-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JwW46qBV+K+35pcIVJIFd5fyBmVdMhEDdXIPViKAwEe6/wQFSSHDY6kfu6zMJbI1 A/D7mzpLvJhQLw8s1ukvug== 0000891020-99-001247.txt : 19990730 0000891020-99-001247.hdr.sgml : 19990730 ACCESSION NUMBER: 0000891020-99-001247 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 26 FILED AS OF DATE: 19990729 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNAP NETWORK SERVICES CORP/WA CENTRAL INDEX KEY: 0001056386 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 91896926 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-84035 FILM NUMBER: 99673367 BUSINESS ADDRESS: STREET 1: TWO UNION SQUARE 601 UNION ST STREET 2: SUITE 1000 CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2064418800 MAIL ADDRESS: STREET 1: TWO UNION SQUARE 601 UNION ST STREET 2: SUITE 1000 CITY: SEATTLE STATE: WA ZIP: 98101 S-1 1 REGISTRATION STATEMENT 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ INTERNAP NETWORK SERVICES CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WASHINGTON 7374 91-896926 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
601 UNION STREET, SUITE 1000 SEATTLE, WASHINGTON 98101 (206) 441-8800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ANTHONY C. NAUGHTIN PRESIDENT AND CHIEF EXECUTIVE OFFICER INTERNAP NETWORK SERVICES CORPORATION 601 UNION STREET, SUITE 1000 SEATTLE, WASHINGTON 98101 (206) 441-8800 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: CHRISTOPHER W. WRIGHT, ESQ. PETER E. WILLIAMS III, ESQ. THOMAS B. YOUTH, ESQ. VICTOR H. SIM, ESQ. DOUGLAS H. HAEUBER, ESQ. MAILE Y.C. YANG, ESQ. COOLEY GODWARD LLP MORRISON & FOERSTER LLP 5200 CARILLON POINT 755 PAGE MILL ROAD KIRKLAND, WA 98033-7355 PALO ALTO, CA 94304-1018 (425) 893-7700 (650) 813-5652
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement number for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] - --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ PROPOSED MAXIMUM TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF TO BE REGISTERED PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------ Common Stock, $.001 par value per share..................... $150,000,000 $41,700 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued , 1999 Shares [INTERNAP LOGO] COMMON STOCK ------------------------- INTERNAP NETWORK SERVICES CORPORATION IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. ------------------------- OUR COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "INAP." ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------------------- PRICE $ A SHARE -------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS PUBLIC COMMISSIONS TO INTERNAP --------------- --------------- --------------- Per Share.......................... $ $ $ Total.............................. $ $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. InterNAP has granted the underwriters the right to purchase up to an additional shares of common stock to cover over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 1999. ------------------------- MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON DONALDSON, LUFKIN & JENRETTE HAMBRECHT & QUIST , 1999 3 (Inside Front Cover) [INTERNAP LOGO] 4 The current Internet architecture was not designed for today's level of traffic flows. Fundamental scaling flaws in the design of the Internet can typically cause latency and data packet loss at the interconnection points between backbone providers. These scaling flaws include routing inefficiencies, a lack of adequate network technology, the distributed management of public network access point, or NAPs, and private peering points, and a lack of economic settlement between network providers. All of these flaws result in unavoidable congestion and poor Internet performance. * The Internet infrastructure does not provide for economic settlement. Today's lack of economic settlement between network backbones at the public NAPs and private peering points results in little or no incentive for these networks to maintain an end to end quality of service. * Public NAPs and private peering points are major intersections of the Internet, where large amounts of data traffic converge. The public NAPs and private peering points are not centrally managed, and no single entity has the economic incentive to facilitate problem resolution, to optimize peering, or to bring about centralized routing administration. [Graphic depicting interaction between network backbones and public network access points and private peering points] * What does it all mean? As the rapid growth in Internet use continues, the congestion and data packet loss at the public NAPs and private peering points will hinder the performance of mission-critical applications over the public Internet. * Congested intersections often result in data packet loss. When public NAPs and private peering points are congested, data packet loss occurs, slowing downloads and decreasing the reliability of data transmissions. 5 InterNAP provides consistent high performance Internet connectivity service that is faster and more reliable than conventional service. Delivering network quality without peer.(TM) Utilizing our proprietary network architecture and advanced routing technologies, we are able to route, or transfer, data to and from businesses that are connected to one or more of our Private-Network Access Points, or P-NAPs, in a manner that minimizes the use of congested public NAPs and private peering points. This optimal routing of data traffic over the multiplicity of networks that comprise the Internet enables higher transmission speeds, lower instances of data packet loss and greater quality of service. * InterNAP provides economic incentive to backbone providers. InterNAP pays the backbone providers for sending and receiving customer data across their networks and provides a differentiated quality of service for InterNAP customers. * InterNAP's technology speeds data transmissions. With InterNAP's intelligent routing technology, data is routed directly to the backbone on which the destination resides, largely bypassing the often-congested public NAPs and private peering points. * InterNAP optimally routes customer data. InterNAP customers' data is optimally routed to and from destinations on the Internet. [Graphic depicting interaction between network backbones and InterNAP P-NAP] * InterNAP consolidates the benefits of direct access to major global Internet networks into one connection. InterNAP provides Internet connectivity services directly to major backbone providers for the price of one connection. * What does it all mean? InterNAP customers receive fast, reliable and centrally managed Internet connectivity services that maximize the performance of their mission-critical Internet-based applications. 6 (Inside Back Cover) * INTERNAP 1999 P-NAP Locations [Graphic of map depicting 1999 P-NAP locations] * Operational P-NAPs * P-NAPs to be operational by the end of 1999 7 [Graphic on page 37 depicting an example of routing over the Internet] 1. Backbone A passes off the ISP Customer request for data at the nearest private peering point to Backbone B, regardless of congestion or performance problems occurring at that point. Public NAPs and private peering points do not provide economic settlement between two peering networks, thereby resulting in "best effort" delivery with no guarantees or accountability for poor performance or lost data. 2. Using an asymmetric return route, Backbone B passes off the ISP Customer request at a public NAP, forcing the data to transit across yet another potentially congested network infrastructure, resulting in possible data packet loss and poor network performance. 8 [Graphic on page 38 depicting P-NAP routing method] The InterNAP Solution: 1. The P-NAP intelligently routes data transmissions between the InterNAP Customer Web site and the backbone ISP Customer, bypassing congested and unreliable public NAPs and private peering points. 2. For InterNAP ISP and Web site Customers that are connected to the same P-NAP, data transmissions occur within the local P-NAP infrastructure, bypassing the Internet entirely. 9 [Graphic on page 39 depicting the InterNAP virtual backbone] 10 [Graphic on page 43 depicting the P-NAP network design] 11 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................. 3 Risk Factors........................ 7 Use of Proceeds..................... 21 Dividend Policy..................... 21 Capitalization...................... 22 Dilution............................ 23 Selected Financial Data............. 24 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 25 Business............................ 35
PAGE ---- Management.......................... 48 Certain Transactions................ 58 Principal Shareholders.............. 61 Description of Capital Stock........ 64 Shares Eligible for Future Sale..... 67 Underwriters........................ 69 Legal Matters....................... 71 Experts............................. 71 Additional Information.............. 71 Index to Financial Statements....... F-1
------------------------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. In this prospectus, "InterNAP," "we," "us," and "our" refer to InterNAP Network Services Corporation and not to the underwriters. Unless otherwise indicated, all information contained in this prospectus: - Gives effect to the conversion of all outstanding shares of preferred stock into 49,469,479 shares of common stock upon the closing of this offering; and - Assumes no exercise of the underwriters' over-allotment option. UNTIL , 1999, 25 DAYS AFTER COMMENCEMENT OF THIS OFFERING, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. InterNAP(R) and P-NAP(R) are registered trademarks of InterNAP. All other brand names or trademarks appearing in this prospectus are the property of their respective holders. 2 12 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our financial statements and the notes to our financial statements appearing elsewhere in this prospectus. INTERNAP NETWORK SERVICES CORPORATION InterNAP is a leading provider of fast, reliable and centrally managed Internet connectivity services targeted at businesses seeking to maximize the performance of mission-critical Internet-based applications. Customers connected to one of our Private-Network Access Points, or P-NAPs, have their data optimally routed to and from destinations on the Internet in a manner that minimizes the use of congested public network access points, or NAPs, and private peering points. We offer our high performance Internet connectivity services at dedicated line speeds of 1.5 Megabits per second, or Mbps, to 155 Mbps to customers desiring higher transmission speeds, lower instances of data packet loss and greater quality of service than they could receive from conventional Internet connectivity providers. As of June 30, 1999, we provided consistent high performance Internet connectivity services to approximately 130 customers, including Amazon.com, Fidelity Investments, Go2Net, ITXC, Nasdaq, TheStreet.com and WebTV. THE OPPORTUNITY The Internet is rapidly becoming a critically important medium for communications and commerce. However, businesses are unable to benefit from the full potential of the Internet due, in part, to slow and unreliable data transfers. This results primarily from peering and routing practices, current routing technologies and the Internet's architecture, which was not designed to support today's large volumes of traffic. To compound this problem, Internet traffic is expected to grow rapidly. Pioneer Consulting, LLC estimates that Internet bandwidth demand in North America will grow from 175 Gigabits per second in 1998 to 2,990 Gigabits per second in 2003, representing a 76% compound annual growth rate. In addition, widespread adoption of applications that rely on network quality and require consistent, high speed data transfer, such as voice and fax over Internet Protocol, virtual private network services, multimedia document distribution and audio and video streaming, will be hindered by the performance problems of the Internet. We believe the future of Internet connectivity services will be driven by providers that, through high performance Internet routing services, enable businesses to successfully execute their mission-critical Internet-based applications over the public network infrastructures and provide consistent, high quality service. OUR SOLUTION We provide high performance Internet connectivity services through the deployment of P-NAPs, which are highly redundant network infrastructure facilities coupled with our proprietary ASsimilator routing technology. Our P-NAPs maintain high speed, dedicated connections to major global Internet backbone networks, such as AGIS, AT&T, Cable & Wireless USA, GTE Internetworking, ICG Communications, Intermedia, PSINet, Sprint, UUNET and Verio. In addition, we have entered into a traffic exchange interconnect agreement with America Online, Inc. which provides us with direct access to AOL's network of over 19 million members. Our technology platform optimally routes our customers' data packets through the backbone networks, generally bypassing Internet traffic congestion and reducing data packet loss that frequently occurs at public NAPs and private peering points. We currently operate seven P-NAPs which are located in the Boston, Chicago, Los Angeles, New York, San Jose, Seattle and Washington, D.C. metropolitan areas, and expect to complete the deployment of five additional P-NAPs in the United States by the end of 1999. 3 13 Our services provide the following key advantages: - High Performance Connectivity. We route our customers' traffic over the Internet in a way that we believe provides consistently greater speed, along with superior end-to-end control, predictability and reliability, than services offered by conventional Internet connectivity providers. - Highly Reliable Network Architecture. P-NAPs are designed with a highly redundant network infrastructure, such that any of the Internet backbones connected to a P-NAP can be used to instantly reroute customers' data packets in the event of a backbone provider network outage. - Superior Route Optimization and Management. Our proprietary routing technology and network management system provide us with data to manage network traffic and to offer economic settlements to backbone providers for the transfer of our customers' data packets. - Scalability and Flexibility. We manage each P-NAP independently and make connection upgrades locally as required with each backbone provider. This allows us to more readily scale our capacity as traffic levels increase, without the need to make uniform upgrades throughout our system of P-NAPs. - Superior Customer Service and Support. Our customers receive the benefit of our proprietary network monitoring and reporting tools and a single point of contact with our highly skilled engineers for support inquiries, network troubleshooting and diagnosis 24 hours a day, seven days a week. OUR STRATEGY Our objective is to be the leading provider of high performance Internet connectivity services that enable businesses to run mission-critical Internet-based applications and to establish and maintain the standard of quality for Internet connectivity services. To achieve this objective we intend to: - Enhance Our Core Technologies to Provide the Highest Performance Internet Connectivity Services. We intend to continue developing our P-NAP architecture and sophisticated routing technology to enable our customers to maximize the performance of existing applications and to take advantage of new services such as voice and fax over Internet Protocol, virtual private network services, multimedia document distribution and audio and video streaming. - Continue to Provide Superior Customer Service and Support. We intend to continue providing our customers with a superior customer service experience which we believe will continue to be a key competitive advantage. - Expand Our Geographic Coverage in Key Markets. We currently offer services through our P-NAPs in seven key metropolitan areas across the United States and we intend to aggressively deploy P-NAPs in key markets across the United States and internationally. - Continue to Build Our Brand Awareness. We intend to continue leveraging our brand name as our Internet connectivity services are increasingly associated with a high quality of service. - Continue to Target Strategic Markets. We intend to continue focusing our marketing message and experienced sales force on strategic market segments which are characterized by a need for fast, reliable and manageable Internet connectivity services. - Maintain Backbone Provider Neutrality. By maintaining backbone provider neutrality we are able to establish high-volume connections to major backbone providers. In order to maintain our high quality of service, we intend to continue to add backbone providers as they emerge, as existing backbone providers increase in importance, and as global Internet traffic patterns evolve. 4 14 THE OFFERING Common stock offered.................... shares Common stock to be outstanding after the offering................................ shares Use of proceeds......................... We intend to use the net proceeds from the offering for capital expenditures and general corporate purposes, including working capital. See "Use of Proceeds." Nasdaq National Market Symbol........... INAP The foregoing information is based upon the number of shares of common stock outstanding as of June 30, 1999. This information does not include, as of June 30, 1999: - 5,035,000 shares reserved for issuance under our 1998 Stock Option/Stock Issuance Plan, of which 4,132,622 shares were subject to outstanding options; - 6,500,000 shares reserved for issuance under our 1999 Equity Incentive Plan, of which 2,004,000 shares were subject to outstanding options; - 500,000 shares reserved for issuance under our 1999 Non-Employee Director Stock Option Plan; - 1,500,000 shares reserved for issuance under our 1999 Employee Stock Purchase Plan; and - 600,136 shares issuable upon exercise of outstanding warrants. See "Description of Capital Stock" and "Management -- Incentive Stock Plans." 5 15 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM INCEPTION YEAR ENDED SIX MONTHS ENDED (MAY 1, 1996) DECEMBER 31, JUNE 30, TO DECEMBER 31, ----------------- ------------------ 1996 1997 1998 1998 1999 --------------- ------- ------- ------- -------- STATEMENT OF OPERATIONS DATA: Revenues.............................. $ 44 $ 1,045 $ 1,957 $ 731 $ 3,410 Total operating costs and expenses.... 961 2,455 8,907 2,277 19,862 Loss from operations.................. (917) (1,410) (6,950) (1,546) (16,452) Net loss.............................. (959) (1,609) (6,973) (1,461) (16,149) Basic and diluted net loss per share............................... $ (.29) $ (.48) $ (2.09) $ (.44) $ (4.78) Weighted average shares used in computing basic and diluted net loss per share........................... 3,333 3,333 3,336 3,336 3,378 Pro forma basic and diluted net loss per share........................... $ (.31) $ (.34) Weighted average shares used in computing pro forma basic and diluted net loss per share.......... 22,733 47,771
Shares used in computing pro forma basic and diluted net loss per share include the shares used in computing basic and diluted net loss per share adjusted for the conversion of preferred stock into shares of common stock, as if the conversion occurred at the date of original issuance. The following table presents summary balance sheet data at June 30, 1999. The pro forma as adjusted column in the balance sheet data below gives effect to the conversion of our preferred stock outstanding as of June 30, 1999 into 49,469,479 shares of common stock and receipt of the net proceeds from the sale of shares of common stock 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.
AS OF JUNE 30, 1999 ------------------------- PRO FORMA ACTUAL AS ADJUSTED ------- -------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $13,296 $ Total assets................................................ 30,830 Capital lease obligations, less current portion............. 6,776 Total shareholders' equity.................................. 17,274
------------------------ We are a Washington corporation. Our principal executive offices are located at 601 Union Street, Suite 1000, Seattle, Washington 98101, and our telephone number is (206) 441-8800. We maintain a worldwide web site at www.internap.com. The reference to our worldwide web address does not constitute incorporation by reference of the information contained at this site. 6 16 RISK FACTORS You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently think are immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be seriously harmed. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NOT ACHIEVE OR SUSTAIN ANNUAL PROFITABILITY We have incurred net losses in each quarterly and annual period since we began operations. We incurred a net loss of $1.6 million for the year ended December 31, 1997 and a net loss of $7.0 million for the year ended December 31, 1998. Our net loss for the six months ended June 30, 1999 was $16.1 million. As of June 30, 1999, our accumulated deficit was $25.7 million. As a result of our expansion plans, we expect to incur net losses and negative cash flows from operations on a quarterly and annual basis in the foreseeable future. We cannot assure you that we will achieve or sustain revenue growth or profitability on either a quarterly or an annual basis. If we do not achieve or sustain profitability in the future, we will be unable to continue our operations. OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR PROSPECTS The revenue and income potential of our business and market is unproven, and our limited operating history makes it difficult to evaluate our prospects. We have only been in existence since 1996, and our services are only offered in limited regions. Due to our limited operating history, you should consider and evaluate our prospects in light of the risks and difficulties frequently encountered by relatively new companies, particularly companies in the rapidly evolving Internet infrastructure and connectivity markets. To address the risks we face, we must, among other things: - build and deploy our operations infrastructure, including additional P-NAPs; - maintain relationships with major backbone providers; - expand our sales organization and marketing programs; - increase awareness of the InterNAP brand; - provide reliable and cost-effective services to our customers; - respond to technological developments or service offerings by competitors; and - attract and retain qualified personnel. If we fail to adequately address these risks, our business, financial condition and results of operations may be significantly harmed. FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY NEGATIVELY AFFECT OUR STOCK PRICE Our quarterly operating results have fluctuated in the past and are likely to fluctuate significantly from quarter to quarter in the future due to a variety of factors, not all of which are under our control. Accordingly, we believe that period-to-period comparisons of our results of operations are not 7 17 meaningful and should not be relied upon as indications of future performance. Some of the factors that could cause our revenues and operating results to fluctuate include the following: - demand for and market acceptance of our Internet connectivity services; - the timing and magnitude of capital expenditures, including costs relating to the buildout and deployment of additional P-NAPs and the expansion of operations; - increasing operating expenses; - our practice of purchasing Internet connectivity from backbone providers at new P-NAPs, before customers are secured and our ability to generate revenues for our services from those P-NAPs; - our contractual obligation to purchase minimum levels of Internet connectivity from some backbone providers, without regard to the amount we resell to our customers; - changes in the prices for Internet connectivity we pay backbone providers; - our revenue mix between usage-based and fixed rate pricing plans; - our ability to obtain, and the pricing for, local loop connections to our P-NAPs; - fluctuations in the duration of the sales cycle for our services; - the compensation of our sales personnel based on achievement of periodic sales quotas; - the announcement or introduction of new or enhanced services by our competitors or us; and - conditions specific to the Internet and telecommunications industries and general economic factors. It is possible that in some future periods our results of operations may fall below the expectations of public market analysts and investors. In this event, the price of our common stock may fall. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. WE MAY EXPERIENCE DIFFICULTY DEPLOYING AND MANAGING OUR NETWORK OF P-NAPS Our success depends on our ability to continue to deploy additional P-NAPs and to integrate, operate and upgrade our P-NAP network and facilities. The deployment of new P-NAP facilities, each of which takes approximately four to six months to complete, is a key element of our business strategy. In addition to our seven existing locations, we are planning to continue to deploy P-NAPs across a wide range of geographic regions. Although we do market research in a geographic area before deploying a P-NAP facility, we do not enter into service contracts with customers prior to building a new facility. Any delay in the opening of these P-NAP facilities would significantly harm our plans for expansion of our business. We cannot assure you that we will be successful in expanding our operations on a cost-effective and timely basis or in additional geographic locations, if at all, or that there will be sufficient customer demand to support our new P-NAP facilities. The successful deployment of new P-NAP facilities will require careful management of the various risks that are associated with significant construction projects, including identifying and locating P-NAP sites, construction delays, cost estimation errors or overruns, equipment and material delays or shortages, the inability to obtain necessary permits on a timely basis, if at all, and other factors, many of which are beyond our control. Our plans to rapidly build and deploy additional P-NAPs could place a significant strain on our management's time and our resources. We cannot assure you that we will be able to successfully deploy and manage our expanding network of P-NAPs. 8 18 New P-NAP facilities, if completed, will result in substantial new operating expenses, including expenses associated with hiring, training, retaining and managing new employees, provisioning capacity from backbone providers, purchasing new equipment, implementing new systems, leasing additional real estate and incurring additional depreciation expense. In addition, if we do not institute adequate financial and managerial controls, reporting systems, and procedures with which to operate multiple facilities in geographically dispersed locations, our operations will be significantly harmed. OUR REVENUES ARE HEAVILY DEPENDENT ON A FEW CUSTOMERS We currently derive a substantial portion of our total revenues from a limited number of customers. For the six months ended June 30, 1999, revenues from U.S. Electrodynamics, Inc. represented 10.6% of our total revenues. For the year ended December 31, 1998, revenues from Go2Net represented 13.6% of our total revenues. For the year ended December 31, 1997, revenues from Starcom Service Corporation represented 20.8% of our total revenues and Go2Net represented 18.1% of our total revenues. Typically, the agreements with our customers are based on our standard terms and conditions of service and generally have terms ranging from one year to three years. We cannot assure you that revenues from these customers or from other customers that have accounted for a significant portion of our revenues in past periods, individually or as a group, will continue, or if continued, will reach or exceed historical levels in any future period. For example, in 1998 Starcom defaulted on its payments to us, subsequently filed for bankruptcy and is no longer a customer of ours. In addition, we may not succeed in diversifying our customer base in future periods. Accordingly, we may continue to derive a significant portion of our revenues from a relatively small number of customers. Further, we have had limited experience with the renewal of contracts by customers whose initial service contract terms have been completed and cannot assure you that these customers will renew their contracts with us. OUR SUCCESS DEPENDS ON OUR RELATIONSHIPS WITH INTERNET BACKBONE PROVIDERS In delivering our services, we rely on Internet backbones which are built and operated by others. In order to be able to provide optimal routing to our customers through our P-NAPs, we must purchase connections from several Internet backbone providers. Currently, in each of our fully operational P-NAPs, we have connections to at least six of the following 10 backbone providers: Apex Global Information Systems (AGIS), AT&T, Cable & Wireless USA, Inc., GTE Internetworking, Inc., ICG Communications, Intermedia Communications Inc., PSINet, Inc., Sprint Internet Services, UUNET, an MCI WorldCom Company, and Verio, Inc. In addition, we do not begin to operate a P-NAP until it is connected to at least two of the following four backbone providers: UUNET, Sprint, Cable & Wireless USA and GTE Internetworking. We cannot assure you that these Internet backbone providers will continue to provide service to us on a cost-effective basis, if at all, or that these providers will provide us with additional capacity to adequately meet customer demand. Furthermore, it is very unlikely that we could replace our Internet backbone providers on comparable terms. If we fail to maintain relationships with, or are unable to obtain necessary additional capacity from, our existing backbone providers, or if we fail to establish and maintain relationships with other backbone providers that may emerge or that are significant in geographic areas in which we locate our P-NAPs, our business and prospects could suffer significantly. In addition, our business, financial condition and results of operations would be significantly harmed if there is a material increase in our cost of obtaining Internet connectivity. WE OPERATE IN AN EXTREMELY COMPETITIVE MARKET, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST OUR MANY COMPETITORS The Internet connectivity services market is extremely competitive, and there are few substantial barriers to entry. We expect that competition will intensify in the future. Many of our competitors 9 19 have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than we do. As a result, as compared to us, our competitors may: - develop and expand their network infrastructures and service offerings more efficiently or more quickly; - adapt more rapidly to new or emerging technologies and changes in customer requirements; - take advantage of acquisitions and other opportunities more effectively; - develop Internet services and products that are superior to or have greater market acceptance; - adopt more aggressive pricing policies and devote greater resources to the promotion, marketing, sale, research and development of their products and services; - make more attractive offers to our existing and potential employees and strategic partners or establish cooperative relationships with each other or with third parties; and - more effectively take advantage of existing relationships with customers or exploit a more widely recognized brand name to market and sell their services. Our competitors include: - backbone providers that provide us connectivity services, including AGIS, AT&T, Cable & Wireless USA, GTE Internetworking, ICG Communications, Intermedia, PSINet, Sprint, UUNET and Verio; - regional Bell operating companies which offer Internet access; and - global, national and regional Internet service providers. In addition, if we are successful in implementing our international expansion, we will encounter additional competition from international Internet service providers as well as international telecommunications companies. We also believe that new competitors will enter our market. Such new competitors could include computer hardware, software, media and other technology and telecommunications companies. A number of telecommunications companies and online service providers currently offer, or have announced plans to offer or expand, their network services. Other companies, including GTE Internetworking, PSINet and Verio, have expanded their Internet access products and services through acquisition. Further, the ability of some of our competitors to bundle other services and products with their network services could place us at a competitive disadvantage. Various companies are also exploring the possibility of providing, or are currently providing, high-speed data services using alternative delivery methods including the cable television infrastructure, direct broadcast satellites, wireless cable and wireless local loop. In addition, Internet backbone providers may make technological developments, such as improved router technology, that will enhance the quality of their services. We may not have the financial resources, technical expertise, sales and marketing abilities or support capabilities to compete successfully in the intensely competitive market served by us. If we are unable to compete successfully against our competitors, our business, financial condition and results of operations will be significantly harmed. WE MAY ENCOUNTER PRICING PRESSURE THAT COULD AFFECT OUR OPERATING RESULTS We currently charge, and expect to continue to charge, more for our Internet connectivity services than our competitors. By bundling their services and reducing the overall cost of their solutions, telecommunications companies that compete with us may be able to provide customers 10 20 with reduced communications costs in connection with their Internet connectivity services or private network services, thereby significantly increasing pricing pressure on us. We may not be able to offset the effects of any such price reductions even with an increase in the number of our customers, higher revenues from enhanced services, cost reductions or otherwise. Increased price competition or other competitive pressures could erode our market share and could significantly harm our business. In addition, we believe that the Internet connectivity industry is likely to encounter consolidation in the future. Consolidation could result in increased price and other competition in our market, which could significantly harm our business, financial condition and results of operations. A FAILURE IN OUR NETWORK OPERATIONS CENTER, P-NAPS OR COMPUTER SYSTEMS WOULD CAUSE A SIGNIFICANT DISRUPTION TO OUR BUSINESS Our business depends on the efficient and uninterrupted operation of our network operations center, our P-NAPs and our computer and communications hardware systems and infrastructure. We currently have one network operations center located in Seattle, and we have seven P-NAPs which are located in the Boston, Chicago, Los Angeles, New York, San Jose, Seattle and Washington, D.C. metropolitan areas. If we experience a problem at our network operations center, we may be unable to provide Internet connectivity services to our customers, provide customer service and support or monitor our network infrastructure and P-NAPs, any of which would seriously harm our business. While we have taken precautions against systems failure, interruptions could result from natural disasters as well as power loss, telecommunications failure and similar events. We also lease capacity from Internet backbone providers whose service may be interrupted. Any damage to or failure of our systems or infrastructure or our service providers could result in reductions in, or terminations of, services supplied by us to our customers, which could significantly harm our business, financial condition and results of operations. OUR BRAND IS NOT WELL-KNOWN AND FAILURE TO DEVELOP BRAND RECOGNITION COULD HURT OUR BUSINESS To successfully execute our strategy, we must strengthen our brand awareness. While many of our competitors have well-established brands associated with the provision of Internet connectivity services, to date our market presence has been limited principally to the Boston, Chicago, Los Angeles, New York, San Jose, Seattle and Washington D.C. metropolitan areas. To date, we have attracted our existing customers primarily through a relatively small sales force and word of mouth. In order to build our brand awareness, we intend to significantly increase our marketing efforts, which may not be successful, and we must continue to provide high quality services. As part of our brand building efforts, we expect to increase our marketing budget substantially as well as our marketing activities, including advertising, tradeshows, direct response programs and new P-NAP launch events. We cannot assure you that these efforts will succeed as planned. If we do not build our brand awareness, our ability to realize our strategic and financial objectives could be hurt. WE DEPEND UPON KEY PERSONNEL AND MAY BE UNABLE TO HIRE AND RETAIN SUFFICIENT NUMBERS OF QUALIFIED PERSONNEL Our future performance depends to a significant degree upon the continued contributions of our executive management team and key technical personnel. The loss of any member of our executive management team or a key technical employee, such as our Chief Executive Officer, Anthony Naughtin, our Chief Technology Officer, Christopher Wheeler, or our Chief Financial Officer, Paul McBride, could significantly harm us. Any of our officers or employees can terminate his or her relationship with us at any time. To the extent that we are able to expand our operations and deploy additional P-NAPs, our workforce will be required to grow. Accordingly, our future success depends on our ability to attract, hire, train and retain a substantial number of highly skilled management, 11 21 technical, sales, marketing and customer support personnel. Competition for qualified employees is intense. Consequently, we may not be successful in attracting, hiring, training and retaining the people we need, which would seriously harm our business and results of operations. WE MAY NOT BE ABLE TO SUPPORT OUR RAPID GROWTH EFFECTIVELY Since the introduction of our Internet connectivity services, we have experienced a period of rapid growth and expansion which has placed, and continues to place, a significant strain on all of our resources. We expect our growth to continue to strain our management, operational and financial resources. For example, we may not be able to install adequate financial control systems in an efficient and timely manner, and our current or planned information systems, procedures and controls may be inadequate to support our future operations. The difficulties associated with installing and implementing new systems, procedures and controls may place a significant burden on our management and our internal resources. Our inability to manage growth effectively would seriously harm our business, financial condition and results of operations. WE FACE RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION Although we currently operate in seven domestic metropolitan markets, a key component of our strategy is to expand into international markets. We have no experience operating internationally. We may not be able to adapt our services to international markets or market and sell these services to customers abroad. In addition, we may find it more difficult and expensive to hire, train and retain employees and to manage international operations together with our United States operations. International operations are subject to a number of risks, including: - expenses associated with localizing our services for foreign countries; - difficulties in establishing and maintaining relationships with foreign backbone providers and local vendors, including co-location and local loop providers; - difficulties in locating, building and deploying P-NAPs in foreign countries and managing P-NAPs and network operations centers across disparate geographic areas; - difficulties complying with different technical requirements and standards; - the development of technologies that are necessary for us to deliver our Internet connectivity services internationally; - business practices that favor local competition and protectionist laws; - multiple, conflicting and changing governmental laws and regulations; - longer sales cycles; - difficulties in collecting accounts receivable; - difficulties associated with enforcing agreements through foreign legal systems; and - foreign currency exchange rate fluctuations. If we fail to successfully address the risks associated with our currently proposed international operations, our international sales growth will be limited and our business, financial condition and results of operations may be significantly harmed. 12 22 OUR FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY MAY ADVERSELY AFFECT US, AND THERE IS A RISK OF INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS We believe that patents and other intellectual property rights are important to our business and our future success. We file patent applications to protect our technology, inventions and improvements to inventions that we consider important to our business. The United States Patent and Trademark Office, USPTO, has recently notified us that it has allowed the claims in our initial patent application. Additional claims that were included by amendment in that application are still pending. We cannot assure you that the USPTO will allow any additional claims under our patent application, or, if allowed, that any patent issued will be of any benefit to us. It is possible that: - our pending patent applications may not result in the issuance of patents; - any patents that may be issued to us could still be successfully challenged by third parties, which could result in our loss of the right to prevent others from exploiting the inventions claimed in those patents; - current and future competitors may independently develop similar technologies, duplicate our services and products or design around any patents that may be issued to us; - effective patent protection may not be available in every country in which we intend to do business; and - any patents that may be issued to us may not provide significant proprietary protection or commercial advantage to us. In addition to patent protection, we believe the protection of our copyrightable materials, trademarks and trade secrets is important to our future success. We rely on a combination of laws, such as copyright, trademark and trade secret laws and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. In particular, we generally enter into confidentiality agreements with our employees and nondisclosure agreements with our customers and corporations with whom we have strategic relationships. In addition, we generally register our important trademarks with the USPTO to preserve their value and establish proof of our ownership and use of these trademarks. Any trademarks that may be issued to us may not provide significant proprietary protection or commercial advantage to us. Despite any precautions that we have taken, intellectual property laws and contractual restrictions may not be sufficient to prevent misappropriation of our technology or deter others from developing similar technology. The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies that are important to our business. Any claims that our services infringe or may infringe proprietary rights of third parties could significantly harm our business, financial condition or results of operations. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel or require us to enter into royalty or licensing agreements, any of which could significantly harm our operating results. In addition, in our customer agreements, we agree to indemnify our customers for any expenses or liabilities resulting from claimed infringement of patents, trademarks or copyrights of third parties. In the event a claim against us was successful, and we could not obtain a license to the relevant or a substitute technology on acceptable terms, or redesign our products to avoid infringement, our business, financial condition and results of operations would be significantly harmed. 13 23 WE ARE DEPENDENT ON THIRD PARTY SUPPLIERS FOR KEY COMPONENTS OF OUR NETWORK INFRASTRUCTURE We are dependent on other companies to supply various key components of our infrastructure, including the local loops between our P-NAPs and our Internet backbone providers and between our P-NAPs and our customers' networks. In addition, the routers and switches used in our network infrastructure are currently supplied by a limited number of vendors, including Cisco Systems, Inc. We cannot assure you that additional sources of these products would be available on satisfactory terms, if at all. We purchase these products pursuant to purchase orders placed from time to time, we do not carry significant inventories of these products, and we have no guaranteed supply arrangements with our vendors. Any failure to obtain required products or services on a timely basis and at an acceptable cost would significantly harm our business, financial condition and results of operations. We have in the past experienced delays in receiving shipments of equipment purchased. To date, these delays have not adversely affected us, but we cannot assure you that we will not be adversely affected by delays in the future. If Cisco Systems does not provide us with its routers, our business, financial condition and results of operations may be significantly harmed. In addition, any failure of our limited source suppliers to provide products or services that comply with evolving Internet and telecommunications standards or that interoperate with other products or services used by us in our network infrastructure could cause our business, financial condition or results of operations to suffer. YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS Many computers, software and other equipment include computer code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems could fail to operate or fail to produce correct results if "00" is interpreted to mean 1900, rather than 2000. These problems are widely expected to increase in frequency and severity as the year 2000 approaches and are commonly referred to as the "Year 2000 problem." The Year 2000 problem could result in system failures or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Year 2000 problem may affect the network infrastructure, computers, software and other equipment that we use, operate or maintain for our operations. We believe that we have identified most of the major computers, software applications and related equipment used in connection with our internal operations that will need to be evaluated to determine if they must be modified, upgraded or replaced to minimize the possibility of a material disruption to our business. We cannot assure you that our computers and systems are Year 2000 compliant. In addition, many of our customers' and suppliers' Internet operations may be affected by complications related to the Year 2000 problem. The failure of our customers or suppliers to ensure that their systems are Year 2000 compliant could have a significantly harmful effect on our customers and suppliers, resulting in decreased Internet usage or the delay or inability to obtain necessary data communication or telecommunication capacity, which in turn could have a significantly harmful effect on our business, financial condition and results of operations. For further discussion of the Year 2000 problem, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE AND MAY NOT BE ABLE TO SECURE ADEQUATE FUNDS ON TERMS ACCEPTABLE TO US The expansion and development of our business will require significant capital, which we may be unable to obtain, to fund our capital expenditures and operations, including working capital needs. Our principal capital expenditures and lease payments include the purchase, lease and installation of network equipment such as routers, telecommunications equipment and other computer equipment. The timing and amount of our future capital requirements may vary significantly depending on 14 24 numerous factors, including regulatory, technological, competitive and other developments in our industry. During the next twelve months, we expect to meet our cash requirements with existing cash, cash equivalents and short-term investments, the net proceeds from this offering and cash flow from sales of our services. However, our capital requirements depend on several factors, including the rate of market acceptance of our services, the ability to expand our customer base, the rate of deployment of additional P-NAPs and other factors. If our capital requirements vary materially from those currently planned, or if we fail to generate sufficient cash flow from the sales of our services, we may require additional financing sooner than anticipated or we may have to delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities. We may not be able to obtain future equity or debt financing on favorable terms, if at all. In addition, our credit agreement contains covenants restricting our ability to incur further indebtedness. Future borrowing instruments such as credit facilities and lease agreements are likely to contain similar or more restrictive covenants and will likely require us to pledge assets as security for borrowings thereunder. Our inability to obtain additional capital on satisfactory terms may delay or prevent the expansion of our business, which could cause our business, financial condition and results of operations to suffer. RISKS RELATED TO OUR INDUSTRY OUR SUCCESS DEPENDS ON THE ACCEPTANCE OF OUR SERVICES IN AN EMERGING AND UNCERTAIN INTERNET CONNECTIVITY MARKET If the market for high performance Internet connectivity services fails to develop, or develops more slowly than expected, or if our services do not achieve widespread market acceptance, our business, financial condition and results of operations would be significantly harmed. This market has only recently begun to develop, is evolving rapidly and likely will be characterized by an increasing number of entrants. There is significant uncertainty as to whether this market ultimately will prove to be viable or, if it becomes viable, that it will grow. Our future growth depends on the growth of the Internet as a global communications and commerce medium. Even if Internet usage grows, we cannot assure you that we will be able to successfully and cost-effectively market and sell our services to a sufficiently large number of customers. We typically charge more for our services than do our competitors, which may affect market acceptance of our services. Furthermore, if the Internet becomes subject to a form of central management, or if the Internet backbone providers establish an economic settlement arrangement regarding the exchange of traffic between backbones, the problems of congestion, latency and data packet loss addressed by our Internet connectivity services could be largely resolved and our business, financial condition and results of operations could be significantly harmed. In order to be successful in this emerging market, we must be able to differentiate ourselves from the competition through service offerings and brand name recognition. We cannot assure you that we will be successful in making this differentiation or achieving widespread acceptance of our services, or that we will not experience difficulties that could delay or prevent the successful development, introduction or marketing of our services. OUR BUSINESS IS DEPENDENT ON THE CONTINUED GROWTH IN USE AND IMPROVEMENT OF THE INTERNET Critical issues concerning the commercial use of the Internet remain unresolved and may affect the growth of Internet use, especially in the business market targeted by us. Despite growing interest in the varied commercial uses of the Internet, many businesses have been deterred from purchasing Internet connectivity services for a number of reasons, including inconsistent quality of service, lack of availability of cost-effective, high-speed options, a limited number of local access points for corporate users, inability to integrate business applications on the Internet, the need to deal with 15 25 multiple and frequently incompatible vendors and a lack of tools to simplify Internet access and use. Capacity constraints caused by growth in the use of the Internet may, unless resolved, impede further development of the Internet to the extent that users experience delays, transmission errors and other difficulties. Further, the adoption of the Internet for commerce and communications, particularly by those individuals and enterprises that have historically relied upon alternative means of commerce and communication, generally requires the understanding and acceptance of a new way of conducting business and exchanging information. In particular, enterprises that have already invested substantial resources in other means of conducting commerce and exchanging information may be particularly reluctant or slow to adopt a new strategy that may make their existing personnel and infrastructure obsolete. The failure of the market for business related Internet solutions to further develop could cause our business, financial condition and results of operations to suffer. IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL CHANGE, OUR BUSINESS COULD SUFFER The Internet connectivity industry is characterized by rapidly changing technology, industry standards, customer needs and competition, as well as by frequent new product and service introductions. If we do not successfully use or develop new technologies, adapt our network infrastructure to changing customer requirements and industry standards, introduce new services or enhance our existing services on a timely basis, or if new technologies or enhancements used or developed by us do not gain market acceptance, our business could be hurt. While continuing to develop our business model, deploy additional P-NAPs and offer additional services, our future success will depend, in part, on our ability to accomplish all of the following in a timely and cost-effective manner: - effectively use and integrate leading technologies; - continue to develop our technical expertise; - enhance our current Internet connectivity services; - develop new services that meet changing customer needs; - achieve significant market acceptance of our services; and - influence and respond to emerging industry standards and other changes. We cannot assure you that we will successfully use or develop new technologies, introduce new services or enhance our existing services on a timely basis, if at all, or that new technologies or enhancements used or developed by us will achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense. In addition, we cannot assure you that, if required, we will successfully adapt our network and services to alternate access devices and technologies. If our services do not continue to be compatible and interoperable with products and architectures offered by other industry members, our ability to compete could be impaired. Our ability to compete successfully is dependent, in part, upon the continued compatibility and interoperability of our services with products and architectures offered by various other industry participants. Although we intend to support emerging standards in the market for Internet connectivity, we cannot assure you that we will be able to conform to new standards in a timely fashion, if at all, or maintain a competitive position in the market. New technologies and industry standards have the potential to replace or provide lower cost alternatives to our services. The adoption of such new technologies or industry standards could render our existing services obsolete and unmarketable. For example, our services rely on the continued widespread commercial use of the Transmission Control Protocol/Internetwork Protocol, commonly known as TCP/IP. Alternative open 16 26 protocol and proprietary protocol standards could emerge and become widely adopted. A resulting reduction in the use of TCP/IP could render our services obsolete and unmarketable. Our failure to anticipate the prevailing standard or the failure of a common standard to emerge could hurt our business. Further, we anticipate the introduction of other new technologies, such as voice and fax over Internet Protocol, virtual private network services, multimedia document distribution and audio and video streaming, requiring broadband access to the Internet, but we cannot assure you that such technologies will create opportunities for us. If alternative technologies are developed that make our services obsolete, our business, financial condition and results of operations will be significantly harmed. WE COULD EXPERIENCE SYSTEM FAILURES AND CAPACITY CONSTRAINTS, WHICH WOULD AFFECT OUR ABILITY TO COMPETE Interruptions in service to our customers could hurt our business. Our operations depend upon our ability to protect our customers' data and equipment, our equipment and our network infrastructure, including our connections to our backbone providers, against damage from human error or "acts of God." Even if we take precautions, the occurrence of a natural disaster or other unanticipated problem could result in interruptions in the services we provide to our customers. At this time, we do not have a formal disaster recovery plan. Although we have built redundancy into our network and hosting facilities, our network is currently subject to various single points of failure. For example, a problem with one or more of our backbone providers could cause an interruption in the services we provide to some of our customers. Any interruptions in service could: - cause end users to seek damages from us for losses incurred; - require us to spend more money replacing existing equipment, expanding facilities or adding redundant facilities; - cause us to spend money on existing or new equipment and infrastructure earlier than we plan; - damage our reputation for reliable service; - cause existing customers to cancel our service; or - make it more difficult for us to attract new customers and partners. Any of these results could hurt our business. Failure of the backbone providers and other Internet infrastructure companies to continue to grow in an orderly manner could result in service interruptions. While the national telecommunications networks and Internet infrastructures have historically developed in an orderly manner, there is no guarantee that this will continue as more services, users and equipment connect to the networks. Failure by our telecommunications and Internet service providers to provide us with the data communications capacity we require could cause service interruptions, which could hurt our business. OUR NETWORK AND SOFTWARE ARE VULNERABLE TO SECURITY BREACHES AND SIMILAR THREATS WHICH COULD RESULT IN OUR LIABILITY FOR DAMAGES AND HARM OUR REPUTATION Despite the implementation of network security measures, the core of our network infrastructure is vulnerable to computer viruses, break-ins, network attacks and similar disruptive problems. This could result in our liability for damages, and our reputation could suffer, thereby deterring potential customers from working with us. Security problems caused by third parties could lead to interruptions and delays or to the cessation of service to our customers. Furthermore, inappropriate use of the network by third parties could also jeopardize the security of confidential information stored in our computer systems and in those of our customers. 17 27 Although we intend to continue to implement industry-standard security measures, in the past some of these industry-standard measures have occasionally been circumvented by third parties, although not in our system. Therefore, we cannot assure you that the measures we implement will not be circumvented. The costs and resources required to eliminate computer viruses and alleviate other security problems may result in interruptions, delays or cessation of service to our customers, which could hurt our business. CHANGES IN GOVERNMENT REGULATION COULD ADVERSELY AFFECT OUR BUSINESS There is currently only a small body of laws and regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet, international, federal, state and local governments may adopt laws and regulations which affect the Internet. The nature of any new laws and regulations and the manner in which existing and new laws and regulations may be interpreted and enforced cannot be fully determined. The adoption of any future laws or regulations might decrease the growth of the Internet, decrease demand for our services, impose taxes or other costly technical requirements or otherwise increase the cost of doing business on the Internet or in some other manner have a significantly harmful effect on us or our customers. The government may also seek to regulate some segments of our activities as it has with basic telecommunications services. Moreover, the applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment, personal privacy and other issues is uncertain and developing. We cannot predict the impact, if any, that future regulation or regulatory changes may have on our business. RISKS RELATED TO OUR OFFERING OUR STOCK HAS NO PRIOR TRADING MARKET; YOU MAY NOT BE ABLE TO RESELL YOUR STOCK AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE Before this offering, there has not been a public trading market for our common stock and there are no assurances that an active trading market for our common stock will develop or be sustained after this offering. Further, the market price of our common stock may decline below our initial public offering price. The initial public offering price will be determined by negotiations between the representatives of the underwriters and us. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. INTERNET RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY DEPRESS OUR STOCK PRICE The stock market and specifically the stock prices of Internet related companies have been very volatile. This volatility is often not related to the operating performance of the companies. This broad market volatility and industry volatility may reduce the price of our common stock, without regard to our operating performance. Due to this volatility, the market price of our common stock could significantly decrease. SIGNIFICANT SHAREHOLDERS AND CURRENT MANAGEMENT WILL CONTROL APPROXIMATELY % OF OUR COMMON STOCK AFTER THIS OFFERING, AND THESE PARTIES MAY HAVE CONFLICTS OF INTEREST Immediately following this offering, Morgan Stanley Venture Partners III, L.P. and certain affiliated funds, collectively, Morgan Stanley Dean Witter Venture Partners, H&Q InterNAP Investors, L.P., Oak Investment Partners VIII, L.P., Vulcan Ventures Incorporated and Robert J. Lunday, Jr. will beneficially own approximately %, %, %, % and %, respectively, of our outstanding common stock. See "Principal Shareholders" and "Underwriters". In 18 28 addition, our executive officers and directors may be deemed to beneficially own in the aggregate approximately % of our outstanding common stock, including shares of our common stock owned by and Robert J. Lunday, Jr. that may be deemed to be owned by some of our officers and directors as a result of their relationships with these entities. Accordingly, Morgan Stanley Dean Witter Venture Partners, H&Q InterNAP Investors, L.P., Oak Investment Partners VIII, L.P., Vulcan Ventures Incorporated and Robert J. Lunday, Jr. and our executive officers and directors, whether acting alone or together, will be able to exert considerable influence over any stockholder vote, including any vote on the election or removal of directors and any merger, consolidation or sale of all or substantially all of our assets, and control our management and affairs. This control could discourage others from initiating potential merger, takeover or other change in control transactions. As a consequence, our business could be hurt. Each of Morgan Stanley Dean Witter Venture Partners, H&Q InterNAP Investors, L.P., Oak Investment Partners VIII, L.P. and Vulcan Ventures Incorporated has one representative on our board of directors. In addition, Robert J. Lunday, Jr. is one of our directors. FUTURE SALES OF OUR COMMON STOCK BY OUR EXISTING SHAREHOLDERS COULD CAUSE OUR STOCK PRICE TO FALL If our shareholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options and warrants, the market price of our common stock may fall. Such sales might also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. After completion of this offering, we will have shares of common stock outstanding, assuming no exercise of outstanding options or warrants after June 30, 1999. For further information regarding sales of stock subsequent to this offering, see "Shares Eligible for Future Sale" and "Underwriting." OUR MANAGEMENT HAS BROAD DISCRETION IN THE APPLICATION OF PROCEEDS, WHICH MAY INCREASE THE RISK THAT THE PROCEEDS WILL NOT BE APPLIED EFFECTIVELY The net proceeds of this offering are not allocated for specific purposes. Our management will have broad discretion in determining how to spend the proceeds of this offering and may spend proceeds in a manner that our shareholders may not deem desirable. YOU WILL EXPERIENCE IMMEDIATE AND SIGNIFICANT DILUTION OF BOOK VALUE PER SHARE The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of the outstanding common stock immediately after this offering. Therefore, based upon an assumed initial public offering price of $ per share, if you purchase our common stock in this offering, you will incur immediate dilution of approximately $ . If additional shares are sold by the underwriters following exercise of their over-allotment option, or if outstanding options or warrants to purchase shares of common stock are exercised, there will be further dilution. WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT MAY DISCOURAGE TAKE-OVER ATTEMPTS AND DEPRESS THE MARKET PRICE OF OUR STOCK Provisions of our amended and restated articles of incorporation and by-laws, as amended, as well as provisions of Washington law, may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. See "Descriptions of Capital Stock" for a discussion of such anti-takeover provisions. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by 19 29 terminology such as "may," "will," "should," "except," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under "Risk Factors." These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results or to changes in our expectations. 20 30 USE OF PROCEEDS The net proceeds to be received by us from the sale of shares of common stock in this offering are estimated to be $ ($ if the underwriters exercise their over-allotment option in full), 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. We expect to use the net proceeds primarily for capital expenditures associated with the expansion of our network, and for general corporate purposes, including working capital. The amounts we actually expend for this expansion and other purposes may vary significantly and will depend on a number of factors, including the amount of our future revenues and other factors described under "Risk Factors." Accordingly, our management will retain broad discretion in the allocation of the net proceeds of this offering. A portion of the net proceeds may also be used to acquire or invest in complementary businesses, technologies, product lines or products. We have no current plans, agreements or commitments with respect to any acquisitions, and we are not currently engaged in any negotiations with respect to any such transaction. Pending these uses, the net proceeds of this offering will be invested in short term, interest-bearing, investment grade securities. DIVIDEND POLICY We have never declared nor paid any cash dividends on our capital stock. We currently intend to retain any future earnings to finance the growth and development of our business and therefore do not anticipate paying any cash dividends in the foreseeable future. In addition, our loan and security agreement with a commercial bank prohibits the payment of dividends. 21 31 CAPITALIZATION The following table sets forth our capitalization as of June 30, 1999: - on an actual basis, - on a pro forma basis to reflect the conversion upon the closing of this offering of all outstanding shares of preferred stock into 49,469,479 shares of common stock; and - on a pro forma as adjusted basis to reflect the sale of the common stock offered in this offering at an assumed initial public offering price of $ per share, and the receipt of the net proceeds therefrom, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. This information should be read in conjunction with our unaudited financial statements and our unaudited pro forma financial information included elsewhere in this prospectus.
