," which became effective in
October 1998. The Digital Millennium Copyright Act provides a limitation on
liability of online service providers for copyright infringement for
transmitting, routing or providing connections, transient storage, caching or
storage at the direction of a user, if the service provider had no knowledge or
awareness that the transmitted or stored material was infringing and meets other
specified conditions. Since this law has not been extensively interpreted by
U.S. courts and does not apply outside of the U.S., we are unsure of how it will
be applied to limit any liability we may face in the future for any possible
copyright infringement or copyright-related issues. This law also requires
service providers to follow "notice and take-down" procedures and to meet other
conditions in order to be able to take advantage of the limitation on liability.
We have not yet implemented these procedures, met these conditions or evaluated
the cost of complying with them. However, our customers are subject to an
acceptable use policy which prohibits them from transmitting, storing or
distributing material on or through any of our services which, in our sole
judgment is (1) in violation of any U.S. federal, state or local law or
regulation, (2) fraudulent online marketing or sales practices or
(3) fraudulent customer information, including identification and payment
information. Although this policy is designed to promote the security,
reliability and privacy of our systems and network, we cannot be certain that
our policy will accomplish this goal or effectively limit our liability.
Despite enactment of the Digital Millennium Copyright Act, the law relating
to the liability of online services companies and Internet access providers for
information carried on or disseminated through their networks remains largely
unsettled. It is possible claims could be made against online services companies
and Internet access providers under both U.S. and foreign law for defamation,
obscenity, negligence, copyright or trademark infringement, or other theories
based on the nature and content of the materials disseminated through their
networks. Several private lawsuits seeking to impose liability upon online
services companies and Internet access providers are currently pending.
Application of existing, modified or new legislation or regulations to our
services and products could materially and adversely affect our business.
Although sections of the Communications Decency Act of 1996 that proposed to
impose criminal penalties on anyone distributing indecent material to minors
over the Internet were held to be unconstitutional by the U.S. Supreme Court,
similar laws may be proposed, adopted and upheld. The nature of future
legislation and the manner in which it may be interpreted and enforced cannot be
fully determined and, therefore, legislation similar to the Communications
Decency Act could subject us and/or our customers to potential liability, which
in turn could harm our business. The adoption of any of these types of laws or
regulations might decrease the growth of the Internet, which, in turn, could
decrease the demand for our services or increase our cost of doing business or
in some other manner harm our business.
Due to the increasing popularity and use of the Internet, it is likely that
a number of additional laws and regulations with respect to the Internet may be
adopted in foreign jurisdictions, or at the federal, state and local levels,
covering issues such as user privacy, freedom of expression, pricing,
characteristics and quality of products and services, taxation, advertising,
intellectual property rights,
40
<PAGE>
information security, access fees and the convergence of traditional
telecommunications services with Internet communications. In addition,
applicability to the Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, taxation, libel,
obscenity and personal privacy is uncertain. The vast majority of these laws
were adopted prior to the advent of the Internet and related technologies and,
as a result, do not contemplate or address the unique issues of the Internet and
related technologies. The adoption or application of any laws or regulations of
this type might decrease the growth of the Internet, which in turn, could
decrease the demand for our services, increase the cost of doing business or in
some other manner harm our business.
EMPLOYEES
As of March 31, 2000, we had employees. None of our employees is
covered by collective bargaining agreements. We believe that our relations with
our employees are good.
FACILITIES
Our corporate headquarters are located in San Antonio, Texas and consist of
approximately 16,600 square feet of office space that is leased until
February 2003. We also maintain sales offices in Austin, Texas, Santa Clara,
California and London, with plans to expand our operations in London by
establishing a data center presence in the second quarter of 2000.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
41
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth information concerning our executive
officers, directors and key employees as of March 27, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- -------- -----------
<S> <C> <C>
Graham M. Weston....................... 36 Chief Executive Officer and Director
Morris A. Miller....................... 33 President, Chief Operating Officer and Director
Quincy J. Lee.......................... 28 Chief Financial Officer and Vice President
Andrew May............................. 46 Vice President, Sales and Marketing
John J. Miksa.......................... 45 Vice President, Channel Sales and Strategic Alliances
Richard K. Yoo......................... 25 Chief Technology Officer
David E. Bryce......................... 28 Vice President, Operations
Patrick R. Condon...................... 24 Vice President, Business Development
Dirk J. Elmendorf...................... 24 Vice President, Product Development
</TABLE>
- ------------------------
GRAHAM M. WESTON has served as our Chief Executive Officer since July 1999
and as a director since March 2000. Prior to joining us, Mr. Weston was a
founder and principal at Assessment Technologies, Inc., an ad valorem tax
consulting firm. Mr. Weston is also Chief Executive Officer of Weston
Properties, LLC, a real estate company owning industrial and office properties
in Texas. Mr. Weston received a B.S. from Texas A&M University.
MORRIS A. MILLER has served as our Chief Operating Officer since July 1999
and as our President and a director since March 2000. From March 1997 to
June 1999, Mr. Miller was a managing director for Knightsbridge, LC, an
investment management firm. From July 1995 to March 1997, Mr. Miller was a
principal in Curtis Hill Publishing Company, a legal software publishing
company, which was subsequently acquired. Mr. Miller received a B.A. in
psychology from The University of Texas at Austin and a J.D. from Southern
Methodist University.
QUINCY J. LEE has served as our Chief Financial Officer and Vice President
since September 1999. From August 1998 to March 1999, Mr. Lee served as a Vice
President of Finance of FlashNet Communications, Inc., an Internet service
provider. From September 1997 to August 1998, Mr. Lee worked as an assistant
portfolio manager for Kleinheinz Capital, Inc., an investment management firm.
Prior to this time, Mr. Lee worked with the corporate finance group of
Deloitte & Touche, LLP. Mr. Lee received a B.B.A. in accounting and a B.A. in
economics from The University of Texas at Austin and an M.B.A. from Rice
University.
ANDREW MAY has served as our Vice President, Sales and Marketing since
November 1999. From February 1998 to November 1999, Mr. May served as the
Worldwide Marketing Director for NCR's Channel Delivery Systems Business.
Mr. May also managed NCR's International Public Relations for the Financial
Solutions Group. Mr. May served as Marketing Director for Ernst & Young LLP's
London-based consulting practice from February 1995 to February 1998.
JOHN J. MIKSA has served as our Vice President, Channel Sales and Strategic
Alliances since December 1999. From June 1997 to November 1999, Mr. Miksa was
responsible for business development for application outsourcing at Computer
Sciences Corporation, a consulting firm. From July 1990 to February 1997,
Mr. Miksa held various management positions with General Electric Information
Services and AMR Corporation, including professional services, marketing, sales
and global channel development. Mr. Miksa received a B.S. in computer sciences
from the University of West Florida.
RICHARD K. YOO is one of our co-founders and has served as our Chief
Technology Officer since December 1998. From January 1998 to December 1998,
Mr. Yoo was a co-founder and principal of Cymitar Technology Group, Inc., an
information technology consulting company. From January 1996 to
42
<PAGE>
December 1997, Mr. Yoo was a principal of Cymitar Network Systems, a
partnership. Mr. Yoo attended Trinity University from September 1993 to
February 1996.
DAVID E. BRYCE has served as our Vice President, Operations since
November 1999. From January 1995 to November 1999, Mr. Bryce founded and served
as a principal for USA EnviroClean, Inc, a commercial services company. While at
USA EnviroClean, Mr. Bryce also co-founded and consulted with the Pearl Group, a
consulting firm. Mr. Bryce received a B.A. in business administration from
Ambassador University.
PATRICK R. CONDON is one of our co-founders and has served as Vice
President, Business Development since December 1998. Mr. Condon was a co-founder
and principal in Cymitar Technology Group, Inc. from June 1998 to
December 1998. From May 1997 to June 1998, Mr. Condon was involved in strategic
consulting for high technology clients for Focus, Inc., a management consulting
company. From February 1996 to January 1997, Mr. Condon worked for Global
Village Communication, Inc., a communications hardware company. Mr. Condon
received a B.A. in finance from Santa Clara University.
DIRK J. ELMENDORF is one of our co-founders and has served as Vice
President, Product Development since December 1998. From December 1997 to
December 1998, Mr. Elmendorf was a principal in Cymitar Technology Group, Inc.
From August 1996 to December 1997, Mr. Elmendorf worked for Cymitar Network
Systems. Mr. Elmendorf received a B.A. in international economics from Trinity
University.
BOARD COMPOSITION
Our authorized board of directors is fixed at seven members, with five
vacancies existing. Our certificate of incorporation provides that at the first
annual meeting of stockholders following this offering, our board of directors
will be divided into three classes, Class I, Class II and Class III, each of
whose members will serve for a staggered three-year term.
Any additional directorships resulting from an increase in the authorized
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the directors. Upon
expiration of the term of a class of directors, the directors in that class will
be elected for three-year terms at the annual meeting of stockholders in the
year in which their term expires. With respect to each class, directors' terms
are subject to the election and qualification of their successors, or their
death, resignation or removal. This staggered classification of the board of
directors may have the effect of delaying or preventing changes in control of
our company or our management.
BOARD COMMITTEES
We will establish an audit committee of the board prior to the effective
date of the registration statement for this offering. This committee will review
and monitor our internal accounting procedures and the results and scope of the
annual audit and other services provided by our independent accountants. The
audit committee also will consult with our management and our independent
auditors prior to the presentation of financial statements to stockholders and,
as appropriate, will initiate inquiries into aspects of our financial affairs.
In addition, the audit committee will be responsible for considering and
recommending the appointment of, and reviewing fee arrangements with, our
independent auditors.
We also will establish a compensation committee concurrently with the
formation of the audit committee. The compensation committee will recommend,
review and oversee the salaries, benefits and stock plans for our directors,
executive officers and other employees. The compensation committee also will
administer our stock plans.
DIRECTOR COMPENSATION
Other than reimbursing directors for customary and reasonable expenses of
attending board of director or committee meetings, we do not intend to pay cash
compensation to our directors. Under
43
<PAGE>
our 2000 Stock Incentive Plan, each non-employee board member who first joins
our board after , 2000 will automatically receive a grant of an option to
purchase shares of common stock at the time of his or her commencement of
board service. In addition, on the date of each annual stockholders meeting
beginning in 2001, each non-employee member of the board of directors who is to
continue to serve as a non-employee board member will be automatically granted
an option to purchase shares of common stock. See "--2000 Stock Incentive
Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a compensation committee during 1999. During that period,
the general partner of Rackspace, Ltd. made decisions regarding compensation to
our executive officers. None of our executive officers serves on the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of our board of directors or our
compensation committee.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of our directors to us
or our stockholders for breaches of the directors' fiduciary duties to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws authorize indemnification of directors and officers to
the fullest extent permitted by Delaware law. We plan to maintain directors' and
officers' liability insurance and will enter into indemnification agreements
with all of our directors and executive officers.
EXECUTIVE COMPENSATION
Our chief executive officer received no compensation during the year ended
December 31, 1999. No executive officer had annual compensation in excess of
$100,000 during the year ended December 31, 1999.
EMPLOYMENT AGREEMENTS
We require each of our employees to enter into confidentiality agreements
prohibiting the employee from disclosing any of our confidential or proprietary
information.
1999 UNIT OPTION PLAN
As of March 27, 2000, options to purchase 432,897 limited partner interests
were outstanding under our 1999 Unit Option Plan. Upon the completion of this
offering, no additional options will be granted under the plan and all
outstanding options will be converted, on a one-for-one-basis, into the right to
purchase shares of our common stock. Currently outstanding options under this
plan will remain outstanding until exercised or until the options terminate or
expire in accordance with their terms.
The administrator of the 1999 Unit Option Plan is the general partner of
Rackspace, Ltd. The administrator of the plan may modify the plan, make
interpretations and adopt rules and regulations for carrying out the plan. The
plan may be terminated or amended at any time. However, termination or amendment
will not adversely affect rights granted under the plan prior to the amendment
or termination.
Options generally vest one-third on each of the anniversary dates following
the grant date. The optionees forfeit their options if they compete with us at
any time while the option remains outstanding. Any options granted under this
plan will expire on or before seven years from the date of the grant.
The options are granted at fair market value which, unless otherwise
determined in good faith by the administrator pursuant to its powers set forth
in the plan, is deemed to equal the greater of (1) $50,000,000 divided by the
number of limited partner interests outstanding, (2) the last purchase price in
an arms' length transaction closed within 120 days prior to the date the option
is granted, or
44
<PAGE>
(3) our annualized revenue based on our revenues for the previous month as the
basis for the determination times 10, and then divided by the limited partner
interests then outstanding.
The options terminate to the extent not vested at the time the optionee is
no longer a full-time employee. If the option is vested and exercisable, it must
be exercised within 60 days of termination of the optionee's employment. If
vested and not exercisable, the option terminates on the 120th day following the
last day of the optionee's employment. Options are not transferable, other than
upon the death or under the will of the holder or by intestate succession.
2000 STOCK INCENTIVE PLAN
The 2000 Stock Incentive Plan is intended to serve as the successor equity
incentive program to our 1999 Unit Option Plan. The 2000 Stock Incentive Plan
became effective on , 2000.
We have authorized shares of common stock for issuance under the 2000
Stock Incentive Plan. The share reserve will automatically be increased on the
first trading day of January each calendar year, beginning in January 2001, by a
number of shares equal to 1% of the total number of shares of common stock
outstanding on the last trading day of the immediately preceding calendar year,
but no such annual increase will exceed shares. However, in no event may
any one participant in the 2000 Stock Incentive Plan receive option grants or
direct stock issuances for more than shares in the aggregate per calendar
year.
The 2000 Stock Incentive Plan has four separate programs. The first program
is the discretionary option grant program under which eligible individuals in
our employ or service, including officers, non-employee board members and
consultants, may be granted options to purchase shares of our common stock. The
second program is the stock issuance program under which eligible individuals
may be issued shares of common stock directly, through the purchase of such
shares or as a bonus tied to the performance of services. The third program is
the salary investment option grant program under which executive officers and
other highly compensated employees may elect to apply a portion of their base
salary to the acquisition of special below-market stock option grants. The
fourth program is the automatic option grant program under which option grants
will automatically be made at periodic intervals to eligible non-employee board
members.
The discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine:
- which eligible individuals are to receive option grants or stock
issuances;
- the time or times when option grants or stock issuances are to be made;
- the number of shares subject to each grant or issuance;
- the exercise or purchase price for each grant or issuance;
- the status of any granted option as either an incentive stock option or a
non-statutory stock option under the federal tax laws;
- the vesting schedule to be in effect for the option grant or stock
issuance; and
- the maximum term for which any granted option is to remain outstanding.
The committee will also select the executive officers and other highly
compensated employees who may participate in the salary investment option grant
program in the event that program is activated for one or more calendar years.
Neither the compensation committee nor the board will exercise any
administrative discretion with respect to option grants made under the salary
investment option grant program or under the automatic option grant program for
the non-employee board members.
The exercise price for options may be paid in cash or in shares of our
common stock valued at fair market value on the exercise date. Options may also
be exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the compensation committee may allow a participant to pay
the option exercise price or direct issue price, and any associated withholding
taxes
45
<PAGE>
incurred in connection with the acquisition of shares, with a full-recourse,
interest-bearing promissory note.
In the event that we are acquired, whether by merger or asset sale or sale
by our stockholders of more than 50% of our voting stock in a transaction
recommended by the board of directors, each outstanding option under the
discretionary option grant program which is not to be assumed by the successor
corporation or otherwise continued will automatically accelerate in full, and
all unvested shares under the discretionary option grant and stock issuance
programs will immediately vest, except to the extent our repurchase rights with
respect to those shares are to be assigned to the successor corporation or
otherwise continued in effect. The compensation committee may grant options
under the discretionary option grant program which will accelerate in the event
of an acquisition even if the options are assumed, or which will accelerate if
the optionee's service is subsequently terminated.
The compensation committee may grant options and issue shares which
accelerate in connection with a hostile change in control effected through a
successful tender offer for more than 50% of our outstanding voting stock or by
proxy contest for the election of board members, or which accelerate upon a
subsequent termination of an individual's service. Stock appreciation rights may
be issued under the discretionary option grant program which will provide the
holders with the option to surrender their outstanding options for an
appreciation distribution from us equal to the fair market value of the vested
shares subject to the surrendered option less the aggregate exercise price
payable for the shares. Such appreciation distribution may be made in cash or in
shares of our common stock. There are currently no outstanding stock
appreciation rights.
The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program in return for the grant of
new options for the same or a different number of option shares with an exercise
price per share based upon the fair market value of the common stock on the new
grant date.
In the event the compensation committee elects to activate the salary
investment option grant program for one or more calendar years, each of our
executive officers and other highly compensated employees selected for
participation may elect to reduce his or her base salary for that calendar year
by a specified dollar amount not less than $ nor more than $ . In
return, the individual will be automatically granted, on the first trading day
in the calendar year for which the salary reduction is to be in effect, a
non-statutory option to purchase that number of shares of common stock
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of our common stock on the grant date. The option
exercise price will be equal to one-third of the fair market value of the option
shares on the grant date. As a result, the fair market value of the option
shares on the grant date less the exercise price payable for those shares will
be equal to the salary reduction amount. The option will become exercisable in a
series of 12 equal monthly installments over the calendar year for which the
salary reduction is to be in effect and will be subject to full and immediate
vesting in the event of an acquisition or change in control of our company.
Under the automatic option grant program, each individual who first joins
our board after , 2000 as a non-employee board member will be
automatically granted an option for shares of our common stock at the time
of his or her commencement of board service. In addition, on the date of each
annual stockholders meeting, beginning with the meeting in the year 2001, each
individual who is to continue to serve as a non-employee board member will
receive an option grant to purchase shares of our common stock. Each
automatic grant will have an exercise price equal to the fair market value per
share of our common stock on the grant date and will have a maximum term of
10 years, subject to earlier termination following the optionee's cessation of
board service. Each share option will become exercisable upon the
optionee's completion of months of board service measured from the option
grant date and each share option grant will become exercisable upon the
optionee's completion of six months of service measured from the grant date.
However, each outstanding option will immediately vest upon an acquisition or
change in control or the death or disability of the optionee while serving as a
board member.
46
<PAGE>
Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant and salary investment option
grant programs and may be granted to one or more officers as part of their
option grants under the discretionary option grant program. Options with this
limited stock appreciation right may be surrendered to us upon the successful
completion of a hostile tender offer for more than 50% of our outstanding voting
stock. In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share equal to the
highest price per share of common stock paid in connection with the tender offer
less the exercise price payable for the share.
The board may amend or modify the 2000 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 2000 Stock Incentive Plan will
terminate no later than , 2010.
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan is designed to allow our eligible
employees and any participating subsidiaries to purchase shares of common stock,
at semi-annual intervals, through periodic payroll deductions. A total of
shares of our common stock are reserved for issuance under the plan.
The plan has a series of successive offering periods, each with a maximum
duration of 24 months. The initial offering period began in , 2000 and
will end on the last business day in . The next offering period will begin
on the first business day in , and subsequent offering periods will be set
by our compensation committee.
Individuals who are eligible employees on the start date of any offering
period may enter the plan on that start date or on any subsequent semi-annual
entry date, generally February 1 or August 1 each year. Individuals who become
eligible employees after the start date of the offering period may join the plan
on any subsequent semi-annual entry date within that period.
A participant may contribute up to % of his or her cash earnings through
payroll deductions and the accumulated payroll deductions will be applied to the
purchase of shares on the participant's behalf on each semi-annual purchase
date, the last business day in January and July each year. The purchase price
per share will be % of the lower of the fair market value of our common stock
on the participant's entry date into the offering period or the fair market
value on the semi-annual purchase date. In no event, however, may any
participant purchase more than shares, nor may all participants in the
aggregate purchase more than shares on any one semi-annual purchase date.
Should the fair market value of our common stock on any semi-annual purchase
date be less than the fair market value on the first day of the offering period,
then the current offering period will automatically end and a new offering
period will begin, based on the lower fair market value.
The board may at any time amend or modify the plan. The plan will terminate
no later than the last business day in 2010.
47
<PAGE>
CERTAIN TRANSACTIONS
OUR FORMATION
In connection with the formation of Rackspace, Ltd. in December 1998,
Messrs. Condon, Elmendorf and Yoo each received limited partner interests.
Trout, Ltd. also received limited partner interests at that time. As part of our
holding company restructuring, these limited partner interests will be exchanged
for shares of our common stock, which will result in Messrs. Condon, Elmendorf
and Yoo and Trout, Ltd. receiving 792,380 shares, 396,190 shares, 3,565,714
shares and 7,279,619 shares of our common stock, respectively. These numbers
reflect a 10-for-1 limited partner interest split effected on November 30, 1999.
Messrs. Weston and Miller, our directors and executive officers, are the
managing members of the general partner of Trout, Ltd and the sole beneficial
owners of Trout, Ltd.
Macroweb, LC is the general partner of Rackspace, Ltd., and holds the
general partner interest in Rackspace, Ltd. which will be converted into 9,904
shares of our common stock in connection with our holding company restructuring.
Messrs. Weston and Miller are the managing members of Macroweb, LC. Following
the restructuring, Macroweb, LC will no longer serve as the general partner of
Rackspace, Ltd.
FINANCING PROVIDED BY EXETER FINANCIAL, LC
Since our formation in December 1998, we have been financed, in part, by
loans made by Exeter Financial, LC an entity affiliated with Messrs. Weston and
Miller. Exeter Financial, LC provided us with cash advances in the principal
amount of approximately $1.6 million. These cash advances accrued interest at a
fixed rate of 8% per year with repayments of the principal and interest due over
a five-year period beginning on January 2002. During 1999, Exeter Financial, LC
assigned its right to repayment of this indebtedness to Trout, Ltd. On
September 29, 1999, Trout, Ltd. converted $1.1 million of indebtedness,
representing the amount of principal and interest then outstanding under the
credit agreement, into 1,904,762 limited partner interests. This number reflects
a 10-for-1 limited partner interest split effected on November 30, 1999. On
November 30, 1999, Trout, Ltd. also converted $500,000 of the principal
outstanding under the second financial commitment into 238,095 limited partner
interests.
2000 PRIVATE PLACEMENT
In March 2000, we raised gross proceeds of $11.1 million through a private
placement of limited partner interests in Rackspace, Ltd. to a group of
investors. The investors in this financing were Norwest Venture Partners VII,
L.P., entities affiliated with Sequoia Capital, Red Hat, Inc. and Tailwind
Capital Partners 2000, L.P., for 1,015,901, 530,035, 353,357 and 53,004 limited
partner interests, respectively. We also have issued Norwest Venture
Partners VII, L.P., and entities affiliated with Sequoia Capital warrants to
purchase and of our limited partner interests, respectively. In
connection with our holding company restructuring, these limited partner
interests will be converted into an aggregate of 1,952,297 shares of our common
stock. The warrants convert into rights to purchase shares of our common
stock upon the completion of our holding company restructuring. Tailwind Capital
Partners 2000, L.P. is an affiliate of Thomas Weisel Partners LLC, an
underwriter in this offering.
1999 PRIVATE EQUITY FINANCING
In connection with our November 30, 1999 financing, we sold an aggregate of
2,766,667 limited partner interests at $2.10 per interest, for a total purchase
price of $5.8 million, which includes the conversion into limited partner
interests of the principal amount of $500,000 described above. In connection
with our holding company restructuring, these limited partner interests will be
exchanged for 2,766,667 shares of our common stock. On November 30, 1999, we
also granted warrants to Trango
48
<PAGE>
Capital, LLC and The Hamilton Companies LLC giving them the right to purchase
380,952 and 238,095 limited partner interests, respectively, at an aggregate
exercise price of $800,000 and $500,000, respectively. This warrant will convert
into a right to purchase our common stock upon the completion of our holding
company restructuring. On January 17, 2000, The Hamilton Companies LLC exercised
its right to purchase 238,095 limited partner interests at an aggregate exercise
price of $500,000. Quincy Lee, our executive officer, is the managing member of
Trango Capital, LLC. Trango Capital, LLC is the general partner of First Inning
Investors, L.P., an entity affiliated with Quincy Lee. In connection with the
holding company restructuring, these limited partner interests and warrants to
acquire limited partner interests will be exchanged on a one-for-one basis for
shares of our common stock, with fractional interests rounded to the nearest
whole share.
The following table shows affiliates of our executive officers, directors
and our 5% stockholders who participated in this private equity investment.
<TABLE>
<CAPTION>
OFFICERS, DIRECTORS AND NUMBER OF SHARES PERCENT
5% STOCKHOLDERS RELATIONSHIP TO US BENEFICIALLY OWNED OWNED
- -------------------------------- ------------------------------------- ------------------- ---------
<S> <C> <C> <C>
Trout, Ltd. Entity affiliated with Graham Weston 7,279,619 42.9%
and Morris Miller
Isom Capital Partners I, L.P. Principal stockholder 1,219,048 7.2
First Inning Investors, L.P. Entity affiliated with Quincy Lee 619,048 3.6
Beaulieu River Capital LC Entity affiliated with Graham Weston 357,143 2.1
(formerly, Weston Investment
Interests, LC)
MiniPat & Company, Ltd. Entity affiliated with Patrick Condon 95,238 *
</TABLE>
- ------------------------
* less than 1%
Beaulieu River Capital LC, formerly Weston Investment Interests, LC,
incident to purchasing 357,143 limited partner interests in connection with our
November 30, 1999 financing, delivered to us a promissory note with an interest
rate of 8% per year which was paid in full on February 18, 2000. Mr. Weston is
the managing member of Beaulieu River Capital LC.
Patrick Condon, an executive officer, serves as the general partner of
MiniPat & Company, Ltd.
See "Principal Stockholders" for a discussion of the beneficial ownership of
our directors, executive officers and 5% stockholders.
LEASES
During 1999, we leased our corporate offices in San Antonio, Texas from the
Santa Clara Land Company, an entity affiliated with Graham Weston, for
approximately $3,000 per month. On February 22, 2000, we entered into a
three-year lease agreement with Santa Clara Land Company. This agreement
provides for monthly rent of approximately $12,000, $16,000 and $31,000 in 2000,
2001 and 2002, respectively.
REGISTRATION RIGHTS
After 180 days from the date of this prospectus, each of Isom Capital
Partners I, L.P., First Inning Investors, L.P., MiniPat & Company, Ltd., The
Hamilton Companies LLC, Beaulieu River Capital LC, 2M Technology Ventures, L.P.,
Red Hat, Inc., Norwest Venture Partners VII, L.P., entities affiliated with
Sequoia Capital and Tailwind Capital Partners 2000, L.P. will have the right to
demand that we register the 4,838,012 shares of our common stock held by them
prior to this offering. Trout, Ltd. will also have the right to participate in
this demand with respect to the 238,095 shares of common stock held by it.
Trango Capital, LLC, Norwest Venture Partners VII, L.P. and entities affiliated
with Sequoia Capital
49
<PAGE>
also have the right to include the shares that are subject to their respective
warrants in any demand registration. See "Description of Capital
Stock--Registration Rights" for a description of these registration rights.
PURCHASE AGREEMENT
In December 1998, Rackspace, Ltd. acquired substantially all of the assets
of Cymitar Technology Group, Inc. for approximately $192,000. This purchase
price represented the aggregate amount of liabilities assumed by it under the
terms of the asset purchase and sale agreement. At that time, Messrs. Condon,
Elmendorf and Yoo, who are executive officers, were officers and significant
stockholders of Cymitar Technology Group, Inc.
DIRECTED SHARE PROGRAM
The underwriters have reserved for sale, at the initial offering price, up
to shares of our common stock for directors, employees and other persons
associated with us who have expressed an interest in purchasing common shares in
this offering.
OPTION GRANTS TO DIRECTORS AND EXECUTIVE OFFICERS
In the first quarter of 2000, we issued options to several of our directors
and executive officers. Our non-employee directors also will receive grants
under our 2000 Stock Incentive Plan. See "Management--Director Compensation,"
"--2000 Stock Incentive Plan" and "Principal Stockholders."
INDEMNIFICATION AGREEMENTS
We will enter into indemnification agreements with each of our executive
officers and directors prior to the effective date of the registration statement
for this offering.
FUTURE TRANSACTIONS
All future transactions between us and our executive officers, directors and
affiliates will be approved by a majority of the independent members or
disinterested members of our board of directors and will be on terms no less
favorable than that which could be obtained from unrelated third parties.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 27, 2000, on a pro forma basis to
reflect the completion of the holding company restructuring and on a pro forma
as adjusted basis to reflect the sale of common stock offered by us in this
offering for:
- each person known by us to beneficially own more than 5% of our common
stock;
- our chief executive officer;
- each of our directors; and
- all of our executive officers and directors as a group.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock held by them. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission. In general, a person who has voting power or investment power with
respect to securities is treated as a beneficial owner of those securities.
Shares subject to options or rights currently exercisable or exercisable within
60 days of March 27, 2000 are considered beneficially owned by the person
holding these options or rights. Unless otherwise indicated, the address for
each 5% stockholder listed in the table is c/o Rackspace.com, Inc., 112 East
Pecan Street, Suite 600, San Antonio, Texas 78205.
The post-offering ownership percentages in the table below assume that the
underwriters will not exercise their over-allotment option to purchase
additional shares from us.
<TABLE>
<CAPTION>
PERCENTAGE OF BENEFICIAL
NUMBER OF OWNERSHIP
SHARES -------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------ ------------ ---------- ------------
<S> <C> <C> <C>
Graham M. Weston (1)........................................ 7,662,539 45.1% %
Morris A. Miller (2)........................................ 7,305,396 43.0
Richard K. Yoo.............................................. 3,565,714 21.0
Quincy J. Lee (3)........................................... 1,000,000 5.8
Patrick R. Condon (4)....................................... 895,713 5.3
Trout, Ltd. ................................................ 7,279,619 42.9
Isom Capital Partners I, L.P. .............................. 1,219,048 7.2
Norwest Venture Partners VII, L.P. (5)...................... 1,015,901 6.0
All executive officers and directors as a group (nine
persons) (6).............................................. 13,562,990 77.8% %
</TABLE>
- ------------------------
(1) Includes 15,873 shares issuable upon the exercise of stock options. Also
includes 7,279,619 shares held of record by Trout, Ltd. Mr. Weston serves as
a managing member of the general partner of Trout, Ltd. Also includes
357,143 and 9,904 shares held of record by Beaulieu River Capital LC and
Macroweb, LC, respectively, for which Mr. Weston is a managing member.
Mr. Weston disclaims beneficial ownership of the shares held by Trout, Ltd.,
Macroweb, LC and Beaulieu River Capital LC, except to the extent of his
pecuniary interest in these shares.
(2) Includes 15,873 shares issuable upon the exercise of stock options. Also
includes 7,279,619 shares held of record by Trout, Ltd. Mr. Miller serves as
a managing member of the general partner of Trout, Ltd. Also includes 9,904
shares held of record by Macroweb, LC for which Mr. Miller is a managing
member. Mr. Miller disclaims beneficial ownership of the shares held by
Trout, Ltd. and Macroweb, LC, except to the extent of his pecuniary interest
in these shares.
(3) Includes 619,048 shares held of record by First Inning Investors, L.P. Also
includes 380,952 shares issuable upon the exercise of an outstanding warrant
held by Trango Capital, LLC. Mr. Lee is the managing member of Trango
Capital, LLC, the general partner of First Inning Investors, L.P.
51
<PAGE>
Mr. Lee disclaims beneficial ownership of the shares held by First Inning
Investors, L.P. and Trango Capital, LLC, except to the extent of his
pecuniary interest in these shares.
(4) Includes 8,095 shares issuable upon the exercise of stock options. Includes
95,238 shares held of record by MiniPat & Company, Ltd. for which
Mr. Condon serves as the general partner. Mr. Condon disclaims beneficial
ownership of these shares, except to the extent of his pecuniary interest in
these shares.
(5) Includes shares issuable upon the exercise of an outstanding
warrant. The address for this stockholder is 245 Lyton Street, Palo Alto,
California 94301-1426.
(6) Includes 447,754 shares issuable upon the exercise of stock options and
warrants.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, our authorized capital stock will consist
of 170,000,000 shares of common stock, par value $0.001 per share, and
30,000,000 shares of preferred stock, par value $0.001 per share. The following
is a summary of material terms of the common stock and preferred stock. The
following summary is qualified by reference to our certificate of incorporation
and our bylaws, copies of which have been filed as exhibits to the registration
statement of which this prospectus is a part.
COMMON STOCK
As of March 27, 2000, assuming the completion of our holding company
restructuring, there were 16,980,865 shares of common stock outstanding that
were held of record by 18 stockholders. Based upon the number of shares
outstanding as of that date and after giving effect to the sale of shares of
common stock to the public under this prospectus, there will be shares of
common stock outstanding, assuming no exercise of the underwriters'
over-allotment option, upon the closing of this offering.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to limitations under
Delaware law and preferences that may apply to any outstanding shares of
preferred stock, holders of common stock are entitled to receive ratably such
dividends or other distributions, if any, as may be declared by our board of
directors out of funds legally available. In the event of our liquidation,
dissolution or winding up, holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to the liquidation
preference of any outstanding preferred stock. The common stock has no
cumulative, preemptive, conversion or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
issued upon completion of the offering will be, validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock that we may designate and issue in the
future.
PREFERRED STOCK
Our certificate of incorporation provides that our board of directors may
establish one or more classes or series of preferred stock having the number of
shares and relative voting rights, dividend rates, liquidation preferences, and
other rights, preferences, and limitations as may be fixed by the board without
further stockholder approval. The holders of our preferred stock may be entitled
to preferences over common stockholders with respect to dividends, liquidation,
dissolution or our winding up in such amounts as are established by our board of
directors when issuing such shares.
The issuance of our preferred stock may have the effect of delaying,
deferring or preventing a change in control of our company without further
action by the stockholders and may adversely affect voting and other rights of
holders of our common stock. In addition, issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could make it more difficult for a third party to
acquire a majority of the outstanding shares of our voting stock. At present, we
have no plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
According to the terms of a registration rights agreement, beginning
180 days after the closing of this offering, some of our stockholders who will
hold, in the aggregate, 5,457,059 shares of common stock, which amount includes
380,952 shares, shares and shares that may be purchased by
Trango Capital, LLC, Norwest Venture Partners VII, L.P. and entities affiliated
with Sequoia Capital, respectively, under outstanding warrants, may require us
to file a registration statement under the Securities Act of 1933 with respect
to the resale of their shares. To demand this
53
<PAGE>
registration, investors holding an aggregate of at least 2,728,531 shares must
request that the registration statement register the resale of all or part of
their shares.
Additionally, some of our stockholders who will hold, in the aggregate,
5,457,059 shares of common stock will have "piggyback" registration rights with
respect to the future registration of our shares of common stock under the
Securities Act. If we propose to register any shares of common stock under the
Securities Act, the holders of shares having piggyback registration rights are
entitled to receive notice of that registration and are entitled to include
their shares in the registration.
These registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares of common stock to be included in the registration. We generally are
required to bear all of the expenses of registrations under the registration
rights agreement, except underwriting discounts and commissions. The
registration rights agreement also contains our commitment to indemnify the
holders of registration rights for losses they may incur in connection with
registrations under the agreement. Registration of any of the shares of common
stock held by security holders with registration rights would result in those
shares becoming freely tradeable without restriction under the Securities Act.
ANTI-TAKEOVER EFFECTS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE
LAW
Various provisions of our certificate of incorporation and our bylaws could
have the effect of delaying or preventing a third party from acquiring our
company, even if the acquisition would benefit our stockholders. These
provisions are intended to ensure that our board of directors will have
sufficient time to act in what the board of directors believes to be in the best
interests of our company and stockholders. These provisions could delay or
frustrate the assumption of control of our company by the holder or holders of a
large block of common stock, and could also discourage or make more difficult a
merger, tender offer, or proxy contest that a stockholder may consider in its
best interest, including acquisition offers that might result in a premium over
the market price for the shares held by stockholders. These provisions of our
certificate of incorporation and bylaws are summarized in the following
paragraphs.
CLASSIFIED BOARD OF DIRECTORS. Our certificate of incorporation provides
that at the first annual meeting following our initial public offering, our
board of directors will be divided into three classes of directors, as nearly
equal in size as is practicable, serving staggered three-year terms. As a
result, approximately one-third of the board of directors will be elected each
year. These provisions, when coupled with the provisions of our certificate of
incorporation and bylaws authorizing our board of directors to fill vacant
directorships or increase the size of our board, may deter a stockholder from
removing incumbent directors and simultaneously gaining control of the board of
directors.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. Our certificate of
incorporation provides that stockholders may not take action by written consent,
but only at a duly called annual or special meeting of stockholders. Our
certificate of incorporation further provides that special meetings of
stockholders may be called only by the chairman of the board, the chief
executive officer or a majority of our board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide us with timely
written notice of their proposals. To be timely, a stockholder's notice must be
delivered to or mailed and received at our principal executive offices not less
than 120 days before the date we released the notice of annual meeting to
stockholders in connection with the previous year's annual meeting. If, however,
no meeting was held in the prior year or the date of the annual meeting has been
changed by more than 30 days from the date contemplated in the notice of annual
meeting, then notice by the stockholder, in order to be timely, must be received
a reasonable time before we release the notice of annual meeting to
stockholders. Our bylaws will also specify certain requirements as to the form
and
54
<PAGE>
content of a stockholder's notice. These provisions may preclude stockholders
from bringing matters before an annual meeting of stockholders or from making
nominations for directors at an annual meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES. Following this offering, we will have a
significant number of authorized but unissued shares of common stock and
preferred stock. These shares will be available for future issuance without
stockholder approval, subject to various limitations imposed by the Nasdaq
National Market. These additional shares may be used for a variety of corporate
purposes, including future public offerings to raise additional capital,
corporate acquisitions and employee benefit plans. The existence of authorized
but unissued shares of common stock and preferred stock could render it more
difficult, or discourage an attempt, to obtain control of our company by means
of a proxy contest, tender offer, merger or other transaction.
SUPERMAJORITY VOTE PROVISIONS. The Delaware General Corporation Law
provides generally that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or bylaws, unless a corporation's certificate of incorporation
or bylaws, as the case may be, requires a greater percentage. Our certificate of
incorporation will impose supermajority vote requirements in connection with the
amendment of certain provisions of our certificate of incorporation, including
the provisions relating to the classified board of directors and the elimination
of action by written consent of stockholders.
INDEMNIFICATION. Our certificate of incorporation and bylaws permit us to
indemnify our directors and officers to the fullest extent permitted by Delaware
law. In addition, our certificate of incorporation limits the personal liability
of our board members for breaches by the directors of their fiduciary duties to
the fullest extent permitted under Delaware law.
DELAWARE LAW. We are subject to the provisions of Section 203 of the
Delaware General Corporation Law, which generally prohibit a Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date that the stockholder
became an interested stockholder, unless:
- prior to that time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding shares owned by directors and
executive officers; or
- on or after that date, the business combination is approved by the board
of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of our
outstanding voting stock which is not owned by the interested stockholder.
For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior to
the date of determination whether the person is an "interested stockholder," did
own, 15% or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, LLC.
NASDAQ NATIONAL MARKET LISTING
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "RACK."
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect the prevailing market prices of our common stock. Upon the
consummation of this offering, we will have outstanding an aggregate of
shares of common stock, based on the number of shares outstanding at
March 27, 2000 and assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding warrants and stock options. Of these
shares, all shares being sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act unless these shares
are purchased by our "affiliates" as the term is defined in Rule 144 under the
Securities Act. The following table summarizes the time frames in which issued
and outstanding common stock will be eligible for sale in the public market
after this offering:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ---------------- -------------------------------------------------
<S> <C>
After the date of this prospectus, freely
tradeable shares sold in this offering.
After 180 days from the date of this prospectus,
shares are eligible for sale in the public market
under Rule 144 (subject, in some cases, to volume
limitations), Rule 144(k) or Rule 701.
At various times more than 180 days from the date
of this prospectus, when these shares have been
held for more than one year and may be sold in
accordance with Rule 144.
</TABLE>
Shares of common stock held by our existing stockholders are "restricted
securities" as defined in 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 or 701 under the Securities Act, which rules are
summarized below.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year will be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately shares outstanding immediately after the
offering, or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to certain manner-of-sale provisions,
notice requirements and the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not an affiliate of our company 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, including the holding period
of certain prior owners other than an affiliate, is entitled to sell these
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, Rule 144(k) shares may be sold immediately upon the closing of this
offering.
56
<PAGE>
RULE 701
In general, under Rule 701 as currently in effect, each of our employees,
consultants or advisors who purchases shares from us in connection with a
compensatory stock plan or other written agreement is eligible to resell these
shares 90 days after the effective date of this offering in reliance on
Rule 144, but without compliance with certain restrictions, including the
holding period, contained in Rule 144.
LOCK-UP AGREEMENTS
All of our directors, executive officers and stockholders of our common
stock prior to the offering have signed lock-up agreements with the
underwriters, which generally require them not to transfer or otherwise dispose
of, directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for shares of our common stock
for 180 days after the date of this prospectus, except under limited
circumstances. See "Underwriting--Lock-up."
REGISTRATION RIGHTS
After this offering, the holders of 5,457,059 shares of our common stock and
shares issuable upon the exercise of outstanding options will be entitled to
certain rights with respect to the registration of those shares under the
Securities Act. See "Description of Capital Stock--Registration Rights." After
any registration and resale under a registration statement, these shares will be
freely tradeable without restriction under the Securities Act. These sales could
have a material adverse effect on the trading price of our common stock.
FORM S-8
We intend to file a registration statement on Form S-8 under the Securities
Act covering shares of common stock reserved for issuance under our stock
option plans and employee stock purchase plan and the shares reserved for
issuance upon exercise of outstanding non-plan options. We expect this
registration statement to be filed and to become effective as soon as
practicable after the effective date of this offering.
57
<PAGE>
UNDERWRITING
We intend to offer our common stock through a number of underwriters.
Deutsche Bank Securities Inc., Bear, Stearns & Co. Inc. and Thomas Weisel
Partners LLC are acting as representatives of each of the underwriters named
below. Subject to the terms and conditions set forth in an underwriting
agreement among us and the representatives on behalf of the underwriters, we
have agreed to sell to the underwriters, and each of the underwriters severally
and not jointly has agreed to purchase from us, the number of shares of common
stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Deutsche Bank Securities Inc................................
Bear, Stearns & Co. Inc.....................................
Thomas Weisel Partners LLC..................................
--------
Total.................................................
========
</TABLE>
The several underwriters have agreed, subject to the terms and conditions
set forth in the underwriting agreement, to purchase all of the shares of common
stock being sold pursuant to the underwriting agreement if any of the shares of
common stock being sold under the terms of the agreement are purchased. In the
event of a default by an underwriter, the underwriting agreement provides that,
in certain circumstances, the purchase commitments of the nondefaulting
underwriters may be increased or the underwriting agreement may be terminated.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.
The shares of common stock are being offered by the underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of legal matters by counsel for the underwriters and other conditions. The
underwriters reserve the right to withdraw, cancel or modify the offer and to
reject orders in whole or in part.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
152 filed public offerings of equity securities, of which 108 have been
completed, and has acted as a syndicate member in an additional 77 public
offerings of equity securities. The limited partners of Tailwind Capital
Partners 2000, L.P. are employees of Thomas Weisel Partners LLC. Tailwind
Capital Partners purchased 53,004 limited partner interests representing limited
partner interests in Rackspace, Ltd. in March 2000 for an aggregate purchase
price of $300,000, which units will be converted into 53,004 shares of our
common stock prior to this offering.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose initially
to offer the shares of common stock to the public at the initial public offering
price set forth on the cover page of this prospectus and to dealers at that
price less a concession not in excess of $ per share of common stock. The
underwriters may allow, and the dealers may reallow, a discount not in excess of
$ per share of common stock on sales to other dealers. After the initial
public offering, the public offering price, concession and discount may change.
58
<PAGE>
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no exercise
or full exercise by the underwriters of the over-allotment option.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price..................................... $ $ $
Underwriting discount..................................... $ $ $
Proceeds, before expenses, to us.......................... $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $ and are payable by us.
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of additional
shares of our common stock at the public offering price set forth on the cover
page of this prospectus, less the underwriting discount. The underwriters may
exercise this option solely to cover over-allotments, if any, made on the sale
of our common stock offered in this offering. To the extent that the
underwriters exercise this option, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of our common
stock proportionate to the underwriters' initial amount reflected in the
foregoing table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to of the shares offered in this offering to be
sold to some of our directors, officers, employees, distributors, dealers,
business associates and related persons. The number of shares of our common
stock available for sale to the general public will be reduced to the extent
that those persons purchase the reserved shares. Any reserved shares that are
not orally confirmed for purchase within one day of the pricing of the offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.
LOCK-UP
We and our executive officers and directors and all existing stockholders
have agreed, subject to certain exceptions, without the prior written consent of
Deutsche Bank Securities Inc. on behalf of the underwriters for a period of
180 days after the date of this prospectus, not to directly or indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant for the sale of or otherwise dispose of or transfer any shares
of our common stock or securities convertible into or exchangeable or
exercisable for or repayable with our common stock, whether now owned or
later acquired by the person executing the agreement or with respect to
which the person executing the agreement later acquires the power of
disposition, or file a registration statement under the Securities Act
with respect to any shares of our common stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our common stock whether
any swap or transaction is to be settled by delivery of our common stock
or other securities, in cash or otherwise.
59
<PAGE>
NASDAQ NATIONAL MARKET QUOTATION
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "RACK."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations
between us and the representatives. The factors to be considered in determining
the initial public offering price, in addition to prevailing market conditions,
will be the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us, our financial information, our
history, our prospects, the industry in which we compete, and an assessment of
our management, its past and present operations, the prospects for, and timing
of, our future revenue, the present state of our development, and the above
factors in relation to market values and various valuation measures of other
companies engaged in activities similar to ours. There can be no assurance that
an active trading market will develop for our common stock or that our common
stock will trade in the public market subsequent to the offering at or above the
initial public offering price.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of our common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters to
bid for and purchase our common stock. As an exception to these rules, the
representatives are permitted to engage in transactions that stabilize the price
of our common stock. These transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering, that is, if they sell more shares of our common
stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our common stock in
the open market. The representatives may also elect to reduce any short position
by exercising all or part of the over-allotment option described above.
The representatives may also impose a penalty bid on underwriters. This
means that if the representatives purchase shares of our common stock in the
open market to reduce the underwriters' short position or to stabilize the price
of our common stock, they may reclaim the amount of the selling concession from
the underwriters and selling group members who sold those shares.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of these purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.
60
<PAGE>
LEGAL MATTERS
The validity of the common stock in this offering will be passed upon for us
by Brobeck, Phleger & Harrison LLP, Austin, Texas. We have agreed to issue a
warrant to Brobeck, Phleger & Harrison LLP to purchase 17,667 shares of common
stock with an exercise price of $5.66 per share. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Vinson & Elkins L.L.P., Dallas, Texas.
EXPERTS
The financial statements of Rackspace, Ltd. as of December 31, 1998 and 1999
and for the period from December 29, 1998 (inception) to December 31, 1998 and
the year ended December 31, 1999, and the financial statements of Cymitar
Technology Group, Inc. for the year ended December 31, 1997 and the period from
January 1, 1998 to December 28, 1998 have been included in this prospectus and
the registration statement of which this prospectus is a part in reliance upon
the report of KPMG LLP, independent certified public accountants, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT RACKSPACE.COM
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits and schedules, under the Securities
Act of 1933 with respect to the shares of common stock to be sold in this
offering. This prospectus does not contain all the information included in the
registration statement and the exhibits thereto. For further information about
us and the shares of our common stock to be sold in this offering, please refer
to this registration statement. Complete exhibits have been or will be filed
with our registration statement on Form S-1.
As a result of this offering, we will be subject to the information and
reporting requirements of the Securities Exchange Act of 1934, and will file and
furnish to our stockholders annual reports containing financial statements
audited by our independent auditors, make available to our stockholders
quarterly reports containing unaudited financial data for the first three
quarters of each fiscal year, proxy statements and other information with the
Securities and Exchange Commission.
You may read and copy any contract, agreement or other document referred to
in this prospectus and any portion of our registration statement or any other
information from our filings at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain
regional offices. You can request copies of these documents, upon payment of a
duplicating fee, by writing to the Securities and Exchange Commission. Please
call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information about the public reference rooms. Our filings with the Securities
and Exchange Commission, including our registration statement, are also
available to you without charge at the Securities and Exchange Commission's Web
site, http://www.sec.gov.
61
<PAGE>
INDEX TO RACKSPACE.COM, INC.
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets at December 31, 1998 and 1999................ F-3
Statements of Operations.................................... F-4
The Company -- For the period from December 29, 1998
(inception) to December 31, 1998 and for the year ended
December 31, 1999
The Predecessor -- For the year ended December 31, 1997
and for the period from January 1, 1998 to
December 28, 1998
Statements of Changes in Partners' Capital/Stockholders'
Equity.................................................... F-5
The Company -- For the period from December 29, 1998
(inception) to December 31, 1998 and for the year ended
December 31, 1999
The Predecessor -- For the year ended December 31, 1997
and for the period from January 1, 1998 to
December 28, 1998
Statements of Cash Flows.................................... F-6
The Company -- For the period from December 29, 1998
(inception) to December 31, 1998 and for the year ended
December 31, 1999
The Predecessor -- For the year ended December 31, 1997
and for the period from January 1, 1998 to
December 28, 1998
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
The Board of Directors
Rackspace, Ltd.
When certain of the transactions referred to in note 7 of the Notes to
Financial Statements have been consummated, we will be in a position to render
the following report.
KPMG LLP
San Antonio, Texas
March 27, 2000
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rackspace, Ltd.
We have audited the accompanying balance sheets of Rackspace, Ltd. (dba
Rackspace.com) (the "Company") as of December 31, 1998 and 1999 and the related
statements of operations, partners' capital, and cash flows for the period from
December 29, 1998 (inception) to December 31, 1998 and the year ended
December 31, 1999 and the statement of operations, stockholders' equity and cash
flows of Cymitar Technology Group, Inc. (the Company's Predecessor) for the year
ended December 31, 1997 and the period from January 1, 1998 to December 28,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rackspace, Ltd. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the period from December 29, 1998 (inception) to December 31, 1998 and the
year ended December 31, 1999 and the results of operations and cash flows of
Cymitar Technology Group, Inc. for the year ended December 31, 1997 and the
period from January 1, 1998 to December 28, 1998, in conformity with generally
accepted accounting principles.
San Antonio, Texas
February 29, 2000, except
as to Note 7 which
is as of .
F-2
<PAGE>
RACKSPACE, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1999
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
-------------------- EQUITY
1998 1999 (NOTE 7)
-------- --------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $150,000 3,794,784
Accounts receivable, net of allowance for doubtful
accounts of $51,016 in 1999 and none in 1998............ 5,233 136,260
Interest receivable--related party........................ -- 4,932
Prepaid expenses and deposits............................. -- 19,622
-------- ---------
Total current assets.................................. 155,233 3,955,598
Property and equipment, net................................. 70,623 1,666,139
Goodwill, at cost, less accumulated amortization............ 117,305 99,805
Other assets................................................ -- 142,244
-------- ---------
Total assets.......................................... $343,161 5,863,786
======== =========
LIABILITIES AND PARTNERS' CAPITAL/STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... 896 974,961
Deferred revenue.......................................... -- 150,083
Accrued expenses.......................................... 105 95,217
-------- ---------
Total current liabilities............................. 1,001 1,220,261
Note payable and accrued interest--related party............ 150,066 --
-------- ---------
Total liabilities..................................... 151,067 1,220,261
Partners' capital/stockholders' equity:
Partners' capital......................................... 192,094 5,393,525
Note receivable for issuance of partnership interest...... -- (750,000) (750,000)
Stockholders' equity--pro forma:
Preferred stock, $0.001 par value, 30,000,000 shares
authorized; no shares issued and outstanding.......... --
Common stock, $0.001 par value, 170,000,000 shares
authorized; 14,671,425 shares issued and
outstanding........................................... 14,671
Additonal paid-in capital............................... 5,378,854
-------- --------- ----------
Total partners' capital/stockholders' equity.......... 192,094 4,643,525 4,643,525
-------- --------- ==========
Total liabilities and partners' capital/stockholders'
equity.............................................. $343,161 5,863,786
======== =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
RACKSPACE, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
--------------------------- ---------------------------
PERIOD FROM
DECEMBER 29,
PERIOD FROM 1998
JANUARY 1, (INCEPTION)
YEAR ENDED 1998 TO TO YEAR ENDED
DECEMBER 31, DECEMBER 28, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total Revenues.............................. $ 72,535 166,632 76 1,700,537
-------- --------- ----- ----------
Operating expenses:
Cost of revenues.......................... 38,895 73,767 -- 513,424
Sales and marketing....................... 648 3,615 -- 1,612,071
General and administrative................ 47,705 181,260 23 870,155
Product development....................... -- -- -- 52,712
Depreciation and amortization............. 6,912 12,363 262 261,730
-------- --------- ----- ----------
Total operating expenses.............. 94,160 271,005 285 3,310,092
-------- --------- ----- ----------
Loss from operations.................. (21,625) (104,373) (209) (1,609,555)
-------- --------- ----- ----------
Other income (expense):
Interest expense.......................... (3,247) (7,767) (66) (53,112)
Other income, net......................... -- -- -- 9,869
-------- --------- ----- ----------
(3,247) (7,767) (66) (43,243)
-------- --------- ----- ----------
Net loss.............................. $(24,872) (112,140) (275) (1,652,798)
======== ========= ===== ==========
Pro forma basic and diluted net loss per
common share (unaudited)................ $ (0.15)
==========
Shares used in computing pro forma basic
and diluted net loss per common share
(unaudited)............................. 10,733,098
==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
RACKSPACE, LTD.
STATEMENTS OF PARTNERS' CAPITAL/STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
PARTNERS' RECEIVABLE FOR
CONTRIBUTIONS ISSUANCE OF COMMON STOCK ADDITIONAL
----------------------- PARTNERSHIP ------------------- PAID IN ACCUMULATED
UNITS AMOUNT INTEREST SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- -------------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996... -- $ -- -- 1,000 $5,552 -- (8,582)
Net loss....................... -- -- -- -- -- -- (24,872)
---------- ---------- -------- ----- ------ --- ----------
Balance at December 31, 1997... -- -- -- 1,000 5,552 -- (33,454)
Net loss....................... -- -- -- -- -- -- (112,140)
---------- ---------- -------- ----- ------ --- ----------
Balance of Predecessor at
December 28, 1998............ -- -- -- 1,000 5,552 -- (145,594)
========== ========== ======== ===== ====== === ==========
Formation of the Company and
initial contribution--at
inception (December 29,
1998)........................ 10,000,000 $ 192,369 -- -- -- -- --
Net loss for the period from
December 29, 1998 to
December 31, 1998............ -- (275) -- -- -- -- --
---------- ---------- -------- ----- ------ --- ----------
Balance at December 31, 1998... 10,000,000 $ 192,094 -- -- -- -- --
Cash contribution.............. -- 7,631 -- -- -- -- --
Conversion of advances on
credit agreement and accrued
interest to partnership
interest..................... 1,904,762 1,082,532 -- -- -- -- --
Conversion of advances on
credit agreement to
partnership interest......... 238,095 500,000 -- -- -- -- --
Sale of partnership interest
for cash and note receivable,
net of related costs......... 2,528,571 5,264,066 (750,000) -- -- -- --
Net loss....................... -- (1,652,798) -- --
---------- ---------- -------- ----- ------ --- ----------
Balance at December 31, 1999... 14,671,428 $5,393,525 (750,000) -- $ -- -- --
========== ========== ======== ===== ====== === ==========
<CAPTION>
TOTAL
PARTNERS'
CAPITAL/
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1996... (3,030)
Net loss....................... (24,872)
----------
Balance at December 31, 1997... (27,902)
Net loss....................... (112,140)
----------
Balance of Predecessor at
December 28, 1998............ (140,042)
==========
Formation of the Company and
initial contribution--at
inception (December 29,
1998)........................ 192,369
Net loss for the period from
December 29, 1998 to
December 31, 1998............ (275)
----------
Balance at December 31, 1998... 192,094
Cash contribution.............. 7,631
Conversion of advances on
credit agreement and accrued
interest to partnership
interest..................... 1,082,532
Conversion of advances on
credit agreement to
partnership interest......... 500,000
Sale of partnership interest
for cash and note receivable,
net of related costs......... 4,514,066
Net loss....................... (1,652,798)
----------
Balance at December 31, 1999... 4,643,525
==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
RACKSPACE, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
--------------------------- -----------------------------
PERIOD FROM
PERIOD FROM DECEMBER 29,
JANUARY 1, 1998
YEAR ENDED 1998 TO (INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 28, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $(24,872) (112,140) (275) (1,652,798)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization......... 6,912 12,363 262 261,730
Interest accrued on credit
agreement........................... 886 7,642 66 53,112
Changes in operating assets and
liabilities:
Receivables......................... (2,146) 1,875 (76) (135,959)
Prepaid expenses and other assets... -- -- -- (163,661)
Accounts payable and accrued
expenses.......................... (5,956) 51,145 1,001 1,048,530
Deferred revenues................... 1,543 10,052 -- 150,083
-------- -------- ------- ----------
Net cash provided by (used in)
operating activities............ (23,633) (29,063) 978 (438,963)
Cash flows from investing activities:
Acquisition of property and equipment..... (5,531) (47,359) (978) (1,837,950)
-------- -------- ------- ----------
Net cash used in investing
activities...................... (5,531) (47,359) (978) (1,837,950)
-------- -------- ------- ----------
Cash flows from financing activities:
Sale of partnership interests, net........ -- -- -- 4,514,066
Advances on credit agreement.............. 47,460 70,000 150,000 1,400,000
Partner contribution...................... -- -- -- 7,631
-------- -------- ------- ----------
Net cash provided by financing
activities...................... 47,460 70,000 150,000 5,921,697
-------- -------- ------- ----------
Increase (decrease) in cash and
cash equivalents................ 18,296 (6,422) 150,000 3,644,784
Cash and equivalents, beginning of period... 887 19,183 -- 150,000
-------- -------- ------- ----------
Cash and cash equivalents, end of period.... $ 19,183 12,761 150,000 3,794,784
======== ======== ======= ==========
Supplemental disclosures of non-cash
transactions:
Purchase of certain assets of Predecessor
for assumption of liabilities........... $ -- -- 192,369 --
======== ======== ======= ==========
Conversion of advances on credit agreement
and accrued interest to partnership
interest................................ $ -- -- -- 1,582,532
======== ======== ======= ==========
Sale of partnership interest for note
receivable.............................. $ -- -- -- 750,000
======== ======== ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
RACKSPACE, LTD.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) ORGANIZATION AND DESCRIPTION OF BUSINESS
Rackspace, Ltd. (the "Company"), a Texas limited partnership, was formed on
December 29, 1998 to provide advanced Internet hosting services. The Company, at
its formation, was owned by Macroweb, LC, a Texas limited liability company (the
"General Partner"), Trout, Ltd., a Texas limited partnership, Richard Yoo,
Patrick Condon, and Dirk Elmendorf (collectively, the "Limited Partners"). The
Company provides advanced Linux-based Internet hosting services primarily
targeted to small- to medium-sized enterprises worldwide. Through the Company's
hosting services, customers are offered a means to outsource their Internet
operations while enabling them to rapidly add bandwidth and upgrade their
dedicated server hardware to support their needs as they expand.
Upon formation, 10,000,000 partner interests were issued. Concurrent with
the formation, the Company entered into an asset purchase and sale agreement
with Cymitar Technology Group, Inc. ("Cymitar" or "the Predecessor"), a Texas
corporation, whereby the Company purchased substantially all of the assets of
Cymitar by assuming substantially all of its outstanding liabilities which
aggregated $192,369 on the date of the agreement (December 29, 1998). The
transaction was accounted for under the purchase method. The purchase price was
allocated principally to computer equipment, software and other equipment at
their estimated fair values, and the excess of cost over the fair value of net
assets acquired of $117,451 was recognized as goodwill which is being amortized
over seven years.
The significant accounting policies and practices utilized by the
Predecessor were consistent with those utilized by the Company.
(B) LIQUIDITY
The Company has incurred net operating losses and negative cash flows from
operations since its inception. Such losses are due primarily to the Company's
efforts to aggressively expand its customer base through targeted marketing and
advertising initiatives. The Company expects that it will continue to incur net
losses as it expends substantial additional resources in an attempt to rapidly
increase its market share. There can be no assurance that the Company will
achieve or sustain profitability or positive cash flow from its operations. The
Company may need to obtain additional debt or equity financing to fund its
operations.
(C) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid interest-bearing instruments with original maturities of three
months or less to be cash equivalents. Cash balances at December 31, 1999
consisted of bank deposits and overnight money market accounts. Cash balances at
December 31, 1998 consisted of bank deposits.
(D) PROPERTY AND EQUIPMENT
Equipment and leasehold improvements are recorded at cost. Depreciation is
provided over the estimated useful lives of the assets, ranging from 3 to
7 years, using the straight line method. Leasehold improvements are amortized
over the shorter of the lease term or the estimated useful life of the asset.
F-7
<PAGE>
RACKSPACE, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(E) OTHER ASSETS
Other assets are comprised primarily of deposits and software licenses which
are amortized over the license term.
(F) INCOME TAXES
As a partnership, the Company is not directly liable for federal income
taxes. For federal income tax purposes, the partnership's tax attributes are
passed through to the partners and included on their individual returns.
Subsequent to the reorganization discussed in note 8, the Company will
account for income taxes in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "ACCOUNTING FOR INCOME TAXES." Had the Company
applied the provisions of SFAS No. 109 for the period from inception through
December 31, 1999, the Company would have recorded a deferred tax asset, subject
to a 100% valuation allowance. This pro forma net deferred tax asset (pro forma
to exclude the effect of tax losses which passed through to the former partners)
is principally comprised of deferred revenue.
(G) REVENUE RECOGNITION
Revenues consist primarily of recurring monthly fees from customer use of
Internet servers and related services and from set-up fees. Contracts are
generally month-to-month; however, customers have the option of entering into
contracts for longer periods. Revenues from these contracts are recognized as
services are provided. Payments received and billings in advance of providing
services are deferred until the services are provided. Set-up fees are
nonrefundable and are separately priced from the use of Internet servers and
related services and are recognized at the time a new customer account is
created and the set-up process is completed. Set-up costs consist primarily of
labor by technical support personnel to configure the customer's Internet server
and to activate the new service. The Company has no obligation to perform any
future set-up services and no additional set-up services are necessary following
expiration of the initial contract period and upon renewal of the contract by
the customer.
(H) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
(I) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets, including goodwill, in
accordance with the provisions of SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF." This
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured
F-8
<PAGE>
RACKSPACE, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
by the amount by which the carrying amount of the assets exceeds the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less cost to sell.
(J) ADVERTISING AND MARKETING COSTS
The Company charges advertising and marketing costs to expense in the period
incurred. Advertising expenses for the year ended December 31, 1997, the period
from January 1, 1998 to December 28, 1998, the period from inception to
December 31, 1998 and the year ended December 31, 1999 were approximately
$1,000, $4,000, $-0- and $1,497,000, respectively.
(K) STOCK-BASED COMPENSATION
Following the reorganization discussed in note 7, the Company will apply the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and
related interpretations, in accounting for its stock options. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. The Company
will adopt the disclosure provisions of SFAS No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION." There were no options issued or outstanding at
December 31, 1999.
(L) PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE
Following the reorganization discussed in note 7, the Company will compute
net loss per share in accordance with the provisions of SFAS No. 128, "EARNINGS
PER SHARE." Under the provisions of SFAS No. 128, basic and diluted net loss per
share is computed by dividing the net loss available to common stockholders for
the period by the weighted average number of common shares outstanding during
the period. The calculation of diluted net loss per share excludes all shares of
common stock issuable upon exercise of employee stock options as the effect of
the exercise would be antidilutive.
(M) COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss) in accordance with SFAS
No. 130, "REPORTING COMPREHENSIVE INCOME." In each period presented,
comprehensive net loss does not differ from the reported net loss.
(N) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," which
will be effective for the Company's fiscal year ending December 31, 2001. This
statement establishes accounting and reporting standards requiring that each
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company has not evaluated the impact of SFAS
No. 133; however, it believes the adoption of SFAS No. 133 will not have a
material effect on its financial position, results of operations, or cash flows
as it has not entered into any derivative contracts.
F-9
<PAGE>
RACKSPACE, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1998 and December 31,
1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
-------- ---------
<S> <C> <C>
Internet access and computer equipment.................. $65,516 1,662,333
Office equipment........................................ 5,223 102,316
Leasehold improvements.................................. -- 144,040
------- ---------
70,739 1,908,689
Less accumulated depreciation and amortization.......... 116 242,550
------- ---------
$70,623 1,666,139
======= =========
</TABLE>
(3) PARTNERS' CAPITAL
Pursuant to the second amendment to the partnership agreement dated
November 30, 1999, the Company declared a ten-for-one split of all limited
partner interests outstanding prior to November 30, 1999. Limited partner
interests for all periods presented have been adjusted to reflect this split.
Under this amendment, certain key personnel were given the option of receiving,
in lieu of their salary, options to acquire limited partner interests commencing
at the beginning of each calendar quarter of 2000. No options were granted as of
December 31, 1999.
Pursuant to a Subscription Agreement (the "Agreement") dated November 30,
1999, between the Company and private investors, some of whom were officers and
equity holders of the Company, the Company sold 2,766,667 limited partner
interests for $2.10 per limited partner interest. The Agreement provided for the
issuance of the limited partner interests for $4,560,000 in cash, conversion of
$500,000 of advances due under the Company's credit agreement and receipt of a
$750,000 short-term promissory note from an entity principally owned by one of
the investors who is also an officer. Subsequent to December 31, 1999, the note
was paid in full. The Agreement also provided certain of the investors warrants
to invest an additional $1,300,000 at the same price per limited partner
interest for a period beginning November 30, 1999 through December 31, 2001.
The Agreement provides the investors anti-dilution rights whereby if the
Company issues any additional limited partner interests, other than to employees
pursuant to an option agreement or as compensation for services rendered, or
incident to an acquisition of assets in which more than 700,000 limited partner
interests are issued to the seller, and the purchase price per limited partner
interest is less than $2.10, the Company will issue the investors additional
limited partner interests in an amount which provides them with the same
ownership percentage as was held by them on November 30, 1999.
(4) DEBT
The Company entered into credit agreements with Exeter Financial, L.C.
("Exeter"), a financial institution owned by the principal owners of
Trout, Ltd., to provide for cash advances in the form of term notes of not more
than $1,550,000 bearing interest at a fixed rate of 8% per annum. Total cash
advances under the credit agreements amounted to $1,550,000. Trout, Ltd.
subsequently acquired the rights to the debt from Exeter. Pursuant to amendments
to the partnership agreement, the partners agreed to convert the $1,550,000 in
outstanding principal and $32,532 of accrued but unpaid interest in exchange for
2,142,857 limited partner interests. Interest expense of $66 and $53,112 for the
period
F-10
<PAGE>
RACKSPACE, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) DEBT (CONTINUED)
ended December 31, 1998 and for the year ended December 31, 1999, respectively,
was incurred under these related party advances.
(5) COMMITMENTS
The Company leased its office space on a month-to-month basis through
December 31, 1999 from an entity controlled by a principal owner of Trout, Ltd.
The Company and this entity entered into a lease agreement in February 2000
which expires in February 2003 and requires the Company to pay all maintenance
and insurance. The Company recognized approximately $38,000 in rental expense
for the year ended December 31, 1999 under this lease arrangement. The Company
has also entered into agreements for dedicated Internet access service with
multiple network vendors. The agreements vary from one to five years and provide
for penalties for early termination. The agreements are generally subject to a
master contract which allows for service order upgrades at the Company's
request. Monthly billings are increased based on usage levels.
Future minimum payments under these commitments are:
<TABLE>
<CAPTION>
YEAR ENDING RELATED
DECEMBER 31, TOTAL PARTY
- ------------ ---------- --------
<S> <C> <C>
2000................................................. $ 904,432 120,000
2001................................................. 672,076 184,000
2002................................................. 518,967 333,510
2003................................................. 219,902 60,302
2004................................................. 146,300 --
---------- -------
Total.................................................. $2,461,677 697,812
========== =======
</TABLE>
Additionally, the Company entered into an agreement to purchase equipment in
December 1999 and paid approximately $106,000 (included in other assets at
December 31, 1999) as a down payment. The agreement is non-cancelable and the
Company is obligated for the remaining balance of $320,000 at December 31, 1999.
This amount, including $117,000 for a related service agreement, became due when
the equipment was delivered in February 2000.
(6) GEOGRAPHIC AND OTHER FINANCIAL INFORMATION
The Company operates in one segment to provide dedicated servers and related
services to its customers. Total export revenues consisted of sales from the
Company's U.S. operation to customers in other geographic regions. No
geographical information is provided for 1997 and 1998 as the Company's
operations were limited to North America.
The following is a summary of revenues by geographic area for the year ended
December 31, 1999:
<TABLE>
<CAPTION>
NORTH AMERICA EUROPE ASIA OTHER TOTAL
------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.............................. $1,132,954 325,695 180,741 61,147 1,700,537
========== ======== ======== ======== ==========
</TABLE>
During the year ended December 31, 1999, the Company charged $91,883 to its
allowance for doubtful accounts and wrote off $40,867 of accounts receivable.
F-11
<PAGE>
RACKSPACE, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) SUBSEQUENT EVENTS
(A) CORPORATE REORGANIZATION
In 2000, the Company's partners authorized the reorganization of the
partnership into a corporation prior to and in anticipation of the Company's
initial public offering. Upon the consummation of the reorganization, the
corporation will be authorized to issue 170,000,000 shares of $0.001 par value
common stock of which 14,671,425 shares will be issued to the existing partners.
The Company also authorized 30,000,000 shares of preferred stock, par value
$0.001.
(B) STOCK-BASED COMPENSATION ARRANGEMENTS
The Company has adopted the 1999 Unit Option Plan. The plan authorizes
grants of options to purchase limited partner interests at fair market value as
determined by the general partner of Rackspace, Ltd. Options have seven year
terms and vest over three years. Subsequent to December 31, 1999, options to
purchase 432,897 limited partner interests of the Company under this plan were
issued to employees at a weighted exercise price of $2.56.
The 2000 Stock Incentive Plan was adopted in 2000, as the
successor to the 1999 Unit Option Plan. The 2000 Stock Incentive Plan will
provide for four separate programs. The first program is the discretionary
option grant program under which eligible individuals as defined and including
officers, non-employee board members and consultants, may be granted options to
purchase shares of common stock. The second program is the stock issuance
program under which eligible individuals may be issued shares of common stock
directly, through the purchase of such shares or as a bonus tied to the
performance of services. The third program is the salary investment option grant
program under which executive officers and other highly compensated employees
may elect to apply a portion of their base salary to the acquisition of special
below-market stock option grants. The fourth program is the automatic option
grant program under which option grants will automatically be made at periodic
intervals to eligible non-employee board members.
Commencing on January 1, 2000, certain key personnel exercised their right
to forgo salary in exchange for 47,936 options to acquire limited partner
interests at an exercise price of $0.01 per partner interest. Options vest
immediately.
The Company adopted an Employee Stock Purchase Plan in 2000.
Under the plan, shares of the Company's common stock may be purchased at
six-month intervals at % of the lower of the fair market value on the first or
the last day of each six-month period.
(C) CAPITAL AND OTHER TRANSACTIONS
In January 2000, the Company sold 238,095 limited partner interests at $2.10
per partner interest pursuant to the Subscription Agreement dated November 30,
1999 (note 3) for cash.
The Company also sold 119,048 limited partner interests at $2.10 per partner
interest to another investor for cash effective January 17, 2000.
In March 2000, the Company sold 1,952,297 limited partner interests at $5.66
per partner interest to certain investors for cash. In addition, two of the
investors were granted warrants to purchase $6 million in additional partner
interests at a price equal to the greater of $18.24 or the price which is at the
mid-point of the filing range of the Company's anticipated initial public
offering.
F-12
<PAGE>
RACKSPACE, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) SUBSEQUENT EVENTS (CONTINUED)
In March 2000, the Company executed a memorandum of understanding with Red
Hat for a proposed joint marketing arrangement. The proposed arrangement
contemplates the payment of an upfront fee and customer referral fees to Red Hat
over a 12 month period.
(D) PRO FORMA EARNINGS PER SHARE
The pro forma information regarding net loss per share and weighted average
shares outstanding set forth below gives effect to the treatment of partner
interests as shares of common stock.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Numerator:
Net loss available to common stockholders................. $(1,652,798)
===========
Denominator:
Weighted average number of shares of common stock
outstanding............................................. 10,733,098
===========
Pro forma basic and diluted net loss per share.............. $ (0.15)
===========
</TABLE>
F-13
<PAGE>
Back Cover
[Description of Graphics]
<PAGE>
You may rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. Neither the delivery of this prospectus nor the sale of common
stock means that information contained in this prospectus is correct after the
date of this prospectus. This prospectus is not an offer to sell or solicitation
of an offer to buy these shares in any circumstances under which the offer or
solicitation is unlawful.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary................ 3
Risk Factors...................... 7
Forward-Looking Statements and
Associated Risks................ 16
Use Of Proceeds................... 17
Dividend Policy................... 17
Capitalization.................... 18
Dilution.......................... 19
Selected Financial Data........... 20
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 21
Business.......................... 28
Management........................ 42
Certain Transactions.............. 48
Principal Stockholders............ 51
Description of Capital Stock...... 53
Shares Eligible for Future Sale... 56
Underwriting...................... 58
Legal Matters..................... 61
Experts........................... 61
Where You Can Find Additional
Information About Rackspace..... 61
Index to Rackspace.Com, Inc.
Financial Statements............ F-1
</TABLE>
Dealer Prospectus Delivery Obligation:
Until , 2000 (25 days after the date of this prospectus), all
dealers that buy, sell or trade in these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. Dealers
are also obligated to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
[LOGO]
Shares
Common Stock
Deutsche Banc Alex. Brown
Bear, Stearns & Co. Inc.
Thomas Weisel Partners LLC
Prospectus
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by us in connection with the sale of common stock
being registered under this registration statement. All amounts are estimates
except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $17,160
NASD fee.................................................... 7,000
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses.................................. *
Transfer agent fees......................................... *
Miscellaneous............................................... *
Total................................................. $ *
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following discussion assumes that our reorganization has occurred.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides,
in effect, that any person made a party to any action by reason of the fact that
he is or was our director, officer, employee or agent may, and in certain cases
must, be indemnified by us against, in the case of a non-derivative action,
judgments, fines, amounts paid in settlement and reasonable expenses (including
attorneys' fees) incurred by him as a result of such action, and in the case of
a derivative action, against expenses (including attorneys' fees), if in either
type of action he acted in good faith and in a manner he reasonably believed to
be in or not opposed to our best interests. This indemnification does not apply,
in a derivative action, to matters as to which it is adjudged that the director,
officer, employee or agent is liable to us, unless upon court order it is
determined that, despite such adjudication of liability, but in view of all the
circumstances of the case, he is fairly and reasonably entitled to indemnity for
expenses, and, in a non-derivative action, to any criminal proceeding in which
such person had reasonable cause to believe his conduct was unlawful.
Article VI of our Certificate of Incorporation provides that no director
shall be liable to us or our stockholders for monetary damages for breaches of
the director's fiduciary duties to the fullest extent permitted by the DGCL.
Reference is made to Section 8 of the underwriting agreement to be filed as
Exhibit 1.1 hereto, pursuant to which the underwriters have agreed to indemnify
our officers and directors against certain liabilities under the Securities Act
of 1933.
We intend to enter into Indemnity Agreements with each director and certain
of our officers, a form of which is filed as Exhibit 10.1 to this registration
statement. Pursuant to these agreements, we will be obligated, to the extent
permitted by applicable law, to indemnify these persons against all expenses,
judgments, fines and penalties incurred in connection with the defense or
settlement of any actions brought against them by reason of the fact that they
were our directors or officers or assumed
II-1
<PAGE>
certain responsibilities at our direction. We also intend to purchase directors'
and officers' liability insurance in order to limit our exposure to liability
for indemnification of directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since our inception in December 1998, we have issued and sold unregistered
securities in the following transactions:
(1) On December 29, 1998, we issued 999,000 limited partner interests to our
founders and an entity affiliated with our executive officers. We also
issued 1,000 general partner interests to our general partner.
(2) On September 29, 1999 we issued 190,476 limited partner interests to an
entity affiliated with our executive officers upon the conversion of
outstanding indebtedness under a promissory note in the approximate amount
of $1.1 million.
(3) On November 30, 1999 we issued an aggregate of 2,766,667 limited partner
interests to entities affiliated with our executive officers and other
purchasers in a private placement for an aggregate purchase price of
$5.8 million. The purchase price for the limited partner interests consisted
of cash in the approximate amount of $4.6 million, a promissory note for
$750,000 and the conversion of principal outstanding under a promissory note
in the amount of $500,000. We also effected a 10-for-1 limited partner
interest split incident to this private placement.
(4) Commencing on January 1, 2000 through April 30, 2000, Graham Weston, Morris
Miller, Pat Condon and Dirk Elmendorf exercised their right to forgo salary
in exchange for options to acquire additional limited partner interests.
Pursuant to an agreement, these individuals have elected to forgo salary
during this four-month period, and receive options to acquire 47,936 limited
partner interests at $.01 per limited partner interest.
(5) On January 17, 2000 we issued 238,095 limited partner interests to an
investor pursuant to the exercise of an option for an aggregate purchase
price of $500,000. Effective the same date, we also issued 119,047 limited
partner interests to an investor for $250,000.
(6) On January 1, 2000 we issued options to two of our executive officers for an
aggregate of 271,672 limited partner interests at $2.10 per limited partner
interest.
(7) On February 15, 2000 we issued to our employees options to acquire an
aggregate of 107,171 limited partner interests at $3.33 per limited partner
interest. In addition we issued options to one of our executive officers for
an aggregate of 54,054 limited partner interests at $3.33 per limited
partner interest.
(8) On March 27, 2000, we issued an aggregate of 1,952,297 limited partner
interests to investors in a private placement for an aggregate purchase
price of $11.1 million. We also issued warrants for limited partner
interests. The limited partners of Tailwind Capital Partners 2000, L.P., an
investor in this private placement, are employees of Thomas Weisel Partners
LLC, an underwriter in this offering.
The above securities were offered and sold by the registrant in reliance
upon exemptions from registration pursuant to either (1) Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving any public
offering or (2) Rule 701 promulgated under the Securities Act of 1933, as
amended. No underwriters were involved in connection with the sales of
securities referred to in this Item 15, except as described in (8) above.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<C> <S> <C>
1.1* -- Form of Underwriting Agreement.
3.1+ -- Certificate of Incorporation of Rackspace.com, Inc.
3.2+ -- Bylaws of Rackspace.com, Inc.
4.1+ -- Specimen Stock Certificate.
5.1* -- Opinion of Brobeck, Phleger & Harrison LLP.
10.1* -- Form of Indemnity Agreement by and between Rackspace.com,
Inc. and each of its directors and executive officers.
10.2+ -- Lease Agreement between Rackspace, Ltd. and Santa Clara Land
Company dated February 22, 2000 for the premises located in
San Antonio, Texas.
10.3+ -- Confidential Anti-Dilution Agreement by and among Rackspace,
Ltd. and the investors named therein dated November 30, 1999
and Amendment thereto dated February 22, 2000.
10.4+ -- Credit Agreement between Rackspace, Ltd and Exeter
Financial, LC dated December 29, 1998.
10.5+ -- Support Agreement dated December 29, 1998 between Rackspace,
Ltd., Morris A. Miller, Graham M. Weston, Richard Yoo, Dirk
Elmendorf and Patrick Condon and First Amendment thereto
dated November 30, 1999 and Second Amendment thereto dated
February 22, 2000 and as amended by Exhibit 10.21.
10.6+ -- Employment Agreement between Rackspace, Ltd. and Richard Yoo
dated December 29, 1998.
10.7+ -- Employment Agreement between Rackspace, Ltd. and Dirk
Elmendorf dated December 29, 1998.
10.8+ -- Employment Agreement between Rackspace, Ltd., and Patrick
Condon dated December 29, 1998.
10.9+ -- Asset Purchase and Sale Agreement dated December 29, 1998
between Cymitar Technology Group, Inc., Richard Yoo, Dirk
Elmendorf and Patrick Condon.
10.10+ -- Transfer Agreement between Rackspace, Ltd., Richard Yoo,
Dirk Elmendorf and Patrick Condon dated December 29, 1998.
10.11+ -- Agreement of Limited Partnership of Rackspace, Ltd, dated
December 29, 1998, First Amendment dated September 29, 1999,
Second Amendment dated November 30, 1999, Third Amendment
dated February 22, 2000 and Fourth Amendment dated
March 27, 2000.
10.12+ -- Warrant between Rackspace, Ltd. and Trango Capital, LLC,
dated November 30, 1999.
10.13+ -- Registration Rights Agreement dated November 30, 1999
between Rackspace, Ltd. and the securityholders named
therein and Amendment thereto dated February 22, 2000 and
as amended by Exhibit 10.21.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<C> <S> <C>
10.14+ -- Promissory Note dated November 30, 1999 between Beaulieu
River Capital LC and Rackspace, Ltd. for $750,000.
10.15+ -- Second Financial Commitment between Rackspace, Ltd. and
Exeter Financial, LC dated September 29, 1999.
10.16+ -- 1999 Unit Option Plan.
10.17+ -- Form of Unit Option Agreement for Stock Unit Plan.
10.18* -- 2000 Stock Incentive Plan.
10.19* -- 2000 Employee Stock Purchase Plan.
10.20+ -- Promissory Note dated December 29, 1998 between Exeter
Financial, LC and Rackspace, Ltd. for $150,000.
10.21+ -- Agreement of Existing Partners of Rackspace Ltd. to
Facilitate Public Offering dated March 27, 2000.
10.22+ -- Warrant between Rackspace, Ltd. and Norwest Venture
Partners, dated March 27, 2000.
10.23+ -- Warrant between Rackspace, Ltd. and Sequoia Capital
Franchise Fund dated March 27, 2000.
10.24+ -- Warrant between Rackspace, Ltd. and Sequoia Capital
Franchise Partners dated March 27, 2000.
21.1+ -- List of Subsidiaries.
23.1+ -- Consent of KPMG LLP.
23.2* -- Consent of Brobeck, Phleger & Harrison LLP (Included in
Exhibit 5.1).
27.1+ -- Financial Data Schedule.
</TABLE>
- ------------------------
+ filed herewith
* to be filed by amendment
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or the related notes.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the DGCL, our Certificate of Incorporation, our Bylaws, the underwriting
agreement or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by one of our directors, officers, or
controlling persons in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of 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.
II-4
<PAGE>
We hereby undertake that:
1. For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act 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 this 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 of 1933, as amended, we
have duly caused this registration statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in San Antonio, Texas, on March 28,
2000.
<TABLE>
<S> <C> <C>
RACKSPACE.COM, INC.
By: /s/ GRAHAM M. WESTON
-----------------------------------------
Graham M. Weston
Chief Executive Officer and Director
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Graham M. Weston and Quincy J. Lee, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to sign any registration statement for the
same offering covered by this registration statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ GRAHAM M. WESTON Chief Executive Officer and
- ------------------------------------------- Director (principal March 28, 2000
Graham M. Weston executive officer)
/s/ MORRIS A. MILLER
- ------------------------------------------- President, Chief Operating March 28, 2000
Morris A. Miller Officer and Director
/s/ QUINCY J. LEE Chief Financial Officer
- ------------------------------------------- (principal accounting and March 28, 2000
Quincy J. Lee financial officer)
</TABLE>
II-6
<PAGE>
CERTIFICATE OF INCORPORATION
OF
RACKSPACE.COM, INC.
ARTICLE I
The name of this Corporation shall be "Rackspace.com, Inc."
(hereinafter referred to as the "CORPORATION").
ARTICLE II
The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, City of Wilmington, County of New
Castle, State of Delaware. The name of the registered agent at that address is
The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the Delaware General
Corporation Law.
ARTICLE IV
The Corporation's capital stock shall be comprised as follows:
A. AUTHORIZED SHARES. The aggregate number of shares that the
Corporation shall have the authority to issue is Two Hundred Million
(200,000,000) shares. Of such authorized shares, One Hundred Seventy Million
(170,000,000) shares shall be Common Stock, par value $0.001 per share, and
Thirty Million (30,000,000) shares shall be Preferred Stock, par value $0.001
per share.
B. COMMON STOCK. Each share of Common Stock shall have one vote on each
matter submitted to a vote of the stockholders of the Corporation. Subject to
the provisions of applicable law and the rights of the holders of the
outstanding shares of Preferred Stock, if any, the holders of shares of Common
Stock shall be entitled to receive, when and as declared by the Board of
Directors of the Corporation, out of the assets of the Corporation legally
available therefor, dividends or other distributions, whether payable in cash,
property or securities of the Corporation. The holders of shares of Common Stock
shall be entitled to receive, in proportion to the number of shares of Common
Stock held, the net assets of the Corporation upon
<PAGE>
dissolution after any preferential amounts required to be paid or distributed to
holders of outstanding shares of Preferred Stock, if any, are so paid or
distributed.
C. PREFERRED STOCK.
1. SERIES. The Preferred Stock may be issued from time to time
by the Board of Directors as shares of one or more series. The description of
shares of each additional series of Preferred Stock, including any designations,
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption shall be as set forth in resolutions adopted by the Board of
Directors.
2. RIGHTS AND PREFERENCES. The Board of Directors is expressly
authorized, at any time, by adopting resolutions providing for the issuance of,
or providing for a change in the number of, shares of any particular series of
Preferred Stock and, if and to the extent from time to time required by law, by
filing certificates of amendment or designation which are effective without
stockholder action, to increase or decrease the number of shares included in
each series of Preferred Stock, but not below the number of shares then issued,
and to set in any one or more respects the designations, preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms and conditions of redemption relating to the shares of
each such series. The authority of the Board of Directors with respect to each
series of Preferred Stock shall include, but not be limited to, setting or
changing the following:
(a) the dividend rate, if any, on shares of such
series, the times of payment and the date from which dividends shall be
accumulated, if dividends are to be cumulative;
(b) whether the shares of such series shall be
redeemable and, if so, the redemption price and the terms and conditions of such
redemption;
(c) the obligation, if any, of the Corporation to
redeem shares of such series pursuant to a sinking fund;
(d) whether shares of such series shall be
convertible into, or exchangeable for, shares of stock of any other class of
classes and, if so, the terms and conditions of such conversion or exchange,
including the price or prices or the rate or rates of conversion or exchange and
the terms of adjustment, if any;
(e) whether the shares of such series shall have
voting rights, in addition to the voting rights provided by law, and, if so, the
extent of such voting rights;
(f) the rights of the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation; and
(g) any other relative rights, powers, preferences,
qualifications, limitations or restrictions thereof relating to such series.
<PAGE>
ARTICLE V
The name and address of the incorporator of the Corporation is:
Quincy J. Lee
Rackspace, Ltd.
112 East Pecan Street, Suite 600
San Antonio, Texas 78205
ARTICLE VI
A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (a) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the Delaware General
Corporation Law or (d) for any transaction from which the director derived any
improper personal benefit. If the Delaware General Corporation Law is amended
after approval by the stockholders of this ARTICLE VI to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law as so
amended.
Any repeal or modification of the foregoing provisions of this
ARTICLE VI by the stockholders of the Corporation shall not adversely affect any
right or protection of a director of the Corporation existing at the time of
such repeal or modification.
ARTICLE VII
The Corporation may indemnify to the fullest extent permitted
by law, any person made or threatened to be made a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that such person is or was a director, officer or employee of the
Corporation or any predecessor of the Corporation or serves or served at any
other corporation or enterprise as a director, officer or employee at the
request of the Corporation or any predecessor to the Corporation.
ARTICLE VIII
The management of the business and the conduct of the affairs
of the Corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed by,
or in the manner provided in, the Bylaws of the Corporation.
ARTICLE IX
Meetings of stockholders may be held within or without the
State of Delaware, as the Bylaws may provide. The books of the Corporation may
be kept (subject to any provision
<PAGE>
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the Corporation.
ARTICLE X
Election of directors at an annual or special meeting of
stockholders need not be by written ballot unless the Bylaws of the Corporation
shall so provide.
ARTICLE XI
A. At each annual meeting of stockholders, directors of the
Corporation shall be elected to hold office until the expiration of the term for
which they are elected, and until their successors have been duly elected and
qualified. At the first annual meeting of stockholders following the closing of
the initial public offering (the "FIRST PUBLIC COMPANY ANNUAL MEETING") of the
Corporation's capital stock pursuant to an effective registration statement
filed under the Securities Act of 1933, as amended (the "INITIAL PUBLIC
OFFERING"), the directors of the Corporation shall be divided into three classes
as nearly equal in size as is practicable, hereby designated as Class I, Class
II and Class III. The term of office of the initial Class I directors shall
expire at the next succeeding annual meeting of stockholders, the term of office
of the initial Class II directors shall expire at the second succeeding annual
meeting of stockholders and the term of office of the initial Class III
directors shall expire at the third succeeding annual meeting of stockholders.
For the purposes hereof, the initial Class I, Class II and Class III directors
shall be those directors designated and elected at the First Public Company
Annual Meeting. At each annual meeting after the First Public Company Annual
Meeting, directors to replace those of a Class whose terms expire at such annual
meeting shall be elected to hold office until the third succeeding annual
meeting and until their respective successors shall have been duly elected and
qualified. If the number of directors is hereafter changed, any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as is practicable.
B. Vacancies occurring on the Board of Directors for any
reason may be filled by vote of a majority of the remaining members of the Board
of Directors, although less than a quorum, at a meeting of the Board of
Directors. A person so elected by the Board of Directors to fill a vacancy shall
hold office until the next succeeding annual meeting of stockholders of the
Corporation and until his or her successor shall have been duly elected and
qualified.
C. After the Initial Public Offering, prior to the natural
expiration of his term of office and subject to applicable laws, no
duly-appointed director may be removed unless cause is shown and then only by
affirmative vote of two thirds (2/3rds) of the shares entitled to vote thereon,
voting together as a single class.
<PAGE>
ARTICLE XII
In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter, amend
or repeal the Bylaws of the Corporation.
ARTICLE XIII
Effective upon the closing of the Initial Public Offering,
stockholders of the Corporation may not take action by written consent in lieu
of a meeting but must take any actions at a duly called annual or special
meeting. A special meeting of stockholders may be called only by the Chairman of
the Board of Directors, the Corporation's Chief Executive Officer or by a
majority of the Board of Directors.
ARTICLE XIV
Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of the
capital stock required by law or this Certificate of Incorporation, the
affirmative vote of the holders of at least two thirds (2/3rds) of the combined
voting power of all of the then-outstanding shares of the Corporation entitled
to vote shall be required to alter, amend or repeal ARTICLES VI, VII, XI or XIII
or this ARTICLE XIV, or any provisions thereof.
ARTICLE XIV
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.
* * * * * *
THE UNDERSIGNED, BEING THE SOLE INCORPORATOR NAMED HEREIN, FOR THE
PURPOSE OF FORMING THE CORPORATION TO DO BUSINESS BOTH WITHIN AND WITHOUT THE
STATE OF DELAWARE AND PURSUANT TO THE GENERAL CORPORATION LAW OF THE STATE OF
DELAWARE, DOES MAKE AND FILE THIS CERTIFICATE OF INCORPORATION OF RACKSPACE.COM,
INC. HEREBY DECLARING AND CERTIFYING THAT THE FACTS HEREIN STATED ARE TRUE, AND
ACCORDINGLY HAS HEREUNTO SET HIS HAND THIS 7TH DAY OF MARCH, 2000.
/s/ Quincy J. Lee
------------------------------
Quincy J. Lee
Sole Incorporator
<PAGE>
BYLAWS
OF
RACKSPACE.COM, INC.,
A DELAWARE CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I. Offices..................................................................1
Section 1.1 Registered Office........................................1
Section 1.2 Other Offices............................................1
ARTICLE II. Corporate Seal..........................................................1
ARTICLE III. Stockholders' Meetings.................................................1
Section 3.1 Place of Meetings........................................1
Section 3.2 Annual Meeting...........................................2
Section 3.3 Special Meetings.........................................4
Section 3.4 Notice of Meetings.......................................4
Section 3.5 Quorum...................................................4
Section 3.6 Adjournment and Notice of Adjourned Meetings.............5
Section 3.7 Voting Rights............................................5
Section 3.8 Joint Owners of Stock....................................5
Section 3.9 List of Stockholders.....................................5
Section 3.10 No Action Without Meeting................................6
Section 3.11 Organization.............................................6
ARTICLE IV. Directors...............................................................7
Section 4.1 Number and Term of Office; Classification................7
Section 4.2 Powers...................................................7
Section 4.3 Vacancies................................................7
Section 4.4 Resignation..............................................8
Section 4.5 Removal..................................................8
Section 4.6 Meetings.................................................8
Section 4.7 Quorum and Voting........................................9
Section 4.8 Action Without Meeting...................................9
Section 4.9 Fees and Compensation....................................9
Section 4.10 Committees..............................................10
ARTICLE V. Officers................................................................11
Section 5.1 Officers Designated.....................................11
Section 5.2 Tenure and Duties of Officers...........................11
Section 5.3 Delegation of Authority.................................14
Section 5.4 Resignations............................................14
Section 5.5 Removal.................................................14
ARTICLE VI. Execution of Corporate Instruments and Voting of Securities Owned
by the Corporation.....................................................14
Section 6.1 Execution of Corporate Instruments......................14
Section 6.2 Voting of Securities Owned by the Corporation...........15
ii
<PAGE>
ARTICLE VII. Shares of Stock.......................................................15
Section 7.1 Form and Execution of Certificates......................15
Section 7.2 Lost Certificates.......................................16
Section 7.3 Transfers...............................................16
Section 7.4 Fixing Record Dates.....................................16
Section 7.5 Registered Stockholders.................................17
ARTICLE VIII. Other Securities of the Corporation..................................17
Section 8.1 Execution of Other Securities...........................17
ARTICLE IX. Dividends..............................................................18
Section 9.1 Declaration of Dividends................................18
Section 9.2 Dividend Reserve........................................18
ARTICLE X. Fiscal Year.............................................................18
ARTICLE XI. Indemnification of Directors, Officers, Employees and Other Agents.....18
Section 11.1 Directors and Executive Officers........................18
Section 11.2 Other Officers, Employees and Other Agents..............19
Section 11.3 Good Faith..............................................19
Section 11.4 Expenses................................................19
Section 11.5 Enforcement.............................................20
Section 11.6 Non-Exclusivity of Rights...............................20
Section 11.7 Survival of Rights......................................20
Section 11.8 Insurance...............................................20
Section 11.9 Amendments..............................................21
Section 11.10 Savings Clause..........................................21
Section 11.11 Certain Definitions.....................................21
ARTICLE XII. Notices...............................................................22
Section 12.1 Notice to Stockholders..................................22
Section 12.2 Notice to Directors.....................................22
Section 12.3 Address Unknown.........................................22
Section 12.4 Affidavit of Mailing....................................22
Section 12.5 Time Notices Deemed Given...............................22
Section 12.6 Failure to Receive Notice...............................22
Section 12.7 Notice to Person with Whom Communication Is Unlawful....23
Section 12.8 Notice to Person with Undeliverable Address.............23
ARTICLE XIII. Amendments...........................................................23
Section 13.1 Amendments..............................................23
Section 13.2 Application of Bylaws...................................24
ARTICLE XIV. Loans to Officers.....................................................24
</TABLE>
iii
<PAGE>
BYLAWS
OF
RACKSPACE.COM, INC.,
A DELAWARE CORPORATION
- --------------------------------------------------------------------------------
ARTICLE I.
OFFICES
SECTION 1.1 REGISTERED OFFICE. The registered office of the corporation
shall be the registered office named in the certificate of incorporation of the
corporation, or such other office as may be designated from time to time by the
Board of Directors in the manner provided by law.
SECTION 1.2 OTHER OFFICES. The corporation may have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require. The books of the corporation may be kept (subject to any provision
contained in the Delaware General Corporation Law) outside the State of Delaware
at such place or places as may be designated from time to time by the Board of
Directors or in these Bylaws.
ARTICLE II.
CORPORATE SEAL
The corporate seal shall consist of a die bearing the name of the
corporation. Said seal may be used by causing it, or a facsimile thereof, to be
impressed, affixed or reproduced.
ARTICLE III.
STOCKHOLDERS' MEETINGS
SECTION 3.1 PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the principal executive offices of the
corporation.
<PAGE>
SECTION 3.2 ANNUAL MEETING.
(a) The annual meeting of the stockholders of the corporation,
for the purpose of election of Directors and for such other business as may
lawfully come before it, shall be held on such date and at such time as may be
designated from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be: (A)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors; (B) otherwise properly brought before
the meeting by or at the direction of the Board of Directors; or (C) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
by the Secretary of the corporation not later than the close of business on the
one hundred twentieth (120th) day prior to the first anniversary of the date of
the proxy statement delivered to stockholders in connection with the preceding
year's annual meeting; provided, however, that if either (i) the date of the
annual meeting is advanced more than thirty (30) days or delayed (other than as
a result of adjournment) more than sixty (60) days from such an anniversary date
or (ii) no proxy statement was delivered to stockholders in connection with the
preceding year's annual meeting, notice by the stockholder to be timely must be
so delivered not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or the close of
business on the tenth (10th) day following the day on which public announcement
of the date of such meeting is first made by the corporation. To be in proper
form, a stockholder's notice to the Secretary shall set forth as to each matter
the stockholder proposes to bring before the annual meeting:
(i) a brief description of the business desired to be
brought before the annual meeting and the reasons for
conducting such business at the annual meeting;
(ii) a representation that the stockholder is a
holder of record of stock of the corporation entitled to vote
at such meeting and, if applicable, intends to appear in
person or by proxy at the meeting to nominate the person or
persons specified in the notice or introduce the business
specified in the notice;
(iii) the name and address, as they appear on the
corporation's books, of the stockholder proposing such
business;
(iv) the class and number of shares of the
corporation which are beneficially owned by the stockholder;
(v) any material interest of the stockholder in such
business; and
(vi) any other information that is required to be
provided by the stockholder pursuant to Regulation 14A under
the Securities Exchange Act of
2
<PAGE>
1934, as amended (the "Exchange Act"), in such stockholder's
capacity as a proponent of a stockholder proposal.
The chairman of the meeting shall determine whether any
business proposed to be transacted by the stockholders has been properly brought
before the meeting and, if any proposed business has not been properly brought
before the meeting, the chairman shall declare that such proposed business shall
not be presented for stockholder action at the meeting. For purposes of this
Section 3.2, "public announcement" shall mean disclosure in a press release
reported by the Dow Jones News Service, Associated Press or comparable national
news service or in a document publicly filed by the corporation with the
Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the
Exchange Act. Notwithstanding any provision in this Section 3.2 to the contrary,
requests for inclusion of proposals in the corporation's proxy statement made
pursuant to Rule 14a-8 under the Exchange Act shall be deemed to have been
delivered in a timely manner if delivered in accordance with such Rule.
Notwithstanding compliance with the requirements of this Section 3.2, the
chairman presiding at any meeting of the stockholders may, in his sole
discretion, refuse to allow a stockholder or stockholder representative to
present any proposal which the corporation would not be required to include in a
proxy statement under any rule promulgated by the Securities and Exchange
Commission.
(c) Only persons who are nominated in accordance with the
procedures set forth in this paragraph shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of Directors at the meeting who complies with the notice
procedures set forth in this paragraph. Such nominations, other than those made
by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation in accordance with
the provisions of paragraph (b) of this Section 3.2. Such stockholder's notice
shall set forth (i) as to each person, if any, whom the stockholder proposes to
nominate for election or re-election as a Director: (A) the name, age, business
address and residence address of such person; (B) the principal occupation or
employment of such person; (C) the class and number of shares of the corporation
which are beneficially owned by such person; (D) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nominations are to be made by the stockholder; and (E) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of Directors, or is otherwise required in each case
pursuant to Regulation 14A under the 1934 Act (including without limitation such
person's written consent to being named in the proxy statement, if any, as a
nominee and to serving as a Director if elected); and (ii) as to such
stockholder giving notice, the information required to be provided pursuant to
paragraph (b) of this Section 3.2. At the request of the Board of Directors, any
person nominated by a stockholder for election as a Director shall furnish to
the Secretary of the corporation that information required to be set forth in
the stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a Director of the corporation unless nominated
in accordance with the procedures set forth in this paragraph. The chairman of
the meeting shall, if the facts warrant, determine and declare at the meeting
that a nomination was not made in accordance with the procedures prescribed by
these Bylaws, and if the chairman should so determine, the chairman shall so
declare at the meeting, and the defective nomination shall be disregarded.
3
<PAGE>
SECTION 3.3 SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation
may only be called, for any purpose or purposes, by the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
Directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption).
(b) No business may be transacted at such special meeting
otherwise than specified in the resolution calling for the meeting. The Board of
Directors shall determine the time and place of such special meeting, which
shall be held not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request other than any actions
effected prior to an Initial Public Offering (as defined below). Upon
determination of the time and place of the meeting, notice shall be given to the
stockholders entitled to vote, in accordance with the provisions of Section 3.4
of these Bylaws. If the notice is not given within sixty (60) days after the
receipt of the request, the person or persons requesting the meeting may set the
time and place of the meeting and give the notice. Nothing contained in this
paragraph (b) shall be construed as limiting, fixing or affecting the time when
a meeting of stockholders may be held.
SECTION 3.4 NOTICE OF MEETINGS. Except as otherwise provided by law or
the certificate of incorporation of the corporation, as the same may be amended
or restated from time to time and including any certificates of designation
thereunder (hereinafter, the "Certificate of Incorporation"), and for actions
effected prior to an Initial Public Offering (for which no notice need be given)
written notice of each meeting of stockholders shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such meeting, such notice to specify the place,
date, time and purpose or purposes of the meeting. Notice of any meeting of
stockholders may be waived in writing, signed by the person entitled to notice
thereof, either before or after such meeting, and will be waived by any
stockholder by his attendance thereat in person or by proxy, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Any stockholder so waiving notice of such
meeting shall be bound by the proceedings of any such meeting in all respects as
if due notice thereof had been given.
SECTION 3.5 QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by duly authorized proxy, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a quorum,
any meeting of stockholders may be adjourned, from time to time, either by the
chairman of the meeting or by vote of the holders of a majority of the shares
represented thereat, but no other business shall be transacted at such meeting.
The stockholders present at a duly called or convened meeting, at which a quorum
is present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, all
actions taken by the holders of a majority of the votes cast, excluding
abstentions, at any meeting at which a quorum is present shall be valid and
binding upon the corporation; provided,
4
<PAGE>
however, that Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of Directors. Where a separate vote by a class or classes
is required, a majority of the outstanding shares of such class or classes,
present in person or represented by proxy, shall constitute a quorum entitled to
take action with respect to that vote on that matter and the affirmative vote of
the majority (plurality, in the case of the election of Directors) of shares of
such class or classes present in person or represented by proxy at the meeting
shall be the act of such class.
SECTION 3.6 ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
SECTION 3.7 VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 7.5 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote or execute consents shall have the right to do so either
in person or by an agent or agents authorized by a written proxy executed by
such person or his duly authorized agent, which proxy shall be filed with the
Secretary at or before the meeting at which it is to be used. An agent so
appointed need not be a stockholder. No proxy shall be voted after three (3)
years from its date of creation unless the proxy provides for a longer period.
Elections of Directors need not be by written ballot, unless otherwise provided
in the Certificate of Incorporation.
SECTION 3.8 JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; or (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the Delaware General Corporation Law, Section 217(b). If
the instrument filed with the Secretary shows that any such tenancy is held in
unequal interests, a majority or even-split for the purpose of clause (c) shall
be a majority or even-split in interest.
SECTION 3.9 LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to
5
<PAGE>
vote at said meeting, arranged in alphabetical order, showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten (10) days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not specified, at the place where the meeting is
to be held. The list shall be produced and kept at the time and place of meeting
during the whole time thereof and may be inspected by any stockholder who is
present.
SECTION 3.10 NO ACTION WITHOUT MEETING. Effective upon the closing of
the corporation's initial public offering of its capital stock pursuant to an
effective registration statement filed under the Securities Act of 1933, as
amended (the "Initial Public Offering"), the stockholders of the corporation may
not take action by written consent without a meeting and must take any actions
at a duly called annual or special meeting.
SECTION 3.11 ORGANIZATION.
(a) At every meeting of stockholders, unless another officer
of the corporation has been appointed by the Board of Directors, the Chairman of
the Board of Directors, or, if a Chairman has not been appointed, is absent, or
designates the next senior officer present to so act, the President, or, if the
President is absent, the most senior Vice President present, or, in the absence
of any such officer, a chairman of the meeting chosen by a majority in interest
of the stockholders entitled to vote, present in person or by proxy, shall act
as chairman. The Secretary, or, in his absence, an Assistant Secretary directed
to do so by the President, shall act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be
entitled to make such rules or regulations for the conduct of meetings of
stockholders as it shall deem necessary, appropriate or convenient. Subject to
such rules and regulations of the Board of Directors, if any, the chairman of
the meeting shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
chairman, are necessary, appropriate or convenient for the proper conduct of the
meeting, including, without limitation, establishing an agenda or order of
business for the meeting, rules and procedures for maintaining order at the
meeting and the safety of those present, limitations on participation in such
meeting to stockholders of record of the corporation and their duly authorized
and constituted proxies and such other persons as the chairman shall permit,
restrictions on entry to the meeting after the time fixed for the commencement
thereof, limitations on the time allotted to questions or comments by
participants and regulation of the opening and closing of the polls for
balloting on matters which are to be voted on by ballot. Unless and to the
extent determined by the Board of Directors or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with
rules of parliamentary procedure.
6
<PAGE>
ARTICLE IV.
DIRECTORS
SECTION 4.1 NUMBER AND TERM OF OFFICE; CLASSIFICATION.
(a) The number of directors which shall constitute the whole
Board of Directors shall be determined from time to time by the Board of
Directors (provided that no decrease in the number of directors which would have
the effect of shortening the term of an incumbent director may be made by the
Board of Directors), provided that the number of directors shall be not less
than one (1). At each annual meeting of stockholders, Directors of the
corporation shall be elected to hold office until the expiration of the term for
which they are elected, and until their successors have been duly elected and
qualified or until such Director's earlier death, resignation or due removal;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the Delaware
General Corporation Law. Directors need not be stockholders unless so required
by the Certificate of Incorporation. If, for any reason, the Directors shall not
have been elected at an annual meeting, they may be elected as soon thereafter
as convenient at a special meeting of the stockholders called for that purpose
in the manner provided in these Bylaws.
(b) At the first annual meeting of stockholders following the
closing of the Initial Public Offering (the "First Public Company Annual
Meeting"), the Directors of the corporation shall be divided into three classes
as nearly equal in size as is practicable, hereby designated Class I, Class II
and Class III. The initial Class I, Class II and Class III directors shall be
those directors designated and elected at the First Public Company Annual
Meeting. The term of office of the initial Class I directors shall expire at the
next succeeding annual meeting of stockholders, the term of office of the
initial Class II directors shall expire at the second succeeding annual meeting
of stockholders, and the term of office of the initial Class III directors shall
expire at the third succeeding annual meeting of stockholders. At each annual
meeting of stockholders following the First Public Company Annual Meeting,
Directors to replace those of the Class whose terms expire at such annual
meeting shall be elected to hold office until the third succeeding annual
meeting and until their respective successors shall have been duly elected and
qualified. If the number of directors is hereafter changed, any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as is practicable.
SECTION 4.2 POWERS. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
SECTION 4.3 VACANCIES. Vacancies occurring on the Board of Directors
may be filled by vote of a majority of the remaining members of the Board of
Directors, although less than a quorum. Each Director so elected shall hold
office for the unexpired portion of the term of the Director or newly created
directorship whose place shall be vacant and until his or her successor shall
have been duly elected and qualified or until such Director's earlier death,
resignation or due removal. A vacancy in the Board of Directors shall be deemed
to exist under this Section 4.3 in the case of (i) the death, removal or
resignation of any Director; (ii) an
7
<PAGE>
increase in the authorized number of Directors pursuant to Section 4.1(a) above;
or (iii) if the stockholders fail at any meeting of stockholders at which
Directors are to be elected (including any meeting referred to in Section 4.6
below) to elect the number of Directors then constituting the whole Board of
Directors.
SECTION 4.4 RESIGNATION. Any Director may resign at any time by
delivering his or her written resignation to the Secretary, such resignation to
specify whether it will be effective at a particular time, upon receipt by the
Secretary or at the pleasure of the Board of Directors. If no such specification
is made, it shall be deemed effective at the pleasure of the Board of Directors.
When one or more Directors shall resign from the Board of Directors, effective
at a future date, a majority of the Directors then in office, including those
who have so resigned, shall have power to fill such vacancy or vacancies, the
vote thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
SECTION 4.5 REMOVAL. At a special meeting of stockholders called for
such purpose and in the manner provided herein, subject to any limitations
imposed by law or the Certificate of Incorporation, the Board of Directors,
or any individual Director, may only be removed from office for cause, and a
new Director or Directors shall be elected by a vote of stockholders holding
two-thirds (2/3) of the outstanding shares entitled to vote at an election of
Directors.
SECTION 4.6 MEETINGS.
(a) ANNUAL MEETINGS. Unless the Board shall determine
otherwise, the annual meeting of the Board of Directors shall be held
immediately before or after the annual meeting of stockholders and at the place
where such meeting is held. No notice of an annual meeting of the Board of
Directors shall be necessary and such meeting shall be held for the purpose of
electing officers and transacting such other business as may lawfully come
before it.
(b) REGULAR MEETINGS. Except as hereinafter otherwise
provided, regular meetings of the Board of Directors shall be held in the
principal executive offices of the corporation. Unless otherwise restricted by
the Certificate of Incorporation, regular meetings of the Board of Directors may
also be held at any place within or without the State of Delaware which has been
designated by resolution of the Board of Directors or the written consent of all
directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, and subject to the notice requirements contained
herein, special meetings of the Board of Directors may be held at any time and
place within or without the State of Delaware whenever called by the Chairman of
the Board, the Chief Executive Officer or a majority of the Directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors,
or of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear
8
<PAGE>
each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
(e) NOTICE OF MEETINGS. Written notice of the time and place
of all special meetings of the Board of Directors shall be given at least one
(1) day before the date of the meeting. Such notice need not state the purpose
or purposes of such meeting, except as may otherwise be required by law or
provided for in the Certificate of Incorporation or these Bylaws. Notice of any
meeting may be waived in writing at any time before or after the meeting and
will be deemed waived by any Director by attendance thereat, except when the
Director attends the meeting solely for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
(f) WAIVER OF NOTICE. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either before
or after meeting, each of the Directors not present shall sign a written waiver
of notice, or a consent to holding such meeting, or an approval of the minutes
thereof. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
SECTION 4.7 QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Article XI hereof, for which a quorum shall be one-third of the exact number of
Directors fixed from time to time in accordance with Section 4.1 hereof, but not
less than one (1), a quorum of the Board of Directors shall consist of a
majority of the exact number of directors fixed from time to time in accordance
with Section 4.1 of these Bylaws, but not less than one (1); provided, however,
at any meeting whether a quorum be present or otherwise, a majority of the
Directors present may adjourn from time to time until the time fixed for the
next regular meeting of the Board of Directors, without notice other than by
announcement at the meeting.
(b) At each meeting of the Board of Directors at which a
quorum is present, all questions and business shall be determined by a vote of
the majority of the Directors present, unless a different vote is required by
law, the Certificate of Incorporation or these Bylaws.
SECTION 4.8 ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 4.9 FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any
9
<PAGE>
meeting of a committee of the Board of Directors. Nothing herein contained shall
be construed to preclude any Director from serving the corporation in any other
capacity as an officer, agent, employee, or otherwise and receiving compensation
therefor.
SECTION 4.10 COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may by
resolution passed by a majority of the whole Board of Directors appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and
specifically granted by the Board of Directors, shall have, and may exercise
when the Board of Directors is not in session, all powers of the Board of
Directors in the management of the business and affairs of the corporation
except such committee shall not have the power or authority to amend the
Certificate of Incorporation, to adopt an agreement of merger or consolidation,
to recommend to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, to recommend to the
stockholders of the corporation a dissolution of the corporation or a revocation
of a dissolution, or to amend these Bylaws.
(b) OTHER COMMITTEES. The Board of Directors may, by
resolution passed by a majority of the whole Board of Directors, from time to
time appoint such other committees as may be permitted by law. Such other
committees appointed by the Board of Directors shall consist of one (1) or more
members of the Board of Directors and shall have such powers and perform such
duties as may be prescribed by the resolution or resolutions creating such
committees, but in no event shall such committee have the powers denied to the
Executive Committee in these Bylaws.
(c) TERM. Each member of a committee of the Board of Directors
shall serve a term on the committee coexistent with such member's term on the
Board of Directors. The Board of Directors, subject to the provisions of
paragraphs (a) and (b) of this Section 4.10 may at any time increase or decrease
the number of members of a committee or terminate the existence of a committee.
The membership of a committee member shall terminate on the date of his or her
death or voluntary resignation from the committee or from the Board of
Directors. The Board of Directors may at any time for any reason remove any
individual committee member and the Board of Directors may fill any committee
vacancy created by death, resignation, removal or increase in the number of
members of the committee. The Board of Directors may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee, and, in addition, in the
absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member.
(d) MEETINGS. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 4.10 shall be held at such times and places
as are determined by the Board of Directors, or by any such committee, and when
notice thereof has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter. Special meetings
10
<PAGE>
of any such committee may be held at any place which has been determined from
time to time by such committee, and may be called by any Director who is a
member of such committee, upon written notice to the members of such committee
of the time and place of such special meeting given in the manner provided for
the giving of written notice to members of the Board of Directors of the time
and place of special meetings of the Board of Directors. Notice of any special
meeting of any committee may be waived in writing at any time before or after
the meeting and will be waived by any Director by attendance thereat, except
when the Director attends such special meeting solely for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. A majority of the
authorized number of members of any such committee shall constitute a quorum for
the transaction of business, and the act of a majority of those present at any
meeting at which a quorum is present shall be the act of such committee.
(e) ORGANIZATION. The Chairman of the Board shall preside at
every meeting of the Board of Directors, if present. In the case of any meeting,
if there is no Chairman of the Board or if the Chairman is not present, the Vice
Chairman (if there be one) shall preside, or if there be no Vice Chairman or if
the Vice Chairman is not present, a chairman chosen by a majority of the
Directors present shall act as chairman of such meeting. The Secretary of the
corporation or, in the absence of the Secretary, any person appointed by the
Chairman shall act as secretary of the meeting.
ARTICLE V.
OFFICERS
SECTION 5.1 OFFICERS DESIGNATED. The officers of the corporation shall
include a President and a Secretary, and, if and when designated by the Board of
Directors, Chairman of the Board of Directors, one or more executive and
non-executive Vice Presidents (any one or more of which executive Vice
Presidents may be designated as Executive Vice President or Senior Vice
President or a similar title), and a Treasurer. The Board of Directors also may,
at its discretion, create additional officers and assign such duties to those
offices as it may deem appropriate from time to time, which offices may include
a Vice Chairman of the Board of Directors, a Chief Executive Officer, a Chief
Operating Officer, a Chief Financial Officer, one or more Assistant Secretaries
and Assistant Treasurers, and one or more other officers which may be created at
the discretion of the Board of Directors. Any one person may hold any number of
offices of the corporation at any one time unless specifically prohibited
therefrom by law. The salaries and other compensation of the officers of the
corporation shall be fixed by or in the manner designated by the Board of
Directors.
SECTION 5.2 TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of
the Board of Directors and until their successors shall have been duly elected
and qualified, unless sooner removed. Any officer elected or appointed by the
Board of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the
11
<PAGE>
vacancy may be filled by the Board of Directors. Except for the Chairman of the
Board and the Vice Chairman of the Board, no officer need be a director.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman
of the Board of Directors, when present, shall preside at all meetings of the
Board of Directors and, unless the Chairman has designated the next senior
officer to so preside, at all meetings of the stockholders. The Chairman of the
Board of Directors shall perform other duties commonly incident to such office
and shall also perform such other duties and have such other powers as the Board
of Directors shall designate from time to time.
(c) POWERS AND DUTIES OF THE VICE CHAIRMAN OF THE BOARD. The
Board of Directors may but is not required to assign areas of responsibility to
a Vice Chairman of the Board, and, in such event, and subject to the overall
direction of the Chairman of the Board and the Board of Directors, the Vice
Chairman of the Board shall be responsible for supervising the management of the
affairs of the corporation and its subsidiaries within the area or areas
assigned and shall monitor and review on behalf of the Board of Directors all
functions within such corresponding area or areas of the corporation and each
such subsidiary of the corporation. In the absence of the President, or in the
event of the President's inability or refusal to act, the Vice Chairman of the
Board shall perform the duties of the President, and when so acting shall have
all the powers of and be subject to all the restrictions upon the President.
Further, the Vice Chairman of the Board shall have such other powers and duties
as designated in accordance with these Bylaws and as from time to time may be
assigned to the Vice Chairman of the Board by the Board of Directors or the
Chairman of the Board.
(d) DUTIES OF PRESIDENT. Unless the Board of Directors
otherwise determines (including by election of Chief Executive Officer) and
subject to the provisions of paragraph (e) below, the President shall be the
chief executive and chief operating officer of the corporation. Unless the Board
of Directors otherwise determines, he shall, in the absence of the Chairman of
the Board or Vice Chairman of the Board or if there be no Chairman of the Board
or Vice Chairman of the Board, preside at all meetings of the stockholders and
(should he be a director) of the Board of Directors. The President shall have
such other powers and duties as designated in accordance with these Bylaws and
as from time to time may be assigned to him by the Board of Directors.
(e) DUTIES OF THE CHIEF EXECUTIVE AND CHIEF OPERATING
OFFICERS. Subject to the control of the Board of Directors, the chief executive
officer shall have general executive charge, management and control, of the
properties, business and operations of the corporation with all such powers as
may be reasonably incident to such responsibilities; and subject to the control
of the chief executive officer, the chief operating officer shall have general
operating charge, management and control, of the properties, business and
operations of the corporation with all such powers as may be reasonably incident
to such responsibilities.
(f) DUTIES OF VICE PRESIDENTS. Vice Presidents, by virtue of
their appointment as such, shall not necessarily be deemed to be executive
officers of the corporation, such status as an executive officer only being
conferred if and to the extent such Vice President is placed in charge of a
principal business unit, division or function (E.G., sales, administration or
finance) or performs a policy-making function for the corporation (within the
meaning of Section 16 of the
12
<PAGE>
1934 Act and the rules and regulations promulgated thereunder). Each executive
Vice President shall at all times possess, and upon the authority of the
President or the chief executive officer any non-executive Vice President shall
from time to time possess, power to sign all certificates, contracts and other
instruments of the corporation, except as otherwise limited pursuant to Article
VI hereof or by the Chairman of the Board, the President, chief executive
officer or the Vice Chairman of the Board. The Vice Presidents shall perform
other duties commonly incident to their office and shall also perform such other
duties and have such other powers as the Board of Directors or the President
shall designate from time to time.
(g) DUTIES OF SECRETARY. The Secretary shall keep the minutes
of all meetings of the Board of Directors, committees of the Board of Directors
and the stockholders, in books provided for that purpose; shall attend to the
giving and serving of all notices; may in the name of the corporation affix the
seal of the corporation to all contracts and attest the affixation of the seal
of the corporation thereto; may sign with the other appointed officers all
certificates for shares of capital stock of the corporation; and shall have
charge of the certificate books, transfer books and stock ledgers, and such
other books and papers as the Board of Directors may direct, all of which shall
at all reasonable times be open to inspection of any director upon application
at the office of the corporation during business hours. The Secretary shall
perform all other duties given in these Bylaws and other duties commonly
incident to such office and shall also perform such other duties and have such
other powers as the Board of Directors shall designate from time to time. The
chief executive officer may direct any Assistant Secretary to assume and perform
the duties of the Secretary in the absence or disability of the Secretary, and
each Assistant Secretary shall perform other duties commonly incident to such
office and shall also perform such other duties and have such other powers as
the Board of Directors or the chief executive officer, shall designate from time
to time.
(h) ASSISTANT SECRETARIES. Each Assistant Secretary shall have
the usual powers and duties pertaining to such offices, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to an Assistant Secretary by the Board of Directors, the Chairman of
the Board, the President, the Vice Chairman of the Board, or the Secretary. The
Assistant Secretaries shall exercise the powers of the Secretary during that
officer's absence or inability or refusal to act.
(i) DUTIES OF TREASURER.
(i) The Treasurer shall keep or cause to be kept the
books of account of the corporation in a thorough and proper manner and shall
render statements of the financial affairs of the corporation in such form and
as often as required by the Board of Directors, the Chairman of the Board, the
Vice Chairman of the Board, chief executive officer, if one be designated, the
Chief Financial Officer. The Treasurer, subject to the order of the Board of
Directors, shall have the custody of all funds and securities of the
corporation. The Treasurer shall perform other duties commonly incident to such
office and shall also perform such other duties and have such other powers as
the Board of Directors, the Chairman of the Board, the Vice Chairman of the
Board or the President shall designate from time to time.
13
<PAGE>
(ii) In absence of a designated Chief Financial
Officer, unless otherwise determined by the Board of Directors or chief
executive officer, the Treasurer shall serve as the chief financial officer
subject to control of the chief executive officer.
(iii) The Chief Financial Officer, if any be
designated, may, but need not serve as the Treasurer.
(j) ASSISTANT TREASURERS. Each Assistant Treasurer shall have
the usual powers and duties pertaining to such office, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to each Assistant Treasurer by the Board of Directors, the Chairman of
the Board, the President, the Vice Chairman of the Board, or the Treasurer. The
Assistant Treasurers shall exercise the powers of the Treasurer during that
officer's absence or inability or refusal to act.
SECTION 5.3 DELEGATION OF AUTHORITY. For any reason that the Board of
Directors may deem sufficient, the Board of Directors may, except where
otherwise provided by statute, delegate the powers or duties of any officer to
any other person, and may authorize any officer to delegate specified duties of
such office to any other person. Any such delegation or authorization by the
Board shall be effected from time to time by resolution of the Board of
Directors.
SECTION 5.4 RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 5.5 REMOVAL. Any officer may be removed from office at any
time, either with or without cause, by the vote or written consent of a majority
of the Directors in office at the time, or by any committee or superior officers
upon whom such power of removal may have been conferred by the Board of
Directors.
ARTICLE VI.
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
SECTION 6.1 EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
14
<PAGE>
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chairman
of the Board of Directors, the President, Chief Executive Officer or any
executive Vice President and if any be designated, Chief Financial Officer,
Treasurer, Assistant Secretary or Assistant Treasurer, and upon the authority
conferred by the Board of Directors, President or Chief Executive Officer, any
non-executive Vice President, and by the Secretary. All other instruments and
documents requiring the corporate signature, but not requiring the corporate
seal, may be executed as aforesaid or in such other manner as may be directed by
the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to
the credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 6.2 VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman or Vice Chairman of the Board of Directors, Chief Executive
Officer, the President, or any executive Vice President.
ARTICLE VII.
SHARES OF STOCK
SECTION 7.1 FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman or Vice Chairman of the Board of Directors,
the Chief Executive Officer, the President or any executive Vice President and
by the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, certifying the number of shares and the class or series owned by him
in the corporation. Where such certificate is countersigned by a transfer agent
other than the corporation or its employee, or by a registrar other than the
corporation or its employee, any other signature on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may
15
<PAGE>
be issued with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
SECTION 7.2 LOST CERTIFICATES. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
SECTION 7.3 TRANSFERS.
(a) Transfers of record of shares of stock of the corporation
shall be made only on its books by the holders thereof, in person or by attorney
duly authorized and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares. Upon surrender to the corporation or a
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. The Board of Directors shall have the power and
authority to make all such other rules and regulations as they may deem
expedient concerning the issue, transfer and registration or the replacement of
certificates for shares of capital stock of the corporation.
(b) The corporation shall have power to enter into and perform
any agreement with any number of stockholders of any one or more classes of
stock of the corporation to restrict the transfer of shares of stock of the
corporation of any one or more classes owned by such stockholders in any manner
not prohibited by the Delaware General Corporation Law.
SECTION 7.4 FIXING RECORD DATES.
(a) In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix, in advance, a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting. If no record date is fixed by the Board of Directors, the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or if notice is waived, at the close
of business on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
16
<PAGE>
(b) In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted, and which record date shall be not more than
sixty (60) days prior to such action. If no record date is fixed by the Board of
Directors, the record date for determining stockholders for any such purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
SECTION 7.5 REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII.
OTHER SECURITIES OF THE CORPORATION
SECTION 8.1 EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate ecurities of the corporation, other than stock certificates
(covered in Section 7.1), may be signed by the Chairman or Vice Chairman of the
Board of Directors, the Chief Executive Officer, the President or any executive
Vice President, or such other person as may be authorized by the Board of
Directors, and the corporate seal impressed thereon or a facsimile of such seal
imprinted thereon and attested by the signature of the Secretary or an Assistant
Secretary, or the Treasurer or an Assistant Treasurer; provided, however, that
where any such bond, debenture or other corporate security shall be
authenticated by the manual signature of a trustee under an indenture pursuant
to which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such bond,
debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the corporation or
such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before any bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.
17
<PAGE>
ARTICLE IX.
DIVIDENDS
SECTION 9.1 DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to law
at any regular or special meeting. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation.
SECTION 9.2 DIVIDEND RESERVE. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X.
FISCAL YEAR
The fiscal year of the corporation shall be the calendar year, unless
otherwise fixed by resolution of the Board of Directors.
ARTICLE XI.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS
SECTION 11.1 DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its Directors and executive officers to the fullest extent not
prohibited by the Delaware General Corporation Law; PROVIDED, HOWEVER, that the
corporation may limit the extent of such indemnification by individual contracts
with its Directors and executive officers; and, PROVIDED, FURTHER, that the
corporation shall not be required to indemnify any Director or executive officer
in connection with any proceeding (or part thereof) initiated by such person or
any proceeding by such person against the corporation or its Directors,
officers, employees or other agents unless (i) such indemnification is expressly
required to be made by law, (ii) the proceeding was authorized by the Board of
Directors of the corporation, or (iii) such indemnification is provided by the
corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the Delaware General Corporation Law.
18
<PAGE>
SECTION 11.2 OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The
corporation shall have power to indemnify its other officers, employees and
other agents as set forth in the Delaware General Corporation Law.
SECTION 11.3 GOOD FAITH.
(a) For purposes of any determination under this Article XI, a
Director or executive officer shall be deemed to have acted in good faith and in
a manner such officer reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe that such officer's
conduct was unlawful, if such officer's action is based on information,
opinions, reports and statements, including financial statements and other
financial data, in each case prepared or presented by:
(i) one or more officers or employees of the corporation
whom the Director or executive officer believed to be
reliable and competent in the matters presented;
(ii) counsel, independent accountants or other persons as
to matters which the Director or executive officer
believed to be within such person's professional
competence; and
(iii) with respect to a Director, a committee of the Board
upon which such Director does not serve, as to
matters within such committee's designated authority,
which committee the Director believes to merit
confidence; so long as, in each case, the Director or
executive officer acts without knowledge that would
cause such reliance to be unwarranted.
(b) The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
and in a manner which such person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal
proceeding, that such person had reasonable cause to believe that his conduct
was unlawful.
(c) The provisions of this Section 11.3 shall not be deemed to
be exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth by the Delaware
General Corporation Law.
SECTION 11.4 EXPENSES. The corporation shall advance, prior to the
final disposition of any proceeding, promptly following request therefor, all
expenses incurred by any Director or executive officer in connection with such
proceeding upon receipt of an undertaking by or on behalf of such person to
repay said amounts if it should be determined ultimately that such person is not
entitled to be indemnified under this Article XI or otherwise.
19
<PAGE>
Notwithstanding the foregoing, unless otherwise determined pursuant to
Section 11.5 of this Article XI, no advance shall be made by the corporation if
a determination is reasonably and promptly made (i) by the Board of Directors by
a majority vote of a quorum consisting of Directors who were not parties to the
proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, that the facts known to the decision-making party at the time
such determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the corporation.
SECTION 11.5 ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to Directors and
executive officers under this Article XI shall be deemed to be contractual
rights and be effective to the same extent and as if provided for in a contract
between the corporation and the Director or executive officer. Any right to
indemnification or advances granted by this Article XI to a Director or
executive officer shall be enforceable by or on behalf of the person holding
such right in any court of competent jurisdiction if (i) the claim for
indemnification or advances is denied, in whole or in part, or (ii) no
disposition of such claim is made within ninety (90) days of request therefor.
The claimant in such enforcement action, if successful in whole or in part, also
shall be entitled to be paid the expense of prosecuting his claim. The
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. Neither the failure of the corporation (including its
Board of Directors, independent legal counsel or its stockholders) to have made
a determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because such person has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the corporation (including its Board of
Directors, independent legal counsel or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that claimant has not met the applicable standard of
conduct.
SECTION 11.6 NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any
person by this Article XI shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its Directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law.
SECTION 11.7 SURVIVAL OF RIGHTS. The rights conferred on any person by
this Article XI shall continue as to a person who has ceased to be a Director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 11.8 INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase
20
<PAGE>
insurance on behalf of any person required or permitted to be indemnified
pursuant to this Article XI.
SECTION 11.9 AMENDMENTS. Any repeal or modification of this Article XI
shall only be prospective and shall not affect the rights under this Article XI
in effect at the time of the alleged occurrence of any action or omission to act
that is the cause of any proceeding against any agent of the corporation.
SECTION 11.10 SAVINGS CLAUSE. If this Article XI or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each Director and executive officer
to the full extent not prohibited by any applicable portion of this Article XI
that shall not have been invalidated, or by any other applicable law.
SECTION 11.11 CERTAIN DEFINITIONS. For the purposes of this Article XI,
the following definitions shall apply:
(a) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(b) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding.
(c) The term the "corporation" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Article XI with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(d) References to a "director," "officer," "employee," or
"agent" of the corporation shall include without limitation, situations where
such person is serving at the request of the corporation as a director, officer,
employee, trustee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
(e) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on,
21
<PAGE>
or involves services by, such director, officer, employee, or agent with respect
to an employee benefit plan, its participants, or beneficiaries; and a person
who acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan shall
be deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Article XI.
ARTICLE XII.
NOTICES
SECTION 12.1 NOTICE TO STOCKHOLDERS. Unless the Certificate of
Incorporation requires otherwise, whenever, under any provisions of these
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to such stockholder's last known post office address as shown by
the stock record of the corporation or its transfer agent.
SECTION 12.2 NOTICE TO DIRECTORS. Any notice required to be given to
any Director may be given by the method stated in Section 12.1, or by facsimile,
telex or telegram, except that such notice other than one which is delivered
personally shall be sent to such address as such Director shall have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such Director. It shall not be necessary that the same
method of giving notice be employed in respect of all Directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
SECTION 12.3 ADDRESS UNKNOWN. If no address of a stockholder or
Director be known, notice may be sent to the principal executive officer of the
corporation.
SECTION 12.4 AFFIDAVIT OF MAILING. An affidavit of mailing, executed by
a duly authorized and competent employee of the corporation or its transfer
agent appointed with respect to the class of stock affected, specifying the name
and address or the names and addresses of the stockholder or stockholders, or
Director or Directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall be conclusive evidence of the
statements therein contained.
SECTION 12.5 TIME NOTICES DEEMED GIVEN. All notices given by mail, as
above provided, shall be deemed to have been given as at the time of mailing,
and all notices given by facsimile, telex or telegram shall be deemed to have
been given as of the sending time recorded at the time of transmission.
SECTION 12.6 FAILURE TO RECEIVE NOTICE. The period or limitation of
time within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any Director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
such person in the manner above provided, shall not be
22
<PAGE>
affected or extended in any manner by the failure of such stockholder or such
Director to receive such notice.
SECTION 12.7 NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
SECTION 12.8 NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever
notice is required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings to such
person during the period between such two consecutive annual meetings, or (ii)
all, and at least two, payments (if sent by first class mail) of dividends or
interest on securities during a twelve-month period, have been mailed addressed
to such person at such person's address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required. Any action or meeting which shall be taken or
held without notice to such person shall have the same force and effect as if
such notice had been duly given. If any such person shall deliver to the
corporation a written notice setting forth such person's then current address,
the requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the corporation is such as to require the filing
of a certificate under any provision of the Delaware General Corporation Law,
the certificate need not state that notice was not given to persons to whom
notice was not required to be given pursuant to this paragraph.
ARTICLE XIII.
AMENDMENTS
SECTION 13.1 AMENDMENTS. Except as otherwise provided in the
Certificate of Incorporation, these Bylaws may be altered, amended or repealed,
or new Bylaws may be adopted, by the holders of a majority of the outstanding
voting shares or by the Board of Directors, when such power is conferred upon
the Board of Directors by the Certificate of Incorporation, at any regular
meeting of the stockholders or of the Board of Directors or at any special
meeting of the stockholders or of the Board of Directors if notice of such
alteration, amendment, repeal or adoption of new Bylaws be contained in the
notice of such special meeting. If the power to adopt, amend or repeal Bylaws is
conferred upon the Board of Directors by the Certificate of Incorporation, it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal Bylaws.
23
<PAGE>
SECTION 13.2 APPLICATION OF BYLAWS. In the event that any provisions of
these Bylaws is or may be in conflict with any law of the United States, of the
state of incorporation of the corporation or of any other governmental body or
power having jurisdiction over this corporation, or over the subject matter to
which such provision of these Bylaws applies, or may apply, such provision of
these Bylaws shall be inoperative to the extent only that the operation thereof
unavoidably conflicts with such law, and shall in all other respects be in full
force and effect.
ARTICLE XIV.
LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiaries, including any officer or employee who is a Director of the
corporation or its subsidiaries, whenever, in the judgment of the Board of
Directors, such loan, guarantee or assistance may reasonably be expected to
benefit the corporation. The loan, guarantee or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this Bylaw shall be deemed to deny, limit
or restrict the powers of guaranty or warranty of the corporation at common law
or under statute.
24
<PAGE>
<TABLE>
<S> <C> <C>
INCORPORATED UNDER THE LAWS OF
THE STATE OF DELAWARE
COMMON STOCK COMMON STOCK
NUMBER SHARES
C [LOGO]
SEE REVERSE FOR
THIS CERTIFICATE IS TRANSFERABLE RACKSPACE.COM, INC. CERTAIN DEFINITIONS
IN NEW YORK, NY AND RIDGEFIELD PARK, NJ CUSIP 750086 10 0
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.001 PER SHARE, OF
RACKSPACE.COM, INC.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney, upon surrender of this Certificate properly
endorsed or accompanied by a proper assignment. This Certificate and the
shares represented hereby are issued and shall be held subject to all of the
provisions of the Certificate of Incorporation and Bylaws of the Corporation
and all amendments thereof, copies of which are on file with the Transfer
Agent, to all of which the holder by the acceptance hereof assents.
This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated: Rackspace.com, Inc. Countersigned and Registered:
CORPORATE ChaseMellon Shareholder Services, L.L.C.
SEAL Transfer Agent
PRESIDENT SECRETARY Delaware and Registrar
By
Authorized Signature
</TABLE>
<PAGE>
Rackspace.com, Inc.
The Corporation shall furnish without charge to each stockholder who
so requests a statement of the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock of the Corporation or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Such requests
shall be made to the Corporation's Secretary at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM-as tenants in common UNIF GIFT MIN ACT-......................Custodian.................
(Cust) (Minor)
TEN ENT-as tenants by the entireties under Uniform Gifts to Minors
JT TEN-as joint tenants with right of Act.............................................
survivorship and not as tenants (State)
in common UNIF TRF MIN ACT-.......................Custodian (until age......)
(Cust)
.....................under Uniform Transfers
(Minor)
to Minors Act...................................
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, __________________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE.
_____________________________________________________________________________________________________
_______________________________________________________________________________________________Shares
of the Capital Stock represented by the within Certificate and do hereby irrevocably constitute and
appoint _____________________________________________________________________________________________
_____________________________________________________________________________________________Attorney
to transfer the said stock on the books of the within-named Corporation with full power of substitution
in the premises.
Dated ________________________
X__________________________________
(SIGNATURE)
NOTICE:
THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN -->
UPON THE FACE OF THE
CERTIFICATE IN EVERY
PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT X__________________________________
OR ANY CHANGE WHATEVER. (SIGNATURE)
__________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANK),
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-16.
__________________________________________
SIGNATURE(S) GUARANTEED BY:
__________________________________________
</TABLE>
<PAGE>
OFFICE BUILDING LEASE AGREEMENT
LANDLORD: SANTA CLARA LAND COMPANY, LTD.
TENANT: RACKSPACE.COM
*********
DATED: Feb. 22, 2000
<PAGE>
BASIC LEASE INFORMATION
Lease Date: February 22, 2000
Tenant: rackspace.com
Address of Tenant: 112 E. Pecan, Suite 600
San Antonio, Texas 78205
Contact: Morris A. Miller
Landlord: Santa Clara Land Company, Ltd.
Address of Landlord: 112 East Pecan, Suite 700
San Antonio, Texas 78205
PREMISES: Suite No. 600 which is located in the office building and parking
garage to be (or which has been) constructed on land described as Lot 15,
N.C.B. 139, , National Bank Subdivision, San Antonio, Bexar County, Texas,
and known as Weston Centre, San Antonio, Texas (the "Building").
LEASE TERM: The period commencing on March 1, 2000 (or on such earlier date
as tenant may occupy the premises with Landlord's prior written consent) (the
"commencement date"), and continuing for thirty-six (36) calendar months
thereafter; provided, however, if the term of this lease is deemed to have
commenced on a date other than the first day of a calendar month, the lease
term shall consist of said number of calendar months in addition to the
remainder of the calendar month during which this lease is deemed to have
commenced.
BASIC RENTAL: As Basic Rental for the lease and use of the Premises, Tenant
will pay Landlord, in lawful money of the United States, at the building
office, or to such other party at such other address as Landlord may from
time to time designate, without demand, deduction or abatement the sums set
forth in the following rent schedule:
FROM TO MONTHLY BASE RENTAL
---- -- -------------------
March 1, 2000 February 28, 2001 $12,000.00
March 1, 2001 February 28, 2002 $16,000.00
March 1, 2002 February 28, 2003 $30,151.00
SECURITY DEPOSIT $ N/A
TENANT'S PROPORTIONATE SHARE: The percentage which expresses the ratio
between the number of rentable square feet comprising the premises (16,446)
and the number of rentable square feet of the Building (490,871), which, for
the purposes of this lease, shall be 3.35%; provided, however, that the
actual number of rentable square feet comprising the premises is subject to
reasonable adjustment per final working drawings for the construction of the
improvements to the premises, which adjustment, if made, will also effect an
adjustment to Tenant's proportionate share.
PERMITTED USE: General Office
<PAGE>
The foregoing Basic Lease Information is hereby incorporated into and made a
part of the lease identified hereinabove. Each reference in the lease to any
of the information and definitions set forth in the basic lease information
shall mean and refer to the information and definitions hereinabove set forth
and shall bemused in conjunction with and limited by all references thereto
in the provisions of the lease. In the event of any conflict between any
Basic Lease Information and the lease, the lease shall control.
LANDLORD TENANT
SANTA CLARA LAND COMPANY, LTD. rackspace.com
By: Wiltshire Holdings L.C.,
General Partner
BY: /s/ Graham Weston BY: /s/ Morris A. Miller, COO
--------------------------- --------------------------
Graham Weston Morris A. Miller
Manager Chief Operating Officer
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <C>
1. Definitions and Basic Provisions......................................1
2. Lease Grant...........................................................1
3. Rent..................................................................1
4. Landlord's Obligations................................................2
5. Rental Adjustment.....................................................3
6. Leasehold Improvements................................................5
7. Use...................................................................5
8. Tenant's Repairs and Alterations......................................5
9. Assignment and Subletting.............................................5
10. Indemnity.............................................................6
11. Subordination.........................................................7
12. Rules and Regulations.................................................7
13. Inspection............................................................7
14. Condemnation..........................................................7
15. Fire or Other Casualty................................................7
16. Holding Over..........................................................8
17. Taxes.................................................................8
18. Events of Default.....................................................8
19. Remedies..............................................................9
20. Surrender of Premises.................................................9
21. Attorney's Fees......................................................10
22. Landlord's Lien......................................................10
23. Mechanic's Lien......................................................10
24. No Subrogation Liability Insurance...................................10
25. Substitution Space...................................................11
26. Brokerage............................................................12
27. Change of Building Name..............................................12
28. Estoppel Certificates................................................12
29. Notices..............................................................12
30. Force Majeure........................................................12
31. Separability.........................................................12
32. Amendments; Binding Effect...........................................12
33. Quiet Enjoyment......................................................13
34. Gender...............................................................13
35. Joint and Several Liability..........................................13
36. Personal Liability...................................................13
37. Certain Rights Reserved by Landlord..................................13
38. Notice to Lender.....................................................14
39. Captions.............................................................14
40. Miscellaneous........................................................14
41. Lender Approval......................................................14
42. Exhibits and Attachments.............................................14
43. Special Provisions...................................................14
Exhibit A.............................Outline of Premises
Exhibit B...........................Rules and Regulations
</TABLE>
<PAGE>
OFFICE BUILDING LEASE AGREEMENT
THIS LEASE AGREEMENT is entered into as of the 22nd day of February,
2000, by and between Santa Clara Land Company, Ltd (hereinafter called
"Landlord') and rackspace.com (hereinafter called "Tenant").
WITNESSETH:
1. DEFINITIONS AND BASIC PROVISIONS: The definitions and basic
provisions set forth in the Basic Lease Information (the "Basic Lease
Information executed by Landlord and Tenant contemporaneously herewith are
incorporated herein by reference for all purposes and shall be used in
conjunction with and limited by the reference thereto in the provisions of this
lease. In the event of any conflict between a provision in the Basic Lease
Information on the one hand, and a provision in this Lease or its exhibit on the
other hand, the latter will control.
2. LEASE GRANT. Landlord, in consideration of the rent to be paid and
the other covenants and agreements to be performed by Tenant and upon the terms
hereinafter stated, does hereby lease, demise and let unto Tenant the premises,
as defined in the Basic Lease Information and generally outlined on the plan
attached hereto as Exhibit A, commencing on the Commencement Date and ending on
the last day of the lease term, unless sooner terminated as herein provided. If
this lease is executed before the premises become vacant, or otherwise available
and ready for occupancy, or if any present tenant or occupant of the premises
holds over, and Landlord cannot acquire possession of the premises prior to the
Commencement Date of this lease, Landlord shall not be deemed to be in default
hereunder, and Tenant agrees to accept possession of the premises on such date
as Landlord is able to tender the same, which shall be deemed to be the
Commencement Date of this lease for all purposes, and this lease shall continue
for the lease term specified in the Basic Lease Information. By occupying the
premises, Tenant shall be deemed to have accepted the same as suitable for the
purpose herein intended and to have acknowledged that the same comply fully with
Landlord's obligations, notwithstanding that certain "punch list" type items may
not have been completed. Within ten (10) days after a written request of
Landlord, Tenant agrees to give Landlord a letter confirming the Commencement
Date and certifying that Tenant has accepted delivery of the premises and that
the condition of the premises complies with Landlord's obligations hereunder.
3. RENT. In consideration of this lease, Tenant promises and agrees
to pay Landlord the Basic Rental defined in the Basic Lease Information
(subject to adjustment as hereinafter provided) without deduction or setoff,
for each month of the entire lease term. One such monthly installment
together with the security deposit shall be payable by Tenant to Landlord
contemporaneously with the execution of this lease, and a like monthly
installment shall be due and payable without demand beginning on the first
day of the calendar month following the expiration of the first full calendar
month of the lease term and continuing thereafter on or before the first day
of each succeeding calendar month during the term hereof. Rent for any
fractional month at the beginning of the lease term shall be prorated based on
one three hundred sixty-fifth (1/365) of the current annual Basic Rental for
each day of the partial month this lease is in effect, and shall be due and
payable on or before the date on which Tenant certifies that it has accepted
the premises pursuant to Paragraph 2 hereof. In the event any installment of
the Basic Rental, or any other sums which become owing by Tenant to Landlord
under the provisions hereof is not received within ten (10) days after the
due date thereof (without in any way implying Landlord's consent to such late
payment), Tenant, to the extent permitted by law, agrees to pay, in addition
to said installment of the Basic Rental or such other sums owed, a late
payment charge equal to ten percent (10%) of the installment of the Basic
Rental or such other sums owed, it being understood that said late payment
charge shall constitute liquidated damages and shall be for the purpose of
reimbursing Landlord for the additional costs and expenses which Landlord
presently expects to incur in connection with the handling and processing of
late installment payments of the Basic Rental and such other sums which
become owing by Tenant to Landlord hereunder. Landlord and Tenant expressly
covenant and agree that in the event of any such late payment(s) by Tenant,
the damages so resulting to Landlord will be difficult to ascertain
precisely, and that the foregoing charge constitutes a reasonable and good
faith estimate by the parties of the extent of such damages. Notwithstanding
the foregoing, the foregoing late charges shall not
1
<PAGE>
apply to any sums which may have been advanced by Landlord to or for the benefit
of Tenant pursuant to the provisions of this lease, it being understood that
such sums shall bear interest, which Tenant hereby agrees to pay to Landlord, at
the maximum rate of interest permitted by law to be charged Tenant for the use
or forbearance of such money. The security deposit (as defined in the Basic
Lease Information) shall be held by Landlord without liability for interest and
as security for the performance by Tenant of Tenant's covenants and obligations
under this lease, it being expressly understood that such deposit shall not be
considered an advance payment of rental or a measure of Landlord's damages in
case of default by Tenant. Upon the occurrence of any event of default by
Tenant, Landlord may, from time to time, without prejudice to any other remedy,
use such deposit to the extent necessary to make good any arrearages of rent and
any other damage, injury, expense or liability caused to Landlord by such event
of default. Following any such application of the security deposit, Tenant shall
pay to Landlord on demand the amount so applied in order to restore the security
deposit to its original amount. If Tenant is not then in default hereunder, any
remaining balance of such deposit shall be returned by Landlord to Tenant within
a reasonable period of time after the termination of this lease. If Landlord
transfers its interest in the premises during the lease term, Landlord may
assign the security deposit to the transferee and thereafter shall have no
further liability for the return of such security deposit.
4. LANDLORD'S OBLIGATIONS.
(a) Subject to the limitations hereinafter set forth, Landlord agrees
to furnish Tenant while occupying the premises and while Tenant is not in
default under this lease, facilities to provide (i) water (hot, cold and
refrigerated) at those points of supply provided for general use of tenants in
the Building; (ii) heated and refrigerated air conditioning in season, at such
times as Landlord normally furnishes these services to all tenants of the
Building, and at such temperatures and in such amounts as are reasonably
considered by Landlord to be standard, such service at hours other than those
established by Landlord as standard to be furnished only at the written
request of Tenant, who shall bear the entire cost thereof; (iii) janitorial
service to the premises on weekdays other than holidays for Building standard
installations (it being understood that Landlord reserves the right to bill
Tenant separately for extra janitorial service required by reason of
nonstandard installations) and such window washing as may from time to time in
the Landlord's judgment be reasonably required; (iv) operator-less passenger
elevators for ingress and egress to the floor on which the premises are
located, in common with other tenants, provided that Landlord may reasonably
limit the number of elevators to be in operation at times other than during
customary business hours for the Building and on holidays. In addition,
Landlord agrees at its cost and expense to maintain the public and common
areas of the Building, such as lobbies, stairs, corridors and restrooms, in
reasonably good order and condition, except for damage occasioned by Tenant,
or its employees, agents, or invitees. If Tenant shall desire any of the
services specified in this Paragraph 4 at any time other than times herein
designated, such service or services shall be supplied to Tenant only at the
written request of Tenant delivered to Landlord before 3:00 p.m. on the
business day preceding such extra usage, and Tenant shall pay to Landlord as
additional rent the cost of such service or services immediately upon receipt
of a bill therefor.
(b) Landlord shall make available to Tenant facilities to provide all
electrical current required by Tenant in its use and occupancy of the premises
and further shall make available electric lighting and current for the common
areas of the Building in the manner and to the extent deemed by Landlord to be
standard. The obligation of the Landlord hereunder to make available such
utilities shall be subject to the rules and regulations of the supplier of such
utilities and of any municipal or other governmental authority regulating the
business of providing such utility service. Landlord shall not in any wise be
liable or responsible to Tenant for any loss or damage or expense which Tenant
may sustain or incur if either the quantity or character of any utility service
is changed or is no longer available or is no longer suitable for Tenant's
requirements. At any time when Landlord is making such utility service available
to the premises pursuant to this paragraph, Landlord may, at its option, upon
not less than thirty (30) days prior written notice to Tenant, discontinue the
availability of such utility service. If Landlord gives any such notice of
discontinuance, Landlord shall make all the necessary arrangements with the
public utility supplying the utilities to the neighborhood with respect to
obtaining such utility service to the premises, but Tenant will contract
directly with such public utility for the supplying of such utility service to
the premises.
2
<PAGE>
(c) In the event that any utility service is submetered to any tenant's
premises, Tenant's proportionate share for purposes of computing charges for
utilities for which Tenant is not submetered shall be adjusted by Landlord so
that it shall be a fraction, the numerator of which is the number of rentable
square feet comprising Tenant's premises not separately metered and the
denominator of which is the number of rentable square feet comprising the
premises of all tenants not separately metered with respect to such utility.
(d) Tenant covenants and agrees that at all times its use of electric
current shall never exceed the capacity of existing feeders to the Building or
the risers or wiring installations. Any riser or risers or wiring to meet
Tenant's excess electrical requirements will be installed by Landlord at the
sole cost and expense of Tenant (if, in Landlord's sole judgment, the same are
necessary and will not cause permanent damage or injury to the Building or the
premises or cause or create a dangerous or hazardous condition or entail
excessive or unreasonable alterations, repairs or expense or interfere with or
disturb other tenants or occupants). In the event Tenant's use of electrical
current (i) exceeds 110 volt power, or (ii) exceeds that required for routine
lighting and operation of general office machines (such as typewriters,
dictating equipment, desk model adding machines and the like) which use 110 volt
electrical power, then Tenant shall also pay on demand the cost of any such
excess. Without Landlord's prior written consent, Tenant shall not install any
data processing or computer equipment in the premises or any other equipment
which shall require for its use other than the normal electrical current or
other utility service. Whenever heat generating machines or equipment (other
than general office machines as described hereinbefore) are used in the premises
by Tenant which affect the temperature otherwise maintained by the air
conditioning system or otherwise overload any utility, Landlord shall have the
right to install supplemental air conditioning units or other supplemental
equipment in the premises, and the cost thereof, including the cost of
installation, operation, use and maintenance, shall be paid by Tenant to
Landlord on demand.
(e) Tenant will be billed monthly for all above standard utility
service and other sums due and all such charges shall be considered due upon
delivery of such bill and be deemed as so much additional rent due from Tenant
to Landlord. The rate charged by Landlord shall not exceed the rate prevailing
for Tenant as a user as established by the applicable rate classification
published from time to time by the local electric power company or other utility
supplier.
(f) Failure to any extent to make available, or any slowdown, stoppage
or interruption of, these defined services resulting from any cause (including,
but not limited to, Landlord's compliance with (i) any voluntary or similar
governmental or business guidelines now or hereafter published or (ii) any
requirements now or hereafter established by any governmental agency, board or
bureau having jurisdiction over the operation and maintenance of the Building)
shall not render Landlord liable in any respect for damages to either person,
property or business, nor be construed an eviction of Tenant or work an
abatement of rent, nor relieve Tenant from fulfillment of any covenant or
agreement hereof. Should any equipment or machinery furnished by Landlord break
down or for any cause cease to function properly, Landlord shall use reasonable
diligence to repair same promptly, but Tenant shall have no claim for abatement
of rent or damages on account of any interruption in service occasioned thereby
or resulting therefrom.
(g) Notwithstanding any expiration or termination of this lease prior
to the lease expiration date, Tenant's obligations to pay any and all additional
rent pursuant to this Paragraph 4 shall continue and shall cover all periods up
to such early expiration or termination date of this lease; provided however, if
Landlord terminates this lease without waiving Landlord's right to seek damages
against Tenant, Tenant's obligation to pay any and all additional rent pursuant
to this Paragraph 4 shall not terminate as a result thereof. Tenant's obligation
to pay any and all additional rent or other sums owing by Tenant to Landlord
under this lease shall survive any expiration or termination of this lease.
5. RENTAL ADJUSTMENT.
(1) Adjustments in Basic Rental. Tenant hereby agrees to pay to
Landlord the Basic Rental specified in the Basic Lease Information adjusted in
the following manner without deduction or set-off:
3
<PAGE>
(a) For the purposes or this Lease the term "Basic Cost" shall mean any
and all costs, expenses and disbursements of every kind and character (subject
to the limitations set forth below) which Landlord shall incur, pay or become
obligated to pay in connection with the ownership of any estate or interest in,
operation, maintenance, repair, replacement, and security of the Building and
Parking Garage, determined in accordance with generally accepted accounting
principles consistently applied, including but not limited to the following:
(i) Wages and salaries (including management fees) of all employees
engaged in the operation, repair, replacement, maintenance, and
security of the Building, including taxes, insurance and benefits
relating thereto.
(ii) All supplies and materials used in the operation, maintenance,
repair, replacement, and security of the Building.
(iii) Annual cost of all capital improvements made to the Building
which although capital in nature can reasonably be expected to reduce
the normal operating costs of the Building, as well as all capital
improvements made in order to comply with any statutes, rules,
regulations or directives hereafter promulgated by any governmental
authority relating to energy, conservation, public safety or security.
(iv) Cost of all utilities, other than the cost of electricity supplied
to tenants of the Building which is actually reimbursed to Landlord by
such tenants.
(v) Cost of all maintenance and service agreements on equipment,
including alarm service, window cleaning and elevator maintenance.
(vi) Cost of casualty and liability insurance applicable to the
Building and Landlord's personal property used in connection therewith.
(vii) "Taxes" as defined in Paragraph 17.
(viii) Cost of repairs, replacements, and general maintenance of the
Building, other than replacement of the roof, foundation and exterior
walls of the Building.
(ix) Cost of service or maintenance contracts with independent
contractors for the operation, maintenance, repair, replacement, or
security of the Building.
There are specifically excluded from the definition of the term "Basic
Cost" expenses for capital improvements made to the Building, other than capital
improvements described in subparagraph (iii) above and except for items which,
though capital for accounting purposes, are properly considered maintenance and
repair items, such as painting of common areas, replacement of carpet in
elevator lobbies, and the like; electricity costs paid by Tenant pursuant to
paragraph 4 of this lease; expenses for repair, replacements and general
maintenance paid by proceeds of insurance or by Tenant or other third parties,
and alterations attributable solely to tenants of the Building other than
Tenant; interest, amortization or other payments on loans to Landlord;
depreciation of the Building; leasing commissions; and income, excess profits or
franchise taxes or other such taxes imposed on or measured by the income of
Landlord from the operation of the Building.
(b) Tenant shall during the term of this lease pay as additional rent
an amount (per each square foot of rentable area within the leased premises)
equal to the excess ("Excess") from time to time of actual Basic Cost per
rentable square foot in the Building over the actual Basic Cost per calendar
year 2000. Landlord, at its option, may collect such additional rent in a lump
sum, to be due and payable within thirty (30) days after Landlord furnishes to
Tenant a statement of actual Basic Cost for the previous year per paragraph
(c) below, or beginning with January 1 of the first full calendar year
following the Rental Commencement Date, and on each January 1 thereafter.
Landlord shall also have the option to make a good faith estimate of the
Excess for each upcoming calendar year and upon thirty (30) days' written
notice to Tenant may require the monthly payment
4
<PAGE>
of such additional rent equal to 1/12 of such estimate. Any amounts paid based
on such an estimate shall be subject to adjustment pursuant to subparagraph (c)
when actual Basic Cost is available for each calendar year. For the purposes of
calculating the additional rental payment hereunder with respect to any
fractional calendar year during the term of this lease, Landlord may either (i)
estimate Basic Cost for the portion of the lease term during such partial year,
or (ii) estimate Basic Cost for the entire calendar year and reduce the same to
an amount bearing the same proportion to the full amount of estimated Basic Cost
for such year as the number of days in such fractional calendar year bears to
the total number of days in such full calendar year.
(c) By April 1 of each calendar year during Tenant's occupancy, or as
soon thereafter as practicable, Landlord shall furnish to Tenant a statement of
Landlord's actual Basic Cost for the previous year adjusted as provided in
subparagraph (d). If for any calendar year additional rent collected for the
prior year as a result of Landlord's estimate of Basic Cost is in excess of the
additional rent actually due during such prior year, then Landlord shall refund
to Tenant any overpayment. Likewise, Tenant shall pay to Landlord, on demand,
any underpayment with respect to the prior year.
(d) With respect to any calendar year or partial calendar year during
the term of this lease in which the Building is not occupied to the extent of
ninety-five percent (95%) of the rentable area thereof, the Basic Cost for such
period shall, for the purposes hereof, be increased to the amount which would
have been incurred had the Building been occupied to the extent of ninety-five
percent (95%) of the rentable area thereof.
6. LEASEHOLD IMPROVEMENTS. Improvements to the premises shall be
installed at the cost and expense of Tenant (which shall be payable on demand by
Landlord), but only in accordance with plans and specifications which have been
previously submitted to and approved in writing by Landlord, such work to be
performed only by Landlord or by contractors and subcontractors approved in
writing by Landlord, it being understood that Tenant shall procure and maintain
and shall cause such contractors, subcontractors and other persons engaged by or
on behalf of Tenant to procure and maintain, insurance coverage against such
risks, in such amounts and with such companies as Landlord may require in
connection with the installation of such improvements. Landlord has made no
representations as to the conditions of the premises or the Building or to
remodel, repair or decorate, except as expressly set forth herein.
7. USE. Tenant shall use the premises only for the permitted use (as
defined in the Basic Lease Information). Tenant will not occupy or use the
premises, or permit any portion of the premises to be occupied or used, for any
business or purpose other than the permitted use or for any use or purpose which
is unlawful in part or in whole or deemed to be disreputable in any manner or
extra hazardous on account of fire, nor permit anything to be done which will in
any way increase the rate of insurance on the Building or contents; and in the
event that, by reason of acts of Tenant, there shall be any increase in rate of
insurance on the Building or contents created by Tenant's acts or conduct of
business, then such acts of Tenant shall be deemed to be an event of default
hereunder and Tenant hereby agrees to pay to Landlord the amount of such
increase on demand and acceptance of such payment shall not constitute a waiver
of any of Landlord's other rights provided herein. Tenant will conduct its
business and control its agents, employees and invitees in such a manner as not
to create any nuisance, nor interfere with, annoy or disturb other tenants or
Landlord in the management of the Building. Tenant will maintain the premises in
a clean, healthful and safe condition and will comply with all laws, ordinances,
orders, rules and regulations (state, federal, municipal and other agencies or
bodies having any jurisdiction thereof) with reference to the use, condition or
occupancy of the premises. Tenant will not, without the prior written consent of
Landlord, paint, install lighting or decorations, or install any signs, window
or door lettering or advertising media of any type on or about the premises or
any part thereof.