AS OF JUNE 30, 1999 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- -------------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Capital lease obligations, less current portion....... $ 6,776 $ 6,776 $ 6,776 -------- -------- ------- Shareholders' equity: Convertible preferred stock: $.001 par value per share, 50,069,615 shares authorized, 49,469,479 issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted.................. 50 -- -- Common stock: $.001 par value per share, 300,000,000 shares authorized, 4,031,749 issued and outstanding, actual; 300,000,000 shares authorized, 53,501,228 shares issued and outstanding, pro forma; and 500,000,000 shares authorized, shares issued and outstanding, pro forma as adjusted............... 4 54 Additional paid-in capital.......................... 57,023 57,023 Deferred stock compensation......................... (14,113) (14,113) Accumulated deficit................................. (25,690) (25,690) -------- -------- ------- Total shareholders' equity....................... 17,274 17,274 -------- -------- ------- Total capitalization........................ $ 24,050 $ 24,050 $ ======== ======== =======
This capitalization table excludes the following shares: - 6,136,622 shares subject to options outstanding as of June 30, 1999 with a weighted average exercise price of $1.58 per share; - 6,703,296 shares that could be issued under our stock plans; and - 600,136 shares issuable upon exercise of outstanding warrants at a weighted average exercise price of $.60 per share. See "Description of Capital Stock" and "Management -- Incentive Stock Plans." 22 32 DILUTION Our pro forma net tangible book value as of June 30, 1999 was approximately $ million, or approximately $ per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of outstanding shares of common stock, assuming conversion of all outstanding shares of preferred stock into common stock. After giving effect to our sale of the shares of common stock in this offering at an assumed initial public offering price of $ per share, and our receipt of the estimated net proceeds therefrom, our pro forma net tangible book value as of June 30, 1999 would have been approximately $ million, or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing shareholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share as of June 30, 1999................................................... $ Increase per share attributable to new investors.......... ------- Pro forma net tangible book value per share after this offering.................................................. ------- Dilution per share to new investors......................... $ =======
The following table summarizes, on a pro forma basis as of June 30, 1999, the differences between existing shareholders and the purchasers of shares in this offering (at an assumed initial public offering price of $ per share) with respect to the number of shares of common stock purchased, the total consideration paid and the average price per share paid, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ---------------------- ---------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ----------- ------- ----------- ------- --------- Existing shareholders.......... 53,501,228 % $$40,948,275 % $ .77 New investors.................. ----------- --- ----------- --- Total................ % $ % =========== === =========== ===
The foregoing discussion and tables assume no exercise of any stock options or warrants outstanding as of June 30, 1999. As of June 30, 1999, there were options outstanding to purchase a total of 6,136,622 shares with a weighted average exercise price of $1.58 per share and warrants outstanding to purchase a total of 600,136 shares with a weighted average exercise price of $.60 per share. To the extent that any of these options or warrants are exercised, there will be further dilution to new investors. 23 33 SELECTED FINANCIAL DATA The following selected financial data are qualified by reference to, and should be read in conjunction with, our financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. The statement of operations data presented below for the period from inception (May 1, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998 and the selected balance sheet data at December 31, 1997 and 1998 are derived from our financial statements that have been audited by PricewaterhouseCoopers LLP, independent accountants, included elsewhere in this prospectus. The selected balance sheet data at December 31, 1996 are derived from our financial statements that have also been audited by PricewaterhouseCoopers LLP and that are not included in this prospectus. The selected statement of operations data for the six months ended June 30, 1998 and 1999 and the balance sheet data at June 30, 1999 are derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include, in the opinion of our management, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and results of operations for these periods. The financial data for the six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999 or any other future period.
YEAR ENDED SIX MONTHS ENDED PERIOD FROM INCEPTION DECEMBER 31, JUNE 30, (MAY 1, 1996) TO ------------------ ------------------- DECEMBER 31, 1996 1997 1998 1998 1999 --------------------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues........................................ $ 44 $ 1,045 $ 1,957 $ 731 $ 3,410 ----- ------- ------- ------- -------- Costs and expenses: Cost of network and customer support.......... 321 1,092 3,216 994 7,906 Product development........................... 184 389 754 318 1,395 Sales and marketing........................... 78 261 2,822 352 5,869 General and administrative.................... 378 713 1,910 594 2,905 Amortization of deferred stock compensation... -- -- 205 19 1,787 ------------- ------- ------- ------- -------- Total operating costs and expenses..... 961 2,455 8,907 2,277 19,862 ------------- ------- ------- ------- -------- Loss from operations............................ (917) (1,410) (6,950) (1,546) (16,452) Other income (expense): Interest income............................... 6 36 169 121 450 Interest and financing expense................ (48) (235) (90) (36) (147) Loss on disposal of assets.................... -- -- (102) -- -- ------------- ------- ------- ------- -------- Net loss........................................ $(959) $(1,609) $(6,973) $(1,461) $(16,149) ------------- ------- ------- ------- -------- ------------- ------- ------- ------- -------- Basic and diluted net loss per share(1)......... $(.29) $ (.48) $ (2.09) $ (.44) $ (4.78) ------------- ------- ------- ------- -------- ------------- ------- ------- ------- -------- Weighted average shares used to compute basic and diluted net loss per share(1)............. 3,333 3,333 3,336 3,336 3,378 ------------- ------- ------- ------- -------- ------------- ------- ------- ------- -------- Pro forma basic and diluted net loss per share(2)...................................... $ (.31) $ (.34) ------- -------- ------- -------- Weighted average shares used in computing pro forma basic and diluted net loss per share(2)...................................... 22,733 47,771 ======= ========
AS OF DECEMBER 31, -------------------------- AS OF JUNE 30, 1996 1997 1998 1999 ------ ------ ------ -------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 145 $4,770 $ 275 $13,296 Total assets................................................ 1,099 5,987 7,487 30,830 Capital lease obligations, less current portion............. 421 240 2,342 6,776 Total shareholders' equity (deficit)........................ 43 4,829 (436) 17,274
- ------------------------- (1) See note 1 of notes to financial statements for a description of the computation of basic and diluted net loss per share and the number of shares used to compute basic and diluted net loss per share. (2) Pro forma per share calculations reflect the conversion of preferred stock into shares of common stock as if the conversion occurred as of the date of original issuance. 24 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis together with our financial statements, including the notes, appearing elsewhere in this prospectus. Some information contained in the discussion and analysis set forth below and elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risk and uncertainties. See "Risk Factors" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in this prospectus. OVERVIEW We are a leading provider of fast, reliable and centrally managed Internet connectivity services targeted at businesses seeking to maximize the performance of mission-critical Internet-based applications. Customers connected to one of our P-NAPs have their data optimally routed to and from destinations on the Internet in a manner that minimizes the use of congested public NAPs and private peering points. This optimal routing of data traffic over the multiplicity of networks that comprise the Internet enables higher transmission speeds, lower instances of packet loss and greater quality of service. As of June 30, 1999, we provided our high quality Internet connectivity services to approximately 130 customers, including Amazon.com, Fidelity Investments, Go2Net, ITXC, Nasdaq, TheStreet.com and WebTV Networks. We were founded in May 1996 and began selling Internet connectivity services from our first P-NAP, located in Seattle, during October 1996. We began selling services from our second and third P-NAPs in New York City and San Jose by December 1998. During the first six months of 1999, we began selling services from our P-NAPs located in the Washington D.C., Los Angeles, Chicago and Boston metropolitan areas. In addition, we expect to complete the deployment of five additional P-NAPs in the United States by the end of 1999, bringing the total number of revenue-generating P-NAPs to 12 by the end of 1999. After we decide to open a new P-NAP, we enter into a deployment phase which typically lasts four to six months, during which time we undertake to complete the necessary arrangements required to make the P-NAP commercially ready for service. Among other things, this usually entails obtaining co-location space to locate our equipment, entering into agreements with backbone providers, obtaining local loop connections from local telecommunications providers, building P-NAPs and initiating pre-sales and marketing activities. Consequently, we usually incur a significant amount of upfront costs related to making a P-NAP commercially ready for service prior to generating revenues. Therefore, our results of operations will be negatively affected during times of P-NAP deployment. Our customers are primarily businesses that desire high performance Internet connectivity services in order to run mission-critical Internet-based applications. Due to our high quality of service we generally price our services at a premium to providers of conventional Internet connectivity services. We expect to remain a premium provider of high quality Internet connectivity services and anticipate continuing our pricing policy in the future. We believe customers will continue to demand the highest quality of service as their Internet connectivity needs grow and become even more complex and, as such, will continue to pay a premium for high quality of service. Our revenues are generated primarily from the sale of Internet connectivity services and, to a lesser extent, other ancillary services primarily provided from our Seattle data center, such as co-location, web hosting and server management services, and installation services at fixed rate or usage 25 35 based pricing to our customers that desire a DS-3 or faster connection. We offer T-1 connections only at a fixed rate. We recognize our revenues when we have provided the related services. Network and customer support costs are primarily comprised of the costs for connecting to and accessing Internet backbone providers, as well as the costs related to deploying, operating, installing and maintaining P-NAPs and our network operations center. To the extent a P-NAP is located a distance from the respective Internet backbone providers, we may incur additional local loop charges on a recurring basis. Additionally, rental fees and depreciation costs related to our P-NAPs are included in cost of network and customer support. Product development costs consist principally of compensation and other personnel costs, consultant fees and prototype costs related to the design, development and testing of our proprietary technology, enhancement of our network management software and development of our internal systems. Significantly all of our product development costs are expensed as incurred. Sales and marketing costs consist of compensation, commissions and other costs for personnel engaged in marketing, sales and field service support functions, as well as collateral advertising, tradeshows, direct response programs, new P-NAP launch events, management of our web site and other promotional costs. General and administrative costs consist primarily of compensation and other expenses for executive, finance, human resources and administrative personnel, professional fees and other general corporate costs. During the year ended December 31, 1998 and the six months ended June 30, 1999, in connection with the grant of certain stock options to employees, we recorded deferred stock compensation totaling $16.1 million, representing the difference between the deemed fair value of our common stock on the date such options were granted and the exercise price. Such amount is included as a reduction of shareholders' equity and is being amortized over the vesting period of the individual options, generally four years, using an accelerated method as described in Financial Accounting Standards Board Interpretation No. 28. We recorded amortization of deferred stock compensation in the amount of $205,000 for the year ended December 31, 1998 and $1.8 million for the six months ended June 30, 1999. At June 30, 1999, we had a total of $14.1 million remaining to be amortized over the corresponding vesting periods of the stock options. The revenue and income potential of our business and market is unproven, and our limited operating history makes it difficult to evaluate our prospects. We have only been in existence since 1996, and our services are only offered in limited regions. We have incurred net losses in each quarterly and annual period since our inception, and as of June 30, 1999, our accumulated deficit was $25.7 million. 26 36 QUARTERLY RESULTS OF OPERATIONS The following tables set forth our statement of operations data for the six quarters ended June 30, 1999, as well as the percentage of total revenues represented by each item. This information has been derived from our unaudited financial statements. In the opinion of our management, the unaudited financial statements have been prepared on the same basis as the audited financial statements appearing elsewhere in this prospectus and include all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of such information. The quarterly data should be read in conjunction with our audited financial statements and the notes thereto appearing elsewhere in this prospectus. The results of operations for any one quarter are not necessarily indicative of the results of operations for any future period.
THREE MONTHS ENDED ---------------------------------------------------------------- MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, 1998 1998 1998 1998 1999 1999 -------- -------- --------- -------- -------- -------- (IN THOUSANDS) Revenues.......................................... $ 314 $ 417 $ 472 $ 754 $ 1,244 $ 2,166 ----- ------ ------- ------- ------- -------- Costs and expenses: Costs of network and customer support........... 440 554 797 1,425 2,346 5,560 Product development............................. 160 158 187 249 565 830 Sales and marketing............................. 128 224 715 1,755 2,236 3,633 General and administrative...................... 235 359 487 829 1,172 1,733 Amortization of deferred stock compensation..... 10 9 110 76 349 1,438 ----- ------ ------- ------- ------- -------- Total operating costs and expenses....... 973 1,304 2,296 4,334 6,668 13,194 ----- ------ ------- ------- ------- -------- Loss from operations.............................. (659) (887) (1,824) (3,580) (5,424) (11,028) Other income (expense): Interest income................................. 65 56 38 10 206 244 Interest and financing expense.................. (12) (24) (27) (27) (57) (90) Loss on disposal of assets...................... -- -- -- (102) -- -- ----- ------ ------- ------- ------- -------- Net loss.......................................... $(606) $ (855) $(1,813) $(3,699) $(5,275) $(10,874) ===== ====== ======= ======= ======= ========
AS A PERCENTAGE OF REVENUES ---------------------------------------------------------------- MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, 1998 1998 1998 1998 1999 1999 -------- -------- --------- -------- -------- -------- Revenues........................................... 100% 100% 100% 100% 100% 100% ---- ---- ---- ---- ---- ---- Costs and expenses: Costs of network and customer support............ 140 133 170 189 189 257 Product development.............................. 51 38 40 33 45 38 Sales and marketing.............................. 41 54 151 233 180 168 General and administrative....................... 75 86 103 110 94 80 Amortization of deferred stock compensation...... 3 2 23 10 28 66 ---- ---- ---- ---- ---- ---- Total operating costs and expenses........ 310 313 487 575 536 609 ---- ---- ---- ---- ---- ---- Loss from operations............................... (210) (213) (387) (475) (436) (509) Other income (expense): Interest income.................................. 21 14 8 1 17 11 Interest and financing expense................... (4) (6) (5) (4) (5) (4) Loss on disposal of assets....................... -- -- -- (13) -- -- ---- ---- ---- ---- ---- ---- Net loss........................................... (193)% (205)% (384)% (491)% (424)% (502)% ==== ==== ==== ==== ==== ====
Our quarterly operating results have fluctuated significantly. We expect that future operating results will be subject to similar fluctuations for a variety of factors, which are difficult or impossible to predict. See "Risk Factors -- Fluctuations in Our Operating Results May Negatively Affect Our Stock Price." 27 37 SIX MONTHS ENDED JUNE 30, 1998 AND 1999 Revenues. Revenues increased from $731,000 for the six-month period ended June 30, 1998 to $3.4 million for the six-month period ended June 30, 1999. This increase of $2.7 million was primarily due to increased Internet connectivity revenues. The increase in Internet connectivity revenues was attributable to the increased sales at our existing P-NAPs and the opening of six additional P-NAPs during 1999 and the second half of 1998, resulting in a total of seven operational P-NAPs at June 30, 1999, as compared to one P-NAP at June 30, 1998. Costs of Network and Customer Support. Costs of network and customer support increased from $1.0 million for the six-month period ended June 30, 1998 to $7.9 million for the six-month period ended June 30, 1999. This increase of $6.9 million was primarily due to increased connectivity costs related to added connections to Internet backbone providers at each P-NAP, and to a lesser extent, increased compensation costs related to our network operations center, depreciation expense related to the equipment at newly deployed P-NAPs and costs related to the P-NAP deployment and customer installations. Network and customer support costs as a percentage of total revenues are generally greater than 100% for newly deployed P-NAPs, because we purchase Internet connectivity capacity from the backbone providers in advance of securing new customers. We expect these costs to increase in absolute dollars as we deploy additional P-NAPs. Product Development. Product development costs increased from $318,000 for the six-month period ended June 30, 1998 to $1.4 million for the six-month period ended June 30, 1999. This increase of $1.1 million was primarily due to increased compensation costs related to increased head count and administrative and facility costs for our product development department. We expect product development costs to increase in absolute dollars for the foreseeable future. Sales and Marketing. Sales and marketing costs increased from $352,000 for the six-month period ended June 30, 1998 to $5.9 million for the six-month period ended June 30, 1999. This increase of $5.5 million was primarily due to increased compensation costs, and to a lesser extent, facility and communications costs related to the addition of sales offices. As part of our expanded sales and marketing activities, we hired a vice president of sales and marketing during the second quarter of 1998 and additional sales personnel during 1999 and the second half of 1998. General and Administrative. General and administrative costs increased from $594,000 for the six-months ended June 30, 1998 to $2.9 million for the six-month period ended June 30, 1999. This increase of $2.3 million was primarily due to increased compensation costs, increased depreciation and amortization costs due to the addition of corporate office space during the third quarter of 1998 and professional services costs. We expect general and administrative costs to increase in absolute dollars as we deploy additional P-NAPs. Other Income (Expense). Other income (expense) consists of interest income, interest and financing expense and other non-operating expenses. Other income, net, increased from $85,000 for the six-month period ended June 30, 1998 to $303,000 for the six-month period ended June 30, 1999. This increase was primarily due to interest income earned on the proceeds from the Series C preferred stock financing, partially offset by increased interest expense on capital lease obligations. 28 38 RESULTS OF OPERATIONS The following table sets forth, as a percentage of total revenues, selected statement of operations data for the periods indicated:
PERIOD FROM YEAR ENDED SIX MONTHS INCEPTION DECEMBER 31, ENDED JUNE 30, (MAY 1, 1996) TO ------------ -------------- DECEMBER 31, 1996 1997 1998 1998 1999 ----------------- ---- ---- ----- ----- Revenues................................. 100% 100% 100% 100% 100% ------ ---- ---- ---- ---- Costs and expenses: Cost of network and customer support... 730 105 164 136 232 Product development.................... 418 37 39 43 41 Sales and marketing.................... 177 25 144 48 172 General and administrative............. 859 68 98 81 85 Amortization of deferred stock compensation........................ -- -- 10 3 52 ------ ---- ---- ---- ---- Total operating costs and expenses.................... 2,184 235 455 311 582 ------ ---- ---- ---- ---- Loss from operations..................... (2,084) (135) (355) (211) (482) Other income (expense): Interest income........................ 13 3 9 16 12 Interest and financing expense......... (109) (22) (5) (5) (4) Loss on disposal of assets............. -- -- (5) -- -- ------ ---- ---- ---- ---- Net loss................................. (2,180)% (154)% (356)% (200)% (474)% ====== ==== ==== ==== ====
INCEPTION TO DECEMBER 31, 1996 AND YEARS ENDED DECEMBER 31, 1997 AND 1998 Revenues. Revenues increased from $44,000 during the period from May 1, 1996 through December 31, 1996 to $1.0 million in 1997 and to $2.0 million in 1998. The increase of $1.0 million in 1997, as compared to the period ended December 31, 1996, and the increase of $1.0 million in 1998, as compared to 1997, were primarily due to increased Internet connectivity revenues, other ancillary service revenues and, to a lesser extent, installation fees. The increase in Internet connectivity revenues was attributable to the deployment of our first P-NAP at the end of 1996 and of two additional P-NAPs during 1998, resulting in a total of three operational P-NAPs at December 31, 1998. Costs of Network and Customer Support. Costs of network and customer support increased from $321,000 during the period from May 1, 1996 through December 31, 1996 to $1.1 million in 1997 and to $3.2 million in 1998. Costs of network and customer support increased by $771,000 in 1997, as compared to the period ended December 31, 1996, and by $2.1 million in 1998, as compared to 1997. These increases were primarily due to increased connectivity costs related to added connections to Internet backbone providers at each P-NAP, local loop costs related to expansion of existing and deployment of new P-NAPs, depreciation expense related to the equipment at newly deployed P-NAPs and costs related to renting space for the newly deployed P-NAPs. In addition, the increase in costs of network and customer support from 1997 to 1998 also included increased compensation costs related to our network operations center. Product Development. Product development costs increased from $184,000 during the period from May 1, 1996 through December 31, 1996 to $389,000 in 1997 and to $754,000 in 1998. Product development costs increased by $205,000 in 1997, as compared to the period ended December 31, 1996, and by $365,000 in 1998, as compared to 1997. These increases were primarily due to increased compensation costs in 1997 and 1998, and increased travel costs related to developing systems at new 29 39 P-NAPs, training and support and administrative and facility costs for our product development department. Sales and Marketing. Sales and marketing costs increased from $78,000 during the period from May 1, 1996 through December 31, 1996 to $261,000 in 1997 and to $2.8 million in 1998. Sales and marketing costs increased by $183,000 in 1997, as compared to the period ended December 31, 1996 and by $2.5 million in 1998, as compared to 1997. These increases were primarily due to increased compensation costs, commissions, marketing costs, facility costs related to the addition of remote sales offices, training and support costs, and travel and entertainment costs and administrative costs related to developing and maintaining the sales and marketing departments. General and Administrative. General and administrative costs increased from $378,000 during the period from May 1, 1996 through December 31, 1996 to $713,000 in 1997 and to $1.9 million in 1998. General and administrative costs increased by $335,000 in 1997, as compared to the period ended 1996 and by $1.2 million in 1998, as compared to 1997. These increases were primarily due to increased compensation costs, depreciation and amortization, facility costs, office expense, outside consulting fees, travel costs related to the deployment of new P-NAPs, communications costs, bad debt expense in 1998 and the subsequent bankruptcy of a significant customer and an increase in general administrative costs related to managing our business and operations. Other Income (Expense). Other expense, net, increased from $42,000 for the period from May 1, 1996 through December 31, 1996 to $199,000 in 1997 and decreased to $23,000 in 1998. Other expense, net, increased by $157,000 in 1997 as compared to the period ended December 31, 1996 primarily due to an expense of $124,000 related to the issuance of warrants to purchase Series B preferred stock, and additional interest expense on capital lease obligations, partially offset by additional interest income on the proceeds from the Series B preferred stock financing. Other expense, net, decreased by $176,000 in 1998 primarily due to increased interest income earned on the proceeds from the Series B preferred stock financing, offset by a loss on disposal of assets of $102,000. PROVISION FOR INCOME TAXES We incurred operating losses from inception through June 30, 1999, and therefore have not recorded a provision for income taxes. We have recorded a valuation allowance for the full amount of our net deferred tax assets, as the future realization of the tax benefit is not currently likely. As of December 31, 1998, we had net operating loss carry-forwards of $7.2 million. These loss carry-forwards are available to reduce future taxable income and expire at various dates through 2018. Under the provisions of the Internal Revenue Code, certain substantial changes in our ownership may limit the amount of net operating loss carry-forwards that could be utilized annually in the future to offset taxable income. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have financed our operations primarily through the issuance of our equity securities, capital leases and bank loans. We have raised an aggregate of approximately $40.7 million, net of offering expenses, through the sale of our equity securities. At June 30, 1999, we had cash, cash equivalents and short-term investments of $13.3 million. We have a revolving line of credit under which we are allowed to borrow, subject to certain conditions, up to $750,000. At June 30, 1999, we had drawn $625,000 on the line of credit, with the remaining balance reserved as collateral for our company credit cards. 30 40 Net cash used in operations was $13.3 million for the six months ended June 30, 1999. Net cash used in operations was $5.3 million in 1998, $1.1 million in 1997 and $679,000 in the period ended December 31, 1996. Net cash used in operations for the six months ended June 30, 1999 was primarily due to net operating losses, increases in accounts receivable and prepaid expenses, partially offset by non-cash charges and an increase in accounts payable. Net cash used in operations for the year ended December 31, 1998 was primarily due to net operating losses and increases in accounts receivable and prepaid expenses, partially offset by non-cash charges and increases in accounts payable and accrued liabilities. Net cash used in operations for the year ended December 31, 1997 was primarily due to net operating losses and accounts receivable, partially offset by non-cash charges. Net cash used in operations for the period ended December 31, 1996 was primarily due to operating losses and prepaid expenses, partially offset by an increase in accounts payable. Net cash used in investing activities was $14.2 million for the six months ended June 30, 1999. Net cash used in investing activities was $702,000 in 1998, $141,000 in 1997 and $174,000 in the period ended December 31, 1996. Net cash used in investing activities in each period reflects increased purchases of property and equipment not financed by capital leases. Purchases of property and equipment related to P-NAP deployments was primarily financed by capital leases (such purchases are excluded from the net cash used in investing activities in the statement of cash flows), and totaled $6.3 million for the six months ended June 30, 1999, $3.6 million for the year ended 1998, $260,000 for the year ended 1997, and $740,000 for the period ended December 31, 1996. Additionally, for the six month period ended June 30, 1999, $10.0 million was used to purchase short- term investments. Net cash provided from financing activities was $30.6 million for the six months ended June 30, 1999, $1.5 million in 1998, $5.9 million in 1997 and $1.0 million in the period ended December 31, 1996. Net cash from financing activities primarily reflects proceeds from the private sales of our equity securities. We expect to spend significant additional capital to recruit and train our customer installation team and the sales force and to build out the sales facilities related to newly deployed P-NAPs. In addition to P-NAP deployment, although to a lesser extent, product development and the development of our internal systems and software will continue to require significant capital expenditures in the foreseeable future, as will the expansion of our marketing efforts. We expect to continue to expend significant amounts of capital on property and equipment related to the expansion of facility infrastructure, computer equipment and for research and development laboratory and test equipment to support on-going research and development operations. We believe that the net proceeds from this offering, together with our cash and cash equivalents, short-term investments and funds available under the revolving and capital lease lines will be sufficient to satisfy our cash requirements for at least the next 12 months. Our management intends to invest cash in excess of current operating requirements in short-term, interest-bearing, investment-grade securities. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Substantially all of our cash equivalents, short-term investments and capital lease obligations are at fixed interest rates, and therefore the fair value of these instruments is affected by changes in market interest rates. However, as of June 30, 1999, all of our cash equivalents mature within three months and all of our short-term investments mature within one year. As of June 30, 1999, we believe the reported amounts of cash equivalents, short-term investments and capital lease obligations to be reasonable approximations of their fair values. As a result, we believe that the market risk arising from our holdings of financial instruments is minimal. 31 41 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, or SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133, which will be effective for us for the fiscal years and quarters beginning after June 15, 2000, requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. We are assessing the requirements of SFAS No. 133 and the effects, if any, on our financial position, results of operations and cash flows. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard requires companies to expense the costs of start-up activities and organization costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The adoption of SOP 98-5 did not have a material impact on our results of operations. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, or SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This standard requires companies to capitalize qualifying computer software costs which are incurred during the application development stage and amortize them over the software's estimated useful life. SOP 98-1 is effective for fiscal years beginning after December 15, 1998, however early adoption is allowed. We adopted the requirements of SOP 98-1 during 1998. IMPACT OF YEAR 2000 Many computers, software and other equipment include computer code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems could fail to operate or fail to produce correct results if "00" is interpreted to mean 1900, rather than 2000. These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Year 2000 problem." General Readiness Assessment. The Year 2000 problem may affect the network infrastructure, computers, software and other equipment that we use, operate or maintain for our operations. As a result, we have formalized our Year 2000 compliance plan, to be implemented by a team of employees, led by our internal information technology staff, responsible for monitoring the assessment and remediation status of our Year 2000 projects and reporting their status to the audit committee of our board of directors. Additionally, according to our Year 2000 compliance plan, the project team has compiled a listing of all mission-critical items, both internally developed and externally purchased, which may be impacted by the Year 2000 problem. We are in the process of obtaining verification or validation from any independent third parties whose products and services are deemed mission-critical to our processes to assess and correct any of our Year 2000 problems or the costs associated with these products and services. We expect to have all third party verifications, or replacement of the related item, completed by the end of the third quarter of 1999. We believe that we have identified most of the major computers, software applications and related equipment used in connection with our internal operations that will need to be evaluated to determine if they must be modified, upgraded or replaced to minimize the possibility of a material disruption to our business. We expect to complete this process before the occurrence of any material disruption of our business. Assessment of Internal Infrastructure. Beginning in 1998, we began assessing the ability of our internally developed software, infrastructure and technologies to operate properly in the year 2000. We believe that our current internally developed software, infrastructure and technologies are Year 32 42 2000 compliant. We have completed a testing plan and expect to complete replacement of any required components by the end of the third quarter of 1999. Additionally, as we design and develop new products, we subject them to testing for Year 2000 compliance and the ability to distinguish between various date formats. Systems Other than Information Technology Systems. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, telephone switches, security systems and other common devices may be affected by the Year 2000 problem. We are currently contacting all related third party suppliers or testing the related items. We expect to have this process completed and necessary replacements finished by the end of third quarter of 1999. Costs of Remediation. We estimate the total cost of completing any required modifications, upgrades or replacements of our internal systems will not exceed $50,000, most of which we expect to incur during calendar 1999. This estimate is being monitored, and we will revise it as additional information becomes available. Based on the activities described above, we do not believe that the Year 2000 problem will significantly harm our business or operating results. In addition, we have not deferred any material information technology projects, nor equipment purchases, as a result of our Year 2000 problem activities. Suppliers. As part of our Year 2000 plan, we intend to contact third-party suppliers of components used in the delivery of our services to identify and, to the extent possible, resolve issues involving the Year 2000 problem. However, we have limited or no control over the actions of these third-party suppliers. Thus, while we expect that we will be able to resolve any significant Year 2000 problems with these third parties, there can be no assurance that these suppliers will resolve any or all Year 2000 problems before the occurrence of a material disruption to the operation of our business. Any failure of these third parties to timely resolve Year 2000 problems with their systems could significantly harm our business, financial condition and results of operations. Most Likely Consequences of Year 2000 Problems. We expect to identify and resolve all Year 2000 problems that could significantly harm our business operations. However, we believe that it is not possible to determine with complete certainty that all Year 2000 problems affecting us have been identified or corrected. The number of devices and systems that could be affected and the interactions among these devices and systems are too numerous to address. In addition, no one can accurately predict which Year 2000 problem-related failures will occur or the severity, timing, duration, or financial consequences of these potential failures. As a result, we believe that the following consequences are possible: - a significant number of operational inconveniences and inefficiencies for us, our suppliers and our customers that will divert management's time and attention and financial and human resources from ordinary business activities; - possible business disputes and claims, including claims under our quality of service warranty, due to Year 2000 problems experienced by our customers and incorrectly attributed to our services or performance, which we believe will be resolved in the ordinary course of business; and - a few serious business disputes alleging that we failed to comply with the terms of contracts or industry standards of performance, some of which could result in litigation or contract termination. Contingency Plans. We are currently developing contingency plans to be implemented if our efforts to identify and correct Year 2000 problems affecting our internal systems are not effective. We 33 43 expect to complete our contingency plans by the end of the third quarter of 1999. Depending on the systems affected, these plans could include: - accelerated replacement of affected equipment or software; - short to medium-term use of backup equipment and software or other redundant systems; - increased work hours for our personnel or the hiring of additional information technology staff; and - the use of contract personnel to correct, on an accelerated basis, any Year 2000 problems that arise or to provide interim alternate solutions for information system deficiencies. Our implementation of any of these contingency plans could significantly harm our business, financial condition and results of operations. 