8. TENANT'S REPAIRS AND ALTERATIONS. Tenant will not in any manner
deface or injure the Building, and will pay the cost of repairing any damage or
injury done to the Building or any part thereof by Tenant or Tenant's agents,
employees, or invitees. Tenant shall throughout the lease term take good care of
the premises and keep them free from waste and nuisance of any kind. Tenant
agrees to keep the premises, including all fixtures installed by Tenant and any
plate glass and special store fronts, in good condition and make all necessary
non-structural repairs except those caused by fire, casualty or acts of God
covered by Landlord's fire
5
<PAGE>
insurance policy covering the Building. The performance by Tenant of its
obligations to maintain and make repairs shall be conducted only by contractors
and subcontractors approved in writing by Landlord, it being understood that
Tenant shall procure and maintain and shall cause such contractors and
subcontractors engaged by or on behalf of Tenant to procure and maintain
insurance coverage against such risks, in such amounts and with such companies
as Landlord may require in connection with any such maintenance and repair. If
Tenant fails to make such repairs within fifteen (15) days after the occurrence
of the damage or injury, Landlord may at its option make such repair, and Tenant
shall, upon demand therefor, pay Landlord for the cost thereof. At the end
or other termination of this lease, Tenant shall deliver up the premises with
all improvements located thereon (except as otherwise herein provided) in good
repair and condition, reasonable wear and tear excepted, and shall deliver to
Landlord all keys to the premises. Tenant will not make or allow to be made any
alterations or physical additions in or to the premises without the prior
written consent of Landlord. All alterations, additions or improvements
(whether temporary or permanent in character) made in or upon the premises,
either by Landlord or Tenant, shall be Landlord's property on termination of
this lease and shall remain on the premises without compensation to Tenant. All
furniture, movable trade fixtures and equipment installed by Tenant may be
removed by Tenant at the termination of this lease if Tenant so elects, and
shall be so removed if required by Landlord, or if not so removed shall, at the
option of Landlord, become the property of Landlord. All such installations,
removals and restoration shall be accomplished in a good workmanlike manner so
as not to damage the premises or the primary structure or structural qualities
of the Building or the plumbing, electrical lines or other utilities.
9. ASSIGNMENT AND SUBLETTING.
(a) Tenant shall not, without the prior written consent of Landlord,
which consent not to be unreasonably withheld (i) assign or in any manner
transfer this Lease or any estate or interest therein, or (ii) permit any
assignment of this Lease or any estate or interest therein, by operation of law,
or (iii) sublet the leased Premises or any part thereof, or (iv) grant any
license, concession or other right of occupancy of any portion of the leased
Premises, or (v) permit the use of the leased Premises by any parties other than
Tenant, its agents and employees and any such act without Landlord's prior
written consent shall be void and of no effect. Consent by Landlord to one or
more assignments or sublettings shall not operate as a waiver of Landlord's
rights as to any subsequent assignments and sublettings. Notwithstanding any
assignment or subletting, Tenant and any guarantor of Tenant's obligations under
this Lease shall at all times remain fully responsible and liable for the
payment of the rent herein specified and for compliance with all of Tenant's
other obligations under this Lease. If an event of default, as hereinafter
defined, should occur while the leased Premises or any part thereof are then
assigned or sublet, Landlord, in addition to any other remedies herein provided
or provided by law, may at its option collect directly from such assignee or
sublessee all rents becoming due to Tenant under such assignment or sublease and
apply such rent against any sums due to Landlord by Tenant hereunder, and Tenant
hereby authorizes and directs any such assignee or sublessee to make such
payments of rent directly to Landlord upon receipt of notice from Landlord. No
direct collection, by Landlord from any such assignee or sublessee shall be
construed to constitute a novation or a release of Tenant or any guarantor of
Tenant from the further performance of its obligations hereunder. Receipt by
Landlord of rent from any assignee, sublessee or occupant of the leased Premises
shall not be deemed a waiver of the covenant of this Lease contained against
assignment and subletting or a release of Tenant under this Lease. The receipt
by Landlord from any such assignee or sublessee obligated to make payments of
rent shall be a full and complete release, discharge, and acquittance to such
assignee or sublessee to the extent of any such amount of rent so paid to
Landlord. Landlord is authorized and empowered, on behalf of Tenant, to
endorse the name of Tenant upon any check, draft, or other instrument payable to
Tenant evidencing payment of rent, or any part thereof, and to receive and apply
the proceeds therefrom in accordance with the terms hereof. Tenant shall not
mortgage, pledge or otherwise encumber its interest in this Lease or in the
leased Premises.
(b) If Tenant requests Landlord's consent to an assignment of the Lease
or subletting of all or a part of the Premises, it shall submit to Landlord, in
writing, the name of the proposed assignee or subtenant and the nature and
character of the business of the proposed assignee or subtenant, the term, use,
rental rate and other particulars of the proposed subletting or assignment,
including without limitation, evidence
6
<PAGE>
satisfactory to Landlord that the proposed subtenant or assignee is financially
responsible and will immediately occupy and thereafter use the Premises (or any
sublet portion thereof) for the remainder of the lease term (or for the entire
term of the sublease, if shorter). Landlord shall have the option (to be
exercised within ten (10) days after submission of Tenant's written request) to
cancel this Lease (or the applicable portion thereof as to a partial subletting)
as of the commencement date stated in the above mentioned subletting or
assignment. If Landlord elects to cancel this Lease as stated, then the term of
this Lease, and the tenancy and occupancy of the leased Premises by Tenant
thereunder, shall cease, terminate, expire and come to an end with respect to
that portion of the Premises so assigned or sublet as if the cancellation date
were the original termination date of this Lease and Tenant shall pay to
Landlord all costs or charges which are the responsibility of Tenant hereunder
with respect to that portion of the Premises so assigned or sublet, and Tenant
shall, at its own cost and expense, discharge in full any outstanding
commission obligation of Landlord with respect to this Lease, or any part hereof
so canceled. Thereafter Landlord may lease the Premises to the prospective
subtenant or assignee without liability to Tenant. If Landlord does not thus
cancel this Lease, the terms and provisions of paragraph (a) hereof will apply.
(c) If Landlord consents to any subletting or assignment by Tenant as
herein provided, and subsequently any rents received by Tenant under any such
sublease are in excess of the rent payable by Tenant under this Lease, or any
additional consideration is paid to Tenant by the assignee under any such
assignment, then Landlord may, at its option, either (i) declare such excess
rents under any sublease or such additional consideration for an assignment to
be due and payable by Tenant to Landlord as additional rent hereunder, or (ii)
elect to cancel this Lease as provided in paragraph (b) hereof.
(d) Landlord shall have the right to transfer, assign or convey, in
whole or in part, the Building and any and all of its rights under this Lease,
and in the event Landlord assigns its rights under this Lease, Landlord shall
thereby be released from any further obligations hereunder, and Tenant agrees to
look solely to such successor in interest of Landlord for performance of such
obligations.
(e) Tenant shall not offer the Premises for lease, assignment or
sublease (without implying the consent of Landlord to offer the Premises for any
purposes) at a rental rate less than the then "current building rental rate,"
which is the rental rate for space in the Building offered by Landlord to third
parties. In the event there is any controversy or question as to the current
building rental rate offered by Landlord, Landlord shall be the sole and
exclusive determinate of such rental rate. In the event Tenant shall enter into
a lease, assignment or sublease of the Premises (without implying the consent
of Landlord thereto) and the rental rate is other than the current building
rental rate, Landlord, in addition to any other right or remedy available to
Landlord may (1) terminate this Lease, (2) terminate the Lease, assignment or
sublease, (3) increase the rental rate under this Lease to the current building
rental rate as determined by Landlord, or (4) increase the rental rate under the
Lease, assignment or sublease to the current building rental rate as determined
by Landlord, and keep the excess, if any for itself as additional rent.
(f) Tenant shall not offer the Premises for lease, assignment or
sublease (without implying the consent of Landlord to offer the Premises for any
such purposes) to any tenant or subtenant of the Building. In the event Tenant
shall enter into a lease, assignment or sublease of the Premises (without
implying the consent of Landlord thereto) with a current tenant of the Building,
Landlord, in addition to any other right or remedy available to Landlord may (1)
terminate this Lease, (2) terminate the lease, assignment or sublease, (3)
increase the rental rate under this Lease to the current building rental rate as
determined by Landlord, or (4) increase the rental rate under the lease,
assignment or sublease to the current building rental crate as determined by
Landlord, and keep the excess, if any for itself as additional rent.
(g) Tenant will not sublease from any tenant of the Building.
(h) Notwithstanding any provision of this Lease to the contrary, Tenant
may assign or otherwise transfer any portion of this Lease, or sublet any
portion of the Premises, to an entity which is the parent company of Tenant, a
wholly owned subsidiary of Tenant, or an entity with entirely common ownership
with Tenant, without the prior consent of Landlord, but with written notice to
Landlord.
7
<PAGE>
10. INDEMNITY. Landlord shall not be liable for and Tenant will
indemnify and save harmless Landlord of and from all fines, suits, claims,
demands, losses and actions (including attorney's fees) for any injury to
person or damage to or loss of property on or about the premises caused by
the negligence or misconduct of or breach of this lease by, Tenant, its
employees, subtenants, invitees or other persons entering the premises or the
Building under express or implied invitation of Tenant, or arising out of
Tenant's use of the premises. Landlord shall not be liable or responsible for
any loss or damage to any property or death or injury to any person
occasioned by theft, fire, act of God, public enemy, criminal conduct of
third parties, injunction, riot, strike, insurrection, war, court order,
requisition or other action by any governmental body or authority, by other
tenants of the Building or any other matter beyond the control of Landlord,
or for any injury or damage or inconvenience which may arise through repair
or alteration of any part of the Building, or failure to make repairs, or
from any cause whatever.
11. SUBORDINATION. This lease and all rights of Tenant hereunder are
subject and subordinate to any deeds of trust, mortgages or other instruments
of security, as well as to any ground leases or primary leases, that now or
hereafter cover all or any part of the Building, the land situated beneath
the Building or any interest of Landlord therein, and to any and all advances
made on the security thereof, and to any and all increases, renewals,
modifications, consolidations, replacements and extensions of any of such
deeds of trust, mortgages, instruments of security or leases. This provision
is hereby declared by Landlord and Tenant to be self-operative and no further
instrument shall be required to effect such subordination of this lease.
Tenant shall, however, upon demand at any time or times execute, acknowledge
and deliver to Landlord any and all instruments and certificates that in the
judgment of Landlord or Landlord's mortgagee may be necessary or proper to
confirm or evidence such subordination. Notwithstanding the generality of the
foregoing provisions of this Paragraph 11, Tenant agrees that any such
mortgagee shall have the right at any time to subordinate any such deeds of
trust, mortgages or other instruments of security to this lease on such terms
and subject to such conditions as such mortgagee may deem appropriate in its
discretion. Tenant further covenants and agrees upon demand by Landlord's
mortgagee at any time, before or after the institution of any proceedings for
the foreclosure of any such deeds of trust, mortgages or other instruments of
security, or sale of the Building pursuant to any such deeds of trust,
mortgages or other instruments of security, to attorn to such purchaser upon
any such sale and to recognize such purchaser as Landlord under this lease.
The agreement of Tenant to attorn upon demand of Landlord's mortgagee
contained in the immediately preceding sentence shall survive any such
foreclosure sale or trustee's sale. Tenant shall upon demand at any time or
times, before or after any such foreclosure sale or trustee's sale, execute,
acknowledge and deliver to Landlord's mortgagee any and all instruments and
certificates that in the judgment of Landlord's mortgagee may be necessary or
proper to confirm or evidence such attornment, and Tenant hereby irrevocably
authorizes Landlord's mortgagee to execute, acknowledge and deliver any such
instruments and certificates on Tenant's behalf.
12. RULES AND REGULATIONS. Tenant and Tenant's agents, employees,
and invitees will comply fully with all requirements of the rules and
regulations of the Building and related facilities which are attached hereto
as Exhibit B, and made a part hereof as though fully set out herein. Landlord
shall at all times have the right to change such rules and regulations or to
promulgate other rules and regulations in such manner as may be deemed
advisable for safety, care, or cleanliness of the Building and related
facilities or premises, and for preservation of good order therein, all of
which rules and regulations, changes and amendments will be forwarded to
Tenant in writing and shall be carried out and observed by Tenant. Tenant
shall further be responsible for the compliance with such rules and
regulations by the employees, servants, agents, visitors and invitees of
Tenant.
13. INSPECTION. Landlord or its officers, agents and representatives
shall have the right to enter into and upon any and all parts of the premises
at all reasonable hours (or, in any emergency, at any hour) to (a) inspect
same or clean or make repairs or alterations or additions as Landlord may
deem necessary (but without any obligation to do so, except as expressly
provided for herein) or (b) show the premises to prospective tenants,
purchasers or lenders; and Tenant shall not be entitled to any abatement or
reduction of rent by reason thereof, nor shall such be deemed to be an actual
or constructive eviction.
8
<PAGE>
14. CONDEMNATION. If the premises or any part thereof, or if the
Building or any portion of the Building leaving the remainder of the Building
unsuitable for use as an office building comparable to its use on the
Commencement Date of this lease, shall be taken or condemned in whole or in part
for public purposes, or sold in lieu of condemnation, then the lease term shall,
at the sole option of Landlord, forthwith cease and terminate; all compensation
awarded for any taking (or sale proceeds in lieu thereof) shall be the property
of Landlord, and Tenant shall have no claim thereto, the same being hereby
expressly waived by Tenant.
15. FIRE OR OTHER CASUALTY. In the event that the Building should be
totally destroyed by fire, tornado or other casualty or in the event the
premises or the Building should be so damaged that rebuilding or repairs cannot
be completed within one hundred eighty (180) days after the date of such damage,
Landlord may at its option terminate this lease, in which event the rent shall
be abated during the unexpired portion of this lease effective with the date of
such damage. In the event the Building or the premises should be damaged by
fire, tornado or other casualty covered by Landlord's insurance, but only to
such extent that rebuilding or repairs can be completed within one hundred
eighty (180) days after the date of such damage, or if the damage should be more
serious but Landlord does not elect to terminate this lease, in either such
event Landlord shall within sixty (60) days after the date of such damage
commence to rebuild or repair the Building and/or the premises and shall proceed
with reasonable diligence to restore the Building and/or premises to
substantially the same condition in which it was immediately prior to the
happening of the casualty, except that Landlord shall not be required to
rebuild, repair or replace any part of the furniture, equipment, fixtures and
other improvements which may have been placed by Tenant or other tenants within
the Building or the premises. Landlord shall allow Tenant a fair diminution of
rent during the time the premises are unfit for occupancy. In the event any
mortgagee under a deed of trust, security agreement or mortgage on the Building
should require that any insurance proceeds be used to retire the mortgage debt,
Landlord shall have no obligation to rebuild and this lease shall terminate upon
notice to Tenant. Except as hereinafter provided, any insurance which may be
carried by Landlord or Tenant against loss or damage to the Building or to the
premises shall be for the sole benefit of the party carrying such insurance and
under its sole control.
16. HOLDING OVER. Should Tenant, or any of its successors in interest,
hold over the premises, or any part thereof, after the expiration of the lease
term, unless otherwise agreed in writing by Landlord, such holding over shall
constitute and be construed as a tenancy at will only, at a daily rental equal
to the daily rent payable for the last month of the lease term plus fifty
percent (50%) of such amount. The inclusion of the preceding sentence shall not
be construed as Landlord's consent for Tenant to hold over.
17. TAXES.
(a) Landlord shall pay before they become delinquent all taxes,
assessments and governmental charges of any kind and nature whatsoever
(hereinafter collectively referred to as "Taxes") lawfully levied or assessed
against the Building and the grounds, parking areas, driveways and alleys
around the Building. In addition, the term "Taxes" shall include any
reasonable fees, expenses and costs incurred by Landlord in its efforts to
insure a fair and equitable tax burden on the land and the Building and in
connection with any protest by Landlord of any assessments, levies or the tax
rate.
(b) If at any time during the term of this lease, the present method
of taxation shall be changed so that in lieu of the whole or any part of any
tax assessments or governmental charges levied, assessed or imposed on real
estate and the improvements thereon, there shall be levied, assessed or
imposed on Landlord a capital levy or other tax directly on the rents
received therefrom and/or a franchise tax, assessment, levy or charge
measured by or based, in whole or in part, upon such rents for the present or
any future building on the premises, then all such taxes, assessments,
levies or charges, or the part thereof so measured or based, shall be deemed
to be included within the term "Taxes" for the purposes hereof.
(c) Tenant shall be liable for all taxes levied or assessed against
personal property, furniture or fixtures placed by Tenant in the premises. If
any such taxes for which Tenant is liable are levied or assessed against
Landlord or Landlord's property and if Landlord elects to pay the same or if
the assessed value of Landlord's
9
<PAGE>
property is increased by inclusion of personal property, furniture or
fixtures placed by Tenant in the premises, and Landlord elects to pay the
taxes based on such increases, Tenant shall pay to Landlord upon demand that
part of such taxes for which Tenant is primarily liable hereunder.
18. EVENTS OF DEFAULT. The following events shall be deemed to be
events of default by Tenant under this lease:
(a) Tenant shall fail to pay when due any rental or other sums
payable by Tenant hereunder (or under any other lease now or hereafter
executed by Tenant in connection with space in the Building).
(b) Tenant shall fail to comply with or observe any other provisions
of this lease (or any other lease now or hereafter executed by Tenant in
connection with space in the Building).
(c) Tenant or any guarantor of Tenant's obligations hereunder shall
make an assignment for the benefit of creditors.
(d) Any petition shall be filed by or against Tenant or any
guarantor of Tenant's obligation hereunder under any section or chapter of
the National Bankruptcy Act as amended, or under any similar law or statute
of the United States or any State thereof, or Tenant or any guarantor of
Tenant's obligations hereunder shall be adjudged bankrupt or insolvent in
proceedings filed thereunder.
(e) A receiver or Trustee shall be appointed for all or
substantially all of the assets of Tenant or any guarantor of Tenant's
obligations hereunder.
(f) Tenant shall desert or vacate any portion of the premises.
19. REMEDIES. Upon the occurrence of any event of default specified
in this lease, Landlord shall have the option to pursue any one or more of
the following remedies without any notice or demand whatsoever:
(a) Terminate this lease in which event Tenant shall immediately
surrender the premises to Landlord, and if Tenant fails to do so, Landlord
may, without prejudice to any other remedy which it may have for possession
or arrearages in rent, enter upon and take possession and expel or remove
Tenant and any other person who may be occupying said premises or any part
thereof, without being liable for prosecution or any claim for damages
therefor; and Tenant agrees to pay to Landlord on demand the amount of all
loss and damage which Landlord may suffer by reason of such termination,
whether through inability to relet the premises on satisfactory terms or
otherwise, including the loss of rental for the remainder of the lease term.
(b) Enter upon and take possession of the premises and expel or
remove Tenant and any other person who may be occupying the premises or any
part thereof, without being liable for prosecution or any claim for damages
therefor, and if Landlord so elects, relet the premises on such terms as
Landlord shall deem advisable and receive the rent therefor; and Tenant
agrees to pay to Landlord on demand any deficiency that may arise by reason
of such reletting for the remainder of the lease term.
(c) Enter upon the premises without being liable for prosecution or
any claim for damages therefor, and do whatever Tenant is obligated to do
under the terms of this lease; and Tenant agrees to reimburse Landlord on
demand for any expenses which Landlord may incur in thus effecting compliance
with Tenant's obligations under this lease, and Tenant further agrees that
Landlord shall not be liable for any damages resulting to the Tenant from
such action.
No reentry or taking possession of the premises by Landlord shall be construed
as an election on its part to terminate this lease, unless a written notice of
such intention be given to Tenant. Notwithstanding any such reletting or
reentry or taking possession, Landlord may at any time thereafter elect to
terminate this lease for a previous default. Pursuit of any of the foregoing
remedies shall not preclude pursuit of any of the other remedies herein
provided or any other remedies provided by law, nor shall pursuit of any
remedy herein
10
<PAGE>
provided constitute a forfeiture or waiver of any rent due to
Landlord hereunder or of any damages occurring to Landlord by reason of the
violation of any of the terms, provisions and covenants herein contained.
Landlord's acceptance of rent following an event of default hereunder shall
not be construed as LandLord's waiver of such event of default. No waiver by
Landlord of any violation or breach of any of the terms, provisions, and
covenants herein contained shall be deemed or construed to constitute a
waiver of any other violation or default. The loss or damage that Landlord
may suffer by reason of termination of this lease or the deficiency from any
reletting as provided for above shall include the expense of repossession and
any repairs or remodeling undertaken by Landlord following repossession.
Should Landlord at any time terminate this lease for any default, in addition
to any other remedy Landlord may have, Landlord may recover from Tenant all
damages Landlord may incur by reason of such default, including the cost of
recovering the premises and the loss of rental for the remainder of the lease
term.
In the event that Landlord enters upon and takes possession of the premises
due to the Tenant's default in payment of rent, the Landlord is expressly
authorized to change the lock on the door to the premises, and shall not be
required to place written notice on the Tenant's front door nor to furnish a
new key to the Tenant. It is further agreed that all rights and remedies of
both the Landlord and the Tenant shall be governed by this lease, and not by
Section 93.002(a)-(g) of the Texas Property Code, which shall have no
applicability to this lease.
20. SURRENDER OF PREMISES. No act or thing done by Landlord or its
agents during the term hereby granted shall be deemed an acceptance of a
surrender of the premises, and no agreement to accept a surrender of the
premises shall be valid unless the same be made in writing and signed by
Landlord.
21. ATTORNEY'S FEES. In case it should be necessary or proper for
Landlord to bring any action under this lease or to consult or place said
lease, or any amount payable by Tenant hereunder, with an attorney concerning
or for the enforcement of any of Landlord's rights hereunder, then Tenant
agrees in each and any such case to pay to Landlord a reasonable attorney's
fee.
22. LANDLORD'S LIEN. In addition to the statutory Landlord's lien,
Landlord shall have, at all times, and Tenant hereby grants to Landlord, a
contractual Landlord's lien and a valid security interest to secure payment
of all rentals and other sums of money becoming due hereunder from Tenant,
and to secure payment loss which Landlord may suffer by reason of the breach
by Tenant of any damages or covenant, agreement or condition contained
herein, upon all goods, wares, equipment, fixtures, furniture, improvements
and other personal property of Tenant presently or which may hereafter be
situated on the premises, and all proceeds therefrom, and such property shall
not be removed therefrom without the consent of Landlord until all arrearages
in rent as well as all other sums of money then due to Landlord hereunder
shall first have been paid and discharged and all the covenants, agreements
and conditions hereof have been fully complied with and performed by Tenant.
Upon the occurrence of an event of default by Tenant, Landlord may, in
addition to any other remedies provided herein, enter upon the premises and
take possession of any goods, wares, equipment, fixtures, furniture,
improvements and other personal property of Tenant situated on the premises,
without liability for trespass or conversion, and sell the same at public or
private sale, with or without having such property at the sale, after giving
Tenant reasonable notice of the time and place of any public sale or of the
time after which any private sale is to be made, at which sale Landlord or
its assigns may, pursuant to its contractual Landlord's lien or its security
interest, purchase unless otherwise prohibited by law. Unless otherwise
provided by law, and without intending to exclude any other manner of giving
Tenant reasonable notice, the requirements of reasonable notice shall be met
if such notice is given in the manner prescribed in Paragraph 29 of this
lease at least five (5) days before the time of sale. The proceeds from any
such disposition, less any and all expenses connected with the taking of
possession, holding and selling of the property (including reasonable
attorney's fees and other expenses), shall be applied as a credit against the
indebtedness secured by the security interest granted in this Paragraph 22.
Any surplus shall be paid to Tenant or as otherwise required by law; and
Tenant shall pay any deficiencies forthwith. Upon request by Landlord, Tenant
agrees to execute and deliver to Landlofd a financing statement in form
sufficient to perfect the security interest of Landlord in the aforementioned
property and proceeds thereof under the provisions of the Uniform Commercial
Code in force in the State of Texas. The statutory lien for rent is not
hereby waived,
11
<PAGE>
the contractual Landlord's lien and the security interest herein granted
being in addition and supplementary thereto.
23. MECHANIC'S LEINS. Tenant will not permit any mechanic's lien or
liens to be placed upon the premises or the Building or improvements thereon
during the lease term caused by or resulting from any work performed,
materials furnished or obligation incurred by or at the request of Tenant,
and in the case of the filing of any such lien Tenant will promptly pay same.
If default in payment thereof shall continue for twenty (20) days after
written notice thereof from Landlord to Tenant, Landlord shall have the right
and privliege at Landlord's option of paying the same or any portion thereof
without inquiry as to the validity thereof, and any amounts so paid,
including expenses and interest, shall be so much additional indebtedness
hereunder due by Tenant to Landlord and shall be repaid to Landlord
immediately on rendition of a bill therefor.
24. NO SUBROGATION-LIABILITY INSURANCE.
(a) Each party hereto hereby waives any cause of action it might
have against the other party on account of any loss or damage that is insured
against under any insurance policy (to the extent that such loss or damage is
recoverable under such insurance policy) that covers the Building, the
premises, Landlord's or Tenant's fixtures, personal property, leasehold
improvements or business and which names Landlord or Tenant, as the case may
be, as a party insured, it being understood and agreed that this provision is
cumulative of Paragraph 10 hereof. Each party hereto agrees that it will
request its insurance carrier to endorse all applicable policies waiving the
carrier's rights of recovery under subrogation or otherwise against the other
party.
(b) Tenant shall procure and maintain throughout the lease term a
policy or policies of insurance at its sole cost and expense and in amounts
of not less than a combined single limit of $1,000,000 or such other amounts
as Landlord may from time to time require, insuring Tenant and Landlord
against any and all liability to the extent obtainable for injury to or death
of a person or persons or damage to property occasioned by or arising out of
or in connection with the use, operation and occupancy of the premises.
Tenant shall furnish a certificate of insurance and such other evidence
satisfactory to Landlord of the maintenance of all insurance coverage
required hereunder, and Tenant shall obtain a written obligation on the part
of each insurance company to notify Landlord at least thirty (30) days prior to
cancellation or material change of any such insurance. Such certificates or
other evidence of insurance coverage to be delivered no later than the date
on which Tenant takes possession of the leased premises for any purpose and
thereafter no later than ten (10) days prior to expiration of existing
policies. All insurance policies required of Tenant shall be written on an
occurrence basis.
25. SUBSTITUTION SPACE. Intentionally Deleted
26. BROKERAGE. Tenant warrants that it has had no dealing with any
broker or agent in connection with the negotiation or execution of this lease
and Tenant agrees to indemnify Landlord against all costs, expenses,
attorneys' fees or other liability for commissions or other compensation or
charges claimed by any broker or agent claiming the same by, through or under
Tenant.
27. CHANGE OF BUILDING NAME. Landlord reserves the right at any time
to change the name by which the Building is designated.
28. ESTOPPEL CERTIFICATES. Tenant agrees to furnish from time to
time when requested by Landlord, the holder of any deed of trust or mortgage
or the lessor under any ground lease covering all or any part of the Building
or the improvements therein or the premises or any interest of Landlord
therein, a certificate signed by Tenant confirming and containing such
factual certifications and representations deemed appropriate by Landlord,
the holder of any deed of trust or mortgage or the lessor under any ground
lease covering all or any part of the Building or the improvements therein or
the premises or any interest of Landlord therein, and Tenant shall within ten
(10) days following receipt of said proposed certificate from Landlord,
return a fully
12
<PAGE>
executed copy of said certificate to Landlord. In the event Tenant shall fail
to return a fully executed copy of such certificate to Landlord within the
foregoing ten-day period, then Tenant shall be deemed to have approved and
confirmed all of the terms, certifications and representations contained in
such certificate.
29. NOTICES. Each provision of this Agreement, or of any applicable
governmental laws, ordinances, regulations, and other requirements with
reference to the sending, mailing or delivery of any notice, or with
reference to the making of any payment by Tenant to Landlord, shall be deemed
to be complied with when and if the following steps are taken:
(a) All rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord in Bexar County, Texas, at
the address set forth in the Basic Lease Information or at such other
address as Landlord may specify from time to time by written notice delivered
in accordance herewith.
(b) Any notice or document required to be delivered hereunder shall
be deemed to be delivered if actually received and whether or not received
when deposited in the United States mail, postage prepaid, certified or
registered mail (with or without return receipt requested), addressed to the
parties hereto at the respective addresses set forth in the Basic Lease
Information or at such other address as either of said parties have
theretofore specified by written notice delivered in accordance herewith.
30. FORCE MAJEURE. Whenever a period of time is herein prescribed
for action to be taken by Landlord, Landlord shall not be liable or
responsible for, and there shall be excluded from the computation for any
such period of time, any delays due to strikes, riots, acts of God, shortages
of labor or materials, war, governmental laws, regulations or restrictions
any other causes of any kind whatsoever which are beyond the reasonable
control of Landlord.
31. SEPARABILITY. If any clause or provision of this lease is
illegal, invalid or unenforceable under present or future laws effective
during the lease term, then and in that event, it is the intention of the
parties hereto that the remainder of this lease shall not be affected
thereby, and it is also the intention of the parties to this lease that in
lieu of each clause or provision of this lease that is illegal, invalid or
unenforceable, there be added as a part of this lease a clause or provision
as similar in terms to such illegal, invalid or unenforceable clause or
provision as may be possible and be legal, valid and enforceable.
32. AMENDMENTS; BINDING EFFECT. This lease may not be altered,
changed or amended, except by instrument in writing signed by both parties
hereto. No provision of this lease shall be deemed to have been waived by
Landlord unless such waiver be in writing signed by Landlord and addressed to
Tenant, nor shall any custom or practice which may evolve between the parties
in the administration of the terms hereof be construed to waive or lessen the
right of Landlord to insist upon the performance by Tenant in strict
accordance with the terms hereof. The terms and conditions contained in this
lease shall apply to, inure to the benefit of, and be binding upon the
parties hereto, and upon their respective successors in interest and legal
representatives, except as otherwise herein expressly provided.
33. QUIET ENJOYMENT. Provided Tenant has performed all of the terms
and conditions of this lease, including the payment of rent, to be performed
by Tenant, Tenant shall peaceably and quietly hold and enjoy the premises for
the lease term, without hindrance from Landlord, subject to the terms and
conditions of this lease.
34. GENDER. Words of any gender used in this lease shall be held and
construed to include any other gender, and words in the singular number shall
be held to include the plural, unless the context otherwise requires.
35. JOINT AND SEVERAL LIABILITY. If there be more than one Tenant,
the obligations hereunder imposed upon Tenant shall be joint and several. If
there be a guarantor of tenant's obligations hereunder, the obligations
hereunder imposed upon Tenant shall be the joint and several obligations of
Tenant and such guarantor and Landlord need not first proceed against Tenant
before proceeding against such guarantor nor
13
<PAGE>
shall any such guarantor be released from its guaranty for any reason
whatsoever, including without limitation, in case of any amendments hereto,
waivers hereof or failure to give such guarantor any notices hereunder.
36. PERSONAL LIABILITY. The liability of Landlord to Tenant for any
default by Landlord under the terms of this lease shall be limited to the
interest of Landlord in the Building and the land and Landlord shall not be
personally liable for any deficiency. This clause shall not be deemed to
limit or deny any remedies which Tenant may have in the event of default by
Landlord hereunder which do not involve the personal liability of Landlord.
37. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord shall have the
following rights, exercisable without notice and without liability to Tenant
for damage or injury to property, persons or business and without effecting
an eviction, constructive or actual, or disturbance of Tenant's use or
possession or giving rise to any claim for setoff or abatement of rent:
(a) To decorate and make repairs, alterations, additions, changes or
improvements, whether structural or otherwise, in and about the Building, or
any part thereof, and for such purposes to enter the leased premises and,
during the continuance of any such work to temporarily close doors,
entry-ways, public space and corridors in the Building, to interrupt or
temporarily suspend Building services and facilities and to change the
arrangement and location of entrances or passageways, doors and doorways,
corridors, elevators, stairs, toilets, or other public parts of the Building,
all without abatement of rent or affecting any of Tenant's obligations
hereunder, so long as the premises are reasonably accessible.
(b) To have and retain a paramount title to the leased premises free
and clear of any act of Tenant purporting to burden or encumber them.
(c) To grant to anyone the exclusive right to conduct any business
or render any service in or to the Building, provided such exclusive right
shall not operate to exclude Tenant from the use expressly permitted herein.
(d) To prohibit the placing of vending or dispensing machines of any
kind in or about the premises without the prior written permission of
Landlord.
(e) To have access for Landlord and other tenants of the Building to
any mail chutes located on the premises according to the rules of the United
States Postal Service.
(f) To take all such reasonable measures as Landlord may deem
advisable for the security of the Building and its occupants, including
without limitation, the search of all persons entering or leaving the
Building, the evacuation of the Building for cause, suspected cause, or for
drill purposes, the temporary denial of access to the Building, and the
closing of the Building after normal business hours and on Saturdays, Sundays
and holidays, subject, however, to Tenant's right to admittance when the
Building is closed after normal business hours under such reasonable
regulations as Landlord may prescribe from time to time which may include by
way of example but not of limitation, that persons entering or leaving the
Building, whether or not during normal business hours, identify themselves to
a security officer by registration or otherwise and that such persons
establish their right to enter or leave the Building.
38. NOTICE TO LENDER. If the premises or the Building or any part
thereof are at any time subject to a first mortgage or a first deed of trust
or other similar instruments and this lease or the rentals are assigned to
such mortgagee, trustee or beneficiary and the Tenant is given written notice
thereof, including the post office address of such assignee, then the Tenant
shall not terminate this lease or abate rentals for any default on the part
of the Landlord without first giving written notice by certified or
registered mail, return receipt requested to such assignee, specifying the
default in reasonable detail, and affording such assignee a reasonable
opportunity to make performance, at its election, for and on behalf of the
Landlord.
14
<PAGE>
39. CAPTIONS. The captions contained in this lease are for
convenience of reference only and in no way limit or enlarge the terms and
conditions of this lease.
40. MISCELLANEOUS.
(a) Any approval by Landlord or Landlord's architects and/or
engineers of any of Tenant's drawings, plans and specifications which are
prepared in connection with any construction of improvements in the premises
shall not in any way be construed or operate to bind Landlord or to
constitute a representation or warranty of Landlord as to the adequacy or
sufficiency of such drawings, plans and specifications, or the improvements
to which they relate, for any use, purpose, or condition, but such approval
shall merely be the consent of Landlord as may be required hereunder in
connection with Tenant's construction of improvements in the leased premises
in accordance with such drawings, plans and specifications.
(b) Each and every covenant and agreement contained in this lease
is, and shall be construed to be, a separate and independent covenant and
agreement.
(c) There shall be no merger of this lease or of the leasehold
estate hereby created with the fee estate in the leased premises or any part
thereof by reason of the fact that the same person may acquire or hold,
directly or indirectly, this lease or the leasehold estate hereby created or
any interest in this lease or in such leasehold estate as well as the fee
estate in the leasehold premises or any interest in such fee estate.
(d) Neither Landlord nor Landlord's agents or brokers have made any
representations or promises with respect to the premises, the Building or the
land except as herein expressly set forth and no rights, easements or
licenses are acquired by Tenant by implication or otherwise except as
expressly set forth in the provisions of this lease.
(e) The submission of this lease to Tenant shall not be construed as
an offer, nor shall Tenant have any rights with respect thereto unless and
until Landlord shall, or shall cause its managing agent to, execute a copy of
this lease and deliver the same to Tenant.
(f) In no event shall Landlord, including any successor or assignee
of all or a portion of Landlord's interest in the Building, be personally
liable or accountable with respect to any provision of this Lease. If
Landlord shall be in breach or default with respect to any obligation
hereunder or otherwise, Tenant agrees to look for satisfaction solely to
Landlord's interest in the Building.
41. LENDER APPROVAL. This lease is subject to Landlord's lender
approval. If Landlord can obtain said approval only upon the basis of
modifications of the terms and provisions of this lease, Landlord shall have
the right to cancel this lease if Tenant refuses to approve in writing any
such modification within fifteen (15) days after Landlord's request
therefor. If such right to cancel is exercised, this lease shall thereafter
be null and void, and security deposited hereunder shall be returned to
Tenant and neither party shall have any liability to the other by reason of
such cancellation.
42. EXHIBITS AND ATTACHMENTS. All exhibits, attachments, riders and
addenda referred to in this lease and the exhibits listed hereinbelow are
incorporated into this lease and made apart hereof for all intents and
purposes.
Exhibit A: Outline of Premises
Exhibit B: Rules and Regulations
15
<PAGE>
43. SPECIAL PROVISIONS.
PARKING: Provided Tenant is not in default hereunder, Tenant shall
be permitted to use the parking garage associated with the Building during
the lease term for the parking of one (1) monthly parking permit for each 800
square feet of rentable area leased in the Building at the current building
rate, conditions and regulations as are from time to time charged or
applicable to patrons of said parking garage for space similarly situated
within said parking garage plus State and Local Taxes; provided, however, the
failure, for any reason, of Landlord to provide or make available such
parking spaces to Tenant or the inability of Tenant to utilize said parking
spaces shall under no circumstances be deemed a default by Landlord as to
permit Tenant to terminate this Lease, in whole or in part, or to have any
claim or cause of action against Landlord as a result thereof, the same being
hereby expressly waived by Tenant.
TERMINATION RIGHT: At the end of the First (1st) year of the Lease Term,
Tenant shall have a one time option to "buy-out" the remaining term of the
Lease and thereby obtain a termination of this Lease on the terms and
provisions stated herein. Provided the proposed buy-out is coincident to
Tenant providing at least one hundred twenty (120) days prior written notice
by Tenant to Landlord of the proposed effective date of termination. Tenant
may terminate this Lease by payment of a "Cancellation Fee" to Landlord
consisting of the following:
(1) All unamortized costs associated with the Lease including unamortized
brokerage commissions, the costs of improvements, architectural fees
and the cost of legal fees incurred by Landlord associated with the
termination of this Lease, which may include the cost of review by
legal counsel of related documents and matters, plus (2) a fee equal
to three (3) months Basic Rental. The costs associated with the Lease
shall be amortized in equal instalments over the initial Lease Term at
a rate of twelve percent (12%) per annum.
In the event Tenant gives Landlord such buy-out notice in accordance
with the terms hereof. Landlord shall provide to Tenant within thirty (30) days
of receipt of such notice, a calculation of the amount due by Tenant to Landlord
representing the Cancellation Fee. Tenant shall, within thirty (30) days after
of receipt of such notice, pay Landlord the Cancellation Fee or Tenant shall be
deemed to have waived the right to exercise this buy-out and this Lease shall
remain in full force.
DATED AS OF THE DATE FIRST ABOVE WRITTEN.
LANDLORD: TENANT:
SANTA CLARA LAND COMPANY, LTD. RACKSPACE.COM
By: Wiltshire Holdings L.C.,
Its General Partner
BY: /s/ Graham Weston BY: /s/ Morris A. Miller COO
------------------------- -------------------------
Graham Weston Morris A. Miller
Manager Chief Operating Officer
TITLE:
-------------
16
<PAGE>
EXHIBIT "A"
OUTLINE OF PREMISES
[GRAPHIC]
<PAGE>
EXHIBIT "B"
BUILDING RULES AND REGULATIONS
The following rules and regulations shall apply, where applicable, to the
premises, the Building, the parking garage associated therewith, the land
situated beneath the Building and the appurtenances thereto:
1. Sidewalks, doorways, vestibules, halls, stairways and other similar areas
shall not be obstructed by tenants or used by any tenant for any purpose
other than ingress and egress to and from the leased premises and for going
from one to another part of the Building.
2. Plumbing, fixtures and appliances shall be used only for the purposes for
which designed, and no sweepings, rubbish, rags or other unsuitable material
shall be thrown or placed therein. Damage resulting to any such fixtures or
appliances from misuse by a tenant or such tenant's agents, employees or
invitees, shall be paid by such tenant, and Landlord shall not in any case be
responsible therefor.
3. No signs, advertisements or notices shall be painted or affixed on or to
any windows or doors or other part of the building except of such color, size
and style and in such places as shall be first approved in writing by
Landlord. No nails, hooks or screws shall be driven or inserted in any part
of the Building except by the Building maintenance personnel nor shall any
part of the Building be defaced by tenants. No curtains or other window
treatments shall be placed between the glass and the Building standard window
treatments.
4. Landlord will provide and maintain an alphabetical directory board for all
tenants in the first floor (main lobby) of the Building and no other
directory shall be permitted unless previously consented to by Landlord in
writing. The cost of directory strips shall be borne by Tenant.
5. Landlord shall provide all locks for doors in each tenant's leased
premises, at the cost of such tenant, and no tenant shall place any
additional lock or locks on any door in its leased area without Landlord's
prior written consent. Landlord shall furnish a reasonable number of keys to
the locks on the doors in each tenant's leased premises to each tenant, at
the cost of such tenant, and the tenants shall not have any duplicate keys
made.
6. With respect to work being performed by tenants in any leased premises
with the approval of Landlord, all tenants will refer all contractors,
contractors' representatives and installation technicians rendering any
service to them to Landlord for Landlord's supervision, approval and control
before the performance of any contractual services. This provision shall
apply to all work performed in the Building including, but not limited to,
installations of telephones, telegraph equipment, electrical devices and
attachments, doors, entranceways, and any and all installations of every
nature affecting floors, walls, woodwork trim, windows, ceilings, equipment
and any other physical portion of the Building.
7. Movement in or out of the Building of furniture or office equipment, or
dispatch or receipt by tenants of any bulky material, merchandise or
materials which requires use of elevators or stairways, or movement through
the Building entrances or lobby shall be restricted to such hours as Landlord
shall designate. All such movements shall be under the supervision of
Landlord and in the manner agreed between the tenants and Landlord by
prearrangement before performance. Such prearrangement initiated by a tenant
will include determination by Landlord, and subject to its decision and
control, as to the time, method, and routing of movement and as to
limitations for safety or other concern which may prohibit any article,
equipment or any other item from being brought into the Building. The tenants
are to assume all risks as to the damage to articles moved and injury to
persons or public engaged or not engaged in such movement, including
equipment, property and personnel of Landlord if damaged or injured as a
result of acts in connection with carrying out this service for a tenant from
the time of entering the property to completion of work; and Landlord shall not
be liable for acts of any person engaged in, or any damage or loss to any of
said property or persons resulting from, any act in connection with such
service performed for a tenant.
8. Landlord shall have the power to prescribe the weight and positition of
safes and other heavy equipment or items, which shall in all cases, to
distribute weight, stand on supporting devices approved by Landlord. All
18
<PAGE>
damages done to the Building by the installation or removal of any property
of a tenant, or done by a tenant's property while in the Building, shall be
repaired at the expense of such tenant.
9. A tenant shall notify the Building Manager when safes or other heavy
equipment are to be taken in or out of the Building, and the moving shall be
done under the supervision of the Building Manager, after written permission
from Landlord. Persons employed to move such property must be acceptable to
Landlord.
10. Corridor doors, when not in use, shall be kept closed.
11. Each tenant shall cooperate with Landlord's employees in keeping its
leased premises neat and clean. Tenant shall not employ any person for the
purpose of such cleaning other than the Building's cleaning and maintenance
personnel.
12. Landlord shall be in no way responsible to the tenants, their agents,
employees, or invitees for any loss of property from the leased premises or
public areas or for any damages to any property thereon from any cause
whatsoever.
13. To insure orderly operation of the Building, no ice, mineral or other
water, towels, newspapers, etc. shall be delivered to any leased area except
by persons appointed or approved by Landlord in writing.
14. Should a tenant require telegraphic, telephonic, annunciator or other
communication service, Landlord will direct the electrician where and how
wires are to be introduced and placed and none shall be introduced or placed
except as Landlord shall direct. Electric current shall not be used for power
or heating without Landlord's prior written permission.
15. Tenant shall not make or permit any improper, objectionable or unpleasant
noises or odors in the Building or otherwise interfere in any way with other
tenants or persons having business with them.
16. Nothing shall be swept or thrown into the corridors, halls, elevator
shafts or stairways. No birds or animals shall be brought into or kept in, on
or about any tenant's leased premises.
17. No machinery of any kind shall be operated by any tenant on its leased
area without the prior written consent of Landlord, nor shall any tenant use
or keep in the Building any inflammable or explosive fluid or substance.
18. No portion of any tenant's leased premises shall at any time be used or
occupied as sleeping or lodging quarters.
19. Landlord will not be responsible for lost or stolen personal property,
money or jewelry from tenant's leased premises or public or common areas
regardless of whether such loss occurs when the area is locked against entry
or not.
20. Landlord reserves the right to rescind any of these rules and regulations
and to make such other and further rules and regulations as in its judgment
shall from time to time be needful for the safety, protection, care and
cleaniness of the Building, the operation thereof, the preservation of good
order therein and the protection and comfort of the tenants and their agents,
employees and invitees, which rules and regulations, when made and written
notice thereof is given to a tenant, shall be binding upon it in like manner
as it originally herein prescribed.
19
<PAGE>
CONFIDENTIAL ANTI-DILUTION AGREEMENT
This Agreement is made this 30th day of November, 1999, by and
between Rackspace, Ltd., a Texas limited partnership, Macroweb, LC, its
general partner, Trout, Ltd., a Texas limited partnership ("Trout"), Weston
Investment Interests, LC, a Nevada limited liability company ("Weston"),
MiniPat & Company, Ltd. ("MiniPat"), Patrick R. Condon ("Condon"), Richard
Yoo ("Yoo") and Dirk Elmendorf ("Elmendorf") and First Inning Investors, L.P.
("First Inning"), Isom Capital Partners I, L.P.("Isom") and Hamilton
Companies, LLC ("Hamilton").
This Agreement, which provides Weston, First Inning, Isom, Hamilton,
MiniPat and Trout (collectively, the "Second Amendment Investors") limited
protections against dilution with respect to the Units in the Partnership
purchased by them under the terms of the Second Amendment to Agreement of
Limited Partnership of Rackspace, Ltd, is made by the parties hereto to
induce the Second Amendment Investors to purchase Units in the Partnership.
THE PARTIES AGREE AS FOLLOWS:
1. TERM. This agreement applies to any equity investment made in the
Partnership between the date hereof and August 30, 2000, provided that this
agreement shall terminate prior to August 30, 2000 upon the closing of an
offering of equity in the Partnership whereby more than $1,500,000.00 in
cash is raised provided that the purchase price per Unit is not less than
$2.10, adjusted by any split or reverse split in the number of Units of the
Partnership which occurs after the date hereof("as Adjusted"). The period
during which this Agreement is in effect is referred to as the "Term".
2. ANTI-DILUTION RIGHTS. To the extent that during the Term the
Partnership issues any additional Units (the "Additional Units") (other than
an issuance pursuant to an option agreement with an employee or otherwise to
compensate an employee, or incident to an acquisition of assets by the
Partnership in which more than 700,000 Units, as Adjusted, are issued to the
seller of such assets), and the purchase price per Unit is less than $2.10
(as determined without regard to the operation of this Agreement and the
issuance of Adjusting Units), as Adjusted ("Dilutive Transaction"),
contemporaneously with the Dilutive Transaction, the Partnership will issue
the Second Amendment Investors additional Units in the Partnership in an
amount which provides them with the Ownership Percentage Interest which they
would have held in the Partnership represented by the Units purchased by them
on this date (for the purposes of calculating such Ownership Percentage
Interest, the 238,095 Units to be purchase by Hamilton under the option
contained in the Second Amendment shall be treated as if the option were
exercised on this date, but only to the extent that Hamilton exercises such
option), had the Additional Units been sold at $2.10 per Unit, as Adjusted
("Adjusting Units"). As a result of this adjustment, the new investor(s)
under the Dilutive Transaction will also receive Adjusting Units in an amount
necessary to provide him with the Ownership Percentage Interest in the
Partnership contemplated by the Dilutive Transaction. Adjusting Units shall
not be subject to any pre-emptive rights contained in the Agreement of
Limited Partnership of Rackspace, Ltd.
<PAGE>
For example: Assume that six months after the date of this agreement
a new investor is willing to invest $2,000,000.00 in exchange for 10% of
Rackspace. Assuming there are 15 Million Units outstanding, if this agreement
were not in effect, the new investor would receive 1,666,666 units at $1.20
per unit and the aggregate units outstanding would be l6,666,666. Because the
per unit price for the new investment is less than $2.10, the proposed
investment would be a Dilutive Transaction. Had the Dilutive Transaction been
at $2.10 per unit, 952,380.95 additional units would have been issued to the
new investor ($2,000,000 divided by $2.10) and 15,952,380.95 aggregate units
would have been outstanding (15,000,000 plus 952,380.95). Assuming the Second
Amendment Investors owned 7,500,000 or 50% of the units outstanding before
the Dilutive Transaction, if the new units were sold at $2.10 per unit the
Second Amended Investors would hold 47.01492% of the outstanding units
(7,500,000 is 47.0492% of 15,952,380.95). The Second Amended Investors would
hold only 45.00l8% of the units outstanding if the Dilutive Transaction were
to occur without adjustment (7,500,000 is 45.0018% of 16,666,666).
Consequently, under the terms of this agreement the Second Amendment
Investors must receive enough Adjustment Units to own 47.01492% of the
aggregate outstanding units after the Dilutive Transaction and the
new investor must receive enough Adjustment Units after the Dilutive
Transaction to own 10% of the aggregate outstanding units after the Dilutive
Transaction. In this example since the Second Amendment Investors are
entitled to hold 47.0192% of the aggregate units and the new investor is
entitled to own 10% of the aggregate units after the Dilutive Transaction,
the holders of the 7,500,000 units not held by the Second Amendment Investors
pre Dilutive Transaction can only hold 42.98508% of the aggregate units after
the Dilutive Transaction (100% less 57.0192%). Consequently, the outstanding
units after the Dilutive Transaction must be 17,447,914 (7,500,000 is
42.98508% of 17,447,914), and 1,744,791.4 (10%) must be held by the new
investor and 8,203,122.8 (47.01492%) must be held by the Second Amended
Investors. To accomplish this the new investor must be issued 78,125.4
Adjustment Units (1,747,914 minus 1,666,666) and the Second Amended Investors
must be issued 703,122.8 Adjustment Units (8,203,122.8 minus 7,500,000).
3. CONFIDENTIALITY. The parties to this agreement agree to keep its
terms strictly confidential and not to disclose the terms hereof to any third
party other than the equity holders of such parties without the consent of
the General Partner (or any successor entity to the Partnership); provided,
however, that this provision shall not apply to information which, at the time
of disclosure, is already part of the public domain (except by breach of this
Agreement) and information which is required to be disclosed by law.
<PAGE>
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE DULY EXECUTED AND DELIVERED THIS
AGREEMENT ON THE DATE FIRST WRITTEN ABOVE.
RACKSPACE, LTD.
By: Macroweb, LC, general partner
By: /s/ Morris Miller, member
---------------------------
By: /s/ Graham Weston, manager
---------------------------
Macroweb, LC,
By: /s/ Morris Miller, member
---------------------------
Its: member
---------------------------
Trout, Ltd.
Macroweb, LC, general partner
By: /s/ Morris Miller, member
---------------------------
Its: member
---------------------------
MiniPat & Company, Ltd.
Patrick R. Condon, general partner
By: /s/ Patrick R. Condon
---------------------------
/s/ Patrick R. Condon
---------------------------
Patrick Condon
/s/ Richard Yoo
---------------------------
Richard Yoo
/s/ Dirk Elmendorf
---------------------------
Dirk Elmendorf
<PAGE>
First Inning Investors, L.P.
By: Trango Capital, L.L.C., its general partner
By: /s/ Quincy Lee
-----------------------
Quincy Lee, manager
Isom Capital Partners I, L.P.
By: BESK Funding, Inc. its general partner
By: /s/ S. James Bishken
---------------------------
S. James Bishken, President
Hamilton Companies, LLC
By: /s/ Frederick C. Hamilton
--------------------------
Title: President
------------------
Weston Investment Interests, LC
By: /s/ Graham Weston
---------------------------
Its: manager
---------------------------
<PAGE>
First Inning Investors, L.P.
By: Trango Capital, L.L.C., its general partner
By: /s/ Quincy Lee
---------------------------
Quincy Lee, manager
Isom Capital Partners I, L.P.
By: BESK Funding, Inc. its general partner
By: /s/ S. James Bishken
---------------------------
S. James Bishken, President
The Hamilton Companies, LLC
By: /s/ Frederick C. Hamilton
---------------------------
Title: President and Manager
------------------------
Weston Investment Interests, LC
By: /s/ Graham Weston
---------------------------
Its: manager
---------------------------
<PAGE>
AMENDMENT TO CONFIDENTIAL ANTI-DILUTION AGREEMENT
This Amendment to Confidential Anti-Dilution Agreement (hereinafter
referred to as the "Amendment") is made this 22nd day of February, 2000, by
and among Rackspace, Ltd. (the "Partnership"), Macroweb, LC, a Texas limited
liability company (the "General Partner" or "Macroweb"), Trout, Ltd., a Texas
limited partnership ("Trout"), Richard Yoo ("Yoo"), Patrick Condon ("Condon")
and Dirk Elmendorf ("Elmendorf"), Isom Capital Partners I, L.P. ("Isom"),
First Inning Investors, L.P. ("First Inning"), The Hamilton Companies LLC, a
Colorado limited liability company ("Hamilton"), Weston Investment Interest,
L.L.C., a Nevada limited liability company ("Weston Entity"), MiniPat &
Company, Ltd., a Texas limited partnership ("MiniPat")(Macroweb, Trout, Yoo,
Condon, Elmendorf, Isom, First Inning, Hamilton, Weston Entity and MiniPat
are sometimes referred to herein as the "Existing Partners") and 2M
Technology Ventures, L.P. (the "New Partner" or "2M"). This Amendment amends
the Confidential Anti-Dilution Agreement dated November 30, 1999 (hereinafter
referred to as the "Agreement"). Except as amended by this Amendment, the
terms of the Agreement shall continue in full force and effect. Capitalized
terms used herein shall, unless otherwise specified, have the meanings
assigned to them in the Agreement.
The parties to this Amendment agree that for the purposes of the
Agreement, 2M shall be included as a "Second Amendment Investor" and as such
shall have the same rights and benefits under the Agreement as those parties
who were originally named in the Agreement as Second Amendment Investors. In
addition, 2M agrees to be bound by the terms and conditions contained in the
Agreement, including but not limited to the confidentiality provisions
contained in the Agreement.
Executed as of the date first written above.
RACKSPACE, LTD.
By: Macroweb, LC, general partner
By: /s/ Graham Weston
---------------------------
Member
By: /s/ Morris A. Miller
---------------------------
Member
Macroweb, LC
/s/ Morris A. Miller
---------------------------------------
Morris A. Miller, Member
/s/ Graham M. Weston
---------------------------------------
Graham M. Weston, Member
<PAGE>
LIMITED PARTNERS:
/s/ Richard Yoo
-----------------------------------------
Richard Yoo
/s/ Dirk Elmendorf
-----------------------------------------
Dirk Elmendorf
/s/ Patrick Condon
-----------------------------------------
Patrick Condon
Trout, Ltd.
By: Knightsbridge, L.C.,General Partner
By: /s/ Graham Weston
----------------------------------
Its: manager
---------------------------------
Isom Capital Partners I, L.P.
By: BESK Funding, Inc., General Partner
By: /s/ S. James Bishkin
----------------------------------
S. James Bishkin
President
First Inning Investors, L.P.
By: Trango Capital L.L.C., General
Partner
By: /s/ Quincy J. Lee
-----------------------------
Quincy J. Lee, Manager
The Hamilton Companies LLC
By: /s/ Frederick C. Hamilton
---------------------------------------
<PAGE>
Title: President
------------------------------------
Weston Investment Interest, L.L.C.
By: /s/ Graham Weston
---------------------------------------
MiniPat & Company, Ltd.
By: /s/ Patrick Condon
---------------------------------------
Title: President
------------------------------------
2M Technology Ventures, L.P.
By: 2M Technology Group, L.L.C.,
Its: General Partner
By: /s/ Steven D. Leeke
------------------------------
<PAGE>
CREDIT AGREEMENT
This Agreement is made this 29th day of December, 1998, by and
between Rackspace, Ltd., a Texas limited partnership ("Borrower") and Exeter
Financial, LC, a Texas limited liability company ("Lender"), Graham Weston and
Morris Miller.
Contemporaneously with the execution of this Agreement, Borrower has
borrowed from Lender and Lender has loaned to Borrower, $150,000.00 (the
"First Loan"), which First Loan is secured by all of the assets of the
Borrower. Incident to the First Loan, Borrower has delivered to Lender a fully
executed Promissory Note (the "First Note") and Security Agreement (the
"Security Agreement"), and UCC-1 financing statement. In consideration for the
Loan and the security interest received by the Lender in the Borrower's
assets, Lender agrees to advance and Morris Miller and Graham Weston agree to
cause Lender to advance, or advance personally, in lieu thereof, an additional
$400,000.00 upon written request of the Borrower (the "Second Loan"). At the
request of Richard Yoo, President of the Borrower, the Second Loan may be
advanced in one lump sum of $400,000.00, or it may be made in more than one
advances; provided, however, that the parties agree that the full $400,000.00
shall be advanced on or before July 1, 1999. The Lender shall advance the
amounts requested by Borrower within ten (10) business days of receipt of
written request. Each advance made under this Agreement shall be evidenced by
a promissory note in substantially the same form as the First Note, to be
prepared by Lender and in a form satisfactory to Lender and Borrower. Such
promissory notes shall have the same payment provisions and interest rates, so
that payments under such notes shall commence on January 1, 2002, and equal
payments of principal and interest shall be made over the five year period
following January 1, 2002 with a final Maturity Date of January 1, 2007.
BORROWER:
RACKSPACE, LTD.
By: Macroweb, LC, general partner
By: /s/ Morris Miller
------------------------
Its: member
------------------------
LENDER:
EXETER FINANCIAL, LC
/s/ Morris Miller
----------------------
By: /s/ Morris Miller Morris A. Miller
-------------------
Its: member /s/ Graham Weston
------------------- ----------------------
Graham Weston
<PAGE>
Support Agreement
This Agreement is made this 29th day of December 1998, by and
between Graham M. Weston ("Weston") and Morris A. Miller ("Miller")
(collectively, "G&M"), Rackspace, Ltd., a Texas limited partnership (the
"Partnership") and Richard Yoo, Dirk Elmendorf and Pat Condon (collectively,
the "Class A Limited Partners").
G&M represent to the Class A Limited Partners that they own 100% of
the limited partner interests of Trout, Ltd. ("Trout") and are the sole
members of Macroweb, LC, which are Partners of the Partnership and as such,
G&M derive a benefit from the success of the Partnership. The Class A Limited
Partners of the Partnership have agreed to become limited partners of the
Partnership based in part upon the commitments made in this Agreement by G&M.
G&M agree as follows:
1. RIGHT OF FIRST REFUSAL. G&M may not propose to make any sale, transfer
(which shall include a merger, statutory exchange, consolidation or
recapitalization of Trout or Macroweb), assignment or other disposition of
all or any part of their membership interests in Macroweb, LC or the Trout
Interests in Trout (such interests desired to be sold, transferred, pledged
or assigned are referred to as the "Controlling Units offered for Sale")
except by sale of cash or a combination of cash and promissory notes. Prior
to making such disposition, Weston or Miller, as the case may be, shall first
offer the Controlling Units Offered for Sale to the Class A Limited Partners,
in proportion to their Ownership Interests in the Partnership under the same
terms and conditions as the proposed sale (the "Terms of Sale"). Miller
and/or Weston, as the case may be, shall provide to the Class A Limited
Partners all available information regarding the proposed sale and the
proposed purchaser, as may be reasonably requested by the Class A Limited
Partners. The Class A Limited Partners shall have four business days from the
receipt of such written offer to (i) elect in writing to purchase all of the
Controlling Units Offered for Sale (in proportion to their Ownership
Interests in the Partnership, or in whatever other proportion they may
otherwise agree), and (ii) make available to Miller and/or Weston, as the
case may be, at the offices of Macroweb, LC, an amount equal to ten (10%)
percent of the purchase price of the Controlling Units Offered for Sale as a
non-refundable deposit; provided that, in lieu of such deposit, the Class A
Limited Partners may pledge (under a pledge agreement reasonably acceptable
to Miller and/or Weston, as the case may be) their Units as security for
their obligation to pay an amount equal to 10% of the purchase price of the
Controlling Units Offered for Sale as a non-refundable deposit. Payment for
the Controlling Units Offered for Sale shall be made in accordance with the
Terms of Sale. To the extent that the Terms of Sale provide for a note or
notes, the Class A Limited Partners, to the extent they desire to purchase
all of the Controlling Units Offered for Sale, shall be required to provide
substantially the same credit worthiness as the proposed purchaser. If the
Class A Limited Partners do not elect to purchase all of the Controlling
1
<PAGE>
Units Offered for Sale, or otherwise fail to provide substantially the same
credit worthiness as the proposed purchaser, Miller and/or Weston, as the
case may be, shall be free to sell all the Controlling Units Offered for Sale
for a period of sixty (60) days after the expiration of the Class A Limited
Partners' option, provided that any such sale must be made under the same
terms and conditions as the Terms of Sale. In addition, G&M covenant that, so
long as G&M controls Macroweb and Trout and Macroweb is the General Partner
of the Partnership, Macroweb will not issue any additional membership
interests, and Trout will not issue any additional limited partner interest
that would result in it losing control of Trout, to anyone other than Miller
or Weston, so that Miller and Weston will own 100% of such interests in
Macroweb and control Trout.
2. TIME AND ATTENTION. Miller and Weston agree at such times as may be
requested by the Partnership from time to time, to provide the Partnership
with time and attention to assist the Partnership to succeed in its business
endeavors. The Partnership and the Class A Limited Partners acknowledge that
Miller and Weston have several additional business interests, and as such the
amount of time which may be spend by Miller and Weston for the benefit of the
Partnership is limited.
3. BOARD OF DIRECTORS. Miller and Weston agree to cause Macroweb, LC to have
a board of directors which will have a minimum of three positions. Miller and
Weston agree to name one of the Class A Limited Partners to Macroweb, LC's
board of directors for so long as they are employed by the Partnership or
own, in aggregate, 15% of the Ownership Percentage Interests of the
Partnership.
4. LOCATION OF SERVERS AND OFFICE. Miller and Weston agree to use their
reasonable best efforts to secure a location for the Partnership's data
center and offices at favorable rent.
5. INDEMNITY. Miller and Weston agree to take whatever action is necessary to
ensure that Richard Yoo incurs no financial loss or expense related to the
office lease at 9828 Lorene Lane, San Antonio, Texas 78216, including
indemnifying him for any amounts he is required to pay thereon.
6. NON-COMPETITION. Miller and Weston agree that they will not, directly or
indirectly (whether through any affiliate, family member or otherwise),
compete with the core business of the Partnership (whatever such core
business shall be at such time) anywhere in the world for so long as they
control the general partner of the Partnership, and for a period of one year
thereafter.
7. PROPRIETARY INFORMATION/BUSINESS OPPORTUNITIES. Miller and Weston
acknowledge and agree that the Partnership has and will continue to develop
proprietary information which is essential for the success of the
Partnership. Such information, includes but is not limited to marketing
plans, strategies, financial data, customer lists, supplier lists, source
code, business ideas (collectively, the "Confidential Information", whether
oral or embodied in documents (including writings, drawings, graphs, charts,
photographs, phonorecords, video recordings,
2
<PAGE>
and other data compilations from which information can be obtained) or
tangible things. Miller and Weston agree to keep the Confidential Information
secret at all times, and not to disclose such information to any third party
without the consent of the General Partner of the Partnership. Miller and
Weston shall be prohibited from using the Confidential Information for any
purpose other than the purpose of the Partnership.
Miller and Weston agree to promptly bring to the attention of the General
Partner and the Partnership, any business opportunity which become known to
them which relates to Partnership's core business activity at the time, which
is currently, commercially developing the Concept (as defined in the
Agreement of Limited Partnership of Rackspace, Ltd.).
8. SEVERABILITY. If any covenant contained in this agreement, or any part
thereof, is hereafter construed to be invalid or unenforceable, the same
shall not affect the remainder of the covenant or covenants, which shall be
given full effect, without regard to the invalid portion or portions. If any
covenant in this agreement, or any part thereof, is held to be unenforceable
because of its duration or its geographic scope, the parties agree that the
court making such determination shall have the power to reduce the duration
and/or area of such covenant to the longest duration and to the greatest
geographical scope which is permitted, and, in said reduced form, such
covenant shall then be enforced.
9. NOTICE. Any notice required in this Agreement shall be provided in the
manner and to the parties set forth in the Agreement of Limited Partnership
of Rackspace, Ltd. of even date herewith.
10. PERSONAL LIABILITY OF WESTON AND MILLER. The parties hereto agree that
under no circumstances shall Miller or Weston have any personal liability to
any of the parties hereto, except to the extent under an agreement executed
individually by Miller or Weston. With the exception of this agreement and
the "Credit Agreement" executed contemporaneously herewith, there are no
agreements between Miller and/or Weston, individually, and the parties
hereto. Therefore, no oral agreement between Miller or Weston and any of the
parties hereto shall be valid unless evidenced in writing and signed by the
parties hereto.
Rackspace, Ltd.
By: Macroweb, LC
By: /s/ Morris Miller
----------------------
Its: member
----------------------
Morris A. Miller
/s/ Morris Miller
------------------------
3
<PAGE>
Graham M. Weston
/s/ Graham M. Weston
------------------------
Richard Yoo
/s/ Richard Yoo
------------------------
Dirk Elmendorf
/s/ Dirk Elmendorf
------------------------
Pat Condon
/s/ Pat Condon
------------------------
4
<PAGE>
AMENDMENT TO SUPPORT AGREEMENT
This Amendment to Support Agreement is made this 30th day of
November, 1999, by and between Graham M. Weston ("Weston"), Morris A. Miller
("Miller") (collectively, "G&M") and Richard Yoo ("Yoo"), MiniPat & Company,
Ltd. ("MiniPat") and Dirk Elmendorf ("Elmendorf) (collectively, the "Class A
Limited Partners") and The Hamilton Companies, LLC ("Hamilton"), Weston
Investment Interests, LLC. ("Weston"), Isom Capital Partners I, L.P.
("Isom"), and First Inning Investors, L.P. ("First Inning") (Isom, Weston,
Hamilton, MiniPat and First Inning are sometimes referred to herein as the
"New Limited Partners"). This Agreement amends the Support Agreement dated
December 29, 1998 between the Existing Partners (the "Support Agreement").
Except as amended by this Agreement, the terms of the Support Agreement shall
continue in full force and effect.
1. Additional Parties. The parties hereby amend the Support
Agreement to include the New Limited Partners as parties to the Support
Agreement.
2. Amendment to Paragraph 1. For the purposes of paragraph 1, in all
instances which refer to the Class A Limited Partners or to a Class A Limited
Partner, it shall read to include both the Class A Limited Partners and the
Class C Limited Partners. In addition, any sale or transfer between Miller
and Weston of the membership interests in Macroweb or the Trout Interests
shall not be subject to the right of first refusal and may be made without
restriction. Miller and Weston shall also have the right to make transfers to
their family members ("Transferees", which include spouses, children,
parents, grandparents, grandchildren, and including family members by
adoption) without subjecting the transfer to the right of first refusal,
however, any transfer made by such Transferee shall be subject to the rights
of first refusal contained herein. Miller and Weston shall also have the
right to make transfers of Trout Interests (in addition to transfers made to
Transferees) up to an amount equal to forty percent (40%) of the outstanding
Trout Interests and such transfers shall not be subject to the rights of
first refusal contained in Paragraph 1. In addition, any holder of a right of
first refusal under Paragraph 1 shall have 15 days, rather than 4 business
days to accept or reject the offer to purchase the Controlling Units offered
for Sale.
3. New Paragraph 11. This Agreement shall terminate upon the
dissolution or termination of Rackspace, Ltd., including but not limited to
any dissolution or termination resulting from the merger of Rackspace, Ltd.
into any other entity, or any dissolution or termination resulting from the
sale of all or substantially all of the assets of Rackspace, Ltd. In
addition, the rights of first refusal contained in Paragraph 1 shall no
longer apply to the Trout Interests if Trout is no longer a limited partner
of Rackspace, Ltd. and shall no longer apply to the membership interests in
Macroweb, LC if Macroweb, LC is no longer the general partner of Rackspace,
Ltd. The above notwithstanding, to the extent that Rackspace, Ltd. is
dissolved or terminated as a result of a merger or other combination wherein
the same or substantially the same owners own the successor entity (the
"Successor") as own Rackspace, Ltd., this Agreement shall continue in effect,
and shall continue until the earlier to occur of the dissolution or
<PAGE>
termination of the Successor, or a public offering of the shares of the
Successor.
4. First Inning agrees that it will not permit any of its ownership
interests (whether represented as stock, membership interests, partnership
interests or otherwise) to be transferred to a third party unless after such
transfer, Quincy Lee (either directly or through his control over Trango
Capital, L.L.C.) will continue to have the right to exercise control over all
matters pertaining to First Inning. Isom agrees that it will not permit any
of its ownership interests (whether represented as stock, membership
interests, partnership interests or otherwise) to be transferred to a third
party unless after such transfer, S. James Bishkin (either directly or
through his control over BESK Funding, Inc.) will continue to have the right
to exercise control over all matters pertaining to Isom. MiniPat agrees that
it will not permit any of its ownership interests (whether represented as
stock, membership interests, partnership interests or otherwise) to be
transferred to a third party unless after such transfer, Condon (either
directly or through his control over MiniPat, will continue to have the right
to exercise control over all matters pertaining to MiniPat. Weston agrees
that it will not permit any of its ownership interests (whether represented
as stock, membership interests, partnership interests or otherwise) to be
transferred to a third party unless after such transfer, Graham M. Weston
(either directly or through his control over Weston will continue to have the
right to exercise control over all matters pertaining to Weston.
5. This agreement may be signed in multiple original counterparts,
each of which shall be deemed an original and all of which shall constitute
one agreement, and the signatures of any party to any counterpart shall be
deemed to be a signature to, and may be appended to, any other counterpart.
6. Notwithstanding anything in this Agreement to the contrary, a
party to this Amendment to Support Agreement ("Existing Party") may assign
any right of first refusal it has to acquire an interest in Trout or
Macroweb to any (i) current limited partner, partner, shareholder or member
of such Existing Party, or an Affiliate of such Person, or an entity
controlled by such Persons or their Affiliates, or (ii) another Person upon
the prior consent of Macroweb and Trout in their sole discretion (a "Current
Affiliate") and provide Macroweb and Trout written notice of such assignment
within five (5) Business Days. Upon any such assignment, the Current
Affiliate shall be subject to the rights, obligations, and restrictions
provided in the Support Agreement (as amended) with respect to exercising any
such rights.
/s/ Morris A. Miller
-----------------------------
Morris A. Miller
/s/ Graham M. Weston
-----------------------------
Graham M. Weston
<PAGE>
/s/ Patrick R. Condon
-----------------------------
Patrick R. Condon
/s/ Richard Yoo
-----------------------------
Richard Yoo
/s/ Dirk Elmendorf
-----------------------------
Dirk Elmendorf
MiniPat & Company, Ltd.
By: /s/ Patrick R. Condon
-------------------------
General Partner
Trout, Ltd.
By: Knightsbridge, L.C.,
General Partner
By: /s/ Morris Miller, member
--------------------------
Its: member
--------------------------
Isom Capital Partners I, L.P.
By: BESK Funding, Inc.,
General Partner
By: /s/ S. James Bishkin
----------------------
S. James Bishkin
President
<PAGE>
SECOND AMENDMENT TO SUPPORT AGREEMENT
This Second Amendment to Support Agreement is made this 22nd day of
February, 2000, by and between Graham M. Weston ("Weston"), Morris A. Miller
("Miller") (collectively, "G&M") and Richard Yoo ("Yoo"), MiniPat & Company,
Ltd. ("MiniPat") and Dirk Elmendorf (AElmendorf) (collectively, the "Class A
Limited Partners") and The Hamilton Companies LLC ("Hamilton"), Weston
Investment Interest, L.L.C. ("Weston"), Isom Capital Partners I, L.P.
("Isom"), and First Inning Investors, L.P. ("First Inning") (Isom, Weston,
Hamilton, MiniPat and First Inning are sometimes referred to herein as the
"Class C Limited Partners") and 2M Technology Ventures, L.P. ("2M"). This
Agreement amends the Support Agreement dated December 29, 1998, as amended
(the "Support Agreement"). Except as amended by this Agreement and the
Amendment to Support Agreement dated November 30, 1999, the terms of the
Support Agreement shall continue in full force and effect.
1. Additional Party. The parties hereby amend the Support Agreement
to include 2M as a Class C Limited Partner under the terms of the Support
Agreement, as amended.
2. 2M agrees that it will not permit any of its ownership interests
(whether represented as stock, membership interests, partnership interests or
otherwise) to be transferred to a third party unless after such transfer,
Morton H. Meyerson or Steven D. Leeke (either directly or indirectly), or
their respective heirs or beneficiaries under their respective wills
(including without limitation any trusts thereunder), will continue to have
the right to exercise control over all matters pertaining to 2M; provided,
however, that the restriction contained in this paragraph 2 shall terminate
upon the earlier to occur of (i) June 30, 2001, or (ii) immediately before
the effective date of an initial public offering of (x) any successor entity
of the Partnership, or (y) any entity that holds a majority of the
outstanding equity interest in the Partnership.
3. This agreement may be signed in multiple original counterparts,
each of which shall be deemed an original and all of which shall constitute
one agreement, and the signatures of any party to any counterpart shall be
deemed to be a signature to, and may be appended to, any other counterpart.
/s/ Morris A. Miller
----------------------
Morris A. Miller
/s/ Graham M. Weston
----------------------
Graham M. Weston
<PAGE>
/s/ Patrick R. Condon
----------------------
Patrick R. Condon
/s/ Richard Yoo
----------------------
Richard Yoo
/s/ Dirk Elmendorf
----------------------
Dirk Elmendorf
MiniPat & Company, Ltd.
By: /s/ Patrick R. Condon
----------------------
General Partner
Trout, Ltd.
By: Knightsbridge, L.C.,General
Partner
By: /s/ Graham M. Weston
---------------------
Its: Member
---------------------
Isom Capital Partners I, L.P.
By: BESK Funding, Inc.,
General Partner
By: /s/ S. James Bishkin
---------------------
S. James Bishkin
President
<PAGE>
First Inning Investors, L.P.
By: Trango Capital L.L.C.,
General Partner
By: /s/ Quincy J. Lee
----------------------
Quincy J. Lee, Manager
The Hamilton Companies LLC
By: /s/ Frederic C. Hamilton
-------------------------
Its: President
-------------------------
Weston Investment Interest, L.L.C.
By: /s/ Graham M. Weston
------------------------
Its: Manager
------------------------
2M Technology Ventures, L.P.
By: 2M Technology Group, L.L.C.
Its: General Partner
By: /s/ Steven D. Leeke
----------------------
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made and entered into effective
as of the 29th day of December, 1998 by and between Rackspace, Ltd., a Texas
Limited Partnership (the "Company"), and Richard Yoo ("Employee").
WITNESSETH:
WHEREAS, Employee and the Company desire that the Company engage the
services of Employee; and
WHEREAS, Employee desires to serve in the employment of the Company on
the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee to serve as the
President and CEO of the Company, and Employee hereby accepts such
employment, upon the terms and conditions set forth herein.
2. TERM. The initial term of Employee's employment shall commence on
the effective date of this Agreement and shall continue through January 1,
2003. On January 1, 2003 and each anniversary of such date thereafter, the
Employee's term of employment shall automatically renew thereafter for
successive one-year terms unless either party to this Agreement has notified
the other party in writing at least thirty (30) days prior to the end of such
four-year initial term or any such one-year renewal term, as applicable, that
it elects to terminate the employment of the Employee as of the end of any
such term. Notwithstanding the foregoing, the term of this Agreement is
subject to earlier termination as hereinafter provided. The period of time
during which Employee is employed under this Agreement through the effective
date of any termination of such employment is hereinafter referred to as the
"Term".
3. DUTIES. During the Term, Employee agrees that he will devote his
full business time, attention and energies to the business of the Company and
to the performance of his duties hereunder which shall include such duties as
from time to time are assigned to him by the General Partner of the Company.
However, the Employee shall be entitled to engage in business activities
unrelated to the business of the Company, provided that, in the Company's
discretion reasonably applied, such activities do not interfere with the
Employee's obligations under this Agreement, the Company is given prior
written notice of Employee's desire to engage in such activities, and to the
extent such business activities constitute a business opportunity of the
Company, the Company has elected not to pursue such activities.
1
<PAGE>
4. COMPENSATION.
(a) BASE COMPENSATION. During the Term, the Company shall pay to
Employee a salary in the amount of $3,000.00 per month, subject to annual
adjustment by the General Partner but in no event less than $3,000.00 per
month. Such monthly salary shall be payable monthly or in such other
installments as the parties may mutually agree. During the Term, the Company
shall also reimburse Employee for all reasonable expenses incurred on behalf
of the Company in accordance with its then existing reimbursement policies.
(b) FRINGE BENEFITS AND VACATION. During the Term, Employee
shall be entitled to the standard employee benefits available to other
management personnel of the Company in comparable positions (which shall
include at least the benefits listed on Exhibit A attached hereto); provided,
however, that the receipt of such fringe benefits by Employee shall be
subject to the Company's eligibility and enrollment requirements pertaining
to such benefit programs and to the further qualifications set forth on
Exhibit A hereto. During each 12 month period of Employee's employment
Employee shall be entitled to two (2) weeks of paid vacation.
(c) BONUS. To the extent that the total annual compensation of
Employee for the initial four year Term is less than $51,000.00 per year,
Employee shall receive a bonus payment equal to the difference between the
actual annual compensation and $51,000.00. However, the bonus will be paid,
only if and to the extent that the Partnership repays all principal owing to
Exeter Financial, LC incident to borrowings by the Company which are a
minimum of $550,000.00, but which may reach $1,050,000.00.
5. INVENTIONS AND PATENTS. Employee agrees that all intellectual
property (including, without limitation, inventions, copyrights, new
contributions, ideas, and discoveries, whether patentable or not) conceived
or made by him during the term shall belong to the Company, provided that
such intellectual property arise out of Employee's employment by the Company,
are related to the Company's business, or are created with the use of the
facilities or materials of the Company.
6. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES.