34 44 BUSINESS OVERVIEW InterNAP is a leading provider of fast, reliable and centrally managed Internet connectivity services targeted at businesses seeking to maximize the performance of mission-critical Internet-based applications. Customers connected to one of our Private-Network Access Points, or P-NAPs, have their data optimally routed to and from destinations on the Internet in a manner that minimizes the use of congested public NAPs and private peering points. This optimal routing of data traffic over the multiplicity of networks that comprise the Internet enables higher transmission speeds, lower instances of data packet loss and greater quality of service than services offered by conventional Internet connectivity providers. As of June 30, 1999, we provided consistent high performance Internet connectivity services to approximately 130 customers, including Amazon.com, Fidelity Investments, Go2Net, ITXC, Nasdaq, TheStreet.com and WebTV. We offer our high performance Internet connectivity services at dedicated line speeds of 1.5 Megabits per second, or Mbps, to 155 Mbps to customers desiring a superior level of Internet performance. We provide our high performance connectivity services through the deployment of P-NAPs, which are highly redundant network infrastructure facilities coupled with our proprietary routing technology. P-NAPs maintain high speed, dedicated connections to major global Internet networks, commonly referred to as backbones, such as AGIS, AT&T, Cable & Wireless USA, GTE Internetworking, ICG Communications, Intermedia, PSINet, Sprint, UUNET and Verio. In addition, we have entered into a traffic exchange interconnect agreement with America Online, Inc. which provides us direct access to AOL's network of over 19 million members. We currently operate seven P-NAPs which are located in the Boston, Chicago, Los Angeles, New York, San Jose, Seattle and Washington, D.C. metropolitan areas. We expect to complete the deployment of an additional five P-NAPs in the United States by the end of 1999. We believe that our P-NAPs provide a quality of service over the public Internet enabling our customers to realize the full potential of their existing Internet-based applications, such as e-commerce and on-line trading. In addition, we believe our P-NAPs will enable our customers to take advantage of new services, such as voice and fax over Internet Protocol, virtual private network services, multimedia document distribution and audio and video streaming. INDUSTRY BACKGROUND THE GROWING IMPORTANCE OF THE INTERNET FOR MISSION-CRITICAL INTERNET-BASED APPLICATIONS The Internet has emerged as a global medium for communications and commerce. The growth in data that is transmitted over the Internet, or data traffic, is driven by a number of factors, including the rapidly increasing number of network-enabled and Internet-based applications, the growing number of personal computers linked to the Internet, improvements in network-enabled devices, servers and routers, and the increasing availability of broadband connections. As an illustration of this growth, Pioneer Consulting, LLC estimates that Internet bandwidth demand in North America will grow from 175 Gigabits per second in 1998 to 2,990 Gigabits per second in 2003, representing a 76% compound annual growth rate. Once primarily used for e-mail and retrieving information, the Internet is now being used as a communications platform for an increasing number of mission-critical Internet-based applications, such as those relating to electronic commerce, virtual private networks, voice and fax over Internet Protocol, supply chain management, customer service and project coordination. To improve the 35 45 effectiveness of their mission-critical Internet-based applications, businesses are requiring increasing levels of network performance, including speed, reliability and manageability, across the Internet. The loss of data as it is transmitted over the Internet, or data packet loss, and inefficiencies in transferring data across the Internet are fundamental causes of unsatisfactory performance of Internet-based applications. Many of these problems are caused by the architectural shortcomings of the Internet that have led to the largely unorchestrated transfer of data traffic from one commercially run network to another. The recent increases in network capacity and improvements in the performance of network devices fail to address many of the problems associated with exchanging data between the multiple networks which comprise the Internet. Further, the popularity of the Internet has resulted in an ever-increasing number of users transmitting rapidly increasing volumes of data across the Internet. THE EMERGENCE OF MULTIPLE INTERNET BACKBONES The Internet originated as a restricted network designed to provide efficient and reliable long distance data communications among the disparate computer systems used by government funded researchers and organizations. As businesses began to use the Internet for functions critical to their core strategies, telecommunications companies established additional networks, or backbones, to supplement the original public infrastructure and satisfy this increasing demand. In this way, the original public Internet infrastructure has grown into a "network of networks" run by numerous commercial telecommunications companies, each of which manages its own backbone. Currently, the Internet is a global collection of hundreds of interconnected computer networks. Of these networks, approximately a dozen commercial backbones contain the majority of the global addressable routes on the Internet. These backbones were developed at great expense but are nonetheless constrained by the fundamental limitations of the Internet's architecture. They must connect to one another, or peer, to permit their customers to communicate with each other. Consequently, many backbone providers have agreed to exchange large volumes of data traffic through a limited number of public NAPs. Five major public NAPs are in use today, including the Metropolitan Area Exchange East, or MAE East, near Washington, D.C. and MAE West in San Jose. The public NAPs are not centrally managed and no single entity has the economic incentive or ability to facilitate problem resolution, to optimize peering within the public NAPs or to bring about centralized routing administration. As a consequence of the lack of coordination among backbones at these public peering points and in order to avoid the increasing congestion and resulting data packet loss at the public NAPs, a number of the backbone providers have established private interfaces connecting pairs of backbones for the exchange of traffic. Although private peering arrangements are helpful for exchanging traffic, they do not overcome the structural and economic shortcomings of the Internet. THE PROBLEM OF INEFFICIENT ROUTING OF DATA TRAFFIC ON THE INTERNET Data packet loss is a fundamental cause of the slowness and unreliability that are characteristic of the Internet today. Data packet loss occurs when the devices handling data lose track of packets before they can be transferred, or routed, to their destination. When this occurs, the computer that originally sent a lost packet will resend it until it receives confirmation of receipt by the destination device, thus compounding the congestion. Data packet loss most frequently occurs at Internet exchange points, such as public NAPs and private peering points. We believe that packet loss at the public NAPs can exceed 20% during peak hours. This can have a dramatic impact on the effective speed at which data is transmitted over the Internet. For example, according to an industry source, downloading a file from a web site under conditions with 1% data packet loss can take up to twice as long as doing so when there is no data packet loss. 36 46 Due to the Internet's lack of central management, there is no organized mechanism to route traffic to avoid congestion at the public NAPs and private peering points. The individual backbone providers only control the routing of data packets within their backbones, and their routing practices tend to compound the inefficiency of the Internet. When a backbone provider receives a packet that is not destined for one of its own customers, it must route it to another backbone provider to complete the delivery of the packet on the Internet. Since the use of a public NAP or a private peering point typically involves no economic settlement, a backbone provider will often route the data packet to the nearest point of traffic exchange, in an effort to get the packet off its network and onto a competitor's backbone as quickly as possible. In this manner, the backbone provider reduces capacity and management burdens on its transport network. Consequently, in order to complete a communication, data packets ordinarily pass through multiple networks and peering points without regard to congestion or other factors that inhibit performance. Further, once a data packet leaves a backbone destined for another network, the backbone provider has no way of controlling the quality of the end-to-end connection. As a result, it is virtually impossible for a single backbone provider to offer a high quality of service across disparate networks. For customers of conventional Internet connectivity providers, this results in lost data packets, slower and more erratic transmission speeds, and an overall lower quality of service. Equally important, these customers have no control over these arrangements and have no single point of contact that they can hold accountable for any decrease in service levels, such as poor data transmission performance. An example of routing over the Internet is depicted in the figure below. [GRAPHIC] The Internet is rapidly becoming a critically important medium for communications and commerce. However, businesses are unable to benefit from the full potential of the Internet primarily because peering and routing practices, current routing technologies, and the Internet's architecture were not designed to support today's large and rapidly growing volume of traffic. We believe the emergence of technologies and applications that rely on network quality and require consistent and high speed data transfer, such as voice and fax over Internet Protocol, virtual private network services, multimedia document distribution and audio and video streaming, will be hindered by the performance problems of the Internet. We also believe the future of Internet connectivity services will 37 47 be driven by providers that, through high performance Internet routing services, provide consistent high quality of service and enable businesses to successfully execute their mission-critical Internet-based applications over the public network infrastructures. THE INTERNAP SOLUTION We are a leading provider of fast, reliable and centrally managed Internet connectivity services targeted at businesses seeking to maximize the performance of mission-critical Internet-based applications. Utilizing our proprietary network architecture and advanced routing technologies, we route our customers' data in an optimal manner over the Internet. We currently operate seven P-NAPs across the United States. Our P-NAP network model is depicted below: [GRAPHIC] By connecting to one of our P-NAPs, mission-critical inbound and outbound data transmissions travel an optimal route to and from destinations on the Internet. This optimal routing of data traffic over the Internet enables higher transmission speeds, lower instances of data packet loss and greater quality of service. Our high performance Internet connectivity services provide the following key advantages: High Performance Connectivity. We route our customers' traffic over the Internet in a way that we believe provides consistently greater speed, along with superior end-to-end control, predictability and reliability, than services offered by conventional Internet connectivity providers. Our P-NAPs have high-speed, direct connections to major global Internet backbones. Our proprietary technology may be used to route data packets directly to the Internet backbone on which a given destination resides, thereby giving our customers direct access to the destination network for a large majority of global Internet addresses. This network architecture combined with our proprietary routing technology generally bypasses congested public NAPs and private peering points, reduces data packet loss and improves reliability and performance for our customers to any of our multiple backbone connections. In addition, customers directly connected to the same P-NAP get one-hop access when communicating with each other, completely avoiding the public Internet. 38 48 We use multiple connections to major backbones to create our own virtual backbone, instead of owning or operating an expensive long-haul backbone infrastructure. As a result, we can offer customers improved service levels by optimally routing traffic between any two P-NAPs using our virtual backbone. Consequently, any customer connected to any P-NAP will experience optimal public backbone network performance in communicating with any other customer connected to any other P-NAP. A model of InterNAP's virtual backbone created between any two P-NAPs is depicted below: [GRAPHIC] Highly Reliable Network Architecture. P-NAPs are designed with a highly redundant network infrastructure, including multiple local loop connections from multiple carriers. This design minimizes interruptions of network operations. If a backbone network connected to a P-NAP should fail, we can instantly reroute data using any of the remaining networks connected to the P-NAP. As a result, our customers experience more reliable services and are less likely to need and pay for redundant Internet backbone connections. Superior Route Optimization and Management. Our proprietary routing technology and network management system provide us with data that enables us to manage network traffic and to offer economic settlements to backbone providers for the transfer of our customers' data packets. As a result, we are able to obtain full sets of global Internet Protocol routes from each backbone provider connected to a P-NAP, and choose from among these routes the most optimal route for our customers' traffic. We are therefore able to hold all of our backbone providers accountable for performance within their respective networks. In addition, because we manage all backbone connections into and out of each P-NAP, we are able to centrally forecast and plan for upgrades. We believe this consistently provides our customers with better service and minimizes congestion and data packet loss for all of the backbones to which our P-NAPs are connected. Scalability and Flexibility. Our Internet connectivity services are designed to be scalable and flexible. Since P-NAPs are localized infrastructures, not long haul backbones, we can manage capacity issues and traffic flows for each backbone provider at each P-NAP separately. Unlike a 39 49 backbone provider, we do not need to make uniform capacity upgrades across an entire network as traffic levels increase. Furthermore, an upgrade to one backbone provider does not require similar upgrades to all backbones connected to a P-NAP or upgrades throughout our system of P-NAPs. This allows us to more readily scale our capacity as traffic levels increase. Superior Customer Service and Support. Our network operations center is staffed 24 hours a day, seven days a week, by skilled engineers. Equipped with sophisticated traffic management reporting and diagnostic tools, they provide our customers with a single point of contact for support inquiries, network troubleshooting and diagnosis. The network operations center constantly monitors the operation of all our P-NAPs, as well as the backbones connected to them, and provides our customers and backbone providers with real-time notification and management of events that might affect service, such as network congestion, equipment failures and network or power outages. Given the overall complexity of our technology and our highly skilled engineers, we believe that our customer support services create a significant barrier to entry for competitors. In addition, since we are a paying customer of each backbone provider connected to a P-NAP, we believe we can get better response times, service level agreements and trouble ticket resolution than Internet service providers that rely on free public peering arrangements. STRATEGY Our objective is to be the leading provider of high performance Internet connectivity services that enable businesses to run mission-critical Internet-based applications and to establish and maintain the standard of quality for Internet connectivity services. We are committed to attracting, hiring and retaining exceptional employees at all levels of our organization in order to realize these objectives. Key components of our strategy include: Enhance Our Core Technologies to Provide the Highest Performance Internet Connectivity Services. We plan to continue developing our P-NAPs, as well as our network operations center, to enhance the level of service we provide to our customers. Our P-NAPs and network operations center have been designed to allow expansion of the features and functionalities of our services and have the scalability required to meet the growing needs of customers. We believe that enhancements to our proprietary technologies are integral to our ability to continue to penetrate new markets and to provide new value-added services to existing customers. For example, we intend to use the intelligent routing capabilities of our P-NAPs to enable our customers to take advantage of new services such as voice and fax over Internet Protocol, virtual private network services, multimedia document distribution and audio and video streaming. Continue to Provide Superior Customer Service and Support. We intend to continue providing our customers with superior customer service and support 24-hours a day, seven days a week. We believe that we can continue to improve our competitive position by supporting our service with our highly-skilled engineers, sophisticated traffic management reporting and diagnostic tools, and network operations center. To reduce the risk of service interruptions, we plan to build a second network operations center that will also monitor all of our P-NAPs. We intend to use our status as a paying customer of the major backbone providers to obtain a higher level of service which we can pass on to our customers. Expand Our Geographic Coverage in Key Markets. We currently offer our services through our P-NAPs in seven key metropolitan areas across the United States and intend to aggressively deploy P-NAPs in key markets across the United States and internationally. As part of our deployment plan, we expect to complete the deployment of five additional P-NAPs in the United States by the end of 1999. 40 50 Continue to Build Our Brand Awareness. We intend to aggressively build our customer base by increasing awareness of the InterNAP brand. We believe that associating our brand with a high quality of service is key to the expansion of our customer base. As we grow in size, we intend to invest in building brand awareness through a marketing plan that includes P-NAP launch events, trade shows, speaking events and media appearances, news announcements, advertisements and customer testimonials. Continue to Target Strategic Markets. We intend to expand our sales and marketing activities by continuing to focus on five strategic market segments, including high technology, e-commerce and retail, communication providers, financial services, and entertainment and publishing. The businesses in these market segments are characterized by early adoption of Internet services and a need for fast, reliable and manageable Internet connectivity services. By focusing on specific strategic markets we expect to be able to leverage our industry knowledge and highly experienced sales force to extend our market reach. We also intend to expand our indirect sales channels by partnering with leading resellers with strong backgrounds and market presence in these markets. Maintain Backbone Provider Neutrality. At each P-NAP, we have connections with at least four major backbone providers. In order to provide one-hop service to a large majority of Internet destinations, we must maintain high-volume connections with major backbone providers. We plan to continue to do this as new backbone providers emerge, as existing backbone providers increase in market size in the metropolitan areas where our P-NAPs are located and as global Internet traffic patterns change. We do not favor one backbone provider over another, but rather use our proprietary technology to route packets directly to the backbone on which an Internet destination is located. We believe this provides substantial benefits to all backbone providers to whom we connect, because we deliver only packets destined for each backbone provider's customers, thus improving the efficiencies of their infrastructure. CUSTOMERS We have established a diversified base of customers across a wide range of industries. As of June 30, 1999, we had approximately 130 customers. The following is a list of selected customers whose monthly bill was between $5,000 and $89,000 for June 1999: Adforce Go2Net Seattle Times Adknowledge Homegrocer.com Shopping.com Advanced Radio Telecom Humongous Entertainment TheStreet.com Amazon.com ITXC Corp Tradescape.com art.com Nasdaq U.S. Electrodynamics Datek Online Primus Telecommunications Waterhouse Investor Services eBay Recreational Equipment, Inc. WebTV Networks Enron Communications Seanet Corporation Won.net Fidelity Investments
We offer superior customer service and support from our network operations center staffed 24 hours a day, seven days a week by highly skilled network engineers who use our sophisticated traffic management reporting and diagnostic tools. As of June 30, 1999, we had 92 employees dedicated to customer service, network support and P-NAP engineering. Our customer service personnel are also available to assist customers whose operations require specialized procedures. Our customer contracts generally cover the provision of services for a one to three year period and may contain service level warranties. To date, none of our customers has utilized this warranty to receive a credit for a period of free service. We have had limited contract renewal experience with customers whose initial service contract terms have expired. 41 51 SERVICES We offer Internet connectivity services to our customers over T-1, DS-3 and OC-3 connections at speeds ranging from 1.5 Mbps to 155 Mbps. Our list prices for a single connection range from $2,695 to $193,320 per month depending on the connection purchased. Customers who connect to a P-NAP with a DS-3 or faster connection have a choice of fixed rate pricing or usage based pricing. Otherwise, customers pay a fixed fee for our Internet connectivity services. Usage based pricing varies according to the volume of data sent and received over the connection. Customers that have networking equipment or servers located within P-NAP facilities may connect directly to the P-NAP using standard Ethernet connections with speeds ranging from 10 Mbps to 200 Mbps. We also offer our customers additional value added services, including: - InterNAP Diversity Plus. Our Diversity Plus service allows customers to maintain multiple connections to InterNAP and other backbone providers while still taking advantage of the optimal routing capabilities of the P-NAP. In a typical Diversity Plus configuration, the customer has a connection to a P-NAP and to one or more backbone providers of their choice. The customer's router is configured using our proprietary routing technology to route packets addressed to Internet destinations located on the alternate provider's backbone through the customer's direct connection while other packets are routed to the P-NAP. In this manner, the customer can use redundant Internet connections, while also taking advantage of the unique features of the P-NAP. - Connections to Data Centers. Many of our customers have their servers located at third party data centers. We connect to these customers either by establishing a circuit directly to their routers or through a connection we have with the network maintained by the third party data center operator. We have our own data center in our Seattle P-NAP at which a number of our customers have co-located their servers. - Installation Services. We perform installation services necessary to connect our customers' networks to our P-NAPs. TECHNOLOGY P-NAP Architecture. The P-NAP architecture was engineered as a redundant, fault tolerant, scalable, production quality network access point. We currently use two primary P-NAP configurations. The P-NAP network design shown below represents the base configuration that is installed when a new P-NAP is deployed in a market. Type II P-NAPs support customer connectivity up to full DS-3 and 100 Mbps fast Ethernet, while Type III P-NAPs support up to 155 Mbps OC-3. As shown in this figure, multiple redundant, full duplex fast Ethernet or Gigabit Ethernet connections between each router and the backbone switches are part of the standard P-NAP configuration. Customer connection routers, or border routers, as well as core routers each have more than one path from a P-NAP to each other router and backbone connection, thus providing redundancy in the face of failure of one or more of the paths. Backbone network connections are divided among multiple core routers for redundancy and load balancing purposes. In the event of a 42 52 core router failure, there is sufficient equipment and backbone provider capacity to accommodate all of the P-NAP's traffic and to continue to route traffic optimally. [DIAGRAM] The P-NAP architecture is designed to scale to the demands of customers terminating on border routers as well as the demands of backbone providers connected to the core routers. Our P-NAP model provides for the addition of significant backbone providers to the core router fabric, as necessary. The P-NAP architecture is also designed so that: - a hot spare of each individual piece of P-NAP equipment also runs live in the P-NAP for redundancy purposes; - failure of a border router is transparent to the servers, because all critical servers are duplicated among multiple local area networks within the P-NAP where each local area network is connected to two border routers; and - all critical Internet services are duplicated among multiple P-NAP servers. Every network device is also connected to the network via a terminal server connection to the console to facilitate problem resolution. This allows for additional access to any malfunctioning device and also provides a means of retrieving potentially useful information to help isolate and prevent future recurrences of similar problems. This form of redundancy is vital to maintaining and building a high quality production environment. 43 53 InterNAP only co-locates P-NAPs within central office grade facilities. All P-NAP facilities are equipped with battery backup and emergency generators, as well as dual heating, ventilation and air conditioning systems. ASsimilator Routing Technology. ASsimilator technology is an automated system for Internet Protocol route management that interfaces with the P-NAP infrastructure to provide the high performance routing service characteristics of the P-NAP. The system is a seamless integration of databases, topology locator algorithms, automated router configuration processes and route verification methods. ASsimilator periodically downloads the global routing tables being advertised by all of the backbone networks touching the P-NAP. It then automatically determines exactly which Internet Protocol routes are attached to which networks and assesses how the world of Internet Protocol addresses are connected to the Internet. ASsimilator then configures the Border Gateway Protocol, the primary routing Protocol of the Internet, within the routers so that they will route Internet Protocol packets to their intended destination backbone in normal instances as well as in failure scenarios. A verification system also allows ASsimilator to monitor the routing of packets, and if routing is found to be suboptimal, adjustments can be made to optimize routing. ASsimilator controls both outbound routing to a backbone network from the P-NAP as well as inbound routing from a backbone network. Distributed Network Management System. We have developed a highly scalable proprietary network management system optimized for distributed network monitoring of P-NAPs. With the use of our distributed network management system, our network operations center is capable of real-time monitoring of the backbones connected to each P-NAP, customer circuits, network devices and servers 24 hours a day, seven days a week. The distributed network management system provides our network operations center with proactive trouble notification, allowing for real-time identification and handling of problems, frequently before our customers become aware of network problems. The distributed network management system also captures and provides capacity usage reports for billing and customer reports. Data provided by the distributed network management system is an integral part of our capacity planning and provisioning process, helping us to forecast and plan upgrades before capacity becomes strained. SALES AND MARKETING Our sales and marketing objective is to achieve broad market penetration and increase brand name recognition by targeting enterprises that depend upon the Internet for mission-critical operations. As of June 30, 1999, we had 50 employees engaged in direct sales and sales management, 17 in sales administration and support, 13 in technical support and 12 in marketing located in 10 cities. Sales. We have developed a direct high-end sales organization with managers who have an average of over 15 years of relevant sales experience and representatives who have many years of relevant sales experience with a broad range of telecommunications and technology companies. In addition, our highly trained technical sales engineers and client interaction engineers, who facilitate optimal routing solutions for our customers, are responsible for generating recurring sales revenues and serve to complement our sales force. When we deploy a new P-NAP, we set up a dedicated team of sales representatives and engineers focused exclusively on that market. We believe this localized direct sales approach allows us to respond to regional competitive characteristics, educate customers, and identify and close business opportunities better than a centralized sales force. We are also developing an indirect sales channel for our products and services through relationships with content 44 54 developers, cable companies, DSL service providers, consulting companies and Internet service providers. Marketing. Our marketing efforts are designed to help educate customers in our targeted vertical markets to understand that a service provider is now available that can provide a quality of service over the entire Internet that enables them to launch and execute mission-critical Internet-based applications. Our marketing activities have included collateral advertising, tradeshows, direct response programs, new P-NAP launch events and management of our Web site. These programs are targeted at key information technology executives as well as senior marketing and finance managers. In addition, we conduct comprehensive public relations efforts focused on cultivating industry analyst and media relationships with the goal of securing broad media coverage and public recognition of our proprietary high speed public Internet communications solutions. Our marketing organization is responsible for expanding our value added service offerings into horizontal markets as new capacity intensive applications such as voice and fax over Internet Protocol, virtual private network services, multimedia document distribution, audio and video streaming and other emerging technologies are introduced. COMPETITION The Internet-based connectivity services market is extremely competitive. Many of our competitors have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than we do. Our competitors include: - backbone providers that provide us connectivity services including AGIS, AT&T, Cable & Wireless USA, GTE Internetworking, ICG Communications, Intermedia, PSINet, Sprint, UUNET and Verio; - regional Bell operating companies which offer Internet access; and - global, national and regional Internet service providers. Because relatively low barriers to entry characterize our market, we expect other companies to enter our market. In addition, if we are successful in implementing our international expansion, we will encounter additional competition from international Internet service providers as well as international telecommunication companies. As new participants enter the Internet connectivity services market, we will face increased competition. Such new competitors could include computer hardware, software, media and other technology and telecommunications companies. A number of telecommunications companies and online service providers currently offer, or have announced plans to offer or expand, their network services. Other companies have expanded their Internet access products and services as a result of acquisitions. Further, the ability of some of our competitors to bundle other services and products with their network services could place us at a competitive disadvantage. Various companies are also exploring the possibility of providing, or are currently providing, high-speed data services using alternative delivery methods. In addition, Internet backbone providers may make technological developments, such as improved router technology, that will enhance the quality of their services. We believe that the principal competitive factors in our market are speed and reliability of connectivity, quality of facilities, level of customer service and technical support, price, brand recognition, the effectiveness of sales and marketing efforts, and the timing and market acceptance of new solutions and enhancements to existing solutions developed by us and our competitors. We believe that we presently are positioned to compete favorably with respect to most of these factors. In particular, many of our competitors have built and must maintain capital-intensive backbone 45 55 infrastructures that are highly dependent on traditional public and private peering exchanges. Each backbone provider tries to offer high quality service within its own network but is unable to guarantee a service quality once a data packet leaves its network, and there is little incentive to optimize the interoperability of traffic between networks. We actively route traffic in an optimal manner, thereby providing customers with a high level of service and increasing the efficiency of the backbone providers themselves. However, the market for Internet connectivity services is evolving rapidly, and we cannot assure you that we will compete successfully in the future. As a result, we may not maintain a competitive position against current or future competitors. See "Risk Factors -- We Operate in an Extremely Competitive Market, and We May Not Be Able to Compete Effectively Against Our Many Competitors." INTELLECTUAL PROPERTY We rely on a combination of patent, copyright, trademark, trade secret and other intellectual property law, nondisclosure agreements and other protective measures to protect our proprietary technology. InterNAP and P-NAP are registered United States trademarks of InterNAP. The United States Patent and Trademark Office has recently notified us that it has allowed the claims in our initial patent application. Additional claims that were included by amendment in that application are still pending. In addition, we have filed an international patent application under the Patent Cooperation Treaty. We also enter into confidentiality and invention assignment agreements with our employees and consultants and control access to and distribution of our proprietary information. Despite our efforts to protect our proprietary rights, departing employees and other unauthorized parties may attempt to copy or otherwise obtain and use our products and technology. Monitoring unauthorized use of our products and technology is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights claims or initiate litigation against us or our suppliers or customers with respect to existing or future products and services. Although we have not been a party to any claims alleging infringement or intellectual property rights, we cannot assure you that we will not be subject to these claims in the future. Further, we may in the future initiate claims or litigation against third parties for infringement of our proprietary rights to determine the scope and validity of our proprietary rights or those of our competitors. Any of these claims, with or without merit, may be time-consuming, result in costly litigation and diversion of technical and management personnel or require us to cease using infringing technology, develop noninfringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. In the event of a successful claim of infringement and our failure or inability to develop noninfringing technology or license the infringed or similar technology on a timely basis, our business and results of operations may be seriously harmed. EMPLOYEES As of June 30, 1999, we employed 221 full-time persons, 12 of whom were engaged in product development, 92 in sales and marketing, 92 in professional services and 25 in finance, administration and operations. None of our employees is represented by a labor union, and we have not experienced any work stoppages to date. We consider our employee relations to be good. 46 56 FACILITIES Our executive offices are located in Seattle, Washington and consist of approximately 20,700 square feet that are leased under an agreement that expires in 2003. On July 1, 1999, we entered into a third amendment to our lease increasing our total square footage to approximately 74,100 square feet as of October 1, 1999. We lease facilities for our network operations center, sales offices and P-NAPs in a number of metropolitan areas and specific cities. We believe that our existing facilities, including the additional space, are adequate for our current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. LEGAL PROCEEDINGS From time to time, we may be involved in litigation relating to claims arising out of our ordinary course of business. We are not currently involved in any material legal proceedings. 47 57 MANAGEMENT Our executive officers and directors, the positions held by them and their ages as of June 30, 1999 are as follows: EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION ---- --- -------- Anthony C. Naughtin...................... 43 Chief Executive Officer, President and Director Paul E. McBride.......................... 37 Chief Financial Officer and Vice President of Finance Christopher D. Wheeler................... 32 Chief Technology Officer and Vice President Charles M. Ortega........................ 44 Vice President of Sales & Marketing Richard Perez............................ 46 Vice President of Deployment, Field Engineering & Provisioning Eugene Eidenberg......................... 59 Chairman of the Board William J. Harding(1).................... 51 Director Frederic W. Harman(1).................... 39 Director Robert J. Lunday, Jr.(2)................. 60 Director Kevin L. Ober(1)(2)...................... 38 Director Robert D. Shurtleff, Jr.(2).............. 45 Director
- ------------------------- (1) Member of audit committee. (2) Member of compensation committee. Anthony C. Naughtin founded InterNAP and has served as our Chief Executive Officer and President since May 1996. Mr. Naughtin has also served as our director since October 1997. Prior to founding InterNAP, he was vice president for commercial network services at ConnectSoft, Inc., an Internet and e-mail software developer, from May 1995 to May 1996. From February 1992 to May 1995, Mr. Naughtin was the director of sales at NorthWestNet, an NSFNET regional network. Mr. Naughtin has served as a director of Fine.com International Corp., a services-computer processing and data preparation company since December 1996. Mr. Naughtin holds a Bachelor of Arts in communications from the University of Iowa and is a graduate of the Creighton School of Law. Paul E. McBride has served as our Vice President of Finance and Administration since May 1996. He has also served as our Chief Financial Officer since June 1999. Prior to joining InterNAP, Mr. McBride was Vice President of Finance and Operations at ConnectSoft Inc. from February 1995 to March 1996. From December 1992 to January 1995, he served as Chief Financial Officer and Vice President of Finance at PenUltimate, Inc., a software developer. Mr. McBride holds a Bachelor of Arts in Economics and a Bachelor of Science in Finance from the University of Colorado and holds a Master of Business Administration from the University of Southern California. Christopher D. Wheeler has served as our Chief Technology Officer and Vice President since May 1996. Prior to joining InterNAP, Mr. Wheeler was co-founder, President and Chief Executive Officer of interGlobe Networks, Inc., a TCP/IP consulting firm from 1994 to 1996. Mr. Wheeler also worked in advanced network/Internet technology areas at NorthwestNet, which is now Verio Northwest, and was responsible for backbone engineering, routing technology design, network management tools development, network operations and systems engineering at the University of 48 58 Washington from 1989 to 1994. Mr. Wheeler holds a Bachelor of Science in Computer Science from the University of Washington. Charles M. Ortega has served as our Vice President of Sales and Marketing since April 1998. Prior to joining InterNAP, Mr. Ortega was Director of Sales for Global and Corporate National Accounts at MCI Communications Corporation from 1989 to April 1998. Prior to MCI, he held senior sales management positions with Wang Laboratories and Hewlett Packard. Mr. Ortega holds a Bachelor of Science degree in Kinesiology from UCLA, and a Master of Business Administration from the Joan Anderson School of Business at UCLA. Richard Perez has served as our Vice President of Deployment, Field Engineering and Provisioning since December 1998. Prior to joining InterNAP, Mr. Perez worked for 17 years at MCI Communications Corporation, serving in various managerial and technical positions. Mr. Perez attended the University of Maryland and is a past Advisory Board member of the University of Washington's Data Communications Extension. Eugene Eidenberg has served as a director and chairman of InterNAP since November 1997 and as chairman of the board of directors since 1998. Dr. Eidenberg has served as a Principal of Hambrecht & Quist Venture Associates since 1998 and was an advisory director at the San Francisco investment banking firm of Hambrecht & Quist from 1995 to 1998. Dr. Eidenberg served for 12 years in a number of senior management positions with MCI Communications Corporation. His positions at MCI included Senior Vice President for Regulatory and Public Policy, President of MCI's Pacific Division, Executive Vice President for Strategic Planning and Corporate Development and Executive Vice President for MCI's international businesses. Dr. Eidenberg is currently a director of LXR Biotechnology, AAPT Ltd. and several private companies. Dr. Eidenberg holds a Ph.D. and a Master of Arts degree from Northwestern University and a Bachelor of Arts degree from the University of Wisconsin. William J. Harding has served as a director of InterNAP since January 1999. Since 1994, Dr. Harding has been an employee and Principal of Morgan Stanley & Co. Incorporated. In addition, Dr. Harding has served as a managing member of Morgan Stanley Venture Partners, L.L.C., the general partner of Morgan Stanley Dean Witter Venture Partners. Prior to joining Morgan Stanley Dean Witter, he was a General Partner of several venture capital partnerships affiliated with J.H. Whitney & Co. Dr. Harding was associated with Amdahl Corporation from 1976 to 1985, serving in various technical and business positions. He is currently a director of ScanSoft, Inc., Persistence Software, Inc., Commerce One, Inc. and several private companies. Dr. Harding holds a Ph.D. in engineering from Arizona State University and a Master of Science degree in systems engineering and Bachelor of Science degree in engineering mathematics from the University of Arizona. Frederic W. Harman has served as a director of InterNAP since January 1999. Since 1994, Mr. Harman has served as a Managing Member of the General Partners of venture capital funds affiliated with Oak Investment Partners. Mr. Harman served as a General Partner of Morgan Stanley Venture Capital, L.P. from 1991 to 1994. Mr. Harman serves as a director of Inktomi Corporation, ILOG, S.A., Primus Knowledge Solutions and several privately held companies. Mr. Harman holds a Bachelor of Science degree and a Masters degree in electrical engineering from Stanford University and a Master of Business Administration from Harvard University. Robert J. Lunday, Jr. has served as a director of InterNAP since inception. Mr. Lunday has served as President of Lunday Communications, Inc., an investment company, since 1973. He was a founder of Commnet Cellular, Inc. and served on its board of directors from 1983 to 1989. 49 59 Kevin L. Ober has served as a director of InterNAP since October 1997. Mr. Ober has been a member of the investment team at Vulcan Ventures, Inc. since November 1993 and in this capacity serves as a director in several portfolio companies including Nexabit Networks, NETSchools Corporation and Command Audio, Inc. Prior to working at Vulcan Ventures, Mr. Ober served in various positions at Conner Peripherals, Inc., a computer hard disk drive manufacturer. Mr. Ober holds a Master of Business Administration from Santa Clara University and Bachelor of Science degree in business administration from St. John's University. Robert D. Shurtleff, Jr. has served as a director of InterNAP since January 1997. In 1999, Mr. Shurtleff founded S.L. Partners, a strategic consulting group focused on early stage companies. From 1988 to 1998, Mr. Shurtleff held various positions at Microsoft Corporation, including Program Management and Development Manager and General Manager Workgroup Solutions Product Unit. Prior to working at Microsoft Corporation, Mr. Shurtleff worked at Hewlett Packard Company from 1979 to 1988. Mr. Shurtleff holds a Bachelor of Arts degree in computer science from the University of California at Berkeley. BOARD COMPOSITION Upon the closing of this offering, we will have authorized a range of directors from five to nine. In accordance with the terms of our amended articles of incorporation, the terms of office of the board of directors will be divided into three classes: - Class I directors, whose term will expire at the annual meeting of shareholders to be held in 2000; - Class II directors, whose term will expire at the annual meeting of shareholders to be held in 2001; and - Class III directors, whose term will expire at the annual meeting of shareholders to be held in 2002. Our Class I directors will be Robert J. Lunday, Jr. and Robert D. Shurtleff, Jr., our Class II directors will be Frederic W. Harman and Kevin L. Ober, and our Class III directors will be Eugene Eidenberg, William J. Harding and Anthony C. Naughtin. At each annual meeting of shareholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our board of directors may have the effect of delaying or preventing a change in control or management of InterNAP. COMMITTEES OF THE BOARD OF DIRECTORS The board of directors has established an audit committee and a compensation committee. Our audit committee consists of Kevin L. Ober, Frederic W. Harman and William J. Harding. The audit committee reviews our internal accounting procedures and consults with and reviews the services provided by our independent accountants. Our compensation committee consists of Kevin L. Ober, Robert J. Lunday, Jr. and Robert D. Shurtleff, Jr. The compensation committee reviews and recommends to the board of directors the compensation and benefits of all our officers and establishes and reviews general policies relating to compensation and benefits for our employees. 50 60 BOARD-COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. DIRECTOR COMPENSATION Our directors currently do not receive any cash compensation for their services on the board of directors or any committees of the board. They are reimbursed for certain expenses in connection with attendance at board and committee meetings. From time to time, certain non-employee directors have received grants of options to purchase shares of our common stock. In March 1998, Messrs. Eidenberg and Ober each were granted an option to purchase 200,000 shares of our common stock at an exercise price of $.06 per share. Non-employee directors are expected to receive an initial option to purchase 40,000 shares of common stock and an annual option to purchase 10,000 shares of common stock under our 1999 non-employee directors' stock option plan. EXECUTIVE COMPENSATION The table below sets forth summary information concerning compensation paid by us during the fiscal year ended December 31, 1998 to (a) our Chief Executive Officer and President and (b) three of our other executive officers other than the Chief Executive Officer whose salary and bonus for fiscal year 1998 exceeded $100,000 and who served as an executive officer during fiscal year 1998: SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION -------------------------------------- ------------ ALL OTHER SECURITIES ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($) - --------------------------- --------- -------- --------------- ------------ --------------- Anthony C. Naughtin, Chief Executive Officer and President.......... $123,750 $ -- $ -- $ -- $ -- Paul E. McBride, Chief Financial Officer and Vice President..... 113,750 -- -- -- -- Christopher D. Wheeler, Chief Technical Officer and Vice President..... 113,750 -- -- -- -- Charles M. Ortega, Vice President of Sales and Marketing.......... 81,658 20,000 30,000 360,000 12,000(1)
- --------------- (1) Consists of living expenses. 51 61 STOCK OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR The following table sets forth information regarding options granted to certain of our executive officers during the fiscal year ended December 31, 1998:
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ------------------------------------------------------- ANNUAL RATES OF TOTAL OPTIONS STOCK SHARES GRANTED TO APPRECIATION FOR UNDERLYING EMPLOYEES EXERCISE OPTION TERM($) OPTIONS IN FISCAL PRICE PER EXPIRATION -------------------- NAME GRANTED(#) YEAR(%) SHARE($) DATE 5% 10% ---- ----------- ------------- --------- ---------- -------- -------- Charles M. Ortega.............. 360,000 10.5% $ .06 7/21/08 $13,584 $34,425
Twenty-five percent of these options vest on the first anniversary of the date of hire and the remainder vest in equal installments each month over the three-year period following the first anniversary of the date of hire. Options were granted at an exercise price equal to the fair market value of our common stock, as determined by the board of directors on the date of grant. The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the SEC. There can be no assurance provided to any executive officer or any other holder of our securities that the actual stock price appreciation over the option term will be at the assumed 5% and 10% levels or at any other defined level. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information as of December 31, 1998 regarding options held by certain of our executive officers. There were no stock appreciation rights outstanding at December 31, 1998:
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT SHARES AT DECEMBER 31, 1998(#) DECEMBER 31, 1998($) ACQUIRED ON VALUE ---------------------------- ---------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ----------- ----------- ------------- ----------- ------------- Charles M. Ortega..... -- -- -- 360,000 -- $32,400