(a) CONFIDENTIALITY. In view of the fact that Employee's work
with the Company will bring him into close contact with many confidential
affairs of the Company, including matters of a business nature such as
information about costs, profits, markets, sales, trade secrets, potential
patents and other business ideas, customer lists, plans for future
developments, business opportunities, and information of any other kind not
known within any industry in which the Company operates (hereinafter,
collectively, "Confidential Matters"), Employee agrees:
(i) To keep secret all Confidential Matters of the
Company and of any subsidiaries and affiliates of the Company and not to
disclose them to anyone outside of the Company or its subsidiaries or
affiliates, or otherwise use them or use his knowledge of them for his own
benefit, including, without limitation, use of the trade names or trademarks
of the Company, either during or after the Term, except with the Company's
prior written consent; and
2
<PAGE>
(ii) To deliver promptly to the Company at the termination
of the Term, or at any time the Company may request, all memoranda, notices,
records, reports and other documents (and all copies thereof) relating to the
business of the Company or any of its subsidiaries or affiliates, including,
but not limited to, Confidential Matters, which he may then possess or have
under his control.
Notwithstanding any of the foregoing, the term "Confidential
Matters" does not include information which (i) Employee is compelled to
disclose by judicial or administrative process, or in the opinion of his
counsel, by other mandatory requirements of law, or (ii) is or becomes
generally available to the public other than as a result of any disclosure by
Employee.
(b) COMPETITIVE ACTIVITIES. During Employee's employment and for a
period of (i) six (6) months following the effective date of a termination of
Employee's employment "without cause", or as a result of his disability, (ii)
eighteen (18) months following the effective date of a termination of
Employee's employment in the event Employee resigns or is terminated for
Cause, Employee shall not, directly or indirectly, or through any subsidiary
or affiliate, own, consult, advise, manage, operate, join, or control, or
participate in the ownership, management, operation, or control of, or be
connected with in any manner (including but not limited to acting as an
employee or independent contractor), any business, person, firm, or
corporation, which (i) provides or intends to provide the same services as the
Company is otherwise competitive with the Company's products or services; or
(ii) is engaged in or intends to engage in any line(s) of business that would
be competitive with any other lines of business that the Company has made a
decision to engage in prior to the termination of Employee's employment with
the Company. This covenant is made to protect the Company's proprietary and
confidential information. In addition, the covenant is made
contemporaneously with and as independent consideration for, the execution of
the Agreement of Limited Partnership of Rackspace, Ltd. of which Employee is
a limited partner. Due to the nature of the Company's business (which
involves internet products and services), it is not practical to impose a
geographical limitation on the prohibitions contained herein. At the end of
the Employee's employment, the Company shall provide the Employee with a
written list of the business activities which the Company is engaged in or
which the Company has made a decision to become engaged in.
If any covenant contained in this Section 6(b), or any part thereof, is
hereafter construed to be invalid or unenforceable, the same shall not affect
the remainder of the covenant or covenants, which shall be given full effect,
without regard to the invalid portion or portions. If any covenant in this
Section 6(b), or any part thereof, is held to be unenforceable because of its
duration or its geographic scope, the parties agree that the court making
such determination shall have the power to reduce the duration and/or area of
such covenant to the longest duration and to the greatest geographical scope
which is permitted, and, in said reduced form, such covenant shall then be
enforced.
7. REMEDIES FOR BREACH. Notwithstanding the provisions of Section 10
hereof, if Employee breaches, or threatens to breach, any of the provisions
of Section 6 hereof, the Company shall have the following rights and
remedies, in addition to any others, each of which shall be independent of
the other and severally enforceable:
3
<PAGE>
(i) The right to have the provisions of Section 6 of this
Agreement specifically enforced by any court having equity jurisdiction, it
being acknowledged and agreed that any such breach or threatened breach will
cause irreparable injury to the Company and that monetary damages will not
provide an adequate remedy to the Company;
(ii) The right to obtain an injunction to prevent the Employee
from taking actions prohibited by this Agreement without the requirement of
posting a bond, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the Company and that
monetary damages will not provide an adequate remedy to the Company;
(iii) The right and remedy to require Employee to pay all damages
resulting from such breach; and
(iv) The right to terminate Employee's employment for "Cause"
pursuant to Section 8 hereof.
8. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. Employee's employment shall
automatically terminate upon the death or disability of Employee. Disability
shall mean an infirmity preventing Employee from performing in any material
respect his duties for at least 120 days (whether or not consecutive) during
any one-year period.
(b) TERMINATION FOR CAUSE. The Company may terminate Employee's
employment at any time for "Cause" in accordance with the procedures provided
below. Termination by the Company for "Cause" shall be limited to termination
upon (i) the material neglect or inattention by Employee of his duties
hereunder after a written warning of such material neglect or inattention of
his duties, or (ii) the engaging by Employee in conduct that is materially
and demonstrably injurious to the Company, monetarily or otherwise, which
shall be deemed to include violating any material term of this Agreement.
Prior to the Company's exercising its right to terminate Employee's
employment for Cause, the Company shall give thirty (30) days prior written
notice to Employee of the specific action proposed to be taken and the
grounds therefor and a reasonable opportunity for Employee to respond thereto
to the Company and to cure such situation.
(c) OTHER TERMINATION. The Company shall have the right to
terminate Employee's employment at any time without Cause by giving at least
thirty (30) days prior written notice to Employee of the Company's election
to terminate the Employee's employment. If the Company terminates the
Employee's employment at the end of the four year initial term (whether with
or without cause) or any time after the four year initial term, Employee
shall only be entitled to his salary and benefits through the date of
termination and no more. If the Company terminates the Employee's employment
without Cause during the initial four year Term or in the event that
Employee's employment is terminated due to Disability during the initial four
year Term, and the Company receives from the Employee a full release of all
claims in a form satisfactory to the
4
<PAGE>
Company the Company shall pay Employee an amount equal to three months salary
as severance pay based upon the monthly salary then in effect.
9. EFFECT OF TERMINATION. Upon the termination of Employee's
employment, the rights of Employee which shall have accrued prior to the date
of such termination shall not be affected in any way. Except as provided in
Section 8(c) hereof, Employee shall not have any rights which have not
previously accrued upon termination of his employment. Section 6 hereof shall
survive any termination of Employee's employment.
10. MEDIATION & BINDING ARBITRATION. Except with respect to the
provisions of Sections 6 and 7 hereof which shall not be subject to binding
arbitration, the Company and Employee agree that all other disputes,
controversies or claims that may arise between them (including their agents
and employees) including, without limitation, any dispute, controversy or
claim as to the interpretation or enforcement of any of the provisions of
this Agreement, shall be submitted first to mediation and then to binding
arbitration in the city of San Antonio, Texas in accordance with the rules of
the American Arbitration Association and judgment upon the award rendered by
the arbitrator(s) may be entered in any court having jurisdiction.
(a) MEDIATION. If a controversy or claim arises between the
parties then that controversy or claim will be mediated within one month of
its identification by the parties.
(b) BINDING ARBITRATION. In the event that the parties cannot
resolve their dispute by mediation within one month, the parties then agree
to bring the dispute to binding arbitration within one month of the
conclusion of the mediation.
11. COMMUNICATIONS. Any notice, request or other communication required
or permitted by this Agreement to be mailed, given or delivered to Employee
shall be in writing, addressed to him at his address shown below or at such
other address as he shall have furnished from time to time to the Company for
the purposes hereof; and any payment to Employee under this Agreement may be
made by check delivered to him or mailed to or delivered at such address. Any
notice, request or other communication required or permitted by this
Agreement to be given to the Company is to be in writing, addressed to the
Company at the address of its principal office in San Antonio, Texas, or at
such other address as the Company shall have furnished to Employee for the
purposes hereof.
12. AMENDMENTS. This Agreement may be amended or modified only by a
written instrument executed by the parties hereto.
13. BINDING EFFECT. This Agreement shall be binding upon, and shall
inure to the benefit of, Employee; the obligations of Employee hereunder are
personal and this Agreement may not be assigned by Employee. This Agreement
shall be binding upon, and shall inure to the benefit of, the Company and
shall also bind and inure to the benefit of any successor of the Company by
merger or consolidation or any assignee or transferee of all or substantially
all of its properties, but, except to any such successor or assignor of the
Company, this Agreement may not be assigned by the Company.
5
<PAGE>
14. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
15. SEVERABILITY. If any provision of this Agreement shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement shall
not be affected, and each term hereof shall be valid and shall be enforced to
the extent permitted by law.
16. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which is to be deemed an original, but all of which,
together, constitute one and the same instrument.
EXECUTED as of the day and year first above written.
RACKSPACE, LTD.
By: MACROWEB, LC
By: /s/ Morris Miller
--------------------------
Its: Member
-------------------------
RICHARD YOO
By: /s/ Richard Yoo
---------------------------
Address:
Richard Yoo
------------------------------
100 Lorenz #102
------------------------------
San Antonio, TX 78209
------------------------------
6
<PAGE>
Exhibit A
1. Health/medical/dental insurance for Employee.
7
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made and entered into effective
as of the 29th day of December, 1998 by and between Rackspace, Ltd., a Texas
Limited Partnership (the "Company"), and Dirk Elmendorf ("Employee").
WITNESSETH:
WHEREAS, Employee and the Company desire that the Company engage the
services of Employee; and
WHEREAS, Employee desires to serve in the employment of the Company on
the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee to serve as the
Chief Technology Evangelist of the Company, and Employee hereby accepts such
employment, upon the terms and conditions set forth herein.
2. TERM. The initial term of Employee's employment shall commence on
the effective date of this Agreement and shall continue through January 1,
2003. On January 1, 2003 and each anniversary of such date thereafter, the
Employee's term of employment shall automatically renew thereafter for
successive one-year terms unless either party to this Agreement has notified
the other party in writing at least thirty (30) days prior to the end of such
four-year initial term or any such one-year renewal term, as applicable, that
it elects to terminate the employment of the Employee as of the end of any
such term. Notwithstanding the foregoing, the term of this Agreement is
subject to earlier termination as hereinafter provided. The period of time
during which Employee is employed under this Agreement through the effective
date of any termination of such employment is hereinafter referred to as the
"Term".
3. DUTIES. During the Term, Employee agrees that he will devote his
full business time, attention and energies to the business of the Company and
to the performance of his duties hereunder which shall include such duties as
from time to time are assigned to him by the General Partner of the Company.
However, the Employee shall be entitled to engage in business activities
unrelated to the business of the Company, provided that, in the Company's
discretion reasonably applied, such activities do not interfere with the
Employee's obligations under this Agreement, the Company is given prior
written notice of Employee's desire to engage in such activities, and to the
extent such business activities constitute a business opportunity of the
Company, the Company has elected not to pursue such activities.
<PAGE>
4. COMPENSATION.
(a) BASE COMPENSATION. During the Term, the Company shall pay to
Employee a salary in the amount of $3,000.00 per month, subject to annual
adjustment by the General Partner but in no event less than $3,000.00 per
month. Such monthly salary shall be payable monthly or in such other
installments as the parties may mutually agree. During the Term, the Company
shall also reimburse Employee for all reasonable expenses incurred on behalf
of the Company in accordance with its then existing reimbursement policies.
(b) FRINGE BENEFITS AND VACATION. During the Term, Employee shall
be entitled to the standard employee benefits available to other management
personnel of the Company in comparable positions (which shall include at least
the benefits listed on Exhibit A attached hereto); provided, however, that the
receipt of such fringe benefits by Employee shall be subject to the Company's
eligibility and enrollment requirements pertaining to such benefit programs
and to the further qualifications set forth on Exhibit A hereto. During each
12 month period of Employee's employment Employee shall be entitled to two (2)
weeks of paid vacation.
(c) BONUS. To the extent that the total annual compensation of
Employee for the initial four year Term is less than $51,000.00 per year,
Employee shall receive a bonus payment equal to the difference between the
actual annual compensation and $51,000.00. However, the bonus will be paid,
only if and to the extent that the Partnership repays all principal owing to
Exeter Financial, LC incident to borrowings by the Company which are a minimum
of $550,000.00, but which may reach $1,050,000.00.
5. INVENTIONS AND PATENTS. Employee agrees that all intellectual property
(including, without limitation, inventions, copyrights, new contributions,
ideas, and discoveries, whether patentable or not) conceived or made by him
during the term shall belong to the Company, provided that such intellectual
property arise out of Employee's employment by the Company, are related to the
Company's business, or are created with the use of the facilities or materials
of the Company.
6. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES.
(a) CONFIDENTIALITY. In view of the fact that Employee's work with
the Company will bring him into close contact with many confidential affairs
of the Company, including matters of a business nature such as information
about costs, profits, markets, sales, trade secrets, potential patents and
other business ideas, customer lists, plans for future developments, business
opportunities, and information of any other kind not known within any industry
in which the Company operates (hereinafter, collectively, "Confidential
Matters"), Employee agrees:
(i) To keep secret all Confidential Matters of the Company and
of any subsidiaries and affiliates of the Company and not to disclose them to
anyone outside of the Company or its subsidiaries or affiliates, or otherwise
use them or use his knowledge of them for his own benefit, including, without
limitation, use of the trade names or trademarks of the Company, either during
or after the Term, except with the Company's prior written consent; and
<PAGE>
(ii) To deliver promptly to the Company at the termination of
the Term, or at any time the Company may request, all memoranda, notices,
records, reports and other documents (and all copies thereof) relating to the
business of the Company or any of its subsidiaries or affiliates, including,
but not limited to, Confidential Matters, which he may then possess or have
under his control.
Notwithstanding any of the foregoing, the term "Confidential
Matters" does not include information which (i) Employee is compelled to
disclose by judicial or administrative process, or in the opinion of his
counsel, by other mandatory requirements of law, or (ii) is or becomes
generally available to the public other than as a result of any disclosure by
Employee.
(b) COMPETITIVE ACTIVITIES. During Employee's employment and for a
period of (i) six (6) months following the effective date of a termination of
Employee's employment "without cause", or as a result of his disability, (ii)
eighteen (18) months following the effective date of a termination of
Employee's employment in the event Employee resigns or is terminated for
Cause, Employee shall not, directly or indirectly, or through any subsidiary
or affiliate, own, consult, advise, manage, operate, join, or control, or
participate in the ownership, management, operation, or control of, or be
connected with in any manner (including but not limited to acting as an
employee or independent contractor), any business, person, firm, or
corporation, which (i) provides or intends to provide the same services as the
Company or is otherwise competitive with the Company's products or services;
or (ii) is engaged in or intends to engage in any line(s) of business that
would be competitive with any other lines of business that the Company has
made a decision to engage in prior to the termination of Employee's employment
with the Company. This covenant is made to protect the Company's proprietary
and confidential information. In addition, the covenant is made
contemporaneously with and as independent consideration for, the execution of
the Agreement of Limited Partnership of Rackspace, Ltd. of which Employee is a
limited partner. Due to the nature of the Company's business (which involves
internet products and services), it is not practical to impose a geographical
limitation on the prohibitions contained herein. At the end of the Employee's
employment, the Company shall provide the Employee with a written list of the
business activities which the Company is engaged in or which the Company has
made a decision to become engaged in.
If any covenant contained in this Section 6(b), or any part thereof, is
hereafter construed to be invalid or unenforceable, the same shall not affect
the remainder of the covenant or covenants, which shall be given full effect,
without regard to the invalid portion or portions. If any covenant in this
Section 6(b), or any part thereof, is held to be unenforceable because of its
duration or its geographic scope, the parties agree that the court making such
determination shall have the power to reduce the duration and/or area of such
covenant to the longest duration and to the greatest geographical scope which
is permitted, and, in said reduced form, such covenant shall then be enforced.
7. REMEDIES FOR BREACH. Notwithstanding the provisions of Section 10
hereof, if Employee breaches, or threatens to breach, any of the provisions of
Section 6 hereof, the Company shall have the following rights and remedies,
in addition to any others, each of which shall be independent of the other and
severally enforceable:
<PAGE>
(i) The right to have the provisions of Section 6 of this Agreement
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed that any such breach or threatened breach will cause
irreparable injury to the Company and that monetary damages will not provide
an adequate remedy to the Company;
(ii) The right to obtain an injunction to prevent the Employee from
taking actions prohibited by this Agreement without the requirement of posting
a bond, it being acknowledged and agreed that any such breach or threatened
breach will cause irreparable injury to the Company and that monetary damages
will not provide an adequate remedy to the Company;
(iii) The right and remedy to require Employee to pay all damages
resulting from such breach; and
(iv) The right to terminate Employee's employment for "Cause"
pursuant to Section 8 hereof.
8. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. Employee's employment shall automatically
terminate upon the death or disability of Employee. Disability shall mean an
infirmity preventing Employee from performing in any material respect his
duties for at least 120 days (whether or not consecutive) during any one-year
period.
(b) TERMINATION FOR CAUSE. The Company may terminate Employee's
employment at any time for "Cause" in accordance with the procedures provided
below. Termination by the Company for "Cause" shall be limited to termination
upon (i) the material neglect or inattention by Employee of his duties
hereunder after a written warning of such material neglect or inattention of
his duties, or (ii) the engaging by Employee in conduct that is materially and
demonstrably injurious to the Company, monetarily or otherwise, which shall be
deemed to include violating any material term of this Agreement.
Prior to the Company's exercising its right to terminate Employee's
employment for Cause, the Company shall give thirty (30) days prior written
notice to Employee of the specific action proposed to be taken and the grounds
therefor and a reasonable opportunity for Employee to respond thereto to the
Company and to cure such situation.
(c) OTHER TERMINATION. The Company shall have the right to
terminate Employee's employment at any time without Cause by giving at least
thirty (30) days prior written notice to Employee of the Company's election to
terminate the Employee's employment. If the Company terminates the Employee's
employment at the end of the four year initial term (whether with or without
cause) or any time after the four year initial term, Employee shall only be
entitled to his salary and benefits through the date of termination and no
more. If the Company terminates the Employee's employment without Cause during
the initial four year Term or in the event that Employee's employment is
terminated due to Disability during the initial four year Term, and the
Company receives from the Employee a full release of all claims in a form
satisfactory to the Company the Company shall pay Employee an amount equal to
<PAGE>
three months salary as severance pay based upon the monthly salary then in
effect.
9. EFFECT OF TERMINATION. Upon the termination of Employee's
employment, the rights of Employee which shall have accrued prior to the date
of such termination shall not be affected in any way. Except as provided in
Section 8(c) hereof, Employee shall not have any rights which have not
previously accrued upon termination of his employment. Section 6 hereof shall
survive any termination of Employee's employment.
10. MEDIATION & BINDING ARBITRATION. Except with respect to the
provisions of Sections 6 and 7 hereof which shall not be subject to binding
arbitration, the Company and Employee agree that all other disputes,
controversies or claims that may arise between them (including their agents
and employees) including, without limitation, any dispute, controversy or
claim as to the interpretation or enforcement of any of the provisions of this
Agreement, shall be submitted first to mediation and then to binding
arbitration in the city of San Antonio, Texas in accordance with the rules of
the American Arbitration Association and judgment upon the award rendered by
the arbitrator(s) may be entered in any court having jurisdiction.
(a) MEDIATION. If a controversy or claim arises between the parties
then that controversy or claim will be mediated within one month of its
identification by the parties.
(b) BINDING ARBITRATION. In the event that the parties cannot
resolve their dispute by mediation within one month, the parties then agree to
bring the dispute to binding arbitration within one month of the conclusion of
the mediation.
11. COMMUNICATIONS. Any notice, request or other communication required
or permitted by this Agreement to be mailed, given or delivered to Employee
shall be in writing, addressed to him at his address shown below or at such
other address as he shall have furnished from time to time to the Company for
the purposes hereof; and any payment to Employee under this Agreement may be
made by check delivered to him or mailed to or delivered at such address. Any
notice, request or other communication required or permitted by this Agreement
to be given to the Company is to be in writing, addressed to the Company at
the address of its principal office in San Antonio, Texas, or at such other
address as the Company shall have furnished to Employee for the purposes
hereof.
12. AMENDMENTS. This Agreement may be amended or modified only by a
written instrument executed by the parties hereto.
13. BINDING EFFECT. This Agreement shall be binding upon, and shall
inure to the benefit of Employee; the obligations of Employee hereunder are
personal and this Agreement may not be assigned by Employee. This Agreement
shall be binding upon, and shall inure to the benefit of, the Company and
shall also bind and inure to the benefit of any successor of the Company by
merger or consolidation or any assignee or transferee of all or substantially
all of its properties, but, except to any such successor or assignor of the
Company, this Agreement may not be assigned by the Company.
14. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance
<PAGE>
with the laws of the State of Texas.
15. SEVERABILITY. If any provision of this Agreement shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement shall not
be affected, and each term hereof shall be valid and shall be enforced to the
extent permitted by law.
16. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which is to be deemed an original, but all of which,
together, constitute one and the same instrument.
EXECUTED as of the day and year first above written.
RACKSPACE, LTD.
By: MACROWEB, LC
By: /s/ Morris Miller
-----------------------
Its: member
-----------------------
DIRK ELMENDORF
By: /s/ Dirk Elmendorf
-----------------------------
Address:
---------------------------------
12221 Blanco Rd #2303
---------------------------------
San Antonio, TX 78216
---------------------------------
<PAGE>
Exhibit A
1. Health/medical/dental insurance for Employee.
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made and entered into effective
as of the 29th day of December, 1998 by and between Rackspace, Ltd., a Texas
Limited Partnership (the "Company"), and Pat Condon ("Employee").
W I T N E S S E T H:
WHEREAS, Employee and the Company desire that the Company engage the
services of Employee; and
WHEREAS, Employee desires to serve in the employment of the Company on the
terms and conditions set forth below;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee to serve as the Chief
Operating Officer of the Company, and Employee hereby accepts such employment,
upon the terms and conditions set forth herein.
2. TERM. The initial term of Employee's employment shall commence on the
effective date of this Agreement and shall continue through January 1, 2003. On
January 1, 2003 and each anniversary of such date thereafter, the Employee's
term of employment shall automatically renew thereafter for successive one-year
terms unless either party to this Agreement has notified the other party in
writing at least thirty (30) days prior to the end of such four-year initial
term or any such one-year renewal term, as applicable, that it elects to
terminate the employment of the Employee as of the end of any such term.
Notwithstanding the foregoing, the term of this Agreement is subject to earlier
termination as hereinafter provided. The period of time during which Employee is
employed under this Agreement through the effective date of any termination of
such employment is hereinafter referred to as the "Term".
3. DUTIES. During the Term, Employee agrees that he will devote his full
business time, attention and energies to the business of the Company and to the
performance of his duties hereunder which shall include such duties as from time
to time are assigned to him by the General Partner of the Company. However, the
Employee shall be entitled to engage in business activities unrelated to the
business of the Company, provided that, in the Company's discretion reasonably
applied, such activities do not interfere with the Employee's obligations under
this Agreement, the Company is given prior written notice of Employee's desire
to engage in such activities, and to the extent such business activities
constitute a business opportunity of the Company, the Company has elected not to
pursue such activities.
<PAGE>
4. COMPENSATION.
(a) BASE COMPENSATION. During the Term, the Company shall pay to
Employee a salary in the amount of $3,000.00 per month, subject to annual
adjustment by the General Partner but in no event less than $3,000.00 per month.
Such monthly salary shall be payable monthly or in such other installments as
the parties may mutually agree. During the Term, the Company shall also
reimburse Employee for all reasonable expenses incurred on behalf of the Company
in accordance with its then existing reimbursement policies.
(b) FRINGE BENEFITS AND VACATION. During the Term, Employee shall be
entitled to the standard employee benefits available to other management
personnel of the Company in comparable positions (which shall include at least
the benefits listed on Exhibit A attached hereto); provided, however, that the
receipt of such fringe benefits by Employee shall be subject to the Company's
eligibility and enrollment requirements pertaining to such benefit programs and
to the further qualifications set forth on Exhibit A hereto. During each 12
month period of Employee's employment Employee shall be entitled to two (2)
weeks of paid vacation.
(c) BONUS. To the extent that the total annual compensation of
Employee for the initial four year Term is less than $51,000.00 per year,
Employee shall receive a bonus payment equal to the difference between the
actual annual compensation and $51,000.00. However, the bonus will be paid, only
if and to the extent that the Partnership repays all principal owing to Exeter
Financial, LC incident to borrowings by the Company which are a minimum of
$550,000.00, but which may reach $1,050,000.00.
5. INVENTIONS AND PATENTS. Employee agrees that all intellectual property
(including, without limitation, inventions, copyrights, new contributions,
ideas, and discoveries, whether patentable or not) conceived or made by him
during the term shall belong to the Company, provided that such intellectual
property arise out of Employee's employment by the Company, are related to the
Company's business, or are created with the use of the facilities or materials
of the Company.
6. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES.
(a) CONFIDENTIALITY. In view of the fact that Employee's work with
the Company will bring him into close contact with many confidential affairs of
the Company, including matters of a business nature such as information about
costs, profits, markets, sales, trade secrets, potential patents and other
business ideas, customer lists, plans for future developments, business
opportunities, and information of any other kind not known within any industry
in which the Company operates (hereinafter, collectively, "Confidential
Matters"), Employee agrees:
(i) To keep secret all Confidential Matters of the Company and of any
subsidiaries and affiliates of the Company and not to disclose them to anyone
outside of the Company or its subsidiaries or affiliates, or otherwise use them
or use his knowledge of them for his own benefit, including, without limitation,
use of the trade names or trademarks of the Company, either during or after the
Term, except with the Company's prior written consent; and
<PAGE>
(ii) To deliver promptly to the Company at the termination of the
Term, or at any time the Company may request, all memoranda, notices, records,
reports and other documents (and all copies thereof) relating to the business of
the Company or any of its subsidiaries or affiliates, including, but not limited
to, Confidential Matters, which he may then possess or have under his control.
Notwithstanding any of the foregoing, the term "Confidential Matters" does
not include information which (i) Employee is compelled to disclose by judicial
or administrative process, or in the opinion of his counsel, by other mandatory
requirements of law, or (ii) is or becomes generally available to the public
other than as a result of any disclosure by Employee.
(b) COMPETITIVE ACTIVITIES. During Employee's employment and for a
period of(i) six (6) months following the effective date of a termination of
Employee's employment "without cause", or as a result of his disability, (ii)
eighteen (18) months following the effective date of a termination of
Employee's employment in the event Employee resigns or is terminated for
Cause, Employee shall not, directly or indirectly, or through any subsidiary
or affiliate, own, consult, advise, manage, operate, join, or control, or
participate in the ownership, management, operation, or control of, or be
connected with in any manner (including but not limited to acting as an
employee or independent contractor), any business, person, firm, or
corporation, which (i) provides or intends to provide the same services as the
Company or is otherwise competitive with the Company's products or services;
or (ii) is engaged in or intends to engage in any line(s) of business that
would be competitive with any other lines of business that the Company has
made a decision to engage in prior to the termination of Employee's employment
with the Company. This covenant is made to protect the Company's proprietary
and confidential information. In addition, the covenant is made
contemporaneously with and as independent consideration for, the execution of
the Agreement of Limited Partnership of Rackspace, Ltd. of which Employee is a
limited partner. Due to the nature of the Company's business (which involves
internet products and services), it is not practical to impose a geographical
limitation on the prohibitions contained herein. At the end of the Employee's
employment, the Company shall provide the Employee with a written list of the
business activities which the Company is engaged in or which the Company has
made a decision to become engaged in.
If any covenant contained in this Section 6(b), or any part thereof; is
hereafter construed to be invalid or unenforceable, the same shall not affect
the remainder of the covenant or covenants, which shall be given full effect,
without regard to the invalid portion or portions. If any covenant in this
Section 6(b), or any part thereof, is held to be unenforceable because of its
duration or its geographic scope, the parties agree that the court making such
determination shall have the power to reduce the duration and/or area of such
covenant to the longest duration and to the greatest geographical scope which is
permitted, and, in said reduced form, such covenant shall then be enforced.
7. REMEDIES FOR BREACH. Notwithstanding the provisions of Section 10
hereof, if Employee breaches, or threatens to breach, any of the provisions of
Section 6 hereof, the Company shall have the following rights and remedies, in
addition to any others, each of which shall be independent of the other and
severally enforceable:
<PAGE>
(i) The right to have the provisions of Section 6 of this Agreement
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed that any such breach or threatened breach will cause
irreparable injury to the Company and that monetary damages will not provide an
adequate remedy to the Company;
(ii) The right to obtain an injunction to prevent the Employee from
taking actions prohibited by this Agreement without the requirement of posting a
bond, it being acknowledged and agreed that any such breach or threatened breach
will cause irreparable injury to the Company and that monetary damages will not
provide an adequate remedy to the Company;
(iii) The right and remedy to require Employee to pay all damages
resulting from such breach; and
(iv) The right to terminate Employee's employment for "Cause"
pursuant to Section 8 hereof.
8. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. Employee's employment shall automatically
terminate upon the death or disability of Employee. Disability shall mean an
infirmity preventing Employee from performing in any material respect his duties
for at least 120 days (whether or not consecutive) during any one-year period.
(b) TERMINATION FOR CAUSE. The Company may terminate Employee's
employment at any time for "Cause" in accordance with the procedures provided
below. Termination by the Company for "Cause" shall be limited to termination
upon (i) the material neglect or inattention by Employee of his duties hereunder
after a written warning of such material neglect or inattention of his duties,
or (ii) the engaging by Employee in conduct that is materially and demonstrably
injurious to the Company, monetarily or otherwise, which shall be deemed to
include violating any material term of this Agreement.
Prior to the Company's exercising its right to terminate Employee's
employment for Cause, the Company shall give thirty (30) days prior written
notice to Employee of the specific action proposed to be taken and the grounds
therefor and a reasonable opportunity for Employee to respond thereto to the
Company and to cure such situation.
(c) OTHER TERMINATION. The Company shall have the right to terminate
Employee's employment at any time without Cause by giving at least thirty (30)
days prior written notice to Employee of the Company's election to terminate the
Employee's employment. If the Company terminates the Employee's employment at
the end of the four year initial term (whether with or without cause) or any
time after the four year initial term, Employee shall only be entitled to his
salary and benefits through the date of termination and no more. If the Company
terminates the Employee's employment without Cause during the initial four year
Term or in the event that Employee's employment is terminated due to Disability
during the initial four year Term, and the Company receives from the Employee a
full release of all claims in a form satisfactory to the Company the Company
shall pay Employee an amount equal to
<PAGE>
three months salary as severance pay based upon the monthly salary then in
effect.
9. EFFECT OF TERMINATION. Upon the termination of Employee's employment,
the rights of Employee which shall have accrued prior to the date of such
termination shall not be affected in any way. Except as provided in Section 8(c)
hereof, Employee shall not have any rights which have not previously accrued
upon termination of his employment. Section 6 hereof shall survive any
termination of Employee's employment.
10. MEDIATION & BINDING ARBITRATION. Except with respect to the provisions
of Sections 6 and 7 hereof which shall not be subject to binding arbitration,
the Company and Employee agree that all other disputes, controversies or claims
that may arise between them (including their agents and employees) including,
without limitation, any dispute, controversy or claim as to the interpretation
or enforcement of any of the provisions of this Agreement, shall be submitted
first to mediation and then to binding arbitration in the city of San Antonio,
Texas in accordance with the rules of the American Arbitration Association and
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction.
(a) MEDIATION. If a controversy or claim arises between the parties
then that controversy or claim will be mediated within one month of its
identification by the parties.
(b) BINDING ARBITRATION. In the event that the parties cannot resolve
their dispute by mediation within one month, the parties then agree to bring the
dispute to binding arbitration within one month of the conclusion of the
mediation.
11. COMMUNICATIONS. Any notice, request or other communication required or
permitted by this Agreement to be mailed, given or delivered to Employee shall
be in writing, addressed to him at his address shown below or at such other
address as he shall have furnished from time to time to the Company for the
purposes hereof; and any payment to Employee under this Agreement may be made by
check delivered to him or mailed to or delivered at such address. Any notice,
request or other communication required or permitted by this Agreement to be
given to the Company is to be in writing, addressed to the Company at the
address of its principal office in San Antonio, Texas, or at such other address
as the Company shall have furnished to Employee for the purposes hereof.
12. AMENDMENTS. This Agreement may be amended or modified only by a
written instrument executed by the parties hereto.
13. BINDING EFFECT. This Agreement shall be binding upon, and shall inure
to the benefit of Employee; the obligations of Employee hereunder are personal
and this Agreement may not be assigned by Employee. This Agreement shall be
binding upon, and shall inure to the benefit of, the Company and shall also bind
and inure to the benefit of any successor of the Company by merger or
consolidation or any assignee or transferee of all or substantially all of its
properties, but, except to any such successor or assignor of the Company, this
Agreement may not be assigned by the Company.
14. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance
<PAGE>
with the laws of the State of Texas.
15. SEVERABILITY. If any provision of this Agreement shall, to any extent,
be invalid or unenforceable, the remainder of this Agreement shall not be
affected, and each term hereof shall be valid and shall be enforced to the
extent permitted by law.
16. COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which is to be deemed an original, but all of which, together,
constitute one and the same instrument.
EXECUTED as of the day and year first above written.
RACKSPACE, LTD.
By: MACROWEB, LC
By: /s/ Morris Miller
------------------------------------
Its: member
-----------------------------------
PATRICK CONDON
By: /s/ Patrick Condon
------------------------------------
Address:
---------------------------------------
13515 West Ave #236
---------------------------------------
San Antonio, TX 78216
---------------------------------------
<PAGE>
Exhibit A
1. Health/medical/dental insurance for Employee.
<PAGE>
ASSET PURCHASE AND SALE AGREEMENT
THIS ASSET PURCHASE AND SALE AGREEMENT (the "Agreement") is entered into
this 29th day of December, 1998, by and between Cymitar Technology Group, Inc.,
a Texas corporation ("Seller"), Richard Yoo ("Yoo"), Dirk Elmendorf
("Elmendorf"), Patrick Condon ("Condon") (Yoo, Elmendorf and Condon are
sometimes referred to herein as the "Shareholders") and Rackspace, Ltd.
("Buyer").
WHEREAS, Seller owns and operates a business under the name "Rackspace"
which involves the leasing of internet servers, bandwidth, connectivity, and
administration of all aspects of servers, as well as other inter-net businesses
(collectively, the "Business"); and
WHEREAS, Buyer desires to purchase all or substantially all of the assets
of the Seller pursuant to the terms of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties agree as follows:
1. SALE AND PURCHASE OF ASSETS.
1.1 SALE AND PURCHASE OF ASSETS. Subject to the terms and
conditions set forth in this Agreement, Seller agrees to sell, convey, transfer,
assign, grant and deliver to Buyer, and Buyer, in reliance on the
representations, warranties and covenants of Seller and the Shareholders, agrees
to purchase, acquire and accept from Seller, all of Seller's right, title and
interest in and to all of the tangible and intangible assets, including real,
personal and mixed property, owned or held by Seller, including but not limited
to all assets used or useful in connection with the operation of the Business
(collectively, the "Assets") which are described on Exhibit A attached hereto.
The Assets shall not include the Excluded Assets, as defined in Section 1.2
below. The Assets shall include but are not limited to:
(a) the leasehold interest under the real property lease
described on Exhibit A (the "Real Property Lease") a true and correct copy of
which have been provided to the Buyer;
(b) all equipment and other tangible personal property used
or useful in connection with the operation of the Business including, all of
which are set forth and described on Exhibit A, and all of Seller's interest in
and to all manufacturer's, distributor's or other warranties relating to any of
the foregoing;
(c) all licenses, permits, franchises, authorizations and
other similar rights issued by any federal, state or local governmental
authority (collectively, the "Authorizations");
<PAGE>
(d) those contracts and other agreements to which Seller is
a party and which are listed on Exhibit A (the "Assumed Contracts"), true,
correct and complete copies of which have been delivered to Buyer;
(e) all patents, trade names, trade marks, service marks,
copyrights, computer programs, data, trade secrets, business information,
customer lists, supplier lists, marketing plans, intellectual property rights
(whether or not reduced to writing or other tangible form) and other intangible
property owned or held by Seller and all of the rights associated therewith
(including any and all applications, registrations, extensions and renewals
relating thereto);
(f) all business and other books, papers, files,
correspondence and records pertaining to the operation of the Business; and
(g) all contract rights, accounts and accounts receivable of
Seller.
The Assets to be sold hereunder shall be transferred to Buyer at the
Closing free and clear of all liens, claims, security interests encumbrances and
liabilities of any kind or nature whatsoever ("Encumbrances"). Buyer is not, and
shall not be deemed to have assumed any liability or obligation of the Seller,
except for those liabilities arising after the Closing under the Assumed
Liabilities (as herein defined) as expressly provided for herein.
1.2 EXCLUDED ASSETS. The Assets shall not include the following
(the "Excluded Assets"):
(a) Any and all cash, bank deposits (other than cash
deposits to secure contract obligations which shall be included within the
Assets);
(b) all contracts of insurance and claims against insurers;
(c) all employee benefit plans and assets thereof and all
employment contracts;
(d) All commitments, contracts and agreements not
specifically assumed by Buyer pursuant to Section 1.1 hereof; and
(e) All other items listed on Schedule 1.2 hereto.
2. PURCHASE PRICE; METHOD OF PAYMENT
2.1 PURCHASE PRICE. The purchase price for the Assets is the sum
of $192,369.00 (the "Purchase Price"). The Purchase Price is equal to the
aggregate amount of the liabilities of the Seller listed on Exhibit B. Seller
and the Shareholders represent that Exhibit B accurately describes the names of
all creditors of the Seller (the "Creditors") and the amounts owed by each of
them. Seller and the Shareholders expressly agree to use the proceeds of the
Purchase Price to pay all of the Creditors the amounts owed, and further agree
to make such payments as soon as possible after the execution of this Agreement,
but in no event later than January 10, 1999. All of Seller's Liabilities
(including the name of the creditor and the amount owed) are set forth on
2
<PAGE>
Exhibit B attached hereto. The Buyer may pay the Seller's creditors directly.
Any such payments will be for the account of Seller and shall reduce the
Purchase Price accordingly. In the event that any additional liabilities of
Seller become known after closing, provided that (i) such liabilities were
incurred prior to closing and not afterward, (ii) the aggregate of all
liabilities of the Seller do not exceed $200,000.00 (which shall include all
liabilities listed on Exhibit B and any other liability of Seller) and (iii) the
shareholders of Seller and Seller did not intentionally or recklessly fail to
disclose such liabilities, at Buyer's election, Buyer shall pay either Seller or
Buyer shall pay such creditors directly. All above notwithstanding, the
aggregate amount of all payments to be made by Buyer under this Agreement shall
not exceed $200,000.00.
2.2 ASSUMPTION OF LIABILITIES. At the Closing, Buyer shall assume
only the liabilities and obligations of Seller to be performed on or after the
Closing Date under (i) the Real Property Lease, and (ii) the Assumed Contracts
(collectively, the "Assumed Liabilities"), except to the extent that such
liabilities arise prior to the Closing. Buyer is not and shall not assume any
other liability of the Seller whatsoever.
2.3 NO OTHER LIABILITIES ASSUMED. Except as expressly provided in
Section 2.2 hereof, Buyer shall not and does not assume any liability or
obligation of Seller, fixed or contingent, disclosed or undisclosed, including
without limitation, (i) contractual obligations, (ii) employment or consulting
contracts or commitments or obligations to employ any employee of Seller, (iii)
obligations for pensions, vacation pay, severance or other employee benefit
plans, programs or practices, (iv) obligations or liabilities for Taxes and (v)
any other liabilities or claims against Seller of any kind or nature whatsoever,
no matter when raised. Except as expressly provided herein, Buyer shall not be
required to defend any suit or claim arising out of any act, event or
transaction occurring prior to the Closing Date or out of any condition existing
prior to the Closing Date, in connection with the ownership or operation of the
Business, including without limitation, any successor or transferee liability.
2.4 ALLOCATION OF PURCHASE PRICE. Within sixty days after the
execution of this Agreement, Buyer and Seller shall use their best efforts to
agree upon an allocation of the Purchase Price amongst the Assets. To the extent
Buyer and Seller reach an agreement on the allocation of the Purchase Price,
Buyer and Seller shall each file with their respective federal income tax return
for the tax year in which the closing occurs, IRS Form 8594 and IRS form 8824,
as applicable, containing the information agreed upon by the parties pursuant to
the immediately preceding sentence. Buyer agrees to report the purchase of the
Assets, and Seller agrees to report the sale of such Assets on all federal,
state and local tax returns in a manner consistent with the information agreed
upon by the parties pursuant to this section and contained in its respective IRS
Form 8594 and IRS Form 8824, as applicable. Notwithstanding any other provision
of this Agreement, the provisions of this Section 2.4 shall survive the Closing
without limitation.
3. REPRESENTATIONS AND WARRANTIES BY SELLER. Seller and the
Shareholders jointly and severally represent and warrant to Buyer as follows:
3.1 BINDING AGREEMENT. This Agreement, and the agreements entered
into pursuant to this Agreement (the "Collateral Agreements") constitutes, and
upon execution and delivery by Seller will constitute, valid and binding
agreements and obligations of Seller enforceable against Seller in accordance
with their respective terms, except as the enforceability hereof may be
3
<PAGE>
affected by bankruptcy, insolvency or similar laws affecting creditors'
rights generally or court applied equitable remedies. There is no agreement,
understanding, or option between Seller and any third party that encumbers
the Assets or obligates Seller to sell any portion of the Assets.
3.2 FINANCIAL STATEMENTS. Seller represents that all financial
statements, financial information, and reports regarding the financial condition
of the Seller, provided or to be provided to Purchaser are true and correct in
all material respects.
3.3 NO CONFLICT OR BREACH. Except as set forth on Schedule 3.3,
the execution and delivery of this Agreement, the fulfillment of and the
compliance with the respective terms and provisions of this Agreement, and the
consummation of the transactions described in this Agreement, will not and do
not (i) conflict with or constitute a violation of (with or without the giving
of notice or the lapse of time or both) any law, ordinance, regulation, order,
award, judgment, injunction or decree of any legislative body, court,
governmental or regulatory authority or arbitrator which is applicable or
relates to Seller or any of the Assets or of the Business, or (ii) violate or
conflict with, constitute a material default under, result in a material breach,
acceleration or termination of any provision of, require the consent of any
third party under, or result in the creation of any Encumbrance upon any of the
Assets pursuant to, any contract, agreement, commitment, indenture, or other
instrument or obligation to which Seller is a party or by which Seller is bound
or to which any of the Assets may be subject.
3.4 GOVERNMENTAL AND THIRD PARTY CONSENTS. Neither the execution
and delivery of this Agreement by Seller nor the consummation by Seller of the
transactions contemplated hereby, nor compliance by Seller with any provisions
of this Agreement or the Collateral Agreements will require any filing with, or
the obtaining of any permit, authorization, consent or approval of, any
governmental or regulatory authority or any third party.
3.5 LITIGATION; COMPLIANCE WITH LAW. Except as set forth in
Schedule 3.5, there is no action, suit, investigation, claim, arbitration,
proceeding or litigation pending or to the knowledge of the Seller or the
Shareholders, threatened against or involving any of the Seller, the Assets,
or the Business at law or in equity, or before or by any court, arbitrator or
governmental authority. The Business is not operating under or subject to any
order, judgment, decree or injunction of any court, arbitrator or governmental
authority. Seller has complied in all material respects and are in compliance
in all material respects with all laws, ordinances, regulations, awards,
orders, judgments, decrees and injunctions applicable to the Assets and to
the Business and operations of Seller, including the federal, state and local
laws, ordinances, regulations and orders pertaining to employment of labor,
zoning and other matters.
3.6 LEASED REAL PROPERTY.
(a) LEASED OR LICENSED REAL PROPERTY. The Real Property
Lease (complete and accurate copies of which have been provided to the Buyer) is
a legal, valid and binding obligation of the parties thereto that is enforceable
in accordance with its terms and is in full force and effect. Seller enjoys
peaceful and undisturbed possession thereunder and is not in default thereunder
and, to the knowledge of Seller and the Shareholders, no circumstances or events
have occurred which, with notice or the lapse of time or both, could constitute
a default by Seller, or to the knowledge of the Seller or the Shareholders, any
other party, under any of the Real Property Lease.
4
<PAGE>
(b) COMPLIANCE. The Seller and the Shareholders have not
received notice of any facts or circumstances which lead them to believe that
the Leased Real Property is not in material compliance with applicable
federal, state, and local laws, including zoning, land use, lighting and
marking requirements, and building code laws, ordinances and regulations
necessary to conduct the operations of the Business as presently conducted.
All of the improvements located on the Leased Real Property (the
"Improvements") are in good condition and repair.
(c) TITLE TO LEASED REAL PROPERTY. Seller has, and at
Closing Buyer will receive good and valid leasehold interest in all the Leased
Real Property, free and clear of all Encumbrances.
3.7 TITLE TO ASSETS; SUFFICIENCY OF ASSETS. Seller has good and
valid title to all of the Assets, free and clear of all Encumbrances. At Closing
shall transfer to Buyer good and valid title to all of the Assets free and clear
of all Encumbrances. The Assets constitute all of the assets which are material
to the conduct of the Business.
3.8 CONDITION OF TANGIBLE ASSETS. All of the tangible personal
property included in the Assets to be conveyed to Buyer are in good operating
condition and repair, normal wear and tear excepted; and are suitable, adequate
and fit for the uses for which they are being used by Seller; and such Assets
and the present use thereof are not in violation in any respect of applicable
laws or regulations.
3.9 INTELLECTUAL PROPERTY. Seller has provided Buyer with an
accurate list of all franchises, licenses, service marks, trademarks, trade
names, copyrights, patents and applications therefor, trade secrets, customer
lists, supplier lists, business information, computer programs and other
intellectual property rights (the "Intellectual Property") owned or licensed for
use by or registered in the name of Seller, all of which are valid and in full
force and effect and are transferable to Buyer by the sole act and deed of
Seller and no consent on the part of any other person is necessary to validate
the transfer to Buyer. All Intellectual Property developed by the Seller and all
Intellectual Property developed by any shareholder or employee of the Seller
which relates to the Business, is owned by the Seller and the Seller is free to
transfer and assign such Intellectual Property to the Buyer. To Seller's and
Shareholders' knowledge, the activities of the Business or Seller's use of any
of the foregoing Intellectual Property has not infringed and Buyer's use of such
Intellectual Property will not infringe upon any trademark, trade name,
copyright, patent, trade secret or legally protectable right of another. No
claim or demand has been made by any third party alleging such infringement by
the Seller, nor does the Seller or the Shareholders have any reason to believe
that the use of the Intellectual Property might infringe the rights of a third
party).
3.10 REPORTS AND RECORDS. All returns, reports and statements
relating to the Business currently required to be filed by Seller with any
governmental instrumentality have been filed and complied with in all material
respects and are true, correct and complete in all material respects, and true,
correct and complete copies thereof have been made available for inspection by
Buyer. All such reports, returns and statements shall continue to be filed on a
current basis until the Closing Date, and will be true, correct, and complete in
all material respects.
3.11 LABOR MATTERS. Seller is in material compliance with all
applicable laws respecting employment and employment practices, terms and
conditions of employment and wages
5
<PAGE>
and hours with respect to its employees. No employee of the Seller is
represented by any labor union or collective bargaining agreement and there
are no collective bargaining or other labor agreements with respect to
employees of the Seller. Seller is not engaged in any unfair labor practice
with respect to any such employees of the Seller, and no unfair labor
practice charge or complaint against Seller with respect to the Business has
been filed before the National Labor Relations Board, any state labor
relations board or any court or tribunal, and none is threatened. There is no
labor strike, dispute, request for representation, slowdown or stoppage
pending and none is or has been threatened.
3.12 TAXES. (i) Seller has filed or caused to be filed all
returns, declarations of estimated taxes, reports, statements, information
statements and the like ("Tax Returns") required to be filed with any taxing
authority prior to the date hereof; except those Tax Returns for which requests
for extensions have been timely filed, and all such Tax Returns are correct and
complete in all material respects.
(ii) Seller has paid or caused to be paid all taxes
(including, without limitation, income, gross receipts, ad valorem, excise,
value-added, sales, use, transfer, franchise, license, stamp, occupation,
withholding, employment, payroll, property or environmental tax or premium,
together with any interest, penalty, addition to tax or additional amount
imposed by any governmental body or authority; collectively, "Taxes") shown to
be due and payable on such Tax Returns.
(iii) Seller has not executed any waiver or waivers which
extend or have the effect of extending any applicable statute of limitations
with respect to the assessment or collection of Taxes.
(iv) No federal, state, local or foreign audits or other
administrative or court proceedings are presently pending with regard to any Tax
Returns or Taxes of Seller and Seller has not received notice from any
governmental authority of the expected commencement of such proceedings.
(v) There are no liens for Taxes on the Assets of Seller
other than liens for taxes not yet due and payable.
(vi) None of the Assets is subject to a lease.
3.13 UNDISCLOSED LIABILITIES. Seller does not have any liabilities
except to the extent disclosed on Exhibit B attached hereto.
3.14 CONTRACTS/ASSIGNMENTS. Each of the Assumed Contracts is a
valid and binding obligation of Seller. Seller and Shareholder have no reason to
believe that the Assumed Contracts are not binding upon all the parties. None of
the parties to any of such Assumed Contract has terminated, canceled, or
substantially modified any of such Assumed Contracts and neither Seller nor, to
Seller's and Shareholders' knowledge, any other party is in default thereunder.
Each of the Assumed Contracts may be freely assigned by Seller to Buyer without
the requirement of any consent or approval, except as otherwise noted on Exhibit
A.
3.15 EMPLOYEE BENEFITS. Seller has no and has never had any
employee benefit plans (as defined in Section (3) of the Employee Retirement
Income Security Act of 1974, as
6
<PAGE>
amended ("ERISA"), maintained by or contributed to by Seller (all such plans
are referred to as the "Plans"), or any employee stock option or stock
purchase, bonus, incentive compensation, severance pay and fringe benefit
arrangements. During the five-year period ending at the Closing, Seller has
not made or been required to make any contributions to any "multiemployer
plan" (as defined in Section 3(37) of ERISA).
3.16 TRUE AND CORRECT COPIES. Seller has delivered or made
available to Buyer true, correct, and complete copies of all contracts,
agreements and documents referred to in this Agreement or related to the
Business, together with all modifications thereof and amendments thereto. A true
and correct list of all contracts and agreements between Seller and any third
party related to the Business, other than the Assumed Contracts, whether written
or oral, is contained in Schedule 3.16, all of which shall be terminated by the
Seller prior to Closing.
3.17 INSURANCE. All insurance policies maintained by Seller with
respect to the Assets and operation of the Business have been provided to the
Buyer.
3.18 ADVERSE BUSINESS CHANGES. Since December 23, 1998, there has
not been (i) any adverse change in the financial condition, assets, liabilities,
business, or results or operations of the Seller other than changes in the
ordinary course of business, none of which has been materially adverse, (ii) any
damage, destruction or loss (whether or not covered by insurance) materially and
adversely affecting the Business, (iii) any amendment or termination of any
contract, agreement, plan, lease, or license to which Seller is a party or by
which it is bound, otherwise than in the ordinary course of business or as
required elsewhere in this Agreement, or (iv) any disposition, mortgage, pledge,
or subjection to any lien, claim, charge, option, or encumbrance of any of the
Assets.
3.19 DISCLOSURE. Neither this Agreement nor any written instrument,
list, exhibit or certificate furnished or to be furnished to Buyer pursuant
hereto contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact necessary in order to make the statements
not misleading. There is no state of facts or circumstances known to Seller or
the Shareholders and not disclosed to Buyer which should be disclosed to Buyer
in order not to make any of the warranties and representations contained herein
not false or misleading or which may have an adverse effect on the Assets.
4. REPRESENTATIONS AND WARRANTIES BY BUYER. Buyer represents, warrants
and covenants to Seller as follows:
4.1 ORGANIZATION AND STANDING. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas. Buyer has all requisite corporate power and corporate authority to enter
into, execute and deliver this Agreement and the Collateral Agreements, and to
perform and comply with all of the terms, covenants and conditions to be
performed or complied with by Buyer in this Agreement and the Collateral
Agreements, and to consummate the transactions contemplated by this Agreement
and the Collateral Agreements.
4.2 AUTHORIZATION. The execution, delivery and performance of this
Agreement and of the Collateral Agreements, and the consummation of the
transactions contemplated by this Agreement and the Collateral Agreements, have
been duly and validly authorized by all necessary corporate action on the part
of Buyer. This Agreement constitutes, and upon execution and delivery the
Collateral Agreements will constitute, valid and binding agreements and
obligations of Buyer,
7
<PAGE>
enforceable in accordance with their respective terms, except as the
enforceability hereof may be affected by bankruptcy, insolvency or similar
laws affecting generally creditors' rights or by court applied equitable
remedies.
5. THE CLOSING; CLOSING DATE.
5.1 CLOSING. The Closing hereunder shall be held upon the
execution of this Agreement at the offices of Matthews & Branscomb, P.C. located
at 106 S. St. Mary's Street, San Antonio, Texas 78205 or such other mutually
agreeable time or location.
5.2 DELIVERY BY SELLER. At or before the Closing, Seller shall
deliver to Buyer:
(a) TRANSFER DOCUMENTS. The following bills of sale,
statements, assignments and other instruments of transfer and consents, in form
prepared by and satisfactory to Buyer, sufficient to transfer and convey to
Buyer, free and clear title (of the quality provided for in this Agreement) to
the Assets to the Buyer, and dated as of the Closing Date:
(i) One or more bills of sale conveying to the Buyer
the tangible personal property;
(iii) One or more assignments of the Assumed Contracts
and the Leased Real Property;
(iv) One or more assignments of the intangible assets;
(v) Any and all tax clearance certificates from state
and local tax authorities as may be requested by the Buyer; provided that Seller
shall be responsible for obtaining all such certificates.
(vi) Such other instruments or documents as Buyer may
reasonably request to effectuate the transfer to Buyer of the Assets.
(vii) Estoppel letters and any other agreement or
document requested by the Buyer, evidencing that there is no default under any
of the Assumed Contracts or the Real Property Lease to be assigned to Buyer and
that such agreements may be assigned to the Buyer.
(viii) UCC-3 termination statements and any other
document requested by the Buyer which evidences the release and termination of
any Encumbrance on the Assets.
(B) SHAREHOLDER AND DIRECTOR RESOLUTIONS. A certified copy
of the resolution of the board of directors and shareholders of the Seller,
authorizing the transactions contemplated by this agreement.
5.3 DELIVERY BY BUYER. At or before the Closing, Buyer shall
deliver to Seller:
(a) PURCHASE PRICE PAYMENT. The Purchase Price by
cashier's check or by wire transfer pursuant to wire instructions that Seller
shall deliver to Buyer prior to the Closing.
8
<PAGE>
(b) ASSUMPTION AGREEMENTS. One or more assumption agreements
in a form satisfactory to the Buyer, pursuant to which Buyer shall assume the
obligations of Seller under the Assumed Contracts and the Real Property Lease.
6. SURVIVAL; INDEMNIFICATION.
6.1 SURVIVAL OF REPRESENTATIONS/LIMITATION OF LIABILITY/SECURITY
INTEREST. All representations and warranties made by any party to this Agreement
shall survive the Closing for a period of eighteen months, except for
representations and warranties regarding taxes which shall survive for a period
of two years. Notwithstanding anything in this Agreement to the contrary, the
Buyer's sole and exclusive remedy in the event of any breach by the Seller or
any of the Shareholders of any provision, representation or warranty contained
in this Agreement, and Buyer's sole and exclusive recourse for any right to
indemnification under Section 6.2 below, shall be to foreclose upon the Units
(limited partnership interests in Rackspace, Ltd. owned by the Shareholders)
held by the Shareholders (or a portion of such Units), and the Buyer expressly
waives the right to pursue the Shareholders directly for monetary damages. For
this purpose, the Shareholders grant to the Buyer, a security interest in the
Units they own in Rackspace, Ltd. as security for the damages which may result
from any breach of the representations and warranties made by the Shareholders
under this Agreement and as security for the indemnity obligations set forth in
Section 6.2 below. The Buyer shall not exercise any right it may have to
foreclose upon any of the Shareholder's Units unless the aggregate amount of
financial loss to the Buyer exceeds $25,000.00. The Shareholders agree that to
sign a UCC-1 financing statement to perfect the Buyer's lien against their
Units, upon request by Buyer. The parties hereby waive any provision of law to
the extent that it would limit or restrict the agreements set forth in this
Section 6.1. The Buyer shall provide the Shareholders with 15 business days
advance written notice of any such foreclose and the Shareholders shall have
until the end of such 15 business day period to pay the the claim arising
hereunder in cash, in which event no such foreclosure shall occur. The Buyer
shall release its security interest on the Shareholders' Units and such Units
shall no longer be subject to a claim hereunder, upon the earlier to occur of
two years from the date of this Agreement (but only to the extent no unsatisfied
claims have been made on or before such date) or upon the Shareholders escrowing
$250,000 in cash to satisfy any claims that may arise hereunder under an escrow
agreement reasonably acceptable to the Buyer.
6.2 INDEMNIFICATION BY SELLER. Subject to the conditions and
provisions of this Section 6.2 and Section 6.4 hereof, Seller agrees to
indemnify, defend and hold harmless Buyer from and against any and all demands,
claims, complaints, actions or causes of action, suits, proceedings,
investigations, arbitrations, assessments, losses, damages, liabilities, costs
and expenses, including, but not limited to, interest, penalties and reasonable
attorneys' fees and disbursements, asserted against, imposed upon or incurred by
Buyer, directly or indirectly, by reason of or resulting from any
misrepresentation or breach of the representations and warranties of Seller and
the Shareholders contained in or made pursuant to this Agreement.
6.3 INDEMNIFICATION BY BUYER. Subject to the conditions and
provisions of this Section 6.3 and the provision of Section 6.4, Buyer hereby
agrees to indemnify, defend and hold harmless Seller from and against all
demands, claims, complaints, actions or causes of action, suits, proceedings,
investigations, arbitrations, assessments, losses, damages, liabilities, costs
and expenses, including, but not limited to, interest, penalties and reasonable
attorneys' fees and disbursements, asserted against, imposed upon or incurred by
Seller, directly or indirectly, by reason of or resulting from (a) any
liability or obligation of or claims against Seller (whether absolute, accrued,
contingent
9
<PAGE>
or otherwise and whether contractual, tax or any other type of liability or
obligation or claim) expressly assumed by Buyer pursuant to Section 2.2
hereof; or (b) any misrepresentation or breach of the representations and
warranties of Buyer contained in or made pursuant to this Agreement.
6.4 CONDITIONS OF INDEMNIFICATION. The obligations and liabilities
of Seller and of Buyer hereunder with respect to their respective indemnities
pursuant to this Section 6, resulting from any claim or other assertion of
liability by third parties (hereinafter called collectively, "Claims"), shall be
subject to the following terms and conditions:
(a) The party seeking indemnification (the "Indemnified
Party") must give the other party or parties, as the case may be (the
"Indemnifying Party"), notice of any such Claim promptly after the Indemnified
Party receives notice thereof.
(b) The Indemnifying Party shall have the right to
undertake, by counsel or other representatives of its own choosing, the defense
of such Claim.
(c) In the event that the Indemnifying Party shall elect not
to undertake such defense, or within a reasonable time after notice of any such
Claim from the Indemnified Party shall fail to defend, the Indemnified Party
(upon further written notice to the Indemnifying Party) shall have the right to
undertake the defense, compromise or settlement of such Claim, by counsel or
other representatives of its own choosing, on behalf of and for the account and
risk of the Indemnifying Party (subject to the right of the Indemnifying Party
to assume defense of such Claim at any time prior to settlement, compromise or
final determination thereof).
(d) Anything in this Section 6.4 to the contrary
notwithstanding, (i) if there is a reasonable probability that a Claim may
materially and adversely affect the Indemnified Party other than as a result of
money damages or other money payments, the Indemnified Party shall have the
right, at its own cost and expense, to participate in the defense, compromise or
settlement of the Claim; (ii) the Indemnifying Party shall not, without the
Indemnified Party's written consent, settle or compromise any Claim or consent
to entry of any judgment which does not include as an unconditional term thereof
the giving by the claimant or the plaintiff to the Indemnified Party of a
release from all liability in respect of such Claim, and (iii) in the event that
the Indemnifying Party undertakes defense of any Claim, the Indemnified Party,
by counsel or other representative of its own choosing and at its sole cost
and expense, shall have the right to consult with the Indemnfiying Party and
its counsel or other representatives concerning such Claim and the Indemnifying
Party and the Indemnified Party and their respective counsel or other
representatives shall cooperate with respect to such Claim.
6.5. NOTICES. All notices, demands, requests, or other
communications which may be or are required to be given or made by any party to
any other party pursuant to this Agreement shall be in writing and shall be
delivered by first class, registered, certified or express mail, return receipt
requested, postage prepaid, or, hand-delivered, addressed as follows:
If to Buyer:
111 Soledad, Suite 1100
San Antonio, Texas 78205
10
<PAGE>
If to Seller or the Shareholders:
Richard K. Yoo
100 Lorene #102
San Antonio, Tx 78209
With copy to:
Fulbright & Jaworski
Attn: Daryl Lansdale
300 Convent Street
Suite 2200
San Antonio, Texas 78205
or such other address or facsimile number as the respective addressee may
indicate by written notice. Each notice, demand, request or communication which
shall be given or made in the manner described above shall be deemed
sufficiently given or made for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, or the affidavit
of messenger) or at such time as delivery is intentionally refused by the
individual named addressee upon presentation.
7. POST CLOSING OBLIGATIONS.
7.1 CHANGE OF NAME. As soon as practicable after the Closing,
Seller shall change (and the Shareholders shall cause Seller to make such
change) its name to a name which is substantially dissimilar to "Cymitar."
Seller agrees never to use the name "Cymitar" or a name similar to Cymitar at
anytime in the future.
8. MISCELLANEOUS.
8.1. SPECIFIC PERFORMANCE. Seller acknowledges that the Assets to
be sold and delivered by Buyer pursuant to this Agreement are unique and that
Buyer has no adequate remedy at law if Seller shall fail to perform any of their
obligations hereunder, and Seller therefore confirm and agree that Buyer's
right to specific performance is essential to protect the rights and interests
of
11
<PAGE>
Buyer. Accordingly, in addition to any other remedies which Buyer may have
hereunder or at law or in equity or otherwise, Seller hereby agree that Buyer
shall have the right to have all obligations, undertakings, agreements and
other provisions of this Agreement specifically performed by Seller and that
Buyer shall have the right to obtain an order or decree of such specific
performance in any of the courts of the United States or of any state or
other political subdivision thereof.
8.2. FURTHER ASSURANCES. Each of the parties hereto agrees that it
will, at any time, prior to, at or after Closing, take or cause to be taken such
further actions, and execute, deliver and file or cause to be executed,
delivered and filed such further documents and instruments, and obtain such
consents, as may reasonably be necessary or reasonably requested in connection
with the consummation of the purchase and sale contemplated by this Agreement or
in order to fully effectuate the purposes, terms and conditions of this
Agreement.
8.3 BROKERS. Each of Seller and Buyer represents to the other that
it has not retained any broker or person in connection with the transactions
contemplated by this Agreement.
8.4 SCHEDULES AND EXHIBITS. Any item set forth on or in any
Schedule or Exhibit to this Agreement shall be deemed to be incorporated by
reference into this Agreement and any information disclosed in any Schedule
shall be deemed to have been disclosed pursuant to all other Schedules to this
Agreement.
8.5 WAIVER. Except as otherwise provided in this Agreement, no
delay or failure on the part of any party hereto in exercising any right, power
or privilege under this Agreement or under any other instrument or document
given in connection with or pursuant to this Agreement shall impair any such
right, power or privilege or be construed as a waiver of any default or any
acquiescence therein. No single or partial exercise of any such right, power or
privilege shall preclude the further exercise of any such right, power or
privilege, or the exercise of any other right, power or privilege. No waiver
shall be valid against any party hereto unless made in writing and signed by the
party against whom enforcement of such waiver is sought and then only to the
extent expressly specified therein.
8.6 REMEDIES CUMULATIVE. Except as specifically provided herein,
the remedies provided herein shall be cumulative and shall not preclude the
assertion by Seller or by Buyer of any other rights or the seeking of any other
remedies against the other, or its successors or assigns. Nothing contained
herein shall preclude a party from seeking equitable relief, where appropriate.
8.7 ENTIRE AGREEMENT; AMENDMENT. This Agreement, including the
Schedules and Exhibits hereto and other instruments and documents referred to
herein or delivered pursuant hereto, contains the entire agreement among the
parties with respect to the subject matter hereof and supersedes all prior oral
or written agreements, commitments or understandings with respect to such
matters. No amendment, modification or discharge of this Agreement shall be
valid or binding unless set forth in writing and duly executed by the party
against whom enforcement of the amendment, modification or discharge is sought.
8.8 HEADINGS. The headings of the sections and subsections
contained in this Agreement are inserted for convenience only and do not form a
part or affect the meaning, construction or scope thereof.
12
<PAGE>
8.9 SIGNATURE IN COUNTERPARTS. This Agreement may be executed in
separate counterparts, none of which need contain the signature of all parties,
each of which shall be deemed to be an original, and all of which taken together
constitute one and the same instrument. It shall not be necessary in making
proof of this Agreement to produce or account for more than the number of
counterparts containing the respective signatures of, or on behalf of, all of
the parties hereto.
8.10 CONSTRUCTION. This Agreement shall be construed and enforced
in accordance with the laws of the State of Texas, excluding the conflicts of
law principles thereof.
8.11 MEDIATION AND ARBITRATION. The parties agree that all
disputes, controversies or claims that may arise between them which relate to
this Agreement, including, without limitation, any dispute, controversy or
claim as to the interpretation or enforcement of any of the provisions of
this Agreement, shall be submitted first to mediation and then to binding
arbitration in the city of San Antonio, Texas in accordance with the rules of
the American Arbitration Association and judgment upon the award rendered by
the arbitrator(s) may be entered in any court having jurisdiction.
(1) MEDIATION. If a controversy or claim arises between the
parties then that controversy or claim will be mediated within one month of its
identification by the parties.
(2) BINDING ARBITRATION. In the event that the parties
cannot resolve their dispute by mediation within one month, the parties then
agree to bring the dispute to binding arbitration within one month of the
conclusion of the mediation.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement, or has caused this Agreement to be duly executed and delivered in its
name on its behalf, all as of the day and year first above written.
BUYER:
RACKSPACE, LTD.
BY: Macroweb, LC, its General Partner
By: /s/ Morris Miller
-------------------------------
Title: member
----------------------------
SELLER:
CYMITAR TECHNOLOGY GROUP, INC.
By: /s/ Richard Yoo
-------------------------------------
Its: President
-------------------------------------
13
<PAGE>
SHAREHOLDERS:
/s/ RICHARD YOO
--------------------------------------
RICHARD YOO
/s/ DIRK ELMENDORF
--------------------------------------
DIRK ELMENDORF
/s/ PATRICK CONDON
--------------------------------------
PATRICK CONDON
14
<PAGE>
Transfer Agreement
This Agreement is made this 29th made of December, 1998, by and between
Rackspace, Ltd. (the "Partnership") and Richard Yoo ("Yoo"), Dirk
Elmendorf ("Elmendorf") and Pat Condon ("Condon").
In consideration for the substantial benefits to be received by Yoo,
Elmendorf and Condon incident to the creation of the Partnership, and to
ensure that the Partnership receives all intellectual property relating to the
business conducted by Cymitar Technology Group, Inc. ("Cymitar"), the parties
agree as follows:
Yoo, Condon and Elmendorf hereby transfer and assign to the Partnership
any and all tradesecrets, rights, inventions, trade marks, copyrights and any
other intellectual property rights whatsoever they may own or have an interest
in which relates to the business conducted by Cymitar at any time previous to
the date of this Agreement or which relate to the Concept as such term is
defined in the Agreement of Limited Partnership of Rackspace, Ltd., except for
the tradesecrets, rights, inventions, trade marks, copyrights and other
intellectual property rights being transferred to Elmendorf pursuant to the
agreement attached hereto as Exhibit A.
/s/ Richard Yoo /s/ Pat Condon
- --------------------- ----------------------
Richard Yoo Pat Condon
/s/ Dirk Elmendorf Rackspace, Ltd.
- ---------------------
Dirk Elmendorf By: Macroweb, LC
By: /s/ Morris Miller
--------------------
Its: member
--------------------
<PAGE>
AGREEMENT OF LIMITED PARTNERSHIP
OF
RACKSPACE, LTD.
This Agreement of Limited Partnership (hereinafter referred to as the
"Agreement") is entered into the 29th day of December, 1998, between Macroweb,
LC, a Texas limited liability company (the "General Partner"), Trout, Ltd, a
Texas limited partnership ("Trout"), Richard Yoo ("Yoo"), Patrick Condon
("Condon") and Dirk Elmendorf ("Elmendorf) (Trout, Yoo, Condon and Elmendorf
are sometimes referred to herein as the "Limited Partners"). The General
Partner and the Limited Partners are sometimes hereinafter collectively
referred to as the "Partners."
W I T N E S S E T H:
WHEREAS, the parties hereto desire to form the Partnership in order to
more conveniently conduct all business for which a partnership may be formed:
Now, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE 1.
DEFINED TERMS
The capitalized terms used in this Agreement, unless the context
otherwise requires, shall have the meanings specified in this Article 1.
ACT. Texas Revised Limited Partnership Act, as set forth at Article
6132a-1 in Vernon's Annotated Texas Civil Statutes, as it may be amended from
time to time.
ADDITIONAL LIMITED PARTNERS. The Limited Partners who are admitted to the
Partnership by the General Partner after the date of this Agreement on terms
negotiated by the General Partner consistent with the General Partner's
fiduciary duty to the Partnership, who shall become a party to this Agreement
upon their execution of a counterpart to this Agreement, all in accordance
with the terms and conditions of this Agreement.
AFFILIATE. Means, with respect to any Person, any corporation, limited
liability company, partnership, individual, trust or association controlled
by, controlling or under common control with such Person, with the concept of
control in this context meaning the ownership of at least 10% of the
1
<PAGE>
voting securities or partnership, equity or other beneficial interest of the
controlled entity.
AGREEMENT. This Agreement of Limited Partnership of Rackspace, Ltd. as
originally executed and as subsequently amended from time to time.
APPROVAL OF THE CLASS A LIMITED PARTNERS. Means and includes the approval
of Yoo (to the extent he is employed by the Partnership), or, the approval by
Elmendorf and Condon (to the extent that both are employed by the
Partnership), or, if only one of Elmendorf, Condon and Yoo are employed by the
Partnership, the approval of the one who is employed by the Partnership. To
the extent that none of the foregoing are employed by the Partnership, the
approval of either Yoo, Condon or Elmendorf, so long as such persons own in
aggregate at least 15% of the Ownership Percentage Interest in the
Partnership. Otherwise, the Approval of the Class A Limited Partners shall be
deemed to be obtained regardless of any action or inaction of Yoo, Condon or
Elmendorf.
CAPITAL ACCOUNT. The Capital Account of a Partner determined from the
inception of the Partnership strictly in accordance with the rules set forth
in Treas. Reg. Section 1.704-1(b)(2)(iv) or any successor provisions.
Subject to the previous sentence, Capital Account means (a) the amount of all
Capital Contributions of such Partner to the Partnership (valuing all capital
contributions at fair market value determined by the General Partner),
increased by (b) the amount of net income and gain allocated to the Partner,
decreased by (c) the amount of losses allocated to the Partner, and further
decreased by (d) the amount of cash distributed and the net fair market value
of all property distributed by the Partnership to the Partner.
CAPITAL CONTRIBUTION. The amount of money and the net fair market value
of any property (other than money) contributed to the Partnership by any
Partner.
CASH AVAILABLE FOR DISTRIBUTION. All cash received by the Partnership
from all sources (including capital contributions and borrowings), less cash
expended or reserved, in the discretion of the General Partner, (i) for
liabilities (contingent or otherwise), federal, state and local taxes,
expenses, capital expenditures, and obligations of the Partnership or
obligations secured by the assets of the Partnership, or (ii) for any other
reason deemed beneficial by the General Partner for the Partnership or the
Partners but not necessarily for any assignees of the Partners.
CERTIFICATE OF LIMITED PARTNERSHIP. The certificate of limited
partnership, as amended or restated, filed with the Secretary of State of the
State of Texas forming the Partnership as a Texas limited partnership.
CLASS A LIMITED PARTNERS. Collectively, Yoo, Elmendorf and Condon and
their successors and assigns.
CLASS B LIMITED PARTNER. Trout, its successors and assigns.
2
<PAGE>
CONCEPT. The offering of full web-server hosting services through the
leasing of internet servers, bandwidth, connectivity and administration of all
aspects of servers; and all copyrights, patents, inventions, trade secrets,
trademarks, service marks, trade logos, trade names, trade dress and other
intellectual property rights that relate thereto.
CODE. The Internal Revenue Code of 1986, as amended from time to time.
FAMILY MEMBER. A spouse, sibling, parent, child or grandchild of a
Person, including adopted children, and relations in law.
GENERAL PARTNER. Macroweb, LC, a Texas limited liability company
("Macroweb"), or any Person subsequently admitted to the Partnership as a
General Partner pursuant to the terms of Section 3.3 of this Agreement.
GENERAL PARTNER INTEREST. The interest in the Partnership owned by the
General Partner representing the rights and interests of the General Partner
under this Agreement.
INITIAL CAPITAL CONTRIBUTION. The Capital Contribution made by Trout in
the amount of $200,000.00.
LIMITED PARTNERS INTEREST. The interest in the Partnership owned by the
Limited Partners representing the rights and interests of the Limited
Partners under this Agreement.
LIMITED PARTNERS. Trout, Yoo, Condon and Elmendorf, any other person
admitted to the Partnership by the General Partner as a Limited Partner in
accordance with this Agreement, and the successors and assigns of any of the
foregoing.
LOSS RECAPTURE ALLOCATIONS. The allocation of Partnership net income
and gain to any Limited Partners in an amount equal to the cumulated amount
of any Specially Allocated Losses.
MAJORITY IN INTEREST OF THE LIMITED PARTNERS. Limited Partners who own,
at the time of determination, more than fifty percent (50%) of the Ownership
Percentage Interests owned by all Limited Partners.
MILLER. Morris A. Miller
OWNERSHIP PERCENTAGE INTEREST. The Ownership Percentage Interests of the
Partners as described in Section 5.1 of this Agreement.
PARTNERS. All of the General and Limited Partners of the Partnership.
3
<PAGE>
PARTNERSHIP. The limited partnership formed under the Act, known as
"Rackspace Ltd".
PERSON. Any natural person, limited liability company, general or limited
partnership, corporation, joint venture, trust or association.
REGULAR ALLOCATION. The allocation of Partnership net income and gain,
after the Loss Recapture Allocation, made to all the Partners in accordance
with their Ownership Percentage Interests.
REGULAR DISTRIBUTIONS. The distributions made to all the Partners out of
Cash Available for Distribution, in accordance with the Capital Accounts, but
after Tax Distributions.
REGULAR LOSS ALLOCATION. The allocation of Partnership losses among the
Partners in accordance with their Ownership Percentage Interests in the
Partnership until the Capital Accounts of Yoo, Condon and Elmendorf (and their
assignees) are reduced to zero.
RELATED PARTY. Shall mean as to any Partner, (i) any Affiliate of such
Partner, (ii) any employee, officer, director, shareholder, member, manager or
partner of such Partner or of any Affiliate of such Partner, (iii) any Family
Member of any Person that is a Related Party of such Partner, and (iv) all
agents (whether or not disclosed) acting on behalf of or by the direction of any
of the foregoing, and shall mean, as to Weston and Miller, (I) any Affiliate of
Weston or Miller, (II) any Family Member of Weston or Miller or any Family
Member of any Person that is a Related Party of Weston or Miller, and (III) all
agents (whether or not disclosed) acting on behalf of or by the direction of any
of the foregoing.
SECURITIES ACT. The Securities Act of 1933, as amended.
SPECIALLY ALLOCATED LOSSES. Allocations of Partnership losses to Trout in
the event the Capital Accounts of all other Limited Partners are zero.
SUBSTITUTE LIMITED PARTNERS. Those Limited Partners admitted pursuant to
the provisions of Section 8.6 of the Agreement.
TAX DISTRIBUTIONS. The distributions made to the Partners to pay the
federal tax liabilities of the Partners.
WESTON. Graham M. Weston.
UNIT. A unit of ownership in the Partnership initially representing a
.01% Ownership Percentage Interest and the rights and interests of a Partner
under this Agreement.
4
<PAGE>
ARTICLE 2
THE LIMITED PARTNERSHIP
SECTION 2.1 NAME. The business of the Partnership shall be conducted
under the name "Rackspace, Ltd." or any other name deemed advisable by the
General Partner.
SECTION 2.2 PRINCIPAL OFFICE. The principal office of the Partnership
and the address of the General Partner shall be 111 Soledad, Ste, 1100, San
Antonio, Texas 78205; provided, however, that the General Partner may, by
notice to the Limited Partners, change the address of the principal office.
The Partnership may maintain such other offices at such other places as the
General Partner deems advisable.
SECTION 2.3 PURPOSE AND POWER OF THE PARTNERSHIP. The Partnership has
the power and authority to conduct any lawful business. The Partnership is
organized for the following purposes:
a. To purchase all of the assets of Cymitar Technology Group, Inc.
("Cymitar");
b. To further develop the Concept;
c. To continue to support the Cymitar customer contracts that are
assigned to the Partnership; and
d. To enter into, make and perform all contracts and other
undertakings, and engage in all activities and transactions, as may be
necessary or advisable to carry out any of the foregoing purposes.
SECTION 2.4 TERM. The Partnership commenced upon the filing of the
Certificate of Limited Partnership with the Secretary of State of the State of
Texas and shall continue in existence until the close of Partnership business
on DECEMBER 31, 2050, or until the earlier termination of the Partnership in
accordance with the provisions of this Agreement.
SECTION 2.5 TAX STATUS. Neither the General Partner nor any other
Partner shall file an election for the Partnership to be treated as other than
a Partnership for federal income tax purposes; provided that this prohibition
shall not in any manner affect, limit or reduce the General Partner's rights
and authorities under Sections 13 and 14 below. Each of the Partners hereby
recognizes that this Partnership will be subject to the provisions of
Sub-Chapter K of Chapter 1 of Subtitle A of the Code. The Partners agree that
the Partnership shall not be required to file any election under Section 754
of the Code.
SECTION 2.6 REGISTERED OFFICE AND AGENT. The post office address of
the registered office of the Partnership is 111 Soledad, Ste. 1100 San
Antonio, Texas 78205, and
5
<PAGE>
the name of the registered agent of the Partnership at such address is Morris
A. Miller.
SECTION 2.7 FISCAL YEAR. The fiscal year of the Partnership shall be
the calendar year ending December 31.
ARTICLE 3.
MANAGEMENT OF PARTNERSHIP
SECTION 3.1 AUTHORITY OF GENERAL PARTNER. Subject to the limitations
imposed in this Agreement, the General Partner shall have full and complete
power and authority, in the name and on behalf of the Partnership, to manage,
control, administer and operate its business and affairs, and to do or cause
to be done any and all acts, to incur and pay out of the funds of the
Partnership any and all fees, costs and expenses, and to execute, deliver,
file and record any and all instruments and documents of every character
deemed by the General Partner to be appropriate. Except as otherwise set forth
herein, the scope of such power and authority shall encompass all matters in
any way connected with, incidental to, or necessary for the business and
affairs of the Partnership. Without in any way limiting the generality of the
foregoing, the General Partner shall have the following specific powers:
a. To borrow on behalf of the Partnership;
b. To employ such agents, employees, consultants, brokers,
accountants and other persons necessary or appropriate to carry out the
Partnership's business and to cause the Partnership to pay fees, expenses,
salaries, wages and other compensation to such persons;
c. To procure and maintain general liability insurance and
insurance on the properties and assets of the Partnership;
d. To negotiate the terms of and execute such notes, evidences of
indebtedness, deeds of trust, contracts, documents and instruments relating to
Partnership business as may, in the opinion of the General Partner, be
appropriate, necessary or advisable;
e. To incur and pay out of the funds of the Partnership, any and
all fees, costs and expenses deemed by the General Partner to be appropriate,
necessary or advisable in the operation of the business of the Partnership;
f. To cause the Partnership to purchase or lease, land, supplies,
equipment and other materials and assets;
g. Consistent with the General Partner's fiduciary duty to the
Partnership, to hold title, or designate others to hold title, to properties
of the Partnership;
h. To mortgage, pledge or sell any properties or assets of the
Partnership;
6
<PAGE>
i. To receive, issue receipts for and otherwise dispose of and
deal in all checks, deeds, monies, and other personal property which arise out
of or are related to the Partnership's business;
j. To open, maintain and close bank accounts and draw checks or
other orders for the payment of money for the management and operation of the
Partnership;
k. To make any and all expenditures that it reasonably deems
necessary or appropriate in connection with the management of the operation of
the Partnership, including reimbursing the General Partner as provided in
Section 3.11 hereof;
l. To manage and supervise the maintenance and operation of all
assets that are owned by the Partnership;
m. To pay, extend, renew, modify, adjust, submit to arbitration,
prosecute, defend or compromise, upon such terms as the General Partner may
determine and upon such evidence as it may deem sufficient, any obligation,
suit, liability, cause of action or claim, either in favor of or against the
Partnership;
n. To loan funds to the Partnership, provided that the interest
charged to the Partnership shall not exceed the lesser of (i) the General
Partner's actual interest cost, or (ii) the rate that would be charged the
Partnership by unrelated lenders on comparable loans;
o. To declare bankruptcy on behalf of the Partnership or assign
property of the Partnership in trust for creditors of the Partnership;
p. To take any action authorized by any Section of this Agreement;
and
q. To take all necessary and reasonable actions to fulfill its
duties hereunder.
SECTION 3.2 SPECIFIC LIMITATIONS ON GENERAL PARTNER. Notwithstanding
any other provision of this Agreement or the Act to the contrary, without the
Approval of the Class A Limited Partners to the specific act in question, the
General Partner shall have no right, power or authority to undertake,
authorize or permit any of the following acts or decisions except in
accordance with the limitations or conditions set forth below as to each
specific act:
a. To allow the Partnership to enter into any transaction of any
nature whatsoever, (including but not limited to, issuing interests under
Sections 9.1 and 9.3 or paying compensation for services), whether directly
or indirectly, with any General Partner, Trout, Miller or Weston or a Related
Party of any General Partner, Trout, Miller or Weston, unless, prior to
entering into such transaction, a fairness opinion is obtained from (i) an
independent third party mutually agreed upon by the Class A Limited Partners
and the General Partner, or (ii) a big 6 accounting firm which is not utilized
by the General Partner,
7
<PAGE>
Weston or Miller or any affiliate of the General Partner, Weston or Miller,
which concludes that the proposed transaction would be fair to the
Partnership; provided however, this limitation shall not apply to
non-recurring single transactions which are less than $5,000.00; provided that
no more than $10,000.00 of such transactions occur in any calendar year;
b. To allow the Partnership to enter into any additional capital
raising or other financing transaction (other than a public offering pursuant
to Article 15 below) until such time as $1,050,000 has been advanced to the
Partnership pursuant to Section 4.5;
c. To sell the Partnership (whether by merger, statutory exchange,
consolidation, recapitalization, sale of all or substantially all of its
assets), unless all of the holders of Units or other Partnership Interests
will receive the same form and amount of consideration per Unit or other
Partnership Interests, or if any holders are given an option as to the form
and amount of consideration to be received, all holders will be given the same
option;
d. To admit any Person as a General Partner of the Partnership;
e. To possess Partnership property or assign its right in
Partnership property, other than for a Partnership purpose;
f. To admit any Additional Limited Partner to the Partnership,
except in accordance with Article 9 of this Agreement;
g. To allow the Partnership to incur indebtedness to Trout, any
General Partner, Weston or Miller or a Related Party of any General Partner,
Trout, Weston or Miller, except for the $1,050,00.00 loan described in Section
4.5 below and any indebtedness that (a) bears interest at the lessor of (i)
the lender's actual interest cost, (ii) the rate that would be charged the
Partnership by unrelated lenders on comparable loans, and (iii) the prime rate
charged by Frost National Bank, N.A. plus 5%, and (b) has an amortization term
of not less than five years (without regard to the maturity date of the loan);
and
h. To amend (i) the Promissory Note and Security Agreement each of
even date herewith and each between the Partnership and Exeter Financial, LC,
or (ii) the Credit Agreement of even date herewith among the Partnership,
Exeter Financial, LC, Miller and Weston.
SECTION 3.3 REPLACEMENT OF GENERAL PARTNER.
a. Replacement. The General Partner may not be replaced except in
the event of such General Partner's dissolution, resignation or bankruptcy or
in the event (a) the General Partner, in violation of this Agreement, makes a
disposition of its Units or Interests in the Partnership, (b) Trout makes a
disposition of its Units or interests in the Partnership in violation of this
Agreement, (c) Weston or Miller makes a disposition of their partnership,
8
<PAGE>
membership or other ownership interests in the General Partner or Trout in
violation of the Support Agreement ("Support Agreement ) dated of even date
herewith among the Class A Limited Partners, the Partnership, Miller and
Weston. In the event that the General Partner may be replaced pursuant to (a),
(b) or (c),the Class A Limited Partners may remove the General Partner and
select a new General Partner. However, before the General Partner is replaced
pursuant to (a), (b) or (c) above, the General Partner shall have thirty (30)
days from receipt of notice from the Class A Limited Partners (and the Class A
Limited Partners shall be required to provide such notice prior to removing
the General Partner) to reverse the transaction giving rise to the right to
remove the General Partner, and if the transaction is reversed, the General
Partner may not be replaced.
b. Dissolution, Resignation or Bankruptcy. In the event of the
dissolution, resignation or bankruptcy of the General Partner where the
Partnership is continued pursuant to Section 11.1(d) hereof, a successor
General Partner shall be admitted to the Partnership upon the approval of a
Majority in Interest of the Limited Partners; provided however, in the event
that 100% of the membership or other ownership interest of the new General
Partner will not be owned by Miller and Weston (or their successors and
assigns who have taken such interests in accordance with this agreement), or
Miller and Weston (or their successors and assigns who have taken such
interests in accordance with this agreement) otherwise fail to control the new
General Partner, the new General Partner shall be selected and Approval of the
Class A Limited Partners. Each successor General Partner shall have equal
responsibility for the management and operation of the Partnership to that of
the General Partner and shall succeed to the rights and obligations of the
original General Partner as set forth in Section 3.1. Any Partner who ceases
to be a General Partner for any reason shall immediately and without further
action of any party lose all rights and privileges incident to such office,
and the General Partner Interest of such former General Partner shall
immediately be converted to a Limited Partner Interest.
SECTION 3.4 OBLIGATIONS OF THE GENERAL PARTNER. The General Partner
shall manage the affairs of the Partnership in accordance with the Act and all
other legal requirements and contractual obligations applicable to the
Partnership, including the General Partner's duty to act in good faith and in
the best interests of the Partnership. The General Partner shall devote such
part of its time to the Partnership as may be required to perform and execute
its responsibilities hereunder. The General Partner shall cause Miller and
Weston to provide the Partnership with time and attention when called to do so
by the Partnership to assist the Partnership to succeed in its business
endeavors (and by separate agreement Miller and Weston have agreed to provide
such time and attention to the Partnership). For so long as Yoo is employed by
the Partnership, the General Partner shall discuss with Yoo important
decisions related to the Partnership. For so long as any of the Class A
Limited Partners are employed by the Partnership and thereafter so long as
they in aggregate own at least 15% of the Ownership Percentage Interest in the
Partnership, one of them shall be elected to serve on the General Partner's
board of directors. Furthermore, for so long as the Class A Limited Partners
are employed by the Partnership, they shall hold the following Partnership
titles and shall have such duties and authority as prescribed by the General
Partner from time to time: Yoo - President/CEO, Condon - Chief Operating
Officer, Elmendorf - Chief Technology
9
<PAGE>
Evangelist. In addition, on or before April 1, 1998, the General Partner shall
cause the Partnership to pay Yoo, Condon and Elmendorf a sufficient amount
(net of taxes) to enable them to pay any federal income taxes accruing to them
as shareholders of Cymitar, as a result of the Partnership's purchase of
Cymitar's assets. The General Partner agrees to cause the Partnership to pay
all rent and other costs and expenses associated with the lease agreement
pertaining to the leasehold at 9828 Lorene Lane, San Antonio, Texas 78216, the
Partnership agrees to indemnify Yoo from and against any liability associated
with such lease.
SECTION 3.5 LIABILITIES OF GENERAL PARTNER. In carrying out its duties
hereunder, the General Partner shall not be liable to the Partnership or to
any other Partner for any actions taken in good faith and reasonably believed
to be in the best interests of the Partnership, or for errors in judgment, but
shall only be liable for willful misconduct, gross negligence, or breach of
its fiduciary obligations under this Agreement.
SECTION 3.6 REPORTS. The General Partner shall maintain all of the
financial records of the Partnership, in accordance with such generally
accepted method as the General Partner deems most appropriate, and otherwise
in accordance with generally accepted accounting principles consistently
applied. Each of the Partners agree to furnish to the General Partner all
cost, expense or other financial information which is necessary to keep such
records. Within 120 days of the close of the Partnership's fiscal year, which
shall correspond with the calendar year, the General Partner will give each
Partner a financial statement for the preceding twelve (12) months, prepared
at the expense of the Partnership by a firm of certified public accountants
selected by the General Partner, which need not be audited. The General
Partner will use its best efforts to give each Partner the information
necessary for tax reporting purposes within ninety (90) days of the close of
the fiscal year.
SECTION 3.7 TAX RETURNS. The Partners intend for the Partnership to be
treated as a partnership for tax purposes. The General Partner shall cause to
be prepared, at the cost and expense of the Partnership, all federal, state
and local income and other tax returns and statements, if any, which must be
filed on behalf of the Partnership with any taxing authority. The General
Partner shall timely file the returns on behalf of the Partnership.
SECTION 3.8 TAX MATTERS PARTNER. The General Partner shall be the "tax
matters partner" of the Partnership, within the meaning of Section 6231(a)(7)
of the Code and any regulations issued thereunder, unless the Code, or the
regulations issued thereunder, require another person to be the tax matters
partner. Said tax matters partner is authorized and required to represent the
Partnership (at the Partnership's expense) in connection with all examinations
of the Partnership's affairs by tax authorities, including resulting
administrative and judicial proceedings, and shall have the following duties
and obligations:
a. The tax matters partner shall have a continuing obligation to
provide the Internal Revenue Service with sufficient information so that
proper notice can be mailed to all Partners as provided in Section 6223 of the
Code, and the Partners shall furnish the tax matters partner with such
information (including information specified in Section 6230(e) of the Code)
as the tax matters partner may reasonably request for such purpose.
10
<PAGE>
b. The tax matters partner shall keep each Partner informed of all
administrative and/or judicial proceedings for the adjustment of the
partnership items (as defined in Section 6231(a)(3) of the Code and
regulations promulgated thereunder) at the partnership level. Without limiting
the generality of the foregoing sentence, within fifteen (15) days of
receiving any written or oral notice of the time and place of a meeting or
other proceeding from the Internal Revenue Service regarding a partnership
proceeding (and in any event, within a reasonable time prior to such meeting
or proceeding), the tax matters partner shall furnish a copy of such written
communication or notice, or inform the Partners in writing of the substance of
any such oral communication. This obligation of the tax matters partner to
inform the Partners shall not extend to routine and minor events.
c. If any administrative proceeding contemplated under Section
6223 of the Code has begun, the Partners shall, upon request by the tax
matters partner, notify the tax matters partner of their treatment of any
Partnership item on their federal income tax return which is or may be
inconsistent with the treatment of that item on the Partnership's return.
d. Any Partner that enters into a settlement agreement with the
Secretary of the Treasury with respect to the partnership items shall notify
the other Partners of such settlement agreement and its terms within thirty
(30) days after the date of such settlement.
e. If the tax matters partner elects not to file suit concerning
an administrative adjustment or request for administrative adjustment and
another Partner elects to file such a suit, such other Partner shall notify
all Partners of such intention and the forum or forums in which such suit
shall be filed shall be agreed to by all of the Partners.
f. The tax matters partner shall have the authority to extend the
statute of limitations, file a request for administrative adjustment, file
suit concerning any tax refund or deficiency relating to any Partnership
administrative adjustment or enter into any settlement agreement relating to
any Partnership item of income, gain, loss, deduction or credit for any
taxable year of the Partnership.
g. Each Partner shall be entitled to participate in all
administrative proceedings with the Internal Revenue Service, as provided by
Code Section 6224(a).
h. The obligations imposed on the tax matters partner and
participation rights afforded the Partners by this Agreement and Sections 6221
through 6233 of the Code may not be restricted or limited in any fashion by
the tax matters partner or any Partner or Partners without the written consent
of all of the Partners.
Each Partner agrees to cooperate with the tax matters partner and to do
or refrain from doing any or all things reasonably required by said Partner to
conduct such proceedings. In the event that said Partner, while acting as the
"tax matters partner," ceases to be the General Partner for any reason, the
remaining Partners shall immediately elect a substitute tax matters partner
who shall be the "tax matters partner" of the Partnership.
11
<PAGE>
SECTION 3.9 BANK ACCOUNTS. The General Partner shall establish one or
more bank accounts in the name of the Partnership into which all funds of the
Partnership shall be deposited. No other funds shall be deposited or commingled
in these accounts. Partnership funds may be withdrawn from the accounts upon the
signature of the General Partner, or its designee, for the purpose of paying the
debts of the Partnership, reimbursing the General Partner for expenses incurred
pursuant to Section 3.11, distributing Cash Available for Distribution to the
Partners, or any other purpose authorized under this Agreement.
SECTION 3.10 BOOKS AND RECORDS. The General Partner, on behalf of the
Partnership, shall keep and maintain at the principal office of the
Partnership the following records:
a. List of Partners. A current list that states the name and
mailing address of each Partner, the Ownership Percentage Interest in the
Partnership owned by each Partner; the number of Units owned by Limited Partner
b. Tax Returns. Copies of the Partnership's federal, state, and
local information or income tax returns for each of the Partnership's six most
recent tax years.
c. Agreement. A copy of this Agreement and the Certificate of
Limited Partnership; copies of any restatements of this Agreement; and
executed copies of any powers of attorney under which this Agreement, the
Certificate of Limited Partnership, and all amendments or restatements thereto
have been executed.
d. Books. Correct and complete books and records of account of the
Partnership.
Each of the Partners agree to furnish the General Partner all documents
regarding costs and expenses and other financial information which are
necessary to maintain such records. Any Partner (or their duly authorized
representatives), on written request to the General Partner, stating the
purpose, may examine and copy, at any reasonable time, for any proper purpose,
and at the Partner's expense, these records and other information kept by the
General Partner on behalf of the Partnership. However, under no circumstances
shall the Partnership or the General Partner have the obligation to provide
information regarding the Partnership to any Limited Partner, except to the
extent that such information is requested for a proper purpose and the General
Partner determines that the disclosure of such information will not harm the
Partnership. The above notwithstanding, if a Class A Limited Partner is no
longer employed by the Partnership, then he (and any transferee or assignee of
such Class A Limited Partner) shall lose his rights to review the books of the
Partnership, to receive any reports from the Partnership and any other right
of a Limited Partner other than the right to receive the distributions and
allocations from the Partnership at such times as those distributions and
allocations may be made by the Partnership. However, at the Class A Limited
Partner's sole cost and expense, at the request of such Class A Limited
Partner, the Partnership shall have the books and records of the Partnership
audited to determine whether or not the Partnership has properly made
distributions and allocations to such Class A Limited Partner. If the audit
12
<PAGE>
determines that such distributions and allocations have been improperly made,
and such discrepancy is at least a 5% difference between the proper allocation
or distribution, and the allocation or distribution made by the General
Partner, then the Partnership shall pay the cost of the audit.
SECTION 3.11 REIMBURSEMENT OF GENERAL PARTNER. The General Partner is
entitled to be reimbursed for reasonable out-of-pocket costs and expenses
incurred by the General Partner on behalf of the Partnership; provided that if
any costs and expenses are incurred to reimburse any Related Party of the
General Partner, Miller, Weston or Trout, the transaction giving rise to such
reimbursement shall have been made on terms no less favorable to the
Partnership than could be reasonably expected to be obtained from a third
party. Without the approval of the Class A Limited Partners, the General
Partner will not be reimbursed for any of its overhead costs and expenses.
ARTICLE 4.
RIGHTS, PROHIBITIONS, AND LIABILITIES OF LIMITED PARTNERS
SECTION 4.1 RIGHTS OF LIMITED PARTNERS. The Limited Partners shall be
entitled to the rights provided by the Act, as the same may be lawfully
modified by the terms of this Agreement.
SECTION 4.2 PROHIBITIONS WITH RESPECT TO LIMITED PARTNERS. The Limited
Partners shall not have the right to:
a. Participate in the control of the business affairs of the
Partnership except as expressly provided herein; transact any business on
behalf of or in the name of the Partnership; or have any power or authority to
bind or obligate the Partnership;
b. Have their original investments, if any, repaid (i) until the
Partnership is dissolved, all Partnership liabilities have been paid or funds
have been set aside therefor, and compliance with the provisions for
dissolution hereunder cause such repayment, or (ii) unless the terms of the
Act, as the same may be lawfully modified by the terms of this Agreement, are
complied with and the same require such repayment, except that distributions
authorized by Section 7.2 hereof shall be made from time to time and may in
some cases represent a return of a Limited Partners' original investment; or
c. Sell or assign any of such Limited Partner's interest in the
Partnership, except as expressly provided herein.
SECTION 4.3 LIABILITIES OF LIMITED PARTNERS. A Limited Partner shall
not be personally liable for any amounts other than the amounts subscribed by
such Limited Partner to the capital of the Partnership, and shall not be
liable for any debts, obligations or losses of the Partnership or of the
General Partner.
13
<PAGE>
SECTION 4.4 DEFICIT CAPITAL ACCOUNTS. The Limited Partners shall not
be obligated to restore the amount of any deficit balance in their respective
Capital Accounts, as such term is hereinafter defined, upon the liquidation of
their interest in the Partnership or upon the liquidation of the Partnership
itself.
SECTION 4.5 LOANS TO THE PARTNERSHIP. Trout agrees to cause the
Partnership to be lent up to $1,050,000.00, $550,000.00 of which is
non-discretionary as further described below and $500,000.00 of which shall
be to fund positive circumstances; provided that Trout, in its sole
discretion determines that such $500,000.00 is needed by the Partnership and
that such loan can be prudently made by the lender. Such loan or loans will
bear interest at the annual rate of 8% interest compounded annually. No
payments of principle or interest will be due for the first three years from
the date funds are first advanced. Beginning in the fourth year monthly
payments of principal and interest will be due and payable based upon an
amortization of the principle and accrued interest (as of the end of the
third year) over the following five years. Such loan or loans will be fully
secured by the assets of the Partnership. The loan or loans may be prepaid at
anytime by the Partnership without penalty. Upon the execution of this
Agreement, not less than $150,000.00 will be advanced to the Partnership by
Exeter Financial, LC pursuant to this Section 4.5. Within six months of the
execution of this Agreement, Trout will cause Exeter Financial LC to advance
an additional advance of $400,000.00 to the Partnership. These two initial
advances shall not be subject to Trout's discretion. Any guaranty by Trout of
the Partnership's debts and obligations shall be treated as an advance under
this paragraph, provided that no interest shall be paid to Trout in respect
of the guaranteed amount unless Trout is forced to pay on the guaranty.
SECTION 4.6 LIFE INSURANCE. The Partnership will purchase a key-man
policy in the amount of $1,250,000 for Yoo. The policy shall be structured to
require, that upon the death of Yoo, Trout is paid $200,000 of the proceeds,
the Partnership's lender (as referenced in Section 4.5) receives the remaining
proceeds up to the amount owing under its loan to the Partnership (and such
amount will fully discharge such loan as well as any obligation of Trout to
cause additional funds to be loaned to the Partnership pursuant to Section 4.5
above), and any remainder is paid to the Partnership.
SECTION 4.7 LOCATION FOR SERVERS. Trout agrees to use its reasonable
best efforts to secure a location for the Partnership's data center and
offices at favorable rent.
ARTICLE 5.
OWNERSHIP PERCENTAGE INTERESTS AND CAPITAL CONTRIBUTIONS
SECTION 5.1 PARTNER'S OWNERSHIP PERCENTAGE INTERESTS.
a. Upon the creation of the Partnership, the Ownership Percentage
Interest of the General Partner shall be .1 percent (.1%), represented by
1,000 Units.
14
<PAGE>
b. Upon the creation of the Partnership, the Ownership Percentage
Interest of Trout will be 50.90% represented by 509,000 Units.
c. Upon the creation of the Partnership, the Ownership Percentage
Interest of Yoo, Condon and Elmendorf shall be Yoo - 37% represented by
370,000 Units, Condon - 8% represented by 80,000 Units, Elmendorf - 4%
represented by 40,000 Units.
d. One Million Units will be issued incident to the creation of
the Partnership. However, a total of Ten Million Units may be issued by the
General Partner to Additional Limited Partners in accordance with the terms of
this Agreement. In the event Additional Limited Partners are admitted to the
Partnership in accordance with the terms of this Agreement, the Ownership
Percentage Interests of each Partner shall be adjusted pro rata, and the
Ownership Percentage Interests of such Additional Limited Partner(s) shall be
established by the General Partner, as provided herein. The General Partner's
rights hereunder are not intended to reduce the General Partner's fiduciary
duty to the Limited Partners.
SECTION 5.2 CAPITAL CONTRIBUTIONS.
a. The General Partner is not required to make any contribution of
capital to the Partnership except as otherwise provided in this Agreement.
b. Trout is required to make an initial capital contribution in
the amount of $200,000 upon the execution of this Agreement. No other Partner
is required to make any capital contribution to the Partnership, except to the
extent required by the General Partner for Additional Limited Partners.
SECTION 5.3 ADDITIONAL CAPITAL. The Partners shall not be obligated to
contribute additional capital to the Partnership beyond their initial Capital
Contributions (to the extent required) nor shall the Partners be obligated to
guarantee any debt or obligation of the Partnership, except as otherwise set
forth in this Agreement.
SECTION 5.4 ESTABLISHMENT OF CAPITAL ACCOUNTS. An individual Capital
Account shall be established for each Partner, which account shall be credited
with the amounts of each Partner's Capital Contributions to the Partnership
from time to time. A Partner shall not be entitled to interest on his or its
Capital Contribution, or to withdraw any part of his or its Capital Account,
or to receive any distribution from the Partnership, except as specifically
provided herein.
15
<PAGE>
ARTICLE 6.
ALLOCATIONS OF INCOME, GAIN AND LOSS
SECTION 6.1 ALLOCATION OF PARTNERSHIP NET INCOME AND GAIN. All
Partnership net income and gain for each tax year of the Partnership will be
allocated as follows:
FIRST: LOSS RECAPTURE ALLOCATION. To the Limited Partners in an amount equal
to the cumulated amount of any Specially Allocated Losses.
SECOND: REGULAR ALLOCATION. The remainder, to all the Partners in accordance
with their Ownership Percentage Interests in the Partnership.
SECTION 6.2 ALLOCATION OF PARTNERSHIP LOSSES. All Partnership losses
shall be allocated among the Partners in accordance with their Ownership
Percentage Interests in the Partnership until the Capital Accounts of all
Limited Partners other than Trout, are reduced to zero (the "Regular Loss
Allocation"). To the extent that the Capital Account balances of all the
Limited Partners other than Trout are zero, any additional losses (the
"Specially Allocated Losses") will be allocated to Trout (and its assigns).
SECTION 6.3 SPECIAL TAX ALLOCATIONS. Notwithstanding anything to the
contrary in this Agreement, the Partnership shall make the following tax
allocations if so required by the Code or Regulations:
SECTION 704(C) PROVISIONS. Upon the sale of the Partnership property
contributed by a Partner (or any property received in exchange for
such property), the resulting gain or loss shall be allocated to that
Partner and/or to any transferee of any interest in the Partnership
from such Partner for income tax purposes as provided in Section
704(c) of the Code and applicable Regulations.
QUALIFIED INCOME OFFSET. Any Partner who unexpectedly receives an
adjustment, allocation, or distribution described in subparagraphs
(4), (5) or (6) of Treas. Reg. Section 1.704-1(b)(2)(ii)(d), which
adjustment, allocation or distribution creates or increases a deficit
balance in that Partner's Capital Account, shall be allocated items
of book income and gain in an amount and manner sufficient to
eliminate the deficit balance in that Partner's Capital Account so
created or increased as quickly as possible in accordance with
Treas. Reg. Section 1.704-1(b) (2)(ii)(d) and its requirements for
a "qualified income offset."
MINIMUM GAIN CHARGEBACK. If Regulations relating to Section 704(b) of
the Code require a Minimum Gain Chargeback to cause the allocations
under Section 3.1 of this Agreement to have substantial economic
effect, the tax
16
<PAGE>
allocations described in Section 3.1 shall be adjusted to accommodate
the necessary Minimum Gain Chargeback.
ARTICLE 7.
DISTRIBUTIONS
SECTION 7.1 GENERAL. The General Partner shall cause the Partnership
to distribute cash for Tax Distributions to the Partners on an annual basis.
However, to the extent the Partnership incurs losses, no Tax Distributions
will be made until the cumulated net income and gain of the Partnership
exceeds the cumulated amount of such losses. Otherwise, the Partnership will
only distribute cash to the extent that the General Partner determines that
such cash is not needed for Partnership operations and expansion, working
capital and contingencies ("Cash Available for Distribution").
SECTION 7.2 DISTRIBUTION OF CASH AVAILABLE FOR DISTRIBUTION. To the
extent that Tax Distributions or distributions of Cash Available for
Distribution are made by the Partnership, such distributions shall be made as
follows:
FIRST: TAX DISTRIBUTIONS. Tax Distributions shall be made to the Partners in
an amount equal to the amount of any federal income tax estimated by
the General Partner to be incurred by the Partners (such estimate to
be made on the assumption that all of the Partners will be taxed at
the highest marginal tax rate applicable to individuals, which is
currently 39.59%) on their allocable share of any net income or gain
from the Partnership which is recognized for federal income tax
purposes during the prior year and not otherwise distributed to the
Partners. However, to the extent the Partnership incurs losses, no
Tax Distributions will be made until the cumulated net income and
gain of the Partnership exceeds the cumulated amount of such losses.
Tax Distributions shall be made not later than February 28th of each
year.
SECOND: REGULAR DISTRIBUTIONS. Regular Distributions of the remaining Cash
Available for Distribution shall be made to all the Partners in
accordance with their Capital Accounts.
ARTICLE 8.
DISPOSITION OF UNITS
SECTION 8.1 REPURCHASE OF CLASS A LIMITED PARTNERS' UNITS BY
PARTNERSHIP. As set forth below and subject to the limitations set forth
herein, the Partnership will have the right to purchase all or a portion (as
described in more detail below) of Condon and
17
<PAGE>
Elmendorf's Units (and they shall have the obligation to sell such Units) in
the event that either of them are no longer employed by the Partnership,
whether as a result of death, resignation, termination for cause, termination
without cause, disability or otherwise; provided that the triggering event
(end of employment) occurs prior to the end of the four year employment term
(as set forth in the employment agreement between each of Condon and Elmendorf
and the Partnership (the "Employment Agreements")). Notwithstanding the
foregoing, the Partnership will not have the right to purchase Elmendorf's and
Condon's Units under this Section 8.1 if the termination of their employment
occurs on or after January 1, 2003. To the extent that: (i) the right to
purchase arises prior to January 1, 2001 and arises out of the resignation or
termination for "cause" (as defined in the Employment Agreements), the
purchase price for Condon or Elmendorf's Units will be the book value of the
Units, (ii) the right to purchase arises at any time and arises out of the
termination of employment without "cause" (as defined in the Employment
Agreements) the purchase price will be the greater of the fair market value
(with no minority ownership or control discount applied) for the Units being
sold (determined by an independent appraiser, who is either (a) selected by
the mutual agreement of the Partner whose Units are being repurchased and the
Partnership, (b) a "big six" accounting firm selected by the Partnership
(provided such accounting firm is not utilized by the Partnership, the General
Partner, Weston or Miller or any Related Party of the foregoing), or, (c) a
third party independent appraiser designated by a "big six" accounting firm
selected by the Partnership (provided such accounting firm is not utilized by
the Partnership, the General Partner, Weston or Miller or any Related Party of
the foregoing)), or the amount of the respective annual salaries of Elmendorf
or Condon, as to Units sold by each of them, respectively, (iii) the right to
purchase arises under any other event, the purchase price will be the fair
market value for the Units being sold (with no minority ownership or control
discount applied), as determined by an independent appraiser selected in
accordance with the provision set forth above. Payment for the Units shall be
20% in cash and the remainder paid pursuant to a promissory note bearing
interest at the rate of 8%, fully amortized over four years. However, in the
event that the purchase arises out of the termination without "cause", 30%
will be paid in cash and the balance will be paid over three years on the
other terms described in the preceding sentence. The Partnership's right to
purchase all of Condon's and Elmendorf's Units in the event that their
employment ends prior to January 1, 2003 is limited by the following: (A) If
(i) Condon or Elmendorf, as the case may be, provides the Partnership with 45
days prior written notice of his election to resign and such resignation takes
place on or after January 1, 2001, or (ii) prior to January 1, 2001, Condon or
Elmendorf dies, becomes disabled, or is terminated by the Partnership without
cause, Elmendorf or Condon, as the case may be, may elect to retain up to
fifty percent (50%)of his Units, (B) To the extent that the termination of
employment occurs after January 1, 2001, Condon or Elmendorf, as the case may
be, may elect to retain that percentage of his Units which is determined by
dividing the number of months that Condon or Elmendorf, as the case may be, is
employed by the Partnership from January 1,1999, by 48. The Partnership shall
have the exact same rights with respect to Yoo and Yoo shall have the exact
same obligations as set forth above, except that if prior to January 1, 2002,
Yoo is terminated for "cause" (as defined in the Employment Agreement between
the Partnership and Yoo) or Yoo resigns prior to January 1, 2002 (or Yoo
otherwise resigns at anytime without giving 45 days prior written notice), the
Partnership will have the right to purchase
18
<PAGE>
all of his Units at book value, and if Yoo is terminated without "cause" (as
defined in the Employment Agreement), the purchase price for his Units will be
the greater of the fair market value (as determined by an independent
appraiser selected in the method described above and with no minority
ownership or control discount applied) of his Units being sold or an amount
equal to 1.5 multiplied by Yoo's annual salary in effect immediately prior to
then end of his employment. With respect to Condon and Elmendorf, the
Partnership, to the extent it desires to exercise its right to purchase their
Units, must purchase all of the Units which are subject to the right of
purchase. With respect to Yoo, the Partnership, to the extent that it desires
to exercise its right to purchase his Units, may purchase less than all of the
Units which are subject to the right of purchase. However, the Partnership may
not elect to leave Yoo with a de minimis number of Units. The book value and
fair market value of Units subject to sale to the Partnership, shall be
determined as of the end of the last fiscal quarter of the Partnership
immediately prior to the end of employment, provided that the appraiser shall
be entitled to take into consideration any events occurring after the last
fiscal quarter which may have a material effect on the fair market value of
the Units, including the departure of any key employee. The above
notwithstanding, in the event of a merger or other business combination, sale
of all or substantially all of the Partnership's assets or in the event that
the Partnership (or a successor entity created for the purpose of making a
public offering) completes a public offering underwritten by a nationally
recognized underwriter and raises more than $10,000,000.00 for the Partnership
(or the successor entity), all the rights of the Partnership to repurchase the
Yoo's Elmendorf's and Condon's Units shall automatically terminate. In order
to clarify the rights of the Partnership described in this Section 8.1,
Exhibit B is attached hereto to outline the rights and obligations of the
parties.
SECTION 8.2 PROHIBITED DISPOSITIONS. Elmendorf, Yoo and Condon
(collectively, the "Class A Partners") shall not make any sale, transfer,
pledge, assignment or other disposition of any of their Units which may be
purchased by the Partnership pursuant to the Partnership's rights under
Section 8.1 above. Therefore, as to each Class A Limited Partner, for so long
as the Partnership has the right to acquire any of such Class A Partners'
Units in the event that he is no longer employed by the Partnership, no
disposition of those Units which may be acquired by the Partnership may be
made by such Class A Partner. In any circumstances where the prior two
sentences do not restrict the transfer of the Units owned by the Class A
Partners, no Limited Partner (including any assignee of a Limited Partner)
other than Trout may propose to make any sale, transfer, pledge, assignment or
other disposition of all or any part of their Units or other Limited
Partnership interests (such interests referred to as the "Units Offered for
Sale") except in exchange for cash or a combination of cash and promissory
notes. Prior to making such disposition, the Class A Limited Partner (the
"Selling Partner") shall first offer his or her Units Offered for Sale to
Trout under the same terms and conditions as the proposed sale (the "Terms of
Sale"). Such offer shall be in writing and delivered to Trout, along with the
name of the proposed purchaser of the Units Offered for Sale. The Selling
Partner shall provide to Trout all information regarding the proposed sale and
the proposed purchaser, as may be reasonably requested by Trout. Trout shall
have four business (4) days from the receipt of such written offer to (i)
elect in writing to purchase all of such Units Offered for Sale, and (ii) make
available to the Selling Partner at the offices of the General Partner, an
amount equal to ten
19
<PAGE>
(10%) percent of the purchase price of the Units Offered for Sale as a
non-refundable deposit. Payment for the Units Offered for Sale shall be made
in accordance with the Terms of Sale. If Trout does not elect to purchase all
the Units Offered for Sale, the Selling Partner shall be free to sell all, but
not less than all of such Units Offered for Sale for a period of sixty (60)
days after the expiration of the Trout's option, provided that any such sale
must be made under the same terms and conditions as the Terms of Sale and to
the proposed purchaser named in the Terms of Sale. The Selling Partner shall
provide all information relating to the transferee of the Units Offered for
Sale which is reasonably requested by the General Partner. Trout and Macroweb
may not propose to make any sale, transfer (which shall include a merger,
statutory exchange, consolidation of either Trout or Macroweb), pledge,
assignment or other disposition of all or any part of their Units or other
interests in the Partnership (such interests desired to be sold, transferred,
pledged or assigned are referred to as the "Controlling Units offered for
Sale") except by sale of cash or a combination of cash and promissory notes.
Prior to making such disposition, Trout or Macroweb, as the case may be, shall
first offer the Controlling Units Offered for Sale to the Class A Limited
Partners, in proportion to their Ownership Interests in the Partnership under
the same terms and conditions as the proposed sale (the "Terms of Sale").
Trout and/or Macroweb shall provide to the Class A Limited Partners all
available information regarding the proposed sale and the proposed purchaser,
as may be reasonably requested by the Class A Limited Partners. The Class A
Limited Partners shall have four (4) business days from the receipt of such
written offer to (i) elect in writing to purchase all of the Controlling Units
Offered for Sale (in proportion to their Ownership Interests in the
Partnership, or in whatever other proportion they may otherwise agree), and
(ii) make available to Trout and Macroweb at the offices of the General
Partner, an amount equal to ten (10%) percent of the purchase price of the
Controlling Units Offered for Sale as a non-refundable deposit; provided that,
in lieu of such deposit, the Class A Limited Partners may pledge (under a
pledge agreement acceptable to Trout or Macroweb, as the case may be) their
Units as security for their obligation to pay an amount equal to 10% of the
purchase price of the Controlling Units Offered for Sale as a non-refundable
deposit. Payment for the Controlling Units Offered for Sale shall be made in
accordance with the Terms of Sale. In addition, to the extent that the Terms
of Sale require a note or notes, the Class A Limited Partners, to the extent
they desire to purchase all of the Controlling Units Offered for Sale, shall
be required to demonstrate that they have at least the same credit worthiness
as the proposed purchaser. If the Class A Limited Partners do not elect to
purchase all of the Controlling Units Offered for Sale or cannot demonstrate
the same credit worthiness as the proposed purchaser under Terms of Sale which
include a note or notes, Trout and/or Macroweb, as the case may be, shall be
free to sell all the Controlling Units Offered for Sale for a period of sixty
(60) days after the expiration of the Class A Limited Partners' option,
provided that any such sale must be made under the same terms and conditions
as the Terms of Sale. Trout shall provide all information relating to the
transferee of the Controlling Units Offered for Sale which is reasonably
requested by the General Partner. Except as specifically allowed under this
Agreement, no Limited Partner may sell, assign, transfer, mortgage, encumber,
hypothecate, pledge or otherwise dispose of all or any part of such Limited
Partner's interests in the Partnership and any attempt to take such action and
any purported separate sale, transfer, assignment, mortgage, encumbrance,
hypothecation, pledge, or other disposition by any Limited Partner shall be
void. In the event of any sale, transfer,
20
<PAGE>
assignment or other disposition which is not made in accordance with this
Agreement, and without herein recognizing such as being permitted or valid,
the Limited Partner making the same shall remain and continue to be liable for
the performance of all of its obligations hereunder and the Partnership shall
continue to make any distributions, if any, to said Limited Partner. All
subsequent owners of any Units, or other Limited Partnership interests
hereunder shall hold same subject to all the terms and provisions hereof. To
the extent that the provisions of this Section 8.2 and the other provisions of
this Agreement are followed incident to any sale of Units, the transferee of
such Units shall become a Substitute Limited Partner of the Partnership with
the written consent of the General Partner, which consent shall not be
withheld or delayed. With respect to any transfer of all of the Units and
interests in the Partnership held by Macroweb, the transferee shall become the
substitute General Partner of the Partnership, provided that the provisions of
this Section 8.2 and all other provisions of this Agreement are followed
incident to the sale of such Units and interests.
SECTION 8.3 TRANSFERS TO A FAMILY MEMBER. Any Limited Partner shall be
permitted to transfer his or her Units or other Limited Partnership interests
to a Family Member or a trust established for the benefit of a Family Member
("Trust") without subjecting such Units to the right of first refusal contained
in Section 8.2 above, provided that written notice of such transfer is
provided to the General Partner at least thirty (30) days prior to the
transfer. However, no such Family Member or Trust shall become a Substitute
Limited Partner without the express written consent of the General Partner and
the Approval of the Class A Limited Partners, which consent may be arbitrarily
withheld. It is expressly agreed that Trout may transfer its Units to Miller,
Weston or any of their Family Members or a trust established for the benefit
of a Family Member.
SECTION 8.4 TRANSFER OF UNITS. Each Partner affirms that he/she/it has
purchased and now holds his, her or its Units for his, her or its own account,
solely for investment and not with any intention of distributing, dividing, or
reselling the same. In addition to other restrictions on transfer contained in
this Agreement, the Units and any other Limited Partnership interests may be
assigned, pledged, or subjected to a security interest (collectively referred
to as "disposition") only if:
a. Such disposition is consistent with such affirmation;
b. The transferee of such disposition is not a competitor of the
Partnership;
c. Except with respect to a transfer to a Family Member or a trust
established for the benefit of a Family Member, such Partner has first offered
to sell the Units or other Limited Partnership interests in accordance with
Section 8.2 above; and
d. The following conditions to such disposition have been met,
unless such conditions have been waived in writing by the General Partner in its
sole discretion which discretion, may be arbitrarily exercised:
21
<PAGE>
(i) the transferee has delivered an instrument reasonably
satisfactory to the General Partner which accepts and adopts the
terms and provisions of this Agreement, including the assumption of
all obligations of the transferor to the Partnership and an
agreement to be subject to all transfer restrictions applicable to
his/her or its transferor;
(ii) the transferor has delivered to the General Partner an
opinion of counsel, who is reasonably satisfactory to the General
Partner, in form and substance satisfactory to counsel designated by
the General Partner to the effect that the tax status of the
Partnership will not be adversely affected by the transfer;
(iii) the transferor has delivered to the General Partner an
opinion of counsel, who is reasonably satisfactory to the General
Partner, in form and substance satisfactory to counsel designated by
the General Partner to the effect that neither the assignment nor any
offering in connection therewith violates any provision of any
federal or state securities or comparable law;
(iv) the General Partner has determined that the transfer would
not cause a termination of the Partnership within the meaning of
Section 708(b) of the Code; and
(v) the transferor pays for all expenses incurred by the
Partnership in connection with such disposition.
It is further expressly provided herein that the Partners shall not make
any transfer, assignment, lease, or gift of any interest in the Partnership to
a "tax exempt entity" as that term is defined in the Code which would cause
such tax exempt entity to become directly or indirectly a Partner in the
Partnership. Any such transfer to such a tax exempt entity shall be void.
SECTION 8.5 PARALLEL EXIT. No Partner (including any transferee or
assignee)or any Family Member or trust established for the benefit of a Family
Member which has received Units from a Partner (a "Transferee"), may sell any
of their Units without first offering to all of the Limited Partners
(including any Additional Limited Partners), the right to participate in such
transfer, on a pro rata basis, on the same terms and conditions as the
proposed sale by the Partner or Transferee seeking to transfer Units. Before
making any sale the Partner or any Transferee shall provide each of the other
Limited Partners and any Additional Limited Partners with written notice of
the date and terms of the proposed sale and each of the other Limited Partners
and the Additional Limited Partners shall each have the right to sell his or
her Units or other Limited Partnership interests pursuant to such sale in an
amount equal to the Units subject to purchase, multiplied by a fraction, the
numerator of which shall be the Ownership Percentage Interests held by such
Limited Partner or Additional Limited Partner, as the case may be, and the
denominator of which is the total amount of the Ownership Percentage Interests
held by all the Partners electing to participate in such sale. Any Limited
22
<PAGE>
Partner or Additional Limited Partner who elects to participate in such sale,
shall be required to irrevocably make its election within four business days
of receipt of written notice from the Limited Partner or Transferee.
Notwithstanding the foregoing, any purchase of less than all of the Units
elected to be sold as provided above, shall be made from all parties
participating in the sale, pro rata, based on the number of Units to be sold
by each. The provisions of this Section 8.5 will not apply to any involuntary
sale of Units, such as a sale under the terms of a pledge or security
agreement, nor does this provision apply to any transfer to a Family Member
of a Limited Partner or a trust established for the benefit of a Family
Member of a Limited Partner.
SECTION 8.6 STATUS OF TRANSFEREE. The transfer by a Limited Partner of
his/her or its Units, or other Limited Partnership interests shall not
constitute the person acquiring such Units, or other Limited Partnership
interests, to become a Substitute Limited Partner, except with the express
written consent of the General Partner. Such consent may not be withheld if
all of the requirements for transfer which are set forth herein have been met.
No such substitution shall become effective until such transferee and all of
the Partners, (either individually or through their agent or attorney in fact,
including the General Partner as such attorney-in-fact) execute all
amendments, certificates and other documents and perform all acts relating to
such substitution which the General Partner deems appropriate to comply with
applicable requirements of law so as to preserve the limited liability status
of the Partnership upon the completion of such substitution under the laws of
the jurisdictions in which the Partnership is doing business. Without in any
way limiting the power of attorney contained in Article 12, each Partner
agrees upon request of the General Partner to execute such amendments,
certificates or other documents and perform such acts.
SECTION 8.7 EFFECTIVE TIME OF TRANSFER. A purported transfer of a
Unit(s), or any other Limited Partnership interest shall be valid as to the
Partnership and the General Partner on the first day of the month following
the month in which the foregoing conditions have been met (whereupon the
General Partner shall cause the name of the transferee to be registered as the
holder of such Unit or Units upon the records maintained for that purpose as
provided in Section 3.12).
SECTION 8.8 SUBDIVIDED UNITS PROHIBITED. Without the written consent
of the General Partner, which may be arbitrarily withheld, Limited Partners
shall not be permitted to sell, transfer, assign, convey, give, donate or
bequeath a fractional part of a Unit, or other fractional part of a Limited
Partnership interest, except to the extent such fractional part was issued as
such upon the formation of the Partnership.
SECTION 8.9 TRANSFER TO BELL AND GRUBBS. Notwithstanding anything
herein to the contrary, Yoo is specifically authorized to transfer and assign
5000 Units to Brian Bell and 5000 Units to Edwin Grubbs, and Yoo agrees to
make such assignment as soon as practicable after the execution of this
Agreement. The General Partner specifically consents to such alignment and
such assignment shall not be subject to the rights of first refusal contained
in Section 8.2; however, the parties shall be required to comply with the
requirements of Section 8.3. Brian Bell and Edwin Grubbs shall be assignees
only and shall not become Substitute
23
<PAGE>
Limited Partners.
ARTICLE 9.
ADDITIONAL LIMITED PARTNERS
SECTION 9.1 ADMISSION OF NEW PARTNERS. In order to raise additional
capital for the Partnership, the General Partner is authorized to admit
Additional Limited Partners and to sell additional Units and other Limited
Partnership interests in the Partnership, under such terms and conditions as
may be negotiated by the General Partner in an arms-length transaction
consistent with the General Partner's fiduciary duty to the Partnership.
However, unless and until at least $1,050,000 has been loaned to the
Partnership pursuant to Trout's obligations under Section 4.5 above (i)
neither Trout, Macroweb, Miller, Weston or any of their Related Parties may be
sold additional Units and other Limited Partnership interests in the
Partnership, and (ii) no sale of the Partnership's Units will be made without
the Approval of the Class A Limited Partners. Incident to admitting
Additional Limited Partners and notwithstanding anything in this Agreement to
the contrary, the terms of this Agreement may be amended by the General
Partner without the consent of the Limited Partners in order to provide for
the rights and duties of such Additional Limited Partners. In the event
Additional Limited Partners are admitted to the Partnership by the General
Partner, the Ownership Percentage Interests of each existing Partner shall be
adjusted on a pro rata basis and the Ownership Percentage Interests of such
Additional Limited Partner shall be established by the General Partner.
SECTION 9.2 PREEMPTIVE RIGHTS. To the extent that the General Partner
proposes to sell additional Units or other Limited Partnership interests or
securities exercisable for or convertible into such Units or other Limited
Partnership Interests as permitted in Section 9.1 above for cash, the General
Partner shall first offer such Limited Partnership interests to all the
Partners and each Partner shall be entitled to purchase an amount of such
Limited Partnership interests in proportion to the Ownership Percentage
Interest of each Partner. Upon receipt of the offer, to the extent that any of
the Limited Partners desire to accept the offer they must, within four
business days of receipt of the offer, (i) notify the General Partner in
writing of acceptance, and (ii) deposit 10% of the purchase price with the
Partnership.
SECTION 9.3 INTERESTS GRANTED TO KEY PERSONNEL. In order to attract
qualified personnel or to reward personnel (collectively, "Key Personnel') for
their efforts, the General Partner has the right to grant Units and Limited
Partnership interests and options to acquire Units and Limited Partnership
interests to such persons in exchange for their future services. The grant of
such Limited Partnership interests shall not be subject to the preemptive
rights provided for in Section 9.2 above. Incident to granting any such
Limited Partnership interests and notwithstanding anything in this Agreement
to the contrary, the terms of this Agreement may be amended by the General
Partner without the consent of the Limited Partners in order to provide for
the rights and duties of such additional Limited Partners. In the event such
Additional Limited Partners are admitted to the Partnership by the General
Partner, the Ownership Percentage Interests of each existing Partner shall be
adjusted on a pro rata basis
24
<PAGE>
and the Ownership Percentage Interests of such Additional Limited Partners
shall be established by the General Partner. The above notwithstanding, unless
the Approval of the Class A Limited Partners is obtained, the General Partner
shall not, in any calendar year of the Partnership, grant to Key Personnel
Units, Limited Partnership interests or options to acquire the same, to the
extent that the aggregate amount of such Units, Limited Partnership interests
and options to acquire the same, constitute more than 10% of the outstanding
Units of the Partnership at the beginning of such calendar year.
ARTICLE 10.
TERMINATION, DEATH, BANKRUPTCY
SECTION 10.1 TERMINATION OF AGREEMENT. Upon dissolution of the
Partnership and termination of this Agreement, the General Partner or the
liquidator, as the case may be, shall promptly liquidate the affairs of the
Partnership by discharging all debts and liabilities of the Partnership and by
distributing all remaining assets in cash or in kind, or partly in cash and
partly in kind, in accordance with Sections 11.2 and 11.3 hereof.
SECTION 10.2 NO RECOURSE. Upon liquidation and termination of the
Partnership, each Limited Partner shall look solely to the assets of the
Partnership for the return of his investment, and such Limited Partner shall
have no recourse or further right or claim in connection therewith against the
General Partner or any other Limited Partner. In winding up the affairs of the
Partnership and distributing its assets, the General Partner or liquidator, as
the case may be, shall set up a reserve to meet any contingent or unforeseen
liabilities or obligations and deposit funds for such purpose, together with
funds held by the Partnership for distribution to Partners which remain
unclaimed after a reasonable period of time, with an escrow agent for the
purpose of disbursing such reserves and funds. The General Partner or
liquidator, as the case may be, shall have sole discretion in establishing and
maintaining such reserves and the amount thereof. The escrow agent is
authorized and directed at the expiration of such period as the liquidator
shall deem advisable, to distribute the balance thereafter remaining in the
manner provided in Article 11.
SECTION 10.3 DEATH, INCAPACITY OR BANKRUPTCY. The death, legal
incapacity or bankruptcy of a Limited Partner (or, in the case of a Limited
Partner that is a partnership, joint venture, association, corporation or
trust, in its insolvency, dissolution or bankruptcy) shall not dissolve nor
terminate the Partnership. In such event, the personal representative,
guardian or other successor in interest of such Limited Partner shall have the
rights of a Limited Partner for the sole purpose of settling the estate of
such Limited Partner and may sell or transfer the Unit(s) of such Limited
Partner only pursuant to the provisions of Article 8.
25
<PAGE>
ARTICLE 11.
DISSOLUTION AND WINDING UP
SECTION 11.1 DISSOLUTION. The Partnership shall be dissolved only upon
the happening of any of the following events:
a. The expiration of the term of the Partnership set forth in
Section 2.5 hereof;
b. Any disposition by the Partnership of all or substantially all
of its assets;
c. The General Partner elects to dissolve (provided such election
takes place after January 1, 2001); or
d. The withdrawal, termination (by the filing of articles of
dissolution of the General Partnership if it is a limited liability company)
or bankruptcy of the General Partner, unless the Partnership is continued
pursuant to the written consent of the Limited Partners owning at least 15% of
the Ownership Percentage Interests of all the Partners.
Upon dissolution, the General Partner or liquidator, as the case may be, shall
proceed with reasonable promptness to liquidate the business of the
Partnership. The Partners shall share in the profits and losses of the
business during the period of liquidation pursuant to the provisions of
Article 6.
SECTION 11.2 DISTRIBUTION UPON LIQUIDATION. Upon dissolution and
termination of the Partnership, any proceeds of liquidation shall be applied
in the following order of priority and according to the following procedures:
a. To pay debts and liabilities of the Partnership (including
loans or advances by the Partners) not otherwise adequately provided for by
reserves held by the Partnership, and the expenses of liquidation;
b. To set up reasonable reserves for any remaining contingent or
unforeseen liabilities of the Partnership not otherwise provided for, to be
maintained in a regular trust fund account for a reasonable period of time and
if any excess funds thereafter remain, then to be distributed pursuant to this
Section 11.2;
c. After giving effect to all contributions and all prior
distributions, and after all Net Income, Net Loss and other items have been
allocated in accordance with Article 6, to the Partners in accordance with and
to the extent of their respective positive Capital Accounts; and
26
<PAGE>
d. Liquidating distributions shall then be made to and among the
Partners based upon their distribution rights provided for in Section 7.2.
PURSUANT TO SECTION 4.4 HEREOF, IF ANY PARTNER HAS A DEFICIT BALANCE IN THE
PARTNER'S CAPITAL ACCOUNT FOLLOWING LIQUIDATION OF THE PARTNER'S INTEREST AS
DETERMINED AFTER TAKING INTO ACCOUNT ALL CAPITAL ACCOUNT ADJUSTMENTS FOR THE
PARTNERSHIP'S TAXABLE YEAR IN WHICH SUCH LIQUIDATION OCCURS, SAID PARTNER
SHALL NOT BE OBLIGATED TO RESTORE THE AMOUNT OF SUCH DEFICIT BALANCE TO THE
PARTNERSHIP. It is the express intention of the Partners to override the
holding of PARK CITIES CORPORATION V. BYRD, 534 S.W.2d 668 (Tex. 1976), as
contemplated herein, and to satisfy the economic effect requirements of
Subchapter K of the Code by the use of the qualified income offset provided
in Section 6.3 hereof.
SECTION 11.3 LIQUIDATION. The General Partner shall act as liquidator,
except in the event of the withdrawal, dissolution or bankruptcy of the
General Partner, in which case a Majority in Interest of the Limited Partners
shall appoint one or more liquidators. A reasonable time shall be allowed for
the orderly liquidation of the assets of the Partnership and the discharge of
liabilities to creditors so as to enable the liquidator to minimize the normal
losses attendant upon the liquidation. Each of the Partners shall be furnished
with a statement which shall set forth the assets and liabilities of the
Partnership as of the date of complete liquidation.
SECTION 11.4 GAINS OR LOSSES IN PROCESS OF LIQUIDATION. Any property
distributed in kind in liquidation shall be treated as though the property
were sold at its fair market value and the cash proceeds were distributed. The
difference between the value of the property distributed in kind and its book
value shall be treated as a gain or loss on sale of the property and shall be
credited to or charged against the interest of the Partners in the proportions
set forth in Article 6. In the event there is Partnership property which has
not been sold and the undivided interests distributed to the respective
Partners, such property will be distributed subject to such liens,
encumbrances, restrictions, contracts, obligations, commitments or
undertakings as existed with respect to such property at the time acquired by
the Partnership or were subsequently created or entered into by the
Partnership, and otherwise not released or terminated.
ARTICLE 12.
POWER OF ATTORNEY
SECTION 12.1 APPOINTMENT OF GENERAL PARTNER. By execution hereof, the
Limited Partners, irrevocably constitutes and appoints the General Partner as
each such Limited Partner's true and lawful attorney-in-fact and agent with
full power and authority to act in his, her or its name and place in
executing, filing and recording (i) any documents or statements required to
change the registered office and/or registered agent of the Partnership, (ii)
this Agreement and the Certificate of Limited Partnership, (iii) any
amendments or restatements
27
<PAGE>
to the Certificate of Limited Partnership required to reflect the admission of
a new General Partner, the withdrawal of a General Partner, a change in name
of the Partnership or other proper amendments made in accordance with Article
13, (iv) a certificate of cancellation upon the completion of the winding up
of the Partnership, (v) any documents or certificates required by law to merge
the Partnership with another limited partnership or other entity as permitted
by this Agreement, (vi) any documents or certificates required to be filed as
a result of the admission of additional or substitute General Partners or
Limited Partners, (vii) any amendments to this Agreement incident to admitting
new Limited Partners in accordance with Article 9 of this Agreement, and
(viii) any amendments to this Agreement which do not affect the rights and
obligations of the Partners but are made to correct a mistake or an omission
to this Agreement. Each Limited Partner further authorizes such
attorney-in-fact to take any further action which such attorney-in-fact shall
consider necessary or advisable in connection with any of the foregoing,
hereby giving such attorney-in-fact full power and authority to do and perform
each and every act or thing whatsoever requisite or advisable to be done in
and about the foregoing as fully and to the same extent as each such Limited
Partner might or could do if personally present, hereby ratifying and
confirming all that such attorney-in-act shall lawfully do or cause to be done
by virtue hereof; provided, that in no event may the attorney-in-fact utilize
this power of attorney to cast any vote or consent of the undersigned other
than as to matters with respect to which the attorney-in-fact is specifically
authorized so to act hereunder or which the undersigned has consented to in
writing. Each Limited Partner has and does hereby agree to execute any and all
additional forms, documents or instruments as may be reasonably necessary or
required by each Limited Partner to evidence this power of attorney.
This power of attorney is coupled with an interest, is irrevocable,
survives the death, incompetency, termination or dissolution of any Limited
Partner, and is binding on any assignee of all or part of a Partnership
interest hereunder. Each Limited Partner agrees to be bound by any
representation made by the attorney-in-fact acting in good faith pursuant to
such power of attorney, and hereby waives any and all defenses which may be
available to protest, negate or disaffirm the actions of the attorney-in-fact
taken in good faith under such power of attorney.
ARTICLE 13.
AMENDMENTS
SECTION 13.1 AUTHORITY TO AMEND. Except as otherwise expressly provided
for herein, this Agreement may be amended with the consent of the General
Partner and the Approval of the Class A Limited Partners.
SECTION 13.2 NOTICE OF AMENDMENTS. A copy of any amendment to be
approved by the Limited Partners shall be mailed in advance to such Limited
Partners.
28
<PAGE>
ARTICLE 14.
MERGER OF PARTNERSHIP
Pursuant to the Act, and with the prior written consent the General
Partner the Partnership may adopt a plan of merger and may merge with one or
more domestic or foreign limited partnerships, corporations, general
partnerships, limited liability companies, associations or other legal entity
organized pursuant to the laws of the state of Texas or any other state to the
extent of such laws or the constituent documents of such entity would permit
such entity to enter into a merger with the Partnership. The approval of the
Class A Limited Partners shall be required to approve such merger unless all
of the holders of Units will receive the same form and amount of consideration
per Unit, or if any holders are given an option as to the form and amount of
consideration to be received, all holders are given the same option.
ARTICLE 15.
PUBLIC OFFERING
Notwithstanding anything herein to the contrary, the General Partner is
authorized, without the consent of the Limited Partners, to cause the
Partnership to merge with a new corporation or to contribute all of the
Partnership's assets and liabilities to a new corporation, incident to a
public offering of the stock of such successor entity, provided that the
offering raises at least $10,000,000. In such event, the Partnership will be
terminated and each Partner will receive, incident to such merger or transfer,
shares of stock in the successor entity, in proportion to each Partner's
respective positive Capital Account balance adjusted by treating the
Partnership as having liquidated and gains and losses allocated in accordance
with Section 11.4 hereof.
ARTICLE 16.
PROTECTION OF PARTNERSHIP
INFORMATION/BUSINESS OPPORTUNITIES
All Partners, and their respective officers, directors, members, managers
and employees (including Miller and Weston) acknowledge and agree that the
Partnership has and will continue to develop proprietary information which is
essential for the success of the Partnership. Such information, includes but
is not limited to marketing plans, strategies, financial data, customer lists,
supplier lists, source code, business ideas (collectively, the "Confidential
Information'), whether oral or embodied in documents (including writings,
drawings, graphs, charts, photographs, phonorecords, video recordings, and
other data compilations from which information can be obtained) or tangible
things. The Partners agree to keep the Confidential Information secret at all
times, and not to disclose such information to any third party without the
consent of the General Partner. The Partners and their
29
<PAGE>
respective officers, directors, members, managers and employees (including
Miller and Weston) all agree, and shall be prohibited from using the
Confidential Information for any purpose other than the purpose of the
Partnership.
All of the Partners, for so long as they own Units or Limited Partnership
interests (whether directly or indirectly), agree to promptly bring to the
attention of the General Partner and the Partnership, any business opportunity
which become known to them which relates to the business of the Partnership.
The above notwithstanding, the parties acknowledge that Weston and Miller
shall have no duty to bring any business opportunity to the Partnership unless
the business opportunity relates to Partnership's core business activity at
the time, which is currently, commercially developing the Concept. Pursuant to
a separate agreement between the Partnership, Weston and Miller, Weston and
Miller have agreed that they will not compete with the core business
activities of the Partnership for so long as they control the General Partner
and for a period of one year after they lose control of the General Partner.
MISCELLANEOUS
SECTION 16.1 LIABILITY OF GENERAL PARTNER. The General Partner, its
officers, directors, representatives, employees and agents shall not be liable
to the Partnership or to the Limited Partners for losses sustained or
liabilities incurred as a result of any error in judgment or mistake of law or
fact (including simple negligence) or for any act done or omitted to be done
in good faith in conducting the Partnership business, unless such error,
mistake, act or omission was performed or omitted fraudulently or in bad faith
or constituted gross negligence or self-dealing.
SECTION 16.2 INDEMNIFICATION OF THE GENERAL PARTNER. THE PARTNERSHIP
SHALL INDEMNIFY THE GENERAL PARTNER, ITS OFFICERS, DIRECTORS, REPRESENTATIVES,
EMPLOYEES AND AGENTS (collectively referred to as the "GENERAL PARTNER" for
this Section 17.2 only), AGAINST EXPENSES (INCLUDING COURT COSTS AND
ATTORNEY'S FEES), LOSSES AND JUDGEMENTS INCURRED BY THE GENERAL PARTNER IN
CONNECTION WITH ANY THREATENED, PENDING OR COMPLETED ACTION, SUIT OR
PROCEEDING, WHETHER CIVIL, CRIMINAL, ADMINISTRATIVE, ARBITRABLE OR
INVESTIGATIVE, ANY APPEAL IN SUCH AN ACTION, SUIT OR PROCEEDING, IN WHICH THE
GENERAL PARTNER IS NAMED DEFENDANT OR RESPONDENT BECAUSE IT IS OR WAS THE
GENERAL PARTNER OF THE PARTNERSHIP, IS OR WAS SERVING AT THE REQUEST OF THE
PARTNERSHIP, OR OTHERWISE ACTING AS THE GENERAL PARTNER OF THE PARTNERSHIP, TO
THE MAXIMUM EXTENT PERMITTED UNDER THE ACT OR OTHERWISE BY TEXAS LAW, BUT ONLY
TO THE EXTENT THAT THE SAME WERE NOT CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE GENERAL PARTNER.
30
<PAGE>
SECTION 16.3 INDEMNIFICATION OF THE CLASS A LIMITED PARTNERS. THE
PARTNERSHIP SHALL INDEMNIFY YOO, ELMENDORF AND CONDON AGAINST EXPENSES
(INCLUDING COURT COSTS AND ATTORNEY'S FEES), LOSSES AND JUDGEMENTS INCURRED BY
THEM IN CONNECTION WITH ANY THREATENED, PENDING OR COMPLETED ACTION, SUIT OR
PROCEEDING, WHETHER CIVIL, CRIMINAL, ADMINISTRATIVE, ARBITRABLE OR
INVESTIGATIVE, ANY APPEAL IN SUCH AN ACTION, SUIT OR PROCEEDING, IN WHICH THEY
ARE NAMED DEFENDANT OR RESPONDENT BECAUSE IT IS OR WAS EMPLOYED BY THE
PARTNERSHIP, TO THE MAXIMUM EXTENT PERMITTED UNDER THE ACT OR OTHERWISE BY
TEXAS LAW, BUT ONLY TO THE EXTENT THAT THE SAME WERE NOT CAUSED BY THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF YOO, ELMENDORF OR CONDON, AS THE CASE MAY
BE.
SECTION 16.4 CONSTRUCTION. The indemnification provided by this Article
shall be subject to all valid and applicable laws, including, without
limitation, Article 11 of the Act, and, in the event this Article or any of
the provisions hereof or the indemnification contemplated hereby are found to
be inconsistent with or contrary to any such valid laws, the latter shall be
deemed to control and this Article shall be regarded as modified accordingly,
and, as so modified, to continue in full force and effect.
SECTION 16.5 PARTNERSHIP PROPERTY. The legal title to the real or
personal property or interest therein now or hereafter acquired by the
Partnership shall be owned, held or operated in the name of the Partnership,
and no Partner, individually, shall have any ownership of such property.
SECTION 16.6 NOTICES. Any notice, payment, demand or communication
required or permitted to be given by the provisions of this Agreement shall be
deemed to have been sufficiently given or served for all purposes if delivered
personally to the party or to an officer of the party to whom the same is
directed, or if sent by Registered or Certified Mail, postage and charges
prepaid, to the address of a Partner as shown on Exhibit "A" of this
Agreement, or to such other address as shall be furnished in writing by any
party to another. Any such notice shall be deemed to be transmitted as of the
date so delivered, if delivered personally, or two business days after the
date on which the same was deposited with adequate postage in a regularly
maintained receptacle for the deposit of United States mail, addressed and
sent as aforesaid. All notices hereunder shall be effective on transmittal,
except where actual receipt is required by an express provision hereof. Each
Partner agrees to promptly provide his current address and telephone number to
the General Partner in the event the last address and telephone number
previously provided to the General Partner becomes inaccurate.
SECTION 16.7 SECTION HEADINGS. Section and other headings contained in
this Agreement are for reference purposes only and are in no way intended to
describe, interpret, define or limit the scope, extent or intent of this
Agreement or any provision hereof.
31
<PAGE>
SECTION 16.8 SEVERABILITY. Every provision of this Agreement is
intended to be severable. If any term or provision hereof is illegal or
invalid for any reason whatsoever, such illegality or invalidity shall not
affect the validity of the remainder of this Agreement.
SECTION 16.9 MEETINGS. In connection with any vote of the Limited
Partners required hereunder, the General Partner or any Limited Partner may
call meetings of the Partners which shall be held in San Antonio, Bexar
County, Texas. The call shall state the nature of the business to be
transacted. Partners may vote at such meeting in person, by proxy or by
written consent to the actions taken at the meeting. All Partners shall
exercise best efforts in attempting to be present at any meeting called as so
provided.
SECTION 16.10 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which shall
constitute one agreement, and the signatures of any party to any counterpart
shall be deemed to be a signature to, and may be appended to, any other
counterpart.
SECTION 16.11 PARTIES IN INTEREST. Each and all of the covenants, terms,
provisions and agreements herein contained shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, assigns,
successors and legal representatives.
SECTION 16.12 GENDER. All words herein in the male gender shall be
deemed to include words in the female gender wherever the context shall so
require, and all words in the neuter gender shall be deemed to include words
in male and female gender wherever the context shall so require.
SECTION 16.13 TIME. Time is of the essence of this Agreement.
SECTION 16.14 CONTRACTS WITH RELATED PARTIES; COMPETITION. Subject to
such additional requirements as may be stated in this Agreement, nothing in
this Agreement shall be construed to prevent any Partner from dealing with the
Partnership and receiving payment for services, materials furnished or
professional services given or for money loaned to the Partnership, provided
such compensation shall be fair, reasonable and competitive and so long as the
terms of such agreement or transaction are no less favorable to the
Partnership than what the Partnership could obtain from an unrelated third
party.
SECTION 16.15 WAIVER OF PARTITION. EACH OF THE PARTIES HERETO
IRREVOCABLY WAIVES, DURING THE TERM OF THE PARTNERSHIP, ANY RIGHT TO MAINTAIN
ANY ACTION FOR PARTITION WITH RESPECT TO THE PROPERTY OF THE PARTNERSHIP. NO
PARTNER SHALL HAVE AN OWNERSHIP INTEREST IN SPECIFIC PROPERTY.
SECTION 16.16 ARBITRATION. Except as specifically provided in this
Agreement or as provided in any employment agreement or other written
agreement between the parties hereto, or between the Partnership and any of
the parties hereto which expressly
32
<PAGE>
provide that such is not subject to binding arbitration, the parties agree
that all disputes, controversies or claims that may arise between them
(including their agents and employees) including, without limitation, any
dispute, controversy or claim as to the interpretation or enforcement of any
of the provisions of this Agreement, shall be submitted first to mediation and
then to binding arbitration in the city of San Antonio, Texas in accordance
with the rules of the American Arbitration Association and judgment upon the
award rendered by the arbitrator(s) may be entered in any court having
jurisdiction.
a. MEDIATION. If a controversy or claim arises between the parties then
that controversy or claim will be mediated within one month of its
identification by the parties.
b. BINDING ARBITRATION. In the event that the parties cannot resolve
their dispute by mediation within one month, the parties then agree to bring
the dispute to binding arbitration within one month of the conclusion of the
mediation.
REMAINDER OF PAGE LEFT BLANK INTENTIONALLY.
33
<PAGE>
c. EFFECTIVE DATE. This Agreement shall be dated and shall be
effective as of the date when this Agreement shall have been signed by all
respective parties and the Certificate of Limited Partnership filed with the
Secretary of State of Texas.
IN WITNESS WHEREOF, the General Partner and the Limited Partners have
executed this Agreement as of the date first above written.
GENERAL PARTNER:
Macroweb, LC
By:/s/ Morris A. Miller, Member
------------------------------------
Morris A. Miller, Member
By:/s/ Graham M. Weston
------------------------------------
Graham M. Weston, Member
LIMITED PARTNERS:
/s/ Richard Yoo
---------------------------------------
Richard Yoo
/s/ Dirk Elmendorf
---------------------------------------
Dirk Elmendorf
/s/ Patrick Condon
---------------------------------------
Patrick Condon
Trout, Ltd.
By: Knightsbridge, L.C., General
Partner
By: /s/ Morris Miller
-------------------
Its: member
-------------------
34
<PAGE>
EXHIBIT A
NAMES AND ADDRESSES OF PARTNERS
Macroweb, LC
111 Soledad
Suite 1100
San Antonio, Texas 78205
Trout, Ltd:
111 Soledad
Suite 1100
San Antonio, Texas 78205
Dirk Elmendorf
12221 Blanco Rd. #2303
San Antonio, Texas 78216
Patrick R. Condon
13515 West Ave. #236
San Antonio, Tx 78216
Richard K. Yoo
100 Lorene #102
San Antonio, Tx 78209
Any notice to Dirk Elmendorf, Patrick Condon or Richard Yoo shall also be sent
to:
Fulbright & Jaworski
Attn: Daryl Lansdale
300 Convent Street
Suite 2200
San Antonio, Tx 78205
35
<PAGE>
FIRST AMENDMENT TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
RACKSPACE, LTD.
This First Amendment to Agreement of Limited Partnership of
(hereinafter referred to as the "Agreement") is made effective the 29th day
of September, 1999 (the "Effective Date"), Rackspace, Ltd. (the
"Partnership"), Macroweb, LC, a Texas limited liability company (the "General
Partner" or "Macroweb"), Trout, Ltd, a Texas limited partnership ("Trout"),
Richard Yoo ("Yoo"), Patrick Condon ("Condon") and Dirk Elmendorf
("Elmendorf) (Macroweb, Trout, Yoo, Condon and Elmendorf are sometimes
referred to herein as the "Partners"). This Agreement amends the Agreement of
Limited Partnership between the parties hereto dated December 29, 1999 (the
"Partnership Agreement").
WHEREAS, Exeter Financial, LC ("Exeter") advanced $1,050,000.00 to the
Partnership pursuant to the Credit Agreement dated December 29, 1999; and
WHEREAS, Trout caused Exeter to commit to advance the Partnership an
additional $500,000 over the next six months, as needed by the Partnership
(the "Second Financial Commitment") of which $225,000.00 has been advanced to
the Partnership as of the date of this Agreement, which commitment is set
forth in the agreement entitled "Second Financial Commitment" of even date
herewith;
WHEREAS, as of the Effective Date of this Amendment, the Partnership
owes Exeter $1,308,139.73 (principal and interest)(the "Outstanding
Balance"); and
WHEREAS, incident to obtaining the Second Financial Commitment, the
Partnership and the Partners have agreed to convert $1,050,000.00 of the
outstanding principal balance and $32,531.51 of accrued but unpaid interest
(the "Converted Debt") to equity in the Partnership; and
WHEREAS, Trout has acquired the right to receive the Converted Debt
from Exeter and therefore the $1,082,531.51 of contributed capital resulting
from the conversion will be credited to Trout's capital account and Trout's
Ownership Percentage Interest will be increased pursuant to the provisions
set forth below.
NOW, THEREFORE, FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN
MADE, THE PARTIES AGREE AS FOLLOWS:
1. DEBT CONVERSION. Trout represents and warrants that it owns the
Converted Debt pursuant to an agreement between Trout and Exeter whereby
Trout purchased the converted Debt from Exeter and as represented by Exeter
under the Second Financial Commitment. Trout hereby contributes the Converted
Debt to the Partnership and as a result, (i) Trout's capital
<PAGE>
account is increased by $1,082,531.51 and (ii) Trout receives an additional
190,476.19 Units in the Partnership.
2. RESULT OF DEBT CONVERSION. The Partners and the Partnership agree
that as a result of the Debt Conversion, the Partners (and assignees), the
number of Units owned by them and their respective Ownership Percentage
Interests are as follows:
<TABLE>
<CAPTION>
Partner Units Ownership Percentage Interest
------- ----- -----------------------------
<S> <C> <C>
Macroweb 1,000 Units .084%
Trout 699,476.19 Units 58.756%
Yoo 360,000 Units 30.24%
Condon 80,000 Units 6.72%
Elmendorf 40,000 Units 3.36%
Grubbs (assignee only) 5,000 Units .42%
Bell (assignee only) 5,000 Units .42%
Total Units Outstanding 1,090,476.19 Units 100.00%
</TABLE>
3. Capital Contribution of Trout. Under the Partnership Agreement,
Trout agreed to initially contribute $200,000.00 to the Partnership, but
mistakenly contributed $192,369 rather than $200,000.00. The Partnership and
Trout agree that, as of the date hereof, Trout owes the Partnership $8,090.95
($7,631.00 principal and $495.95 interest)(the "Amount Owed"). Trout agrees
to pay the Amount Owed to the Partnership within 30 days of the date hereof.
Executed by the Partners and the Partnership this 11 day of November,
1999, but made effective on the date first stated above.
RACKSPACE, LTD.
By: Macroweb, LC
Its: General Partner
/s/ Graham M. Weston
----------------------------
Graham M. Weston, Member
/s/ Morris A. Miller, member
----------------------------
Morris A. Miller, Member
<PAGE>
Macroweb, LC
/s/ Morris A. Miller, member
----------------------------
Morris A. Miller, Member
/s/ Graham M. Weston
----------------------------
Graham M. Weston, Member
LIMITED PARTNERS:
/s/ Richard Yoo 11/11/99
---------------------------------
Richard Yoo
/s/ Dirk Elmendorf 11/11/99
---------------------------------
Dirk Elmendorf
/s/ Patrick Condon 11/11/99
---------------------------------
Patrick Condon
Trout, Ltd.
By: Knightsbridge, L.C., General
Partner
By: /s/ Morris Miller
-------------------
Its: manager
------------------
<PAGE>
SECOND AMENDMENT TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
RACKSPACE, LTD.
This Second Amendment to Agreement of Limited Partnership of Rackspace,
Ltd. (hereinafter referred to as the "Second Amendment") is made effective
the 30th day of November, 1999 (the "Effective Date"), by and among
Rackspace, Ltd. (the "Partnership"), Macroweb, LC, a Texas limited liability
company (the "General Partner" or "Macroweb"), Trout, Ltd., a Texas limited
partnership ("Trout'), Richard Yoo ("Yoo"), Patrick Condon ("Condon") and
Dirk Elmendorf ("Elmendorf'), (Macroweb, Trout, Yoo, Condon and Elmendorf are
sometimes referred to herein as the "Existing Partners"), and Isom Capital
Partners I, L.P. ("Isom"), First Inning Investors, L.P. ("First Inning"), The
Hamilton Companies LLC, a Colorado limited liability company ("Hamilton"),
Weston Investment Interests, LLC, a Nevada limited liability company ("Weston
Entity"), and MiniPat & Company, Ltd., a Texas limited partnership
("MiniPat"). This Second Amendment amends the Agreement of Limited
Partnership dated December 29, 1999 between the Existing Partners
(hereinafter referred to as the "Agreement" or "Partnership Agreement").
Except as amended by this Second Amendment and by the First Amendment to
Agreement of Limited Partnership of Rackspace, Ltd., the terms of the
Partnership Agreement shall continue in full force and effect. Capitalized
terms used herein shall, unless otherwise specified, have the meanings
assigned to them in the Partnership Agreement.
WHEREAS, Trout, the Class B Limited Partner, desires to purchase
additional Units in the Partnership;
WHEREAS, Isom, First Inning, Hamilton, Weston Entity, and MiniPat desire
to purchase Units in the Partnership and to become Limited Partners in the
Partnership pursuant to the terms hereof.;
WHEREAS, the Partnership and the Existing Partners desire to have Trout,
MiniPat, Isom, First Inning, Hamilton and Weston Entity make the investments
in the Partnership as set forth herein and to have such persons become
Limited Partners of the Partnership.
NOW, THEREFORE, FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN
MADE, THE PARTIES AGREE AS FOLLOWS:
1. ADMISSION OF NEW PARTNERS. Upon the execution of this Second
Amendment by all the parties hereto, Isom, First Inning, Hamilton, Weston
Entity, and MiniPat shall become Additional Limited Partners of the
Partnership as "Class C Limited Partners," having the rights and interests
set forth in this Second Amendment. For the purposes of the Partnership
Agreement, the
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 1
<PAGE>
Class C Limited Partners are included in the definition of "Partner" and
"Limited Partner." The Units issued to MiniPat pursuant to this Second
Amendment shall not be subject to the repurchase and sale provisions of
Section 8.1 hereof, even though MiniPat is owned or controlled by Condon.
2. INCREASE IN NUMBER OF UNITS. Section 5.2 of the Partnership
Agreement permits the General Partner to issue up to Ten Million Units to
Additional Limited Partners. The parties agree to increase the number of
Units which may be issued under Sections 5.2 and 9.1 of the Partnership
Agreement by the General Partner to One Hundred Million Units. In addition,
the number of Units outstanding as of the date of this Second Amendment
(1,190,476.19) shall be split on a 10 for 1 basis such that number of Units
outstanding shall be increased by a multiple often to 11,904,761.9 (prior to
the issuance of the additional Units contemplated herein) and the number of
Units (and options to acquire Units) which may be issued or granted by the
General Partner to Key Personnel under Section 9.3 is increased by a multiple
of ten.
The term "Unit" in the Partnership Agreement shall be amended to read:
"Unit. A unit of ownership in the Partnership initially represents a .00001%
Ownership Percentage Interest and the rights and interests of a Partner under
this Agreement, subject to adjustment upon the issuance of additional Units;
provided that all Units at any time outstanding shall represent the same
fractional parts of the Ownership Percentage Interests of the Limited
Partners.
3. CONTRIBUTION OF CAPITAL.
a. Upon the execution of this Second Amendment, Isom, First
Inning, Trout and Condon shall contribute the amounts set forth below to the
Partnership (the "New Contributions to Capital"):
<TABLE>
<S> <C>
Isom: $2,560,000.00
First Inning: $1,300,000.00
Hamilton: $ 500,000.00
Weston Entity: $ 750,000.00
Trout: $ 500,000.00
Condon: $ 200,000.00
Total Contribution: $5,810,000.00
</TABLE>
The $500,000.00 contributed by Trout consists of conversion of existing
debt of the Partnership in that amount (including principal and interest)
(the "Existing Debt"). All other contributions are made in cash, except for
the Weston Entity contribution which is being made in the form of a
short-term promissory note. The Existing Debt constitutes advances made by
Exeter Financial, LC to the Partnership. By separate agreement, Trout has
acquired from Exeter Financial, LC the right to be repaid the Existing Debt.