In the table above, the value of unexercised in-the-money options is based on the fair market value of our common stock, determined by the board of directors as discussed above to be $.15 per share on or about December 31, 1998, minus the per share exercise price multiplied by the number of shares. EMPLOYMENT AGREEMENTS We have entered into employment letter agreements with several of our officers, including Anthony C. Naughtin, Paul E. McBride, Christopher D. Wheeler and Charles M. Ortega. Each letter agreement sets forth the officer's compensation level. Under each letter agreement an officer serves at-will and employment may be terminated by us or by the officer at any time, with or without cause and with or without notice. Each employment agreement contains a noncompetition covenant one year in duration. 52 62 INCENTIVE STOCK PLANS 1998 Stock Option/Stock Issuance Plan. Our board of directors adopted our 1998 Stock Option/Stock Issuance Plan on February 2, 1998 and our shareholders approved it on March 1, 1998. On January 19, 1999, our board reserved an additional 1,000,000 shares for option grants under the 1998 Plan, which the shareholders approved on January 26, 1999. We have reserved a total of 5,035,000 shares for issuance under the 1998 Plan. As of June 30, 1999, 695,082 shares had been issued upon the exercise of options granted under the 1998 Plan and options to purchase 4,132,622 shares were outstanding, with 207,296 shares reserved for future grants or purchases under the 1998 Plan. Options currently outstanding under the 1998 Plan will continue in full force and effect under the terms of the 1998 Plan until such outstanding options are exercised or terminated in accordance with their terms. The 1998 Plan provides for grants of incentive stock options that qualify under Section 422 of the Internal Revenue Code of 1986, as amended, and nonstatutory stock options and common stock awards to employees, directors and consultants. Incentive stock options may be granted only to employees. The 1998 Plan is administered by a committee appointed by the board, which determines the terms of awards granted, including the exercise price, the number of shares subject to the award and the exercisability of awards. The exercise price of incentive stock options granted under the 1998 Plan must be at least equal to the fair market value of our common stock on the date of grant. However, for any employee holding more than 10% of the voting power of all classes of our stock, the exercise price of incentive stock options must be not less than 110% of the fair market value. The exercise price of nonstatutory stock options is set by the administrator of the 1998 Plan. The maximum term of options granted under the 1998 Plan is ten years. An optionee whose relationship as an employee, director or consultant with us or any related corporation ceases for any reason, other than for death, total and permanent disability or "for cause," may exercise options in the three-month period following such cessation, or such other period of time as determined by the administrator, unless such options terminate or expire sooner, or later, by their terms. The three-month period is extended to twelve months for terminations due to total and permanent disability or death. Options terminate immediately upon an optionee's termination "for cause." Generally, the optionholder may not transfer a stock option other than by will or the laws of descent or distribution. In the event of certain corporate transactions, the board of directors may, in its sole discretion, either (i) accelerate the vesting of outstanding options under the 1998 Plan, (ii) arrange for outstanding options to be assumed or substituted for similar options by a successor corporation, (iii) arrange for outstanding options to be replaced by a comparable cash incentive program of the successor corporation or (iv) take no action with respect to outstanding options, whereby such options will terminate upon the consummation of the corporation transaction. The 1998 plan will terminate on the earlier of 10 years from its adoption by the board or the date all shares have been issued. As of June 19, 1999, no further options will be granted under the 1998 plan. 1999 Equity Incentive Plan. Our Board adopted the 1999 Equity Incentive Plan on June 19, 1999. As of June 30, 1999, an aggregate of 6,500,000 shares of common stock, subject to shareholder approval, have been authorized for issuance under the 1999 Plan. As of June 30, 1999, options to purchase an aggregate of 2,004,000 shares were outstanding under the 1999 Plan and 4,496,000 shares were currently available for future grant of stock awards under the 1999 Plan. 53 63 The Incentive Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, nonstatutory stock options, restricted stock purchase rights and stock bonuses to our employees, consultants and directors. Incentive stock options may be granted only to employees. The Incentive Plan is administered by the board of directors or a committee appointed by the board, which determines the terms of awards granted, including the exercise price, the number of shares subject to the award and the exercisability of awards. The exercise price of incentive stock options granted under the 1999 Plan must be at least equal to the fair market value of our common stock on the date of grant. However, for any employee holding more than 10% of the voting power of all classes of our stock, the exercise price will be no less than 110% of the fair market value. The exercise price of nonstatutory stock options is set by the administrator of the 1999 Plan, but can be no less than 85% of the fair market value. The maximum term of options granted under the 1999 Plan is ten years. Unless otherwise provided in an option agreement, an optionee whose relationship as an employee, director or consultant with us or any related corporation ceases for any reason, other than for death, total and permanent disability or "for cause," may exercise options in the three-month period following such cessation, or such other period of time as determined by the administrator, unless such options terminate or expire sooner, or later, by their terms. The three-month period is extended to twelve months for terminations due to total and permanent disability and eighteen months for terminations due to death. Options terminate immediately upon an optionee's termination "for cause." Generally, the optionholder may not transfer a stock option other than by will or the laws of descent or distribution unless the optionholder holds a nonstatutory stock option that provides for transfer in the stock option agreement. However, an optionholder may designate a beneficiary who may exercise the option following the optionholder's death. In the event of the sale of substantially all of our assets or merger with or into another corporation (a "change in control"), any outstanding options held by persons then performing services for us as an employee, director or consultant may either be assumed or continued or an equivalent award may be substituted by the surviving entity or, if such options are not assumed, continued or substituted, such options shall become fully exercisable, including shares as to which they would not otherwise be exercisable, and restricted stock shall become fully vested. Options also become fully exercisable in the event of a securities acquisition representing 50% or more of the combined voting power of our securities and in the event that a participant's service is terminated by a surviving corporation for any reason other than "for cause" within 13 months following a change in control. As of the first nine anniversaries of the effective date of the 1999 Plan, an additional number of shares will automatically be added to the number of shares already reserved for issuance under the 1999 Plan. The additional number of shares will not be more than the lesser of (i) 3 1/2% of the number of shares of our common stock issued and outstanding on an anniversary date or (ii) 6,500,000 shares. When we become subject to Section 162(m) of the Internal Revenue Code, which, among other things, denies a deduction to publicly held corporations for certain compensation paid to specified employees in a taxable year to the extent that the compensation exceeds $1,000,000, no person may be granted options under the 1999 Plan covering more than 3,000,000 shares of common stock in any calendar year. Restricted stock purchase awards granted under the 1999 Plan may be granted pursuant to a repurchase option in favor of InterNAP in accordance with a vesting schedule determined by the board or a committee appointed by the board. The price of a restricted stock purchase award under the 1999 Plan cannot be less than 85% of the fair market value of the stock subject to the award on the date of grant. Stock bonuses may be awarded in consideration of past services without a purchase 54 64 payment. Unless otherwise specified, rights under a stock bonus or restricted stock bonus agreement generally may not be transferred other than by will or the laws of descent and distribution during such period as the stock awarded pursuant to such an agreement remains subject to the agreement. Our board of directors may amend (subject to shareholder approval as necessary) the 1999 Plan at any time. The Incentive Plan will terminate on the day before the 10th anniversary of its adoption by the board. 1999 Employee Stock Purchase Plan. In July 1999, our board of directors adopted, subject to shareholder approval, the 1999 Employee Stock Purchase Plan. A total of 1,500,000 shares of common stock have been reserved for issuance under the purchase plan. As of the first nine anniversaries of the adoption of the purchase plan, the number of shares reserved for issuance under the purchase plan will automatically be increased by 2% of the total number of shares of common stock then outstanding or, if less, by 1,500,000 shares. The purchase plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code. The purchase plan provides a means by which employees may purchase common stock of InterNAP through payroll deductions. The purchase plan is implemented by offerings of rights to eligible employees. Under the purchase plan, InterNAP may specify offerings with a duration of not more than 27 months, and may specify shorter purchase periods within each offering. The first offering will begin on the effective date of this offering and terminate on June 30, 2001. Purchase dates will occur each December 31 and June 30 under the initial offering. Employees who participate in an offering may have up to 15% of their earnings withheld pursuant to the purchase plan. The amount withheld is then used to purchase shares of the common stock on specified dates determined by the board of directors. The price of common stock purchased under the purchase plan will be equal to 85% of the lower of the fair market value of the common stock at the commencement date of each offering period or the relevant purchase date. Employees may end their participation in an offering at any time during such offering except during the 15 day period immediately prior to a purchase date. Employees' participation in all offerings will end automatically on termination of their employment with us or one of our subsidiaries. Unless otherwise determined by our board of directors, employees are eligible to participate in the purchase plan only if they are customarily employed by us or one of our subsidiaries designated by the board of directors for at least 20 hours per week and five months per calendar year. No employee may be granted rights under the purchase plan if immediately after such rights are granted, such employee will have voting power over 5% or more of InterNAP's outstanding capital stock. Eligible employees may be granted rights only if the rights together with any other rights granted under employee stock purchase plans do not permit such employee's rights to purchase stock of InterNAP to accrue at a rate which exceeds $25,000 of fair market value of such stock for each calendar year in which such rights are outstanding. Upon a change in control of InterNAP, our board of directors has discretion to provide that each right to purchase common stock will be assumed or an equivalent right substituted by the successor corporation or that all sums collected by payroll deductions to be applied to purchase stock immediately prior to such change in control. The board of directors has the authority to amend or terminate the purchase plan, provided, however, that no such action may adversely affect any outstanding rights to purchase common stock. 1999 Non-Employee Directors' Stock Option Plan. In July 1999, our board of directors adopted, subject to shareholder approval, the 1999 Non-Employee Directors' Stock Option Plan to provide for the automatic grant of options to purchase shares of common stock to non-employee directors of InterNAP. The directors' plan is administered by our compensation committee. 55 65 The aggregate number of shares of common stock that may be issued pursuant to options granted under the directors' plan is 500,000. Pursuant to the terms of the directors' plan, each of our directors who is not an employee of InterNAP will be automatically granted an option to purchase 40,000 shares of common stock on the effective date of this offering. Each person who is elected or appointed for the first time to be a non-employee director after the effective date of this offering will be granted an Initial Grant upon such election or appointment. In addition, on the day following each annual meeting of our shareholders, each non-employee director who has served as a non-employee director for at least six months and who continues to serve as a non-employee director of InterNAP will be automatically granted an option to purchase 10,000 shares of common stock. Each option granted under the directors' plan will be fully vested on the date it is granted. No option granted under the directors' plan may be exercised after the expiration of ten years from the date on which it was granted. The exercise price of options under the directors' plan will equal the fair market value of the common stock on the date of grant. A non-employee director whose service as a non-employee director or employee of or consultant to InterNAP or any of our affiliates ceases for any reason other than death or permanent and total disability may exercise vested options in the three-month period following such cessation (unless such options terminate or expire sooner by their terms). Vested options may be exercised during the 12-month period after a non-employee director's service ceases due to disability and during the 18-month period after such service ceases due to death. The directors' plan will terminate in July 2009, unless terminated earlier by our board of directors. Upon certain changes in control of InterNAP, all outstanding stock awards under the directors' plan may be assumed by the surviving entity or replaced with similar stock awards granted by the surviving entity. 401(k) Plan. We have established a tax-qualified employee savings and retirement plan, the 401(k) Plan, for eligible employees. Eligible employees may elect to defer a percentage of their pre-tax gross compensation in the 401(k) Plan, subject to the statutorily prescribed annual limit. We may make matching contributions on behalf of all participants in the 401(k) Plan in an amount determined by our board of directors. We may also make additional discretionary profit sharing contributions in such amounts as determined by the board of directors, subject to statutory limitations. Matching and profit-sharing contributions, if any, are subject to a vesting schedule; all other contributions are at all times fully vested. We intend the 401(k) Plan, and the accompanying trust, to qualify under Sections 401(k) and 501 of the Internal Revenue Code so that contributions by employees or by InterNAP to the 401(k) Plan, and income earned (if any) on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that we will be able to deduct our contributions, if any, when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in any of a number of investment options. LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION Our articles of incorporation limit the liability of directors to the fullest extent permitted by the Washington Business Corporation Act as it currently exists or as it may be amended in the future. Consequently, subject to the Washington Business Corporation Act, no director will be personally liable to us or our shareholders for monetary damages resulting from his or her conduct as a director of InterNAP, except liability for: - acts or omissions involving intentional misconduct or knowing violations of law; - unlawful distributions; or - transactions from which the director personally receives a benefit in money, property or services to which the director is not legally entitled. 56 66 Upon the closing of this offering, our articles of incorporation will also provide that we may indemnify any individual made a party to a proceeding because that individual is or was a director or officer of ours, and this right to indemnification will continue as to an individual who has ceased to be a director or officer and will inure to the benefit of his or her heirs, executors or administrators. Any repeal of or modification to our articles of incorporation may not adversely affect any right of a director or officer of ours who is or was a director or officer at the time of such repeal or modification. To the extent the provisions of our articles of incorporation provide for indemnification of directors or officers for liabilities arising under the Securities Act of 1933, as amended, those provisions are, in the opinion or the Securities and Exchange Commission, against public policy as expressed in the Securities Act and they are therefore unenforceable. Upon the closing of this offering, our bylaws will provide that we will indemnify our directors and officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. Upon the closing of this offering, we will enter into agreements to indemnify our directors and certain officers, in addition to indemnification provided for in our articles of incorporation or bylaws. These agreements, among other things, indemnify our directors and certain officers for certain expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by us arising out of such person's services as our director or officer or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. We also currently maintain liability insurance for our officers and directors. CHANGE OF CONTROL ARRANGEMENTS Under the 1998 Stock Option/Stock Issuance Plan, in the event of certain corporate transactions, including the sale of substantially all of our assets or merger with or into another corporation, the plan administrator may, in its sole discretion, either (i) accelerate the vesting of outstanding options under the 1998 Plan, (ii) arrange for outstanding options to be assumed or substituted for similar options by a successor corporation, (iii) arrange for outstanding options to be replaced by a comparable cash incentive program of the successor corporation or (iv) take no action with respect to outstanding options, whereby such options will terminate upon the consummation of the corporation transaction. Under the 1999 Equity Incentive Plan, in the event of the sale of substantially all of our assets or merger with or into another corporation (a "change in control"), any outstanding options held by persons then performing services for us as an employee, director or consultant may either be assumed or continued or an equivalent award may be substituted by the surviving entity or, if such options are not assumed, continued or substituted, such options shall become fully exercisable, including shares as to which they would not otherwise be exercisable, and restricted stock shall become fully vested. Options also become fully exercisable in the event of a securities acquisition representing 50% or more of the combined voting power of our securities and in the event that a participant's service is terminated by a surviving corporation for any reason other than "for cause" within 13 months following a change in control. 57 67 CERTAIN TRANSACTIONS Since our inception in May 1996, we have issued and sold securities to the following persons who are our executive officers, directors or principal shareholders:
SERIES A SERIES B SERIES C PREFERRED PREFERRED PREFERRED COMMON INVESTOR(1) STOCK(2) STOCK(3) STOCK(4) WARRANTS(5) STOCK ----------- --------- --------- --------- ----------- ------- Anthony C. Naughtin................................. -- -- -- -- 916,952 Paul E. McBride(6).................................. -- -- -- -- 916,952 Christopher D. Wheeler.............................. -- -- -- -- 916,952 Robert D. Shurtleff, Jr.(7)......................... -- 338,304 357,160 432,266 -- Robert J. Lunday, Jr.(8)............................ 6,666,667 -- -- -- -- H&Q InterNAP Investors, L.P.(9)..................... -- 1,685,000 1,866,958 -- -- Morgan Stanley Dean Witter Venture Partners(10)..... -- -- 9,259,259 -- -- Oak Investment Partners VIII, L.P.(11).............. -- -- 6,018,519 -- -- TI Ventures, LP(12)................................. -- 1,666,667 1,759,556 -- -- Vulcan Ventures Incorporated(13).................... -- 2,500,000 2,236,071 -- --
- ------------------------- (1) See "Principal Shareholders" for more detail on shares held by these purchasers. (2) The per share purchase price for our Series A preferred stock was $.102. Upon the closing of the offering, each outstanding share of Series A preferred stock will convert into one share of common stock. (3) The per share purchase price for our Series B preferred stock was $.60. Upon the closing of the offering, each outstanding share of Series B preferred stock will convert into one share of common stock. (4) The per share purchase price for our Series C preferred stock was $1.08. Upon the closing of the offering, each outstanding share of Series C preferred stock will convert into one share of common stock. (5) Warrants are exercisable for our Series B preferred stock at a per share exercise price of $.60. (6) Consists of 916,952 shares of common stock issued to Mr. McBride, of which 250,000 shares of common stock were subsequently transferred by Mr. McBride to the McBride Trust and 46,000 shares of common stock to other shareholders. (7) Consists of 338,304 shares of Series B preferred stock issued to Mr. Shurtleff, of which 199,916 were subsequently transferred to other shareholders, warrants to purchase 432,266 shares of Series B preferred stock, of which Mr. Shurtleff subsequently exercised 116,666, and 357,160 shares of Series C preferred stock issued to Mr. Shurtleff. (8) Consists of 6,666,667 shares of Series A preferred stock issued to Mr. Lunday, of which 844,280 were subsequently transferred to other shareholders. (9) Mr. Eidenberg, one of our directors, is a principal of Hambrecht & Quist Venture Associates. (10) Consists of 780,000 shares of Series C preferred stock held by Morgan Stanley Venture Investors III, L.P., 355,417 shares of Series C preferred stock held by The Morgan Stanley Venture Partners Entrepreneur Fund, L.P. and 8,123,842 shares of Series C preferred stock held by Morgan Stanley Venture Partners III, L.P. Dr. Harding, one of our directors, is a managing member of the general partner of the Morgan Stanley Dean Witter Venture Partners Funds. The institutional managing member of the general partner of each of the Morgan 58 68 Stanley Dean Witter Venture Partners Funds is a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., the parent of Morgan Stanley & Co. Incorporated. (11) Consists of 5,904,167 shares of Series C preferred stock held by Oak Investment Partners VIII, L.P. and 114,352 shares of Series C preferred stock held by Oak VIII Affiliates Fund, L.P. Mr. Harman, one of our directors, is a managing member of the general partner of venture capital funds affiliated with Oak Investment Partners. (12) Consists of 1,666,667 shares of Series B preferred stock held by TI Ventures, LP, and 1,759,556 shares of Series C preferred stock issued to TI Ventures, LP of which 88,047 were subsequently transferred to other shareholders. (13) Mr. Ober, one of our directors, is a member of the investment team of Vulcan Ventures Incorporated. In addition, we have granted options to certain of our executive officers. See "Management -- Executive Compensation." Pursuant to a Limited Liability Company Agreement of InterNAP Network Services, L.L.C., in October 1996, we sold 1,787,180 Class A Units in InterNAP Network Services, L.L.C. to certain investors, including our officers Paul E. McBride, Christopher D. Wheeler and Anthony C. Naughtin, for an aggregate consideration of $1,787. InterNAP Network Services, L.L.C. was dissolved on October 27, 1997. InterNAP was incorporated in the State of Washington in October 1997. These Class A Units were exchanged for shares of common stock at an exchange of 1 to 1.667. In May 1996, we issued 2,000,000 Class B Units in InterNAP Network Services, L.L.C. to Robert J. Lunday, Jr., in consideration for arranging a guarantee of certain of our leasehold obligations and an unconditional promise to contribute $500,000 to our capital on or before October 15, 1996. Additionally, Lunday Communications loaned us $475,000 in 1996 and we repaid the principal and interest during 1996. Robert J. Lunday, Jr., one of our directors, is president of Lunday Communications, Inc. Further, in May 1996, Mr. Lunday purchased an additional 2,000,000 Class B Units for $500,000. These Class B Units were exchanged for shares of Series A preferred stock at an exchange ratio of 1 to 1:667. Pursuant to a shareholders agreement, dated October 1, 1997, among InterNAP, Robert J. Lunday, Jr., and some of our founders, including Anthony C. Naughtin, Paul E. McBride and Christopher D. Wheeler, Mr. Lunday granted to each founder an option to purchase, under conditions set out in the shareholder agreement, his or her pro rata share (as that term is defined in the shareholder agreement) of 5,000,000 of the 6,666,667 shares of Series A preferred stock, or common stock upon conversion, owned by Mr. Lunday at the date of the shareholder agreement at a price of $1.26 per share. Mr. Lunday, one of our directors, is father-in-law of Mr. McBride, our Chief Financial Officer and Vice President of Finance. In an assignment agreement, dated October 3, 1997, between InterNAP, Ophir Ronen and Christopher D. Wheeler, our Chief Technology Officer, Mr. Wheeler and Mr. Ronen assigned all of their right, title and interest in and to that certain application for Letters Patent of the United States entitled Private Network Access Point Router for Interconnecting Among Internet Route Providers. On October 29, 1997, December 29, 1997 and February 4, 1998, we sold an aggregate of 12,862,558 shares of Series B preferred stock to 36 investors, including H&Q InterNAP Investors, L.P., TI Ventures, LP and Vulcan Ventures Incorporated, three of our principal shareholders, at an aggregate purchase price of $7,717,534 or $.60 per share. The investor group included Robert D. Shurtleff, Jr., one of our directors, who converted a promissory note dated February 13, 1997 in the amount of $125,000 plus accrued interest for 221,638 shares of Series B preferred stock. 59 69 On January 11, 1999, Lunday Communications, Inc. loaned $500,000 to us, represented by a promissory note that bore interest at the rate of prime plus 2% and had a maturity date of February 15, 1999. We repaid the outstanding principal and accrued interest on the loan in February 1999 from the proceeds of the Series C financing. On January 13, 1999, Robert D. Shurtleff, Jr., one our directors, loaned $600,000 to us, represented by a promissory note that bore interest at the rate of prime plus 2% and had a maturity date of February 15, 1999. We repaid the outstanding principal and accrued interest on the loan in February 1999 from the proceeds of the Series C financing. On January 28, 1999 and February 26, 1999, we sold an aggregate of 29,629,630 shares of Series C preferred stock to 44 investors, including Robert D. Shurtleff, Jr., one of our directors, and H&Q InterNAP Investors, L.P., Morgan Stanley Dean Witter Venture Partners, Oak Investment Partners VIII, L.P., TI Ventures, LP and Vulcan Ventures Incorporated, five of our principal shareholders, at an aggregate purchase price of $32,000,000, or $1.08 per share. We have entered into employment letter agreements with several of our key employees, including Anthony C. Naughtin, Paul E. McBride, Charles M. Ortega and Christopher D. Wheeler. These agreements are described in "Management-Employment Agreements." We plan to enter into indemnification agreements with our directors and executive officers for the indemnification of and advancement of expenses to such persons to the fullest extent permitted by law. We also intend to enter into these agreements with our future directors and executive officers. We believe that the foregoing transactions were in our best interest and were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. All future transactions between us and any of our officers, directors or principal shareholders will be approved by a majority of the independent and disinterested members of the board of directors, will be on terms no less favorable to us than could be obtained from unaffiliated third parties and will be in connection with our bona fide business purposes. 60 70 PRINCIPAL SHAREHOLDERS The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of June 30, 1999 and as adjusted to reflect our sale of shares for: - each person who we know to own beneficially more than five percent of the common stock, - each of our directors, - certain of our executive officers, and - all directors and executive officers as a group. Except as indicated, and subject to community property laws where applicable, the persons named have sole voting and investment power with respect to all shares shown as beneficially owned by them. Percentage of beneficial ownership is based on 53,501,228 shares of common stock outstanding on an as-converted basis as of June 30, 1999. This assumes no exercise of the underwriters' over-allotment option. If the underwriters' over-allotment option is exercised in full, we will sell up to an aggregate of shares of common stock and up to shares of common stock will be outstanding after the completion of this offering. The number of shares beneficially owned by each shareholder is determined under rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days after June 30, 1999 through the exercise of any stock option or other right. The inclusion in this table of these shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner of, or receives the economic benefit from these shares. Unless otherwise indicated in the table set forth below, each person or entity named below has an address in care of our principal executive offices.
PERCENTAGE OF SHARES BENEFICIALLY OWNED SHARES -------------------- BENEFICIALLY PRIOR TO AFTER NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING ------------------------------------ ------------ -------- -------- Morgan Stanley Dean Witter Venture Partners(1)........... 9,259,259 17.3% % c/o Morgan Stanley Dean Witter Venture Partners 1221 Avenue of the Americas New York, NY, 10020 William G. Harding(1).................................... 9,259,259 17.3 H&Q InterNAP Investors, L.P.(2).......................... 7,090,134 13.2 c/o Hambrecht & Quist LLC One Bush Street San Francisco, CA 94104 TI Ventures, LP(2)....................................... 7,090,134 13.2 c/o Hambrecht & Quist LLC One Bush Street San Francisco, CA 94104 Eugene Eidenberg(2)...................................... 7,090,134 13.2
61 71
PERCENTAGE OF SHARES BENEFICIALLY OWNED SHARES -------------------- BENEFICIALLY PRIOR TO AFTER NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING ------------------------------------ ------------ -------- -------- Oak Investment Partners VIII, L.P.(3).................... 6,018,519 11.2 535 University Avenue, Suite 1300 Palo Alto, CA, 94301 Frederic W. Harman(3).................................... 6,018,519 11.2 Robert J. Lunday, Jr.(4) ................................ 5,822,387 10.9 Vulcan Ventures Incorporated(5).......................... 4,936,071 9.2 110 100th Avenue Northwest, Suite 550 Bellevue, WA, 98004 Kevin L. Ober(5)......................................... 4,936,071 9.2 Fidelity Investors II Limited Partnership(6)............. 2,777,778 5.2 82 Devonshire Street, R25D Boston, MA, 02110-2106 FTT Ventures Limited(6).................................. 2,777,778 5.2 82 Devonshire Street, R25D Boston, MA, 02110-2106 Paul E. McBride(7)....................................... 2,689,804 5.0 Anthony C. Naughtin(8)................................... 2,292,380 4.3 Christopher D. Wheeler(9)................................ 2,292,380 4.3 Robert D. Shurtleff, Jr.(10)............................. 894,398 1.7 Charles M. Ortega(11).................................... 120,000 * Richard Perez(12)........................................ 25,000 * All directors and executive officers as a group (11 persons)(13)....................................... 37,314,048 69.0
- ------------------------- * Represents beneficial ownership of less than 1%. (1) Consists of 780,000 shares held by Morgan Stanley Venture Investors III, L.P., 355,417 shares held by The Morgan Stanley Venture Partners Entrepreneur Fund, L.P. and 8,123,842 shares held by Morgan Stanley Venture Partners III, L.P. The institutional managing member of the general partner of Morgan Stanley Dean Witter Venture Partners is a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., the parent of Morgan Stanley & Co. Incorporated. Dr. William J. Harding, one of our directors, is a managing member of the general partner of Morgan Stanley Dean Witter Venture Partners. Dr. Harding disclaims beneficial ownership of the shares held by Morgan Stanley Dean Witter Venture Partners, except to the extent of his proportionate interest therein. (2) Consists of 3,551,958 shares held by H&Q InterNAP Investors, L.P., 3,338,176 shares held by TI Ventures, LP, 83,333 shares issuable upon exercise of vested options that are held by Mr. Eugene Eidenberg and 116,667 shares issuable upon exercise of options held by Mr. Eidenberg that are exercisable within 60 days of June 30, 1999 but subject to repurchase by InterNAP under terms set forth in a notice of grant of stock option. Mr. Eidenberg, the chairman of our board of directors, is a Principal of Hambrecht and Quist Venture Associates. Mr. Eidenberg disclaims beneficial ownership of the shares held by H&Q InterNAP Investors, L.P. and TI Ventures, LP. 62 72 (3) Consists of 5,904,167 shares held by Oak Investment Partners VIII, L.P. and 114,352 shares held by Oak VIII Affiliates Fund L.P. Mr. Frederic W. Harman, one of our directors, is a managing member of the general partners of venture capital funds affiliated with Oak Investment Partners. Mr. Harman disclaims beneficial ownership of the shares held by Oak Investment Partners VIII, L.P. and Oak VIII Affiliates Fund L.P. (4) Includes 5,000,000 shares subject to an option under a Shareholders Agreement dated October 1, 1997, in favor of original Class A Members of InterNAP Network Services, L.L.C., including Paul E. McBride, Anthony C. Naughtin and Christopher D. Wheeler. (5) Consists of 4,736,071 shares held by Vulcan Ventures Incorporated, 83,333 shares held by Mr. Kevin L. Ober and 116,667 shares held by Mr. Ober that are subject to repurchase by InterNAP under terms set forth in a notice of grant of stock option. Mr. Ober, one of our directors, is a member of the investment team of Vulcan Ventures Incorporated. Mr. Ober disclaims beneficial ownership in the shares held by Vulcan Ventures Incorporated. (6) Consists of 1,388,889 shares owned by Fidelity Investors II Limited Partnership and 1,388,889 shares owned by FTT Ventures Limited, an affiliate of Fidelity Investors II Limited Partnership. (7) Includes 250,000 shares held by the McBride Trust, 110,856 shares held by Mr. McBride FBO Emily A. McBride UTMA, 110,856 shares held by Mr. McBride FBO Seth L. McBride UTMA, 110,856 shares held by Mr. McBride's wife in her own name, and 1,375,428 shares that may be purchased from Mr. Robert J. Lunday, Jr. upon exercise of an outstanding option under a Shareholder Agreement, dated October 1, 1997. Mr. Lunday is Mr. McBride's father- in-law. (8) Includes 1,375,428 shares that may be purchased from Mr. Robert J. Lunday, Jr. upon exercise of an outstanding option under a Shareholder Agreement, dated October 1, 1997. (9) Includes 1,375,428 shares that may be purchased from Mr. Robert J. Lunday, Jr. upon exercise of an outstanding option under a Shareholder Agreement, dated October 1, 1997. (10) Includes 315,600 shares issuable upon exercise of warrants exercisable within 60 days of June 30, 1999. (11) Includes 15,000 shares issuable upon exercise of options exercisable within 60 days of June 30, 1999. (12) Includes 25,000 shares issuable upon exercise of options exercisable within 60 days of June 30, 1999. (13) Includes 555,600 shares subject to options and warrants which are exercisable within 60 days of June 30, 1999. 63 73 DESCRIPTION OF CAPITAL STOCK Effective upon the closing of this offering, the authorized capital stock consists of 500,000,000 shares of common stock, $.001 par value, and 10,000,000 shares of preferred stock, $.001 par value. The following description of our capital stock does not purport to be complete and is subject to and qualified in its entirety by our amended and restated articles of incorporation and bylaws and by the applicable provisions of Washington law. COMMON STOCK As of June 30, 1999, there were 53,501,228 shares of common stock outstanding, after giving effect to the conversion of all outstanding shares of preferred stock into 49,469,479 shares of common stock. The holders of common stock are entitled to one vote per share on all matters to be voted on by the shareholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the board of directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive, conversion, subscription or other rights. There are no redemption or sinking fund provisions applicable to the common stock. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of preferred stock will be converted at a rate of one share of common stock for each share of preferred stock into an aggregate of 49,469,479 shares of common stock. Following the conversion, our articles of incorporation will be amended and restated to delete all references to such shares of preferred stock. Under the amended and restated articles of incorporation, the board has the authority, without further action by shareholders, to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon such preferred stock, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preference and sinking fund terms, any or all of which may be greater than the rights of the common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and reduce the likelihood that such holders will receive dividend payments and payments upon liquidation. Such issuance could have the effect of decreasing the market price of the common stock. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control. We have no present plans to issue any shares of preferred stock. WARRANTS As of June 30, 1999, warrants to purchase an aggregate of 600,136 shares of Series B preferred stock were outstanding at an exercise price of $.60 per share. Each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon the exercise of the warrant in the event of stock dividends, stock splits, reorganizations and reclassifications and consolidations. Upon the closing of this offering, all warrants described herein will become exercisable for common stock at the rate of one share of common stock for each share of preferred stock underlying the warrants. 64 74 REGISTRATION RIGHTS After this offering, the holders of 52,965,681 shares of common stock, including shares issuable upon exercise of warrants, or their permitted transferees, are entitled to certain rights with respect to the registration of such shares under the Securities Act. If we propose to register any of our securities under the Securities Act for our own account or the account of any of our shareholders other than the holders of the registrable shares, holders of the registrable shares are entitled, subject to certain limitations and conditions, to notice of this registration and are, subject to certain conditions and limitations, entitled to include registrable shares in the registration, provided, among other conditions, that the underwriters of any such offering have the right to limit the number of shares included in the registration. In addition, commencing 180 days after the effective date of the registration statement of which this prospectus is a part, we may be required to prepare and file a registration statement under the Securities Act at our expense if requested to do so by the holders of at least 21,186,272 of the registrable shares, provided the reasonably expected aggregate offering price will equal or exceed $5,000,000. We are required to use our best efforts to effect such registration, subject to certain conditions and limitations. We are not obligated to effect more than two of these shareholder-initiated registrations. Further, holders of registrable securities may require us to file additional registration statements on Form S-3, subject to certain conditions and limitations. We are required to bear substantially all costs incurred in connection with any of the registrations described above, other than underwriting discounts and commissions. The registration rights described above could result in substantial future expenses and adversely affect any future equity or debt offerings. ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF AMENDED AND RESTATED ARTICLES OF INCORPORATION, BYLAWS, AS AMENDED, AND WASHINGTON LAW Our board of directors, without shareholder approval, will have upon the closing of this offering authority under our amended and restated articles of incorporation to issue preferred stock with rights superior to the rights of the holders of common stock. As a result, our board could issue preferred stock quickly and easily, which could adversely affect the rights of holders of common stock and which our board could issue with terms calculated to delay or prevent a change in control or make removal of management more difficult. Election and Removal of Directors. Effective upon the closing of this offering, our articles of incorporation will provide for the division of our board of directors into three classes, as nearly as equal in number as possible, with the directors in each class serving for a three-year term, and one class being elected each year by our shareholders. The Class I term will expire at the annual meeting of shareholders to be held in 2000; the Class II term will expire at the annual meeting of shareholders to be held in 2001; and the Class III term will expire at the annual meeting of shareholders to be held in 2002. At each annual meeting of shareholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Because this system of electing and removing directors generally makes it more difficult for shareholders to replace a majority of the board of directors, it may discourage a third party from making a tender offer or otherwise attempting to gain control and may maintain the incumbency of the board of directors. Shareholder Meetings. Upon the closing of this offering our bylaws, as amended, will provide that, except as otherwise required by law or by our amended and restated articles of incorporation, special meetings of the shareholders can only be called pursuant to a resolution adopted by our board of directors, the chairman of the board or president. These provisions of our amended and restated articles of incorporation and bylaws, as amended, could discourage potential acquisition proposals and 65 75 could delay or prevent a change in control. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and in the policies formulated by the board of directors and to discourage certain types of transactions that may involve an actual or threatened change of control. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management. Washington law also imposes restrictions on certain transactions between a corporation and certain significant shareholders. Chapter 23B.19.040 of the Washington Business Corporation Act prohibits a "target corporation," with certain exceptions, from engaging in certain significant business transactions with an "acquiring person," which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation, for a period of five years after such acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporation's board of directors prior to the time of acquisition. Such prohibited transactions include, among other things: - a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person; - termination of 5% or more of the employees of the target corporation as a result of the acquiring person's acquisition of 10% or more of the shares; or - allowing the acquiring person to receive any disproportionate benefits as a shareholder. After the five-year period, a "significant business transaction" may occur, as long as it complies with certain "fair price" provisions of the statute. A corporation may not "opt out" of this statute. This provision may have the effect of delaying, deferring or preventing a change in control. TRANSFER AGENT The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company. 66 76 SHARES ELIGIBLE FOR FUTURE SALE Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect the market price of the common stock. Upon completion of this offering, we will have outstanding shares of common stock, assuming the issuance of shares of common stock offered in this prospectus, conversion of all shares of preferred stock and no exercise of options or warrants after June 30, 1999. Of these shares, the blank shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act; provided, however, that if shares are purchased by "affiliates," as that term is defined in Rule 144 under the Securities Act, their sales of shares would be subject to certain limitations and restrictions that are described below. We issued and sold the remaining shares of common stock, assuming conversion of all shares of preferred stock, held by existing shareholders as of June 30, 1999 in reliance on exemptions from the registration requirements of the Securities Act. Of these shares, shares will be subject to lock-up agreements described below on the effective date of the offering. Upon expiration of the lock-up agreements 180 days after the effective date of the prospectus, shares will become eligible for sale, subject in most cases to the limitations of Rule 144. In addition, holders of stock options and warrants could exercise their options and warrants and sell the shares issued upon exercise as described below.
DAYS AFTER DATE OF SHARES ELIGIBLE THIS PROSPECTUS FOR SALE COMMENT ------------------ --------------- ------- Upon effectiveness...... Shares sold in the offering 90 days................. Shares saleable under Rule 144 that are not subject to the lock-up 180 days................ Lock-up released: shares saleable under Rules 144 and 701
As of June 30, 1999 there were a total of 600,136 shares of common stock that could be issued upon exercise of outstanding warrants. of these shares are subject to lock-up agreements. As of June 30, 1999, there were a total of 6,136,622 shares of common stock subject to outstanding options under our stock plans, of which were vested. However, all of these shares are subject to lock-up agreements. Immediately after the completion of the offering, we intend to file registration statements on Form S-8 under the Securities Act to register all of the shares of common stock issued or reserved for future issuance under our stock plans. On the date 180 days after the effective date of this prospectus, a total of 352,160 shares of common stock subject to outstanding options are exercisable. After the effective dates of the registration statements on Form S-8, shares purchased upon exercise of options granted pursuant to our 1998 Stock Option/Stock Issuance Plan generally would be available for resale in the public market. The officers, directors and certain of our shareholders have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this prospectus. Morgan Stanley & Co. Incorporated, however, may in its sole discretion, at any time and in most cases without notice, release all or any portion of the shares subject to lock-up agreements. 67 77 RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after the effective date of this offering; or - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to other requirements regarding the manner of sale, notice filing and the availability of current public information about us. RULE 701 In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of the offering is entitled to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with certain restrictions, including the holding period, contained in Rule 144. The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the shares acquired upon exercise of these options (including exercises after the date of this prospectus). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one year minimum holding period requirement. In addition, following this offering, the holders of shares of common stock and of warrants exercisable for shares of common stock will, under certain circumstances, have rights to require us to register their shares for future sale. LOCK-UP AGREEMENTS All officers and directors and certain holders of common stock or securities convertible for common stock and options and warrants to purchase common stock have agreed pursuant to certain "lock-up" agreements that they will not offer, sell, contract to sell, pledge, grant any option to sell, or otherwise dispose of, directly or indirectly, any shares of common stock or securities convertible or exchangeable for common stock, or warrants or other rights to purchase common stock for a period of 180 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated. 68 78 UNDERWRITERS Under the terms and subject to the conditions contained in the underwriting agreement, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, and Hambrecht & Quist L.L.C. are acting as representatives, have severally agreed to purchase, and we have agreed to sell to them, severally, an aggregate of shares of common stock. The number of shares of common stock that each underwriter has agreed to purchase is set forth opposite its name below:
NUMBER OF NAME SHARES ---- --------- Morgan Stanley & Co. Incorporated........................... Credit Suisse First Boston Corporation...................... Donaldson, Lufkin & Jenrette Securities Corporation......... Hambrecht & Quist LLC....................................... -------- Total............................................. ========
The underwriters are offering the shares subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any shares are taken. However, the underwriters are not required to take or pay for the share covered by the underwriters over-allotment option described below. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriters may allow, and such dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives. Pursuant to the underwriting agreement, we have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise such option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent such option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares of common stock as the number listed next to such underwriter's name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. If the underwriter's over-allotment option is exercised in full, the total price to the public would be $ , the total underwriters' discounts and commissions would be $ and the total proceeds to us would be $ . The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of common stock offered by them. 69 79 Our common stock has been approved for quotation, subject to official notice of issuance, on the Nasdaq National Market under the symbol "INAP." We, the directors, officers, shareholders and certain optionholders of ours have each agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we will not, during the period commencing on the date of this prospectus and ending 180 days after such date, directly or indirectly: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of common stock. Any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. The restrictions described in the previous paragraph do not apply to: - the sale to the underwriters of the shares of common stock under the underwriting agreement; - the issuance by us of shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus which is described in this prospectus; - transactions by any person other than us relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares; or - issuances of certain shares of common stock or options to purchase shares of common stock pursuant to our employee benefit plans as in existence on the date of this prospectus. In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own account. In addition, to cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering if the syndicate repurchases previously distributed shares of common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. Upon consummation of this offering, affiliates of Morgan Stanley & Co. Incorporated will own % of the common stock on an as-converted basis ( % if the over-allotment option granted to the underwriters is exercised in full). Currently, affiliates of Morgan Stanley & Co. Incorporated have designated one member to the board of directors (Dr. Harding). Dr. Harding is a principal and employee of Morgan Stanley & Co. Incorporated. See "Management." Morgan Stanley & Co. Incorporated may continue to provide investment banking and financial advisory services to us for which it may receive customary fees and commissions. 70 80 We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. PRICING OF THE OFFERING Prior to this offering, there has been no public market for the common stock. The public offering price for the shares of common stock will be determined by negotiations between us and the representatives of the underwriters. Among the factors to be considered in determining the public offering price will be our record of operations, our current financial position and future prospects and our industry in general, the experience of our management, sales, earnings and certain of our other financial and operating information in recent periods, the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours. The estimated public offering price range set forth on the cover page of this prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The legality of the shares of common stock offered hereby will be passed upon for us by Cooley Godward LLP, Kirkland, Washington. An investment partnership of Cooley Godward attorneys beneficially owns an aggregate 46,296 shares of our common stock. Certain legal matters will be passed upon for the underwriters by Morrison & Foerster LLP, Palo Alto, California. EXPERTS The financial statements of InterNAP Network Services Corporation as of December 31, 1997 and 1998 and for the period from inception (May 1, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998, included in this prospectus, have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to the common stock offered hereby. As permitted by the rules and regulations of the SEC, this prospectus, which is a part of the registration statement, omits certain information, exhibits, schedules and undertakings set forth in the registration statement. For further information pertaining to us and the common stock offered hereby, reference is made to such registration statement and the exhibits and schedules thereto. Statements contained in this prospectus as to the contents or provisions of any contract or other document referred to herein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. A copy of the registration statement may be inspected without charge at the office of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549, and at the SEC's regional offices located at the Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1 800-SEC-0330. In addition, registration statements and certain other filings made with the SEC through its Electronic Data Gathering, Analysis and Retrieval, or EDGAR, system are publicly available through the SEC's Web site on the Internet's World Wide Web, located at http://www.sec.gov. The registration statement, including all exhibits thereto and amendments thereof, was filed with the SEC through EDGAR. 71 81 INTERNAP NETWORK SERVICES CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Balance Sheet............................................... F-3 Statement of Operations..................................... F-4 Statement of Shareholders' Equity (Deficit)................. F-5 Statement of Cash Flows..................................... F-6 Notes to Financial Statements............................... F-7
F-1 82 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders InterNAP Network Services Corporation In our opinion, the accompanying balance sheet and the related statements of operations, of shareholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of InterNAP Network Services Corporation at December 31, 1997 and 1998, and the results of its operations and its cash flows for the period from inception (May 1, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Seattle, Washington April 2, 1999 F-2 83 INTERNAP NETWORK SERVICES CORPORATION BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA SHAREHOLDERS' DECEMBER 31, EQUITY AT ----------------- JUNE 30, JUNE 30, 1997 1998 1999 1999 ------- ------- -------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................... $ 4,770 $ 275 $ 3,301 Short-term investments.................................. -- -- 9,995 Accounts receivable, net of allowance of $27, $65, and $78, respectively.................................... 228 766 1,577 Prepaid expenses and other assets....................... 8 280 197 ------- ------- -------- Total current assets............................ 5,006 1,321 15,070 Property and equipment, net............................... 867 5,828 13,665 Restricted cash........................................... -- -- 1,019 Patents and trademarks, net............................... 48 48 79 Deposits and other assets, net............................ 66 290 997 ------- ------- -------- Total assets.................................... $ 5,987 $ 7,487 $ 30,830 ======= ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable........................................ $ 345 $ 2,603 $ 2,638 Accrued liabilities..................................... 94 713 737 Deferred revenues....................................... 84 284 23 Note payable............................................ 34 -- -- Line of credit.......................................... -- 650 625 Capital lease obligations, current portion.............. 361 1,331 2,757 ------- ------- -------- Total current liabilities....................... 918 5,581 6,780 Capital lease obligations, less current portion........... 240 2,342 6,776 ------- ------- -------- Total liabilities............................... 1,158 7,923 13,556 ------- ------- -------- Commitments and contingencies Shareholders' equity (deficit): Convertible preferred stock, $.001 par value, authorized 50,070 shares; 17,195, 19,645, 49,469 and no pro forma shares issued and outstanding, respectively; aggregate liquidation preference of $6,998, $8,466 and $40,584, respectively............................ 18 20 50 $ -- Common stock, $.001 par value, authorized 300,000 shares; 3,333, 3,336, 4,032, and 53,501 (pro forma) shares issued and outstanding, respectively.......... 3 3 4 54 Additional paid-in capital.............................. 7,376 9,576 57,023 57,023 Deferred stock compensation............................. -- (494) (14,113) (14,113) Accumulated deficit..................................... (2,568) (9,541) (25,690) (25,690) ------- ------- -------- -------- Total shareholders' equity (deficit)............ 4,829 (436) 17,274 $ 17,274 ------- ------- -------- ======== Total liabilities and shareholders' equity (deficit)..................................... $ 5,987 $ 7,487 $ 30,830 ======= ======= ========
The accompanying notes are an integral part of these financial statements. F-3 84 INTERNAP NETWORK SERVICES CORPORATION STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM SIX INCEPTION YEARS ENDED MONTHS ENDED (MAY 1, 1996) DECEMBER 31, JUNE 30, TO DECEMBER ----------------- ------------------ 31, 1996 1997 1998 1998 1999 ------------- ------- ------- ------- -------- (UNAUDITED) Revenues............................... $ 44 $ 1,045 $ 1,957 $ 731 $ 3,410 ------ ------- ------- ------- -------- Costs and expenses: Cost of network and customer support........................... 321 1,092 3,216 994 7,906 Product development.................. 184 389 754 318 1,395 Sales and marketing.................. 78 261 2,822 352 5,869 General and administrative........... 378 713 1,910 594 2,905 Amortization of deferred stock compensation...................... -- -- 205 19 1,787 ------ ------- ------- ------- -------- Total operating costs and expenses..................... 961 2,455 8,907 2,277 19,862 ------ ------- ------- ------- -------- Loss from operations................. (917) (1,410) (6,950) (1,546) (16,452) Other income (expense): Interest income...................... 6 36 169 121 450 Interest and financing expense....... (48) (235) (90) (36) (147) Loss on disposal of assets........... -- -- (102) -- -- ------ ------- ------- ------- -------- Net loss.......................... $ (959) $(1,609) $(6,973) $(1,461) $(16,149) ====== ======= ======= ======= ======== Basic and diluted net loss per share... $ (.29) $ (.48) $ (2.09) $ (.44) $ (4.78) ====== ======= ======= ======= ======== Weighted average shares used in computing basic and diluted net loss per share............................ 3,333 3,333 3,336 3,336 3,378 ====== ======= ======= ======= ======== Pro forma basic and diluted net loss per share (unaudited)................ $ (.31) $ (.34) ======= ======== Weighted average shares used in computing pro forma basic and diluted net loss per share (unaudited)....... 22,733 47,771 ======= ========
The accompanying notes are an integral part of these financial statements. F-4 85 INTERNAP NETWORK SERVICES CORPORATION STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) FROM INCEPTION (MAY 1, 1996) TO JUNE 30, 1999 (IN THOUSANDS)
CLASS A AND CONVERTIBLE COMMON B UNIT PREFERRED STOCK STOCK -------------- ---------------- -------------- ADDITIONAL DEFERRED PAR PAR PAR PAID-IN STOCK ACCUMULATED UNITS VALUE SHARES VALUE SHARES VALUE CAPITAL COMPENSATION DEFICIT ------ ----- ------- ------ ------ ----- ---------- -------------- ----------- Issuance of Class A Units... 2,000 $ 2 -- $-- -- $-- $ -- $ -- $ -- Issuance of Class B Units... 4,000 4 -- -- -- -- 996 -- -- Net loss.................... -- -- -- -- -- -- -- -- (959) ------ --- ------ --- ----- --- ------- -------- -------- Balances, December 31, 1996...................... 6,000 6 -- -- -- -- 996 -- (959) Exchange of Class A Units for common stock at an exchange ratio of 1:1.667................... (2,000) (2) -- -- 3,333 3 (1) -- -- Exchange of Class B Units for Series A preferred stock at an exchange ratio of 1:1.667................ (4,000) (4) 6,667 7 -- -- (3) -- -- Convertible notes payable and accrued interest converted to Series B preferred stock........... -- -- 927 1 -- -- 556 -- -- Value ascribed to bridge financing warrants........ -- -- -- -- -- -- 124 -- -- Issuance of Series B preferred stock, net of issuance costs of $47.................... -- -- 9,601 10 -- -- 5,704 -- -- Net loss.................... -- -- -- -- -- -- -- -- (1,609) ------ --- ------ --- ----- --- ------- -------- -------- Balances, December 31, 1997...................... -- -- 17,195 18 3,333 3 7,376 -- (2,568) Issuance of Series B preferred stock, net of issuance costs of $21.................... -- -- 2,333 2 -- -- 1,376 -- -- Issuance of common stock to an employee............... -- -- -- -- 3 -- 1 -- -- Value ascribed to lease financing warrants........ -- -- -- -- -- -- 54 -- -- Exercise of warrants to purchase Series B preferred stock........... -- -- 117 -- -- -- 70 -- -- Deferred compensation related to grants of stock options................... -- -- -- -- -- -- 699 (699) -- Amortization of deferred stock compensation........ -- -- -- -- -- -- -- 205 -- Net loss.................... -- -- -- -- -- -- -- -- (6,973) ------ --- ------ --- ----- --- ------- -------- -------- Balances, December 31, 1998...................... -- -- 19,645 20 3,336 3 9,576 (494) (9,541) Issuances of Series C preferred stock, net of issuance costs of $85.................... -- -- 29,630 30 -- -- 31,884 -- -- Exercise of warrants to purchase Series B preferred stock........... -- -- 194 -- -- -- 116 -- -- Exercise of employee stock options................... -- -- -- -- 696 1 41 -- -- Deferred compensation related to grants of stock options................... -- -- -- -- -- -- 15,406 (15,406) -- Amortization of deferred stock compensation........ -- -- -- -- -- -- -- 1,787 -- Net loss.................... -- -- -- -- -- -- -- -- (16,149) ------ --- ------ --- ----- --- ------- -------- -------- Balances, June 30, 1999 (unaudited)............... -- $-- 49,469 $50 4,032 $ 4 $57,023 $(14,113) $(25,690) ====== === ====== === ===== === ======= ======== ======== TOTAL -------- Issuance of Class A Units... $ 2 Issuance of Class B Units... 1,000 Net loss.................... (959) -------- Balances, December 31, 1996...................... 43 Exchange of Class A Units for common stock at an exchange ratio of 1:1.667................... -- Exchange of Class B Units for Series A preferred stock at an exchange ratio of 1:1.667................ -- Convertible notes payable and accrued interest converted to Series B preferred stock........... 557 Value ascribed to bridge financing warrants........ 124 Issuance of Series B preferred stock, net of issuance costs of $47.................... 5,714 Net loss.................... (1,609) -------- Balances, December 31, 1997...................... 4,829 Issuance of Series B preferred stock, net of issuance costs of $21.................... 1,378 Issuance of common stock to an employee............... 1 Value ascribed to lease financing warrants........ 54 Exercise of warrants to purchase Series B preferred stock........... 70 Deferred compensation related to grants of stock options................... -- Amortization of deferred stock compensation........ 205 Net loss.................... (6,973) -------- Balances, December 31, 1998...................... (436) Issuances of Series C preferred stock, net of issuance costs of $85.................... 31,914 Exercise of warrants to purchase Series B preferred stock........... 116 Exercise of employee stock options................... 42 Deferred compensation related to grants of stock options................... -- Amortization of deferred stock compensation........ 1,787 Net loss.................... (16,149) -------- Balances, June 30, 1999 (unaudited)............... $ 17,274 ========
The accompanying notes are an integral part of these financial statements. F-5 86 INTERNAP NETWORK SERVICES CORPORATION STATEMENT OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM INCEPTION YEAR ENDED SIX MONTHS ENDED (MAY 1, 1996) TO DECEMBER 31, JUNE 30, DECEMBER 31, ----------------- ------------------ 1996 1997 1998 1998 1999 ---------------- ------- ------- ------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (959) $(1,609) $(6,973) $(1,461) $(16,149) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......................... 103 297 725 247 1,305 Loss on disposal of assets............................ -- -- 102 -- -- Non-cash interest and financing expense............... -- 146 7 2 9 Provision for doubtful accounts....................... -- 27 140 92 58 Amortization of deferred stock compensation........... -- -- 205 19 1,787 Changes in operating assets and liabilities: Accounts receivable................................ (31) (224) (678) (135) (869) Prepaid expenses and other assets.................. (113) 38 (391) (117) (580) Accounts payable................................... 264 82 721 (75) 1,370 Deferred revenues.................................. -- 84 200 (75) (261) Accrued liabilities................................ 57 37 619 57 24 ------- ------- ------- ------- -------- Net cash used in operating activities.............. (679) (1,122) (5,323) (1,446) (13,306) ------- ------- ------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (174) (93) (641) (343) (4,221) Deposits on property and equipment........................ -- -- (58) -- -- Purchase of short-term investments........................ -- -- -- -- (9,995) Payments for patents and trademarks....................... -- (48) (3) -- (33) ------- ------- ------- ------- -------- Net cash used in investing activities.............. (174) (141) (702) (343) (14,249) ------- ------- ------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from shareholder loan and line of credit......... 475 180 -- -- 1,100 Repayment of shareholder loan and line of credit.......... (475) (180) -- -- (1,100) Issuance of notes payable................................. 69 -- -- -- -- Proceeds from issuance of Class A and B Units............. 1,002 -- -- -- -- Principal payments on note payable........................ -- (34) (34) -- -- Net increase (decrease) in line of credit................. -- -- 650 250 (25) Payments on capital lease obligations..................... (73) (327) (534) (187) (875) Proceeds from equipment leaseback financing............... -- -- -- -- 428 Restricted cash related to obtaining lease line........... -- -- -- -- (1,019) Proceeds from exercise of stock options................... -- -- -- -- 42 Proceeds from issuance of convertible notes payable....... -- 660 -- -- -- Principal payments on convertible note payable............ -- (125) -- -- -- Proceeds from issuance of preferred stock, net of issuance cost.................................................... -- 5,714 1,448 1,378 32,030 ------- ------- ------- ------- -------- Net cash provided by financing activities.......... 998 5,888 1,530 1,441 30,581 ------- ------- ------- ------- -------- Net increase (decrease) in cash and cash equivalents........ 145 4,625 (4,495) (348) 3,026 Cash and cash equivalents at beginning of period............ -- 145 4,770 4,770 275 ------- ------- ------- ------- -------- Cash and cash equivalents at end of period.................. $ 145 $ 4,770 $ 275 $ 4,422 $ 3,301 ======= ======= ======= ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest, net of amounts capitalized........ $ 48 $ 103 $ 82 $ 34 $ 138 ======= ======= ======= ======= ======== Purchase of property and equipment financed with capital leases.................................................. $ 740 $ 260 $ 3,606 $ -- $ 6,307 ------- ------- ------- ------- -------- Purchase of property and equipment included in accounts payable................................................. $ -- $ -- $ 1,537 $ -- $ 202 ======= ======= ======= ======= ======== Conversion of convertible notes to Series B preferred stock................................................... $ -- $ 535 $ -- $ -- $ -- ======= ======= ======= ======= ======== Value ascribed to warrants................................ $ -- $ 124 $ 54 $ 14 $ -- ======= ======= ======= ======= ========
The accompanying notes are an integral part of these financial statements. F-6 87 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES: THE COMPANY InterNAP Network Services Corporation (the "Company") was originally incorporated in the State of Washington as a limited liability company ("LLC") in May 1996. The Company was re-incorporated in the State of Washington in October 1997 as a C corporation without changing its ownership. The Articles of Incorporation were further amended in January 1999 to provide for the authorization of additional common and preferred stock and, accordingly, the disclosures in the financial statements and related notes have been adjusted to reflect this amendment for all periods presented. The Company is a leading provider of fast, reliable and centrally managed Internet connectivity services targeted at businesses seeking to maximize the performance of mission-critical Internet-based applications. Customers connected to one of the Company's Private-Network Access Points ("P-NAPs") have their data optimally routed to and from destinations on the Internet in a manner that minimizes the use of congested public network access points and private peering points. The Company began selling Internet connectivity services from its first P-NAP, located in Seattle, during October 1996. The Company began selling services from its second and third P-NAPs in New York City and San Jose by December 1998. During the six months ended June 30, 1999, the Company began selling services from P-NAPs located in the Washington D.C., Los Angeles, Chicago and Boston metropolitan areas. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses since inception and the expansion and development of its business plan will require significant capital. The Company is currently seeking additional financing; however, there can be no assurance that the Company will be able to obtain such equity or debt financing when required, or, if available, on acceptable terms. If the Company fails to obtain capital when required, the Company could modify, delay or abandon some or all of the Company's business and expansion plans, which management believes would result in the reduction of expenditures. INTERIM FINANCIAL INFORMATION The financial information at June 30, 1999 and for the six months ended June 30, 1998 and 1999, and the related notes, are unaudited but include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation, in all material respects, of its financial position, operating results, and cash flows for the interim date and periods presented. Results for the six-month period ended June 30, 1999 are not necessarily indicative of results for the entire fiscal year or future periods. ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and disclosure of contingent assets and liabilities at the date of the financial statements. Examples of estimates subject to possible revision based upon the outcome of future events include depreciation of property and equipment, income tax liabilities, F-7 88 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) the valuation allowance against the deferred tax assets and the allowance for doubtful accounts. Actual results could differ from those estimates. CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS The Company generally considers any highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. The Company classifies, at the date of acquisition, its marketable securities into categories in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Currently, the Company classifies its securities as available-for-sale which are reported at fair market value with the related unrealized gains and losses included in shareholders' equity (deficit). Unrealized gains and losses were not material for all periods presented. Realized gains and losses and declines in value of securities judged to be other than temporary are included in other income (expense). Interest and dividends on all securities are included in interest income. The fair value of the Company's short-term investments are based on quoted market prices. The carrying value of those investments approximates their fair value. At June 30, 1999, short-term investments consisted of commercial paper and government securities with maturities of less than one year. The Company invests its cash and cash equivalents in deposits with two financial institutions that may, at times, exceed federally insured limits. Management believes that the risk of loss is minimal. To date, the Company has not experienced any losses related to temporary cash investments. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK The Company extends trade credit terms to its customers based upon a credit analysis performed by management. Further credit reviews are done on a periodic basis as necessary. Generally, collateral is not required on accounts receivable, however, advance deposits are collected for accounts considered credit risks. During 1998, the Company had two significant customers representing approximately 13.6% and 9.6% of revenues and 9.9% and 11.0% of accounts receivable at December 31, 1998, respectively. Additionally, the Company had a single customer which is billed for its quarterly services in advance and, as a result, comprised 23.4% of accounts receivable at December 31, 1998. Similarly, during 1997, the Company had two significant customers representing 18.1% and 20.8% of revenues and 28.1% and 35.5% of accounts receivable at December 31, 1997, respectively. For 1996, the Company had two significant customers which represented 14.9% and 56.2% of revenues. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable, capital lease obligations, and the line of credit are carried at cost. The Company's short-term financial instruments approximate fair value due to their relatively short maturities. The carrying value of the Company's long-term financial instruments approximate fair value as the interest rates approximate current market rates of similar debt. F-8 89 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment consists principally of routers, telecommunications equipment and other computer equipment. Network equipment and furniture and equipment are carried at original acquisition cost and depreciated or amortized on a straight-line basis over the estimated useful lives of the assets which range from 3 to 7 years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the related lease. Additions and improvements that increase the value or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred. Gains or losses from asset disposals are charged to operations in the year of disposition. Direct construction costs of each P-NAP, including equipment and labor costs, are capitalized during the construction period. In addition, the Company capitalizes interest costs as part of the cost of its P-NAPs when the P-NAPs require an extended period of time to ready them for their intended use. During 1998, the Company capitalized approximately $78,000 and $34,000 of labor and interest costs, respectively, related to the construction of several P-NAPs. These costs are included as part of the cost of the network equipment. The Company currently purchases the majority of its network equipment from one vendor. The Company does not carry significant inventory of such equipment. Failure to obtain the network equipment when required could negatively impact the Company's operating results until an alternative supply source is established. Although there are a limited number of other suppliers, there can be no assurance that such equipment would be available and on comparable terms. COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE Costs of computer software developed or obtained for internal use are capitalized while in the application development stage and are expensed while in the preliminary stage and the post-implementation stage. During 1998, the Company capitalized approximately $76,000 of internal development costs incurred during the application development stage of certain software. These costs are included as part of the cost of network equipment. PATENTS AND TRADEMARKS Capitalized patent and trademark costs represent professional fees incurred for patent and trademark filings and are capitalized at cost. Patents and trademarks are amortized over 15 years. Accumulated amortization as of December 31, 1997 and 1998 was $284 and $3,698, respectively. VALUATION OF LONG LIVED ASSETS The Company periodically evaluates the carrying value of its long-lived assets, including, but not limited to, property and equipment, patents and trademarks, and other assets. The carrying value of a long-lived asset is considered impaired when the undiscounted cash flow from such asset is separately identifiable and is estimated to be less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long lived assets to be disposed of would be F-9 90 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) determined in a similar manner, except that fair market values would be reduced by the cost of disposal. INCOME TAXES The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. DEBT ISSUED WITH STOCK PURCHASE WARRANTS Proceeds from debt issued with stock purchase warrants are allocated between the debt and the warrants based on their relative fair values, and the value ascribed to the warrants, based on the Black-Scholes option pricing model, is amortized to interest expense over the term of the related debt using the effective interest method. When the Company issues stock purchase warrants in conjunction with obtaining a lease financing line of credit, the fair value of the warrants, based on the Black-Scholes option pricing model, is included as a deferred financing cost in deposits and other assets and is amortized to interest expense over the term of the lease line using the straight-line method. At December 31, 1998, $46,934 of deferred financing costs, net of accumulated amortization of $7,525, are included in deposits and other assets, net. STOCK-BASED COMPENSATION Employee stock options are accounted for under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25") "Accounting for Stock Issued to Employees" and related interpretations. REVENUE RECOGNITION The Company recognizes service revenues as they are earned. Revenues from initial installation of customer network connections are recognized when installations are complete. Customers are billed on the last day of each month either on a usage or a flat-rate basis. The usage based billing relates to the month in which the billing occurs, whereas certain flat rate billings are for the month subsequent to the billing month. Deferred revenues consist of revenues for services to be delivered in the future and consist primarily of advance billings for flat rate customers. PRODUCT DEVELOPMENT COSTS Product development costs are primarily related to network engineering costs associated with changes to the functionality of the Company's proprietary services and network architecture. Such costs that do not qualify for capitalization are expensed as incurred. F-10 91 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) ADVERTISING COSTS The Company expenses advertising costs as they are incurred. Advertising expense for 1997 and 1998 was $15,670 and $63,433, respectively. There was no advertising expense for the period from inception (May 1, 1996) to December 31, 1996. COMPREHENSIVE INCOME The Company has adopted the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective January 1, 1998. SFAS No. 130 requires the disclosure of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is the change in equity from transactions and other events and circumstances other than those resulting from investments by owners and distributions to owners. SFAS No. 130 had no impact on the Company and, accordingly, a separate statement of comprehensive income has not been presented. NET LOSS PER SHARE Basic and diluted net loss per share has been computed using the weighted average number of shares of common stock outstanding during the period, less the weighted average number of unvested shares of common stock issued that are subject to repurchase. Basic and diluted pro forma net loss per share, as presented in the statement of operations, has been computed as described above and also gives effect to the conversion of the convertible preferred stock (using the if-converted method) from the original date of issuance. The Company has excluded all convertible preferred stock, warrants to purchase convertible preferred stock, outstanding options to purchase common stock and shares subject to repurchase from the calculation of diluted net loss per share, as such securities are antidilutive for all periods presented. F-11 92 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following table presents the calculation of basic and diluted and pro forma basic and diluted (unaudited) net loss per share (in thousands, except per share data):
PERIOD FROM SIX MONTHS INCEPTION YEAR ENDED ENDED (MAY 1, 1996) TO DECEMBER 31, JUNE 30, DECEMBER 31, ----------------- ------------------ 1996 1997 1998 1998 1999 ---------------- ------- ------- ------- -------- (UNAUDITED) Net loss............................. $ (959) $(1,609) $(6,973) $(1,461) $(16,149) ====== ======= ======= ======= ======== Basic and diluted: Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share.................. 3,333 3,333 3,336 3,336 3,378 ====== ======= ======= ======= ======== Basic and diluted net loss per share.............................. $ (.29) $ (.48) $ (2.09) $ (.44) $ (4.78) ====== ======= ======= ======= ======== Pro forma (unaudited): Net loss........................... $(6,973) $(16,149) ======= ======== Shares used above.................. 3,336 3,378 Pro forma adjustment to reflect weighted effect of assumed conversion of convertible preferred stock................. 19,397 44,393 ------- -------- Weighted average shares used in computing pro forma basic and diluted net loss per common share........................... 22,733 47,771 ======= ======== Pro forma basic and diluted net loss per common share (unaudited)....... $ (.31) $ (.34) ======= ======== Antidilutive securities not included in diluted net loss per share calculation: Convertible preferred stock..... 6,667 17,195 19,645 19,529 49,469 Options to purchase common stock......................... -- -- 3,412 400 6,137 Warrants to purchase Series B preferred stock............... -- 786 794 828 600 Unvested shares of common stock subject to repurchase......... -- -- -- -- 50 ------ ------- ------- ------- -------- 6,667 17,981 23,851 20,757 56,256 ====== ======= ======= ======= ========
UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY Upon closing of the offering contemplated by this prospectus, all of the convertible preferred stock outstanding will automatically be converted into common stock. Unaudited pro forma shareholders' equity at June 30, 1999, as adjusted for the assumed conversion of convertible preferred stock based on the shares of convertible preferred stock outstanding at June 30, 1999, is disclosed on F-12 93 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) the balance sheet. Series A, B and C preferred stock convert to common stock at a conversion rate of one to one. SEGMENT INFORMATION The Company has adopted Statement of Financial Accounting Standards No. 131 ("SFAS No. 131") "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 31, 1997. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. The Company's operations consist of Internet connectivity services, other ancillary services, such as co-location, web hosting and server management, and installation services. Management uses one measurement of profitability and does not disaggregate its business for internal reporting. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133, which will be effective for the Company for fiscal years and quarters beginning after June 15, 2000, requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company is assessing the requirements of SFAS No. 133 and the effects, if any, on the Company's financial position, results of operations and cash flows. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement requires companies to capitalize qualifying computer software costs which are incurred during the application development stage and amortize them over the software's estimated useful life. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The Company adopted the requirements of SOP 98-1 during 1998. In April 1998, the American Institute of Certified Public Accountants issued Statements of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities." This statement requires companies to expense the costs of start-up activities and organization costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company adopted SOP 98-5 during 1999, which did not have a material impact on its results of operations. F-13 94 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. PROPERTY AND EQUIPMENT: Property and equipment consists of the following (in thousands):
DECEMBER 31, ---------------- JUNE 30, 1997 1998 1999 ------ ------ ------------ (UNAUDITED) Network equipment........................................ $ 88 $1,150 $ 1,972 Network equipment under capital lease.................... 908 4,465 9,735 Furniture, equipment and software........................ 7 424 2,322 Furniture, equipment and software under capital lease.... 92 142 948 Leasehold improvements................................... 171 688 998 ------ ------ ------- 1,266 6,869 15,975 Less: Accumulated depreciation and amortization ($258, $952 and $1,747 (unaudited) related to capital leases at December 31, 1997 and 1998, and June 30, 1999, respectively).......................................... (399) (1,041) (2,310) ------ ------ ------- Property and equipment, net.............................. $ 867 $5,828 $13,665 ====== ====== =======
Depreciation and amortization expense for the period from inception (May 1, 1996) to December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999 amounted to $102,746, $297,027, $720,762, $245,320 (unaudited) and $1,303,253 (unaudited), respectively. Assets under capital leases are pledged as collateral for the underlying lease agreements. 3. ACCRUED LIABILITIES: Accrued liabilities consist of the following (in thousands):
DECEMBER 31, ------------ JUNE 30, 1997 1998 1999 ---- ---- ------------ (UNAUDITED) Compensation payable................................. $33 $567 $423 Taxes payable........................................ 49 95 52 Other................................................ 12 51 262 --- ---- ---- $94 $713 $737 === ==== ====
4. NOTES PAYABLE AND LINE OF CREDIT: During November 1997, the Company entered into a line of credit agreement (the "Line") with a bank allowing aggregate borrowings of up to $750,000 for the purchase of equipment and for working capital. The Line is collateralized by the assets of the Company and interest is payable at prime plus 1% (8.75% at December 31, 1998). The Line requires interest only payments monthly and expires in May 1999. Among other things, the lender has the right to require immediate payment in the event of a material adverse change in the financial position or prospects of the Company. As of December 31, 1998 and 1997, the Company had $650,000 and $0, respectively, outstanding on the Line. F-14 95 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) During 1997, the Company entered into a series of convertible notes payable (the "Bridge Financing Agreements") to finance working capital equipment requirements prior to the sale of Series B preferred stock. The total amount borrowed under the Bridge Financing Agreements was $660,000. The Bridge Financing Agreements had various due dates within 1997, with interest at 9% per year. The Bridge Financing Agreements were either converted to Series B preferred stock or repaid during 1997 and there were no amounts outstanding at December 31, 1997. In connection with the Bridge Financing Agreements, the Company issued warrants to purchase 785,759 shares of Series B preferred stock at a price of $.60 per share, which resulted in financing expense of $124,310. The Company also entered into an agreement during 1997 with a shareholder to provide a $250,000 working capital line of credit. During 1997, the Company borrowed $180,000 on the line and recorded interest expense of $5,020. All amounts borrowed under the working capital line of credit were repaid during 1997. At December 31, 1997, the Company had a note payable due to a lessor for leasehold improvements in the amount of $34,444, which was repaid in full during 1998. The note included interest at 10% and was guaranteed by certain shareholders and officers of the Company. 5. CAPITAL LEASES: The Company has leases for a significant portion of its property and equipment which are classified as capital leases. Interest on equipment and furniture leases range from 4% to 20%, expire through 2003 and generally include an option allowing the Company to purchase the equipment or furniture at the end of the lease term for fair market value. Future minimum capital lease payments together with the present value of the minimum lease payments are as follows as of December 31, 1998 (in thousands):
YEARS ENDING DECEMBER 31, - ------------ 1999........................................................ $ 1,663 2000........................................................ 1,414 2001........................................................ 1,152 2002........................................................ 39 2003........................................................ 10 ------- Total minimum lease payments...................... 4,278 Less: amount representing interest.......................... (605) ------- Present value of minimum lease payments..................... 3,673 Less: current portion....................................... (1,331) ------- Capital lease obligations, less current portion........... $ 2,342 =======
At December 31, 1998, the Company had approximately $900,000 available on a lease line with a financing company and, in January and February 1999, the Company drew the remaining $900,000 for the purchase of certain property and equipment. In March 1999, the Company amended an existing lease credit facility with a vendor which increased the available line by $4,000,000 through March 31, 1999 and an additional $2,000,000 subsequent to March 31, 1999, if certain terms and conditions are met. The $4,000,000 and F-15 96 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) $2,000,000 increases require the Company to maintain $539,100 and $359,400, respectively, in a restricted account for twenty four months. Alternatively, the Company may establish an unused line of credit at a commercial bank for the same amounts. 6. INCOME TAXES: Prior to the re-incorporation of the Company in October 1997, the Company operated as an LLC and was not subject to income taxes. As of December 31, 1998, the Company has net operating loss carryforwards of approximately $7,242,000, expiring through 2018. The Company has placed a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. Management evaluates, on a quarterly basis, the recoverability of the deferred tax asset and the level of the valuation allowance. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. The Company's ability to use its net operating losses to offset future income is subject to restrictions in the Internal Revenue Code which could limit the Company's future use of its net operating losses if certain stock ownership changes occur. The Company's deferred tax assets and liabilities are as follows (in thousands):
DECEMBER 31, ---------------- 1997 1998 ----- ------- Deferred income tax assets: Net operating loss carryforwards.......................... $ 94 $ 2,680 Allowance for doubtful accounts........................... 9 24 Property and equipment.................................... 9 -- Other..................................................... 2 -- ----- ------- 114 2,704 Deferred income tax liabilities: Property and equipment.................................... -- (58) ----- ------- 114 2,646 Valuation allowance....................................... (114) (2,646) ----- ------- Net deferred tax assets................................... $ -- $ -- ===== =======
The following is a reconciliation of the income tax benefit to the amount calculated based on the statutory federal rate of 34% and the estimated state apportioned rate of 3%, net of the federal tax benefit, for the period from inception (May 1, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998.
1996 1997 1998 ---- ---- ---- Federal income tax benefit at statutory rates.............. (34)% (34)% (34)% State income tax benefit at statutory rates................ -- -- (3) Non-taxable LLC losses..................................... 34 25 -- Change in valuation allowance.............................. -- 9 37 --- --- --- Effective tax rate......................................... --% --% --% === === ===
F-16 97 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. EMPLOYEE RETIREMENT PLAN: During March 1998, the Company established a 401(k) Retirement Plan (the "Plan") which covers substantially all eligible employees. The Plan is a qualified salary reduction plan in which all eligible participants may elect to have a percentage of their pre-tax compensation contributed to the Plan, subject to certain guidelines issued by the Internal Revenue Service. The Company can contribute to the plan at the discretion of the Board of Directors. To date, no contributions have been made by the Company. 8. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES Leases relating to office space and P-NAP rental space are classified as operating. Future minimum lease payments on non-cancelable operating leases are as follows at December 31, 1998 (in thousands):
YEARS ENDING DECEMBER 31, 1999........................................................ $1,009 2000........................................................ 944 2001........................................................ 904 2002........................................................ 754 2003........................................................ 484 ------ $4,095 ======
Rent expense was approximately $61,000, $111,000, $571,000, $95,827 (unaudited) and $1,003,136 (unaudited) for the period from inception (May 1, 1996) to December 31, 1996, for the years ended December 31, 1997 and 1998 and for the six months ended June 30, 1998 and 1999, respectively. SERVICE COMMITMENTS The Company has entered into contracts with a backbone service provider and a local exchange carrier to provide interconnection services. The contract with the local exchange carrier provides for volume pricing based on a minimum monthly payment. The required minimum monthly payment to the local exchange carrier does not begin until six months after the deployment of the related P-NAP and, as a result, will not begin until mid-1999. During that interim period, the monthly payments are based on actual usage. F-17 98 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) Minimum payments under these service commitments are as follows at December 31, 1998 (in thousands):
YEARS ENDING DECEMBER 31, 1999........................................................ $ 693 2000........................................................ 1,383 2001........................................................ 1,054 2002........................................................ 240 ------ $3,370 ======
9. SHAREHOLDERS' EQUITY (DEFICIT): In January 1999, the Articles of Incorporation were amended to provide for the authorization of additional common and preferred stock (the "Amendment") and, accordingly, the disclosures in the financial statements and related notes have been adjusted to reflect the Amendment for all periods presented. CONVERTIBLE PREFERRED STOCK At December 31, 1998, after giving effect to the Amendment, preferred stock consists of the following (in thousands):
ISSUED ADDITIONAL COMMON STOCK SHARES AND PAID-IN RESERVED FOR LIQUIDATION SERIES DESIGNATED OUTSTANDING PAR VALUE CAPITAL (NET) CONVERSION PREFERENCE - ------ ---------- ----------- --------- ------------- ------------ ----------- A 6,667 6,667 $ 7 $ 993 6,667 $ 680 B 13,773 12,978 13 7,706 12,978 7,786 C 29,630 -- -- -- -- -- ------ ------ --- ------ ------ ------ 50,070 19,645 $20 $8,699 19,645 $8,466 ====== ====== === ====== ====== ======
Preferred stock may be issued in one or more series, each with such designations, preferences, rights, qualifications, limitations and restrictions as the Board of Directors of the Company may determine at the time of issuance. During 1997, the Board of Directors authorized 30,000,000 shares of preferred stock. As a result of the Amendment in January 1999, the number of shares authorized for preferred stock was increased to 50,069,615 shares. Each share of Series A, Series B and Series C preferred stock is convertible on a one-for-one basis to common stock at the option of the holder, subject to adjustment in certain instances or automatically upon registration of the Company's common stock pursuant to a public offering under the Securities Act of 1933, as amended (an "Offering"). The Series A and Series B preferred stock would be converted upon an Offering at a price of not less than $1.20 per share with aggregate proceeds of not less than $7,000,000. The Series C preferred stock would be converted upon an Offering at a price of not less than $3.00 per share with aggregate proceeds of not less than $20,000,000. Automatic conversion of Series A and Series B preferred stock would also occur on such date as fewer than 1,333,333 and 2,185,609 shares remained outstanding, respectively. Additionally, automatic conversion of Series A preferred stock would occur upon written agreement of the holders F-18 99 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) of a majority of Series A preferred stock, or, in the case of Series B and Series C preferred stock, upon written agreement of the holders of 66 2/3% of such shares. The holder of each share of preferred stock has the right to one vote for each share of common stock into which such preferred stock can be converted. Preferred shareholders have the same voting rights and powers as common shareholders. Holders of the Company's preferred stock and warrants also have certain registration rights. Holders of preferred stock are entitled to receive dividends in preference to any dividends paid to holders of common stock. Dividends are based on a rate equal to 8% per share per annum of the original issue price, or $.102, $.60 and $1.08 per share for Series A, Series B, and Series C preferred stock, respectively. No dividends shall be paid to common or Series A preferred shareholders unless all dividends payable to Series B and Series C preferred shareholders have been paid or set apart on a pro rata basis. Dividends are not cumulative and are payable when and if declared by the Board of Directors. In the event of a liquidation of the Company, the holders of Series B and Series C preferred stock will receive a liquidation preference of up to $.60 and $1.08 per share, respectively, over the holders of common or Series A preferred stock, adjusted for any combinations, consolidations, stock distributions, or declared but unpaid dividends. Upon satisfaction of the Series B and Series C preferred stock liquidation preference, distributions will be made to Series A preferred shareholders in an amount equal to $.102 per share, adjusted for any combinations, consolidations, stock distributions, or declared but unpaid dividends. Upon completion of preference distributions to Series A, Series B and Series C preferred shareholders, any remaining amounts will be distributed among the holders of Series A, Series B, and Series C preferred stock and common shareholders on a pro rata basis. COMMON STOCK As a result of the Amendment, the number of shares of common stock authorized was increased to 100,000,000 from 70,000,000. CLASS A AND B UNITS During 1996, conducting business as an LLC, the Company issued 2,000,000 Class A units to its founding members upon incorporation and subsequently sold 4,000,000 Class B units. All units were exchanged for preferred and common stock during 1997 as part of the re-incorporation. WARRANTS TO PURCHASE SERIES B PREFERRED STOCK During 1997, the Company issued warrants to purchase up to 785,759 shares of Series B preferred stock at $.60 per share in conjunction with its bridge financing. During 1998, the Company issued warrants to purchase up to 125,001 shares of Series B preferred stock at $.60 per share in connection with various lease and bridge financings. The warrants to purchase Series B preferred stock automatically convert to warrants to purchase common stock upon the automatic conversion of the Series B preferred stock into common stock. During 1998, a warrant holder exercised warrants to purchase 116,666 shares of Series B preferred stock, resulting in proceeds to the Company of $70,000. F-19 100 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) Outstanding warrants to purchase shares of Series B preferred stock at December 31, 1998 are as follows (shares in thousands):
YEAR OF EXERCISE EXPIRATION PRICE SHARES - ---------- -------- ------ 2002 $.60 669 2008 $.60 125 --- 794 ===
During January of 1999, two warrant holders exercised warrants to purchase a total of 193,958 shares of Series B preferred stock, resulting in proceeds to the Company of $116,375. 10. STOCK OPTION PLAN: In March 1998, the Company's Board of Directors adopted the 1998 Stock Option/Stock Issuance Plan (the "1998 Plan"), which provides for the issuance of incentive stock options ("ISOs") and non-qualified options to eligible individuals responsible for the management, growth and financial success of the Company. The Company has applied the accounting principles discussed below to stock option commitments made by the Company. Shares of common stock reserved for the 1998 Plan in March 1998 totaled 4,035,000 and were increased to 5,035,000 in January 1999. ISOs may be issued only to employees of the Company and have a maximum term of 10 years from the date of grant. The exercise price for ISOs may not be less than 100% of the estimated fair market value of the common stock at the time of the grant. In the case of options granted to holders of more than 10% of the voting power of the Company, the exercise price may not be less than 110% of the estimated fair market value of the common stock at the time of grant, and the term of the option may not exceed five years. Options become exercisable in whole or in part from time to time as determined by the Board of Directors, which will administer the Plan. Both ISOs and non-qualified options generally vest over four years. The Company has elected to account for stock-based compensation using the intrinsic value method prescribed in APB 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company's stock at the date of grant over the exercise price to be paid to acquire the stock. Option activity for 1998 is as follows (there was no activity in 1997 and for the period from inception (May 1, 1996) to December 31, 1996) (shares in thousands):
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------ -------------- Granted............................................. 3,412 $.10 Exercised........................................... -- -- Canceled............................................ -- -- ----- Balance, December 31, 1998.......................... 3,412 $.10 =====
Options granted during 1998 include 400,000 non-qualified options granted to members of the Board of Directors ("Directors' Options") which are immediately exercisable, and upon exercise, are F-20 101 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) subject to the terms of restricted stock purchase agreements. The Directors' Options, or if exercised, the related restricted stock, vest over a period of four years from the vesting commencement date, as determined by the Board of Directors. The following table summarizes information about options outstanding at December 31, 1998 (shares in thousands):
OPTIONS EXERCISABLE (EXCLUDING OPTIONS OUTSTANDING OPTIONS WHICH SHARES WOULD BE - ---------------------------------------------------- SUBJECT TO THE COMPANY'S RIGHT WEIGHTED AVERAGE OF REPURCHASE) NUMBER REMAINING ------------------------------- OF CONTRACTUAL LIFE NUMBER WEIGHTED AVERAGE EXERCISE PRICES SHARES (IN YEARS) OF SHARES EXERCISE PRICE - --------------- --------- ---------------- --------- ---------------- $.06 1,916 9.49 184 $.06 $.15 1,496 9.85 -- -- ----- --- $.06 - $.15 3,412 9.65 184 $.06 ===== ===
The Company has adopted the disclosure only provisions of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." Pro forma information regarding the net loss is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value of options granted in 1998 was estimated at the date of grant using the minimum value method allowed for non-public companies assuming no expected dividends and the following weighted-average assumptions: risk-free interest rate of 6.00%; volatility of 0%; and an expected life of 6 years. For purposes of the pro forma disclosures, the estimated fair value of options is amortized to expense over the options' vesting periods. If the Company had accounted for compensation expense related to stock options under the fair value method prescribed by SFAS No. 123, the net loss and the basic and diluted net loss per share for the year ended December 31, 1998 would have been approximately $6,985,000 and $2.09, respectively. During 1998, options to purchase 3,411,749 shares of the Company's common stock, with a weighted-average exercise price of $.10 per share and a weighted-average option fair value of $.23 per share, were granted with an exercise price below the estimated market value at the date of grant. DEFERRED STOCK COMPENSATION During 1998, the Company issued stock options to certain employees under the 1998 Plan with exercise prices below the deemed fair value of the Company's common stock at the date of grant. In accordance with the requirements of APB 25, the Company has recorded deferred stock compensation for the difference between the exercise price of the stock options and the deemed fair value of the Company's common stock at the date of grant. This deferred stock compensation is amortized to expense over the period during which the options become exercisable, generally four years, using an accelerated method as described in Financial Accounting Standards Board Interpretation No. 28. As of December 31, 1998, the Company has recorded deferred stock compensation related to these options in the total amount of $697,830, of which $204,599 has been amortized to expense during 1998. The weighted average exercise price of the 3,411,749 options to purchase common stock was $.10 and the weighted average fair value per share was $.31 during 1998. F-21 102 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. EVENTS SUBSEQUENT TO DECEMBER 31, 1998: BRIDGE NOTES PAYABLE In January 1999, the Company borrowed $1,100,000 from two existing shareholders as a bridge loan until the completion of the Series C financing. Interest on these notes was at prime plus 2% and was repaid in full, plus accrued interest, during February of 1999. PREFERRED STOCK In February 1999, the Company sold 29,629,630 shares of Series C preferred stock at a price of $1.08 per share, resulting in gross proceeds of approximately $32,000,000, prior to deducting issuance costs. DEBT COVENANTS The bank line of credit agreement requires that the Company provide audited financial statements prior to March 31 of each year. The December 31, 1998 financial statements were issued subsequent to March 31, 1999 and, accordingly, resulted in a violation of this covenant. The Company has obtained a waiver for this violation from the bank. 12. EVENTS SUBSEQUENT TO DECEMBER 31, 1998 (UNAUDITED): STOCK OPTIONS During the six months ended June 30, 1999, the Company granted an additional 1,468,500 options under the 1998 Plan. During June 1999, the Company's Board of Directors adopted the 1999 Equity Incentive Plan (the "1999 Plan") which provides for the issuance of ISOs and nonqualified stock options to eligible individuals responsible for the management, growth and financial success of the Company. As of June 30, 1999, 6,500,000 shares of common stock are reserved for the 1999 Plan, of which 2,004,000 options were outstanding. The terms of the 1999 Plan are the same as the 1998 Plan with respect to ISO treatment and vesting. During the six months ended June 30, 1999, the Company granted 3,482,500 options with exercise prices below the deemed fair value of the Company's common stock and recorded approximately $15,406,000 of deferred stock compensation related to such options, and amortized approximately $1,787,000 to expense. The weighted average exercise price per share of the 3,482,500 options to purchase common stock was $2.72 and the weighted average fair value per share was $7.14 during 1999. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN During July 1999, the Company adopted the 1999 Non-Employee Directors' Stock Option Plan (the "Director Plan"). The Director Plan provides for the grant of non-qualified stock options to non-employee directors. A total of 500,000 shares of the Company's common stock have been reserved for issuance under the Director Plan. Initial grants, which are fully vested as of the date of the grant, of 40,000 shares of the Company's common stock are to be made under the Director Plan to all non-employee directors upon the closing of an initial public offering and, thereafter, to each eligible non-employee director on the date such person is first elected or appointed as a non-employee director. On the day after each of the Company's annual shareholder meetings, starting with the annual F-22 103 INTERNAP NETWORK SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) meeting in 2000, each non-employee director will automatically be granted a fully vested and exercisable option for 10,000 shares, provided such person has been a non-employee director of the Company for at least the prior six months. The options are exercisable as long as the non-employee director continues to serve as a director, employee or consultant of the Company or any of its affiliates. EMPLOYEE STOCK PURCHASE PLAN During July 1999, the Company adopted the Employee Stock Purchase Plan (the "ESPP"). The ESPP allows all full-time employees to participate by purchasing the Company's common stock using a uniform percentage of compensation at a discount allowed under guidelines issued by the Internal Revenue Service. A total of 1,500,000 shares of the Company's common stock has been reserved for issuance under the ESPP. Each year, the number of shares reserved for issuance under the purchase plan will automatically be increased by 2% of the total number of shares of common stock then outstanding or, if less, by 1,500,000 shares. COMMON STOCK During July 1999, the Board of Directors increased the number of authorized shares of common stock to 300,000,000 shares. OPERATING LEASES As of June 30, 1999, the Company entered into various operating lease agreements which increased the total payments that will be paid on non-cancelable leases over the next five years by approximately $5,205,000 to approximately $9,300,000. F-23 104 [INTERNAP LOGO] 105 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC registration fee........................................ $ 41,700 NASD filing fee............................................. 15,500 Nasdaq National Market listing fee.......................... 95,000 Printing and engraving costs................................ 125,000 Legal fees and expenses..................................... 375,000 Accounting fees and expenses................................ 250,000 Blue Sky fees and expenses.................................. 5,000 Transfer Agent and Registrar fees........................... 10,000 Miscellaneous expenses...................................... 32,800 -------- Total............................................. $950,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Sections 23B.08.500 through 23.B.08.600 of the Washington Business Corporation Act (the "WBCA") authorize a court to award, or a corporation's board of directors to grant, indemnification to directors and officers on terms sufficiently broad to permit indemnification under certain circumstances for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). The directors and officers of InterNAP also may be indemnified against liability they may incur for serving in that capacity pursuant to a liability insurance policy maintained by InterNAP for such purpose. Section 23B.08.320 of the WBCA authorizes a corporation to limit a director's liability to the corporation or its shareholders for monetary damages for acts or omissions as a director, except in certain circumstances involving intentional misconduct, knowing violations of law or illegal corporate loans or distributions, or any transaction from which the director personally receives a benefit in money, property or services to which the director is not legally entitled. Section 5 of InterNAP's Amended and Restated Articles of Incorporation, as amended by Articles of Amendment (Exhibit 3.2 hereto) contains provisions implementing, to the fullest extent permitted by Washington law, such limitations on a director's liability to InterNAP and its shareholders. InterNAP has entered into certain indemnification agreements with its directors and certain of its officers, the form of which is attached as Exhibit 10.1 to this Registration Statement and incorporated herein by reference. The indemnification agreements provide InterNAP's directors and certain of its officers with indemnification to the maximum extent permitted by the WBCA. The Underwriting Agreement, which is attached as Exhibit 1.1 to the Registration Statement, provides for indemnification by the Underwriters of InterNAP and its executive officers and directors and by InterNAP of the Underwriters, for certain liabilities, including liabilities arising under the Securities Act, in connection with matters specifically provided in writing by the Underwriters for inclusion in this Registration Statement. II-1 106 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES During the past three years, we have issued unregistered securities to a limited number of persons, as described below. None of these transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access to information about us, through their relationships with us. Since May 1, 1996 we have issued and sold the following securities: Pursuant to a Limited Liability Company Agreement of InterNAP Network Services, L.L.C., dated October 11, 1996, we sold 1,787,180 Class A Units in InterNAP Network Services, L.L.C. to certain investors, including our officers Paul E. McBride, Christopher D. Wheeler and Anthony C. Naughtin, for an aggregate consideration of $1,787.00. InterNAP Network Services, L.L.C. was dissolved on October 27, 1997. InterNAP was incorporated in the State of Washington in October 1997. These Class A Units were exchanged for shares of common stock at an exchange ratio of 1 to 1.667. In May 1996, we issued 2,000,000 Class B Units in InterNAP Network Services, L.L.C. to Robert J. Lunday, Jr., in consideration for arranging a guarantee of certain of our leasehold obligations and an unconditional promise to contribute $500,000 to our capital on or before October 15, 1996. Additionally, Lunday Communications loaned us $475,000 in 1996 and we repaid the principal and interest during 1996. Robert J. Lunday, Jr., one of our directors, is president of Lunday Communications, Inc. Further, in May 1996, Mr. Lunday purchased an additional 2,000,000 Class B Units for $500,000. These Class B Units were exchanged for shares of Series A preferred stock at an exchange ratio of 1 to 1:667. On October 29, 1997, December 29, 1997 and February 4, 1998, we sold an aggregate of 12,862,558 shares of Series B preferred stock to 36 investors, including H&Q InterNAP Investors, L.P., TI Ventures, LP and Vulcan Ventures Incorporated, three of our principal shareholders, at an aggregate purchase price of $7,717,534 or $.60 per share. The investor group included Robert D. Shurtleff, Jr., one of our directors, who converted a promissory note dated February 13, 1997 in the amount of $125,000 plus accrued interest for 221,638 shares of Series B preferred stock. On January 28, 1999 and February 26, 1999, we sold an aggregate of 29,629,630 shares of Series C preferred stock to 44 investors, including Robert D. Shurtleff, Jr., one of our directors, and H&Q InterNAP Investors, L.P., Morgan Stanley Dean Witter Venture Partners, Oak Investment Partners VIII, L.P., TI Ventures, LP and Vulcan Ventures Incorporated, five of our principal shareholders, at an aggregate purchase price of $32,000,000 or $1.08 per share. From May 1, 1996 to December 1998, we issued warrants to 12 private investors to purchase an aggregate of 794,092 shares of Series B preferred stock at a weighted average exercise price of $.60. In May and September 1998, we issued warrants to First Portland Corporation and Phoenix Leasing Incorporated, to purchase an aggregate of 116,668 shares of Series B preferred stock at a weighted average exercise price of $.60. From July 22, 1998, date of the first issuance of options under our 1998 Stock Option Plan, through June 30, 1999, we granted stock options to purchase an aggregate of 4,880,249 shares of II-2 107 common stock, with exercise prices ranging from $.06 to $.80 per share, to employees and directors pursuant to our 1998 Stock Option Plan. Of these options, options for an aggregate of 695,082 shares have been exercised, options for an aggregate of 352,160 shares are exercisable, options for an aggregate of 52,545 shares have been cancelled and options for an aggregate of 4,132,622 shares remain outstanding. Pursuant to our 1999 Equity Incentive Plan, as of June 30, 1999 we have granted stock options to purchase 2,014,000 shares of our common stock, with exercise prices ranging from $4.00 to $6.00 per share to employees, consultants and directors. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1* Form of Underwriting Agreement. 3.1 Amended and Restated Articles of Incorporation of InterNAP, as amended. 3.2 Form of Amended and Restated Articles of Incorporation to be filed upon the closing of the offering made pursuant to this Registration Statement. 3.3 Bylaws of InterNAP, as currently in effect. 3.4 Form of Amended and Restated Bylaws of InterNAP to be filed upon the closing of the offering made pursuant to this Registration Statement. 4.1 Specimen Common Stock Certificate. 5.1* Opinion of Cooley Godward LLP. 10.1 Form of Indemnification Agreement between the Registrant and each of its directors and certain of its officers. 10.2 1999 Non-Employee Directors' Stock Option Plan. 10.3 Form of 1999 Non-Employee Directors' Stock Option Agreement. 10.4 1999 Employee Stock Purchase Plan. 10.5 1998 Stock Option/Stock Issuance Plan. 10.6 Form of 1998 Stock Option Agreement. 10.7 1999 Equity Incentive Plan. 10.8 Form of 1999 Equity Incentive Plan Stock Option Agreement. 10.9 Lease Agreement, dated June 11, 1998, between Registrant and Union Square Limited Partnership, as amended. 10.10 Lease Agreement, dated June 1, 1996, between Registrant and Sixth & Virginia Properties. 10.11 Form of Employee Confidentiality, Nonraiding and Noncompetition Agreement used between Registrant and its Executive Officers. 10.12 Form of Stock Purchase Warrant. 10.13 Preferred Stock Purchase Warrant, dated December 15, 1998, between Registrant and Bob Kingsbook. 10.14 Preferred Stock Purchase Warrant, dated September 1, 1998, between Registrant and Phoenix Leasing Incorporated. 10.15 Preferred Stock Purchase Warrant, dated May 5, 1998, between Registrant and First Portland Corporation. 10.16 Preferred Stock Purchase Warrant, dated December 24, 1998, between Registrant and Robert Shurtleff, Jr. 10.17 Amended and Restated Investor Rights Agreement, dated January 28, 1999. 10.18 Shareholders Agreement, dated October 1, 1997. 10.19* Quick Start Loan and Security Agreement, dated November 3, 1997, between Registrant and Silicon Valley Bank. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
II-3 108
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (contained on signature page). 27.1 Financial Data Schedule.