Contemporaneously with the execution of this Second Amendment, Trout and
Exeter Financial, LC have delivered a certificate evidencing that no sums are
owed to either of them by the Partnership for advances made by either of
Trout or Exeter
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 2
<PAGE>
Financial, LC. The $500,000.00 contribution by Trout satisfies and discharges
the obligation of Exeter to advance $500,000.00 to advance such sum to the
Partnership pursuant to the Second Financial Commitment dated September 29,
1999.
b. Contemporaneously with the $1,300,000.00 contribution made by
First Inning, the Partnership shall enter into the agreement ("Option
Agreement") attached hereto as EXHIBIT A entitled "Option for Investment"
with First Inning's general partner, Trango Capital L.L.C. ("Trango"),
pursuant to which Trango has the right, but not the obligation to contribute
$800,000.00 to the Partnership and receive Units as a Class C Limited
Partner. The purchase price per Unit acquired by Trango will be $2.10 per
Unit subject to adjustment as provided in the Option Agreement. The parties
expressly agree that upon the Closing (as defined in the) Option Agreement,
Trango shall acquire additional Units in accordance with the Option
Agreement. At such time, the General Partner, at its option, shall have the
right to revalue the Partnership property in accordance with Treasury
Regulation 1.704-1(b)(2)(iv)(f).
c. At any time on or prior to January 17, 2000 (the "Expiration
Date"), Hamilton shall have the option, but not the obligation, to contribute
an additional $500,000.00 to the Partnership and receive additional Units as
a Class C Limited Partner. The purchase price per Unit pursuant to this
option shall be $2.10 per Unit. The issuance of these Units shall not be
subject to the preemptive rights in Section 9.2 of the Partnership Agreement.
The option shall be exercisable by Hamilton delivering to the General Partner
written notice of such exercise at any time before the Expiration Date. If
this option shall be exercised subsequent to any recapitalization, merger,
consolidation, combination or exchange of Units, reorganization or
liquidation of the Partnership occurring after the date hereof, as a result
of which securities of any class shall be issued in respect of outstanding
Units, Hamilton shall receive, for the aggregate price paid upon such
exercise, the aggregate number and class of securities which Hamilton would
have received if this option had been exercised immediately prior to such
recapitalization, merger, consolidation, combination or exchange of Units,
reorganization or liquidation.
This option shall not be transferable or assignable by Hamilton, except
upon the prior written consent of the General Partner which consent may be
withheld in the General Partner's sole discretion.
4. ADJUSTMENT TO CAPITAL ACCOUNTS. The parties to this Second Amendment
have made a determination that the fair market value of the assets of the
Partnership, immediately prior to the contributions required by this Second
Amendment, is $25,000,000.00 (the "Current Valuation"). However, the parties
further agree that the value of the assets is extremely speculative and may
in fact be substantially more or substantially less than $25,000,000.00. The
number of Units received by Isom, First Inning, Trout, Hamilton, Weston
Entity, and MiniPat are based upon the parties' mutual determination that the
value of the Partnership's assets immediately prior to closing of the sale of
such additional Units is $25,000,000.00. The Capital Accounts of each of the
Existing Partners shall be adjusted in accordance with Treasury Regulation
1.704-1(b)(2)(iv)(f) to reflect the Current Valuation as follows:
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 3
<PAGE>
<TABLE>
<CAPTION>
Pre-Offering Post-Offering
Adjusted Adjusted
Partner Capital Account Capital Account
------- --------------- ---------------
<S> <C> <C>
CLASS A
-------
Yoo $ 7,487,999.97 $ 7,487,999.97
Condon 1,663,999.99 1,663,999.99
Elmendorf 832,000.00 832,000.00
Grubbs* 104,000.00 104,000.00
Bell* 104,000.00 104,000.00
CLASS B
-------
Macroweb $ 20,800.00 $ 20,800.00
Trout 14,787,200.04 15,287,200.04
CLASS C
-------
First Inning --- $ 1,300,000.00
Isom --- 2,560,000.00
Hamilton 500,000.00
Weston Entity --- 750,000.00
MiniPat --- 200,000.00
TOTAL $25,000,000.00 $30,810,000.00
--------------- ---------------
</TABLE>
*ASSIGNEE ONLY
The parties agree that hereafter the Partners' Capital Accounts shall be
adjusted, and the Partners' distributive shares of income, gain, loss and
deduction of the Partnership, determined for purposes of computing their book
Capital Accounts, shall be determined in accordance with, Treasury
Regulations Sections 1.704-1(b) (including without limitation Sections
1.704-1(b)(2)(iv)(f) and (g)) and 1.704-2.
5. OWNERSHIP PERCENTAGES AND UNITS. As a result of the contributions of
capital set forth in paragraph 3 above, the Ownership Percentage Interests and
number of Units held by each Partner is as follows:
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 4
<PAGE>
<TABLE>
<CAPTION>
Ownership
Percentage
Partner Units Interests
------- ----- ---------
<S> <C> <C>
CLASS A
-------
Yoo 3,600,000.00 24.537%
Condon 800,000.00 5.453%
Elmendorf 400,000.00 2.726%
Grubbs (assignee of Class A) 50,000.00 .341%
Bell (assignee of Class A) 50,000.00 .341%
CLASS B
-------
Macroweb 10,000.00 .068%
Trout* 7,232,856.20 49.299%
CLASS C
-------
First Inning 619,047.61 4.219%
Isom 1,219,047.62 8.309%
Hamilton** 238,095.24 1.623%
Weston Entity 357,142.86 2.434%
MiniPat 95,238.10 .649%
TOTAL UNITS OUTSTANDING 14,671,428.58
----------------------- -------------
</TABLE>
*AS A CONSEQUENCE OF THE NEW CONTRIBUTIONS TO CAPITAL, TROUT HAS BEEN
ISSUED AN ADDITIONAL 238,095 UNITS TO BE HELD AS A CLASS B LIMITED PARTNER.
**THIS DOES NOT INCLUDE 238,095.24 UNITS TO BE ISSUED HAMILTON SHOULD IT
EXERCISE ITS OPTION TO PURCHASE $500,000.00 OF ADDITIONAL UNITS AT $2.10
PER UNIT PRIOR TO THE EXPIRATION DATE.
6. ALLOCATIONS. Article 6 of the Partnership Agreement is amended and
restated in its entirety to read as follows:
ARTICLE 6.
ALLOCATIONS OF INCOME AND LOSS
SECTION 6.1 ALLOCATIONS OF PARTNERSHIP INCOME AND LOSS FOR PERIODS PRIOR
TO THE SECOND AMENDMENT. Partnership net income or net loss and items of
Partnership income, gain, loss and deduction allocable in accordance
with Section 6.6 to taxable years or periods ending on or before the
date of the Second Amendment shall be allocated among the Existing
Partners (defined in the Second Amendment) in accordance with the
Partnership Agreement as in effect prior to the Second Amendment. For
this purpose, items of Partnership income, gain, loss and deduction
arising from the transactions contemplated by the Second
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 5
<PAGE>
Amendment (including, without limitation, any cancellation of
indebtedness income of the Partnership resulting from Trout's
acquisition of the right to be repaid the Existing Debt (as defined in
the Second Amendment) and the contribution of such right to the
Partnership pursuant to Section 3 of the Second Amendment) shall be
deemed to have been realized and recognized by the Partnership on or
before the date of the Second Amendment and shall be allocated solely to
the Existing Partners.
SECTION 6.2 ALLOCATIONS OF PARTNERSHIP NET INCOME FOR PERIODS AFTER
THE SECOND AMENDMENT. Partnership net income (determined for purposes of
maintaining the Partners' Capital Accounts and after any allocations for
such taxable year or period pursuant to Section 6.4) allocable to
taxable years or periods beginning after the date of the Second
Amendment shall be allocated to the Partners as follows:
(a) First, to the General Partner until the cumulative
allocations of net income made to the General Partner pursuant to
this Section 6.2(a) equal the cumulative allocations of net loss
previously made to the General Partner pursuant to the proviso
clause of Section 6.3(b);
(b) Second, to the Limited Partners in proportion to and to
the extent of the excess, if any, of (i) the cumulative allocations
of net loss previously made to them pursuant to Section 6.3(b),
over (ii) the cumulative allocations of net income previously made
to them pursuant to this Section 6.2(b); and
(c) Third, to the Partners in proportion to their Ownership
Percentage Interests.
SECTION 6.3 ALLOCATIONS OF PARTNERSHIP NET LOSS FOR PERIODS AFTER
THE SECOND AMENDMENT. Partnership net loss (as determined for purposes
of maintaining the Partners' Capital Accounts and after any allocations
for such taxable year or period pursuant to Section 6.4) allocable to
taxable years or periods beginning after the date of the Second
Amendment shall be allocated to the Partners as follows:
(a) First, to the Partners in proportion to and to the extent
of the excess, if any, of (i) the cumulative allocations of net
income previously made to them pursuant to Section 6.2(c), over
(ii) the cumulative allocations of net loss previously made to them
pursuant to this Section 6.3(a); and
(b) Second, to the Partners in accordance with their
Ownership Percentage Interests; PROVIDED THAT to the extent any
such loss allocation would cause or increase a deficit balance in
any Limited Partner's Capital Account (after adjustment for any
applicable increases described in the penultimate sentences of
Treasury regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and
after any applicable decreases described in Treasury regulations
Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6)
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 6
<PAGE>
(hereinafter, a Partner's "Adjusted Capital Account"), the amount
thereof shall instead be allocated to Limited Partners with
positive Adjusted Capital Accounts, if any, in proportion to and to
the extent of their positive Adjusted Capital Accounts, and the
balance, if any, shall be allocated to the General Partner.
SECTION 6.4 SPECIAL ALLOCATIONS OF ITEMS OF PARTNERSHIP INCOME,
GAIN, LOSS AND DEDUCTION FOR PERIODS AFTER THE SECOND AMENDMENT. Before
giving effect to allocations of net income or net loss for a taxable
year or period pursuant to Sections 6.2 and 6.3, the following items of
Partnership income, gain, loss and deduction (determined for purposes of
maintaining the Partners' Capital Accounts) shall be specially allocated
to the Partners, as follows and in the following order of priority:
(a) If there is a net decrease in "partnership minimum gain"
(as defined in Treasury regulations Section 1.704-2(d)), items of
income and gain (determined in accordance with Treasury regulations
Section 1.704-2(f)(6))) shall, to the extent required by the
Treasury regulations, be specially allocated to the Partners in an
amount equal to each Partner's share of the net decrease in
partnership minimum gain (determined in accordance with Treasury
regulations Section 1.704-2(g)). This Section 6.4(a) shall be
applied consistently with, and subject to the exceptions contained
in, the minimum gain chargeback requirements of Treasury
regulations Section 1.704-2(f).
(b) If there is a net decrease in "partner nonrecourse debt
minimum gain" (as defined in Treasury regulations Section
1.704-2(i)(2)), items of income and gain (determined in accordance
with the provisions of Treasury regulations Section 1.704-2(i)(4))
shall, to the extent required by the Treasury regulations, be
specially allocated to the Partners in an amount equal to each
Partner's share of the net decrease in partner nonrecourse debt
minimum gain (determined in accordance with the provisions of
Treasury regulations Section 1.704-2(i)(5)). This Section 6.4(b)
shall be applied consistently with, and subject to the exceptions
contained in, the partner nonrecourse debt minimum gain chargeback
requirements of Treasury regulations Section 1.704-2(i)(4).
(c) if a Partner unexpectedly receives any adjustment,
allocation or distribution described in Treasury regulations
Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6) that causes or
increases a deficit balance in the Partner's Adjusted Capital
Account, items of income and gain shall be specially allocated to
the Partner in an amount and manner sufficient to eliminate, to the
extent required by the Treasury regulations, such deficit balance
in the Partner's Adjusted Capital Account as quickly as possible,
provided that an allocation pursuant to this Section 6.4(c) shall
be made only to the extent that the Partner has a deficit balance
in its Adjusted Capital Account after all other allocations
provided for in this Article IV have been tentatively made as if
this Section 6.4(c) were not in this Agreement. This Section 6.4(c)
shall be interpreted
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 7
<PAGE>
consistently with the "qualified income offset" provisions of Treasury
regulations Section 1.704-1(b)(2)(ii)(d).
(d) If any Partner has a deficit balance in its Capital
Account at the end of any taxable year or period that is in excess
of the sum of any amount the Partner is obligated to restore
pursuant to this Agreement and any amount the Partner is treated as
obligated to restore pursuant to the penultimate sentences of
Treasury regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5),
items of income and gain in the amount of such excess shall be
specially allocated to the Partner as quickly as possible, provided
that an allocation pursuant to this Section 6.4(d) shall be made
only to the extent of any such excess determined after all other
allocations provided for in this Article IV have been tentatively
made as if Section 6.4(c) and this Section 6.4(d) were not in this
Agreement.
(e) "Nonrecourse deductions" (as defined in Treasury
regulations Section 1.704-2(c)) shall be specially allocated to,
and "excess nonrecourse liabilities" (as defined in Treasury
regulations Section 1.752-3(a)(3)) shall be shared among, the
Partners in proportion to their Ownership Percentage Interests.
(f) "Partner nonrecourse deductions" (as defined in Treasury
regulations Section 1.704-2(i)(2)) shall be specially allocated to
the Partners who bear the economic risk of loss for the liability
to which those deductions are attributable, determined in
accordance with the principles of Treasury regulations Section
1.704-2(i)(l).
(g) To the extent an adjustment to the adjusted tax basis of
any Partnership asset under Code Sections 734(b) or 743(b) is
required to be taken into account in determining Capital Accounts
under Treasury regulations Section 1.704-1(b)(2)(iv)(m), the amount
of the Capital Account adjustment shall be treated as an item of
income (if positive) or loss (if negative) and shall be specially
allocated to the Partners consistent with the manner in which their
Capital Accounts are required to be adjusted by such Treasury
Regulation.
(h) To minimize any distortions in the manner that the
Partners would have shared Partnership distributions if the special
allocations required by Sections 6.4(a) through (g) had not been
part of this Agreement, the General Partner shall specially
allocate to the Partners offsetting items of income, gains, loss or
deduction so that the net amounts allocated to each Partner
pursuant to Section 6.2, Section 6.3 and this Section 6.4 will, to
the extent reasonably possible, equal the net amounts that would
have been allocated to each Partner pursuant to Sections 6.2 and
6.3 had Sections 6.4(a)-(g) not been part of this Agreement. In
exercising its authority hereunder, the General Partner may
consider any expected future allocations pursuant to Sections
6.4(a) and 6.4(b) that are likely to offset other allocations made
pursuant to Sections 6.4(a) through 6.4(g).
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 8
<PAGE>
SECTION 6.5 ALLOCATIONS FOR FEDERAL INCOME TAX PURPOSES.
(a) Except as provided in Section 6.5(b), for each taxable
year or period of the Partnership, items of taxable income, gain,
loss and deduction of the Partnership, determined solely for
federal income tax purposes, shall be allocated to the Partners in
the same manner as each correlative item of income, gain, loss,
and deduction is allocated to the Partners pursuant to Sections
6.1 through 6.4.
(b) In accordance with Section 704(c) of the Code and the
Treasury regulations thereunder, solely for federal income tax
purposes, items of taxable income, gain, loss and deduction with
respect to any Partnership asset other than money that has been
contributed to the Partnership or revalued on the books of the
Partnership shall be allocated among the Partners in a manner that
takes into account the difference, at the time of contribution or
revaluation, between the adjusted tax basis of the asset and the
amount by which it is carried on the books of the Partnership for
purposes of maintaining the Partner's Capital Accounts. Such
allocations shall be made utilizing the "Remedial Method" described
in Treasury regulations Section 1.704-3(d). Allocations pursuant to
this Section 6.5 are solely for federal income tax purposes and
shall not affect the Partners' Capital Accounts.
SECTION 6.6. VARYING INTERESTS. To reflect the varying interests
of the Partners during any taxable year, net income or net loss and
items of income, gain, loss and deduction of the Partnership shall be
determined on a daily, monthly or other basis using any convention or
method permitted under Code Section 706 and the Treasury regulations
thereunder, provided that gain or loss arising from dispositions of
Partnership assets shall be allocated to the Partners on the date of the
disposition. Notwithstanding the foregoing, for the Partnership's 1999
taxable year such items shall be allocated as follows:
a. The Partnership's books shall be closed as of June 30,
1999, and net income or net loss and items of income, gain, loss
and deduction of the Partnership for the period ending on June 30,
1999 shall be allocated to the persons who were Partners on June
30, 1999.
b. Proration of Tax items For Second Half of 1999. Net
income or net loss and items of income, gain, loss and deduction of
the Partnership for the period beginning on July 1, 1999 and ending
on December 31, 1999 shall, except as otherwise provided in Section
6.1, be allocated to the persons who were Partners during such
period by assigning an equal portion of each such item to each day
in such period and allocating the amount assigned to each day among
the persons who were Partners on such day in accordance with the
provisions of this Agreement in effect on such day.
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 9
<PAGE>
7. CERTAIN DEFINED TERMS. The defined terms: Loss Recapture
Allocation, Regular Allocation, Regular Loss Allocation and Specially
Allocated Losses contained in Article I of the Partnership Agreement are
deleted.
8. DISTRIBUTIONS. Section 7.2 of the Partnership Agreement is amended
and restated in its entirety as follows:
SECTION 7.2 DISTRIBUTIONS OF CASH AVAILABLE FOR DISTRIBUTION. To
the extent that Tax Distributions or distributions of Cash Available for
Distribution are made by the Partnership, such distributions shall be made
as follows:
FIRST: TAX DISTRIBUTIONS. Tax Distributions shall be made to the
Partners in an amount equal to the amount of any federal
income tax estimated by the General Partner to be incurred
by the Partners (such estimate to be made on the assumption
that all of the Partners will be taxed at the highest
marginal federal income tax rate applicable to individuals,
which is currently 39.59%) on their allocable share of any
net income or net gain from the Partnership which is
recognized for federal income tax purposes during the prior
year and not otherwise distributed to the Partners.
However, to the extent that a Partner has been allocated
losses, no Tax Distributions will be made to the Partner
until the cumulative net income and gain of the Partnership
allocated to the Partner exceeds the cumulative amount of
losses allocated to the Partner. Tax Distributions shall be
made not later than February 28th of each year. To the
extent the Partnership makes Tax Distributions, subsequent
distributions that would have been made pursuant to Sections
7.2 Second and 11.2(c) shall first be made among the
Partners in a manner that, to the extent possible, will
cause the cumulative distributions pursuant to Article 7 and
Section 11.2(c) to each Partner to be equal to the amount
that would have been distributed to each Partner had Section
7.2 First not been part of this Agreement; and
notwithstanding Sections 4.4 and 11.2(c) to the contrary,
the amount of any such excess distributions to a Partner
remaining upon liquidation of the Partnership or the
Partner's interest in the Partnership shall be immediately
repaid to the Partnership by the Partner for distribution to
the other Partners.
SECOND: REGULAR DISTRIBUTIONS. Regular Distributions of the
remaining Cash Available for Distribution shall be made to
all the Partners in accordance with their Ownership
Percentage Interests.
9. RIGHTS AND OBLIGATIONS OF CLASS C PARTNERS. The Class C Limited
Partners shall have all of the rights and all of the obligations which apply
to Limited Partners. In addition, the following terms shall apply:
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 10
<PAGE>
a. SECTION 3.2. Section 3.2 of the Partnership Agreement
restricts the General Partner from taking certain actions without the
approval of the Class A Limited Partners (the "Restricted Acts"). Section
3.2 is hereby amended to require the General Partner to obtain the "Approval
of the Class C Limited Partners" before taking the Restricted Act in
question, in addition to the approval of the Class A Limited Partners.
For the purposes of this Second Amendment, the "Approval of the Class C
Limited Partners" shall mean the approval of 65% of Limited Partners Interest
held by the Class C Limited Partners. A Class C Limited Partner's approval or
consent shall be pursuant to a vote or written consent as provided in Section
16.9.
b. SECTION 3.3 Section 3.3 addresses when the General Partner may
be removed or replaced. The parties agree that in the event the General
Partner may be removed and replaced under Section 3.3(a), such removal and
replacement shall require the Approval of the Class A Limited Partners and
the Class C 3 Limited Partners, but at all times subject to the rights
contained in Section 3.3 of the General Partner to reverse the transaction
giving rise to the removal. Provided, however, at any time the General
Partner may be removed upon the approval of 60% of the Limited Partners
Interests. In the event of the dissolution, bankruptcy or resignation of the
General Partner under Section 3.3(b), where a successor General Partner is
appointed which is not owned 100% by Graham M. Weston ("Weston") and Morris
A. Miller ("Miller"), the new General Partner will be selected by and with
the Approval of the Class A Limited Partners and the Class C Limited Partners.
c. SECTION 8.2 (RESTRICTIONS ON TRANSFER). Section 8.2 of the
Partnership Agreement is amended to read in its entirety as follows:
SECTION 8.2 PROHIBITED DISPOSITIONS.
a. CLASS A PARTNER RESTRICTION. The Class A Limited
Partners shall not make any sale, transfer, pledge, assignment or
other disposition of any of their Units which may be purchased by the
Partnership pursuant to the Partnership's rights under Section 8.1
above. Therefore, as to each Class A Limited Partner, for so long as
the Partnership has the right to acquire any of such Class A Partners'
Units in the event that he is no longer employed by the Partnership,
no disposition of those Units which may be acquired by the Partnership
under Section 8.1 may be made by such Class A Partner.
b. TRANSFERS PROHIBITED. Except as specifically
allowed under this Agreement, no Limited Partner may sell, assign,
transfer, mortgage, encumber, hypothecate, pledge or otherwise dispose
of all or any part of such Limited Partner's interests in the
Partnership and any attempt to take such action and any purported
separate sale, transfer, assignment, mortgage, encumbrance,
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 11
<PAGE>
hypothecation, pledge, or other disposition by any Limited Partner
shall be void. In the event of any sale, transfer, assignment or other
disposition which is not made in accordance with this Agreement, and
without herein recognizing such as being permitted or valid, the
Limited Partner making the same shall remain and continue to be liable
for the performance of all of its obligations hereunder and the
Partnership shall continue to make any distributions, if any, to said
Limited Partner. All subsequent owners of any Units, or other Limited
Partnership interests hereunder shall hold same subject to all the
terms and provisions hereof. To the extent that the provisions of this
Section 8.2 and the other provisions of this Agreement are followed
incident to any sale of Units, the transferee of such Units shall
become a Substitute Limited Partner of the Partnership with the
written consent of the General Partner, which consent shall not be
withheld or delayed. With respect to any transfer of all of the Units
and interests in the Partnership held by Macroweb, the transferee
shall become the substitute General Partner of the Partnership,
provided that the provisions of this Section 8.2 and all other
provisions of this Agreement are followed incident to the sale of such
Units and interests.
c. RIGHT OF FIRST REFUSAL. Subject to transfers of
Units of the Class A Limited Partner in accordance with Section 8.1
above, no Limited Partner (including any assignee of a Limited
Partner) may propose to make any sale, transfer, pledge, assignment or
other disposition of all or any part of their Units or other Limited
Partnership interests (such interests referred to as the "Units
Offered for Sale") except in exchange for cash or a combination of
cash and promissory notes. Prior to making such disposition, the
Limited Partner desiring to make such sale (the "Selling Partner")
shall first offer his or her Units Offered for Sale to each of the
other Limited Partners under the same terms and conditions as the
proposed sale (the "Terms of Sale"). Such offer shall be in writing
(the "Offer Notice") and delivered to the other Partners, along with
the name of the proposed purchaser of the Units Offered for Sale. The
Selling Partner shall provide to the other Partners all information
regarding the proposed sale and the proposed purchaser, as may be
reasonably requested by the other Partners. For a period of 15
Business Days after the date of the Offer Notice is given, a Partner
may accept the Selling Partner's offer with respect to the portion of
the Units Offered for Sale that corresponds to the ratio of the
accepting Partner's Limited Partners interest to the Limited Partners
Interest of all the other Partners (other than the Selling Partner) by
giving written notice
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 12
<PAGE>
of such acceptance to the Selling Partner and the General Partner.
Beginning with the expiration of 15 Business Days after the date
the Offer Notice is given and ending on the 20th Business Day after
the date the Offer Notice was given, the Partnership or the General
Partner may, in the sole discretion of the General Partner, accept
the Seller's offer with respect to all of the remaining portion of
the Units Offered for Sale by giving written notice of such
acceptance to the Seller and the other Partners. Unless the other
Partners and the Partnership (in the aggregate) accept the Seller's
offer with respect to all of the Units Offered for Sale, the
Selling Partner's offer shall be deemed rejected in its entirety.
Upon an election to purchase all of such Units Offered for Sale as
provided above, the purchasing Partners (and the Partnership as the
case may be) shall make available to the Selling Partner at the
offices of the General Partner, an amount equal to ten (10%)
percent of the purchase price of the Units Offered for Sale as a
non-refundable deposit. In addition, to the extent that the Terms
of Sale require a note or notes, the accepting Limited Partners
shall be required to demonstrate that they have at least the same
credit worthiness as the proposed purchaser. Payment for the Units
Offered for Sale shall be made in accordance with the Terms of
Sale. If the Partners and the Partnership do not elect to purchase
all the Units Offered for Sale, the Selling Partner shall be free
to sell all, but not less than all of such Units Offered for Sale
for a period of sixty (60) days after the expiration of the option
of the other Partners, provided that any such sale must be made
under the same terms and conditions and to the same purchaser as
described in the Terms of Sale. The Selling Partner shall provide
all information relating to the transferee of the Units Offered for
Sale which is reasonably requested by the General Partner.
d. SECTION 8.3 (TRANSFERS TO A FAMILY MEMBER). Section 8.3 of the
Partnership Agreement is amended to read in its entirety as follows:
Any Limited Partner shall be permitted to transfer his or her Units or
other Limited Partner Interests to (i) a Family Member or a trust
established for the benefit of a Family Member ("Trust"), (ii)
Affiliates of the Limited Partner, (iii) to the General Partner, (iv)
to the Partnership, (v) to Persons to whom the interest is transferred
by reason by the Limited Partner's death or involuntarily by operation
of law, or (vi) pursuant to a transfer in accordance with the
provisions of Section 8.2. However, no such transferee shall become a
Substitute Limited Partner except in accordance with Section 8.6 of
the Partnership Agreement. It is expressly agreed that
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 13
<PAGE>
Trout may transfer its Units to Miller, Weston or any of their Family
Members or a trust established for the benefit of a Family Member.
In addition, the definition of "Affiliate" shall be amended to read in its
entirety:
"AFFILIATE" means a Person who directly or indirectly
controls, is controlled by, or is under common control with, the
Person referred to. For this purpose, "control" means the ability to
direct or cause the direction of the management or affairs of a
Person, whether through the ownership of voting securities, by
contract or otherwise.
e. SECTION 13.1 (AMENDMENTS TO PARTNERSHIP AGREEMENT). In
such instances when Section 13.1 of the Partnership Agreement requires the
Approval of the Class A Limited Partners, the General Partner shall be
required to obtain both the Approval of the Class A Limited Partners and the
Approval of the Class C Limited Partners. In addition Section 13.1 is further
amended to add a second sentence to read in its entirety: "The consent of
each Limited Partner must be obtained for any amendment which would
materially affect the Limited Partner's rights to distributions (other than
by virtue of additional Capital Contributions by other Partners), its
obligations for Capital Contributions, adversely affect its limited liability
as a Limited Partner, modify the provisions of this SECTION 13.1, or lower
the threshold required by the Partnership Agreement or the Act for obtaining
the vote, consent or approval of the Limited Partners with respect to any
action or undertaking."
f. ARTICLE 14 (MERGER OF PARTNERSHIP). The last sentence of
Article 14 Merger of Partnership is deleted and the following shall be added
in its place: "The Approval of the Class A Limited Partners and the Approval
of the Class C Limited Partners shall be required to approve such merger,
unless all of the holders of Units will be given the same or substantially
the same rights as they have pursuant to this Second Amendment (including,
without limitation, preferences, rights of first refusal, options, conversion
rights, preemptive rights, voting rights, or registration rights). Provided,
however, no Approval of the Class A Limited Partners nor Class C Limited
Partners shall be required for a transaction to convert the Partnership to a
corporation (whether by virtue of merger, conversion or other transaction)
which is consummated solely for the purpose of changing the form of entity
used to conduct business of the Partnership, so long as the Limited Partners
have the same or substantially the same rights, obligations and interests in
the new entity as they enjoyed as Partners of the Partnership, including,
without limitation, preferences, rights of first refusal, options, conversion
rights, preemptive rights, voting rights and registration rights, but
excluding any rights to limit the General Partner as provided in Section 3.2
of the Partnership Agreement. In the event any transaction pursuant to this
Article 14 results in the termination of the Partnership, each Partner will
receive, incident to such merger or other transaction, shares of stock in the
successor entity, in proportion to each Partner's then current respective
positive Capital Account balance, as adjusted by treating the Partnership as
having liquidated and gains and losses allocated in accordance with Section
11.4 hereof."
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 14
<PAGE>
g. ARTICLE 15 (PUBLIC OFFERING). Article 15 is amended to read in
its entirety:
"Notwithstanding anything herein to the contrary, the Partners agree
that incident to an initial public offering of the securities of the
Partnership or any successor entity, which raises at least
$10,000,000.00, the following rights contained in this Agreement shall
be terminated: (i) preemptive rights, (ii) parallel exit rights, (iii)
rights of first refusal, and (iv) transfer restrictions (other than as
required by applicable securities laws)."
h. REPRESENTATION ON BOARD OF DIRECTORS. If the Partnership
converts to a corporation, limited liability company or other entity (whether
by virtue of corporate reorganization, merger, conversion or
otherwise)(herein referred to as the "Successor Entity"): (i) the Class C
Limited Partners, for so long as the Class C Limited Partners hold at least
10% of the equity interests (capital stock, membership interests or
otherwise) of the Successor Entity, they shall have the right to designate
one director or manager of such entity; (ii) Hamilton, for so long as
Hamilton holds at least 2.5% of the equity interests (capital stock,
membership interests or otherwise) of the Successor Entity (either directly
or indirectly through their limited partner interest in Isom), it shall have
the right to designate one director or manager of such entity; and (iii)
Trout, for so long as Trout holds at least 20% of the equity interest
(capital stock, member interest or otherwise) of the Successor Entity, it
shall have the right to designate up to five (5) directors or managers of
such entity. Provided, however, should Hamilton not exercise its option to
purchase $500,000.00 in additional Units prior to the Expiration Date, as
provided in Section 3.c. of this Second Amendment, then its right to
designate a director or manager shall be subject to termination in the
discretion of the Partnership or the Successor Entity. Provided, further,
should Trout elect to waive its right to designate any directors (so that it
has no right to designate any director or manager) in connection with a sale
of securities of the Partnership or Successor Entity which raises
$10,000,000.00 or more, then the Class C Limited Partners and Hamilton will
agree to waive their designation right as well. There shall be not more than
7 directors or managers of the Successor Entity, except upon the consent of
the Class C Limited Partners and Hamilton (so long as Hamilton has a
designation right). The designation of the director or manager by the Class C
Limited Partners shall be determined by a vote of 65% of the Class C Limited
Partners other than Hamilton for so long as Hamilton has a right to designate
a director or manager, and thereafter upon the Approval of the Class C
Limited Partners (including Hamilton).
10. DISSOLUTION (SECTION 11.1.c.). Section 11.1.c. of the Partnership
Agreement is amended in its entirety to read:
c. The General Partner, upon approval of a Majority
in Interest of the Limited Partners, elects to dissolve (provided such
election takes place after January 1, 2001).
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 15
<PAGE>
11. MEETING & VOTING OF LIMITED PARTNERS. Section 16.9 of the Partnership
Agreement is amended to read in its entirety as follows:
SECTION 16.9. MEETINGS & VOTING BY LIMITED PARTNERS.
a. MEETINGS. Within a reasonable time after each
fiscal year and at such other times as the General Partner, in its
sole discretion, shall determine, the General Partner shall call a
meeting of the Partners for the purpose of discussing the affairs
of the Partnership and acting on any matter permitted or required
by this Agreement or the Act to be acted on by the Limited
Partners. The General Partner shall give not less than ten days
prior written notice of the meeting, specifying the time and
location of the meeting and the matters to be discussed or acted
upon. Meetings may be held at any time during normal business hours
and at any place within San Antonio, Texas as the General Partner
may select. Partners may waive notice of or attendance at the
meeting and may vote in Person, by proxy, by delivering a signed
written consent specifying its vote for or against a matter to the
General Partner at or prior to the meeting, or by telephone or
other electronic communication device. Attendance at a meeting
shall constitute waiver of notice of the meeting. The General
Partner or its designee shall chair the meeting and may conduct the
meeting under such rules as it may reasonably select.
b. VOTING BY LIMITED PARTNERS. Unless by vote
pursuant to a meeting called in accordance with SECTION 16.9.a, a
Limited Partner's approval or consent shall be conveyed in writing
to the General Partner not later than 15 Business Days after the
date the approval or consent was requested by the General Partner.
A failure to respond in any such time period shall constitute a
consent or approval which is consistent with the General Partner's
recommendation with respect to the proposal. If the General Partner
receives the necessary vote, approval or consent of the Limited
Partners to any action, the General Partner shall be authorized and
empowered to implement such action without further authorization by
the Limited Partners. The Limited Partners shall have the right to
consent, approve or vote with respect to a matter only as
specifically reserved for their consent, approval or vote pursuant
to this Agreement or any nonvariable provision of the Act. Unless
otherwise required by this Agreement or any nonvariable provision
of the Act, the vote, consent or approval of the Limited Partners on
any matter required or permitted to be submitted to their vote,
consent or
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 16
<PAGE>
approval shall be had only by a Majority in Interest of the Limited
Partners.
c. TIME PERIODS FOR CONSENTS. Notwithstanding anything
in the Agreement to the contrary, the Class C Limited Partners
shall not have less than 15 Business Days to make any election or
give any consent, whether in connection with the election to
exercise preemptive rights, parallel exit rights or otherwise. In
the case of exercise of preemptive rights under Section 9.2 of the
Agreement, the 15 Business Days time period shall commence to run
upon the Limited Partners' receipt from the General Partner of a
description (containing all material terms) of the proposed
offering giving rise to the preemptive rights. The term "Business
Day" as used in this Agreement shall mean Monday through Friday,
except any of those days in any week in which the national banks of
the U.S.A. are closed for business.
12. TAX PROVISIONS. Incident to a sale of Units in compliance with the
terms of the Partnership Agreement, upon request of the transferring Partner,
the General Partner shall, to the extent permitted by law, make the
appropriate election to adjust the basis of Partnership properties pursuant
to Code Sections 754, 755, 734(b) and 743(b), or comparable provisions of
state or local law, in connection with transfers of interests and Partnership
distributions; PROVIDED, HOWEVER, that the General Partner, as a condition to
making any such election, may require any Partner or transferee requesting
such election to pay or make adequate provisions for payment of the
reasonable costs and expenses incurred by the Partnership in making and as a
consequence of making such election.
13. REGISTRATION RIGHTS. The Class C Limited Partners and Trout shall
be granted demand and piggy-back registration rights for the Units acquired
pursuant to this Second Amendment, as more particularly set forth in that
certain Registration Rights Agreement by and among the Partnership, the Class
C Limited Partners and Trout entered into contemporaneously with this Second
Amendment.
14. PARTIES BOUND. The Class C Limited Partners agree, that by
executing this Second Amendment, they are bound to the terms contained herein
as well as the terms contained in the Partnership Agreement as if they had
become direct signatories to the Partnership Agreement.
15. RELATED PARTIES. The parties to the Second Amendment acknowledge
that the Weston Entity may meet the definition of a Related Party of Weston
under the terms of the Partnership Agreement. To the extent that the Weston
Entity does meet the definition of a Related Party of Weston, with the
respect to the issuance of Units to the Weston Entity pursuant to the terms
of this Second Amendment, the parties agree to waive the requirements of
Section 3.2(a) of the Partnership Agreement.
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 17
<PAGE>
16. KEY MAN LIFE INSURANCE. For a period of two (2) years, the
Partnership shall maintain Key Man Life Insurance on the life of Graham M.
Weston in an amount of not less than $4,000,000.00.
17. OPTIONS TO KEY PERSONNEL.
a. Section 9.3 to of the Partnership Agreement permits the
General Partner to issue Units and options to acquire Units to Key Personnel.
The Partners desire to cap the number of Units, Limited Partnership
Interests, or options to acquire the same at 10% of the outstanding Units.
Therefore, the last sentence of Section 9.3 is hereby amended to read in its
entirety: "The above notwithstanding, except upon the Approval of the Class A
Limited Partners and the Approval of the Class C Limited Partners (including
the affirmative approval of Isom), the General Partner shall not grant to any
Key Personnel, any Units, Limited Partnership Interests, or options to
acquire the same, to the extent that the aggregate amount of all such
interests granted to Key Personnel would (if fully exercised) constitute more
than 10% of the then outstanding number of Units or Limited Partners
Interests of the Partnership." All the options contemplated to be granted to
the Certain Key Employees (as defined below) and First Inning pursuant to
this Second Amendment and the Option Agreement shall be counted towards the
10% cap on such interests.
b. Currently, Richard Yoo ("Yoo"), Pat Condon ("Condon") and Dirk
Elmendorf ("Elmendorf") are subject to employment agreements with the
Partnership and are paid annualized salaries of $3,000.00 per month, with the
right to receive an annual bonus of $15,000.00 to the extent that the
Partnership has repaid all principal owing to Exeter Financial, LC. If the
bonus were paid and spread throughout the year, the monthly salary of Yoo,
Condon and Elmendorf would be $4,250.00. Miller and Weston are employees at
will and are not currently being paid a salary, but may be paid an annual
salary not in excess of $100,000 in 2000, $110,000 in 2001 and $121,000 in
2002. The parties agree that the General Partner may issue options to Yoo,
Condon, Elmendorf, Miller and Weston (collectively "Certain Key Personnel")
to acquire Units, in lieu of their salary, in accordance with the following
general terms, SUBJECT TO execution of definitive option agreements:
(i) Yoo, Condon and Elmendorf may elect at the beginning of
each calendar quarter, during 2000, to forgo some or all of their monthly
salary and earn the right to receive options to acquire Units. Each of Yoo,
Condon and Elmendorf, to the extent that any of them elect not to continue
their salary at $3,000 per month for the next twelve months and not receive a
bonus (or elect to receive such amount less than $4,250 per month) he will
earn options to acquire such number of Units determined by dividing the
difference between $12,750 (3 months salary and imputed bonus amount) and the
actual cash salary and bonus paid to them in the applicable quarter of 2000,
by the Fair Market Unit Value. The "Fair Market Unit Value" shall mean $2.10
through December 31, 2000, and thereafter shall be determined on each
calendar quarter to be the lesser of: (i) 120 times the gross revenues of the
Partnership for the month immediately preceding the month of determination
and then divided by the number of Units outstanding; or (ii) the highest
sales price of any Units sold by the Partnership, if any, during any of the
four months immediately preceding determination.
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 18
<PAGE>
(ii) Weston and Miller may elect at the beginning of each
calendar quarter (or for the entire year at their election), during 2000,
2001 and 2002 to forgo some or all of their monthly salary and earn the right
to receive options to acquire Units. Miller and Weston, to the extent that
they elect not to receive any salary (or to the extent that elect to receive
part cash, then the difference between the cash compensation received and the
applicable compensation level for that year) they will receive options to
acquire such number of Units determined by dividing the difference between
the amount of their monthly salary earned for such quarter and the amount of
the cash salary, if any, actually paid to them in the applicable quarter, by
the Fair Market Unit Value.
(iii) The foregoing options to Certain Key Personnel shall be
earned and calculated on a quarterly basis throughout the year and granted at
the end of each year. The exercise price of the options shall be $.01 per
Unit (payable in cash or netted out of the number of Units granted). The
options shall be subject to forfeiture by each of the Certain Key Personnel
if their employment with the Partnership (or any successor entity) is
terminated voluntarily or involuntarily, for cause, or without cause, prior
to June 30, 2001, unless employment is terminated due to death, disability,
or in connection with the sale of substantially all the ownership interests
or assets of the Partnership (whether by sale, merger or other transaction)
to a third party. In the event of such forfeiture, the terminated employee
shall be entitled to receive the salary he would have received during the
time of employment but for his election to earn the options.
c. The option agreements for the Certain Key Personnel (including
amendments, as necessary, to the employment agreements of Yoo, Condon and
Elmendorf) shall contain the terms as outlined in Section 17(b)(i), (ii)
and (iii) above, be in a form acceptable to the General Partner and shall
contain anti-dilutions provisions, forfeiture provisions upon termination of
employment or competition with the Partnership, and other provisions which
are customary and reasonable.
18. ASSIGNMENT OF CERTAIN RIGHTS. Notwithstanding anything in the
Partnership Agreement or this Second Amendment to the contrary, a Limited
Partner which has executed this Second Amendment may assign any right of
first refusal, preemptive right or other right to acquire Units to any (i)
current limited partner, partner, shareholder or member of such Limited
Partner, or an Affiliate of such Person, or an entity controlled by such
Persons or their Affiliates, or (ii) another Person upon the prior consent of
the General Partner in the General Partner's sole discretion (a "Current
Affiliate") and provide the General Partner written notice of such assignment
within five (5) Business Days. Upon any such assignment, the Current
Affiliate shall be subject to the rights, obligations, and restrictions
provided in the Partnership Agreement (as amended) with respect to exercising
any such rights and becoming a Limited Partner or Substitute Limited Partner.
19. REPRESENTATION. The parties to this Second Amendment acknowledge
that the law firm of Matthews and Branscomb, P.C. has assisted in the
preparation of this document on behalf of and as counsel for Trout, Ltd. and
the General Partner, and further acknowledge that the Partnership will pay
the fees and expenses associated with such services.
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 19
<PAGE>
20. MULTIPLE COUNTERPARTS. This Second Amendment may be executed in one
or more counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument.
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 20
<PAGE>
Executed as of the date first written above.
RACKSPACE, LTD.
By: Macroweb, LC
Its: General Partner
/s/ Graham M. Weston
----------------------------
Graham M. Weston, Member
/s/ Morris A. Miller, Member
----------------------------
Morris A. Miller, Member
GENERAL PARTNER:
Macroweb, LC
/s/ Morris A. Miller, Member
----------------------------
Morris A. Miller, Member
/s/ Graham M. Weston
----------------------------
Graham M. Weston, Member
LIMITED PARTNERS:
/s/ Richard Yoo
----------------------------
Richard Yoo
/s/ Dirk Elmendorf
----------------------------
Dirk Elmendorf
/s/ Patrick Condon
----------------------------
Patrick Condon
Trout, Ltd.
By: Knightsbridge, L.C.,General Partner
By: /s/ Morris Miller, Member
-------------------------
Its: Member
-------------------------
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD.
<PAGE>
Isom Capital Partners I, L.P.
By: BESK Funding, Inc., General Partner
By: /s/ S. James Bishkin
-------------------------------
S. James Bishkin
President
First Inning Investors, L.P.
By: Trango Capital L.L.C., General Partner
By: /s/ Quincy J. Lee
-------------------------------
Quincy J. Lee, Manager
The Hamilton Companies LLC
By: /s/ Frederic C. Hamilton
-------------------------------
Title: President
---------------------------
Weston Investment Interests, LLC
By: /s/ Graham M. Weston
------------------------------
Title: Manager
---------------------------
MiniPat & Company, Ltd.
By: /s/ Patrick Condon
-----------------------------
Title: President
--------------------------
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD.
<PAGE>
Isom Capital Partners I, L.P.
By: BESK Funding, Inc., General Partner
By: /s/ S. James Bishkin
--------------------------
S. James Bishkin
President
First Inning Investors, L.P.
By: Trango Capital L.L.C., General Partner
By: /s/ Quincy J. Lee
-------------------------------
Quincy J. Lee, Manager
The Hamilton Companies LLC
By: /s/ Frederic C. Hamilton
------------------------------
Title: President & Man.
---------------------------
Weston Investment Interests, LLC
By: /s/ Graham Weston
-----------------------------
Title: Manager
--------------------------
MiniPat & Company, Ltd.
By: /s/ Patrick Condon
----------------------------
Title: Manager
-------------------------
SECOND AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP OF RACKSPACE, LTD.
<PAGE>
THIRD AMENDMENT TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
RACKSPACE, LTD.
This Third Amendment to Agreement of Limited Partnership of
Rackspace, Ltd. (hereinafter referred to as the "Third Amendment") is made
this 22nd day of February, 2000, by and among Rackspace, Ltd. (the
"Partnership"), Macroweb, LC, a Texas limited liability company (the "General
Partner" or "Macroweb"), Trout, Ltd., a Texas limited partnership ("Trout"),
Richard Yoo ("Yoo"), Patrick Condon ("Condon") and Dirk Elmendorf
("Elmendorf"), Isom Capital Partners I, L.P. ("Isom"), First Inning
Investors, L.P. ("First Inning"), The Hamilton Companies LLC, a Colorado
limited liability company ("Hamilton"), Weston Investment Interest, L.L.C., a
Nevada limited liability company ("Weston Entity"), MiniPat & Company, Ltd.,
a Texas limited partnership ("MiniPat")(Macroweb, Trout, Yoo, Condon,
Elmendorf, Isom, First Inning, Hamilton, Weston Entity and MiniPat are
sometimes referred to herein as the "Existing Partners") and 2M Technology
Ventures, L.P. (the "New Partner" or "2M"). This Third Amendment amends the
Agreement of Limited Partnership dated December 29, 1998, as amended on
September 29, 1999 (the "First Amendment") and again on November 30, 1999
(the "Second Amendment," and collectively, hereinafter referred to as the
"Agreement" or "Partnership Agreement"). Except as amended by this Third
Amendment, the Second Amendment and the First Amendment to Agreement of
Limited Partnership of Rackspace, Ltd., the terms of the Partnership
Agreement shall continue in full force and effect. Capitalized terms used
herein shall, unless otherwise specified, have the meanings assigned to them
in the Partnership Agreement.
WHEREAS, Hamilton has exercised its right to contribute an
additional $500,000.00 to the Partnership and thereby receive an additional
238,095.24 Units to be held as a Class C Limited Partner; and
WHEREAS, 2M desires to contribute $250,000.00 to the Partnership, to
become a Class C Limited Partner and to receive 119,047.62 Units in
accordance with the terms of this Agreement.
WHEREAS, the Partnership and the Existing Partners desire to have 2M
make an investment in the Partnership as set forth herein and to have it
become a Limited Partner of the Partnership.
NOW, THEREFORE, FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES
HEREIN MADE, THE PARTIES AGREE AS FOLLOWS:
1. ADMISSION OF NEW PARTNER. Upon the execution of this Third
Amendment by all the parties hereto, effective January 21, 2000 2M shall
become an Additional Limited Partner of the
<PAGE>
Partnership as a "Class C Limited Partner," having the rights and interests
of a Class C Limited Partner as set forth in the Second Amendment except as
otherwise provided herein.
2. CONTRIBUTION OF CAPITAL.
a. Upon the execution of this Third Amendment, 2M shall
contribute $250,000.00 to the Partnership (the "New Contribution to Capital")
and effective January 21st, 2000 shall be deemed to have received 119,047.62
Units as a Class C Limited Partner.
b. On January 21st, 2000 Hamilton contributed an additional
$500,000.00 to the Partnership and received 238,095.24 additional Units as a
Class C Limited Partner.
3. CAPITAL ACCOUNTS. The parties to this Third Amendment have made a
determination that the fair market value of the assets of the Partnership,
immediately prior to the contributions by Hamilton and 2M described in 2
above, was $30,810,000.00 (the "Valuation"). However, the parties further
agree that the value of the assets is extremely speculative and may in fact
be substantially more or substantially less than $30,810,000.00. The number
of Units received by Hamilton and 2M are based upon the parties' mutual
determination that the value of the Partnership's assets immediately prior to
closing of the sale of such additional Units is $30,810,000.00. The parties
agree as of and immediately prior to January 21, 2000, the Partners' Capital
Accounts shall be adjusted to reflect the Valuation and the Partners'
distributive shares of tax items shall be determined all in accordance with
Treasury Regulation 1.704-1(b)(2)(iv)(f) and (g). The parties further agree
that immediately prior to any subsequent contribution to the Partnership or
distribution from the Partnership, Capital Accounts shall be adjusted in
accordance with the provisions of Code Section 704(b) and the Regulations,
including Treasury Regulation 1.704-1(b)(2)(iv)(f) and (g).
4. OWNERSHIP PERCENTAGES AND UNITS. As a result of the contributions
of capital set forth in paragraph 3 above, the Ownership Percentage Interests
and number of Units held by each Partner is as follows:
<TABLE>
<CAPTION>
Ownership
Percentage
Partner Units Interests
------- ----- ---------
<S> <C> <C>
CLASS A
Yoo 3,600,000.00 23.95437%
Condon 800,000.00 5.32319%
Elmendorf 400,000.00 2.66159%
Grubbs (assignee of Class A) 50,000.00 .33269%
Bell (assignee of Class A) 50,000.00 .33269%
CLASS B
2
<PAGE>
Macroweb 10,000.00 .06653%
Trout 7,232,856.20 48.12737%
CLASS C
First Inning 619,047.61 4.11913%
Isom 1,219,047.62 8.11153%
Hamilton 476,190.48 3.16856%
Weston Entity 357,142.86 2.37642%
MiniPat 95,238.10 .63371%
2M 119,047.62 .79214%
TOTAL UNITS OUTSTANDING 15,028,570.49
</TABLE>
5. WAIVER OF PRE-EMPTIVE RIGHTS. The parties to this Agreement
hereby waive any pre-emptive rights that they may have to acquire Units
issued by the Partnership, but only with respect to the Units issued by the
Partnership which are set forth in 4 above (and Units issued under Options in
effect prior to the date hereof) and not with respect to any Units issued by
the Partnership after the date of this Agreement.
6. RIGHT TO APPOINT DIRECTORS. Notwithstanding Section 9(h) of the
Second Amendment to the Agreement of Limited Partnership of Rackspace, Ltd.
to the contrary, 2M shall not have the right to participate with the other
Class C Limited Partners in designating one director or manager of the
Successor Entity under the terms set forth in such Section 9(h), nor for the
purposes of Section 9(h) shall 2M's equity interest in the Partnership be
included in determining whether the Class C Limited Partners hold 10% of the
equity interests of the Successor Entity.
7. PARTIES BOUND/ADDITIONAL AGREEMENTS. The parties hereto agree
that Hamilton and 2M, by executing this Third Amendment, are bound to and
have the benefit of the terms contained herein as well as the terms contained
in the First Amendment, the Second Amendment and the Partnership Agreement as
if they had become direct signatories to such agreements.
8. REPRESENTATION. The parties to this Third Amendment acknowledge
that the law firm of Matthews and Branscomb, P.C. has assisted in the
preparation of this document on behalf of and as counsel for Trout, Ltd. and
the General Partner, and further acknowledge that the Partnership will pay
the fees and expenses associated with such services.
9. MULTIPLE COUNTERPARTS. This Third Amendment may be executed in
one or more counterparts, each of which shall be deemed an original but all
of which together will constitute one and the same instrument.
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
3
<PAGE>
Executed as of the date first written above.
RACKSPACE, LTD.
By: Macroweb, LC
Its: General Partner
/s/ Graham M. Weston
---------------------------------
Graham M. Weston, Member
/s/ Morris A. Miller
---------------------------------
Morris A. Miller, Member
GENERAL PARTNER:
Macroweb, LC
/s/ Morris A. Miller
---------------------------------
Morris A. Miller, Member
/s/ Graham M. Weston
---------------------------------
Graham M. Weston, Member
LIMITED PARTNERS:
/s/ Richard Yoo
---------------------------------
Richard Yoo
/s/ Dirk Elmendorf
---------------------------------
Dirk Elmendorf
/s/ Patrick Condon
---------------------------------
Patrick Condon
Trout, Ltd.
By: Knightsbridge, L.C.,General Partner
By: /s/ Graham M. Weston
---------------------------------
Its:
---------------------------------
4
<PAGE>
Isom Capital Partners I, L.P.
By: BESK Funding, Inc., General Partner
By: /s/ S. James Bishkin
--------------------------
S. James Bishkin
President
First Inning Investors, L.P.
By: Trango Capital L.L.C., General
Partner
By: /s/ Quincy J. Lee
-----------------------
Quincy J. Lee, Manager
The Hamilton Companies LLC
By: /s/ Frederic C. Hamilton
-----------------------------
Title: President
--------------------------
Weston Investment Interest, L.L.C.
By: /s/ Graham Weston
-----------------------------
Title: Member
--------------------------
MiniPat & Company, Ltd.
By: /s/ Patrick Condon
----------------------------
Title: President
-------------------------
2M Technology Ventures, L.P.
By: 2M Technology Group, L.L.C.
Its: General Partner
By: /s/ Steven Leeke
-------------------------
5
<PAGE>
FOURTH AMENDMENT TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
RACKSPACE, LTD.
This Fourth Amendment to Agreement of Limited Partnership of Rackspace,
Ltd. (hereinafter referred to as the ("Fourth Amendment") is made effective the
27 day of March, 2000 (the "Effective Date"), by and among Rackspace, Ltd. (the
"Partnership"), Macroweb, LC, a Texas limited liability company (the "General
Partner" or "Macroweb"), Trout, Ltd., a Texas limited partnership ("Trout"),
Richard Yoo ("Yoo"), Patrick Condon ("Condon"), Dirk Elmendorf ("Elmendorf"),
Isom Capital Partners I, L.P. ("Isom"), First Inning Investors, L.P. ("First
Inning"), The Hamilton Companies LLC, a Colorado limited liability company
("Hamilton"), Beaulieu River Capital LC (formerly, Weston Investment Interest,
L.L.C.), a Nevada limited liability company ("Beaulieu"), MiniPat & Company,
Ltd., a Texas limited partnership ("MiniPat"), 2M Technology Ventures, L.P.
("2M") (Macroweb, Trout, Yoo, Condon, Elmendorf, Isom, First Inning, Hamilton,
Weston Entity, MiniPat and 2M are sometimes referred to herein as the "Existing
Partners"), Norwest Venture Partners VII, L.P. ("Norwest"), Red Hat, Inc. ("Red
Hat") and Tailwind Capital Partners 2000, L.P. ("Thomas Weisel"). This Fourth
Amendment amends the Agreement of Limited Partnership dated December 29, 1998,
as amended on September 29, 1999 (the "First Amendment"), on November 30, 1999
(the "Second Amendment") and again on February 22, 2000 (the "Third Amendment")
(collectively, hereinafter referred to as the "Agreement" or the "Partnership
Agreement"). Except as amended by this Fourth Amendment, the Third Amendment,
the Second Amendment and the First Amendment to Agreement of Limited Partnership
of Rackspace, Ltd., the terms of the Partnership Agreement shall continue in
full force and effect. Capitalized terms used herein shall, unless otherwise
specified, have the meanings assigned to them in the Partnership Agreement.
WHEREAS, Norwest desires to contribute $5,750,000, to become a Class C
Limited Partner and to receive Units in accordance with the terms of this
Agreement.
WHEREAS, Red Hat desires to contribute $2,000,000, to become a Class C
Limited Partner and to receive Units in accordance with the terms of this
Agreement.
WHEREAS, Thomas Weisel desires to contribute $300,000, to become a Class
C Limited Partner and to receive Units in accordance with the terms of this
Agreement.
<PAGE>
WHEREAS, the Partnership and the Existing Partners desire to have
Norwest, Red Hat and Thomas Weisel invest in the Partnership as set forth
herein and to have them become Limited Partners of the Partnership.
NOW, THEREFORE, FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN
MADE, THE PARTIES AGREE AS FOLLOWS:
1. ADMISSION OF NEW PARTNERS. Upon the execution of this Fourth
Amendment by all the parties hereto, effective the date set forth above,
Norwest, Red Hat and Thomas Weisel shall become Additional Limited Partners of
the Partnership as "Class C Limited Partners", having the rights and interests
of Class C Limited Partners as set forth in the Second Amendment except as
otherwise provided herein. For the purposes hereof, references to the "Partners"
or the "Limited Partners" shall include Norwest, Red Hat and Thomas Weisel.
2. CONTRIBUTION OF CAPITAL/WARRANTS. Upon the execution of this
Fourth Amendment, (i) Norwest shall contribute $5,750,000 to the Partnership
and shall receive 1,015,901 Class C Units to be held as a Class C Limited
Partner, (ii) Red Hat shall contribute $2,000,000 to the Partnership and shall
receive 353,356.89 Class C Units to be held as a Class C Limited Partner, and
Thomas Weisel shall contribute $300,000 to the Partnership and shall receive
53,003.53 Class C Units to be held as a Class C Limited Partner (collectively,
the "New Contributions to Capital). In addition, Norwest shall receive a
warrant (the "Norwest Warrant") to purchase an amount of Class C Units (which
have the same rights and obligations as the Units initially purchased by
Norwest), determined by dividing $3,000,000 by the greater of the $18.24 or the
mid-point in the filing range (the "Mid-point") set forth in the preliminary
prospectus (commonly referred to as the "red herring") which is first circulated
by the Company. After the Mid-point is established, the warrant may be
exercised at anytime before one year after the date of issuance, unless the
Mid-point is not established within four months of the date hereof, in which
case it may be exercised after four months from the date of issuance. A copy of
the warrant is attached as Exhibit A.
3. CAPITAL ACCOUNTS. The parties to this Fourth Amendment have made
a determination that the fair market value of the assets of the Partnership,
immediately prior to the contributions by Norwest, Red Hat and Thomas Weisel
described in 2 above, was $85,000,000.00 (the "Valuation"). However, the parties
further agree that the value of the assets is extremely speculative and may in
fact be substantially more or substantially less than $85,000,000. The number
of Units received by Norwest, Red Hat and Thomas Weisel is based upon the
parties' mutual determination that the value of the Partnership's assets
immediately prior to the Effective Date, was $85,000,000. The parties agree as
of and immediately prior to the Effective Date, the Partners' Capital Accounts
shall be adjusted to reflect the Valuation and the Partners' distributive shares
of tax items shall be determined all in accordance with Treasury Regulation
1.704-1(b)(2)(iv)(f) and (g). The parties further agree that immediately prior
to any subsequent contribution to the Partnership or distribution from the
Partnership, Capital Accounts shall be adjusted in accordance with the
provisions of Code Section 704(b) and the Regulations, including Treasury
Regulation 1.704-1(b)(2)(iv)(f) and (g). The Capital Accounts of all of the
Partners as of the Effective Date are as set forth on Exhibit "B" attached
hereto.
2
<PAGE>
4. OWNERSHIP PERCENTAGES AND UNITS. As a result of the contributions
of capital set forth in paragraph 2 above, the Ownership Percentage Interests
and number of Units held by each Partner is as follows:
<TABLE>
<CAPTION>
Ownership
Percentage
Partner Units Interests
------- ----- ---------
<S> <C> <C>
CLASS A
Yoo 3,600,000 21.88339%
Condon 800,000 4.86298%
Elmendorf 400,000 2.43149%
Grubbs (assignee of Class A) 50,000 .30394%
Bell (assignee of Class A) 50,000 .30394%
CLASS B
Macroweb 10,000 .06079%
Trout 7,232,856.20 43.96651%
CLASS C
First Inning 619,047.61 3.76302%
Isom 1,219,047.62 7.41025%
Hamilton 476,190.48 2.89463%
Beaulieu 357,142.86 2.17097%
MiniPat 95,238.10 .57893%
2M 119,047.62 .72366%
Norwest 1,015,901 6.17538%
Red Hat 353,356.89 2.14796%
Thomas Weisel 53,003.53 .32219%
TOTAL UNITS OUTSTANDING 16,450,831.91
</TABLE>
5. NEW INVESTORS. It is expressly agreed that the General Partner
may cause the Partnership to issue up to 530,035.34 Class C Units (the
"Additional Units") to one or more additional persons or entities (the "New
Investors") and to admit them as Class C Limited Partners, provided that the
aggregate purchase price per Unit is not less than $5.66 per Unit. In addition,
the General Partner may cause the Partnership to issue a warrant to the New
Investors with the same terms as contained in the Norwest Warrant, including
terms as to amount of Units subject to purchase, price, and the time period in
which it may be exercised. It is the intention of the parties hereto that such
New Investors shall have the benefits and obligations of the Class C Limited
Partners, except to the extent limited by paragraph 7 below, and that they may
become signatories to this Agreement without any further consent or agreement of
the parties to this agreement. To the extent that such New Investors become
parties to this agreement, the schedule set forth in paragraph 4 above shall be
appropriately
3
<PAGE>
adjusted and the capital accounts of all the Partners will be "booked-up" in
accordance with paragraph 3 above at the time of the investment to reflect the
valuation of the Partnership at that time. To the extent that the New Investors
are admitted to the Partnership, for the purposes hereof, references to the
"Partners" or the "Limited Partners" shall include the New Investors.
6. WAIVER OF PRE-EMPTIVE RIGHTS. The parties to this Agreement
hereby waive any pre-emptive rights that they may have to acquire Units issued
by the Partnership, but only with respect to the Units issued by the Partnership
which are set forth in 4 above, Units issued upon options in effect prior to the
date hereof, or Units issued to New Investors under paragraph 5 above, and not
with respect to any Units issued by the Partnership after the date of this
Agreement. In addition, with respect to the Units purchased by Norwest, Red
Hat, Thomas Weisel and the New Investors, if any, the parties hereto waive any
rights of first refusal which may exist with respect to the resale of those
Units by any of them.
7. RIGHT TO APPOINT DIRECTORS. Notwithstanding Section 9(h) of the
Second Amendment to the Agreement of Limited Partnership of Rackspace, Ltd. to
the contrary, Norwest, Red Hat, Thomas Weisel and the New Investors, if any,
shall not have the right to participate with the other Class C Limited Partners
in designating one director or manager of the Successor Entity under the terms
set forth in such Section 9(h), nor for the purposes of Section 9(h) shall
Norwest's, Red Hat's, Thomas Weisel's or the New Investors equity interest in
the Partnership be included in determining whether the Class C Limited Partners
hold 10% of the equity interests of the Successor Entity.
8. PARTIES BOUND/ADDITIONAL AGREEMENTS. The parties hereto agree
that Norwest, Red Hat, Thomas Weisel and the New Investors, if any, by
executing this Fourth Amendment, are bound to and have the benefit of the terms
contained herein as well as the terms contained in the First Amendment, the
Second Amendment, the Third Amendment and the Partnership Agreement as if they
had become direct signatories to such agreements.
9. REPRESENTATION. The parties to this Fourth Amendment acknowledge
that the law firm of Matthews and Branscomb, P.C. has assisted in the
preparation of this document on behalf of and as counsel for Trout, Ltd. and the
General Partner, and further acknowledge that the Partnership will pay the fees
and expenses associated with such services.
10. MULTIPLE COUNTERPARTS. This Fourth Amendment may be executed in
one or more counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
4
<PAGE>
Executed as of the date first written above.
RACKSPACE, LTD.
By: Macroweb, LC
Its: General Partner
/s/ Graham M. Weston
-------------------------------------
Graham M. Weston, Member
/s/ Morris A. Miller
-------------------------------------
Morris A. Miller, Member
GENERAL PARTNER:
Macroweb, LC
/s/ Morris A. Miller
-------------------------------------
Morris A. Miller, Member
/s/ Graham M. Weston
-------------------------------------
Graham M. Weston, Member
LIMITED PARTNERS:
/s/ Richard Yoo
-------------------------------------------
Richard Yoo
/s/ Dirk Elmendorf
-------------------------------------------
Dirk Elmendorf
/s/ Patrick Condon
-------------------------------------------
Patrick Condon
Trout, Ltd.
By: Knightsbridge, L.C.,General Partner
By: /s/ Morris Miller
----------------------------------
Its: Member
---------------------------------
5
<PAGE>
Isom Capital Partners I, L.P.
By: BESK Funding, Inc., General Partner
By: /s/ S. James Bishkin
----------------------------------
S. James Bishkin
President
First Inning Investors, L.P.
By: Trango Capital L.L.C., General
Partner
By: /s/ Quincy J. Lee
----------------------------------
Quincy J. Lee, Manager
The Hamilton Companies LLC
By: /s/ Frederic C Hamilton
---------------------------------------
Beaulieu River Capital LC
(formerly, Weston Investment Interest,
L.L.C.)
By: /s/ Graham Weston
---------------------------------------
MiniPat & Company, Ltd.
By: /s/ Patrick Condon
---------------------------------------
6
<PAGE>
2M Technology Ventures, L.P.
By: 2M Technology Group, L.L.C.
Its: General Partner
By: /s/ Steven [ILLEGIBLE]
----------------------------------
Red Hat, Inc.
By: /s/ Walter McCormick
---------------------------------------
Norwest Venture Partners VII, L.P.
By: /s/ George Still, Jr.
---------------------------------------
General Partner
Tailwind Capital Partners 2000, L.P.
By: Thomas Weisel Capital Partners LLC,
general partner
By: /s/ David A. Baylor
----------------------------------
David A. Baylor, General Counsel
NEW INVESTORS:
7
<PAGE>
FOURTH AMENDMENT TO
AGREEMENT OF LIMITED PARTNERSHIP OF
RACKSPACE, LTD.
Separate Signature Page for New Investors
With respect to the 466,431 Class C Units purchased by Sequoia Capital Franchise
Fund for $2,640,000.
Sequoia Capital Franchise Fund
By: /s/ illegible
---------------------------
With respect to the 63,604 Class C Units purchased by Sequoia Capital Franchise
Partners for $360,000.
Sequoia Capital Franchise Partners
By: /s/ illegible
---------------------------
8
<PAGE>
Exhibit 10.12
WARRANT
This Agreement (herein the "AGREEMENT") is entered into effective the
30th day of November, 1999 (herein the "EFFECTIVE DATE"), by and between
RACKSPACE, LTD. (herein "RACKSPACE"), a Texas limited partnership whose sole
general partner is Macroweb, LC, a Texas limited liability company, and
TRANGO CAPITAL, L.L.C., a Texas limited liability company (herein "TRANGO").
WHEREAS, Rackspace is in the business of offering web-server hosting
services through the leasing of internet servers, bandwidth, connectivity and
administration of all aspects of servers; and
WHEREAS, Trango is the sole general partner of First Inning Investors,
L.P., a Texas limited partnership (herein "FIRST INNING"); and
WHEREAS, contemporaneous with the execution of this Agreement, First
Inning is investing One Million Three Hundred Thousand and No/100 Dollars
($1,300,000.00) in Rackspace (herein the "FIRST INVESTMENT"), which
investment is being made, in part, in consideration for the agreement of
Rackspace to provide to Trango a warrant to make a substantial additional
investment in Rackspace, all as provided herein;
NOW, THEREFORE, in consideration of the premises herein set out, and Ten
Dollars and other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Rackspace and First Inning agree as follows:
1. OPTION TO INVEST.
Trango will have the option (but not the obligation) to acquire all (but
not less than all) of the Option Interest (as hereinafter defined) in
consideration for the payment to Rackspace of the Purchase Price (as
hereinafter defined) (herein the "OPTION TO INVEST"). If Trango exercises
such Option to Invest, it shall acquire the Option Interest through a new
limited partnership to be formed, of which Trango will be sole general
partner, which will be pursuant to a limited partnership agreement on
substantially the same terms as the Agreement of Limited Partnership of First
Inning, with the limited partners being one or more of the Limited Partners
of First Inning and/or Melvin Lachman, the specific limited partners and the
percentage of ownership of each shall be determined by Trango, in its sole
and absolute discretion (herein "FIRST INNING II").
WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 1 OF 7 PAGES
<PAGE>
2. EXERCISE OF OPTION.
The Option to Invest may be exercised by Trango providing to Rackspace
written notice of the exercise by Trango of such option (herein the "NOTICE OF
EXERCISE") at any time from the Effective Date hereof through 5 p.m., CST, on
December 31, 2001 (herein the "OPTION PERIOD").
3. PURCHASE PRICE.
The Purchase Price for the Option Interest is Eight Hundred Thousand and
No/100 Dollars ($800,000.00), to be paid by First Inning II to Rackspace at the
Closing (as hereinafter defined).
4. OPTION INTEREST.
4.1 For purposes of this Agreement:
(a) The interest acquired by First Inning for the First Investment,
as subsequently altered by virtue of any merger, exchange or dilution for
other investment in Rackspace (or its successor-in-interest), if any, is
herein referred to as the "INITIAL INVESTMENT";
(b) The OPTION INTEREST, as that term is used in this Agreement,
shall be an interest equal to 61.5385% (that is, $800,000 DIVIDED BY
$1,300,000) of the then Initial Investment (that is, of the same quality
and character of investment in the same entity [e.g., undivided limited
partnership interest, or shares in corporation, or membership interests in
a limited liability company] but only 61.5385% of the equity interest
represented by the First Investment at the time of exercise of the Option).
4.2 In consideration for the payment of the Purchase Price by First
Inning II as herein provided, at the Closing, Rackspace will transfer and
assign the Option Interest to First Inning II, free and clear of any liens or
encumbrances.
4.3 The Option Interest will have all of the rights and privileges
generally available to other Limited Partners of Rackspace.
5. CLOSING.
The Closing shall occur at the offices of Rackspace within ten (10)
business after the Notice of Exercise is delivered by Trango to Rackspace.
WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 2 OF 7 PAGES
<PAGE>
6. SALE OR MERGER.
6.1 In the event that, during the Option Period while Trango has not yet
exercised the Option to Invest, all or substantially all of the ownership/equity
interests (i.e., undivided limited partnership, or shares in a corporation, or
membership interests in a limited liability company, as the case may be) in
Rackspace, or all or substantially all of the assets of Rackspace, are to be
sold, then Rackspace will provide to Trango not less than fifteen (15) business
days prior written notice of such sale and the terms and provisions of such sale
(herein the "NOTICE OF INTENT TO SELL"), and Trango will be entitled to exercise
the Option to Invest prior to consummation of such sale, and the Option Interest
acquired by First Inning II will participate fully and ratably (that is, with
all other ownership/equity interests) in such sale; provided, however, if Trango
fails to exercise the Option to Invest within such 15 business days and
consummate the purchase of the Option Interest within such 15 days, then the
Option to Invest will lapse and be of no further force and effect.
6.2 In the event that during the Option Period while Trango has not yet
exercised the Option to Invest, Rackspace contemplates a merger or exchange
which will result in the then owners of the ownership/equity in Rackspace
receiving ownership/equity in any other entity, then Rackspace will provide
to Trango not less than fifteen (15) business days prior written notice of
such merger or exchange and the terms and provisions of such merger or
exchange (therein the "NOTICE OF INTENT TO SELL"), and Trango will be
entitled to exercise the Option to Invest prior to consummation of such
merger or exchange, and the Purchase Price paid by First Inning II will be
taken into consideration in valuation of the assets of Rackspace in
determining the valuation to be used in such merger or exchange, and the
Option Interest acquired by First Inning II will participate fully and
ratably (that is, with all other ownership/equity interests) in such sale or
exchange; provided, however, if Trango fails to exercise the Option to Invest
within such fifteen (15) business days, the Option to Invest will NOT lapse
prior to the end of the Option Period and the Option Interest will be in the
proportionate interest (i.e., 61.5385%) of the interest received and
thereafter held in exchange for the Initial Investment.
7. ACCESS TO BOOKS AND RECORDS.
From the Effective Date hereof until the expiration of the Option Period:
(a) Trango (though its designated representative or agent) will be
provided access from time to time to the books and records of Rackspace
during normal business hours, and upon not less than 48 hours prior written
notice, for the purpose of determining the financial condition of and value
of interests in Rackspace; and
(b) Rackspace will provide to Trango copies of all unaudited and/or
audited operating statements and financial statements (monthly, quarterly
and/or annually) as Rackspace shall prepare or have prepared for the
benefit of its management, lender(s) or partners.
WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 3 OF 7 PAGES
<PAGE>
8. REPRESENTATIONS AND WARRANTIES OF RACKSPACE.
8.1 Rackspace does hereby make the following representations and
warranties to Trango, and will again at the Closing make the following
representations and warranties to Trango:
8.1.1 Rackspace is a limited partnership, duly formed and validly
existing and in good standing under the laws of the State of Texas.
8.1.2 Rackspace has all of the requisite authority to execute,
deliver and carry out the terms and provisions of this Agreement and other
documents to be executed and delivered by and pursuant to this Agreement.
8.1.3 Rackspace is not in default under any agreement to which it
is a party (including, without limitation, its partnership agreement), the
effect of which will materially adversely affect performance by Rackspace
of its obligations pursuant to and contemplated by the terms of this
Agreement, or its operations or the value of its assets or the value of
partnership interests therein.
8.1.4 There are no actions, suits or proceedings pending, or to
the current actual knowledge of Rackspace, without duty of independent
inquiry, threatened against or affecting Rackspace or its General Partner,
before any court or any governmental, administrative, regulatory,
adjudicatory or arbitrational body or agency of any kind which will
materially adversely affect the performance of Rackspace of its obligations
pursuant to and as contemplated by the terms and provisions of this
Agreement or the operations of Rackspace, or the value of partnership
interests therein.
8.1.5 Neither this Agreement nor any document, financial
statement, or financial information furnished by Rackspace to Trango, at
the time furnished, contains, or will contain, any untrue statement of
material fact or omits the stated fact material thereto or to this
Agreement.
8.1.6 Rackspace has good and marketable title to all of its assets
and interests in assets, whether real, personal, mixed, tangible, or
intangible, which constitute all of the assets and interests in assets that
are used in the business of Rackspace, and all those assets are free and
clear of restrictions on or conditions to transfer or assignment, and free
and clear of mortgages, liens and pledges, charges, encumbrances, claims,
conditions or restrictions, except for (i) those disclosed in financial
statements of Rackspace which have been previously delivered to Trango,
(ii) any lien for current taxes not yet due and payable, and (iii) possible
minor matters that, in the aggregate, are not substantial in amount and do
not materially detract from or interfere with the
WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 4 OF 7 PAGES
<PAGE>
present or intended use of any of these assets or materially impair the
business operations of Rackspace. The above notwithstanding, with respect
to the intellectual property rights held by Rackspace, no warranty is made
other than, Rackspace is not aware of any facts which indicate that
Rackspace's use of such intellectual property infringes the rights of any
third party.
8.1.7 Rackspace has not relied upon any representations or
warranties, written or oral, express or implied, by Trango or its agents,
and neither Trango or its agents have made any representations, written,
oral, express or implied, to Rackspace, as to the past, current or future
value of the Option Interest.
9. REPRESENTATIONS AND WARRANTIES OF TRANGO.
9.1 Trango does hereby make the following representations and warranties
to Rackspace, and will again at the Closing make the following representations
and warranties to Rackspace:
9.1.1 Trango is a limited liability company duly formed and
validly existing and in good standing under the laws of the State of
Texas.
9.1.2 Trango has all of the requisite authority to execute,
deliver and carry out the terms and provisions of this Agreement and
other documents to be executed and delivered by and pursuant to this
Agreement.
9.1.3 Trango is fully satisfied that it has received such
access to the books and records of Rackspace as it requires, as well
as such other information pertaining to Rackspace, and its operations
of current and potential competitors, as it deems necessary or
appropriate, in evaluating the acquisition of the offered interests
other than access to the financial information as provided for herein.
9.1.4 Trango has not relied upon any representations or
warranties, written or oral, express or implied, by Rackspace or its
agents, and neither Rackspace nor its agents, have made any
representations, written or oral, express or implied, to Trango, as to
the present, current or future value of the Option Interest.
9.1.5 All representations of First Inning and its limited
partners as contained in the subscription agreement of even date
herewith between First Inning and Rackspace are true and correct in
all material respects.
WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 5 OF 7 PAGES
<PAGE>
10. MISCELLANEOUS.
10.1 There are no brokers in this transaction, and no commissions will
be due and owing upon the consummation of the transactions contemplated in
this Agreement.
10.2 The parties hereto agree that they will execute and deliver or
cause to be executed and delivered, such additional agreements and
instruments that shall be reasonably required and necessary to carry into
effect the purpose of this Agreement.
10.3 All notices or other communications with the parties hereto shall
be required or permitted to give hereunder shall be deemed given, when
delivered or if and when mailed by certified mail, return receipt requested,
postage prepaid, addressed to the party to whom given at the address set
forth below, or such other addresses which may be designated by written
notice served on the other party, or by hand delivery, to the address below,
or by telecopy to the telecopy number provided below:
RACKSPACE: Rackspace, Ltd.
111 Soledad, Suite 1100
San Antonio, Texas 78205
Attention: Mr. Graham M. Weston
Telecopy: (210) 892-4329
FIRST INNING: Trango Capital, L.L.C.
970 Isom Road
San Antonio, Texas 78216
Attention: Mr. Quincy J. Lee
Telecopy: (210) 804-4394
10.4 Captions and arrangements used in this Agreement are for
convenience only, and shall not affect the interpretation of this Agreement.
10.5 This Agreement has been made and entered into and is performable in
Bexar County, Texas, and shall be construed under the laws of the State of
Texas, and venue shall be in Bexar County, Texas.
10.6 Any provision of this Agreement held by a Court of competent
jurisdiction to be invalid or enforceable shall not impair or invalidate the
remainder of the Agreement, and the effect thereof shall be confined to the
provision held to be invalid or enforceable.
10.7 This written Agreement constitutes the entire and complete
agreement between the parties hereto, and it is expressly understood that
there are no verbal understandings or agreements which may change the terms,
covenants, conditions herein set forth, and that no modification of this
Agreement and no waiver of any terms and conditions herein shall be effective
unless made in writing and duly executed by all of the parties hereto.
WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 6 OF 7 PAGES
<PAGE>
10.8 The terms, conditions and obligations of this Agreement shall inure
to the benefit of and shall be binding upon the parties hereto and their
respective heirs, legal representatives, predecessors, successors and assigns.
10.9 This Agreement may be executed in multiple counterparts, each of
which shall be an original, but all of which shall constitute one document.
It shall not be necessary that all parties hereto be signatory to the same
counterpart.
10.10 Each party shall pay all costs and expenses incurred or to be
incurred by it in negotiating and preparing this Agreement and in closing and
carrying the transactions contemplated by this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date hereinabove set out.
RACKSPACE:
RACKSPACE, LTD.,
a Texas limited partnership
By: MACROWEB, LC, a Texas limited
liability company, Sole General Partner
By: /s/ Graham Weston
------------------------------------
Its: manager
-----------------------------------
FIRST INNING:
TRANGO CAPITAL, L.L.C.,
a Texas limited liability company
By: /s/ Quincy J. Lee
-----------------------------------------
Quincy J. Lee, Manager
WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 7 OF 7 PAGES
<PAGE>
Exhibit 10.13
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and
entered into effective as of the 30th day of November, 1999, by and among
Rackspace, Ltd., a Texas limited partnership (the "Company"), and the
securities holders of the Company set forth on EXHIBIT A attached hereto
(such persons being referred to herein as the "Investors" and individually as
an "Investor").
WITNESSETH:
WHEREAS, each investor is acquiring Units of Limited Partners Interest
("Units") in the Company in accordance with the Second Amendment to Agreement
of Limited Partnership of the Company, dated effective November 30, 1999 (the
"Second Amendment"); and
WHEREAS, one of the Investors, First Inning Investors, L.P. ("First
Inning"), has the right to acquire additional Units pursuant to an Option
Agreement ("Option Agreement") to be entered into in accordance with the
Second Amendment; and
WHEREAS, another investor, The Hamilton Companies LLC ("Hamilton"), has
the right to acquire additional Units pursuant to an option ("Hamilton
Option") granted in the Second Amendment: and
WHEREAS the execution of this Agreement by the Investors is a condition
to the closing of the transactions contemplated by the Second Amendment; and
WHEREAS the Company has agreed to provide the Investors with certain
registration rights with respect to the Registrable Securities.
NOW THEREFORE, in consideration of the mutual covenants herein contained
and for other good and valuable consideration, the parties hereto hereby
agree as follows:
Section 1. CERTAIN DEFINITIONS. As used in this Agreement, the
following definitions shall apply:
"AFFILIATE" means a Person who directly or indirectly controls, is
controlled by, or is under common control with, the Person referred to. For
this purpose, "control" means the ability to direct or cause the direction of
the management or affairs of a Person, whether through the ownership of
voting securities, by contract or otherwise.
"COMMISSION" means the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
<PAGE>
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, or any similar successor federal statute, and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
"FAMILY AFFILIATE" means, with respect to any Investor, (i) a
natural Person who is a spouse, lineal descendent or spouse of a lineal
descendent, or any trust or family trust of which the investor or any of such
Persons is the trustee or a beneficiary (ii) a corporation, partnership,
limited partnership, limited liability company or other business entity if
and for so long as the Investor holds, directly or indirectly, equity
securities or interests in such entity having the right to elect a majority
of the members of the board of directors or other governing body or to
otherwise manage the affairs of the entity.
"HOLDER" means any holder of outstanding Registrable Securities;
provided, however, that for all purposes under this Agreement, the holder of
any Registrable Securities shall be deemed to be the Holder of the
Registrable Securities into which such Registrable Securities are then
convertible.
"PERSON" means any natural Person, any unincorporated organization
or association, and any partnership limited liability company, corporation,
estate, trust, nominee, custodian or other individual or entity.
The terms "REGISTER", REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (and any post-effective amendments thereto
filed or required to be filed), and the declaration or ordering of the
effectiveness of such registration statement.
"REGISTRABLE SECURITIES" means: (i) the Units held by the Investors
issued pursuant to the Second Amendment, including any additional Units
acquired by the Investors by exercise of any preemptive rights or rights of
first refusal, (ii) the Units, if any, issued to First Inning pursuant to the
Option Agreement, (iii) the Units, if any, issued to Hamilton pursuant to the
Hamilton Option, and (iv) any securities of the Company issued or issuable,
directly or indirectly, in respect of by way of exchange for such Units held
by the Investors, together with any other securities which are issued with
respect thereto by way of any stock split, stock dividend, recapitalization,
reorganization, or similar event; PROVIDED, HOWEVER, that Registrable
Securities shall not include any Registrable Securities which have previously
been registered or sold to the public or which are eligible for sale to the
public under paragraph (k) of Rule 144 as defined below.
"REGISTRATION DATE" means the effective date of the first
registration statement filed by the Company for an offering of its securities
to the general public, or the date on which the Company first becomes subject
to the registration requirements of Section 12(b) or Section 12(h) of the
Securities Exchange Act, whichever first occurs.
-2-
<PAGE>
"REGISTRATION EXPENSES" means all expenses incurred by the Company
in complying with registration obligations hereunder, including, without
limitation, all registration, qualification and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for the Company and
the reasonable fees and disbursements of not more than one counsel chosen by
the Holders who are the holders of a majority of Registrable Securities being
registered, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration (but excluding the
compensation of regular employees of the Company which shall be paid in any
event by the Company). Registration Expenses shall not include fees of
counsel for the Holders other than of one counsel as set forth above or
Selling Expenses as defined below.
"REQUISITE HOLDERS" means Holders of not less than 50% of the
Registrable Securities; except in the case of a Demand Registration for the
first registered offering of the Company's securities it means holders of not
less than 40% of the then outstanding equity securities of the Company.
"RESTRICTED SECURITIES" means the securities of the Company
required to bear the legend set forth in Section 2 hereof.
"RULE 144" means Rule 144 promulgated under the Securities Act, or
any similar successor rule, as the same shall be in effect from time to time.
"RULE 145" means Rule 145 promulgated under the Securities Act, or
any similar successor rule, as the same shall be in effect from time to time.
"RULE 415" means Rule 415 promulgated under the Securities Act, or
any similar successor rule, as the same shall be in effect from time to time.
"SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the sale of Registrable
Securities.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, as shall be in effect at the time.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended, and the rules, regulations and interpretations promulgated
thereunder.
Section 2. DEMAND REGISTRATION.
(a) REQUEST FOR REGISTRATION. If, at any time after the first to
occur of (i) 180 days following the Registration Date or (ii) the third
anniversary of this Agreement, the Company shall receive from the Requisite
Holders a written request that the Company effect the registration under the
Securities Act of the resale of Registrable Securities held by such Requisite
Holders (a "Demand Registration"), then The Company shall:
-3-
<PAGE>
(i) promptly give written notice of the proposed registration
to all other Holders; and
(ii) use its best efforts to effect, as soon as practicable,
the registration under the Securities Act (including, without limitation, by
means of a shelf registration pursuant to Rule 415 under the Securities Act
if so requested and if the Company is then eligible to use such a
registration) of the Registrable Securities which the Company has been so
requested to register, together with all or such portion of the Registrable
Securities of any Holders joining in such request as are specified in a
written request received by the Company within 20 days after the Company
mails such written notice in accordance with the registration procedures set
forth in Section 7 hereof;
PROVIDED, HOWEVER, that the Company shall not be obligated to take any action
to effect any such registration under the Securities Act:
(A) after the Company has effected one such registration
pursuant to this Section 2 which have been declared or ordered
effective and pursuant to which securities have been sold; or
(B) if such request is for a shelf registration pursuant to Rule
415 of the Securities Act and is in connection with the first
registration statement filed by the Company.
Subject to the foregoing clauses (A) and (B) the Company shall file
a registration statement covering the Registrable Securities so requested to
be registered as soon as practicable, and in any event within 120 days, after
receipt of the request or requests of the Requisite Holders; PROVIDED,
HOWEVER, that if the Company shall furnish to such Holder a certificate
signed by the president of the Company stating that in the good faith
judgment of the board of directors of the Company, it would be seriously
detrimental to the Company or its shareholders for such registration
statement to be filed on or before the date filing would be required and it
is therefore essential to defer the filing of such registration statement,
the Company shall have the right to defer such filing for a reasonable period
not to exceed 90 days. The Company's right to delay such registration as set
forth in the previous sentence may only be exercised one time during any
twelve month period.
(b) PRIORITY ON UNDERWRITTEN DEMAND REGISTRATIONS. If the
Requisite Holders so elect, the offering of such Registrable Securities
pursuant to such Demand Registration shall be in the form of an underwritten
offering. In such event, if the managing underwriter or underwriters of the
Demand Registration advise the Company and the Requisite Holders in writing
that the total amount of Registrable Securities requested to be included in
such offering would exceed the maximum amount of securities which can be
marketed at a price reasonably related to the current fair market value of
such securities without adversely affecting such offering (the "Underwriters
Maximum Number"), the Company will be required to include in such
registration to the extent of the Underwriters Maximum Number: FIRST, the
Registrable Securities requested to be included in such registration by the
Holders thereof, allocated PRO RATA among such Holders on the basis of the
-4-
<PAGE>
number of Registrable Securities requested to be included therein by each
such Holder; and SECOND, any equity securities requested to be included in
such registration by the Company and any other holders of such securities,
allocated as determined by the Company subject to any agreements between the
Company and any such holders.
(c) SELECTION OF UNDERWRITERS. The managing underwriter or
underwriters to be used in connection with such registration shall be
selected by the Requisite Holders holding a majority of the Registrable
Securities being registered. The Company shall have the right to approve the
selection of any such underwriters, which approval shall not be unreasonably
withheld.
(d) UNDERWRITING AGREEMENTS. The Company shall (together with all
Holders selling Registrable Securities) enter into an underwriting agreement
in customary form with the managing underwriter selected for such
underwriting by a majority in interest of the Requisite Holders, and each
Holder selling Registrable Securities shall participate in such underwriting.
(e) WITHDRAWAL FROM UNDERWRITING. If any Holder of Registrable
Securities disapproves of the terms of the underwriting, such person may
elect to withdraw therefrom by written notice to the Company, the managing
underwriter and the Requisite Holders. The Registrable Securities and/or
other securities so withdrawn shall also be withdrawn from registration, and
such Registrable Securities shall not be transferred in a public distribution
prior to 90 days after the effective date of such registration, or such other
shorter period of time as the underwriters may require. If by the withdrawal
of such Registrable Securities a greater number of Registrable Securities
held by other Holders may be included in such registration (up to the maximum
of any limitation imposed by the underwriters), then the Company shall offer
to all Holders who have included Registrable Securities in the registration
the right to include additional Registrable Securities in the same proportion
and manner used in determining the underwriter limitation in this Section 2.
(f) INCLUSION AS A DEMAND REGISTRATION. For purposes of this
Section 2, a registration will not count as a Demand Registration until it
has become effective; PROVIDED, HOWEVER, if the Requisite Holders withdraw
their Registrable Securities (whether before or after the effectiveness of
such registration), such demand will count as a Demand Registration for
purposes of this Section 2 unless the Requisite Holders pay all of the
Registration Expenses associated with such attempted registration.
(g) RIGHTS OF OTHER SECURITIES HOLDERS JOINING DEMAND. In order
for the Requisite Holders to make a Demand Registration that would result in
the First public offering of the securities of the Company, it will be
necessary to have other equity securities holders of the Company (as selected
in the discretion of the Investors) join the Investors in making such demand.
In such event, the holders of Company securities joining the Investors in
that Demand Registration shall be entitled to participate in that particular
registration on the same basis as the Investors.
-5-
<PAGE>
Section 3. PIGGYBACK REGISTRATION.
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. Whenever the Company
proposes to register the sale of any of its equity securities under the
Securities Act other than on Form S-4 or Form S-8 promulgated under the
Securities Act or any similar form then in effect, the Company shall give
written notice thereof to each Holder as soon as practicable (but in any
event at least 30 days before such filing), offering such Holder the
opportunity to register on such registration statement such number of
Registrable Securities as such Holder may request in writing, subject to the
provisions of section 3(b), not later than 20 days after the date of the
giving of such notice (a "Piggyback Registration"). Upon receipt by the
Company of any such request, the Company shall use reasonable efforts to, or
in the case of an underwritten offering, to cause the managing underwriter or
underwriters to, include such Registrable Securities in such registration
statement (or in a separate registration statement concurrently filed) and to
cause such registration statement to become effective with respect to such
Registrable Securities in accordance with the registration procedures set
forth in Section 7 hereof. If the Company's registration is to be effected
pursuant to an underwritten offering, Registrable Securities registered
pursuant to this Section 3 shall be distributed in accordance with such
offering. Notwithstanding the foregoing, if at any time after giving written
notice of its intention to register its equity securities and before the
effectiveness of the registration statement filed in connection with such
registration, the Company determines for any reason either not to effect such
registration or to delay such registration, the Company may, at its election,
by delivery of written notice to each Holder (A) in the case of a
determination not to effect registration, relieve itself of its obligation to
register the Registrable Securities in connection with such registration or
(B) in the case of a determination to delay registration, delay the
registration of such Registrable Securities for the same period as the delay
in the registration of such other equity securities. Each Holder requesting
inclusion in a registration pursuant to this Section 3 may, at any time
before the effective date of the registration statement relating to such
registration, revoke such request by delivering written notice of such
revocation to the Company (which notice shall be effective only upon receipt
by the Company); PROVIDED, HOWEVER, that if the Company, in consultation with
its financial and legal advisors, determines that such revocation would
materially delay the registration or otherwise require a recirculation of the
prospectus contained in the registration statement, then such holder shall
have no right to so revoke its request.
(b) PRIORITY IN PIGGYBACK REGISTRATION. Notwithstanding the
foregoing, with respect to any primary registration that is underwritten and
with respect to which the managing underwriter or underwriters advise the
Company of an Underwriters Maximum Number, then the Company will so notify
all Holders requesting inclusion in such registration and will be required to
include in such registration, to the extent of the Underwriters Maximum
Number: FIRST, any equity securities that the Company proposes to sell for
its own account (up to the Underwriters Maximum Number); SECOND, the
Registrable Securities requested by Holders to be included in such
registration allocated PRO RATA with any other holders of equity securities
having piggyback registration rights on the basis of the number of securities
requested to be included therein by each such holder; and THIRD, to the
extent that the Underwriters Maximum Number has not been filled by the
application of the preceding clauses, any further equity securities that the
Company proposes to sell for its own account and/or
-6-
<PAGE>
any equity securities requested to be included in such registration by other
holders of such securities, allocated as determined by the Company subject to
agreements between the Company and any such holders.
(c) SELECTION OF UNDERWRITERS. If any Piggyback Registration is in
the form of an underwritten offering, the managing underwriter or
underwriters and any additional investment bankers and managers to be used in
connection with such registration shall be selected by the Company (subject
to any separate agreement with the holders on behalf of which a secondary
underwritten offering is being made). The selection of such underwriters
shall also be subject to the approval by the Holders participating in such
underwritten offering holding a majority of the Registrable Securities being
registered, which approval shall not be unreasonably withheld.
(d) UNDERWRITING AGREEMENTS. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company and
the other holders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by the Company, and each Holder selling
Registrable Securities shall participate in such underwriting.
(e) WITHDRAWAL FROM UNDERWRITING. If any Holder or other holder
disapproves of the terms of any such underwriting, he may elect to withdraw
therefrom by written notice to the Company and the managing underwriter. Any
securities excluded or withdrawn from such underwriting shall be withdrawn
from such registration, and shall not be transferred in a public distribution
prior to 180 days after the effective date of the registration statement
relating thereto, or such other shorter period of time as the underwriters
may require.
(f) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 3 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration.
Section 4. MARKET STANDOFF. If the Company at any time shall
register the offer and sale of shares of Common Stock to the public under the
Securities Act (including any registration pursuant to Sections 2 or 3), the
Holders shall not sell publicly, make any short sale of, grant any option for
the purchase of, or otherwise dispose publicly of, any Registrable Securities
(other than those shares of Common Stock included in such registration
pursuant to Sections 2 or 3) without the prior written consent of the Company
for a period designated by the Company in writing to the Holders, which
period shall begin not more than 10 days prior to the effectiveness of the
registration statement pursuant to which such public offering shall be made
and shall not last more than 180 days after the effective date of such
registration statement. The Company shall obtain the agreement of any person
permitted to sell shares of stock in a registration to be bound by and to
comply with this Section 4 as if such person was a Holder hereunder.
Section 5. EXPENSES OF REGISTRATION. All Registration Expenses
incurred in connection with the one Demand Registration and the Piggyback
Registrations shall be borne by the Company. All
-7-
<PAGE>
Selling Expenses relating to securities so registered as well as all
Registration Expenses relating to Demand Registrations and Piggyback
Registrations not required to be borne by the Company shall be borne by the
holders of such securities pro rata on the basis of the number of shares of
securities so registered on their behalf.
Section 6. REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions of Section 2 or 3 hereof to use its best efforts
to effect promptly the registration of Registrable Securities, the Company
shall:
(a) Prepare and file with the Commission a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become and remain effective as provided herein;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective and current and to comply with the provisions of the Securities Act
with respect to the sale of or other disposition of all Registrable
Securities covered by such registration statement, including such amendments
and supplements as may be necessary to reflect the intended method of
disposition of the prospective seller or sellers of such Registrable
Securities, but for no longer than one hundred eighty (180) days subsequent
to the effective date of such registration in the case of a registration
statement on Form S-1 (or any similar form of registration statement required
to set forth substantially identical information) and for no longer than one
hundred twenty (120) days in the case of a registration statement on Form
S-3; PROVIDED, HOWEVER, that (i) such period shall be extended for a period
of time equal to the period the Holder refrains from selling any securities
included in such registration at the request of an underwriter of Common
Stock (or other securities) of the Company; and (ii) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such period shall be extended, if
necessary, to keep the registration statement effective until all such
Registrable Securities are sold, provided that Rule 415 permits an offering
on a continuous or delayed basis, and provided further that applicable rules
under the Securities Act governing the obligation to file a post-effective
amendment permit, in lieu of filing a post-effective amendment that (I)
includes any prospectus required by Section 10(a)(3) of the Securities Act or
(II) reflects facts or events representing a material or fundamental change
in the information set forth in the registration statement, the incorporation
by reference of information required to be included in (I) and (II) above to
be contained in periodic reports filed pursuant to Section 13 or 15(d) of the
Exchange Act in the registration statement;
(c) Furnish to each prospective seller of Registrable Securities
such number of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other
documents, as such seller may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Securities of such seller;
-8-
<PAGE>
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or incomplete in the light of
the circumstances then existing, and at the request of any such seller,
prepare and furnish to such seller a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that,
as thereafter delivered to the purchasers of such shares, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange or approved for quotation
on any inter-dealer quotation system on which similar securities issued by
the Company are then listed or quoted;
(f) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP
number of all such Registrable Securities, in each case not later than the
effective date of such registration;
(g) Use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions
as any Holder may reasonably request and do any and all other acts and things
which may be reasonably necessary or advisable to enable any Holder to
consummate the disposition in such jurisdictions of the Registrable
Securities owned by such Holder; PROVIDED, HOWEVER, that the Company will not
be required to qualify generally to do business, subject itself to general
taxation or consent to general service of process in any jurisdiction where
it would not otherwise be required to do so but for this paragraph (g);
(h) Use its best efforts to cause such Registrable Securities to
be registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and operations of
the Company to enable each Holder holding such Registrable Securities to
consummate the disposition of such Registrable Securities;
(i) Subject to the execution of confidentiality agreements in form
and substance satisfactory to the Company, make available upon reasonable
notice and during normal business hours, for inspection by each Holder
holding such Registrable Securities, any underwiter participating in any
disposition pursuant to such registration statement and any attorney,
accountant or other agent retained by any Holder or underwriter
(collectively, the "Inspectors"), all pertinent financial and other records,
pertinent corporate documents and properties of the Company as shall be
reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's officers, directors and employees to
supply all information reasonably requested by any such Inspector in
connection with such registration statement;
-9-
<PAGE>
(j) Use its best efforts to obtain from its independent certified
public accountants "cold comfort" letters in customary form and at customary
times and covering matters of the type customarily covered by cold comfort
letters;
(k) Use its best efforts to obtain from its counsel an opinion or
opinions in customary form;
(l) Issue to any underwriter to which any Holder holding such
Registrable Securities may sell shares in such offering certificates
evidencing such Registrable Securities;
(m) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering
the period of at least twelve months, but not more than eighteen months,
beginning with the first month after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act;
(n) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 2 hereof, enter into an
underwriting agreement reasonably necessary to effect the offer and sale of
Common Stock, provided such underwriting agreement contains customary
underwriting provisions and provided further that if the underwriter so
requests the underwriting agreement will contain customary contribution
provision; and
(o) Use its best efforts to take all other steps necessary to
effect the registration of such Registrable Securities contemplated hereby.
Section 7. INDEMNIFICATION. In the event any of the Registrable
Securities are included in a registration statement under this Section:
(a) The Company will indemnify each Holder, each of such Holder's
officers and directors and partners (and each partner's officers, directors
and partners) and such Holder's separate legal counsel and independent
accountants, and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, and each underwriter, if any, and each
person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities
(or actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or
based on any untrue statement (or alleged untrue statement) of a material
fact contained, on the effective date thereof, in any registration statement,
any prospectus contained therein, or any amendment or supplement there to, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein (in
the case of a prospectus, in the light of the circumstances under which they
were made) not misleading, or any violation by the Company of any rule or
regulation promulgated under the Securities Act applicable to the Company in
connection with any such registration, qualification or compliance, and the
Company will reimburse each such Holder, each of its officers, directors and
partners (and each partner's
-10-
<PAGE>
officers, directors and partners) and such Holders' separate legal counsel
and independent accountants and each person controlling such Holder, each
such underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability
or action, provided that the Company will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder or underwriter and stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers and its legal counsel and independent accountants,
each underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities
Act, against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained, on the effective date thereof
in any such registration statement, any prospectus contained therein, or any
omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein (in the case of
a prospectus, in the light of the circumstances under which they were made)
not misleading, and will reimburse the Company, such Holders, such directors,
officers, persons, underwriters or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or defending
any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement or prospectus in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder and stated to be specifically for use therein; provided, however, that
the obligations of any such Holder hereunder shall be limited to an amount
equal to the proceeds to each such Holder of Registrable Securities sold as
contemplated herein.
(c) Each party entitled to indemnification under this Section (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 8 to the extent such
failure is not prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any
-11-
<PAGE>
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
(d) If the indemnification provided for in this Section 8 is held
by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage or expense referred
to herein, then the Indemnifying Party, in lieu of indemnifying the
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party with respect to such loss, liability, claim, damage or
expense in the proportion that is appropriate to reflect the relative fault
of the Indemnifying Party and the Indemnified Party in connection with the
statements or omissions that resulted in such loss, liability, claim, damage
or expense, as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and the Indemnified Party shall he
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact or the omission (or alleged omission) to
state a material fact relates to information supplied by the Indemnifying
Party or by the Indemnified Party, and the parties, relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
Section 8. INFORMATION BY HOLDER. The Holder or Holders of
Registrable Securities included in any registration shall furnish to the
Company such information regarding such Holder or Holders and the
distribution proposed by such Holder or Holders as the Company may request in
writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section.
Section 9. RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Restricted Securities to the public without
registration, after such time as a public market exists for the Common Stock
of the Company, the Company shall use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, beginning 90
days after (i) the Registration Date, or (ii) the Company issues an offering
circular meeting the requirements of Regulation A under the Securities Act;
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Securities Exchange Act (at any time after it has become subject to such
reporting requirements); and
(c) Furnish to any Holder promptly upon request a written
statement as to its compliance with the reporting requirements of Rule 144
(at any time after 90 days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the
general public), and of the Securities Act and the Securities Exchange Act
(at any time after it has become subject to such reporting requirements), a
copy of the most recent annual or quarterly report
-12-
<PAGE>
of the Company, and such other reports and documents of the Company and other
information in the possession of or reasonably obtainable by the Company as a
Holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing a Holder to sell any such securities without
registration.
Section 10. ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause
the Company to register securities granted under this Agreement may be
assigned to a transferee or assignee in connection with the transfer or
assignment of shares of Registrable Securities (i) to a Family Affiliate of
the Holder, (ii) to Affiliates of the Holder, (iii) to the Company, (iv) to
Persons to whom the Registrable Securities are transferred by reason of the
Holder's death or involuntarily by operation of law, (v) pursuant to a
transfer approved by the Company in its sole and absolute discretion, or (vi)
to Persons to whom the Registrable Securities are transferred in accordance
with the transfer restriction provisions, if any, in the limited partnership
agreement, regulations, bylaws or other documents or agreements of Holder;
provided, however, that the Company is given written notice thereof.
Section 11. SUBSEQUENT PURCHASERS. Without the affirmative vote of
the Holders of at least 66-2/3% of the Registrable Securities, the Company
shall not grant to any purchaser of the Company's securities any demand
registration rights, or any piggyback registration rights that, with respect
to underwriters cutbacks, would be inconsistent or in conflict with the
provisions hereof. Moreover, for so long as the holders of the Registrable
Securities are entitled to exercise the registration rights described herein,
they shall receive the benefit of any and all registration rights granted by
the Company to any other person who is as of the date of this Agreement
securities holder in the Company (or any affiliate of such existing
securities holder) which are more favorable than the registration rights
granted to the Investors herein.
Section 12. TERM. This Agreement and all rights granted to the
investors hereunder shall expire on the seventh anniversary of the date on
which the first registration statement by the Company for an offering of its
securities to the general public is declared effective by the Commission.
Section 13. MISCELLANEOUS.
(a) NOTICES. Any notice or other communications required or
permitted hereunder shall be deemed to be sufficient if contained in a
written instrument delivered in person or by nationally-recognized overnight
courier or duly sent by First Class certified mail, postage prepaid, or by
telecopy addressed to such party at the address or telecopy number set forth
below or such other address or telecopy number as may hereafter be designated
in writing by the addressee to the addressor listing all parties:
-13-
<PAGE>
If to the Company: Rackspace, Ltd.
112 E. Pecan Street, Suite 600
San Antonio, Texas 78205
Telephone: (210) 892-4000
Facsimile: (210) 892-4329
Attn: Morris A. Miller
If to the Investors: Those addresses set forth next to each
Investor's name, as set forth in EXHIBIT A
(b) ENTIRE AGREEMENT; AMENDMENTS. This Agreement represents the
entire agreement of the parties hereto, and supersedes any other agreements
among the parties with respect to the subject matter hereof the terms and
provisions of this Agreement may not be modified or amended, or any of the
provisions hereof waived, except pursuant to the written consent of the
Company and holders of a majority of the Registrable Securities.
(c) ASSIGNMENT. This Agreement may not be assigned by any party
without the prior written consent of the other parties, except by a Holder in
accordance with Section 10 above. Any assignment which contravenes this
Section shall be void AB INITIO.
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an
original instrument, but all such counterparts together shall constitute but
one agreement.
(e) HEADINGS; INTERPRETATIONS. The headings of the various
sections of this Agreement have been inserted for convenience of reference
only and shall not be deemed to be a part of this Agreement. Whenever the
context requires, references in this Agreement to the singular number shall
include the plural and, likewise, the plural number shall include the
singular, and words denoting gender shall include the masculine, feminine and
neuter.
(f) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas without regard to
the principles of conflicts of law thereof.
(g) SEPARABILITY. In case any one or more of the provisions
contained in this Agreement or any application thereof shall be invalid,
illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and other
applications thereof shall not in any way be affected or impaired thereby.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-14-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration
Rights Agreement to be executed the day and date above written.
RACKSPACE, LTD.
By: Macroweb, LC
By: /s/ Graham M. Weston
-----------------------------
Graham M. Weston, Member
By: /s/ Morris A. Miller
-----------------------------
Morris A. Miller, Member
INVESTORS:
MACROWEB, LC
By: /s/ Graham M. Weston
------------------------------
Graham M. Weston, Member
By: /s/ Morris A. Miller
------------------------------
Morris A. Miller, Member
ISOM CAPITAL PARTNERS I, LTD.
By: BESK Funding Inc., General Partner
By: /s/ S. James Bishkin
------------------------------
S. James Bishkin, President
FIRST INNING INVESTORS, L.P.
By: Trango Capital L.L.C., General Partner
By: /s/ Quincy J. Lee
------------------------------
Quincy J. Lee, Manager
-15-
<PAGE>
MINIPAT & COMPANY, LTD.
By: /s/ Patrick Condon
----------------------------------
Title: President
-------------------------------
THE HAMILTON COMPANIES, LLC
By: /s/ Frederic Hamilton
----------------------------------
Title: President
-------------------------------
WESTON INVESTMENT INTERESTS, LLC
By: /s/ Graham M. Weston
----------------------------------
Title: member
-------------------------------
-16-
<PAGE>
MINIPAT & COMPANY, LTD.
By: /s/ Patrick Condon
----------------------------------
THE HAMILTON COMPANIES, LLC
By: /s/ Fredric C. Hamilton
----------------------------------
Title: President and Manager
-------------------------------
WESTON INVESTMENT INTERESTS, LLC
By: /s/ Graham Weston
----------------------------------
Title: Member
-------------------------------
-16-
<PAGE>
EXHIBIT A
INVESTORS
1. Macroweb LC
111 Soledad, Suite 1100
San Antonio, TX 78205
Attn.: Graham Weston
2. Isom Capital Partners I, Ltd.
c/o BESK Funding, Inc., its General Partner
970 Isom Road
San Antonio, TX 78216
Attn.: S. James Bishkin, President
3. First Inning Investors, L.P.
c/o Trango Capital L.L.C., its General Partner
970 Isom Road
San Antonio, TX 78216
Attn.: Quincy J. Lee
4. MiniPat & Company, Ltd.
13515 West Avenue, No. 236
San Antonio, TX 78216
Attn.: Patrick Condon
5. The Hamilton Companies LLC
1560 Broadway, Suite 2200
Denver, CO 80202
Attn.: Lisa Ireland
6. Weston Investment Interests, LLC
111 Soledad, Suite 1100
San Antonio, TX 78205
Attn.: Graham Weston
<PAGE>
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
This Amendment to Registration Rights Agreement is made this 22nd day
of February, 2000, by and among Rackspace, Ltd., a Texas limited partnership,
Macroweb, LC, Trout, Ltd., Isom Capital Partners I, Ltd., First Inning
Investors, L.P., MiniPat & Company, Ltd., The Hamilton Companies LLC, Weston
Investment Interest, L.L.C., and 2M Technology Ventures, L.P.
The parties hereby amend the Registration Rights Agreement dated
November 30, 1999 to include as an "Investor", Hamilton that has acquired an
additional 238,095.24 Class C Units, and 2M Technology Ventures, L.P. that has
acquired 119,047.62 Class C Units. In addition, as specified by the Second
Amendment to the Agreement of Limited Partnership of Rackspace, Ltd., the
parties acknowledge that Trout, Ltd. is also included as an Investor rather than
Macroweb, LC.
RACKSPACE, LTD.
By: Macroweb, LC, general partner
By: /s/ Graham M. Weston
--------------------------------
By: /s/ Morris A. Miller
--------------------------------
Member
Macroweb, LC
/s/ Morris A. Miller
--------------------------------------------
Morris A. Miller, Member
/s/ Graham M. Weston
--------------------------------------------
Graham M. Weston, Member
<PAGE>
Trout, Ltd.
By: Knightsbridge, L.C.,General Partner
By: /s/ Graham Weston
--------------------------------
Its: Member
-------------------------------
CLASS C LIMITED PARTNERS
Isom Capital Partners I, L.P.
By: BESK Funding, Inc., General Partner
By: /s/ S. James Bishkin
--------------------------------
S. James Bishkin
President
First Inning Investors, L.P.
By: Trango Capital L.L.C., General
Partner
By: /s/ Quincy J. Lee
--------------------------------
Quincy J. Lee, Manager
The Hamilton Companies LLC
By: /s/ Frederic Hamilton
-----------------------------------------
Weston Investment Interest, L.L.C.
By: /s/ Graham Weston
-----------------------------------------
Title: Member
--------------------------------------
<PAGE>
MiniPat & Company, Ltd.
By: /s/ Patrick Condon
-----------------------------------------
Title: President
--------------------------------------
2M Technology Ventures, L.P.
By: 2M Technology Group, L.L.C.
Its: General Partner
By: /s/ Steven D. Leeke
------------------------------
<PAGE>
Exhibit 10.14
PROMISSORY NOTE
$750,000.00 San Antonio, Texas November 30, 1999
FOR VALUE RECEIVED, the undersigned BEAULIEU RIVER CAPITAL LC, (FORMERLY
WESTON INVESTMENT INTERESTS, L.L.C.), a Nevada limited liability company
(herein called "MAKER", whether one or more), hereby promises to pay to the
order of RACKSPACE, LTD. a Texas limited partnership (herein together with all
subsequent holders hereof called "HOLDER") at its main office in San Antonio,
Bexar County, Texas, or at such other address as the Holder hereof may from
time to time designate in writing to Maker, the principal sum of $750,000.00,
or so much thereof as may be advanced, together with interest on the principal
balance from time to time remaining unpaid from the date of advance until paid
at the rate hereinafter provided. This Note is made in substitution of that
certain Note dated November 30, 1999 between Weston Investement Interest,
L.L.C. as Maker and Rackspace, Ltd. As Holder which provided for a Maturity
Date of January 5, 2000.
I. MATURITY DATE:
As used herein, the "MATURITY DATE" for this Note shall be February 18,
2000.
II. INTEREST RATE:
Prior to the Maturity Date, interest on the principal balance advanced
and outstanding shall accrue at the rate of eight percent (8.00%) per annum.
Interest on this Note shall be calculated on a daily rate equal to 1/365th of
the annual percentage rate herein provided.
III. PAYMENT OF PRINCIPAL AND INTEREST:
This Note shall be due and payable as follows, to-wit:
Principal and interest shall be due and payable in full on the Maturity
Date.
IV. PREPAYMENT:
Maker may prepay the principal of this Note in whole or in part at any
time or times without penalty.
V. SUCCESSORS AND ASSIGNS:
The terms and conditions hereof shall inure to the benefit of and be
binding upon the successors and assigns of the parties hereto.
(SIGNATURES ON NEXT PAGE)
IN WITNESS WHEREOF Maker has duly executed this Note as of the day and
year first above written.
<PAGE>
MAKER:
BEAULIEU RIVER CAPITAL LC
/s/ Graham M. Weston
-------------------------------
By: Graham M. Weston, Member
PAGE
<PAGE>
Exhibit 10.15
SECOND FINANCIAL COMMITMENT
This Second Financial Commitment is made effective the 29th day of
September, 1999 (the "Effective Date"), by Exeter Financial, LC, a Texas
limited liability company ("Lender"), for the benefit of Rackspace, Ltd., a
Texas limited partnership (the "Partnership").
Lender advanced $1,050,000 (the "Initial Loan") to the Partnership
pursuant to the commitment made under Credit Agreement dated December 29, 1998
between Lender and the Partnership (the "First Financial Commitment").
Contemporaneously with the execution of this Agreement, Lender
acknowledges to the Partnership that it will transfer and assign notes and
instruments representing $ 1,050,000.00 principal and $32,531.51 of accrued
interest of the Initial Loan to Trout, Ltd. (the "Assigned Debt"). In
consideration for the Partnership's agreement herein and separate
consideration made to its lender by Trout, Ltd. ("Trout") Lender has advanced
and agrees to commit to advance additional funds to the Partnership in order
to benefit both the Partnership and Trout, both of which share common owners
with Lender.
Now Therefore, for and in consideration of the mutual promises herein
made, the parties agree and represent as follows:
1. ASSIGNMENT OF CONVERTED DEBT AND AGREEMENT TO CONVERT DEBT TO
EQUITY. Lender represents and warrants that it has, contemporaneously with the
execution of this Agreement, assigned the notes and other instruments
representing the Assigned Debt to Trout. The Partnership represents and
warrants that simultaneously with the execution of this Agreement, it will
accept the Assigned Debt as a capital contribution by Trout under the terms of
the First Amendment to Agreement of Limited Partnership of Rackspace, Ltd., of
even date herewith.
2. FINANCIAL COMMITMENT. Lender agrees to advance the Partnership and
upon the Partnerships request, in one or more advances on or before March 31,
2000, of up to $500,000.00, which amount includes $225,000.00 which has
already been advanced by Lender so that an additional $275,000.00 is to be
advanced after the date hereof. The amounts advanced shall be evidenced by
promissory notes, each of which shall bear interest at a rate of 8% per annum
(compounded annually and added to principal), and shall be secured by all of
the assets of the Company. The note(s) shall not require any payments to be
made at any time prior to January 1, 2002. From and after January 1, 2002,
equal monthly payments of principal and interest shall be due on the first day
of each month in an amount necessary to amortize the outstanding principal
balance over the five year term of the note. The note shall mature on January
1, 2007.
[remainder of page left intentionally blank]
<PAGE>
EXETER FINANCIAL, LC RACKSPACE, LTD.
By:/s/ Morris Miller By: MACROWEB, LC, its general partner
-----------------
its: member By:/s/ Morris Miller
---------------- -----------------
Its: member
----------------
<PAGE>
RACKSPACE, LTD.
1999 UNIT OPTION PLAN
1. PURPOSE. This 1999 Unit Option Plan (the "Plan") is intended to
provide incentives to the employees of Rackspace, Ltd. or any successor to
Rackspace, Ltd. (the "Company"), its general partner, any future parent, and
any present or future subsidiaries of the Company (collectively, "Related
Entities"), by providing them with opportunities to purchase Class D Units in
the Company or any successor security of such Class D Units as the result of
the operation of paragraph 6 hereof (the "Units") pursuant to options granted
hereunder (the "Options"). The holders of Class D Units will have the rights
of an "assignee" of a Limited Partnership Interest and thus they will not
have any voting rights under the Agreement of Limited Partnership of
Rackspace, Ltd. (the "Partnership Agreement"), nor will they be will they
have any right which may only be exercised by Limited Partners, however, they
will be subject to all terms, conditions and restrictions contained in the
Partnership Agreement. Anything in this Plan to the contrary notwithstanding,
Options shall not be granted or awarded hereunder to any administrator or
administrators if such grant, award or purchase would cause such
administrator or administrators not to satisfy the "disinterested person"
requirements of Rule 16b-3, or any successor or amended rule ("Rule 16b-3"),
promulgated by the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended (the "1934 Act"). Nothing in this Plan
shall confer upon an Optionee any right to continue in service for any period
or duration or interfere with or otherwise restrict in any way the rights of
the Company or any Related Entity, which rights are hereby expressly
reserved, to terminate such person's employment at any time and for any
reason, with or without cause.
Recipients of Options are hereafter referred to individually as an
"Optionee" and collectively as "Optionees."
2. ADMINISTRATION OF THE PLAN. The Plan shall be administered (i) to
the extent required by Rule 16b-3, by an administrator or administrators in
compliance with Rule 16b-3, and (ii) in all other cases, by such
administrator or administrators as the general partner of the Company or the
board of directors of any successor of the Company (the "Board") may
designate or by the Board (collectively, the "Administrators"). Subject to
the terms of the Plan, the applicable Administrator shall have the authority
to (i) determine the employees of the Company and Related Entities to whom
Options may be granted; (ii) determine the option price of Units subject to
each Option; (iv) determine the time or times when each Option shall become
exercisable and the duration of the exercise period; (v) interpret the Plan
and prescribe and rescind rules and regulations relating to it. With respect
to persons subject to Section 16 of the 1934 Act, transactions under the Plan
are intended to comply with all applicable conditions of Rule 16b-3. To the
extent any provision of the Plan or action by the applicable Administrator
fails to so comply, it shall be deemed null and void, to the extent permitted
by law and deemed
<PAGE>
advisable by the applicable Administrator. The interpretation and
construction by the applicable Administrator of any provisions of the Plan or
of any Option granted under it shall be final unless otherwise determined by
the Board. Administrators or the Board may from time to time adopt such
rules and regulations for carrying out the Plan as they may deem best. No
member of the Board, any Administrator nor the Company shall be liable for
any action or determination made under the terms hereof with respect to the
Plan or any Option granted under it.
3. UNITS. The Units subject to the Options shall be authorized but
unissued Units. The aggregate number of Units which may initially be issued
pursuant to the Plan is six hundred thousand (600,000). The number of Units
authorized for the grant of Options under the Plan shall be subject to
adjustment as provided in paragraph 6. If any Option granted under the Plan
shall expire or terminate for any reason without having been exercised in
full or shall cease for any reason to be exercisable in whole or in part, the
un-purchased Units subject to such Options shall again be available for
grants of Units under the Plan to the extent permitted by Rule 16b-3.
4. TERMS OF OPTIONS.
A. MINIMUM OPTION PRICE. The price per Unit specified in the
agreement relating to each Option granted under the Plan shall not be less
than the fair market value per Unit on the date of such grant. If, at the
time an Option is granted under the Plan, the Units are publicly traded,
"fair market value" shall be determined as of the last business day for which
the prices or quotes discussed in this sentence are available prior to the
date such Option is granted and shall mean (i) the last reported sales price
of a Unit on the principal national securities exchange on which the Units
are traded, if the Units are then traded on a national securities exchange;
or (ii) the last reported sale price (on that date) of the Units on the
NASDAQ National Market List, if the Units are not then traded on a national
securities exchange; or (iii) the closing bid price (or the average of bid
prices) last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Units are not reported on the NASDAQ
National Market List. However, if the Units are not publicly traded at the
time an Option is granted under the Plan, "fair market value" shall be deemed
to be the greater of (a) the last purchase price of any Unit sold by the
Company in an arm's length negotiated transaction within 120 days previous to
the date that an Option is granted under the Plan, (b) the annualized revenue
of the Company using the revenues for the month preceding the date of grant
of an option (12 times the revenue for such previous month) times ten (10)
and divided by the number of Units of the Company then outstanding, or (c)
$50,000,000 divided by the number of Units of the Company then outstanding.
Provided, however, in the event the Administrator shall in good faith
determine that the above methods of determining the fair market value of
Units are unfair to either the Optionee or the Company, the fair market value
of the Units shall be as determined by the Administrator after taking into
consideration all
2
<PAGE>
factors which it deems appropriate, including, without limitation, the price
determined in any applicable public trading market, or any recent sale and
offer prices of units of interest in the Company in private transactions
negotiated at arm's length.
B. DURATION OF OPTIONS. Each Option shall expire on the date
specified by the applicable Administrator, but not more than ten (10) years
from the date of grant.
C. VESTING AND EXERCISE OF OPTIONS. Options shall vest as
follows: one third (1/3) of the aggregate Units under the Option on or after
the first anniversary of the date of its grant and an additional one third
(1/3) of such Units on each of the next following two anniversary dates of
its grant. The above notwithstanding, the Administrator shall have the right
to increase or decrease the vesting schedule specified above, and to the
extent it does so, such vesting schedule shall be specified in the Option.
Options which may be exercised according to the above vesting schedule
("Vested Options") may be exercised at anytime after six (6) years from the
date of grant, provided however, that such Vested Options may be exercised
earlier than six (6) years from the date of grant upon or after the first to
occur of (i) the effectiveness of the Company's initial public offering
("IPO"), or (ii) on or after a "Significant Transaction." "Significant
Transaction" means the sale of all or substantially all of the assets of the
Company, or a merger, business combination or a change in control through the
issuance or transfer of equity in the Company, wherein the equity owners of
the Company (whether partners, stockholders, members or otherwise)
immediately prior to the merger, combination or change in control, do not own
or control (directly or indirectly) at least 10% of the equity interest in
the Company or the successor company, as the case may be. As to outstanding
Vested Options, the Administrator may permit the exercise of such options
notwithstanding the failure to meet the IPO and Significant Transaction
requirements. The Company makes no representation that an IPO or Significant
Transaction will occur and shall have no obligation to seek to cause such
events to occur.
D. DATE OF GRANT AND EMPLOYEES ELIGIBLE FOR OPTIONS. Options
granted under this Plan shall be granted only to employees of the Company or
a Related Entity who have been so employed continuously as a full-time
employee for at least six (6) months. The above notwithstanding, with
respect to persons employed by the Company during 1999, the Administrator
shall have the right to deviate from this requirement (whether by an increase
or decrease in the number of months a person must be employed) without
amending this Plan. Options shall be granted on either December 31 or June
30 of each year, provided that the Administrator may grant Options on dates
other than on December 31 and June 30 if extenuating circumstances exist, as
determined by the Administrator.
E. LIMITATION OF UNITS UNDER OPTION TO A SINGLE OPTIONEE. No
Optionee shall be granted Options with aggregate
3
<PAGE>
exercise prices for all Units covered by such Options in excess of ten
percent (10%) of the annual base salary (exclusive of bonus and commission)
of the Optionee at the time of grant. The Administration may deviate from
this limit to the extent the circumstance requires.
F. OPTION TERMINATES WITH EMPLOYMENT. Upon the termination of the
Optionee's full time employment with the Company or a Related Entity, Options
held by the Optionee shall terminate except to the extent such Options are
Vested Options on the date of any such termination. All Vested Options which
may be exercised under the provisions of 4(C) above at the time of
termination of employment must be exercised, if at all, within 60 days
following any such termination of employment. If not exercised during such
sixty (60) day period, such Vested Options shall terminate. All Vested
Options which are not exercisable at the time of termination of employment
shall terminate on the 120th day following the date of termination of
employment, whether or not they become exercisable under the provisions of
4(C) above during such 120 day period.
G. CAPITAL ACCOUNT UPON EXERCISE OF OPTION. Units issued upon
the exercise of an Option shall be issued with a capital account in the
Company (provided the Company upon such exercise is a partnership or other
entity for which capital accounts are maintained in respect of units of
ownership) which shall bear the same ratio to the total capital accounts in
the Company as the number of such Units issued upon such exercise bear to the
aggregate units of ownership in the Company then outstanding.
H. FORFEITURE FOR COMPETITION. If, at any time while the
Optionee remains an employee of the Company or after the Optionee's
termination of employment while any Option remains outstanding, the Optionee
provides services to a competitor of the Company or a Related Entity, whether
as an employee, officer, director, independent contractor, consultant, agent
or otherwise (engaging in "Competition"), then the Optionee's rights under
any Options outstanding shall terminate and be forfeited, subject only to a
determination by the Administrator to the contrary.
5. WRITTEN AGREEMENTS. Options shall be evidenced by instruments
(which need not be identical) in such forms as the applicable Administrator
may from time to time approve. Such instruments shall conform to such terms,
conditions and provisions as are applicable hereunder and may contain such
other terms and conditions and provisions as the applicable Administrator
deems advisable which are not inconsistent with the Plan, including
restrictions applicable to Units issuable upon exercise of Options. The
applicable Administrator may from time to time confer authority and
responsibility on one or more of its own members and/or one or more officers
of the Company or any general partner of the Company to execute and deliver
such instruments. The proper officers of the Company or any general partner
of the Company are authorized and
4
<PAGE>
directed to take any and all action necessary or advisable from time to time
to carry out the terms of such instruments.
6. ADJUSTMENTS. Upon the happening of any of the following described
events, an Optionee's rights with respect to Options granted to him
hereunder, shall be adjusted as hereinafter provided, unless otherwise
specifically provided, in addition or to the contrary, in the written
agreement between the recipient and the Company relating to such Option.
A. CERTAIN CORPORATE EVENTS. In the event Units shall be
subdivided or combined into a greater or smaller number of units of
participation in the Company or if, upon a merger, consolidation,
reorganization, split-up, liquidation, combination, recapitalization, the
distribution of units of ownership interest, stock or other participation
rights as a distribution upon or with respect to Units or the like of the
Company, the Units shall be exchanged for other securities of the Company or
of another entity, each grantee of an Option shall be entitled, subject to
the conditions herein stated, to purchase upon exercise of the Option (or
have used for measurement purposes) such number of such units of
participation or amount of other securities of the Company or such other
entity as were exchangeable for the number of Units which such grantee would
have been entitled to purchase (or have used for measurement purposes) except
for such action, and appropriate adjustments shall be made in the purchase
price per Unit to reflect such subdivision, combination or exchange. In the
event any of the foregoing events should occur and the entity the securities
of which would be issuable under an Option as the result of the operation of
this subparagraph C of this paragraph 6 is not bound and chooses not to be
bound under the provisions of this Plan or any Option, and the Company is not
a reporting company under the Securities and Exchange Act of 1934, the
Administrators shall determine the rights of the Optionee under the Option,
which may include termination of the Option. If the surviving entity does
not agree to recognize the Options and (i) the transaction meets the
definition of a Significant Transaction, or (ii) the Company is otherwise a
reporting company under the Securities and Exchange Act of 1934, holders of
Vested Options are required to exercise their Options, if at all, within
sixty (60) days after the Significant Transaction or other event involving
this subparagraph A and any exercise during such 60 days shall be deemed to
have occurred on the date previous to such Significant Transaction or other
event.
B. NEW SECURITIES. If any person or entity owning Units obtained
by exercise of an Option receives new or additional or different interests or
securities ("New Securities") in connection with a transaction described in
subparagraph A above or a distribution described in subparagraph A above as a
result of owning such Units, such New Securities shall be subject to all of
the conditions and restrictions applicable to the Units with respect to which
such New Securities were issued.
5
<PAGE>
C. CASH DISTRIBUTIONS. No adjustments in a Unit shall be made
for distributions paid in cash or in property other than interests in the
Company, unless specified to the contrary by the applicable Administrator in
the instrument evidencing such Unit.
D. FRACTIONAL UNITS. No fractional Units shall actually be
issued under an Option. Any fractional Units which, but for this
subparagraph D, would have been issued to a grantee pursuant to an Option
shall be deemed to be a whole Unit.
E. ADJUSTMENTS. Upon the happening of any of the foregoing
events described in subparagraphs A or B above, the class and aggregate
number of Units set forth in paragraph 3 hereof that are subject to Options
which previously have been or subsequently may be granted under the Plan
shall also be appropriately adjusted to reflect the events described in such
subparagraphs. The Board shall determine the specific adjustments to be made
under this paragraph 6 and its determination shall be conclusive.
7. MEANS OF EXERCISING OPTIONS AND DENIAL OF RIGHTS AS UNIT HOLDER.
An Option(or any part or installment thereof) shall be exercised as specified
in the written instrument granting such Option, which instrument may specify
any legal method of exercise. The holder of an Option exercisable for Units
shall not have the rights of a holder of Units with respect to the Units
covered by his Option until the date of issuance of a certificate to him
representing such Units. Except as expressly provided above in paragraph 6
with respect to changes in capitalization and distributions in interests, no
adjustment shall be made for distributions or similar rights for which the
record date is before the date such Unit certificate is issued.
8. TRANSFERABILITY OF OPTIONS. Except as otherwise provided in the
Plan, no Option granted under the Plan shall be transferrable by an Optionee
other than by will or the laws of descent and distribution. Any Option
purported to be transferred to the spouse or former spouse of an Optionee
pursuant to any court order or decree or settlement agreement issued or
entered into incident to any divorce action shall terminate, whether or not
any such court order or decree or settlement agreement purports to merely
recognize or document a community interest of such spouse or former spouse.
9. TERMINATION; AMENDMENT. The Board may terminate or amend the Plan
in any respect at any time.
10. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of an
Option, the Company, in accordance with Section 3402(a) of the Internal
Revenue Code, may require the Optionee, purchaser, or holder or exerciser of
an Option to pay additional withholding taxes in respect of the amount that
is considered compensation includable in such person's gross income. In
addition, each Optionee, no later than the date as of which the value of a
grant or of any Unit or other amount received thereunder first becomes
includable in the gross
6
<PAGE>
income for the Optionee for Federal income tax purposes, shall pay to the
Company, or make arrangements satisfactory to the Administrator regarding
payment of any Federal, state, or local taxes of any kind required by law to
be withheld with respect to such income. The Administrator may permit
payment of taxes to be made through tender of cash or securities, the
withholding of securities or cash to be received or any other arrangement
satisfactory to the Administrator. The Company, to the extent permitted by
law, shall have the right to deduct any such taxes from any payment of any
kind otherwise due to the Optionee.
11. COMPANY'S RIGHT OF FIRST REFUSAL AND OTHER RESTRICTIONS ON TRANSFER OF
UNITS.
(A) RIGHT OF FIRST REFUSAL AND RESTRICTION ON TRANSFER. No
transfer of Units, other than a "Permitted Transfer" as defined in 11(D)
below, may be made within twenty-four (24)months of the date the Unit holder
first become a full-time employee of the Company. After such 24 month
period, in the event that the Optionee proposes to sell, pledge or otherwise
transfer to a third party any Units acquired under an Option, or any interest
in such Units, the Company shall have a Right of First Refusal with respect
to all (and not less than all) of such Units. If the Optionee desires to
transfer Units acquired under an Option, the Optionee shall give a written
notice (the "Transfer Notice") to the Company describing fully the proposed
transfer, including the number of Units proposed to be transferred, the
proposed transfer price, the name and address of the proposed transferee (the
"Transferee") and proof satisfactory to the Company that the proposed sale or
transfer will not violate any applicable federal or state securities laws.
The Transfer Notice shall be signed both by the Optionee and by the proposed
Transferee and must constitute a binding commitment of both parties to the
transfer of the Units. The Company shall have the right to purchase all, and
not less than all, of the Units on the terms of the proposal described in the
Transfer Notice (subject, however, to any change in such terms permitted
under Subsection(B) below) by delivery of a notice of exercise of the Right
of First Refusal within 30 days after the date when the Transfer Notice was
received by the Company. The Company's rights under this Subsection(A) shall
be freely assignable, in whole or in part.
(B) TRANSFER OF UNITS. If the Company fails to exercise its Right
of First Refusal within 30 days after the date when it received the Transfer
Notice, the Optionee may, not later than 90 days following receipt of the
Transfer Notice by the Company, conclude a transfer of the Units subject to the
Transfer Notice on the terms and conditions described in the Transfer Notice,
provided that any such sale is made in compliance with applicable federal and
state securities laws and not in violation of any other contractual restrictions
to which the Optionee is bound, including any restriction
7
<PAGE>
against transfer contained in the Partnership Agreement. Any proposed
transfer on terms and conditions different from those described in the
Transfer Notice, as well as any subsequent proposed transfer by the Optionee,
shall again be subject to the Right of First Refusal and shall require
compliance with the procedure described in Subsection (A) above. If the
Company exercises its Right of First Refusal, the parties shall consummate
the sale of the Units on the terms set forth in the Transfer Notice within 60
days after the date when the Company received the Transfer Notice (or within
such longer period as may have been specified in the Transfer Notice);
provided, however, that in the event the Transfer Notice provided that
payment for the Units was to be made in a form other than cash or cash
equivalents paid at the time of transfer, the Company shall have the option
of paying for the Units with cash or cash equivalents equal to the present
value of the consideration described in the Transfer Notice.
(C) TERMINATION OF RIGHT OF FIRST REFUSAL. Any other provision of
this Paragraph 11 notwithstanding, in the event that the Units are readily
tradable on an established securities market when the Optionee desires to
transfer Units, the Company shall have no Right of First Refusal, and the
Optionee shall have no obligation to comply with the procedures prescribed by
Subsections (A) and (B) above, provided that such transfer takes place not
less than 24 months from the date the Optionee first became a full-time
employee of the Company.
(D) PERMITTED TRANSFERS. This Paragraph 11 shall not apply to (i)
a transfer by beneficiary designation, will or intestate succession or (ii) a
transfer to the Optionee's spouse, children or to a trust established by the
Optionee for the benefit of the Optionee or the Optionee's spouse, children
or grandchildren, provided in either case that the Transferee agrees in
writing on a form prescribed by the Company to be bound by all provisions of
this Plan or the Option, including but not limited to the Right of First
Refusal and the restriction against transfer for a period of 24 months from
the date the Optionee first became a full-time employee of the Company. If
the Optionee transfers any Units acquired under this Plan and the Option,
either under this Subsection (D) or after the Company has failed to exercise
the Right of First Refusal, then this Paragraph 11 shall apply to the
Transferee to the same extent as to the Optionee.
(E) TERMINATION OF RIGHTS AS UNITHOLDER. If the Company makes
available, at the time and place and in the amount and form provided in this
Option, the consideration for the Units to be purchased in accordance with
this Paragraph 11, then after such time the person from whom such Units are
to be purchased shall no longer have any rights as a holder of such Units
(other than the right to receive payment of such consideration in accordance
with this Option). Such Units shall be deemed to have been purchased in
accordance with the applicable provisions hereof, whether or not the
certificate(s) therefor have been delivered as required by this Option.
8
<PAGE>
(F) SECURITIES LAW RESTRICTIONS. Regardless of whether the
offering and sale of Units under the Plan have been registered under the
Securities Act of 1933 or have been registered or qualified under the
securities laws of any state, the Company at its discretion may impose
restrictions upon the sale, pledge or other transfer of such Units (including
the placement of appropriate legends on stock certificates or the imposition
of stop-transfer instructions) if, in the judgment of the Company, such
restrictions are necessary or desirable in order to achieve compliance with
the Securities Act of 1933, the securities laws of any state or any other law.
(G) MARKET STAND-OFF. In connection with any underwritten public
offering by the Company of its equity securities pursuant to an effective
registration statement filed under the Securities Act of 1933, including the
Company's initial public offering, the Optionee shall not directly or
indirectly sell, make any short sale of, loan, hypothecate, pledge, offer,
grant or sell any option or other contract for the purchase of, purchase any
option or other contract for the sale of, or otherwise dispose of or
transfer, or agree to engage in any of the foregoing transactions with
respect to, any Units acquired under this Option without the prior written
consent of the Company or its underwriters. Such restriction (the "Market
Stand-Off") shall be in effect for such period of time following the date of
the final prospectus for the offering as may be requested by the Company or
such underwriters. In order to enforce the Market Stand-Off, the Company may
impose stop-transfer instructions with respect to the Units acquired under
this Agreement until the end of the applicable stand-off period.
12. COMPANY'S RIGHT TO PURCHASE UNITS.
(A) COMPANY'S RIGHT TO PURCHASE UNITS IN EVENT OF TERMINATION OF
EMPLOYMENT OR IN THE EVENT OF COMPETITION. The Company shall have the right
to purchase any Units acquired by an Optionee under Options granted under
this Plan in the event that the Optionee is (i) terminated for "cause", (ii)
after being continuously employed by the Company for less than 24 months,
resigns or is terminated without "cause", (iii) becomes disabled or dies
after being continuously employed by the Company for less than 24 months, or
(iv) in the event that the Optionee engages in Competition (as defined in
4(H) above) during his/her employment or anytime thereafter. The purchase
price for the Units shall be the exercise price paid by the Optionee plus an
amount necessary to provide an annualized 10% rate of return from the date
the Option was exercised. However, in the event that the Optionee's
employment is terminated without "cause," Optionee dies or becomes disabled,
and at such time the Company is a reporting company under Securities and
Exchange Act of 1934, the Company shall have a right to purchase any Units
acquired by the Optionee under Options granted under this Plan for a purchase
price equal to the fair market value of the Units determined on the date of
termination in accordance with Section 4(A) above (Minimum Option Price).
For the purposes hereof, termination for "cause" shall mean
9
<PAGE>
termination of employment by the Company made on the basis of the conduct
(whether acts or omissions) or performance of the Optionee. The Administrator
shall have the sole right to make the determination of whether or not the
termination is for "cause."
(B) EXERCISE OF RIGHT OF PURCHASE. If the Company desires to
exercise its right to purchase such Units, it shall within 120 days after the
date employment is ended (i) deliver a notice of exercise to the last known
address of the Optionee, and (ii) make available at the offices of the
Company, a check in the amount of the purchase price for the Units.
(C) TERMINATION OF RIGHTS AS UNITHOLDER. If the Company makes
available, at the time and place and in the amount and form provided the
consideration for the Units to be purchased in accordance with this Paragraph
12, then after such time the person from whom such Units are to be purchased
shall no longer have any rights as a holder of such Units (other than the
right to receive payment of such consideration in accordance with this
Option). Such Units shall be deemed to have been purchased in accordance with
the applicable provisions hereof, whether or not the certificate(s) therefor
have been delivered as required by this Option.
13. GOVERNING LAW; CONSTRUCTION. The validity and construction of the
Plan and the instruments evidencing Options shall be governed by the laws of
the State of Texas. In construing this Plan, the singular shall include the
plural and the masculine gender shall include the feminine and neuter, unless
the context otherwise requires.
14. NO LIMITATIONS ON COMPANY'S RIGHT TO GRANT OPTIONS. Nothing in
this Plan is intended to limit the right of the Company to issue options to
purchase Units or any other security with terms inconsistent with or in
addition to the terms described above.
15. PROVISION FOR PAYMENT. To the extent that the exercise of an
Option relates back to a Significant Transaction, the Company shall make
adequate provision to ensure that the Optionee receives the securities, cash
or other item of value, which it would have received had he/she become a Unit
holder on the date of the Significant Transaction.
16. PARTNERSHIP GOVERNING INSTRUMENT. This Plan is and shall remain
subject to the terms of the Agreement of Limited Partnership of Rackspace,
Ltd. as the same may be amended from time to time. As a condition to issuing
any Units under any Option granted under this Plan, the Administrator shall
require the Optionee to become a signatory to the Agreement of Limited
Partnership of Rackspace, Ltd., as the same may be amended from time to time.
However, the Optionee shall have the rights of an assignee only and shall
not have the rights of a Limited Partner. Furthermore, as Class D Unit
holders,
10
<PAGE>
they will not have any voting rights, pre-emptive rights, rights to review
the books and records of the Company, rights to receive reports from the
Company or any other right of a Limited Partner other than the right to
receive the distributions and allocations from the Company at such times as
those distributions and allocations may be made.
11
<PAGE>
Exhibit 10.17
FORM OF NON-STATUTORY UNIT OPTION AGREEMENT
THIS OPTION AGREEMENT is made as of the 15th day of February, 2000,
by and between Rackspace, Ltd., a Texas Limited Partnership, with its
principal place of business in San Antonio, Bexar County, Texas (hereinafter
called the "Company"), and __________ (Employee), an employee of the Company
(hereinafter called the "Employee").
WHEREAS, the Company desires to afford the Employee an opportunity to
purchase Class D Limited Partnership Units (hereinafter called the "Units").
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth and Employee's employment by the Company, the parties hereto agree
as follows:
1. THE PLAN. This Option Agreement is subject to and shall be
governed by the terms and provisions of the Rackspace Ltd.
1999 Unit Option Plan (the "Plan"). Capitalized terms used in
the Option Agreement, which are used in the Plan, shall have
the same meanings established in the Plan. A copy of the Plan
has been provided to the Employee herewith and the receipt
and review of which is hereby acknowledged by the Employee.
2. GRANT OF OPTION. The Company hereby grants to the Employee
the right and option (hereinafter called the "Option" or
"Options") to purchase all or any part of an aggregate of
__________) Units on the terms and conditions hereinafter set
forth (subject to adjustment as provided in the Plan). The
date of grant is _________________.
3. PURCHASE PRICE. The purchase price of the Units covered by
the Option shall be $_____ per Unit (subject to adjustment as
provided in the Plan).
4. VESTING AND EXERCISE. Until this Option is terminated, the
Employee shall have the right to purchase all or a portion of
the Units subject to this Option at such times, and from time
to time, as is hereinafter set out. There is no obligation on
the Employee to purchase any of the Units subject to the
Option. The Option shall vest (and to the extent vested
become "Vested Options") as follows: one third (1/3) of the
aggregate Units under the Option on the first anniversary of
the date of grant and an additional one third (1/3) of such
Units on each of the next following two anniversaries of the
date of grant. To the extent vested, Options may be
exercised at any time after the sixth anniversary date from
the date of grant, provided that such Vested Options may be
exercised earlier than six (6) years from the date of grant
upon or after the first to occur of (i) the effectiveness of
the Company's initial public offering ("IPO"), or (ii) on or
after a "Significant Transaction." "Significant Transaction"
means the sale of all or substantially all of the assets of
the Company to an unaffiliated third party, or
1
<PAGE>
a merger, business combination or a change in control through
the issuance or transfer of equity in the Company, wherein
the equity owners of the Company (whether partners,
stockholders, members or otherwise) of the Company
immediately prior to the merger, combination or change in
control, do not own or control (directly or indirectly) at
least 10% of the equity interest in the Company or the
successor company, as the case may be. The Company makes no
representation that an IPO or Significant Transaction will
occur and shall have no obligation to seek to cause such
events to occur.
5. OPTION TERMINATES WITH EMPLOYMENT AND COMPETITION. Upon the
termination of full time employment with the Company, the
Options held by the Employee terminate except to the extent
the Options are Vested Options on the date of any such
termination. Vested Options which are exercisable under the
terms of paragraph 4 above upon termination of employment
must be exercised, if at all, within 60 days following
termination. If not exercised during such sixty (60) day
period, the Options shall terminate. Vested Options which
are not exercisable under the terms of paragraph 4 shall
terminate on the 120th day following the termination of
employment, whether or not they become exercisable under the
provisions of paragraph 4 during such 120 day period.
Pursuant to Section 4H of the Plan, this Option terminates
in the event that the Employee engages in competition
against the Company.
6. EXPIRATION. This Option expires on (a) the seventh
anniversary date from the date of grant, (b) the date this
Option terminates under the terms of Sections 5 of this
Option Agreement, or (c) the date the Option terminates
under Section 6A of the Plan, or as otherwise provided under
the Plan.
7. MANNER OF EXERCISE OF OPTION. The Employee may exercise this
Option by giving written notice to the Company specifying the
number of full Units to be purchased and accompanied by
payment of the full price thereof. No exercise of the Option
shall be complete and no Units shall be delivered to the
Employee prior to the time that the full purchase price for
such Units has been paid. The purchase price shall be paid in
cash or by such other method as the Administrator may approve
and the Administrator shall have the right, as a condition of
issuance of the Units, to require the Employee to execute
documentation in a form satisfactory to the Administrator and
the Company to ensure that Employee will comply with the
terms and provisions of the Plan, this Option and the
Agreement of Limited Partnership (or other governing
documents) of the Company. During the lifetime of the
Employee, the Option may not be exercised by any person
(including the spouse of the Employee) other than by the
Employee. Upon the death of the Employee, the Option may be
exercised by the personal representative, legatees or heirs
of the Employee as to options exercisable upon such death
until the termination of the Option.
2
<PAGE>
8. NONTRANSFERABILITY OF OPTION. This Option is not transferable
except by will or by the laws of descent and distribution.
Any Option purported to be transferred to the spouse or
former spouse of Employee pursuant to any court order or
decree or settlement agreement issued or entered into
incident to any divorce action shall terminate, whether or
not any such court order or decree or settlement agreement
purports to merely recognize or document a community
interest of such spouse or former spouse. This Option may
not be assigned, transferred, pledged or hypothecated in any
manner and shall not be subject to any form of execution,
attachment or similar process. Any attempted assignment,
transfer, pledge, hypothecation or other disposition of this
Option contrary to the provisions of this Option Agreement,
or the levy of any execution, attachment or similar process
upon the Option, shall be null and void and of no effect.
9. UNIT-HOLDER RIGHTS. The Employee shall not have any of the
rights of a Unit-holder merely because of his ownership of
the Option granted by this Option Agreement. Furthermore, as
a Class D Unit holder, upon exercise, the Option holder
shall only have the rights of an "assignee" of a limited
partner of the Company and shall not be a limited partner.
10. EMPLOYMENT STATUS. The grant of this Option shall not impose
upon the Company, or any parent or subsidiary corporation,
any obligation whatsoever to retain the Employee in
employment status. This Option is personal to the Employee
and may be exercised by him as provided in the Plan only if
he is continuously retained by the Company, or by any parent
or subsidiary corporation.
11. REQUIREMENTS OF LAW. If any law or regulation of the
Securities and Exchange Commission (the "Commission") or any
other federal or state commission or agency having
jurisdiction requires the Company or the Employee to take any
action with respect to the Units acquired by the exercise of
this Option, then the date upon which the Company shall
deliver the Units shall be postponed until full compliance
has been made with all such legal or regulatory
requirements. Further, at or before the time of the delivery
of the Units, the Employee shall, if requested by the
Company, deliver to the Company his written statement that
he intends to hold the Units so acquired by him on exercise
of this Option for investment and not with a view to resale
or other distribution thereof to the public. Further, in the
event the Company shall determine that, in compliance with
the Securities Act of 1933, as amended, or any other
applicable federal or state statute or regulation, it is
necessary to register any of the Units with respect to which
an exercise of this Option has been made, or to qualify any
such Units for exemption from any of such requirements, the
Company shall take such action at its own expense, or at the
Company's discretion, treat the exercise of the Option as
unenforceable. In any case, not until registration has been
completed shall the Units be delivered to the Employee.
3
<PAGE>
12. RESTRICTION ON SALE OR OTHER TRANSFER OF UNITS. An Employee
may not sell, assign or otherwise transfer any of the Units
purchased pursuant to the exercise of the Option granted
hereunder in any manner that is not permitted by the Plan or
the Agreement of Limited Partnership (or other governing
corporate documents of the Company), or violates the
Securities Act of 1933, as amended, or the rules and
regulations of the Commission issued thereunder, or any other
federal or state laws, rules and regulations applicable to
the sale or transfer of securities.
13. RESTRICTION ON TRANSFER, RIGHT OF FIRST REFUSAL AND MARKET
STAND-OFF. The Units purchased under this Option are subject
to certain Restriction on Transfer, Rights of First Refusal
and Market Stand-Off obligations included in the Plan.
14. LEGENDS. All certificates evidencing Units purchased under
this Agreement shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT
IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN
THE COMPANY AND THE REGISTERED HOLDER OF SUCH SECURITIES (OR
THE PREDECESSOR IN INTEREST TO SUCH SECURITIES). SUCH
AGREEMENT CONTAINS RESTRICTIONS ON TRANSFER AND GRANTS TO THE
COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED
TRANSFER OF THE SUCH SECURITIES AND CERTAIN MARKET STAND-OFF
OBLIGATIONS. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN
REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF
WITHOUT CHARGE. THE SECURITIES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR
AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS
COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
15. GOVERNING LAW; CONSTRUCTION. The validity and construction of
this Option Agreement shall be governed by the laws of the
State of Texas. In construing this Option Agreement, the
singular shall include the plural and the masculine gender
shall include the feminine and neuter, unless the context
otherwise requires.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Non-Statutory Units
Option Agreement to be executed by an authorized officer, and the Employee has
hereunto set his hand, all as of the day and year first above written.
RACKSPACE, LTD., a Texas Limited
Partnership
By: MACROWEB, LC, General Partner
By: -------------------------------
Its:-------------------------------
EMPLOYEE:
-----------------------------------
Field (Name)
5
<PAGE>
PROMISSORY NOTE
$150,000.00 San Antonio, Texas December 29, 1998
FOR VALUE RECEIVED, the undersigned Rackspace, Ltd. (herein called
"Maker", whether one or more), hereby promises to pay to the order of Exeter
Financial, LC (herein together with all subsequent holders' hereof called
"Holder") by check into Holder's designated account at Frost Bank, N.A., San
Antonio, Bexar County Texas, or at such other bank account in Bexar County,
Texas as the Holder hereof may from time to time designate in writing to
Maker, the principal sum of $150,000.00, together with interest on the
principal balance from time to time remaining unpaid at the rate hereinafter
provided.
I. MATURITY DATE:
As used herein, the "MATURITY DATE" for this Note shall be the first
to occur of acceleration in accordance with the terms of this Note, or January
1, 2007.
II. INTEREST RATE:
Prior to the Maturity Date, interest on the principal balance
advanced and outstanding shall accrue at the rate of eight percent (8%) per
annum. Prior to the Maturity Date, accrued but unpaid interest shall compound
annually and therefore shall be added to the principal balance of this Note at
the end of each twelve month period. Interest on this Note shall be calculated
on a daily rate equal to 1/365th (or 1/366th in leap years) of the annual
percentage rate herein provided.
III. PAYMENT OF PRINCIPAL AND INTEREST:
This Note shall be due and payable as follows, to-wit:
Principal and interest shall be due and payable in equal monthly
installments of $3,831.36, commencing on January 1, 2002 and continuing
regularly and monthly thereafter on the first day of each succeeding calendar
month, until the Maturity Date, when all accrued and unpaid interest and all
unpaid principal shall be due and payable in full. Absent a default by Maker,
no payments are scheduled under this Note prior to January 1, 2002. Each
installment will be applied first to payment of accrued interest on the unpaid
principal, and the remainder will be applied to reduction of unpaid principal.
IN ANY EVENT, ALL UNPAID PRINCIPAL AND ALL ACCRUED AND UNPAID INTEREST SHALL
BE DUE AND PAYABLE IN FULL ON THE MATURITY DATE, WHETHER SUCH MATURITY OCCURS
BY ACCELERATION OR OTHERWISE.
All payments called for hereunder shall (a) be paid in lawful money
of the United States of America in federal or other immediately collectible
funds, which, at the time of payment is legal tender for the payment of public
and private debts; (b) be payable not later than 1:00 p.m. San Antonio Time on
the date such payments are due; and (c) be made to the Holder by wire transfer
or direct deposit to the bank account stated above, or at such other bank
account in Bexar County,
1
<PAGE>
Texas as the Holder may from time to time designate in writing to Maker.
IV. SECURITY:
This Note is secured by a Security Agreement and Financing Statement
(the "SECURITY AGREEMENT") of even date herewith. The Security Agreement
covers and constitutes a valid lien upon and against all of Maker's assets,
whether now existing or hereafter acquired. The Security Agreement and all
other documents or instruments securing the Note are collectively referred to
herein as the "SECURITY DOCUMENTS".
V. LIMITATION ON INTEREST:
This Note and all documents securing the same have been executed
under and shall be construed and enforced in accordance with the laws of the
State of Texas from time to time in effect, except to the extent United States
federal law permits Holder to contract for, charge or receive a greater amount
of interest. It is expressly stipulated and agreed to be the intent of Maker
and Holder to at all times comply strictly with the applicable usury laws now
or hereafter governing consideration received under the Note, Security
Documents or any other agreements between the parties with respect to the
Property. If the applicable law is ever revised, repealed or judicially
interpreted so as to render usurious any consideration called for, contracted
for, charged, taken, reserved or received with respect to the Note, the
Security Documents, or any other agreement between the parties, or if any
prepayment by Maker, or Holder's exercise of the options herein contained to
accelerate the maturity of this Note, results in Maker having paid any
interest in excess of that permitted by applicable law, then notwithstanding
anything to the contrary in this Note, the Security Documents or any other
agreement, it is Maker's and Holder's express intent and agreement that all
excess amounts theretofore collected by Holder be credited on the principal
balance of this Note or any other principal indebtedness of Maker to Holder
(or, if this Note and all other such indebtedness have been paid in full,
refunded to Maker) and the provisions of this Note, the Security Documents and
any other agreements shall immediately be deemed reformed and the amounts
thereafter collectible hereunder and thereunder reduced, without the necessity
of the execution of any new documents, so as to comply with the then
applicable law, but so as to permit the recovery of the greatest amount
otherwise called for hereunder and thereunder. The right to accelerate the
maturity of this Note does not include the right to accelerate any interest
which has not otherwise accrued on the date of such acceleration, and Holder
does not intend to collect any unearned interest in the event of acceleration.
All consideration paid to the Holder hereof in consideration for the loan
evidenced by this Note that constitutes interest under applicable law shall,
to the extent permitted by applicable law, be amortized, prorated, allocated,
and spread throughout the full term of such indebtedness (including the period
of any renewal or extension hereof) so that the rate of interest on account of
such indebtedness does not exceed the usury ceiling from time to time in
effect and applicable to the loan evidenced by this Note for so long as the
debt is outstanding. The term "applicable law" and similar terms used herein
refer to the law in effect on the date of the first disbursement under this
Note; provided that if the law is subsequently revised to permit more interest
to be charged on the loan evidenced by this Note, then Holder and Maker agree
that to the extent permitted by law, such revised law shall be the "applicable
law" as used herein. The provisions of this paragraph shall control all
agreements between the Maker and the Holder hereof.
2
<PAGE>
Maker represents and warrants to Holder and to all other owners or
holders of this Note, that: (i) the loan evidenced hereby is for business,
commercial, investment or other similar purposes, and not primarily for
personal, family, household or agricultural use, as such terms are used in
applicable provisions of Title 4 of the Texas Finance Code, and (ii) the
credit transaction evidenced by this Note is specifically exempted under
Regulation Z issued by the Board of Governors of the Federal Reserve System in
Title 1 (Consumer Credit Cost Disclosure) of the Consumer Credit Protection
Act and that no disclosures are required to be given under such regulation and
federal laws in connection with this credit transaction. In no event shall the
provisions of Chapter 346 of the Texas Finance Code (regarding certain
revolving credit accounts) apply to the loan evidenced by this Note.
VI. PREPAYMENT:
Maker may prepay the principal of this Note in whole or in part at
any time or times without penalty. Any prepayment shall be applied first
toward accrued and unpaid interest, and then to the principal installments
last maturing upon this Note, that is, in the inverse order of maturity and
without reducing the amount or time of payment of the remaining obligatory
installments. Amounts prepaid may not be reborrowed.
VII. DEFAULT:
It is hereby agreed that:
(i) If default shall be made in the payment of any part of the
principal or interest on this Note when due, or in the payment of any
other sums due under the Security Agreement or any of the other
Security Documents when due, and if such delinquent payment shall not
be received by Holder within five (5) business days following written
notice thereof by or on behalf of Holder to Maker; provided, however,
that after such time as Holder has provided two (2) such notices and
opportunity to cure to Maker during any twelve month period, then upon
Maker's subsequent default in payment, Holder shall be entitled to
exercise its remedies hereunder and under the Security Documents
without further notice or opportunity to cure; and provided further,
that the failure to pay all indebtedness that is due upon the maturity
of this Note, whether matured by acceleration or otherwise, shall be
an event of default immediately, without any notice, grace or
opportunity to cure; or
(ii) If default shall be made in the performance or observance
of any of the covenants and agreements contained in this Note, the
Security Agreements or any of the other Security Documents, other than
a covenant to pay money, and such default shall continue for thirty
(30) days following written notice thereof by or on behalf of Holder
to Maker; or
(iii) Upon the occurrence of any other event whereby,
according to the tents of this Note, the Security Agreement or any
other Security Document, the required time of payment of this Note may
be accelerated;
3
<PAGE>
then an "EVENT OF DEFAULT" shall have occurred under this Note and in such
event, without further notice or demand, the entire unpaid principal balance
of and accrued and unpaid interest on this Note, shall, at the option of the
Holder hereof, become immediately due and payable, and Holder may foreclose
all liens securing payment hereof, pursue any and all other rights, remedies
and recourses available to Holder, or pursue any combination of the foregoing,
all remedies hereunder and under the Security Documents being cumulative.
Failure by the Holder to exercise any option upon one Event of Default shall
not constitute a waiver thereof or a waiver of the right to exercise such
option in the event of a subsequent Event of Default. The acceptance by Holder
of any payment hereunder that is less than payment in full of all amounts due
and payable at the time of such payment shall not constitute a waiver of the
right to exercise any of the foregoing options at that lime or at any
subsequent time, or nullify any prior exercise of any such option without the
express written consent of the Holder. If, after an Event of Default, this
Note is placed in the hands of an attorney for collection, or if collected
through judicial proceedings, Maker shall pay, in addition to the sums
referred to above, all costs incurred by Holder in collection of the unpaid
amounts due hereunder, including a reasonable sum as collection or attorneys'
fees, whether or not any judicial action is instituted to enforce this Note.
VIII. LATE CHARGE AND DEFAULT INTEREST:
If Holder has not received the full amount of any installment due
hereunder, or any payment due hereunder (excluding the balance due on the
Maturity Date), on or before the date that such amount or payment is due,
Maker shall pay, in addition to the amount due, a late charge (the "LATE
CHARGE") equal to five percent (5.0%) of each dollar of principal, interest or
other amount not paid when due, for the purpose of defraying the expense
incident to handling such delinquent payments, whether or not the Note is
accelerated for such delinquency. The Late Charge shall be due and payable
immediately whether or not demand is made for payment of same.
It is further agreed that during the existence of any Event of
Default under this Note (but immediately ceasing upon the timely cure of any
such Event of Default prior to the acceleration of this Note), the Security
Agreement or any other Security Documents, the entire unpaid balance of
principal hereunder shall, at the option of Holder, bear interest (the
"DEFAULT INTEREST") at a rate equal to the lesser of (i) eighteen percent
(18.0%) per annum, or (ii) the highest nonusurious rate permitted by
applicable law; provided, however, in the event a Late Charge has been charged
or received by Holder with respect to any delinquent installment, the amount
of Default Interest shall be reduced by the amount of the Late Charge charged
or received as necessary to comply with any applicable law regarding usury.
Default Interest shall be due and payable upon demand, and if no demand, then
on the first (1st) day of each and every month after such default. During any
time when the Default Interest is in effect, Holder may, at its sole option,
collect interest at a rate that is less than the rate for Default Interest,
however, any such forbearance by Holder, or any demand by Holder for less than
the full amount of Default Interest, shall not constitute a waiver of Holder's
right to demand payment in full of the total Default Interest both with
respect to the period of forbearance or any later period, and shall not
constitute or imply any consent to a reduction in the rate of the Default
Interest. The rights of Holder under this Article VIII shall in any event be
subject to the limitations set forth in Article V.
4
<PAGE>
IX. WAIVERS:
Maker understands that under Texas law Maker has, unless waived, the
right to notice of Holder's intent to accelerate the principal balance of this
Note, the right to notice of the actual acceleration of the principal balance
of this Note, and the right to presentment of this Note by Holder's demand for
payment. Maker also understands that Maker can waive these rights. BY MAKER'S
SIGNATURE ON THIS NOTE, EACH MAKER and all sureties, endorsers, guarantors and
any other party now or hereafter liable for the payment of this Note in whole
or in part, hereby severally (i) WAIVE demand (except as otherwise specifically
set forth in this Note), presentment for payment, notice of nonpayment,
protest, notice of protest, notice of intent to accelerate, notice of
acceleration and all other notices, filing of suit and diligence in collecting
this Note or enforcing any of the security for this Note, (ii) agree to any
subordination or release of any of such security or the release of any party
primarily or secondarily liable hereon, (iii) agree that the Holder hereof
shall not be required first to institute suit or exhaust its remedies hereon
against the Maker, or any one of them, or others liable or to become liable
hereon, or to enforce its rights against them or any security herefor, and
(iv) consent to any extension or postponement of time of payment of this Note
and to any other indulgence with respect hereto without notice thereof to any
of them and without affecting their liability hereunder.