- ------------------------- * To be filed by amendment. ITEM 17. UNDERTAKINGS We hereby undertake to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by us for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the provisions referenced in Item 14 of this registration statement or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by our director, officer, or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. We hereby undertake that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of Prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act will be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 109 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, InterNAP has duly caused this registration statement to be signed on its behalf by the undersigned, thereinto duly authorized, in the City of Seattle, State of Washington, on the 29th day of July, 1999. INTERNAP NETWORK SERVICES CORPORATION By: /s/ ANTHONY C. NAUGHTIN ----------------------------------- Anthony C. Naughtin Chief Executive Officer and President POWER OF ATTORNEY Each person whose individual signature appears below hereby authorizes and appoints Anthony C. Naughtin and Paul E. McBride, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this registration statement, including any and all post-effective amendments and amendments thereto and any registration statement relating to the same offering as this registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ ANTHONY C. NAUGHTIN Chief Executive Officer and July 29, 1999 - ----------------------------------------------------- President (Principal Executive Anthony C. Naughtin Officer) /s/ PAUL E. MCBRIDE Vice President and Chief July 29, 1999 - ----------------------------------------------------- Financial Officer (Principal Paul E. McBride Finance and Accounting Officer) /s/ EUGENE EIDENBERG Chairman of the Board July 29, 1999 - ----------------------------------------------------- Eugene Eidenberg
II-5 110
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM J. HARDING Director July 29, 1999 - ----------------------------------------------------- William J. Harding /s/ FREDERIC W. HARMAN Director July 29, 1999 - ----------------------------------------------------- Frederic W. Harman /s/ ROBERT J. LUNDAY, JR. Director July 29, 1999 - ----------------------------------------------------- Robert J. Lunday, Jr. /s/ KEVIN L. OBER Director July 29, 1999 - ----------------------------------------------------- Kevin L. Ober /s/ ROBERT D. SHURTLEFF, JR. Director July 29, 1999 - ----------------------------------------------------- Robert D. Shurtleff, Jr.
II-6 111 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1* Form of Underwriting Agreement. 3.1 Amended and Restated Articles of Incorporation of InterNAP, as amended. 3.2 Form of Amended and Restated Articles of Incorporation to be filed upon the closing of the offering made pursuant to this Registration Statement. 3.3 Bylaws of InterNAP, as currently in effect. 3.4 Form of Amended and Restated Bylaws of InterNAP to be filed upon the closing of the offering made pursuant to this Registration Statement. 4.1 Specimen Common Stock Certificate. 5.1* Opinion of Cooley Godward LLP. 10.1 Form of Indemnification Agreement between the Registrant and each of its directors and certain of its officers. 10.2 1999 Non-Employee Directors' Stock Option Plan. 10.3 Form of 1999 Non-Employee Directors' Stock Option Agreement. 10.4 1999 Employee Stock Purchase Plan. 10.5 1998 Stock Option/Stock Issuance Plan. 10.6 Form of 1998 Stock Option Agreement. 10.7 1999 Equity Incentive Plan. 10.8 Form of 1999 Equity Incentive Plan Stock Option Agreement. 10.9 Lease Agreement, dated June 11, 1998, between Registrant and Union Square Limited Partnership, as amended. 10.10 Lease Agreement, dated June 1, 1996, between Registrant and Sixth & Virginia Properties. 10.11 Form of Employee Confidentiality, Nonraiding and Noncompetition Agreement used between Registrant and its Executive Officers. 10.12 Form of Stock Purchase Warrant. 10.13 Preferred Stock Purchase Warrant, dated December 15, 1998, between Registrant and Bob Kingsbook. 10.14 Preferred Stock Purchase Warrant, dated September 1, 1998, between Registrant and Phoenix Leasing Incorporated. 10.15 Preferred Stock Purchase Warrant, dated May 5, 1998, between Registrant and First Portland Corporation. 10.16 Preferred Stock Purchase Warrant, dated December 24, 1998, between Registrant and Robert Shurtleff, Jr. 10.17 Amended and Restated Investor Rights Agreement, dated January 28, 1999. 10.18 Shareholder Agreement, dated October 1, 1997. 10.19* Quick Start Loan and Security Agreement, dated November 3, 1997, between Registrant and Silicon Valley Bank. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (contained on signature page). 27.1 Financial Data Schedule.
- ------------------------- * To be filed by amendment. EX-3.1 2 AMENDED AND RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 FILED STATE OF WASHINGTON JUL 28 1999 RALPH MUNRO SECRETARY OF STATE ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF INTERNAP NETWORK SERVICES CORPORATION Pursuant to the provisions of RCW 23B.10 of the Washington Business Corporation Act, InterNAP Network Services Corporation, a Washington corporation, (the "Corporation") hereby adopts the following amendment to its articles of incorporation: FIRST: Part A of Article II of the articles of incorporation, setting forth the authorized capital stock of the Corporation, is amended to read in its entirety as follows: "(A) AUTHORIZED CAPITAL. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is Three Hundred Fifty Million Sixty-Nine Thousand Six Hundred Fifteen (350,069,615) shares, each with a par value of $0.001 per share. Three Hundred Million (300,000,000) shares shall be Common Stock and Fifty Million Sixty-Nine Thousand Six Hundred Fifteen (50,069,615) shares shall be Preferred Stock." SECOND: The amendment does not provide for an exchange, reclassification or cancellation of any issued shares. THIRD: The amendment was adopted on July 21, 1999 by the shareholders of the Corporation in accordance with the provisions of RCW 23B.10.030 and 23B.10.040. FOURTH: These Articles of Amendment will become effective upon filing. [The remainder of this page intentionally left blank.] 2 The undersigned hereby certifies that he is an officer of the corporation and is authorized to execute these Articles of Amendment on behalf of the Corporation. EXECUTED this 27th day of July, 1999. INTERNAP NETWORK SERVICES CORPORATION By: /s/ Paul E. McBride ------------------------------------------ Paul E. McBride Vice President and Chief Financial Officer 3 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF INTERNAP NETWORK SERVICES CORPORATION Pursuant to the provisions of RCW 23B.10 of the Washington Business Corporation Act, InterNAP Network Services Corporation, a Washington corporation, (the "Corporation") hereby adopts the following articles of amendment to its articles of incorporation: FIRST: Part A of Article II of the articles of incorporation, setting forth the authorized capital stock of the Corporation, is amended to read in its entirety as follows: "(A) AUTHORIZED CAPITAL. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is One Hundred Fifty Million Sixty-Nine Thousand Six Hundred Fifteen (150,069,615) shares, each with a par value of $0.001 per share. One Hundred Million (100,000,000) shares shall be Common Stock and Fifty Million Sixty-Nine Thousand Six Hundred Fifteen (50,069,615) shares shall be Preferred Stock." SECOND: Part C of Article II of the articles of incorporation, setting forth the rights, preferences and restrictions of Preferred Stock, is amended to read in its entirety as set forth on Exhibit A attached and made a part hereof. THIRD: The amendments do not provide for an exchange, reclassification or cancellation of any issued shares. FOURTH: The foregoing amendments of the articles of incorporation were adopted on January 26, 1999. FIFTH: The amendments were duly approved by the shareholders in accordance with the provisions of RCW 23B.10.030 and 23B.10.040. 1. 4 EXECUTED this 26 day of January, 1999. INTERNAP NETWORK SERVICES CORPORATION By: /s/ ANTHONY C. NAUGHTIN --------------------------------------- Anthony C. Naughtin President and CEO 2. 5 Exhibit A DECLARATION OF RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SERIES A PREFERRED STOCK, SERIES B PREFERRED STOCK AND SERIES C PREFERRED STOCK (c) RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF PREFERRED STOCK. The first series of Preferred Stock shall be designated "SERIES A PREFERRED STOCK" and shall consist of six million six hundred sixty-six thousand six hundred sixty-seven (6,666,667) shares. The second series of Preferred Stock shall be designated "SERIES B PREFERRED STOCK" and shall consist of thirteen million seven hundred seventy three thousand three hundred eighteen (13,773,318) shares. The third series of Preferred Stock shall be designated "SERIES C PREFERRED STOCK" and shall consist of twenty nine million six hundred twenty-nine thousand six hundred thirty (29,629,630) shares. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock are as set forth below in this Part C of Article II. 1. DIVIDEND PROVISION. The holders of shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock) on the Common Stock of the Corporation, (i) at the rate of eight percent (8%) per share per annum of the Original Series A Issue Price (as defined below) on each share of Series A Preferred Stock, (ii) at the rate of eight percent (8%) per share per annum of the Original Series B Issue Price (defined below) on each share of Series B Preferred Stock, and at the rate of eight percent (8%) per share per annum of the Original Series C Issue Price (defined below) on each share of Series C Preferred Stock payable when, as and if declared by the Board of Directors. Dividends to holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be payable in preference and priority to any payment of any dividend on Common Stock of the Corporation. Payments of any dividends to the holders of the Series B Preferred Stock and Series C Preferred Stock shall be made pro rata, on an equal priority, pari passu basis, according to their respective dividend rates as set forth herein. No dividends or distributions shall be made with respect to the Series A Preferred Stock or Common Stock, other than those payable solely in Common Stock, until all dividends on the Series B Preferred Stock and Series C Preferred Stock at the rates specified have been paid or declared and set apart. No dividends or other distributions shall be made with respect to the Common Stock, other than dividends payable solely in Common Stock, until all dividends on the Series A Preferred Stock have been paid or declared and set apart. Dividends shall not be cumulative and no right to such dividends shall accrue to holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Common Stock unless declared by the Board of Directors. 2. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution, or winding up of the Corporation (whether voluntary or involuntary), distributions to the stockholders of the Corporation shall be made in the following manner: (a) The holders of the Series B Preferred Stock and Series C Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Series A Preferred Stock or Common Stock 1. 6 by reason of their ownership of such stock, an amount equal to (i) $0.60 per share (the "Original Series B Issue Price") for each share of Series B Preferred Stock then held by them, adjusted for any stock dividends, combinations or splits of such shares plus any declared but unpaid dividends and (ii) $1.08 per share (the "Original Series C Issue Price") for each share of Series C Preferred Stock then held by them, adjusted for any stock dividends, combinations or splits of such shares plus any declared but unpaid dividends. If the assets and funds thus distributed among the holders of the Series B Preferred Stock and Series C Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of Series B Preferred Stock and Series C Preferred Stock in proportion to the preferential amount each such holder is otherwise entitled to receive. The right of holders of Series B Preferred Stock and Series C Preferred Stock to receive a distribution pursuant to this Section 2(a) shall also apply to an event described in Section 2(d) below if so elected as provided therein, in which event the distribution to holders of Series B Preferred Stock and Series C Preferred Stock shall be limited to the amount provided for in this Section 2. (b) The holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership of such stock, an amount equal to (i) $0.102 per share (the "Original Series A Issue Price") for each share of Series A Preferred Stock then held by them, adjusted for any stock dividends, combinations or splits of such shares plus any declared but unpaid dividends. If the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series A Preferred Stock in proportion to the preferential amount each such holder is otherwise entitled to receive. (c) Upon the completion of the distribution required by Sections 2(a) and (b) above the remaining assets of the Corporation available for distribution to stockholders shall be distributed among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and the Common Stock pro rata based on the number of shares of Common Stock held by each (assuming conversion of all such Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock). (d) For purposes of this Section 2, unless otherwise agreed by the holders of a majority of the Series B Preferred Stock and sixty percent (60%) of the Series C Preferred Stock (each voting as a separate series), a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, or to include, (i) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, but excluding any merger effected for the purpose of changing the domicile of the Corporation) that results in the transfer of fifty percent (50%) or more of the outstanding voting power of the Corporation; or (ii) a sale of all or substantially all of the assets of the Corporation. 2. 7 (e) In any of the events specified in Section 2(d) above, if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability: (A) If traded on a securities exchange or the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty-day period ending three (3) days prior to the closing of such acquisition or sale; (B) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the thirty-day period ending three (3) days prior to the closing of such acquisition or sale; and (C) If there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Corporation's Board of Directors. (ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (i)(A), (B) or (C) to reflect the approximate fair market value thereof, as determined in good faith by the Corporation's Board of Directors. (f) The Corporation shall give each holder of record of Series B Preferred Stock and Series C Preferred Stock written notice of any such impending acquisition or sale not later than twenty (20) days prior to the stockholders' meeting called to approve such transaction, or twenty (20) days prior to the closing of such acquisition or sale, whichever is earlier, and shall also notify such holders in writing of the final approval of such acquisition or sale. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the Corporation has given the first notice provided for herein or sooner than ten (10) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Series B Preferred Stock and Series C Preferred Stock that represent at least a majority of the voting power of all then outstanding shares of Series B Preferred Stock and Series C Preferred Stock. 3. CONVERSION. The holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) RIGHT TO CONVERT. Subject to Section 3(c)(i), each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series A Issue Price for the Series A Preferred Stock by the Conversion 3. 8 Price applicable to the Series A Preferred Stock, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. Subject to Section 3(c)(i), each share of Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series B Issue Price for the Series B Preferred Stock by the Conversion Price applicable to the Series B Preferred Stock, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. Subject to Section 3(c)(i), each share of Series C Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series C Issue Price for the Series C Preferred Stock by the Conversion Price applicable to the Series C Preferred Stock, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share of Series A Preferred Stock shall be the Series A Original Issue Price, the initial Conversion Price per share of Series B Preferred Stock shall be the Series B Original Issue Price, and the initial Conversion Price per share of Series C Preferred Stock shall be the Series C Original Issue Price; provided, however, that the Conversion Price for each series of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be subject to adjustment as set forth in Section 3(d), (e) and (g). (b) AUTOMATIC CONVERSION. (i) Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such shares (A) immediately upon the closing of the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $1.20 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) and which results in aggregate cash proceeds to the Corporation of not less than $7,000,000 (net of underwriting discounts and commissions), (B) on such date on which fewer than 1,333,333 Shares of Series A Preferred Stock remain outstanding (subject to adjustment for subsequent stock dividends, stock splits or recapitalizations) or (C) on such date as is specified by written consent or agreement of the holders of a majority of the then outstanding shares of Series A Preferred Stock. (ii) Each share of Series B Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such shares (A) immediately upon the closing of the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $1.20 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) and which results in aggregate cash proceeds to the Corporation of not less than $7,000,000 (before deduction of underwriting discounts and commissions), (B) on such date on which fewer than 2,185,609 Shares of Series B Preferred Stock remain outstanding (subject to adjustment for subsequent stock dividends, stock splits or recapitalizations) or (C) on such date specified by 4. 9 written consent or agreement of the holders of sixty-six and two thirds percent (66 2/3%) of the then outstanding shares of Series B Preferred Stock. (iii) Each share of Series C Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such shares (A) immediately upon the closing of the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $3.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) and which results in aggregate cash proceeds to the Corporation of not less than $20,000,000 (before deduction of underwriting discounts and commissions), or (B) on such date specified by written consent or agreement of the holders of sixty percent (60%) of the then outstanding shares of Series C Preferred Stock. (c) MECHANICS OF CONVERSION. (i) Before any holder of Series A, B or C Preferred Stock shall be entitled to convert the same into shares of Common Stock pursuant to Section 3(a), such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series A, B or C Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A, B or C Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A, B or C Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date and any declared and unpaid dividends on such shares being converted shall be paid promptly. (ii) Upon the occurrence of an event specified in Section 3(b) above, all outstanding shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, as applicable, shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless the certificates evidencing such shares of Series A, B or C Preferred Stock are either delivered to the Corporation or its transfer agent as provided below, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Upon the occurrence of such automatic conversion of the Series A, B or C Preferred Stock, as applicable, the holders of such Series A, B or C Preferred Stock shall surrender the certificates representing such shares at the office of the Corporation or any transfer agent for such Series A, B or C Preferred Stock. Thereupon, there 5. 10 shall be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of Series A, B or C Preferred Stock surrendered were convertible on the date on which such automatic conversion occurred, and any declared and unpaid dividends on such shares being converted shall be paid promptly. (d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN DILUTIVE ISSUANCES. (i) SPECIAL DEFINITIONS. For purposes of this Section 3(d), the following definitions shall apply: (A) "ADDITIONAL STOCK" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 3(d)(ii)(F)) by the Corporation after the Purchase Date (as defined below) with respect to the applicable series) other than (1) Common Stock issued pursuant to a transaction described in subsection 3(e)(i) hereof, (2) shares of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued or to be issued to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary, pursuant to stock purchase or stock option plans or other arrangements that are approved by a majority of the entire Board of Directors; (3) Capital stock, or options or warrants to purchase capital stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, or any similar transactions approved by a majority of the entire Board of Directors, (4) Shares of Common Stock or Preferred Stock issuable upon exercise of warrants outstanding as of the date of filing of these Articles of Incorporation, (5) Capital stock or warrants or options to purchase capital stock issued in connection with bona fide acquisitions, mergers or similar transactions, the terms of which are approved by a majority of the entire Board of Directors of the Corporation, (6) Shares of Common Stock issued upon conversion of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, and (7) Shares of Common Stock issued in a public offering prior to or in connection with which all outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock will be converted to Common Stock. 6. 11 (ii) ADJUSTMENT OF CONVERSION PRICE. The Conversion Price of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be subject to adjustment from time to time as follows: (A) If the Corporation shall issue, after the date upon which any shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock were first issued (the "Purchase Date" with respect to such series), any Additional Stock without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall automatically (except as otherwise provided in this clause (ii)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock that the aggregate consideration received by the Corporation for such issuance would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding plus the number of shares of such Additional Stock; provided that for the purpose of calculating the respective Conversion Prices for Series A Preferred Stock and Series B Preferred Stock pursuant to this subsection, all shares of Common Stock issuable upon exercise of outstanding options and warrants and/or upon conversion of outstanding convertible securities (including outstanding Preferred Stock), shall be deemed to be outstanding, and immediately after any Additional Stock is deemed issued, such Additional Stock shall be deemed to be outstanding; and provided further that for the purpose of calculating the Conversion Price for Series C Preferred Stock pursuant to this subsection, all shares of Common Stock issuable upon conversion of outstanding Preferred Stock, shall be deemed to be outstanding, and immediately after any Additional Stock is deemed issued, such Additional Stock shall be deemed to be outstanding. (B) No adjustment of the Conversion Price for the Preferred Stock shall be made in an amount less than one cent ($0.01) per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subparagraphs (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this subsection 3(d)(ii) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors irrespective of any accounting treatment. 7. 12 (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 3(d)(ii) and Section 3(e): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 3(d)(ii)(C) and (d)(ii)(D)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 3(d)(ii)(C) and (d)(iii)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights, or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock, to the 8. 13 extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 3(d)(ii)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 3(d)(ii)(E)(3) or (4). (e) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN SPLITS AND COMBINATIONS. The Conversion Price of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be subject to adjustment from time to time as follows: (i) In the event the Corporation should at any time or from time to time after the respective Purchase Dates of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of each series of Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in Section 3(d)(ii)(E). (ii) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for each series of Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (f) OTHER DISTRIBUTIONS. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Section 3(e), then, in each such case for the purpose of this Section 3(f), the holders of Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their 9. 14 shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (g) RECAPITALIZATIONS. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 3) provision shall be made so that the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion of the Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the holders of the Preferred Stock after the recapitalization to the end that the provisions of this Section 3 (including adjustment of the applicable Conversion Price then in effect with respect to the Preferred Stock and the number of shares purchasable upon conversion of the Preferred Stock) shall be applicable after that event and be as nearly equivalent as practicable. (h) NO IMPAIRMENT. The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. (i) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the Corporation shall, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the Common Stock's fair market value (as determined in good faith by the Board of Directors) on the date of conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Preferred Stock pursuant to this Section 3, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for the Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock. 10. 15 (j) NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (k) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to these Articles of Incorporation. (l) NOTICES. Any notice required by the provisions of this Section 3 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder's address appearing on the books of the Corporation. 4. VOTING RIGHTS. (a) The holder of each share of Preferred Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Preferred Stock held by each holder could be convened) shall be rounded to the nearest whole number (with one-half being rounded upward). (b) The holders of Preferred Stock shall have no class voting rights except as explicitly provided in these Articles of Incorporation or by applicable law. 11. 16 5. PROTECTIVE PROVISIONS. (a) So long as at least 1,333,333 shares of Series A Preferred Stock are outstanding (subject to adjustment for subsequent stock dividends, stock splits or recapitalizations), the Corporation shall not without first obtaining the approval of the holders of a majority of the then outstanding shares of Series A Preferred Stock amend or repeal a provision of, or add any provision to, the Corporation's Articles of Incorporation or Bylaws if such action would alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect such shares adversely. (b) So long as at least 2,185,609 shares of Series B Preferred Stock are outstanding (subject to adjustment for subsequent stock dividends, stock splits or recapitalizations), the Corporation shall not without first obtaining the approval of the holders of a majority of the then outstanding shares of Series B Preferred Stock: (i) amend or repeal a provision of, or add any provision to, the Corporation's Articles of Incorporation or Bylaws if such action would alter or change the rights, preferences or privileges of the shares of Series B Preferred Stock so as to affect such shares adversely; (ii) take any other action that would alter or change the rights, preferences or privileges of the shares of Series B Preferred Stock so as to affect such shares adversely; (iii) authorize or issue capital stock that is, or reclassify any series of stock to be, senior to or on parity with the Series B Preferred Stock; (iv) increase or decrease the authorized number of shares of Series B Preferred Stock; (v) take any action that results in the redemption or repurchase of any shares of Common Stock or Preferred Stock (other than pursuant to equity incentive agreements with employees, consultants and service providers giving the Corporation the right to repurchase shares upon termination of services); (vi) sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of, provided that this Section 5(b)(vi) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Corporation; or (vii) change the principal business of the Corporation. (c) So long as at least 1,000,000 shares of Series C Preferred Stock are outstanding (subject to adjustment for subsequent stock dividends, stock splits or recapitalizations), the Corporation shall not without first obtaining the approval of the holders of a sixty percent (60%) of the then outstanding shares of Series C Preferred Stock: 12. 17 (i) amend or repeal a provision of, or add any provision to, the Corporation's Articles of Incorporation or Bylaws if such action would alter or change the rights, preferences or privileges of the shares of Series C Preferred Stock so as to affect such shares adversely; (ii) take any other action that would alter or change the rights, preferences or privileges of the shares of Series C Preferred Stock so as to affect such shares adversely; (iii) authorize or issue capital stock that is, or reclassify any series of stock to be, senior to or on parity with the Series C Preferred Stock; (iv) increase or decrease the authorized number of shares of Series C Preferred Stock; (v) increase the number of directors on the Board of Directors to more than seven (7); (vi) take any action that results in the redemption or repurchase of any shares of Common Stock or Preferred Stock (other than pursuant to equity incentive agreements with employees, consultants and service providers giving the Corporation the right to repurchase shares upon termination of services); (vii) sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of, provided that this Section 5(b)(vi) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Corporation; or (viii) change the principal business of the Corporation. 6. STATUS OF CONVERTED STOCK. In the event any shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be canceled and shall not be issuable by the Corporation. 13. 18 FILED STATE OF WASHINGTON DEC 31 1997 RALPH MUNRO SECRETARY OF STATE ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF INTERNAP NETWORK SERVICES CORPORATION Pursuant to the provisions of RCW 23B.10 of the Washington Business Corporation Act, InterNAP Network Services Corporation, a Washington corporation, hereby adopts the following articles of amendment to its articles of incorporation: FIRST: The name of the corporation is: InterNAP Network Services Corporation SECOND: The first paragraph of Part C of Article II is hereby amended to read in its entirety as follows: (C) RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The first series of Preferred Stock shall be designated "SERIES A PREFERRED STOCK" and shall consist of six million six hundred sixty-six thousand six hundred sixty-seven (6,666,667) shares. The second series of Preferred Stock shall be designated "SERIES B PREFERRED STOCK" and shall consist of thirteen million five-hundred thousand (13,500,000) shares. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A Preferred Stock and the Series B Preferred Stock are as set forth in this Part C of Article II. THIRD: The amendments do not provide for an exchange, reclassification or cancellation of any issued shares. FOURTH: The foregoing amendment of the articles of incorporation were adopted on December 29, 1997. -1- 19 FIFTH: The amendments were duly approved by the shareholders in accordance with the provisions of RCW 23B.10.030 and 23B.10.040. EXECUTED this 29th day of December, 1997. INTERNAP NETWORK SERVICES CORPORATION By /s/ ANTHONY C. NAUGHTIN --------------------------- Anthony C. Naughtin President -2- 20 FILED STATE OF WASHINGTON OCT 28 1997 RALPH MUNRO SECRETARY OF STATE ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF INTERNAP CORPORATION Pursuant to the provisions of RCW 23B.10 of the Washington Business Corporation Act, InterNAP Corporation, a Washington corporation, hereby adopts the following articles of amendment to its articles of incorporation: FIRST: The name of the corporation is: InterNAP Corporation SECOND: Article I of the articles of incorporation is amended to read in its entirety as follows: ARTICLE I "The name of the corporation is InterNAP NETWORK SERVICES CORPORATION (the "Corporation"). THIRD: Part C of Article II of the articles of incorporation, setting forth the rights, preferences and restrictions of Preferred Stock, is amended to read in its entirety as set forth on Exhibit A and made a part hereof. FOURTH: The amendments do not provide for an exchange, reclassification or cancellation of any issued shares. FIFTH: The foregoing amendments of the articles of incorporation were adopted on October 27, 1997. -1- 21 SIXTH: The amendments were duly approved by the shareholders in accordance with the provisions of RCW 23B.10.030 and 23B.10.040. EXECUTED this 27th day of October, 1997. INTERNAP CORPORATION By /s/ ANTHONY C. NAUGHTIN ------------------------------------- Anthony C. Naughtin President -2- 22 EXHIBIT A DECLARATION OF RIGHTS, PREFERENCES AND RESTRICTIONS OF SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK (C) RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The first series of Preferred Stock shall be designated "SERIES A PREFERRED STOCK" and shall consist of six million six hundred sixty-six thousand six hundred sixty-seven (6,666,667) shares. The second series of Preferred Stock shall be designated "SERIES B PREFERRED STOCK" and shall consist of ten million nine hundred twenty-eight thousand forty-seven (10,928,047) shares. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A Preferred Stock and the Series B Preferred Stock are as set forth below in this Part C of Article II. 1. DIVIDEND PROVISION. The holders of shares of Series A Preferred Stock and Series B Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, at the rate of eight percent (8%) per share per annum of the Original Series A Issue Price (as defined below) on each share of Series A Preferred Stock, and at the rate of eight percent (8%) per share per annum of the Original Series B Issue Price (defined below) on each share of Series B Preferred Stock, payable when, as and if declared by the Board of Directors. Dividends to holders of Series A Preferred Stock and Series B Preferred Stock shall be payable in preference and priority to any payment of any dividend on Common Stock of the Corporation. No dividends or distributions shall be made with respect to the Series A Preferred Stock or Common Stock, other than those payable solely in Common Stock, until all declared dividends on the Series B Preferred Stock have been paid or set apart. No dividends or other distributions shall be made with respect to the Common Stock, other than dividends payable solely in Common Stock, until all declared dividends on the Series A Preferred Stock have been paid or set apart. Dividends shall not be cumulative and no right to such dividends shall accrue to holders of Series A Preferred Stock, Series B Preferred Stock or Common Stock unless declared by the Board of Directors. 2. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution, or winding up of the Corporation (whether voluntary or involuntary), distributions to the stockholders of the Corporation shall be made in the following manner: a. The holders of the Series B Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Series A Preferred Stock or Common Stock by reason of their ownership of such stock, an amount equal to (i) $0.60 per share (the "Original Series B Issue Price") for each share of Series B Preferred Stock then held by them, adjusted for any combinations, consolidations, or stock distributions or declared but unpaid dividends on such shares. If the assets and funds thus distributed among the holders of the Series B Preferred Stock shall be insufficient to permit the payments to such holders of the full aforesaid preferential A-1 23 amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of Series B Preferred Stock in proportion to the preferential amount each such holder is otherwise entitled to receive. The right of holders of Series B Preferred Stock to receive a distribution pursuant to this Section 2(a) shall also apply to an event described in Section 2(d) below if so elected as provided therein, in which event the distribution to holders of Series B Preferred Stock shall be limited to the amount provided for in this paragraph (a). (b) Upon completion of the distribution required by Section 2(a) above, the holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership of such stock, an amount equal to (i) $0.102 per share (the "ORIGINAL SERIES A ISSUE PRICE") for each share of Series A Preferred Stock then held by them, adjusted for any combinations, consolidations, or stock distributions or declared but unpaid dividends on such shares. If the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then the entire remaining assets and funds of the Corporation legally available for distribution shall be distributed among the holders of Series A Preferred Stock in proportion to the preferential amount each such holder is otherwise entitled to receive. (c) Upon the completion of the distribution required by Sections 2(a) and (b) above the remaining assets of the Corporation available for distribution to stockholders shall be distributed among the holders of the Series A Preferred Stock, Series B Preferred Stock and the Common Stock pro rata based on the number of shares of Common Stock held by each (assuming conversion of all such Series A Preferred Stock and Series B Preferred Stock). (d) For purposes of this Section 2, unless otherwise agreed by the holders of a majority of the Series B Preferred Stock (voting as a single class), a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, or to include, (i) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, but excluding any merger effected primarily for the purpose of changing the domicile of the Corporation) that results in the transfer of fifty percent (50%) or more of the outstanding voting power of the Corporation; or (ii) a sale of all or substantially all of the assets of the Corporation, unless the Corporation's stockholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the Corporation's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity. (e) In any of the events specified in Section 2(d) above, if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability; A-2 24 (A) If traded on a securities exchange or the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty-day period ending three (3) days prior to the closing of such acquisition or sale; (B) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty-day period ending three (3) days prior to the closing of such acquisition or sale; and If there is no active public market, the value shall be the fair market value thereof, as determined by the Corporation's Board of Directors. (ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (i)(A), (B) or (C) to reflect the approximate fair market value thereof, as determined by the Corporation's Board of Directors. (iii) The Corporation shall give each holder of record of Series B Preferred Stock written notice of any such impending acquisition or sale not later than twenty (20) days prior to the stockholders' meeting called to approve such transaction, or twenty (20) days prior to the closing of such acquisition or sale, whichever is earlier, and shall also notify such holders in writing of the final approval of such acquisition or sale. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the Corporation has given the first notice provided for herein or sooner than ten (10) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Series B Preferred Stock that represent at least a majority of the voting power of all then outstanding shares of Series B Preferred Stock. 3. CONVERSION. The holders of Series A Preferred Stock and Series B Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) RIGHT TO CONVERT. Subject to Section 3(c)(i), each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series A Issue Price for the Series A Preferred Stock by the Conversion Price applicable to the Series A Preferred Stock, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. Subject to Section 3(c)(i), each share of Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and A-3 25 nonassessable shares of Common Stock as determined by dividing the Original Series B Issue Price for the Series B Preferred Stock by the Conversion Price applicable to the Series B Preferred Stock, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share of Series A Preferred Stock shall be the Series A Original Issue Price and the initial Conversion Price per share of Series B Preferred Stock shall be the Series B Original Issue Price; provided, however, that the Conversion Price for each series of Series A Preferred Stock and Series B Preferred Stock shall be subject to adjustment as set forth in Section 3(d), (e) and (g). (b) AUTOMATIC CONVERSION. (i) Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such shares (A) immediately upon the closing of the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $1.20 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and which results in aggregate cash proceeds to the Corporation of not less than $7,000,000 (net of underwriting discounts and commissions), (B) on such date on which fewer than 1,333,333 Shares of Series A Preferred Stock remain outstanding (subject to adjustment for subsequent stock dividends, stock splits or recapitalizations) or (C) on such date as is specified by written consent or agreement of the holders of a majority of the then outstanding shares of Series A Preferred Stock. (ii) Each share of Series B Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such shares (A) immediately upon the closing of the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $1.20 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and which results in aggregate cash proceeds to the Corporation of not less than $7,000,000 (net of underwriting discounts and commissions), (B) on such date on which fewer than 2,185,609 Shares of Series B Preferred Stock remain outstanding (subject to adjustment for subsequent stock dividends, stock splits or recapitalizations) or (C) on such date specified by written consent or agreement of the holders of sixty-six and two thirds percent (66 2/3%) of the then outstanding shares of Series B Preferred Stock. (c) MECHANICS OF CONVERSION. (i) Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock pursuant to Section 3(a), such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at A-4 26 such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date and any declared and unpaid dividends on such shares being converted shall be paid promptly. (ii) Upon the occurrence of an event specified in Section 3(b) above, all outstanding shares of Series A Preferred Stock or Series B Preferred Stock, as applicable, shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Company or its transfer agent; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless the certificates evidencing such shares of Preferred Stock are either delivered to the Company or its transfer agent as provided below, or the holder notifies the Company or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnity the Company from any loss incurred by it in connection with such certificates. Upon the occurrence of such automatic conversion of the Series A Preferred Stock or Series B Preferred Stock, as applicable, the holders of such Preferred Stock shall surrender the certificates representing such shares at the office of the Company or any transfer agent for such Preferred Stock. Thereupon, there shall be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of Preferred Stock surrendered were convertible on the date on which such automatic conversion occurred, and any declared and unpaid dividends on such shares being converted shall be paid promptly. (d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN DILUTIVE ISSUANCES. (i) Special Definitions. For purposes of this Section 3(d), the following definitions shall apply: (A) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 3(d)(ii)(E)) by the Corporation after the Purchase Date) other than (1) Common Stock issued pursuant to a transaction described in subsection 3(e)(i) hereof, (2) Shares of Common Stock issuable or issued to employees, consultants, officers or directors of the Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Corporation, A-5 27 (3) Capital stock, or options or warrants to purchase capital stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions approved by the Board of Directors of the Corporation, (4) Shares of Common Stock or Preferred Stock issuable upon exercise of warrants outstanding as of the date of filing of these Articles of Amendment to Articles of Incorporation, (5) Capital stock or warrants or options to purchase capital stock issued in connection with bona fide acquisitions, mergers or similar transactions, the terms of which are approved by the Board of Directors of the Corporation, (6) Shares of Common Stock issued upon conversion of the Series A Preferred Stock or Series B Preferred Stock, and (7) Shares of Common Stock issued in a public offering prior to or in connection with which all outstanding shares of Series A Preferred Stock and Series B Preferred Stock will be converted to Common Stock. (ii) Adjustment of Conversion Price. The Conversion Price of the Series A Preferred Stock and Series B Preferred Stock shall be subject to adjustment from time to time as follows: (A) If the Corporation shall issued, after the date upon which any shares of Series A Preferred Stock or Series B Preferred Stock were first issued (the "Purchase Date" with respect to such series), any Additional Stock without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall automatically (except as otherwise provided in this clause (ii)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock that the aggregate consideration received by the Corporation for such issuance would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding plus the number of shares of such Additional Stock; provided that for the purposes of this subsection, all shares of Common Stock issuable upon exercise of outstanding options and warrants and/or upon conversion of outstanding convertible securities (including outstanding Preferred Stock), shall be deemed to be outstanding, and immediately after any Additional Stock is deemed issued, such Additional Stock shall be deemed to be outstanding. (B) No adjustment of the Conversion Price for the Preferred Stock shall be made in an amount less than one cent ($0.01) per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall A-6 28 be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subparagraphs (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this subsection 3(d)(ii) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 3(d)(ii) and Section 3(e): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 3(d)(ii)(C) and (d)(ii)(D)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related A-7 29 options or rights (the consideration in each cash to be determined in the manner provided in Sections 3(d)(ii)(C) and (d)(iii)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights, or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series A Preferred Stock and the Series B Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A Preferred Stock and the Series B Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 3(d)(ii)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 3(d)(ii)(E)(3) or (4). (e) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN SPLITS AND COMBINATIONS. The Conversion Price of the Series A Preferred Stock and Series B Preferred Stock shall be subject to adjustment from time to time as follows: (i) In the event the Corporation should at any time or from time to time after the respective Purchase Dates of the Series A Preferred Stock and Series B Preferred Stock fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of each series of Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with A-8 30 respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in Section 3(d)(ii)(E). (ii) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for each series of Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (f) OTHER DISTRIBUTIONS. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Section 3(e), then, in each such case for the purpose of this Section 3(f), the holders of Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (g) RECAPITALIZATIONS. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 3) provision shall be made so that the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion of the Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the holders of the Preferred Stock after the recapitalization to the end that the provisions of this Section 3 (including adjustment of the applicable Conversion Price then in effect with respect to the Preferred Stock and the number of shares purchasable upon conversion of the Preferred Stock) shall be applicable after that event and be as nearly equivalent as practicable. (h) NO IMPAIRMENT. The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. (i) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Preferred Stock. All shares of Common Stock (including fractions A-9 31 thereof) issuable upon conversion of more than one share of Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the Corporation shall, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the Common Stock's fair market value (as determined by the Board of Directors) on the date of conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Preferred Stock pursuant to this Section 3, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for the Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock. (j) NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (k) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to these Articles of Incorporation. (l) NOTICES. Any notice required by the provisions of this Section 3 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder's address appearing on the books of the Corporation. A-10 32 4. VOTING RIGHTS. (a) The holder of each share of Preferred Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Series A Preferred Stock held by each holder could be convened) shall be rounded to the nearest whole number (with one-half being rounded upward). (b) The holders of Preferred Stock shall have no class voting rights except as explicitly provided in these Articles of Incorporation. 5. PROTECTIVE PROVISIONS. (a) So long as at least 1,333,333 shares of Series A Preferred Stock are outstanding (subject to adjustment for subsequent stock dividends, stock splits or recapitalizations), the Corporation shall not without first obtaining the approval of the holders of a majority of the then outstanding shares of Series A Preferred Stock amend or repeal a provision of, or add any provision to, the Corporation's Articles of Incorporation or Bylaws if such action would alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect such shares adversely. (b) So long as at least 2,185,609 shares of Series B Preferred Stock are outstanding (subject to adjustment for subsequent stock dividends, stock splits or recapitalizations), the Corporation shall not without first obtaining the approval of the holders of a majority of the then outstanding shares of Series B Preferred Stock: (i) amend or repeal a provision of, or add any provision to, the Corporation's Articles of Incorporation or Bylaws if such action would alter or change the rights, preferences or privileges of the shares of Series B Preferred Stock so as to affect such shares adversely; (ii) take any other action that would alter or change the rights, preferences or privileges of the shares of Series B Preferred Stock so as to affect such shares adversely; (iii) authorize or issue capital stock that is, or reclassify and series of stock to be, senior to or on parity with the Series B Preferred Stock; (iv) increase or decrease the authorized number of shares of Series B Preferred Stock; A-11 33 (v) take any action that results in the redemption or repurchase of any shares of Common Stock or Preferred Stock (other than pursuant to equity incentive agreements with employees, consultants and service providers giving the Corporation the right to repurchase shares upon termination of services); (vi) sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of, provided that this Section 5(b)(vi) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Corporation; or (vii) change the principal business of the Corporation. 6. STATUS OF CONVERTED STOCK. In the event any shares of Series A Preferred Stock or Series B Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be canceled and shall not be issuable by the Corporation. A-12 34 ARTICLES OF INCORPORATION OF INTERNAP CORPORATION FILED STATE OF WASHINGTON SEP 04 1997 RALPH MUNRO SECRETARY OF STATE Anthony C. Naughtin hereby executes these Articles of Incorporation for the purpose of forming a corporation under Title 23B of the Revised Code of Washington, the Washington Business Corporation Act (the "Act"). ARTICLE I The name of the corporation is INTERNAP Corporation (the "Corporation"). ARTICLE II (A) AUTHORIZED CAPITAL. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is One Hundred Million (100,000,000) shares, each with a par value of $0.001 per share. Seventy Million (70,000,000) shares shall be Common Stock and Thirty Million (30,000,000) shares shall be Preferred Stock. (B) RIGHTS OF CLASSES GENERALLY. Except to the extent such rights are granted to Preferred Stock or one or more series thereof, Common Stock has unlimited voting rights and is entitled to receive the net assets of the Corporation upon dissolution. Except as provided in Part C of Article II, the preferences, limitations and relative rights of Preferred Stock are undesignated. Subject to the provisions of Part C, the Board of Directors may designate one or more additional series of Preferred Stock, and the designation and number of shares within each such series, and shall determine the preferences, limitations, and relative rights of any shares of Preferred Stock or any series of Preferred Stock, before issuance of any shares of that class or series. Shares of one class or series may be issued as a share dividend in respect to shares of another class or series. (C) RIGHTS, PREFERENCES AND RESTRICTIONS OF SERIES A PREFERRED STOCK. The first series of Preferred Stock shall be designated "SERIES A PREFERRED STOCK" and shall consist of six million six hundred sixty-six thousand six hundred sixty-seven (6,666,667) shares. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A Preferred Stock are as set forth below in this Part C of Article II. 1. DIVIDEND PROVISION. The holders of shares of Series A Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly -1- 35 or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, at the rate of eight percent (8%) per share per annum of the Original Series A Issue Price (as defined below) on each share of Series A Preferred Stock payable when, as and if declared by the Board of Directors. Dividends to holders of Series A Preferred Stock shall be payable in preference and priority to any payment of any dividend on Common Stock of the Corporation. No dividends or other distributions shall be made with respect to the Common Stock, other than dividends payable solely in Common Stock, until all declared dividends on the Series A Preferred Stock have been paid or set apart. Dividends shall not be cumulative and no right to such dividends shall accrue to holders of Series A Preferred Stock or Common Stock unless declared by the Board of Directors. 2. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution, or winding up of the Corporation (whether voluntary or involuntary), distributions to the stockholders of the Corporation shall be made in the following manner: (a) The holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership of such stock, an amount equal to (i) $0.102 per share (the "Original Series A Issue Price") for each share of Series A Preferred Stock then held by them, adjusted for any combinations, consolidations, or stock distributions or declared but unpaid dividends on such shares. If the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series A Preferred Stock in proportion to the preferential amount each such holder is otherwise entitled to receive. (b) Upon the completion of the distribution required by Section 2(a) above the remaining assets of the Corporation available for distribution to stockholders shall be distributed among the holders of the Series A Preferred Stock and the Common Stock pro rata based on the number of shares of Common Stock held by each (assuming conversion of all such Series A Preferred Stock). 3. CONVERSION. The holders of Series A Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) RIGHT TO CONVERT. Subject to Section 3(c), each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series A Issue Price for the Series A Preferred Stock by the Conversion Price applicable to the Series A Preferred Stock, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share of Series A Preferred Stock shall be the Series A Original Issue Price; provided, however, that the Conversion Price for each series of Series A Preferred Stock shall be subject to adjustment as set forth in Section 3(d), (e) and (g). -2- 36 (b) AUTOMATIC CONVERSION. Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such shares immediately upon the earlier of (i) except as provided below in Section 3(c), the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $1.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and which results in aggregate cash proceeds to the Corporation of not less than $7,000,000 (net of underwriting discounts and commissions) or (ii) the date specified by written consent or agreement of the holders of at least fifty percent (50%) of the then outstanding shares of Series A Preferred Stock. (c) MECHANICS OF CONVERSION. Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series A Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date; provided, however, in the event of an automatic conversion pursuant to Section 3(b), the conversion shall be deemed to have occurred on the date of the event giving rise to such conversion. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Series A Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive Common Stock upon conversion of such Series A Preferred Stock shall not be deemed to have converted such Series A Preferred Stock until immediately prior to the closing of such sale of securities. (d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN DILUTIVE ISSUANCES. (i) Special Definitions. For purposes of this Section 3(d), the following definitions shall apply: (A) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 3(d)(ii)(E)) by the Corporation after the Purchase Date) other than (1) Common Stock issued pursuant to a transaction described in subsection 3(e)(i) hereof, -3- 37 (2) Shares of Common Stock issuable or issued to employees, consultants, officers or directors of the Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Corporation, (3) Capital stock, or options or warrants to purchase capital stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions, (4) Shares of Common stock or Preferred Stock issuable upon exercise of warrants outstanding as of the date of filing of these Articles of Incorporation, (5) Capital stock or warrants or options to purchase capital stock issued in connection with bona fide acquisitions, mergers or similar transactions, the terms of which are approved by the Board of Directors of the Corporation, (6) Shares of Common Stock issued upon conversion of the Series A Preferred Stock, and (7) Shares of Common Stock issued in a public offering prior to or in connection with which all outstanding shares of Series A Preferred Stock will be converted to Common Stock. (ii) Adjustment of Conversion Price. The Conversion Price of the Series A Preferred Stock shall be subject to adjustment from time to time as follows: (A) If the Corporation shall issue, after the date upon which any shares of Series A Preferred Stock were first issued (the "Purchase Date"), any Additional Stock without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to the issuance of such Additional Stock, the Conversion Price in effect immediately prior to each such issuance shall automatically (except as otherwise provided in this clause (ii)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock that the aggregate consideration received by the Corporation for such issuance would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding plus the number of shares of such Additional Stock; provided that for the purposes of this subsection, all shares of Common Stock issuable upon exercise of outstanding options and warrants and/or upon conversion of outstanding convertible securities (including outstanding Preferred Stock), shall be deemed to be outstanding, and immediately after any Additional Stock is deemed issued, such Additional Stock shall be deemed to be outstanding. (B) No adjustment of the Conversion Price for the Series A Preferred Stock shall be made in an amount less than one cent ($0.01) per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior -4- 38 to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subparagraphs (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this subsection 3(d)(ii) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 3(d)(ii) and Section 3(e): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 3(d)(ii)(C) and (d)(ii)(D)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related -5- 39 options or rights (the consideration in each case to be determined in the manner provided in Sections 3(d)(ii)(C) and (d)(iii)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights, or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series A Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 3(d)(ii)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 3(d)(ii)(E)(3) or (4). (e) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN SPLITS AND COMBINATIONS. The Conversion Price of the Series A Preferred Stock shall be subject to adjustment from time to time as follows: (i) In the event the Corporation should at any time or from time to time after the respective Purchase Dates of the Series A Preferred Stock fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series A Preferred Stock shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock -6- 40 Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in Section 3(d)(i)(E). (ii) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (f) OTHER DISTRIBUTIONS. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Section 3(e), then, in each such case for the purpose of this Section 3(f), the holders of Series A Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Series A Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (g) RECAPITALIZATIONS. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 3) provision shall be made so that the holders of the Series A Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the holders of the Series A Preferred Stock after the recapitalization to the end that the provisions of this Section 3 (including adjustment of the applicable Conversion Price then in effect with respect to the Series A Preferred Stock and the number of shares purchasable upon conversion of the Series A Preferred Stock) shall be applicable after that event and be as nearly equivalent as practicable. (h) NO IMPAIRMENT. The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Series A Preferred Stock against impairment. -7- 41 (i) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series A Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series A Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum of cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors of the Corporation). (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock pursuant to this Section 3, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustments or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for the Series A Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Series A Preferred Stock. (j) NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series A Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (k) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of shares of the Series A Preferred Stock, such number of it shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series A Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, in addition to such other remedies as shall be available to the holder of such Series A Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best -8- 42 efforts to obtain the requisite stockholder approval of any necessary amendment to these Articles of Incorporation. (l) NOTICES. Any notice required by the provisions of this Section 3 to be given to the holders of shares of Series A Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder's address appearing on the books of the Corporation. 4. VOTING RIGHTS. (a) The holder of each share of Series A Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series A Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Series A Preferred Stock held by each holder could be convened) shall be rounded to the nearest whole number (with one-half being rounded upward). (b) Preferred Stock shall have no class voting except as explicitly provided in these Articles of Incorporation or by applicable law. 5. PROTECTIVE PROVISIONS. So long as at least 2,000,000 shares of Series A Preferred Stock are outstanding (subject to adjustment for subsequent stock dividends, stock splits or recapitalization), the Corporation shall not without first obtaining the approval of the holders of at least fifty percent (50%) of the then outstanding shares of Series A Preferred Stock amend or repeal a provision of, or add any provision to, the Corporation's Articles of Incorporation or Bylaws if such action would alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect such shares adversely. 6. STATUS OF CONVERTED STOCK. In the event any shares of Series A Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be canceled and shall not be issuable by the Corporation. ARTICLE III (A) NO PREEMPTIVE RIGHTS. The stockholders of the Corporation shall have no preemptive rights to acquire additional shares of the Corporation. (B) NO CUMULATIVE VOTING. The stockholders of the Corporation shall not be entitled to cumulative voting at any election of directors. -9- 43 (C) ACTION BY CONSENT. Any action which may be authorized or approved by a vote of the stockholders at a meeting thereof may be taken with the written consent of stockholders holding that number of shares as could authorize or approve the action at a meeting of all stockholders entitled to vote on such action. Except as provided by statute, a notice describing the action taken and the effective date of such action shall be provided to each nonconsenting stockholder no later than ten (10) days prior to the effective date of any action approved pursuant to the preceding sentence. (D) APPROVAL BY MAJORITY VOTE. Unless these Articles of Incorporation provide for a greater voting requirement for any voting group of shareholders, any action which would otherwise require the approval of two-thirds of all the votes entitled to be cast, including without limitation the amendment of the Articles of Incorporation, the approval of a plan of merger or share exchange, the sale, lease, exchange or other disposition of all, or substantially all of the Corporation's property otherwise than in the usual and regular course of business, and the dissolution of the Corporation, shall be authorized if approved by each voting group entitled to vote thereon by a simple majority of all the votes entitled to be case by that voting group. ARTICLE IV The initial board of directors shall consist of one director. The name and address of the person who is to serve as the initial director is: Anthony C. Naughtin 2001 Sixth Avenue Suite 800 Seattle, Washington 98121 Except with respect to the initial board of directors, the number of directors constituting the board of directors shall be determined in the manner specified in the Bylaws. In the absence of such a provision in the Bylaws, the board shall consist of the number of directors constituting the initial board of directors. ARTICLE V A director of this Corporation shall not be personally liable to the corporation or its stockholders for monetary damages for conduct as a director, except for liability of the director (i) for acts or omission that involve intentional misconduct by the director or a knowing violation of law by the director, (ii) for conduct violating RCW 23B.08.310 of the Act, or (iii) for any transaction from which the director will personally receive a benefit in money, property or services to which the director is not legally entitled. If the Washington Business Corporation Act is amended in the future to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of this Corporation shall be eliminated or limited to the full extent permitted by the Washington Business Corporation Act, as so amended, without any requirement of further action by the stockholders. -10- 44 ARTICLE VI The Corporation shall indemnify any individual made a party to a proceeding because that individual is or was a director of the Corporation and shall advance or reimburse the reasonable expenses incurred by such individual in advance of final disposition of the proceeding, without regard to the limitations in RCW 23B.08.510 through 23B.08.550 of the Act, or any other limitation which may hereafter be enacted to the extent such limitation may be disregarded if authorized by the Articles of Incorporation, to the full extent and under all circumstances permitted by applicable law. Any repeal or modification of this Article by the stockholders of this Corporation shall not adversely affect any right of any individual who is or was a director of the Corporation which existed at the time of such repeal or modification. ARTICLE VII The name and address of the Incorporator is as follows: Anthony C. Naughtin 2001 Sixth Avenue Suite 800 Seattle, Washington 98121 ARTICLE VIII The name and address of the Corporation's registered agent is: RSC Corporation 1201 Third Ave., Suite 3400 Seattle, WA 98101 * * * Executed at Seattle, Washington, on the 3rd day of September, 1997. /s/ ANTHONY C. NAUGHTIN ---------------------------------------- Anthony C. Naughtin, Incorporator -11- 45 CONSENT TO SERVE AS REGISTERED AGENT RSC Corporation hereby consents to serve as Registered Agent in the State of Washington for InterNAP CORPORATION. It understands that as agent for the corporation, it will be its responsibility to receive service of process in the name of the corporation; to forward all mail to the corporation; and to immediately notify the office of the Secretary of State in the event of its resignation, or of any changes in the registered office address of the corporation for which it is agent. DATED: September 3, 1997. RSC CORPORATION By /s/ PHILIP M. ROBERTS -------------------------------------- Philip M. Roberts, President Address: 1201 Third Avenue, Suite 3400 Seattle, Washington 98101-3034 EX-3.2 3 AMENDED AND RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.2 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF INTERNAP NETWORK SERVICES CORPORATION I. NAME The name of this Corporation (hereinafter called the "Corporation") is INTERNAP NETWORK SERVICES CORPORATION. II. AUTHORIZED SHARES 2.1 This Corporation is authorized to issue [510,000,000] shares of stock in the aggregate. Such shares shall be divided into two classes as follows: (a) [500,000,000] shares of common stock ("Common Stock"). (b) 10,000,000 shares of preferred stock ("Preferred Stock"). Holders of Common Stock are entitled to one vote per share on any matter on which holders of Common Stock are entitled to vote. On dissolution of the Corporation, after any preferential amount with respect to the Preferred Stock has been paid or set aside, the holders of Common Stock and the holders of any series of Preferred Stock entitled to participate further in the distribution of assets are entitled to receive the net assets of the Corporation. 2.2 The Board of Directors is authorized, subject to limitations prescribed by the Washington Business Corporation Act (the "Act") and by the provisions of this Article II, to provide for the issuance of shares of Preferred Stock in series, to establish from time to time the number of shares to be included in each series and to determine the designations, relative rights, preferences and limitations of the shares of each series. The authority of the Board of Directors with respect to each series includes determination of the following: 2.2.1 The number of shares in and the distinguishing designation of that series; 2.2.2 Whether shares of that series shall have full, special, conditional, limited or no voting rights, except to the extent otherwise provided by the Act; 2.2.3 Whether shares of that series shall be convertible and the terms and conditions of the conversion, including provision for adjustment of the conversion rate in circumstances determined by the Board of Directors; 2.2.4 Whether shares of that series shall be redeemable and the terms and conditions of redemption, including the date or dates upon or after which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions or at different redemption dates; 1 2 2.2.5 The dividend rate, if any, on shares of that series, the manner of calculating any dividends and the preference of any dividends; 2.2.6 The rights of shares of that series in the event of voluntary or involuntary dissolution of the Corporation and the rights of priority of that series relative to the Common Stock and any other series of Preferred Stock on the distribution of assets on dissolution; and 2.2.7 Any other rights, preferences and limitations of that series that are permitted by the Act. Within any limits stated in these Articles or in the resolution of the Board of Directors establishing a series, the Board of Directors, after the issuance of shares of a series, may amend the resolution establishing the series to decrease (but not below the number of shares of such series then outstanding) the number of shares of that series, and the number of shares constituting the decrease shall thereafter constitute authorized but undesignated shares, and the Board of Directors may amend the rights and preferences of the shares of any series that has been established but is wholly unissued. The authority herein granted to the Board of Directors to determine the relative rights and preferences of the Preferred Stock shall be limited to unissued shares, and no power shall exist to alter or change the rights and preferences of any shares that have been issued. 2.3 The Board of Directors shall have the authority to issue shares of the capital stock of this Corporation and the certificates therefor subject to such transfer restrictions and other limitations as it may deem necessary to promote compliance with applicable federal and state securities laws, and to regulate the transfer thereof in such manner as may be calculated to promote such compliance or to further any other reasonable purpose. 2.4 At any time when the Corporation is subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, special meetings of the shareholders for any purpose or purposes may be called only by the Board of Directors or the Chairman of the Board (if one be appointed) or the Chief Executive Officer. III. DIRECTORS 3.1 The number of directors of the Corporation and the manner in which such directors are to be elected shall be as set forth in the Bylaws. 3.2 Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of shareholders following the adoption and filing of these Articles of Incorporation, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of shareholders following the 2 3 adoption and filing of these Amended and Restated Articles of Incorporation, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of shareholders following the adoption and filing of these Amended and Restated Articles of Incorporation, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of shareholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. Neither the Board of Directors nor any individual director may be removed without cause. Subject to any limitation imposed by law, any individual director or directors may be removed with cause by the holders of a majority of the voting power of the corporation entitled to vote at an election of directors. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3.3 In furtherance and not in limitation of the powers conferred by statute, the Board of Directors shall have the power to make, adopt, amend or repeal the Bylaws, or adopt new Bylaws for this Corporation, by a resolution adopted by a majority of the directors. 3.4 Vacancies in the Board of Directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. IV. SHAREHOLDER RIGHTS 4.1 No shareholder of this Corporation shall have, solely by reason of being a shareholder, any preemptive or preferential right or subscription right to any stock of this Corporation or to any obligations convertible into stock of this Corporation, or to any warrant or option for the purchase thereof, except to the extent provided by resolution or resolutions of the Board of Directors establishing a series of Preferred Stock or by written agreement with this Corporation. 4.2 In any election for directors of the Corporation, a holder of shares of any class or series of stock then entitled to vote has the right to vote in person or by proxy the number of shares of stock held thereby for as many persons as there are directors to be elected. No cumulative voting for directors shall be permitted. 4.3 The approval of any plan of merger, plan of share exchange, sale, lease, exchange or other disposition of all, or substantially all, of the Corporation's property otherwise than in the usual and regular course of business, or proposal to dissolve, shall require the affirmative vote of the holders of not less than a majority of all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors of the Corporation. At any time when the corporation is subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, pursuant to the authority granted under RCW 3 4 23B.10.030, RCW 23B.11.030, RCW 23B.12.020, and RCW 23B.14.020, the vote of shareholders of this Corporation required in order to approve amendments to the Articles of Incorporation, a plan of merger or share exchange, the sale, lease, exchange, or other disposition of all or substantially all of the property of the Corporation not in the usual and regular course of business, or dissolution of the Corporation shall be a majority of all of the votes entitled to be cast by each voting group, regardless of whether or not the corporation is a "public company," as that term is defined in Section 23B.01.400 of the Act. V. INDEMNIFICATION AND LIABILITY OF OFFICERS AND DIRECTORS 5.1 The Corporation may indemnify, in the manner and to the full extent permitted by law, any person (or the estate of any person) who was or is a party to, or is threatened to be made a party to any threatened, pending or complete action, suit or proceeding, whether or not by or in the right of the Corporation, and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise. The Corporation may, to the full extent permitted by law, purchase and maintain insurance on behalf of any such person against any liability which may be asserted against such person. To the full extent permitted by law, the indemnification provided herein shall include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, and, in the manner provided by law, any such expenses may be paid by the corporation in advance of the final disposition of such action, suit or proceeding. The indemnification provided herein shall not be deemed to limit the right of the Corporation to indemnify any other person for any such expenses to the full extent permitted by law, nor shall it be deemed exclusive of any other rights to which any person seeking indemnification from the Corporation may be entitled under any agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 5.2 No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for his conduct as a director, except for (i) acts or omissions that involve intentional misconduct or a knowing violation of law by the director, (ii) approval of distributions or loans in violation of RCW 23B.08.310, or (iii) any transaction from which the director will personally receive a benefit in money, property or services to which the director is not legally entitled. If the Act is hereafter amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Act, as so amended. Any amendment to or repeal of this Article shall not adversely affect any right or protection of a director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. 4 5 VI. OTHER MATTERS 6.1 Except as otherwise provided in these Articles, as amended from time to time, the Corporation reserves the right to amend, alter, change or repeal any provisions contained in these Articles in any manner now or hereafter prescribed or permitted by statute. 6.2 The Corporation shall have authority to correct clerical errors in any documents filed with the Secretary of State of Washington, including these Articles or any amendments hereto, without the necessity of special shareholder approval of such corrections. The undersigned has signed these Amended and Restated Articles of Incorporation on _______ ___, 1999. INTERNAP NETWORK SERVICES CORPORATION ------------------------------------------ Paul E. McBride Secretary 5 6 CERTIFICATE The undersigned, as Secretary of InterNAP Network Services Corporation, hereby certifies that the accompanying Amended and Restated Articles of Incorporation were adopted by the Board of Directors on July 22, 1999 and by the shareholders on _______ ___, 1999. Dated: _______ ___, 1999 INTERNAP NETWORK SERVICES CORPORATION ------------------------------------------ Paul E. McBride Secretary EX-3.3 4 BYLAWS OF INTERNAP, AS CURRENTLY IN EFFECT 1 EXHIBIT 3.3 BYLAWS OF INTERNAP NETWORK SERVICES CORPORATION Originally adopted on October 27, 1997. Amended January 19, 1999 Amendments are listed on page i 2 BYLAWS OF INTERNAP NETWORK SERVICES CORPORATION ARTICLE I OFFICES The principal office and place of business of the corporation in the state of Washington shall be located at 2001 Sixth Avenue, Suite 800, Seattle, Washington 98121. The corporation may have such other offices within or without the state of Washington as the board of directors may designate or the business of the corporation may require from time to time. ARTICLE II NUMBER OF DIRECTORS The board of directors of this corporation shall consist of seven (7) directors, or such other number as shall be set from time to time by resolution of the Board of Directors. ARTICLE III SHAREHOLDERS SECTION 3.1 ANNUAL MEETING. The annual meeting of the shareholders shall be held on the second Tuesday in the month of February in each year, beginning with the year 1997, at 10:00 a.m., or at such other date or time as may be determined by the board of directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday in the state of Washington, the meeting shall be held on the next succeeding business day. If the election of directors is not held on the day designated herein for any annual meeting of the shareholders or at any adjournment thereof, the board of directors shall cause the election to be held at a meeting of the shareholders as soon thereafter as may be convenient. SECTION 3.2 SPECIAL MEETINGS. Special meetings of the shareholders for any purpose or purposes unless otherwise prescribed by statute may be called by the president, by the board of directors, or by the written request of any director or holders of at least ten percent (10%) of the votes entitled to be cast on each issue to be considered at the special meeting. SECTION 3.3 PLACE OF MEETINGS. Meetings of the shareholders shall be held at either the principal office of the corporation or at such other place within or without the state of Washington as the board of directors or the president may designate. 3 SECTION 3.4 FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors may fix in advance a date as the record date for any such determination of shareholders, which date in any case shall not be more than seventy (70) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend or distribution, the day before the first notice of a meeting is dispatched to shareholders or the date on which the resolution of the board of directors authorizing such dividend or distribution is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to notice of or to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof unless the board of directors fixes a new record date, which it must do if the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting. SECTION 3.5 VOTING LISTS. At least ten (10) days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the corporation shall prepare an alphabetical list of all its shareholders on the record date who are entitled to vote at the meeting or any adjournment thereof, arranged by voting group, and within each voting group by class or series of shares, with the address of and the number of shares held by each, which record for a period of ten (10) days prior to the meeting shall be kept on file at the principal office of the corporation or at a place identified in the meeting notice in the city where the meeting will be held. Such record shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder, shareholder's agent or shareholder's attorney at any time during the meeting or any adjournment thereof. Failure to comply with the requirements of this bylaw shall not affect the validity of any action taken at the meeting. SECTION 3.6 NOTICE OF MEETINGS. Written or printed notice stating the date, time and place of a meeting of shareholders and, in the case of a special meeting of shareholders, the purpose or purposes for which the meeting is called, shall be given by or at the direction of the president, the secretary, or the officer or persons calling the meeting to each shareholder of record entitled to vote at such meeting (unless required by law to send notice to all shareholders regardless of whether or not such shareholders are entitled to vote), not less than ten (10) days and not more than sixty (60) days before the meeting, except that notice of a meeting to act on an amendment to the articles of incorporation, a plan of merger or share exchange, a proposed sale, lease, exchange or other disposition of all or substantially all of the assets of the corporation other than in the usual course of business, or the dissolution of the corporation shall be given not less than twenty (20) days and not more than sixty (60) days before the meeting. Written notice may be transmitted by: Mail, private carrier or personal delivery; telegraph or teletype; or telephone, wire or wireless equipment which transmits a facsimile of the notice. Such notice shall be effective upon dispatch if sent to the shareholder's address, telephone number, or other number appearing on the records of the corporation. 2. 4 If an annual or special shareholders' meeting is adjourned to a different date, time or place, notice need not be given of the new date, time or place if the new date, time or place is announced at the meeting before adjournment unless a new record date is or must be fixed. If a new record date for the adjourned meeting is or must be fixed, however, notice of the adjourned meeting must be given to persons who are shareholders as of the new record date. SECTION 3.7 WAIVER OF NOTICE. A shareholder may waive any notice required to be given under the provisions of these bylaws, the articles of incorporation or by applicable law, whether before or after the date and time stated therein. A valid waiver is created by any of the following three methods: (a) in writing signed by the shareholder entitled to the notice and delivered to the corporation for inclusion in its corporate records; (b) by attendance at the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; or (c) by failure to object at the time of presentation of a matter not within the purpose or purposes described in the meeting notice. SECTION 3.8 MANNER OF ACTING; PROXIES. A shareholder may vote either in person or by proxy. A shareholder may vote by proxy by means of a proxy appointment form which is executed in writing by the shareholder, his agent, or by his duly authorized attorney-in-fact. All proxy appointment forms shall be filed with the secretary of the corporation before or at the commencement of meetings. No unrevoked proxy appointment form shall be valid after eleven (11) months from the date of its execution unless otherwise expressly provided in the appointment form. No proxy appointment may be effectively revoked until notice in writing of such revocation has been given to the secretary of the corporation by the shareholder appointing the proxy. SECTION 3.9 PARTICIPATION BY CONFERENCE TELEPHONE. At the discretion of the board of directors, shareholders or proxies may participate in a meeting of the shareholders by any means of communication by which all persons participating in the meeting can hear each other during the meeting, and participation by such means shall constitute presence in person at the meeting. SECTION 3.10 QUORUM. At any meeting of the shareholders, a majority in interest of all the shares entitled to vote on a matter, represented by shareholders of record, shall constitute a quorum of that voting group for action on that matter. Once a share is represented at a meeting, other than to object to holding the meeting or transacting business, it is deemed to be present for purposes of a quorum for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be fixed for the adjourned meeting. At such reconvened meeting, any business may be transacted which might have been transacted at the adjourned meeting. If a quorum exists, action on a matter is approved by a voting group if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the question is one upon which a different vote is required by express provision of law or of the articles of incorporation or of these bylaws. SECTION 3.11 VOTING OF SHARES. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except as may be otherwise provided in the articles of incorporation. 3. 5 SECTION 3.12 VOTING FOR DIRECTORS. Unless otherwise provided in the articles of incorporation, shareholders entitled to vote at any election of directors are entitled to cumulate votes by multiplying the number of votes they are entitled to cast by the number of directors for whom they are entitled to vote and to cast the product for a single candidate or distribute the product among two or more candidates. Unless otherwise provided in the articles of incorporation, in any election of directors the candidates elected are those receiving the largest numbers of votes cast by the shares entitled to vote in the election, up to the number of directors to be elected by such shares. SECTION 3.13 VOTING OF SHARES BY CERTAIN HOLDERS. 3.13.1 Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the board of directors of such corporation may determine. A certified copy of a resolution adopted by such directors shall be conclusive as to their determination. 3.13.2 Shares held by a personal representative, administrator, executor, guardian or conservator may be voted by such administrator, executor, guardian or conservator, without a transfer of such shares into the name of such personal representative, administrator, executor, guardian or conservator. Shares standing in the name of a trustee may be voted by such trustee, but no trustee shall be entitled to vote shares held in trust without a transfer of such shares into the name of the trustee. 3.13.3 Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by the receiver without the transfer thereof into his name if authority so to do is contained in an appropriate order of the court by which such receiver was appointed. 3.13.4 If shares are held jointly by three or more fiduciaries, the will of the majority of the fiduciaries shall control the manner of voting or appointment of a proxy, unless the instrument or order appointing such fiduciaries otherwise directs. 3.13.5 Unless the pledge agreement expressly provides otherwise, a shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. 3.13.6 Shares held by another corporation shall not be voted at any meeting or counted in determining the total number of outstanding shares entitled to vote at any given time if a majority of the shares entitled to vote for the election of directors of such other corporation is held by this corporation. 3.13.7 On and after the date on which written notice of redemption of redeemable shares has been dispatched to the holders thereof and a sum sufficient to redeem such shares has been deposited with a bank or trust company with irrevocable instruction and authority to pay the redemption price to the holders thereof upon surrender of certificates therefor, such shares shall not be entitled to vote on any matter and shall be deemed to be not outstanding shares. 4. 6 SECTION 3.14 ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action which may or is required to be taken at a meeting of the shareholders may be taken without a meeting if one or more written consents setting forth the action so taken shall be signed, either before or after the action taken, by all the shareholders entitled to vote with respect to the subject matter thereof. Action taken by written consent of the shareholders is effective when all consents are in possession of the corporation, unless the consent specifies a later effective date. Whenever any notice is required to be given to any shareholder of the corporation pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to notice, shall be deemed equivalent to the giving of notice. ARTICLE IV BOARD OF DIRECTORS SECTION 4.1 GENERAL POWERS. The business and affairs of the corporation shall be managed by its board of directors. SECTION 4.2 NUMBER, TENURE AND QUALIFICATION. The number of directors set forth in Article II of these bylaws may be increased or decreased from time to time by amendment to or in the manner provided in these bylaws. No decrease, however, shall have the effect of shortening the term of any incumbent director unless such director resigns or is removed in accordance with the provisions of these bylaws. Except as classification of directors may be specified by the articles of incorporation and unless removed in accordance with these bylaws, each director shall hold office until the next annual meeting of the shareholders and until a successor shall have been elected and qualified. Directors need not be residents of the state of Washington or shareholders of the corporation. SECTION 4.3 ANNUAL AND OTHER REGULAR MEETINGS. An annual meeting of the board of directors shall be held without other notice than this bylaw, immediately after and at the same place as the annual meeting of shareholders. The board of directors may specify by resolution the time and place, either within or without the state of Washington, for holding any other regular meetings of the board of directors. SECTION 4.4 SPECIAL MEETINGS. Special meetings of the board of directors may be called by the board of directors, the chairman of the board, the president, the secretary or any director. Notice of special meetings of the board of directors stating the date, time and place thereof shall be given at least two (2) days prior to the date set for such meeting by the person or persons authorized to call such meeting, or by the secretary at the direction of the person or persons authorized to call such meeting. The notice may be oral or written. Oral notice may be communicated in person or by telephone, wire or wireless equipment, which does not transmit a facsimile of the notice. Oral notice is effective when communicated. Written notice may be transmitted by mail, private carrier, or personal delivery; telegraph or teletype; or telephone, wire, or wireless equipment which transmits a facsimile of the notice. Written notice is effective upon dispatch if such notice is sent to the director's address, telephone number, or other number appearing on the records of the corporation. If no place for such meeting is designated in the notice thereof, the meeting shall be held at the principal office of the corporation. Any director may waive notice of any meeting at any time. Whenever any notice is required to be given to 5. 7 any director of the corporation pursuant to applicable law, a waiver thereof in writing signed by the director, entitled to notice, shall be deemed equivalent to the giving of notice. The attendance of a director at a meeting shall constitute a waiver of notice of the meeting except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully convened. Unless otherwise required by law, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. SECTION 4.5 QUORUM. A majority of the number of directors specified in or fixed in accordance with these bylaws shall constitute a quorum for the transaction of any business at any meeting of directors. If less than a majority shall attend a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, and a quorum present at such adjourned meeting may transact business. SECTION 4.6 MANNER OF ACTING. If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board of directors. SECTION 4.7 PARTICIPATION BY CONFERENCE TELEPHONE. Directors may participate in a regular or special meeting of the board by, or conduct the meeting through the use of, any means of communication by which all directors participating can hear each other during the meeting and participation by such means shall constitute presence in person at the meeting. SECTION 4.8 PRESUMPTION OF ASSENT. A director who is present at a meeting of the board of directors at which action is taken shall be presumed to have assented to the action taken unless such director's dissent shall be entered in the minutes of the meeting or unless such director shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 4.9 ACTION BY BOARD WITHOUT A MEETING. Any action permitted or required to be taken at a meeting of the board of directors may be taken without a meeting if one or more written consents setting forth the action so taken, shall be signed, either before or after the action taken, by all the directors. Action taken by written consent is effective when the last director signs the consent, unless the consent specifies a later effective date. SECTION 4.10 BOARD COMMITTEES. The board of directors may by resolution designate from among its members an executive committee and one or more other committees, each of which must have two (2) or more members and shall be governed by the same rules regarding meetings, action without meetings, notice, waiver of notice, and quorum and voting requirements as applied to the board of directors. To the extent provided in such resolutions, each such committee shall have and may exercise the authority of the board of directors, except as limited by applicable law. The designation of any such committee and the delegation thereto of authority shall not relieve the board of directors, or any members thereof, of any responsibility imposed by law. 6. 8 SECTION 4.11 RESIGNATION. Any director may resign at any time by delivering written notice to the chairman of the board, the president, the secretary, or the registered office of the corporation, or by giving oral notice at any meeting of the directors or shareholders. Any such resignation shall take effect at any subsequent time specified therein, or if the time is not specified, upon delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 4.12 REMOVAL. At a meeting of the shareholders called expressly for that purpose, any director or the entire board of directors may be removed from office, with or without cause (unless the articles of incorporation provide that directors may be removed only for cause) by a vote of the holders of a majority of the shares then entitled to vote at an election of the director or directors whose removal is sought. If shareholders have the right to cumulate votes in the election of directors and if less than the entire board is to be removed, no one of the directors may be removed if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire board or the class of directors of which he is a part. If the board of directors or any one or more directors is so removed, new directors may be elected at this same meeting. SECTION 4.13 VACANCIES. A vacancy on the board of directors may occur by the resignation, removal or death of an existing director, or by reason of increasing the number of directors on the board of directors as provided in these bylaws. Except as may be limited by the articles of incorporation, any vacancy occurring in the board of directors may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, except that a vacancy to be filled by reason of an increase in the number of directors shall be filled by the board of directors for a term of office continuing only until the next election of directors by shareholders. If the vacant office was held by a director elected by holders of one or more authorized classes or series of shares, only the holders of those classes or series of shares are entitled to vote to fill the vacancy. SECTION 4.14 COMPENSATION. By resolution of the board of directors, the directors may be paid a fixed sum plus their expenses, if any, for attendance at meetings of the board of directors or committee thereof, or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE V OFFICERS SECTION 5.1 NUMBER. The corporation shall have a president, and may have one or more vice-presidents, a secretary and a treasurer, each of whom shall be appointed by the board of directors. Such other officers and assistant officers, including a chairman of the board, as may be deemed necessary or appropriate may be appointed by the board of directors. By resolution, the board of directors may designate any officer as chief executive officer, chief operating 7. 9 officer, chief financial officer, or any similar designation. Any two or more offices may be held by the same person. SECTION 5.2 APPOINTMENT AND TERM OF OFFICE. The officers of the corporation shall be appointed by the board of directors for such term as the board may deem advisable or may be appointed to serve for an indefinite term at the pleasure of the board. Each officer shall hold office until a successor shall have been appointed regardless of such officer's term of office, except in the event of such officer's termination of an indefinite term at the pleasure of the board or such officer's removal in the manner herein provided. SECTION 5.3 RESIGNATION. Any officer may resign at any time by delivering written notice to the chairman of the board, the president, a vice-president, the secretary or the board of directors, or by giving oral notice at any meeting of the board. Any such resignation shall take effect at any subsequent time specified therein, or if the time is not specified, upon delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 5.4 REMOVAL. Any officer appointed by the board of directors may be removed by the board of directors with or without cause. The removal shall be without prejudice to the contract rights, if any, of the person so removed. Appointment of an officer or agent shall not of itself create contract rights. SECTION 5.5 CHAIRMAN AND VICE-CHAIRMEN OF THE BOARD. The chairman of the board, if there be such an office, shall, if present, preside at all meetings of the board of directors, and exercise and perform such other powers and duties as may be determined from time to time by resolution of the board of directors. The vice-chairman of the board, if there be such an office, or in the event there shall be more than one vice-chairman, the one designated most senior at the time of election, shall perform the duties of the chairman of the board in the chairman's absence, or in the event of the chairman's death, disability or refusal to act. The vice-chairman of the board shall exercise and perform such other powers and duties as may be determined from time to time by resolution of the board of directors. SECTION 5.6 PRESIDENT. The president shall be the principal executive officer of the corporation and, subject to the control of the board of directors, shall generally supervise and control the business and affairs of the corporation. When present the president shall preside at all meetings of the shareholders and in the absence of the chairman or vice-chairman of the board, or if there be none, at all meetings of the board of directors. The president may sign with the secretary or any other proper officer of the corporation thereunto authorized by law, certificates for shares of the corporation, and may sign deeds, mortgages, bonds, contracts, or other instruments which the board of directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors or by these bylaws to some other officer or agent of the corporation or shall be required by law to be otherwise signed or executed. In general, the president shall perform all duties incident to office of and such other duties as may be prescribed by resolution of the board of directors from time to time. 8. 10 SECTION 5.7 VICE-PRESIDENTS. In the absence of the president or in the event of his death, disability or refusal to act, the vice-president, or in the event there shall be more than one vice-president, the vice-presidents in the order designated at the time of their election, or in the absence of any designation then in the order of their election, if any, shall perform the duties of the president. When so acting the vice-president shall have all the powers of and be subject to all the restrictions upon the president and shall perform such other duties as from time to time may be assigned to the vice-president by resolution of the board of directors. SECTION 5.8 SECRETARY. The secretary shall keep the minutes of the proceedings of the shareholders and board of directors, shall give notices in accordance with the provisions of these bylaws and as required by law, shall be custodian of the corporate records of the corporation, shall keep a record of the names and addresses of all shareholders and the number and class of shares held by each, have general charge of the stock transfer books of the corporation, may sign with the president, or a vice-president, certificates for shares of the corporation, deeds, mortgages, bonds, contracts, or other instruments which shall have been authorized by resolution of the board of directors, and in general shall perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to the secretary by resolution of the board of directors. SECTION 5.9 TREASURER. If required by the board of directors, the treasurer shall give a bond for the faithful discharge of his duties, in such sum and with such surety or sureties as the board of directors shall determine. The treasurer shall have charge and custody of and be responsible for keeping correct and complete books and records of account, for all funds and securities of the corporation, receive and give receipts for moneys due and payable to the corporation from any source whatsoever, deposit all such moneys in the name of the corporation in the banks, trust companies or other depositories as shall be selected in accordance with the provisions of these bylaws, and in general perform all of the duties incident to the office of treasurer and such other duties as from time to time may be assigned to the treasurer by resolution of the board of directors. SECTION 5.10 ASSISTANT OFFICERS. The assistant officers in general shall perform such duties as are customary or as shall be assigned to them by resolution of the board of directors. If required by the board of directors, the assistant treasurers shall respectively give bonds for the faithful discharge of their duties in such sums and with such sureties as the board of directors shall determine. SECTION 5.11 COMPENSATION OF OFFICERS AND EMPLOYEES. The board of directors shall fix compensation of officers and may fix compensation of other employees from time to time. No officer shall be prevented from receiving a salary by reason of the fact that such officer is also a director of the corporation. In the event any salary payment, or portion thereof, to an officer or other employee is not allowable as a deduction for employee compensation under Section 162(a)(1) of the Internal Revenue Code of 1986, as may be amended from time to time, on the grounds such payment was unreasonable in amount, then such officer or employee shall promptly repay the amount disallowed as a deduction to the corporation. 9. 11 ARTICLE VI CONTRACTS, LOANS, CHECKS, DEPOSITS SECTION 6.1 CONTRACTS. The board of directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and that authority may be general or confined to specific instances. SECTION 6.2 LOANS. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors, which authority may be general. SECTION 6.3 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by the officer or officers, or agent or agents, of the corporation and in the manner as shall from time to time be prescribed by resolution of the board of directors. SECTION 6.4 DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in the banks, trust companies or other depositories as the board of directors may select. SECTION 6.5 CONTRACTS WITH OR LOANS TO DIRECTORS AND OFFICERS. The corporation may enter into contracts and otherwise transact business as vendor, purchaser, or otherwise, with its directors, officers, and shareholders and with corporations, associations, firms, and entities in which they are or may become interested as directors, officers, shareholders, members, or otherwise, as freely as though such interest did not exist, as permitted by applicable law. In the absence of fraud the fact that any director, officer, shareholder, or any corporation, association, firm or other entity of which any director, officer, or shareholder is interested, is in any way interested in any transaction or contract shall not make the transaction or contract void or voidable, or require the director, officer, or shareholder to account to this corporation for any profits therefrom if the transaction or contract is or shall be authorized, ratified, or approved by (a) vote of a majority of a quorum of the board of directors excluding any interested director or directors, (b) the written consent of the holders of a majority of the shares entitled to vote, or (c) a general resolution approving the acts of the directors and officers adopted at a shareholders meeting by vote of the holders of the majority of the shares entitled to vote. Nothing herein contained shall create or imply any liability in the circumstances above described or prevent the authorization, ratification or approval of such transactions or contracts in any other manner. ARTICLE VII SHARES SECTION 7.1 CERTIFICATES FOR SHARES. The shares of the corporation may be represented by certificates in such form as prescribed by the board of directors. Signatures of the corporate officers on the certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent, or registered by a registrar, other than the corporation itself or an 10. 