X. NOTICES:
All notices hereunder shall be given at the following addresses: If
to Maker: 111 Soledad, Suite 1100, San Antonio, Texas 78205-3692; if to
Holder: 111 Soledad, Suite 1100, San Antonio, Texas 78205-3692. Any party may
change its address for notice purposes upon giving thirty (30) days prior
notice thereof in accordance with this paragraph. All notices given hereunder
shall be in writing and shall be considered properly given if mailed by
first-class United States Mail, postage prepaid, registered or certified with
return receipt requested, or by delivering same to the intended addressee, or
by prepaid telegram. Any notice mailed as above provided shall be deemed to be
effective and received upon its deposit in the custody of the U.S. Postal
Service; all other notices shall be effective upon actual receipt.
XI. ACCELERATION UPON DISPOSITION:
As more fully detailed in the Security Agreement, Maker expressly
acknowledges, covenants and agrees (i) that, except in the ordinary course of
business and as may otherwise be provided in the Security Agreement, there may
be no sale, lease, assignment, transfer, conveyance, mortgage, pledge,
hypothecation, or any other disposition of all or any portion of, or interest
in, the property securing this Note, without the prior written consent of
Holder, (ii) that, except as may be provided otherwise in the Security
Agreement, Holder may arbitrarily withhold such prior written consent in its
sole discretion, and (iii) that in the event any such disposition occurs
without Holder's prior written consent, then Holder shall, except as provided
in the Security Agreement, have the option of accelerating the maturity hereof
and declaring the then unpaid principal balance and accrued interest
immediately due and payable.
5
<PAGE>
XII. JOINT AND SEVERAL LIABILITY:
If this Note is executed by more than one party, each such party
shall be jointly and severally liable for the obligations of Maker under this
Note.
XIII. SUCCESSORS AND ASSIGNS:
The terms and conditions hereof shall inure to the benefit of and be
binding upon the successors and assigns of the parties hereto.
XIV. VENUE:
MAKER AGREES THAT BEXAR COUNTY, TEXAS SHALL BE THE PROPER VENUE FOR
ANY JUDICIAL PROCEEDINGS BROUGHT IN CONNECTION WITH THIS NOTE.
HOLDER ACKNOWLEDGES AND AGREES THAT THE LIMITED PARTNERS OF THE MAKER
SHALL NOT BE LIABLE FOR THE OBLIGATIONS OF MAKER UNDER THIS NOTE AND THAT
HOLDER WILL NOT SEEK PAYMENT OF ANY AMOUNTS HEREUNDER FROM SUCH LIMITED
PARTNERS.
IN WITNESS WHEREOF Maker has duly executed this Note as of the day
and year first above written.
MAKER:
RACKSPACE, LTD.
BY: MACROWEB, LC. its general partner
By: /s/ Morris Miller
-----------------------------
HOLDER:
EXETER FINANCIAL, LC
By: /s/ S. West
-----------------------------
Its: Manager
-----------------------------
<PAGE>
AGREEMENT OF EXISTING PARTNERS
OF RACKSPACE, LTD. TO FACILITATE PUBLIC OFFERING
This Agreement is made this 27 day of March, 2000, by and between
Rackspace, Ltd. ("Rackspace" or the "Company" or the "Partnership") and all of
its present partners (which include Red Hat, Thomas Weisel and Norwest, as
defined below), all of whom are signatories to this Agreement (the "Partners").
Rackspace.com, Inc., a newly formed, Delaware corporation, is also made a party
to this Agreement ("New Rackspace"). In addition, Brian Bell and Edwin Grubbs
are made parties to this agreement with respect to the partnership interests
held by them as assignees.
NEW INVESTORS TO BE INCLUDED
Under the terms of the Fourth Amendment to Agreement of Limited
Partnership of Rackspace, Ltd., it is expressly contemplated that the General
Partner may cause Rackspace to issue up to 530,035.34 Class C Units (the
"Additional Units") to one or more additional persons or entities (the "New
Investors"), provided that the aggregate purchase price per Unit is not less
than $5.66 per Unit. The General Partner may also issue to the New Investors a
warrant to purchase an amount of Class C Units determined by dividing $3,000,000
by the greater of the $18.24 or the mid-point in the filing range (the
"Mid-point") set forth in the preliminary prospectus (commonly referred to as
the "red herring") which is first circulated by the Company. It is the
intention and agreement of the parties hereto that such New Investors shall have
the benefits and obligations of the Holders as set forth herein, and that they
may become signatories to this Agreement without any further consent or
agreement of the parties to this agreement.
CERTAIN REFERENCES
The Agreement of Limited Partnership of Rackspace, Ltd. and the four existing
amendments thereto, are sometimes collectively referred to herein as the
"Partnership Agreement." The Registration Rights Agreement dated November 30,
1999, as amended on February 22, 2000 is referred to as the "Rights Agreement."
The Support Agreement dated December 29, 1998, as amended on November 30, 1999
and again on February 22, 2000 is referred to as the "Support Agreement." For
the purposes of this agreement, Richard Yoo is referred to as "Yoo," Pat Condon
is referred to as "Condon," Dirk Elmendorf is referred to as "Elmendorf," Trout,
Ltd. is referred to as "Trout," Macroweb, LC is referred to as the "General
Partner," First Inning Investors, L.P., is referred to as "First Inning," Isom
Capital Partners I, L.P. is referred to as "Isom," The Hamilton Companies LLC is
referred to as "Hamilton," Beaulieu River Capital LC is referred to as
"Beaulieu," MiniPat & Company, Ltd. is referred to as "MiniPat," 2M Technology
Ventures, L.P., is referred to as "2M," Trango Capital, L.L.C. is referred to as
"Trango,"Red Hat, Inc. is referred to as "Red Hat," Norwest Venture Partners
VII, L.P. is referred to as "Norwest," Tailwind Capital Partners 2000, L.P. is
referred to as "Thomas Weisel," Graham M. Weston is referred to as "Weston,"
Morris A. Miller is referred to as
1
<PAGE>
"Miller," Brian Bell is referred to as "Bell" and Edwin Grubbs is referred to
herein as "Grubbs." The Partners, Bell, Grubbs and the New Investors are
sometimes collectively referred to herein as the "Holders."
PURPOSE OF AGREEMENT
This Agreement is made by and amongst Rackspace, New Rackspace, the Holders and
the New Investors, if any, to satisfy certain requirements and follow certain
recommendations of the Underwriters (defined below) and to facilitate the
registration and sale of the stock of New Rackspace in a public offering
registered under the Securities Act of 1993 (inclusive of the sale of such
stock, the "IPO") underwritten by Deutsche Bank, Securities, Inc., Bear, Stearns
& Co. Inc. and Thomas Weisel Partners LLC and certain other underwriters (the
"Underwriters"). The IPO will benefit the Holders as they will become
shareholders of New Rackspace pursuant to the terms of this Agreement. This
Agreement is entered into contemporaneously with the execution of the Fourth
Amendment of the Partnership Agreement, whereby Red Hat, Thomas Weisel and
Norwest become Class C Limited Partners of the Partnership.
ACTIONS TO BE TAKEN UNDER THIS AGREEMENT
END OF OPTION RIGHTS. The Underwriters have requested that Weston, Miller,
Condon, Elmendorf and Yoo end their rights under Section 17 of the Second
Amendment to the Partnership Agreement to forego salary and receive options to
acquire additional interests in the Company (and New Rackspace, its successor).
If these rights are not terminated, these individuals will have the right to
acquire a substantial amount of New Rackspace's stock at prices substantially
below market value which will likely result in large earnings charges against
New Rackspace. Weston, Miller, Condon, Elmendorf and Yoo have agreed to waive
these rights.
REGISTRATION RIGHTS. Certain of the Partners have demand and piggyback
registration rights under the terms of the Rights Agreement. Red Hat, Norwest,
Thomas Weisel and the New Investors do not have such registration rights,
whether demand rights or piggyback rights. The parties desire to amend the
existing Rights Agreement to include Red Hat, Norwest, Thomas Weisel and the New
Investors as Investors under the Registration Rights Agreement.
CONVERSION TO CORPORATION. The General Partner has broad powers to cause the
Company to convert to a corporation, including for the purpose of facilitating
an IPO. In order to facilitate the description of the succession of Rackspace
to New Rackspace, the underwriters have suggested that the Holders transfer all
of their interests in the Partnership (the "Units") to New Rackspace, in
exchange for common stock in New Rackspace (the "Common Stock"). The Partners
have agreed to make this exchange
2
<PAGE>
pursuant to the terms of this Agreement and agree to allow this exchange,
whether or not the IPO occurs.
AMENDMENT OF SUPPORT AGREEMENT. The parties desire to amend the Support
Agreement to include as Class C Limited Partners, Red Hat, Norwest, Thomas
Weisel and the New Investors.
NOW, THEREFORE, FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN
MADE, THE PARTIES AGREE AS FOLLOWS:
OPTIONS
TERMINATION OF OPTION RIGHTS. Provided that the IPO is completed by July 31,
2000, effective April 30, 2000, Miller, Weston, Yoo, Elmendorf and Condon will
have no further right to forgo salary and receive options to acquire Units in
the Company (or stock in New Rackspace) under Section 17 of the Second Amendment
to the Partnership Agreement. Miller, Weston, Elmendorf and Condon each made an
election on January 1, 2000 to receive options in lieu of salary. Yoo hereby
waives his right to receive options under Section 17 in lieu of salary for the
four-month period ending April 30, 2000. Commencing January 1, 2000 and ending
April 30, 2000, Miller, Weston, Elmendorf and Condon will continue to forgo
salary and receive options to acquire Units in accordance with the terms of
Section 17 of the Second Amendment to the Partnership Agreement.
SUPPORT AGREEMENT
AMENDMENT TO SUPPORT AGREEMENT. The Support Agreement, as amended, is further
amended to include, for the purpose of Paragraph 1, Norwest, Red Hat, Thomas
Weisel and the New Investors, as "Class C Limited Partners."
REGISTRATION RIGHTS
1. CORRECTION TO REGISTRATION RIGHTS AGREEMENT. The Rights Agreement
does not include Trango as an "Investor." The Rights Agreement is
hereby amended to include Trango as an Investor, as if it had
initially executed the Rights Agreement.
2. LOCK-UP AGREEMENT. The Underwriters have required that each of
the Holders agree not to sell their stock in New Rackspace for a
period of 180 days following the IPO and the parties to the Rights
Agreement are required to execute the same under the obligations
set forth in the Rights Agreement. Therefore, each of the Holders
agree to enter into the Lock-up Agreement attached as Exhibit A
and deliver the same to the offices of the Company upon the
execution of this Agreement.
3
<PAGE>
3. PIGGYBACK AND DEMAND REGISTRATION RIGHTS- RED HAT, THOMAS WEISEL,
NEW INVESTORS, NORWEST. The parties agree that Red Hat, Norwest,
New Investors and Thomas Weisel shall have piggyback and demand
registration rights in accordance with the provisions of Section 2
and Section 3 of the Rights Agreement with respect to the Units
held by them (and Common Stock acquired incident to the
Exchange), shall be considered Holders of Registrable Securities
with respect to all the Units (and Common Stock acquired incident
to the Exchange) held by them for purposes of the Rights Agreement
and each shall have all the benefits and obligations of an
Investor under the Rights Agreement, the same as if they were
direct signatories to the Rights Agreement. Upon the Exchange (as
defined below), the parties agree that without further act of the
parties, New Rackspace will be substituted in place of the Company
for all purposes of the Rights Agreement.
EXCHANGE OF INTERESTS
EXCHANGE OF INTERESTS. To accomplish various business purposes, the
General Partner of the Partnership has the ability to cause the
Partnership to convert to a corporation. The Partnership Agreement
specifically contemplates that the Company, through a successor entity,
will have an IPO and the General Partner is given broad powers to change
the form of the Company from a limited partnership to a corporation by
merger or contribution of assets and liabilities, in order to effect an
IPO. In addition, if the Company does not have an IPO, the General
Partner has determined that it may nevertheless be beneficial to convert
to a corporation. At the request of the Underwriters, the General
Partner desires that, rather than a merger or contribution of assets and
liabilities, the Holders exchange their Units for Common Stock, and that
this exchange occur with the possibility that the New Rackspace may not
complete the IPO. The exchange will take place on a one Unit for one
share of Common Stock basis, except for Yoo, Elmendorf, Condon, Bell,
Grubbs and Macroweb, each of whom will receive slightly less than one
share of Common Stock per Unit exchanged, and except for Trout, which
will receive slightly more than one share of Common Stock per Unit
exchanged. Each of the Holders agree that at such time that the General
Partner contributes all of its Units to New Rackspace, the Units of such
Holder and of all of the Holders, without any further act of the
Holders, shall be transferred to New Rackspace in exchange for Common
Stock in proportion to the Holders' positive Capital Account balances,
adjusted by treating the Partnership as having liquidated and its
property sold at fair market value, and gains and losses allocated in
accordance with Section 11.4 of the Partnership Agreement, which
proportions are set forth below (the "Exchange"). The Common Stock
received from New Rackspace will have an appropriate legend indicating
that it is subject to the restrictions contained in the Partnership
Agreement (which restriction shall be removed after the IPO, if it
occurs), and that it is restricted stock and may not be sold without an
opinion of counsel to the satisfaction of New Rackspace that such sale
will not be in violation of the provisions of the Securities Act of 1933.
The
4
<PAGE>
Holders agree that no fractional shares of Common Stock will be issued,
and as a result fractional Units shall be rounded to the nearest whole
number as set forth below:
<TABLE>
<CAPTION>
Partner Units Exchanged Common Stock to be
------- --------------- received upon Exchange
----------------------
<S> <C> <C>
Yoo 3,600,000 3,565,714
Condon 800,000 792,380
Elmendorf 400,000 396,190
Grubbs 50,000 49,523
Bell 50,000 49,523
Macroweb 10,000 9,904
Trout 7,232,856.2 7,279,619
First Inning 619,047.61 619,048
Isom 1,219,047.62 1,219,048
Hamilton 476,190.48 476,190
Beaulieu 357,142.86 357,143
MiniPat 95,238.10 95,238
2M 119,047.61 119,048
Red Hat 353,356.89 353,357
Norwest 1,015,901 1,015,901
Thomas Weisel 53,003.53 53,003
--------- ------
Total 16,450,831.94* 16,450,829*
</TABLE>
*Subject to adjustment for Units held by the New Investors which will be
exchanged on a one Unit for one share of Common Stock basis and subject
to further adjustment for the exchange of any Units issued pursuant to
the Warrant in favor of Trango Capital, LLC (380,952.38 Units), or any
other option holder, all of which will be exchanged on the basis of one
share of Common Stock for each Unit exchanged.
DIRECTORS/RIGHTS OF PARTNERS/PROXIES
1. DIRECTORS OF NEW RACKSPACE. The Class C Units Holders, The
Hamilton Companies, LLC and Trout have the right to appoint
directors of New Rackspace under the terms of the Second Amendment
to the Partnership Agreement (the "Voting Agreement"). However,
these rights end when and if Trout, Ltd. waives its right to
appoint five of the seven directors. Miller and Weston are
currently the sole directors of New Rackspace. In order to
timely
5
<PAGE>
appoint five additional members to New Rackspace's board of
directors, each of the Holders hereby grant to the General
Partner, their irrevocable proxy to vote all of the shares of
Common Stock in New Rackspace received by them as a result of the
Exchange, to elect and name up to five additional members to the
board of directors of New Rackspace. This proxy will expire on
the earlier to occur of July 31, 2000, the date immediately prior
to the IPO, or the date seven directors are named to New
Rackspace's board of directors. The General Partner agrees to
consult with each of the Partners prior to naming any of the
directors. Effective the date immediately prior to the IPO, the
Voting Agreement will terminate. The General Partner agrees that
it will not exercise the proxies granted under this paragraph in
order to appoint persons who are related to Morris A. Miller or
Graham M. Weston.
2. CONVERSION TO CORPORATION PRIOR TO IPO. It is likely that the
General Partner will determine that it is necessary to convert to
a corporation at a time when it is not certain whether or not the
Company will effect the IPO. The Holders agree that all
pre-emptive rights, rights of first refusal, share transfer
restrictions, re-purchase rights, voting agreements, parallel exit
rights and all other rights contained in the Partnership
Agreement, and the Support Agreement that do not exist as a
consequence of the application of the general corporate provisions
of Delaware corporation law (collectively, the "Rights and
Obligations"), shall be binding on and inure to the benefit of all
New Rackspace's shareholders and on New Rackspace, the same as
such Rights and Obligations are presently binding on the Partners
and the Company; provided that all of such Rights and Obligations
shall terminate immediately prior to the IPO. The parties also
agree that the Support Agreement shall terminate immediately prior
to the IPO. If, however, the IPO does not take place by July 31,
2000, New Rackspace agrees to prepare the documentation necessary
to ensure that all such Rights and Obligations are binding on New
Rackspace, the Holders and all other shareholders of New Rackspace
(such documents are referred to as the "Documents"), with New
Rackspace having the discretion, to the extent reasonably
exercised, to modify such Rights and Obligations to the extent
necessary to accommodate the differences between a limited
partnership and a corporation. The Holders agree to execute
Documents upon receipt so long as the Documents substantially
conform to the Rights and Obligations set forth in the Partnership
Agreement.
3. STOCK PLAN. In order for New Rackspace to adopt a qualified
incentive stock option plan, the shareholders of New Rackspace
must adopt the plan. The General Partner has selected a highly
flexible plan based upon the recommendations of its SEC counsel.
In order to approve the plan prior to the IPO, the Holders each
give the General Partner, their irrevocable proxy to approve the
plan recommended by the Company's counsel. Therefore, each of the
Holders give the General Partner their irrevocable proxy with
respect to the Common Stock received by them incident to the
Exchange, to exercise the voting rights of such stock to approve
any incentive stock option plan
6
<PAGE>
(including qualified and non-qualified stock options), employee
stock purchase plan, director option and compensation plan, and
any other plan which is designed to enable New Rackspace to
compensate, reward and/or incentivize its employees, agents,
consultants and directors. This proxy will end on the earlier to
occur of July 31, 2000 or the IPO.
4. INDEMNITY OF GENERAL PARTNER. Upon the Exchange, Macroweb shall
no longer be the general partner of Rackspace, Ltd., but rather
Rackspace Management, LC shall be the new general partner. The
Company acknowledges and agrees that the indemnity obligations
contained in the Partnership Agreement shall continue to be
enforceable by Macroweb and its members, officers and agents,
against the Company and against New Rackspace, with respect to
acts and omissions occurring while Macroweb was the general
partner of the Company.
MISCELLANEOUS
1. REPRESENTATION The parties to this Agreement acknowledge that the
law firm of Matthews and Branscomb, P.C. has assisted in the
preparation of this document on behalf of and as counsel for
Trout, Ltd. and the General Partner only, and further acknowledge
that the Partnership will pay the fees and expenses associated
with such services.
2. MULTIPLE COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but
all of which together will constitute one and the same instrument.
Executed as of the date first written above.
RACKSPACE, LTD.
By: Macroweb, LC
Its: General Partner
/s/ Graham M. Weston
-----------------------------------
Graham M. Weston, Member
/s/ Morris A. Miller
-----------------------------------
Morris A. Miller, Member
GENERAL PARTNER:
Macroweb, LC
7
<PAGE>
/s/ Morris A. Miller
---------------------------------------------
Morris A. Miller, Member
/s/ Graham M. Weston
---------------------------------------------
Graham M. Weston, Member
LIMITED PARTNERS:
/s/ Richard Yoo
--------------------------------------------------
Richard Yoo
/s/ Dirk Elmendorf
--------------------------------------------------
Dirk Elmendorf
/s/ Patrick Condon
--------------------------------------------------
Patrick Condon
Trout, Ltd.
By: Knightsbridge, L.C., General Partner
By: /s/ Morris A. Miller
-------------------------------------
Isom Capital Partners I, L.P.
By: BESK Funding, Inc., General Partner
By: /s/ S. James Bishkin
-------------------------------------
S. James Bishkin, President
First Inning Investors, L.P.
By: Trango Capital L.L.C., General Partner
By: /s/ Quincy J. Lee
-------------------------------------
Quincy J. Lee, Manager
The Hamilton Companies LLC
By: /s/ Frederick Hamilton
-------------------------------------
8
<PAGE>
Beaulieu River Capital LC (formerly,
Weston Investment Interest, L.L.C.)
By: /s/ Graham Weston
------------------------------------------
Title: Member
---------------------------------------
MiniPat & Company, Ltd.
By: /s/ Patrick Condon
------------------------------------------
2M Technology Ventures, L.P.
By: 2M Technology Group, L.L.C.
Its: General Partner
By: /s/ Steven Leeke
------------------------------------------
Red Hat, Inc.
By: /s/ Walter McCormick
------------------------------------------
Norwest Venture Partners VII, L.P.
By: /s/ George Still, Jr.
------------------------------------------
General Partner
/s/ Brian Bell
---------------------------------------------
Brian Bell
/s/ Edwin Grubbs
---------------------------------------------
Edwin Grubbs
9
<PAGE>
Tailwind Capital Partners 2000, L.P.
By: Thomas Weisel Capital Partners LLC,
general partner
By: /s/ David A. Baylor
---------------------------
David A. Baylor, General Counsel
NEW INVESTORS:
10
<PAGE>
AGREEMENT OF EXISTING PARTNERS
OF RACKSPACE, LTD. TO FACILITATE PUBLIC OFFERING
Separate Signature Page for New Investors
With respect to the 466,431 Class C Units purchased by Sequoia Capital Franchise
Fund for $2,640,000.
Sequoia Capital Franchise Fund
By: /s/ illegible
--------------------------
With respect to the 63,604 Class C Units purchased by Sequoia Capital Franchise
Partners for $360,000.
Sequoia Capital Franchise Partners
By: /s/ illegible
--------------------------
RACKSPACE, LTD.
By: Macroweb, LC, general partner
By: /s/ Graham Weston
--------------------------
Its: Member
--------------------------
11
<PAGE>
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION
OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO RACKSPACE, THAT SUCH
REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.
RACKSPACE, LTD.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
March 27, 2000 ("Date of Grant")
THIS CERTIFIES THAT, for value received, and subject to the provisions
and upon the terms and conditions hereinafter set forth, Norwest Venture
Partners (the "Holder") is entitled to subscribe for and purchase, at an
exercise price per unit or share (as set forth in Section 1(a) and as adjusted
herein, the "Warrant Price"), up to that number of Class C Units (having the
rights of a Class C Limited Partner), or shares of fully paid and nonassessable
Common Stock (the "Shares") of RACKSPACE, LTD., a Texas limited partnership or
its successor corporation ("Rackspace"), as determined by dividing $3,000,000 by
the Warrant Price (the "Warrant Coverage").
1. WARRANT PRICE; TERM
(a) WARRANT PRICE. The Warrant Price shall be the greater of (i)
$18.24 [a number determined by dividing $300,000,000 by 16,450,831.94, the
number of currently outstanding units of Rackspace], or (ii) the price which is
at the mid-point of the filing range of Rackspace's Form S-1 filed under the
Securities Act of 1933, which is circulated as its preliminary prospectus (the
"Mid-point price").
(b) TERM. The purchase right represented by this Warrant is
exercisable, in whole or in part, at any time and from time to time one (1) year
from the Date of Grant; provided that it may not be exercised prior to the time
the Mid-point price is determined unless the Mid-point price is not determined
within four months of the Date of Grant, in which case the Warrant may be
exercised after such four month period whether or not the Mid-point price has
been determined. If the Mid-point price has not been determined, the Warrant
Price shall be $18.24.
2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT. Subject to
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, by
the surrender of this Warrant (with the notice of exercise form attached hereto
as EXHIBIT A duly executed) at the principal office of Rackspace and by the
payment to Rackspace, by wire transfer according to wire transfer instructions
provided by Rackspace, of an amount equal to the then applicable Warrant Price
multiplied by the number of Shares then being purchased. The entity or entities
in whose name(s) any certificate(s) representing Shares shall be issuable upon
exercise of this Warrant shall be deemed to have become the holder(s) of record
of, and shall be treated for all purposes
-1-
<PAGE>
as the record holder(s) of, the units or shares represented thereby (and such
units or shares shall be deemed to have been issued) immediately prior to the
close of business on the date or dates upon which this Warrant is exercised. In
the event of any exercise of the rights represented by this Warrant,
certificates for the units or shares of stock so purchased shall be delivered to
the holder hereof as soon as possible and in any event within thirty days after
such exercise and, unless this Warrant has been fully exercised or expired, a
new Warrant representing the portion of the Shares, if any, with respect to
which this Warrant shall not then have been exercised shall also be issued to
the holder hereof as soon as possible and in any event within such thirty day
period.
3. STOCK FULLY PAID. All Shares that may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance pursuant to the terms and
conditions herein, be fully paid and nonassessable, and free from all taxes,
liens and charges with respect to the issue thereof.
4. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and kind of
securities purchasable upon the exercise of this Warrant and the Warrant Price
shall be subject to adjustment from time to time upon the occurrence of certain
events, as follows:
(a) RECLASSIFICATION OR MERGER. In case of any reclassification,
change or conversion of securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or in case of any merger of Rackspace with or into another corporation (other
than a merger with another corporation in which Rackspace is the acquiring and
the surviving corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant), or in
case of any sale of all or substantially all of the assets of Rackspace, or such
successor or purchasing corporation, as the case may be, or its parent
corporation, shall duly execute and deliver to the holder of this Warrant a new
Warrant (in form and substance reasonably satisfactory to the holder of this
Warrant), so that the holder of this Warrant shall have the right to receive, at
a total purchase price not to exceed that payable upon the exercise of the
unexercised portion of this Warrant, and in lieu of the Shares theretofore
issuable upon exercise of this Warrant, the kind and amount of shares of stock,
other securities, money and property receivable upon such reclassification,
change or merger by a holder of the number of Shares then purchasable under this
Warrant. Such new Warrant shall provide for adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
4. The provisions of this subparagraph (a) shall similarly apply to successive
reclassifications, changes, mergers, consolidations, transfers, amendments and
waivers.
(b) SUBDIVISION OR COMBINATION OF SHARES. If Rackspace at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its outstanding Shares, the Warrant Price shall be proportionately decreased in
the case of a subdivision or increased in the case of a combination, effective
at the close of business on the date the subdivision or combination becomes
effective.
(c) STOCK DIVIDENDS AND OTHER DISTRIBUTIONS/CAPITAL ACCOUNT UPON
EXERCISE OF OPTION. In case Rackspace shall make or issue, or shall fix a record
date for the determination of eligible holders entitled to receive, a dividend
or other distribution with respect to the Shares (or any shares of stock or
other securities at the time issuable upon exercise of the Warrant) payable in
(a) securities of
<PAGE>
Rackspace or (b) assets (excluding cash dividends paid or payable solely out of
retained earnings), then, in each such case, the holder of this Warrant on
exercise hereof at any time after the consummation, effective date or record
date of such dividend or other distribution, shall receive, in addition to the
Shares (or such other stock or securities) issuable on such exercise prior to
such date, and without the payment of additional consideration therefor, the
securities or such other assets of Rackspace to which such Holder would have
been entitled upon such date if such Holder had exercised this Warrant on the
date hereof and had thereafter, during the period from the date hereof to and
including the date of such exercise, retained such shares and/or all other
additional stock available by it as aforesaid during such period giving effect
to all adjustments called for by this Section 4. Units issued upon exercise of
the Warrant shall be issued with a capital account (provided that Rackspace upon
such exercise is a partnership or other entity for which capital accounts are
maintained in respect of units of ownership) which shall bear the same ratio to
the total capital accounts in Rackspace as the number of such Units issued upon
exercise bear to the aggregate units of ownership in the Company then
outstanding.
(d) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in the
Warrant Price, the number of Shares purchasable hereunder shall be adjusted, to
the nearest whole share, to the product obtained by multiplying the number of
Shares purchasable immediately prior to such adjustment in the Warrant Price by
a fraction, the numerator of which shall be the Warrant Price immediately prior
to such adjustment and the denominator of which shall be the Warrant Price
immediately thereafter.
(e) CONVERSION OF SHARES. In the event that all of the authorized and
outstanding Shares are redeemed or converted or reclassified into other
securities or property pursuant to Rackspace's charter documents or otherwise,
or the Shares otherwise cease to exist, then, in such case, the Holder of this
Warrant, upon exercise hereof at any time after the date on which the Shares are
so redeemed or converted, reclassified or cease to exist (the "Termination
Date"), shall receive, in lieu of the number of Shares that would have been
issuable upon such exercise immediately prior to the Termination Date, the
securities or property that would have been received if this Warrant had been
exercised in full and the Shares received thereupon had been simultaneously
converted immediately prior to the Termination Date, all subject to further
adjustment as provided in this Warrant. Additionally, the Warrant Price shall be
immediately adjusted to equal the quotient obtained by dividing (x) the
aggregate Warrant Price of the maximum number of Shares for which this Warrant
was exercisable immediately prior to the Termination Date by (y) the number of
Shares for which this Warrant is exercisable immediately after the Termination
Date, all subject to further adjustment as provided herein.
5. NOTICE OF ADJUSTMENTS. Whenever the Warrant Price or the number of
Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof,
Rackspace shall make a certificate signed by its chief executive officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Warrant Price and the number of Shares purchasable hereunder after giving effect
to such adjustment, which shall be mailed (by first class mail, postage prepaid)
to the holder of this Warrant.
6. FRACTIONAL SHARES. No fractional Shares will be issued in connection
with any exercise hereunder, but in lieu of such fractional Shares Rackspace
shall make a cash payment therefor based on the fair market value of the Shares
on the date of exercise as reasonably determined in good faith by Rackspace's
Board of Directors.
<PAGE>
7. COMPLIANCE WITH SECURITIES ACT: DISPOSITION OF WARRANT OR SHARES.
(a) COMPLIANCE WITH SECURITIES ACT. The holder of this Warrant, by
acceptance hereof, agrees that this Warrant, and the Shares to be issued upon
exercise hereof are being acquired for investment and that such holder will not
offer, sell or otherwise dispose of this Warrant, or any Shares to be issued
upon exercise hereof except under circumstances which will not result in a
violation of the Securities Act of 1933, as amended (the "Act"). If at the time
of any transfer or exercise of this Warrant or any of the Shares, such
securities have not been registered under the Act and are not eligible for sale
without registration under Rule 144 of the Act, Rackspace may require as a
condition of allowing such transfer or exercise, that the holder of such
securities furnish to Rackspace such information as is reasonably necessary to
establish that such transfer and exercise may be made without registration under
the Act. This Warrant and all Shares issued upon exercise of this Warrant
(unless registered under the Act) shall be stamped or imprinted with a legend in
substantially the following form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR
DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS
RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
SATISFACTORY TO RACKSPACE, THAT SUCH REGISTRATIONS ARE NOT REQUIRED OR (iii)
RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES. IN
ADDITION, NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED,
DIRECTLY OR INDIRECTLY."
(b) DISPOSITION OF WARRANT OR SHARES. Subject to the provisions of
this Section 7, this Warrant may be assigned or transferred in whole or in part
by the holder hereof. With respect to any proposed offer, sale or other
disposition of this Warrant or any Shares acquired pursuant to the exercise of
this Warrant prior to registration of such Warrant or shares, the holder hereof
and each subsequent holder of this Warrant agrees to seek and obtain the written
permission of Rackspace prior thereto, describing briefly the manner thereof,
together with a written opinion of such holder's counsel, if reasonably
requested by Rackspace, to the effect that such offer, sale or other disposition
may be effected without registration or qualification (under the Act as then in
effect or any federal or state law then in effect) of this Warrant or such
Shares and indicating whether or not under the Act certificates for this Warrant
or such Shares to be sold or otherwise disposed of require any restrictive
legend as to applicable restrictions on transferability in order to ensure
compliance with such law. Upon receiving such written notice and reasonably
satisfactory opinion, if so requested, Rackspace, as promptly as practicable,
shall notify such holder whether or not such holder may sell or otherwise
dispose of this Warrant or such Shares, all in accordance with the terms of the
notice delivered to Rackspace. Any offer, sale or other disposition of this
Warrant (or any Shares acquired pursuant to the exercise of this Warrant)
without the prior written consent of Rackspace pursuant to this Section 7(b)
shall be null and void and of no effect.
8. RIGHTS AS STOCKHOLDERS; INFORMATION. No holder of this Warrant, as such,
shall be entitled to vote or receive dividends or be deemed the holder of Shares
or any other securities of Rackspace
<PAGE>
which may at any time be issuable on the exercise hereof for any purpose, nor
shall anything contained herein be construed to confer upon the holder of this
Warrant, as such, any of the rights of a partner or stockholder of Rackspace or
any right to vote for the election of directors or upon any matter submitted to
stockholders or partners at any meeting thereof, or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until this
Warrant shall have been exercised and the Shares purchasable upon the exercise
hereof shall have become deliverable, as provided herein.
9. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
10. NOTICES. Any notice, request, communication or other document required
or permitted to be given or delivered to the holder hereof or Rackspace shall be
delivered, or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of Rackspace or to
Rackspace at the address indicated therefor on the signature page of this
Warrant.
11. BINDING EFFECT ON SUCCESSORS. Until the issuance of any new warrant
required to be issued under Section 4(a), this Warrant shall be binding upon any
corporation that issues securities in exchange for securities of the class
issuable upon exercise of this Warrant in connection with any merger,
consolidation or acquisition of all or substantially all of Rackspace's assets,
and all of the obligations of Rackspace relating to the Shares issuable upon the
exercise of this Warrant shall survive the exercise and termination of this
Warrant and all of the covenants and agreements of Rackspace shall inure to the
benefit of the successors and assigns of the holder hereof. Rackspace will, at
the time of the exercise of this Warrant, in whole or in part, upon request of
the holder hereof but at Rackspace's expense, acknowledge in writing its
continuing obligation to the holder hereof in respect of any rights (including,
without limitation, any right to registration of the shares) to which the holder
hereof shall continue to be entitled after such exercise or conversion in
accordance with this Warrant; provided, that the failure of the holder hereof to
make any such request shall not affect the continuing obligation of Rackspace to
the holder hereof in respect of such rights.
12. LOST WARRANTS OR STOCK CERTIFICATES. Rackspace covenants to the holder
hereof that, upon receipt of evidence reasonably satisfactory to Rackspace of
the loss, theft, destruction or mutilation of this Warrant or any stock
certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to Rackspace, or in the case of
any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, Rackspace will make and deliver a new Warrant or stock certificate,
of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or
stock certificate.
13. DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
14. GOVERNING LAW. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the
internal laws of the State of Texas without regard to its conflicts of laws
principles.
<PAGE>
15. SURVIVAL. All agreements of Rackspace and the holder hereof contained
herein shall survive indefinitely until, by their respective terms, they are no
longer operative.
16. REMEDIES. In case any one or more of the covenants and agreements
contained in this Warrant shall have been breached, the holders hereof (in the
case of a breach by Rackspace), or Rackspace (in the case of a breach by a
holder), may proceed to protect and enforce their or its rights either by suit
in equity and/or by action at law, including, but not limited to, an action for
damages as a result of any such breach and/or an action for specific performance
of any such covenant or agreement contained in this Warrant.
17. ACCEPTANCE. Receipt of this Warrant by the holder hereof shall
constitute acceptance of and agreement to the foregoing terms and conditions.
18. NO IMPAIRMENT OF RIGHTS. Rackspace will not, by amendment of its
charter documents through any other means, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such action as may be necessary or appropriate in order to protect the rights of
the holder of this Warrant against impairment. Without limiting the generality
of the foregoing, Rackspace (a) will not increase the par value of any shares of
stock issuable upon the exercise of this Warrant above the amount payable
therefor upon such exercise, and (b) will take all such action as may be
necessary or appropriate in order that Rackspace may validly and legally issue
fully paid and non-assessable Shares upon exercise of this Warrant.
19. SEVERABILITY. If any term, provision, covenant, or restriction of this
Warrant is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Warrant shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
20. NOTICES OF RECORD DATE. In case:
(a) Rackspace shall take a record of the holders of its securities, for
the purpose of entitling them to receive any dividend or other distribution, or
any right to subscribe for or purchase any shares of stock of any class or any
other securities or to receive any other right; or
(b) of any consolidation or merger of Rackspace with or into another
corporation, any capital reorganization of Rackspace, any reclassification of
the capital stock of Rackspace, or any conveyance of all or substantially all of
the assets of Rackspace to another corporation in which holders of Rackspace's
stock are to receive stock, securities or property of another corporation; or
(c) of any voluntary dissolution, liquidation or winding-up of
Rackspace; or
(d) of any redemption or conversion of all outstanding securities.
Then, and in each such case, Rackspace will mail or cause to be mailed to the
holder of this Warrant a notice specifying, as the case may be, (i) the date on
which a record is to be taken for the purpose of such dividend, distribution or
right, or (ii) the date on which such reorganization, reclassification,
<PAGE>
consolidation, merger, conveyance, dissolution, liquidation, winding-up,
redemption or conversion is to take place, and the time, if any is to be fixed,
as of which the holders of record of Rackspace's shares or units (or such stock
or securities as at the time are receivable upon the exercise of this Warrant)
shall be entitled to exchange their shares or units (or such other stock or
securities), for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up. Such notice shall be delivered at least
seven (7) days prior to the date therein specified.
<PAGE>
RACKSPACE, LTD.
By: Macroweb, LC, its general partner
By: /s/ Graham Weston
-------------------------------------
Graham Weston, CEO
ACKNOWLEDGED AND AGREED:
/s/ George Still, Jr.
- ---------------------------------
Signature
Norwest Venture Partners
- ---------------------------------
Name of Holder
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
To: RACKSPACE, LTD.
1. The undersigned hereby elects to purchase _________________
units or shares of ________________ of RACKSPACE, LTD. pursuant to the terms of
the attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
2. Please issue a certificate or certificates representing said
shares in the name of the undersigned or in such other name or names as are
specified below:
-----------------------------
(Name)
-----------------------------
-----------------------------
(Address)
3. The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undersigned has executed an Investment Representation
Statement attached hereto as Schedule 1.
-----------------------------------------
Signature
-----------------------------------------
Date
<PAGE>
Schedule 1
- ----------
INVESTMENT REPRESENTATION STATEMENT
Purchaser:
--------------------------------
Rackspace: RACKSPACE, LTD. ("Rackspace")
Security:
--------------------------------
Amount:
--------------------------------
Date:
--------------------------------
In connection with the purchase of the above-listed securities (the
"Securities"), the undersigned (the "Purchaser") represents to Rackspace as
follows:
(a) The Purchaser is aware of Rackspace's business affairs and
financial condition, and has acquired sufficient information about Rackspace to
reach an informed and knowledgeable decision to acquire the Securities. The
Purchaser is purchasing the Securities for its own account for investment
purposes only and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933, as amended
(the "Act").
(b) The Purchaser understands that the Securities have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of the Purchaser's investment intent as expressed herein. In this
connection, the Purchaser understands that, in the view of the Securities and
Exchange Commission ("SEC"), the statutory basis for such exemption may be
unavailable if the Purchaser's representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) The Purchaser further understands that the Securities must be
held indefinitely unless subsequently registered under the Act or unless an
exemption from registration is otherwise available. Moreover, the Purchaser
understands that Rackspace is under no obligation to register the Securities
except as set forth in the Warrant under which the Securities are being
acquired. In addition, the Purchaser understands that the certificate evidencing
the Securities will be imprinted with the legend referred to in the Warrant
under which the Securities are being purchased.
(d) The Purchaser is aware of the provisions of Rule 144 and 144A,
promulgated under the Act, which, in substance, permit limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, if applicable, including, among other
things: The availability of certain public information about Rackspace, the
resale occurring not less than one year after the party has purchased and paid
for the securities to be sold; the sale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined
<PAGE>
under the Securities Exchange Act of 1934, as amended) and the amount of
securities being sold during any three-month period not exceeding the specified
limitations stated therein.
(e) The Purchaser further understands that at the time it wishes
to sell the Securities there may be no public market upon which to make such a
sale, and that, even if such a public market then exists, Rackspace may not be
satisfying the current public information requirements of Rule 144 and 144A, and
that, in such event, the Purchaser may be precluded from selling the Securities
under Rule 144 and 144A even if the one-year minimum holding period had been
satisfied.
(f) The Purchaser further understands that in the event all of the
requirements of Rule 144 and 144A are not satisfied, registration under the Act,
compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Purchaser:
Date:
---------------, ----
-2-
<PAGE>
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION
OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO RACKSPACE, THAT SUCH
REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.
RACKSPACE, LTD.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
March 27, 2000 ("Date of Grant")
THIS CERTIFIES THAT, for value received, and subject to the provisions
and upon the terms and conditions hereinafter set forth, SEQUOIA CAPITAL
FRANCHISE FUND (the "Holder") is entitled to subscribe for and purchase, at an
exercise price per unit or share (as set forth in Section 1(a) and as adjusted
herein, the "Warrant Price"), up to that number of Class C Units (having the
rights of a Class C Limited Partner), or shares of fully paid and nonassessable
Common Stock (the "Shares") of RACKSPACE, LTD., a Texas limited partnership or
its successor corporation ("Rackspace"), as determined by dividing $2,640,000 by
the Warrant Price (the "Warrant Coverage").
1. WARRANT PRICE; TERM
(a) WARRANT PRICE. The Warrant Price shall be the greater of
(i) $18.24, or (ii) the price which is at the mid-point of the filing range of
Rackspace's Form S-1 filed under the Securities Act of 1933, which is circulated
as its preliminary prospectus (the "Mid-point price").
(b) TERM. The purchase right represented by this Warrant is
exercisable, in whole or in part, at any time and from time to time one (1) year
from the Date of Grant; provided that it may not be exercised prior to the time
the Mid-point price is determined unless the Mid-point price is not determined
within four months of the Date of Grant, in which case the Warrant may be
exercised after such four month period whether or not the Mid-point price has
been determined. If the Mid-point price has not been determined, the Warrant
Price shall be $18.24.
2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT. Subject to
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, by
the surrender of this Warrant (with the notice of exercise form attached hereto
as EXHIBIT A duly executed) at the principal office of Rackspace and by the
payment to Rackspace, by wire transfer according to wire transfer instructions
provided by Rackspace, of an amount equal to the then applicable Warrant Price
multiplied by the number of Shares then being purchased. The entity or entities
in whose name(s) any certificate(s) representing Shares shall be issuable upon
exercise of this Warrant shall be deemed to have become the holder(s) of record
of, and shall be treated for all purposes as the record holder(s) of, the units
or shares represented thereby (and such units or shares shall be deemed to have
been issued) immediately prior to the close of business on the date or dates
upon which
-1-
<PAGE>
this Warrant is exercised. In the event of any exercise of the rights
represented by this Warrant, certificates for the units or shares of stock so
purchased shall be delivered to the holder hereof as soon as possible and in any
event within thirty days after such exercise and, unless this Warrant has been
fully exercised or expired, a new Warrant representing the portion of the
Shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be issued to the holder hereof as soon as possible and in
any event within such thirty day period.
3. STOCK FULLY PAID. All Shares that may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance pursuant to the
terms and conditions herein, be fully paid and nonassessable, and free from all
taxes, liens and charges with respect to the issue thereof.
4. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and
kind of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
(a) RECLASSIFICATION OR MERGER. In case of any
reclassification, change or conversion of securities of the class issuable upon
exercise of this Warrant (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), or in case of any merger of Rackspace with or into another
corporation (other than a merger with another corporation in which Rackspace is
the acquiring and the surviving corporation and which does not result in any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant), or in case of any sale of all or substantially all of the assets
of Rackspace, or such successor or purchasing corporation, as the case may be,
or its parent corporation, shall duly execute and deliver to the holder of this
Warrant a new Warrant (in form and substance reasonably satisfactory to the
holder of this Warrant), so that the holder of this Warrant shall have the right
to receive, at a total purchase price not to exceed that payable upon the
exercise of the unexercised portion of this Warrant, and in lieu of the Shares
theretofore issuable upon exercise of this Warrant, the kind and amount of
shares of stock, other securities, money and property receivable upon such
reclassification, change or merger by a holder of the number of Shares then
purchasable under this Warrant. Such new Warrant shall provide for adjustments
that shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 4. The provisions of this subparagraph (a) shall
similarly apply to successive reclassifications, changes, mergers,
consolidations, transfers, amendments and waivers.
(b) SUBDIVISION OR COMBINATION OF SHARES. If Rackspace at any
time while this Warrant remains outstanding and unexpired shall subdivide or
combine its outstanding Shares, the Warrant Price shall be proportionately
decreased in the case of a subdivision or increased in the case of a
combination, effective at the close of business on the date the subdivision or
combination becomes effective.
(c) STOCK DIVIDENDS AND OTHER DISTRIBUTIONS/CAPITAL ACCOUNT
UPON EXERCISE OF OPTION. In case Rackspace shall make or issue, or shall fix a
record date for the determination of eligible holders entitled to receive, a
dividend or other distribution with respect to the Shares (or any shares of
stock or other securities at the time issuable upon exercise of the Warrant)
payable in (a) securities of Rackspace or (b) assets (excluding cash dividends
paid or payable solely out of retained earnings), then, in each such case, the
holder of this Warrant on exercise hereof at any time after the consummation,
<PAGE>
effective date or record date of such dividend or other distribution, shall
receive, in addition to the Shares (or such other stock or securities) issuable
on such exercise prior to such date, and without the payment of additional
consideration therefor, the securities or such other assets of Rackspace to
which such Holder would have been entitled upon such date if such Holder had
exercised this Warrant on the date hereof and had thereafter, during the period
from the date hereof to and including the date of such exercise, retained such
shares and/or all other additional stock available by it as aforesaid during
such period giving effect to all adjustments called for by this Section 4.
Units issued upon exercise of the Warrant shall be issued with a capital account
(provided that Rackspace upon such exercise is a partnership or other entity for
which capital accounts are maintained in respect of units of ownership) which
shall bear the same ratio to the total capital accounts in Rackspace as the
number of such Units issued upon exercise bear to the aggregate units of
ownership in the Company then outstanding.
(d) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in
the Warrant Price, the number of Shares purchasable hereunder shall be adjusted,
to the nearest whole share, to the product obtained by multiplying the number of
Shares purchasable immediately prior to such adjustment in the Warrant Price by
a fraction, the numerator of which shall be the Warrant Price immediately prior
to such adjustment and the denominator of which shall be the Warrant Price
immediately thereafter.
(e) CONVERSION OF SHARES. In the event that all of the
authorized and outstanding Shares are redeemed or converted or reclassified into
other securities or property pursuant to Rackspace's charter documents or
otherwise, or the Shares otherwise cease to exist, then, in such case, the
Holder of this Warrant, upon exercise hereof at any time after the date on which
the Shares are so redeemed or converted, reclassified or cease to exist (the
"Termination Date"), shall receive, in lieu of the number of Shares that would
have been issuable upon such exercise immediately prior to the Termination Date,
the securities or property that would have been received if this Warrant had
been exercised in full and the Shares received thereupon had been simultaneously
converted immediately prior to the Termination Date, all subject to further
adjustment as provided in this Warrant. Additionally, the Warrant Price shall
be immediately adjusted to equal the quotient obtained by dividing (x) the
aggregate Warrant Price of the maximum number of Shares for which this Warrant
was exercisable immediately prior to the Termination Date by (y) the number of
Shares for which this Warrant is exercisable immediately after the Termination
Date, all subject to further adjustment as provided herein.
5. NOTICE OF ADJUSTMENTS. Whenever the Warrant Price or the number
of Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof,
Rackspace shall make a certificate signed by its chief executive officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Warrant Price and the number of Shares purchasable hereunder after giving effect
to such adjustment, which shall be mailed (by first class mail, postage prepaid)
to the holder of this Warrant.
6. FRACTIONAL SHARES. No fractional Shares will be issued in
connection with any exercise hereunder, but in lieu of such fractional Shares
Rackspace shall make a cash payment therefor based on the fair market value of
the Shares on the date of exercise as reasonably determined in good faith by
Rackspace's Board of Directors.
7. COMPLIANCE WITH SECURITIES ACT: DISPOSITION OF WARRANT OR SHARES.
<PAGE>
(a) COMPLIANCE WITH SECURITIES ACT. The holder of this
Warrant, by acceptance hereof, agrees that this Warrant, and the Shares to be
issued upon exercise hereof are being acquired for investment and that such
holder will not offer, sell or otherwise dispose of this Warrant, or any Shares
to be issued upon exercise hereof except under circumstances which will not
result in a violation of the Securities Act of 1933, as amended (the "Act"). If
at the time of any transfer or exercise of this Warrant or any of the Shares,
such securities have not been registered under the Act and are not eligible for
sale without registration under Rule 144 of the Act, Rackspace may require as a
condition of allowing such transfer or exercise, that the holder of such
securities furnish to Rackspace such information as is reasonably necessary to
establish that such transfer and exercise may be made without registration under
the Act. This Warrant and all Shares issued upon exercise of this Warrant
(unless registered under the Act) shall be stamped or imprinted with a legend in
substantially the following form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR
DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS
RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
SATISFACTORY TO RACKSPACE, THAT SUCH REGISTRATIONS ARE NOT REQUIRED OR (iii)
RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES. IN
ADDITION, NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED,
DIRECTLY OR INDIRECTLY."
(b) DISPOSITION OF WARRANT OR SHARES. Subject to the
provisions of this Section 7, this Warrant may be assigned or transferred in
whole or in part by the holder hereof. With respect to any proposed offer, sale
or other disposition of this Warrant or any Shares acquired pursuant to the
exercise of this Warrant prior to registration of such Warrant or shares, the
holder hereof and each subsequent holder of this Warrant agrees to seek and
obtain the written permission of Rackspace prior thereto, describing briefly the
manner thereof, together with a written opinion of such holder's counsel, if
reasonably requested by Rackspace, to the effect that such offer, sale or other
disposition may be effected without registration or qualification (under the Act
as then in effect or any federal or state law then in effect) of this Warrant or
such Shares and indicating whether or not under the Act certificates for this
Warrant or such Shares to be sold or otherwise disposed of require any
restrictive legend as to applicable restrictions on transferability in order to
ensure compliance with such law. Upon receiving such written notice and
reasonably satisfactory opinion, if so requested, Rackspace, as promptly as
practicable, shall notify such holder whether or not such holder may sell or
otherwise dispose of this Warrant or such Shares, all in accordance with the
terms of the notice delivered to Rackspace. Any offer, sale or other
disposition of this Warrant (or any Shares acquired pursuant to the exercise of
this Warrant) without the prior written consent of Rackspace pursuant to this
Section 7(b) shall be null and void and of no effect.
8. RIGHTS AS STOCKHOLDERS; INFORMATION. No holder of this Warrant,
as such, shall be entitled to vote or receive dividends or be deemed the holder
of Shares or any other securities of Rackspace which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the holder of this Warrant, as such, any of the rights
of a partner or
<PAGE>
stockholder of Rackspace or any right to vote for the election of directors or
upon any matter submitted to stockholders or partners at any meeting thereof, or
to receive notice of meetings, or to receive dividends or subscription rights or
otherwise until this Warrant shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become deliverable, as provided
herein.
9. MODIFICATION AND WAIVER. This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
10. NOTICES. Any notice, request, communication or other document
required or permitted to be given or delivered to the holder hereof or Rackspace
shall be delivered, or shall be sent by certified or registered mail, postage
prepaid, to each such holder at its address as shown on the books of Rackspace
or to Rackspace at the address indicated therefor on the signature page of this
Warrant.
11. BINDING EFFECT ON SUCCESSORS. Until the issuance of any new
warrant required to be issued under Section 4(a), this Warrant shall be binding
upon any corporation that issues securities in exchange for securities of the
class issuable upon exercise of this Warrant in connection with any merger,
consolidation or acquisition of all or substantially all of Rackspace's assets,
and all of the obligations of Rackspace relating to the Shares issuable upon the
exercise of this Warrant shall survive the exercise and termination of this
Warrant and all of the covenants and agreements of Rackspace shall inure to the
benefit of the successors and assigns of the holder hereof. Rackspace will, at
the time of the exercise of this Warrant, in whole or in part, upon request of
the holder hereof but at Rackspace's expense, acknowledge in writing its
continuing obligation to the holder hereof in respect of any rights (including,
without limitation, any right to registration of the shares) to which the holder
hereof shall continue to be entitled after such exercise or conversion in
accordance with this Warrant; provided, that the failure of the holder hereof to
make any such request shall not affect the continuing obligation of Rackspace to
the holder hereof in respect of such rights.
12. LOST WARRANTS OR STOCK CERTIFICATES. Rackspace covenants to the
holder hereof that, upon receipt of evidence reasonably satisfactory to
Rackspace of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to Rackspace, or in the case of
any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, Rackspace will make and deliver a new Warrant or stock certificate,
of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or
stock certificate.
13. DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
14. GOVERNING LAW. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the
internal laws of the State of Texas without regard to its conflicts of laws
principles.
15. SURVIVAL. All agreements of Rackspace and the holder hereof
contained herein shall survive indefinitely until, by their respective terms,
they are no longer operative.
<PAGE>
16. REMEDIES. In case any one or more of the covenants and agreements
contained in this Warrant shall have been breached, the holders hereof (in the
case of a breach by Rackspace), or Rackspace (in the case of a breach by a
holder), may proceed to protect and enforce their or its rights either by suit
in equity and/or by action at law, including, but not limited to, an action for
damages as a result of any such breach and/or an action for specific performance
of any such covenant or agreement contained in this Warrant.
17. ACCEPTANCE. Receipt of this Warrant by the holder hereof shall
constitute acceptance of and agreement to the foregoing terms and conditions.
18. NO IMPAIRMENT OF RIGHTS. Rackspace will not, by amendment of its
charter documents through any other means, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such action as may be necessary or appropriate in order to protect the rights of
the holder of this Warrant against impairment. Without limiting the generality
of the foregoing, Rackspace (a) will not increase the par value of any shares of
stock issuable upon the exercise of this Warrant above the amount payable
therefor upon such exercise, and (b) will take all such action as may be
necessary or appropriate in order that Rackspace may validly and legally issue
fully paid and non-assessable Shares upon exercise of this Warrant.
19. SEVERABILITY. If any term, provision, covenant, or restriction of
this Warrant is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Warrant shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
20. NOTICES OF RECORD DATE. In case:
(a) Rackspace shall take a record of the holders of its
securities, for the purpose of entitling them to receive any dividend or other
distribution, or any right to subscribe for or purchase any shares of stock of
any class or any other securities or to receive any other right; or
(b) of any consolidation or merger of Rackspace with or into
another corporation, any capital reorganization of Rackspace, any
reclassification of the capital stock of Rackspace, or any conveyance of all or
substantially all of the assets of Rackspace to another corporation in which
holders of Rackspace's stock are to receive stock, securities or property of
another corporation; or
(c) of any voluntary dissolution, liquidation or winding-up of
Rackspace; or
(d) of any redemption or conversion of all outstanding
securities.
Then, and in each such case, Rackspace will mail or cause to be mailed to the
holder of this Warrant a notice specifying, as the case may be, (i) the date on
which a record is to be taken for the purpose of such dividend, distribution or
right, or (ii) the date on which such reorganization, reclassification,
consolidation, merger, conveyance, dissolution, liquidation, winding-up,
redemption or conversion is to take place, and the time, if any is to be fixed,
as of which the holders of record of Rackspace's shares or units (or such stock
or securities as at the time are receivable upon the exercise of this Warrant)
shall
<PAGE>
be entitled to exchange their shares or units (or such other stock or
securities), for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up. Such notice shall be delivered at least
seven (7) days prior to the date therein specified.
<PAGE>
RACKSPACE, LTD.
By: Macroweb, LC, its general partner
By: /s/ Graham Weston
--------------------------------
Graham Weston, CEO
ACKNOWLEDGED AND AGREED:
SEQUOIA CAPITAL FRANCHISE FUND
/s/ illegible
- -------------------------------
Signature
Sequoia Capital Franchise Fund
- -------------------------------
Name of Holder
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
To: RACKSPACE, LTD.
1. The undersigned hereby elects to purchase units or
shares of ________________ of RACKSPACE, LTD. pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
2. Please issue a certificate or certificates representing said
shares in the name of the undersigned or in such other name or names as are
specified below:
-----------------------------
(Name)
-----------------------------
-----------------------------
(Address)
3. The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undersigned has executed an Investment Representation
Statement attached hereto as Schedule 1.
-------------------------------------
Signature
-------------------------------------
Date
<PAGE>
SCHEDULE 1
INVESTMENT REPRESENTATION STATEMENT
Purchaser:
-----------------------------------
Rackspace: RACKSPACE, LTD. ("Rackspace")
Security:
-----------------------------------
Amount:
-----------------------------------
Date:
-----------------------------------
In connection with the purchase of the above-listed securities (the
"Securities"), the undersigned (the "Purchaser") represents to Rackspace as
follows:
(a) The Purchaser is aware of Rackspace's business affairs and
financial condition, and has acquired sufficient information about Rackspace to
reach an informed and knowledgeable decision to acquire the Securities. The
Purchaser is purchasing the Securities for its own account for investment
purposes only and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933, as amended
(the "Act").
(b) The Purchaser understands that the Securities have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of the Purchaser's investment intent as expressed herein. In this
connection, the Purchaser understands that, in the view of the Securities and
Exchange Commission ("SEC"), the statutory basis for such exemption may be
unavailable if the Purchaser's representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) The Purchaser further understands that the Securities must be held
indefinitely unless subsequently registered under the Act or unless an exemption
from registration is otherwise available. Moreover, the Purchaser understands
that Rackspace is under no obligation to register the Securities except as set
forth in the Warrant under which the Securities are being acquired. In
addition, the Purchaser understands that the certificate evidencing the
Securities will be imprinted with the legend referred to in the Warrant under
which the Securities are being purchased.
(d) The Purchaser is aware of the provisions of Rule 144 and 144A,
promulgated under the Act, which, in substance, permit limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, if applicable, including, among other
things: The availability of certain public information about Rackspace, the
resale occurring not less than one year after the party has purchased and paid
for the securities to be sold; the sale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined
<PAGE>
under the Securities Exchange Act of 1934, as amended) and the amount of
securities being sold during any three-month period not exceeding the specified
limitations stated therein.
(e) The Purchaser further understands that at the time it wishes to
sell the Securities there may be no public market upon which to make such a
sale, and that, even if such a public market then exists, Rackspace may not be
satisfying the current public information requirements of Rule 144 and 144A, and
that, in such event, the Purchaser may be precluded from selling the Securities
under Rule 144 and 144A even if the one-year minimum holding period had been
satisfied.
(f) The Purchaser further understands that in the event all of the
requirements of Rule 144 and 144A are not satisfied, registration under the Act,
compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Purchaser:
Date:
---------------, ----
-2-
<PAGE>
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION
OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO RACKSPACE, THAT SUCH
REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.
RACKSPACE, LTD.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
March 27, 2000 ("Date of Grant")
THIS CERTIFIES THAT, for value received, and subject to the provisions
and upon the terms and conditions hereinafter set forth, SEQUOIA CAPITAL
FRANCHISE PARTNERS (the "Holder") is entitled to subscribe for and purchase, at
an exercise price per unit or share (as set forth in Section 1(a) and as
adjusted herein, the "Warrant Price"), up to that number of Class C Units
(having the rights of a Class C Limited Partner), or shares of fully paid and
nonassessable Common Stock (the "Shares") of RACKSPACE, LTD., a Texas limited
partnership or its successor corporation ("Rackspace"), as determined by
dividing $360,000 by the Warrant Price (the "Warrant Coverage").
1. WARRANT PRICE; TERM
(a) WARRANT PRICE. The Warrant Price shall be the greater of
(i) $18.24, or (ii) the price which is at the mid-point of the filing range of
Rackspace's Form S-1 filed under the Securities Act of 1933, which is circulated
as its preliminary prospectus (the "Mid-point price").
(b) TERM. The purchase right represented by this Warrant is
exercisable, in whole or in part, at any time and from time to time one (1) year
from the Date of Grant; provided that it may not be exercised prior to the time
the Mid-point price is determined unless the Mid-point price is not determined
within four months of the Date of Grant, in which case the Warrant may be
exercised after such four month period whether or not the Mid-point price has
been determined. If the Mid-point price has not been determined, the Warrant
Price shall be $18.24.
2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT. Subject to
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, by
the surrender of this Warrant (with the notice of exercise form attached hereto
as EXHIBIT A duly executed) at the principal office of Rackspace and by the
payment to Rackspace, by wire transfer according to wire transfer instructions
provided by Rackspace, of an amount equal to the then applicable Warrant Price
multiplied by the number of Shares then being purchased. The entity or entities
in whose name(s) any certificate(s) representing Shares shall be issuable upon
exercise of this Warrant shall be deemed to have become the holder(s) of record
of, and shall be treated for all purposes as the record holder(s) of, the units
or shares represented thereby (and such units or shares shall be deemed to have
been issued) immediately prior to the close of business on the date or dates
upon which
-1-
<PAGE>
this Warrant is exercised. In the event of any exercise of the rights
represented by this Warrant, certificates for the units or shares of stock so
purchased shall be delivered to the holder hereof as soon as possible and in any
event within thirty days after such exercise and, unless this Warrant has been
fully exercised or expired, a new Warrant representing the portion of the
Shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be issued to the holder hereof as soon as possible and in
any event within such thirty day period.
3. STOCK FULLY PAID. All Shares that may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance pursuant to the
terms and conditions herein, be fully paid and nonassessable, and free from all
taxes, liens and charges with respect to the issue thereof.
4. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and
kind of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
(a) RECLASSIFICATION OR MERGER. In case of any
reclassification, change or conversion of securities of the class issuable upon
exercise of this Warrant (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), or in case of any merger of Rackspace with or into another
corporation (other than a merger with another corporation in which Rackspace is
the acquiring and the surviving corporation and which does not result in any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant), or in case of any sale of all or substantially all of the assets
of Rackspace, or such successor or purchasing corporation, as the case may be,
or its parent corporation, shall duly execute and deliver to the holder of this
Warrant a new Warrant (in form and substance reasonably satisfactory to the
holder of this Warrant), so that the holder of this Warrant shall have the right
to receive, at a total purchase price not to exceed that payable upon the
exercise of the unexercised portion of this Warrant, and in lieu of the Shares
theretofore issuable upon exercise of this Warrant, the kind and amount of
shares of stock, other securities, money and property receivable upon such
reclassification, change or merger by a holder of the number of Shares then
purchasable under this Warrant. Such new Warrant shall provide for adjustments
that shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 4. The provisions of this subparagraph (a) shall
similarly apply to successive reclassifications, changes, mergers,
consolidations, transfers, amendments and waivers.
(b) SUBDIVISION OR COMBINATION OF SHARES. If Rackspace at any
time while this Warrant remains outstanding and unexpired shall subdivide or
combine its outstanding Shares, the Warrant Price shall be proportionately
decreased in the case of a subdivision or increased in the case of a
combination, effective at the close of business on the date the subdivision or
combination becomes effective.
(c) STOCK DIVIDENDS AND OTHER DISTRIBUTIONS/CAPITAL ACCOUNT
UPON EXERCISE OF OPTION. In case Rackspace shall make or issue, or shall fix a
record date for the determination of eligible holders entitled to receive, a
dividend or other distribution with respect to the Shares (or any shares of
stock or other securities at the time issuable upon exercise of the Warrant)
payable in (a) securities of Rackspace or (b) assets (excluding cash dividends
paid or payable solely out of retained earnings), then, in each such case, the
holder of this Warrant on exercise hereof at any time after the consummation,
<PAGE>
effective date or record date of such dividend or other distribution, shall
receive, in addition to the Shares (or such other stock or securities) issuable
on such exercise prior to such date, and without the payment of additional
consideration therefor, the securities or such other assets of Rackspace to
which such Holder would have been entitled upon such date if such Holder had
exercised this Warrant on the date hereof and had thereafter, during the period
from the date hereof to and including the date of such exercise, retained such
shares and/or all other additional stock available by it as aforesaid during
such period giving effect to all adjustments called for by this Section 4.
Units issued upon exercise of the Warrant shall be issued with a capital account
(provided that Rackspace upon such exercise is a partnership or other entity for
which capital accounts are maintained in respect of units of ownership) which
shall bear the same ratio to the total capital accounts in Rackspace as the
number of such Units issued upon exercise bear to the aggregate units of
ownership in the Company then outstanding.
(d) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in
the Warrant Price, the number of Shares purchasable hereunder shall be adjusted,
to the nearest whole share, to the product obtained by multiplying the number of
Shares purchasable immediately prior to such adjustment in the Warrant Price by
a fraction, the numerator of which shall be the Warrant Price immediately prior
to such adjustment and the denominator of which shall be the Warrant Price
immediately thereafter.
(e) CONVERSION OF SHARES. In the event that all of the
authorized and outstanding Shares are redeemed or converted or reclassified into
other securities or property pursuant to Rackspace's charter documents or
otherwise, or the Shares otherwise cease to exist, then, in such case, the
Holder of this Warrant, upon exercise hereof at any time after the date on which
the Shares are so redeemed or converted, reclassified or cease to exist (the
"Termination Date"), shall receive, in lieu of the number of Shares that would
have been issuable upon such exercise immediately prior to the Termination Date,
the securities or property that would have been received if this Warrant had
been exercised in full and the Shares received thereupon had been simultaneously
converted immediately prior to the Termination Date, all subject to further
adjustment as provided in this Warrant. Additionally, the Warrant Price shall
be immediately adjusted to equal the quotient obtained by dividing (x) the
aggregate Warrant Price of the maximum number of Shares for which this Warrant
was exercisable immediately prior to the Termination Date by (y) the number of
Shares for which this Warrant is exercisable immediately after the Termination
Date, all subject to further adjustment as provided herein.
5. NOTICE OF ADJUSTMENTS. Whenever the Warrant Price or the number
of Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof,
Rackspace shall make a certificate signed by its chief executive officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Warrant Price and the number of Shares purchasable hereunder after giving effect
to such adjustment, which shall be mailed (by first class mail, postage prepaid)
to the holder of this Warrant.
6. FRACTIONAL SHARES. No fractional Shares will be issued in
connection with any exercise hereunder, but in lieu of such fractional Shares
Rackspace shall make a cash payment therefor based on the fair market value of
the Shares on the date of exercise as reasonably determined in good faith by
Rackspace's Board of Directors.
7. COMPLIANCE WITH SECURITIES ACT: DISPOSITION OF WARRANT OR SHARES.
<PAGE>
(a) COMPLIANCE WITH SECURITIES ACT. The holder of this
Warrant, by acceptance hereof, agrees that this Warrant, and the Shares to be
issued upon exercise hereof are being acquired for investment and that such
holder will not offer, sell or otherwise dispose of this Warrant, or any Shares
to be issued upon exercise hereof except under circumstances which will not
result in a violation of the Securities Act of 1933, as amended (the "Act"). If
at the time of any transfer or exercise of this Warrant or any of the Shares,
such securities have not been registered under the Act and are not eligible for
sale without registration under Rule 144 of the Act, Rackspace may require as a
condition of allowing such transfer or exercise, that the holder of such
securities furnish to Rackspace such information as is reasonably necessary to
establish that such transfer and exercise may be made without registration under
the Act. This Warrant and all Shares issued upon exercise of this Warrant
(unless registered under the Act) shall be stamped or imprinted with a legend in
substantially the following form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR
DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS
RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
SATISFACTORY TO RACKSPACE, THAT SUCH REGISTRATIONS ARE NOT REQUIRED OR (iii)
RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES. IN
ADDITION, NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED,
DIRECTLY OR INDIRECTLY."
(b) DISPOSITION OF WARRANT OR SHARES. Subject to the
provisions of this Section 7, this Warrant may be assigned or transferred in
whole or in part by the holder hereof. With respect to any proposed offer, sale
or other disposition of this Warrant or any Shares acquired pursuant to the
exercise of this Warrant prior to registration of such Warrant or shares, the
holder hereof and each subsequent holder of this Warrant agrees to seek and
obtain the written permission of Rackspace prior thereto, describing briefly the
manner thereof, together with a written opinion of such holder's counsel, if
reasonably requested by Rackspace, to the effect that such offer, sale or other
disposition may be effected without registration or qualification (under the Act
as then in effect or any federal or state law then in effect) of this Warrant or
such Shares and indicating whether or not under the Act certificates for this
Warrant or such Shares to be sold or otherwise disposed of require any
restrictive legend as to applicable restrictions on transferability in order to
ensure compliance with such law. Upon receiving such written notice and
reasonably satisfactory opinion, if so requested, Rackspace, as promptly as
practicable, shall notify such holder whether or not such holder may sell or
otherwise dispose of this Warrant or such Shares, all in accordance with the
terms of the notice delivered to Rackspace. Any offer, sale or other
disposition of this Warrant (or any Shares acquired pursuant to the exercise of
this Warrant) without the prior written consent of Rackspace pursuant to this
Section 7(b) shall be null and void and of no effect.
8. RIGHTS AS STOCKHOLDERS; INFORMATION. No holder of this Warrant,
as such, shall be entitled to vote or receive dividends or be deemed the holder
of Shares or any other securities of Rackspace which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the holder of this Warrant, as such, any of the rights
of a partner or
<PAGE>
stockholder of Rackspace or any right to vote for the election of directors or
upon any matter submitted to stockholders or partners at any meeting thereof, or
to receive notice of meetings, or to receive dividends or subscription rights or
otherwise until this Warrant shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become deliverable, as provided
herein.
9. MODIFICATION AND WAIVER. This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
10. NOTICES. Any notice, request, communication or other document
required or permitted to be given or delivered to the holder hereof or Rackspace
shall be delivered, or shall be sent by certified or registered mail, postage
prepaid, to each such holder at its address as shown on the books of Rackspace
or to Rackspace at the address indicated therefor on the signature page of this
Warrant.
11. BINDING EFFECT ON SUCCESSORS. Until the issuance of any new
warrant required to be issued under Section 4(a), this Warrant shall be binding
upon any corporation that issues securities in exchange for securities of the
class issuable upon exercise of this Warrant in connection with any merger,
consolidation or acquisition of all or substantially all of Rackspace's assets,
and all of the obligations of Rackspace relating to the Shares issuable upon the
exercise of this Warrant shall survive the exercise and termination of this
Warrant and all of the covenants and agreements of Rackspace shall inure to the
benefit of the successors and assigns of the holder hereof. Rackspace will, at
the time of the exercise of this Warrant, in whole or in part, upon request of
the holder hereof but at Rackspace's expense, acknowledge in writing its
continuing obligation to the holder hereof in respect of any rights (including,
without limitation, any right to registration of the shares) to which the holder
hereof shall continue to be entitled after such exercise or conversion in
accordance with this Warrant; provided, that the failure of the holder hereof to
make any such request shall not affect the continuing obligation of Rackspace to
the holder hereof in respect of such rights.
12. LOST WARRANTS OR STOCK CERTIFICATES. Rackspace covenants to the
holder hereof that, upon receipt of evidence reasonably satisfactory to
Rackspace of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to Rackspace, or in the case of
any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, Rackspace will make and deliver a new Warrant or stock certificate,
of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or
stock certificate.
13. DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
14. GOVERNING LAW. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the
internal laws of the State of Texas without regard to its conflicts of laws
principles.
15. SURVIVAL. All agreements of Rackspace and the holder hereof
contained herein shall survive indefinitely until, by their respective terms,
they are no longer operative.
<PAGE>
16. REMEDIES. In case any one or more of the covenants and agreements
contained in this Warrant shall have been breached, the holders hereof (in the
case of a breach by Rackspace), or Rackspace (in the case of a breach by a
holder), may proceed to protect and enforce their or its rights either by suit
in equity and/or by action at law, including, but not limited to, an action for
damages as a result of any such breach and/or an action for specific performance
of any such covenant or agreement contained in this Warrant.
17. ACCEPTANCE. Receipt of this Warrant by the holder hereof shall
constitute acceptance of and agreement to the foregoing terms and conditions.
18. NO IMPAIRMENT OF RIGHTS. Rackspace will not, by amendment of its
charter documents through any other means, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such action as may be necessary or appropriate in order to protect the rights of
the holder of this Warrant against impairment. Without limiting the generality
of the foregoing, Rackspace (a) will not increase the par value of any shares of
stock issuable upon the exercise of this Warrant above the amount payable
therefor upon such exercise, and (b) will take all such action as may be
necessary or appropriate in order that Rackspace may validly and legally issue
fully paid and non-assessable Shares upon exercise of this Warrant.
19. SEVERABILITY. If any term, provision, covenant, or restriction of
this Warrant is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Warrant shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
20. NOTICES OF RECORD DATE. In case:
(a) Rackspace shall take a record of the holders of its
securities, for the purpose of entitling them to receive any dividend or other
distribution, or any right to subscribe for or purchase any shares of stock of
any class or any other securities or to receive any other right; or
(b) of any consolidation or merger of Rackspace with or into
another corporation, any capital reorganization of Rackspace, any
reclassification of the capital stock of Rackspace, or any conveyance of all or
substantially all of the assets of Rackspace to another corporation in which
holders of Rackspace's stock are to receive stock, securities or property of
another corporation; or
(c) of any voluntary dissolution, liquidation or winding-up of
Rackspace; or
(d) of any redemption or conversion of all outstanding
securities.
Then, and in each such case, Rackspace will mail or cause to be mailed to the
holder of this Warrant a notice specifying, as the case may be, (i) the date on
which a record is to be taken for the purpose of such dividend, distribution or
right, or (ii) the date on which such reorganization, reclassification,
consolidation, merger, conveyance, dissolution, liquidation, winding-up,
redemption or conversion is to take place, and the time, if any is to be fixed,
as of which the holders of record of Rackspace's shares or units (or such stock
or securities as at the time are receivable upon the exercise of this Warrant)
shall
<PAGE>
be entitled to exchange their shares or units (or such other stock or
securities), for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up. Such notice shall be delivered at least
seven (7) days prior to the date therein specified.
<PAGE>
RACKSPACE, LTD.
By: Macroweb, LC, its general partner
By: /s/ Graham M. Weston
--------------------------------
Graham Weston, CEO
ACKNOWLEDGED AND AGREED:
SEQUOIA CAPITAL FRANCHISE PARTNERS
/s/ illegible
- ----------------------------------
Signature
Sequoia Capital Franchise Partners
- ----------------------------------
Name of Holder
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
To: RACKSPACE, LTD.
1. The undersigned hereby elects to purchase units or
shares of ________________ of RACKSPACE, LTD. pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
2. Please issue a certificate or certificates representing said
shares in the name of the undersigned or in such other name or names as are
specified below:
-----------------------------
(Name)
-----------------------------
-----------------------------
(Address)
3. The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undersigned has executed an Investment Representation
Statement attached hereto as Schedule 1.
------------------------------
Signature
------------------------------
Date
<PAGE>
SCHEDULE 1
INVESTMENT REPRESENTATION STATEMENT
Purchaser:
-----------------------------------
Rackspace: RACKSPACE, LTD. ("Rackspace")
Security:
-----------------------------------
Amount:
-----------------------------------
Date:
-----------------------------------
In connection with the purchase of the above-listed securities (the
"Securities"), the undersigned (the "Purchaser") represents to Rackspace as
follows:
(a) The Purchaser is aware of Rackspace's business affairs and
financial condition, and has acquired sufficient information about Rackspace to
reach an informed and knowledgeable decision to acquire the Securities. The
Purchaser is purchasing the Securities for its own account for investment
purposes only and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933, as amended
(the "Act").
(b) The Purchaser understands that the Securities have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of the Purchaser's investment intent as expressed herein. In this
connection, the Purchaser understands that, in the view of the Securities and
Exchange Commission ("SEC"), the statutory basis for such exemption may be
unavailable if the Purchaser's representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) The Purchaser further understands that the Securities must be held
indefinitely unless subsequently registered under the Act or unless an exemption
from registration is otherwise available. Moreover, the Purchaser understands
that Rackspace is under no obligation to register the Securities except as set
forth in the Warrant under which the Securities are being acquired. In
addition, the Purchaser understands that the certificate evidencing the
Securities will be imprinted with the legend referred to in the Warrant under
which the Securities are being purchased.
(d) The Purchaser is aware of the provisions of Rule 144 and 144A,
promulgated under the Act, which, in substance, permit limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, if applicable, including, among other
things: The availability of certain public information about Rackspace, the
resale occurring not less than one year after the party has purchased and paid
for the securities to be sold; the sale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined
<PAGE>
under the Securities Exchange Act of 1934, as amended) and the amount of
securities being sold during any three-month period not exceeding the specified
limitations stated therein.
(e) The Purchaser further understands that at the time it wishes to
sell the Securities there may be no public market upon which to make such a
sale, and that, even if such a public market then exists, Rackspace may not be
satisfying the current public information requirements of Rule 144 and 144A, and
that, in such event, the Purchaser may be precluded from selling the Securities
under Rule 144 and 144A even if the one-year minimum holding period had been
satisfied.
(f) The Purchaser further understands that in the event all of the
requirements of Rule 144 and 144A are not satisfied, registration under the Act,
compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Purchaser:
Date:
---------------, ----
-2-
<PAGE>
EXHIBIT 21.1
------------
Rackspace Limited, LLC Delaware
Rackspace Management, LLC Delaware
<PAGE>
EXHIBIT 23.1
The Board of Directors
Rackspace, Ltd.
When certain of the transactions referred to in note 7 of the Notes to Financial
Statements have been consummated, we will be in a position to render the
following consent.
/s/ KPMG LLP
San Antonio, Texas
March 27, 2000
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Rackspace, Ltd.
We consent to the use of our report included herein and to the references to our
firm under the headings "Experts" and "Selected Financial Data" in the
prospectus.
San Antonio, Texas
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR RACKSPACE, LTD. AS OF AND FOR PERIOD ENDED DECEMBER 31,
1999 AND PERIOD SINCE INCEPTION DECEMBER 29 - DECEMBER 31, 1998; AS WELL AS
SELECTED INCOME DATA OF PREDECESSOR, CYMITAR TECHNOLOGY GROUP, FOR 1997 AND 98
RESPECTIVELY.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR OTHER OTHER YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-28-1998 DEC-31-1997
<PERIOD-START> JAN-01-1999 DEC-29-1998 JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-28-1998 DEC-31-1997
<CASH> 3,794,784 150,000 0 0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 192,208 5,233 0 0
<ALLOWANCES> 51,016 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 3,955,598 155,233 0 0
<PP&E> 1,908,689 70,739 0 0
<DEPRECIATION> 242,550 116 0 0
<TOTAL-ASSETS> 5,863,786 343,161 0 0
<CURRENT-LIABILITIES> 1,220,261 1,001 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> 4,643,525 192,094 0 0
<TOTAL-LIABILITY-AND-EQUITY> 5,863,786 343,161 0 0
<SALES> 1,700,537 76 166,632 72,535
<TOTAL-REVENUES> 1,710,406 76 166,632 72,535
<CGS> 513,424 0 73,767 38,895
<TOTAL-COSTS> 513,424 0 73,767 38,895
<OTHER-EXPENSES> 2,796,668 285 197,238 55,265
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 53,112 66 7,767 3,247
<INCOME-PRETAX> (1,652,798) (275) 0 0
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (1,652,798) (275) (112,140) (24,872)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (1,652,798) (275) (112,140) (24,872)
<EPS-BASIC> 0 0 0 0
<EPS-DILUTED> 0 0 0 0
</TABLE>