12 employee of the corporation. All certificates shall be consecutively numbered or otherwise identified. All certificates shall bear such legend or legends as prescribed by the board of directors or these bylaws. SECTION 7.2 ISSUANCE OF SHARES. Shares of the corporation shall be issued only when authorized by the board of directors, which authorization shall include the consideration to be received for each share. SECTION 7.3 BENEFICIAL OWNERSHIP. Except as otherwise permitted by these bylaws, the person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. The board of directors may adopt by resolution a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. Upon receipt by the corporation of a certification complying with such procedure, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification. SECTION 7.4 TRANSFER OF SHARES. Transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by his legal representative who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the secretary of the corporation, on surrender for cancellation of the certificate for the shares. All certificates surrendered to the corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled. SECTION 7.5 LOST OR DESTROYED CERTIFICATES. In the case of a lost, destroyed or mutilated certificate, a new certificate may be issued therefor upon such terms and indemnity to the corporation as the board of directors may prescribe. SECTION 7.6 RESTRICTIONS ON TRANSFER. Except to the extent that the corporation has obtained an opinion of counsel acceptable to the corporation that transfer restrictions are not required under applicable securities laws, all certificates representing shares of the corporation shall bear a legend on the face of the certificate or on the reverse of the certificate if a reference to the legend is contained on the face, to the effect as follows: These securities are not registered under state or federal securities laws and may not be offered, sold, pledged or otherwise transferred, nor may these securities be transferred on the books of the company, without an opinion of counsel or other assurance satisfactory to the company that no violation of such registration provisions would result therefrom. SECTION 7.7 STOCK TRANSFER RECORDS. The stock transfer books shall be kept at the principal office of the corporation or at the office of the corporation's transfer agent or registrar. The name and address of the person to whom the shares represented by any certificate, together with the class, number of shares and date of issue, shall be entered on the stock transfer books of the corporation. Except as provided in these bylaws, the person in whose name shares stand on 11. 13 the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. ARTICLE VIII SEAL This corporation need not have a corporate seal. If the directors adopt a corporate seal, the seal of the corporation shall be circular in form and consist of the name of the corporation, the state and year of incorporation, and the words "Corporate Seal." ARTICLE IX INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS SECTION 9.1 POWER TO INDEMNIFY. The corporation shall have the following powers: 9.1.1 POWER TO INDEMNIFY. The corporation may indemnify and hold harmless to the full extent permitted by applicable law each person who was or is made a party to or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any actual or threatened action, suit or other proceeding, whether civil, criminal, administrative or investigative, by reason of that fact that he or she is or was a director, officer, employee or agent of the corporation or, being or having been such a director, officer, employee or agent, he or she is or was serving at the request of the corporation as a director, officer, employee, agent, trustee, or in any other capacity of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action or omission in an official capacity or in any other capacity while serving as a director, officer, employee, agent, trustee or in any other capacity, against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) actually or reasonably incurred or suffered by such person in connection therewith. Such indemnification may continue as to a person who has ceased to be a director, officer, employee or agent of the corporation and shall inure to the benefit of his or her heirs and personal representatives. 9.1.2 POWER TO PAY EXPENSES IN ADVANCE OF FINAL DISPOSITION. The corporation may pay expenses incurred in defending any such proceeding in advance of the final disposition of any such proceeding; provided, however, that the payment of such expenses in advance of the final disposition of a proceeding shall be made to or on behalf of a director, officer, employee or agent only upon delivery to the corporation of an undertaking, by or on behalf of such director, officer, employee or agent, to repay all amounts so advanced if it shall ultimately be determined that such director, officer, employee or agent is not entitled to be indemnified under this Article or otherwise, which undertaking may be unsecured and may be accepted without reference to financial ability to make repayment. 9.1.3 POWER TO ENTER INTO CONTRACTS. The corporation may enter into contracts with any person who is or was a director, officer, employee and agent of the corporation in furtherance of the provisions of this Article and may create a trust fund, grant a 12. 14 security interest in property of the corporation, or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article. 9.1.4 EXPANSION OF POWERS. If the Washington Business Corporation Act is amended in the future to expand or increase the power of the corporation to indemnify, to pay expenses in advance of final disposition, to enter into contracts, or to expand or increase any similar or related power, then, without any further requirement of action by the shareholders or directors of this corporation, the powers described in this Article shall be expanded and increased to the fullest extent permitted by the Washington Business Corporation Act, as so amended. 9.1.5 LIMITATION ON POWERS. No indemnification shall be provided under this Article to any such person if the corporation is prohibited by the nonexclusive provisions of the Washington Business Corporation Act or other applicable law as then in effect from paying such indemnification. For example, no indemnification shall be provided to any director in respect of any proceeding, whether or not involving action in his or her official capacity, in which he or she shall have been finally adjudged to be liable on the basis of intentional misconduct or knowing violation of law by the director, or from conduct of the director in violation of RCW 23B.08.310, or that the director personally received a benefit in money, property or services to which the director was not legally entitled. SECTION 9.2 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. 9.2.1 DIRECTORS. The corporation shall indemnify and hold harmless any person who is or was a director of this corporation, and pay expenses in advance of final disposition of a proceeding, to the full extent to which the corporation is empowered. 9.2.2 OFFICERS, EMPLOYEES, AND AGENTS. The corporation may, by action of its Board of Directors from time to time, indemnify and hold harmless any person who is or was an officer, employee or agent of the corporation, and pay expenses in advance of final disposition of a proceeding, to the full extent to which the corporation is empowered, or to any lesser extent which the Board of Directors may determine. 9.2.3 CHARACTER OF RIGHTS. The rights to indemnification and payment of expenses in advance of final disposition of a proceeding conferred by or pursuant to this Article shall be contract rights. 9.2.4 ENFORCEMENT. A director, officer, employee or agent ("claimant") shall be presumed to be entitled to indemnification and/or payment of expenses under this Article upon submission of a written claim (and, in an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition, where the undertaking in subsection 9.1.2 above has been delivered to the corporation) and thereafter the corporation shall have the burden of proof to overcome the presumption that the claimant is so entitled. If a claim under this Article is not paid in full by the corporation within sixty (60) days after a written claim has been received by the corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty (20) days, the claimant may at any time thereafter bring suit 13. 15 against the corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the corporation (including its board of directors, its shareholders or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances nor an actual determination by the corporation (including its board of directors, its shareholders or independent legal counsel) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses shall be a defense to the action or create a presumption that the claimant is not so entitled. 9.2.5 RIGHTS NOT EXCLUSIVE. The right to indemnification and payment of expenses in advance of final disposition of a proceeding conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the articles of incorporation, bylaws, agreement, vote of shareholders or disinterested directors or otherwise. SECTION 9.3 INSURANCE. The corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee, agent or trustee of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act. SECTION 9.4 SURVIVAL OF BENEFITS. Any repeal or modification of this Article shall not adversely affect any right of any person existing at the time of such repeal or modification. SECTION 9.5 SEVERABILITY. If any provision of this Article or any application thereof shall be invalid, unenforceable or contrary to applicable law, the remainder of this Article, or the application of such provision to persons or circumstances other than those as to which it is held invalid, unenforceable or contrary to applicable law, shall not be affected thereby and shall continue in full force and effect. SECTION 9.6 APPLICABLE LAW. For purposes of this Article, "applicable law" shall at all times be construed as the applicable law in effect at the date indemnification may be sought, or the law in effect at the date of the action, omission or other event giving rise to the situation for which indemnification may be sought, whichever is selected by the person seeking indemnification. As of the date hereof, applicable law shall include RCW 23B.08.500 through .600, as amended. ARTICLE X BOOKS AND RECORDS The corporation shall keep correct and complete books and records of account, stock transfer books, minutes of the proceedings of its shareholders and the board of directors and such other records as may be necessary or advisable. 14. 16 ARTICLE XI FISCAL YEAR The fiscal year of the corporation shall be determined by resolution adopted by the board of directors. In the absence of such a resolution, the fiscal year shall be the calendar year. ARTICLE XII VOTING OF SHARES OF ANOTHER CORPORATION Shares of another corporation held by this corporation may be voted by the president or vice-president, or by proxy appointment form executed by either of them, unless the directors by resolution shall designate some other person to vote the shares. ARTICLE XIII AMENDMENTS TO BYLAWS These bylaws may be altered, amended or repealed, and new bylaws may be adopted, by the board of directors or by the shareholders. The undersigned, being the secretary of the corporation, hereby certifies that these bylaws are the bylaws of InterNAP Network Services Corporation, adopted by resolution of the directors on October 27, 1997 and amended on January 19, 1999. DATED this 19th day of January, 1999. /s/ PAUL E. McBRIDE --------------------------------------- Paul E. McBride Secretary 15. 17 AMENDMENTS
ARTICLE/SECTION EFFECT OF AMENDMENT DATE OF AMENDMENT - --------------- ------------------- ----------------- XIV, Right of First Refusal Deleted in its entirety January 19, 1999
i. 18 TABLE OF CONTENTS
PAGE ARTICLE I OFFICES....................................................................1 ARTICLE II NUMBER OF DIRECTORS........................................................1 ARTICLE III SHAREHOLDERS...............................................................1 Section 3.1 Annual Meeting.........................................................1 Section 3.2 Special Meetings.......................................................1 Section 3.3 Place of Meetings......................................................1 Section 3.4 Fixing of Record Date..................................................2 Section 3.5 Voting Lists...........................................................2 Section 3.6 Notice of Meetings.....................................................2 Section 3.7 Waiver of Notice.......................................................3 Section 3.8 Manner of Acting; Proxies..............................................3 Section 3.9 Participation by Conference Telephone..................................3 Section 3.10 Quorum.................................................................3 Section 3.11 Voting of Shares.......................................................3 Section 3.12 Voting for Directors...................................................4 Section 3.13 Voting of Shares by Certain Holders....................................4 Section 3.14 Action by Shareholders Without a Meeting...............................5 ARTICLE IV BOARD OF DIRECTORS.........................................................5 Section 4.1 General Powers.........................................................5 Section 4.2 Number, Tenure and Qualification.......................................5 Section 4.3 Annual and Other Regular Meetings......................................5 Section 4.4 Special Meetings.......................................................5 Section 4.5 Quorum.................................................................6 Section 4.6 Manner of Acting.......................................................6 Section 4.7 Participation by Conference Telephone..................................6 Section 4.8 Presumption of Assent..................................................6 Section 4.9 Action by Board Without a Meeting......................................6 Section 4.10 Board Committees.......................................................6 Section 4.11 Resignation............................................................7 Section 4.12 Removal................................................................7
ii. 19 TABLE OF CONTENTS (CONTINUED)
PAGE Section 4.13 Vacancies..............................................................7 Section 4.14 Compensation...........................................................7 ARTICLE V OFFICERS...................................................................7 Section 5.1 Number.................................................................7 Section 5.2 Appointment and Term of Office.........................................8 Section 5.3 Resignation............................................................8 Section 5.4 Removal................................................................8 Section 5.5 Chairman and Vice-Chairmen of the Board................................8 Section 5.6 President..............................................................8 Section 5.7 Vice-Presidents........................................................9 Section 5.8 Secretary..............................................................9 Section 5.9 Treasurer..............................................................9 Section 5.10 Assistant Officers.....................................................9 Section 5.11 Compensation of Officers and Employees.................................9 ARTICLE VI CONTRACTS, LOANS, CHECKS, DEPOSITS........................................10 Section 6.1 Contracts.............................................................10 Section 6.2 Loans.................................................................10 Section 6.3 Checks, Drafts, Etc...................................................10 Section 6.4 Deposits..............................................................10 Section 6.5 Contracts with or Loans to Directors and Officers.....................10 ARTICLE VII SHARES....................................................................10 Section 7.1 Certificates for Shares...............................................10 Section 7.2 Issuance of Shares....................................................11 Section 7.3 Beneficial Ownership..................................................11 Section 7.4 Transfer of Shares....................................................11 Section 7.5 Lost or Destroyed Certificates........................................11 Section 7.6 Restrictions on Transfer..............................................11 Section 7.7 Stock Transfer Records................................................11 ARTICLE VIII SEAL......................................................................12
iii. 20 TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE IX INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS..............12 Section 9.1 Power to Indemnify....................................................12 Section 9.2 Indemnification of Directors, Officers, Employees and Agents..........13 Section 9.3 Insurance.............................................................14 Section 9.4 Survival of Benefits..................................................14 Section 9.5 Severability..........................................................14 Section 9.6 Applicable Law........................................................14 ARTICLE X BOOKS AND RECORDS.........................................................14 ARTICLE XI FISCAL YEAR...............................................................15 ARTICLE XII VOTING OF SHARES OF ANOTHER CORPORATION...................................15 ARTICLE XIII AMENDMENTS TO BYLAWS......................................................15
iv. EX-3.4 5 FORM OF AMENDED AND RESTATED BYLAWS OF INTERNAP 1 EXHIBIT 3.4 AMENDED AND RESTATED BYLAWS OF INTERNAP NETWORK SERVICES CORPORATION 2
PAGE ---- ARTICLE 1 OFFICES.......................................................................1 1.1 Principal Office..............................................................1 1.2 Registered Office and Registered Agent........................................1 1.3 Other Offices.................................................................1 ARTICLE 2 SHAREHOLDERS..................................................................1 2.1 Annual Meeting................................................................1 2.2 Special Meetings..............................................................2 2.3 Notice of Meetings............................................................2 (a) Notice of Special Meeting..............................................3 (b) Proposed Articles of Amendment or Dissolution..........................3 (c) Proposed Merger, Consolidation, Exchange, Sale, Lease or Disposition............................................................3 (d) Declaration of Mailing.................................................3 (e) Waiver of Notice.......................................................3 2.4 Quorum........................................................................3 2.5 Voting of Shares..............................................................4 2.6 Adjourned Meetings............................................................4 2.7 Record Date...................................................................4 2.8 Record of Shareholders Entitled to Vote.......................................4 2.9 Telephonic Meetings...........................................................5 2.10 Proxies.......................................................................5 2.11 Organization..................................................................5 ARTICLE 3 BOARD OF DIRECTORS............................................................6 3.1 Management Responsibility.....................................................6 3.2 Number of Directors, Qualification............................................6 3.3 Election......................................................................6 3.4 Vacancies.....................................................................6 3.5 Removal.......................................................................6 3.6 Resignation...................................................................6
i. 3 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 3.7 Annual Meeting................................................................7 3.8 Regular Meetings..............................................................7 3.9 Special Meetings..............................................................7 3.10 Notice of Meeting.............................................................7 3.11 Quorum of Directors...........................................................8 3.12 Presumption of Assent.........................................................8 3.13 Action by Directors Without a Meeting.........................................8 3.14 Telephonic Meetings...........................................................8 3.15 Compensation..................................................................8 3.16 Committees....................................................................8 ARTICLE 4 OFFICERS......................................................................9 4.1 Appointment...................................................................9 4.2 Qualification.................................................................9 4.3 Officers Designated...........................................................9 (a) Chief Executive Officer...............................................10 (b) President.............................................................10 (c) Vice Presidents.......................................................10 (d) Secretary.............................................................10 (e) Chief Financial Officer...............................................11 (f) Treasurer.............................................................11 4.4 Delegation...................................................................11 4.5 Resignation..................................................................11 4.6 Removal......................................................................11 4.7 Vacancies....................................................................11 4.8 Compensation.................................................................12 ARTICLE 5 EXECUTION OF CORPORATION INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION...........................................................12 5.1 Execution of Corporate Instruments...........................................12 5.2 Voting of Securities Owned by the Corporation................................12
ii. 4 TABLE OF CONTENTS (CONTINUED)
PAGE ---- ARTICLE 6 STOCK........................................................................12 6.1 Form and Execution of Certificates...........................................12 6.2 Lost Certificates............................................................13 6.3 Transfers....................................................................13 6.4 Registered Shareholders......................................................13 6.5 Execution of Other Securities................................................14 ARTICLE 7 BOOKS AND RECORDS............................................................14 7.1 Books of Accounts, Minutes and Share Register................................14 7.2 Copies of Resolutions........................................................15 ARTICLE 8 FISCAL YEAR..................................................................15 ARTICLE 9 CORPORATE SEAL...............................................................15 ARTICLE 10 INDEMNIFICATION..............................................................15 10.1 Right to Indemnification.....................................................15 10.2 Right of Indemnitee to Bring Suit............................................16 10.3 Nonexclusivity of Rights.....................................................16 10.4 Insurance, Contracts and Funding.............................................17 10.5 Indemnification of Employees and Agents of the Corporation...................17 10.6 Persons Serving Other Entities...............................................17 ARTICLE 11 AMENDMENT OF BYLAWS..........................................................17
iii. 5 AMENDED AND RESTATED BYLAWS OF INTERNAP NETWORK SERVICES CORPORATION These AMENDED AND RESTATED BYLAWS are promulgated pursuant to the Washington Business Corporation Act, as set forth in Title 23B of the Revised Code of Washington. ARTICLE 1 OFFICES 1.1 PRINCIPAL OFFICE. The principal office of the Corporation shall be located at the principal place of business or such other place as the Board of Directors may designate. 1.2 REGISTERED OFFICE AND REGISTERED AGENT. The registered office of the Corporation shall be located in the State of Washington at such place as may be fixed from time to time by the Board of Directors upon filing of such notices as may be required by law, and the registered agent shall have a business office identical with such registered office. Any change in the registered agent or registered office shall be effective upon filing such change with the office of the Secretary of State of the State of Washington. 1.3 OTHER OFFICES. The Corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Washington, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE 2 SHAREHOLDERS 2.1 ANNUAL MEETING (a) The annual meeting of the shareholders of the Corporation for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year on a date and at a time and place to be set by the Board of Directors. (b) At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be 1. 6 delivered to or mailed and received at the principal executive offices of the Corporation not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the shareholder to be timely must be so received not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or, in the event public announcement of the date of such annual meeting is first made by the Corporation fewer than seventy (70) days prior to the date of such annual meeting, the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting: (A) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (B) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (C) the class and number of shares of the Corporation which are beneficially owned by the shareholder, (D) any material interest of the shareholder in such business and (E) any other information that is required to be provided by the shareholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a shareholder proposal. Notwithstanding the foregoing, in order to include information with respect to a shareholder proposal in the proxy statement and form of proxy for a shareholders' meeting, shareholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. 2.2 SPECIAL MEETINGS. Special meetings of the shareholders for any purpose or purposes may be called at any time by a majority of the Board of Directors or by the Chairperson of the Board (if one be elected) or by the Chief Executive Officer. The Board of Directors may designate any place as the place of any special meeting called by the Chairperson, the Chief Executive Officer or the Board. 2.3 NOTICE OF MEETINGS. Except as otherwise provided in Subsections 2.3(b) and 2.3(c) below, the Secretary, Assistant Secretary, or any transfer agent of the Corporation shall deliver, either personally or by mail, private carrier, telegraph or teletype, or telephone, wire or wireless equipment which transmits a facsimile of the notice, not less than ten (10) nor more than sixty (60) days before the date of any meeting of shareholders, written notice stating the place, day, and time of the meeting to each shareholder of record entitled to vote at such meeting. If mailed in the United States, such notice shall be deemed to be delivered when deposited in the United States mail, with first-class postage thereon prepaid, addressed to the shareholder at his 2. 7 address as it appears on the Corporation's record of shareholders. If mailed outside the United States, such notice shall be deemed to be delivered five (5) days after being deposited in the mail, with first-class airmail postage thereon, return receipt requested, addressed to the shareholder at the shareholder's address as it appears on the Corporation's record of shareholders. (a) NOTICE OF SPECIAL MEETING. In the case of a special meeting, the written notice shall also state with reasonable clarity the purpose or purposes for which the meeting is called and the actions sought to be approved at the meeting. No business other than that specified in the notice may be transacted at a special meeting. (b) PROPOSED ARTICLES OF AMENDMENT OR DISSOLUTION. If the business to be conducted at any meeting includes any proposed amendment to the Articles of Incorporation or the proposed voluntary dissolution of the Corporation, then the written notice shall be given not less than twenty (20) nor more than sixty (60) days before the meeting date and shall state that the purpose or one of the purposes is to consider the advisability thereof, and, in the case of a proposed amendment, shall be accompanied by a copy of the amendment. (c) PROPOSED MERGER, CONSOLIDATION, EXCHANGE, SALE, LEASE OR DISPOSITION. If the business to be conducted at any meeting includes any proposed plan of merger or share exchange, or any sale, lease, exchange, or other disposition of all or substantially all of the Corporation's property otherwise than in the usual or regular course of its business, then the written notice shall state that the purpose or one of the purposes is to consider the proposed plan of merger or share exchange, sale, lease, or disposition, as the case may be, shall describe the proposed action with reasonable clarity, and, if required by law, shall be accompanied by a copy or a detailed summary thereof; and written notice shall be given to each shareholder of record, whether or not entitled to vote at such meeting, not less than twenty (20) nor more than sixty (60) days before such meeting, in the manner provided in Section 2.3 above. (d) DECLARATION OF MAILING. A declaration of the mailing or other means of giving any notice of any shareholders' meeting, executed by the Secretary, Assistant Secretary, or any transfer agent of the Corporation giving the notice, shall be prima facie evidence of the giving of such notice. (e) WAIVER OF NOTICE. Notice of any shareholders' meeting may be waived in writing by any shareholder at any time, either before or after the meeting. Except as provided below, the waiver must be signed by the shareholder entitled to the notice, and be delivered to the Corporation for inclusion in the minutes or filing with the corporate records. A shareholder's attendance at a meeting waives objection to lack of notice, or defective notice, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. 2.4 QUORUM. A quorum shall exist at any meeting of shareholders if a majority of the shares entitled to vote is represented in person or by proxy. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. The shareholders present at a duly organized meeting may continue to transact business at such meeting and at any adjournment of such meeting (unless a 3. 8 new record date is or must be set for the adjourned meeting), notwithstanding the withdrawal of enough shareholders from either meeting to leave less than a quorum. Once a share is represented for any purpose at a meeting other than solely to object to holding the meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for the adjourned meeting. 2.5 VOTING OF SHARES. Except as otherwise provided in the Articles of Incorporation or these Bylaws, every shareholder of record shall have the right at every shareholders' meeting to one vote for every share standing in his name on the books of the Corporation. If a quorum exists, action on a matter, other than the election of directors, is approved by a voting group if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless a greater number is required by the Articles of Incorporation or the Washington Business Corporation Act. 2.6 ADJOURNED MEETINGS. A majority of the shares represented at a meeting, even if less than a quorum, may adjourn the meeting from time to time without further notice. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is or must be fixed in accordance with the Washington Business Corporation Act, notice of the adjourned meeting must be given to persons who are shareholders as of the new record date. At any adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. 2.7 RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or entitled to receive payment of any dividend, the Board of Directors may fix in advance a record date for any such determination of shareholders, such date to be not more than seventy (70) days and, in the case of a meeting of shareholders, not less than ten (10) days prior to the meeting or action requiring such determination of shareholders. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the day before the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof, unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned more than one hundred twenty (120) days after the date is fixed for the original meeting. 2.8 RECORD OF SHAREHOLDERS ENTITLED TO VOTE. After fixing a record date for a shareholders' meeting, the Corporation shall prepare an alphabetical list of the names of all shareholders on the record date who are entitled to notice of the shareholders' meeting. The list shall be arranged by voting group, and within each voting group by class or series of shares, and show the address of and number of shares held by each shareholder. A shareholder, 4. 9 shareholder's agent, or a shareholder's attorney may inspect the shareholders list, beginning ten days prior to the shareholders' meeting and continuing through the meeting, at the Corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held during regular business hours and at the shareholder's expense. The shareholders list shall be kept open for inspection during such meeting or any adjournment. Failure to comply with the requirements of this section shall not affect the validity of any action taken at such meeting. 2.9 TELEPHONIC MEETINGS. Shareholders may participate in a meeting by means of a conference telephone or other communications equipment by which all persons participating in the meeting can hear each other during the meeting, and participation by such means shall constitute presence in person at a meeting. 2.10 PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall be filed with the secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. 2.11 ORGANIZATION (a) At every meeting of shareholders, the Chairperson of the Board of Directors, or, if a Chairperson has not been appointed or is absent, the Chief Executive Officer, or, if the Chief Executive Officer is absent, a chairman of the meeting chosen by a majority in interest of the shareholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the Chief Executive Officer, shall act as secretary of the meeting. (b) The Board of Directors of the Corporation shall be entitled to make such rules or regulations for the conduct of meetings of shareholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to shareholders of record of the Corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of shareholders shall not be required to be held in accordance with rules of parliamentary procedure. 5. 10 ARTICLE 3 BOARD OF DIRECTORS 3.1 MANAGEMENT RESPONSIBILITY. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors, except as may be otherwise provided in the Articles of Incorporation or the Washington Business Corporation Act. 3.2 NUMBER OF DIRECTORS, QUALIFICATION. The authorized number of directors of the Corporation shall be not less than five (5) nor more than nine (9), the specific number to be set by resolution of the Board of Directors. Directors need not be shareholders. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION. At the first annual meeting of shareholders and at each annual meeting thereafter, the shareholders shall elect directors to hold office at the annual meeting. If, for any reason, the directors shall not have been elected at an annual meeting, they may be elected at a special meeting of shareholders called for that purpose in accordance with these Bylaws. Despite the expiration of a director's term, the director continues to serve until the director's successor shall have been elected and qualified or until there is a decrease in the number of directors. 3.4 VACANCIES. Any vacancy occurring in the Board of Directors (whether caused by resignation, death, an increase in the number of directors, or otherwise) may be filled the Board of Directors or the shareholders if not filled by the Board. If the directors in office constitute fewer than a quorum of the Board, they may fill the vacancy by the affirmative vote of a majority of all the directors in office. A director elected to fill any vacancy shall hold office until the next shareholders meeting at which directors are elected. 3.5 REMOVAL. One or more members of the Board of Directors (including the entire Board) may be removed, with cause, at a meeting of shareholders called expressly for that purpose. A director may be removed only if the number of votes cast to remove the director exceeds the number of votes cast not to remove the director. Neither the Board of Directors nor any individual director may be removed without cause. 3.6 RESIGNATION. Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. 6. 11 3.7 ANNUAL MEETING. The first meeting of each newly elected Board of Directors shall be known as the annual meeting thereof and shall be held without notice immediately after the annual shareholders' meeting or any special shareholders' meeting at which a Board is elected. Said meeting shall be held at the same place as such shareholders' meeting unless some other place shall be specified by resolution of the Board of Directors. 3.8 REGULAR MEETINGS. Regular meetings of the Board of Directors or of any committee designated by the Board may be held at such place and such day and hour as shall from time to time be fixed by resolution of the Board or committee, without other notice than the delivery of such resolution as provided in Section 3.10 below. 3.9 SPECIAL MEETINGS. Special meetings of the Board of Directors or any committee designated by the Board may be called by the Chief Executive Officer or the Chairperson of the Board (if one be elected) or any director or committee member, to be held at such place and such day and hour as specified by the person or persons calling the meeting. 3.10 NOTICE OF MEETING. Notice of the date, time, and place of all special meetings of the Board of Directors or any committee designated by the Board shall be given by the Secretary, or by the person calling the meeting, by mail, private carrier, telegram, facsimile transmission, or personal communication over the telephone or otherwise, provided such notice is received at least two (2) days prior to the day upon which the meeting is to be held. No notice of any regular meeting need be given if the time and place thereof shall have been fixed by resolution of the Board of Directors or any committee designated by the Board and a copy of such resolution has been delivered by mail, private carrier, telegram or facsimile transmission to every director or committee member and is received at least two (2) days before the first meeting held in pursuance thereof. Notice of any meeting of the Board of Directors or any committee designated by the Board need not be given to any director or committee member if it is waived in a writing signed by the director entitled to the notice, whether before or after such meeting is held. A director's attendance at or participation in a meeting waives any required notice to the director of the meeting unless the director at the beginning of the meeting, or promptly upon the director's arrival, objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors or any committee designated by the Board need be specified in the notice or waiver of notice of such meeting unless required by the Articles of Incorporation or these Bylaws. Any meeting of the Board of Directors or any committee designated by the Board shall be a legal meeting without any notice thereof having been given if all of the directors or committee members have received valid notice thereof, are present without objecting, or waive notice thereof in a writing signed by the director and delivered to the Corporation for inclusion in the minutes or filing with the corporate records, or any combination thereof. 7. 12 3.11 QUORUM OF DIRECTORS. A majority of the number of directors fixed by or in the manner provided by these Bylaws shall constitute a quorum for the transaction of business. If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the Board of Directors unless the Articles of Incorporation or these Bylaws require the vote of a greater number of directors. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. If the meeting is adjourned for more than forty-eight (48) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.10 of these Bylaws, to the directors who were not present at the time of the adjournment. 3.12 PRESUMPTION OF ASSENT. Any director who is present at any meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless (a) the director objects at the beginning of the meeting, or promptly upon the director's arrival, to holding the meeting or transacting business at the meeting; (b) the director's dissent or abstention from the action taken is entered in the minutes of the meeting; or (c) the director delivers written notice of dissent or abstention to the presiding officer of the meeting before the adjournment thereof or to the Corporation within a reasonable time after adjournment of the meeting. Such right to dissent or abstain shall not be available to any director who voted in favor of such action. 3.13 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required by law to be taken or which may be taken at a meeting of the Board of Directors or of a committee thereof may be taken without a meeting if one or more written consents, setting forth the action so taken, shall be signed by all of the directors or all of the members of the committee, as the case may be, either before or after the action taken and delivered to the Corporation for inclusion in the minutes or filing with the corporate records. Such consent shall have the same effect as a unanimous vote at a meeting duly held upon proper notice on the date of the last signature thereto, unless the consent specifies a later effective date. 3.14 TELEPHONIC MEETINGS. Members of the Board of Directors or any committee designated by the Board may participate in a meeting of the Board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other during the meeting. Participation by such means shall constitute presence in person at a meeting. 3.15 COMPENSATION. By resolution of the Board of Directors, the directors and committee members may be paid their expenses, if any, or a fixed sum or a stated salary as a director or committee member for attendance at each meeting of the Board or of such committee as the case may be. No such payment shall preclude any director or committee member from serving the Corporation in any other capacity and receiving compensation therefor. 3.16 COMMITTEES. The Board of Directors, by resolution adopted by a majority of the full Board, may from time to time designate from among its members one or more committees, each of which must have two (2) or more members and, to the extent provided in such resolution, 8. 13 shall have and may exercise all the authority of the Board of Directors, except that no such committee shall have the authority to: (a) authorize or approve a distribution except according to a general formula or method prescribed by the Board of Directors; (b) approve or propose to shareholders action that the Washington Business Corporation Act requires to be approved by shareholders; (c) fill vacancies on the Board of Directors or on any of its committees; (d) adopt any amendment to the Articles of Incorporation; (e) adopt, amend or repeal these Bylaws; (f) approve a plan of merger; or (g) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board of Directors may authorize a committee, or a senior executive officer of the Corporation, to do so within limits specifically prescribed by the Board of Directors. Meetings of such committees shall be governed by the same procedures as govern the meetings of the Board of Directors. All committees so appointed shall keep regular minutes of their meetings and shall cause them to be recorded in books kept for that purpose at the office of the Corporation. ARTICLE 4 OFFICERS 4.1 APPOINTMENT. The officers of the Corporation shall be appointed annually by the Board of Directors at its annual meeting held after the annual meeting of the shareholders. If the appointment of officers is not held at such meeting, such appointment shall be held as soon thereafter as a Board meeting conveniently may be held. Except in the case of death, resignation or removal, each officer shall hold office at the pleasure of the Board of Directors until the next annual meeting of the Board and until his successor is appointed and qualified. 4.2 QUALIFICATION. None of the officers of the Corporation need be a director, except as specified below. Any two or more of the corporate offices may be held by the same person. 4.3 OFFICERS DESIGNATED. The officers of the Corporation shall be a Chief Executive Officer, a President, one or more Vice Presidents (the number thereof to be determined by the Board of Directors), a Secretary, a Chief Financial Officer and a Treasurer, each of whom shall be elected by the Board of Directors. Such other officers and assistant officers as may be deemed necessary may be appointed by the Board of Directors. 9. 14 The Board of Directors may, in its discretion, appoint a Chairperson of the Board of Directors; and, if a Chairperson has been appointed, the Chairperson shall, when present, preside at all meetings of the Board of Directors and the shareholders and shall have such other powers commonly incident to his office and as the Board may prescribe. (a) CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be the chief executive officer of the corporation and, subject to the direction and control of the Board, shall supervise and control all of the assets, business, and affairs of the corporation. The Chief Executive Officer shall vote the shares owned by the corporation in other corporations, domestic or foreign, unless otherwise prescribed by resolution of the Board. In general, the Chief Executive Officer shall perform all duties incident to the office of Chief Executive Officer and such other duties as may be prescribed by the Board from time to time. The Chief Executive Officer shall, unless a Chairperson of the Board of Directors has been appointed and is present, preside at all meetings of the shareholders and the Board of Directors. (b) PRESIDENT. The President shall report to the Chief Executive Officer. In the absence of the Chief Executive Officer or his inability to act, the President, if any, shall perform all the duties of the Chief Executive Officer and when so acting shall have all the powers of, and be subject to all the restrictions upon, the Chief Executive Officer; provided that no such President shall assume the authority to preside as Chairperson of meetings of the Board unless such President is a member of the Board. In general, the President shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board from time to time. (c) VICE PRESIDENTS. In the absence of the President or his inability to act, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked a Vice President designated by the Board shall perform all the duties of the President and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President; provided that no such Vice President shall assume the authority to preside as Chairperson of meetings of the Board unless such Vice President is a member of the Board. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be respectively prescribed for them by the Board, these Bylaws or the President. (d) SECRETARY. The Secretary shall attend all meetings of the shareholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the Corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the shareholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties 10. 15 commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (e) CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep or cause to be kept the books of account of the Corporation in a thorough and proper manner and shall render statements of the financial affairs of the Corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the Corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (f) TREASURER. Subject to the direction and control of the Board of Directors, the Treasurer shall have charge and custody of and be responsible for all funds and securities of the Corporation; and, at the expiration of his term of office, he shall turn over to his successor all property of the Corporation in his possession. In the absence of the Treasurer, an Assistant Treasurer may perform the duties of the Treasurer. 4.4 DELEGATION. In case of the absence or inability to act of any officer of the Corporation and of any person herein authorized to act in his place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer or director or other person whom it may select. 4.5 RESIGNATION. Any officer may resign at any time by delivering written notice to the Corporation. Any such resignation shall take effect when the notice is delivered unless the notice specifies a later date. Unless otherwise specified in the notice, acceptance of such resignation by the Corporation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. 4.6 REMOVAL. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board at any time with or without cause. Election or appointment of an officer or agent shall not of itself create contract rights. 4.7 VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, creation of a new office, or any other cause may be filled by the Board of Directors for the unexpired portion of the term or for a new term established by the Board. 11. 16 4.8 COMPENSATION. Compensation, if any, for officers and other agents and employees of the Corporation shall be determined by the Board of Directors, or by the Chief Executive Officer to the extent such authority may be delegated to him by the Board. No officer shall be prevented from receiving compensation in such capacity by reason of the fact that he is also a director of the Corporation. ARTICLE 5 EXECUTION OF CORPORATION INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION 5.1 EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the Corporation any corporate instrument or document, or to sign on behalf of the Corporation the corporate name without limitation, or to enter into contracts on behalf of the Corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the Corporation. All checks and drafts drawn on banks or other depositaries on funds to the credit of the Corporation or in special accounts of the Corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 5.2 VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the Corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairperson of the Board of Directors, the Chief Executive Officer, the President or any Vice President. ARTICLE 6 STOCK 6.1 FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the Corporation shall be in such form as is consistent with the Articles of Incorporation and applicable law. Every holder of stock in the Corporation shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairperson of the Board of Directors, the Chief Executive Officer, the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the Corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed 12. 17 upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the Corporation will furnish without charge to each shareholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the Corporation will furnish without charge to each shareholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. 6.2 LOST CERTIFICATES. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to agree to indemnify the Corporation in such manner as it shall require or to give the Corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. 6.3 TRANSFERS (a) Transfers of record of shares of stock of the Corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (b) The corporation shall have power to enter into and perform any agreement with any number of shareholders of any one or more classes of stock of the Corporation to restrict the transfer of shares of stock of the Corporation of any one or more classes owned by such shareholders in any manner not prohibited by the Act. 6.4 REGISTERED SHAREHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Washington. 13. 18 6.5 EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate securities of the Corporation, other than stock certificates (covered in Section 6.1), may be signed by the Chairperson of the Board of Directors, the Chief Executive Officer, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the Corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the Corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the Corporation. Except as otherwise specifically provided in these Bylaws, no shares of stock shall be transferred on the books of the Corporation until the outstanding certificate therefor has been surrendered to the Corporation. All certificates surrendered to the Corporation for transfer shall be cancelled, and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed, or mutilated certificate a new one may be issued therefor upon such terms (including indemnity to the Corporation) as the Board of Directors may prescribe. ARTICLE 7 BOOKS AND RECORDS 7.1 BOOKS OF ACCOUNTS, MINUTES AND SHARE REGISTER. The corporation shall keep as permanent records minutes of all meetings of its shareholders and Board of Directors, a record of all actions taken by the shareholders or Board of Directors without a meeting, and a record of all actions taken by a committee of the Board of Directors exercising the authority of the Board of Directors on behalf of the Corporation. The corporation shall maintain appropriate accounting records. The corporation or its agent shall maintain a record of its shareholders, in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each. The corporation shall keep a copy of the following records at its principal office: the Articles or Restated Articles of Incorporation and all amendments to them currently in effect; the Bylaws or Restated Bylaws 14. 19 and all amendments to them currently in effect; the minutes of all shareholders' meetings, and records of all actions taken by shareholders without a meeting, for the past three years; its financial statements for the past three years, including balance sheets showing in reasonable detail the financial condition of the Corporation as of the close of each fiscal year, and an income statement showing the results of its operations during each fiscal year prepared on the basis of generally accepted accounting principles or, if not, prepared on a basis explained therein; all written communications to shareholders generally within the past three years; a list of the names and business addresses of its current directors and officers; and its most recent annual report delivered to the Secretary of State of Washington. 7.2 COPIES OF RESOLUTIONS. Any person dealing with the Corporation may rely upon a copy of any of the records of the proceedings, resolutions, or votes of the Board of Directors or shareholders, when certified by the Chief Executive Officer, the President or Secretary. ARTICLE 8 FISCAL YEAR The fiscal year of the Corporation shall be set by resolution of the Board of Directors. ARTICLE 9 CORPORATE SEAL The Board of Directors may adopt a corporate seal for the Corporation which shall have inscribed thereon the name of the Corporation, the year and state of incorporation and the words "corporate seal". ARTICLE 10 INDEMNIFICATION 10.1 RIGHT TO INDEMNIFICATION. Each individual (hereinafter an "indemnitee") who was or is made a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or officer of the Corporation or that, while serving as a director or officer of the Corporation, he or she is or was also serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation or of a foreign or domestic partnership, joint venture, trust, employee benefit plan or other enterprise, whether the basis of the proceeding is alleged action in an official capacity as such a director, officer, employee, partner, trustee, or agent or in any other capacity while serving as such director, officer, employee, partner, trustee, or agent, shall be indemnified and held harmless by the Corporation to the full extent permitted by applicable law as then in effect, against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts to be 15. 20 paid in settlement) incurred or suffered by such indemnitee in connection therewith, and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee, partner, trustee, or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators; provided, however, that no indemnification shall be provided to any such indemnitee if the Corporation is prohibited by the Washington Business Corporation Act or other applicable law as then in effect from paying such indemnification; and provided, further, that except as provided in Section 10.2 of this Article with respect to proceedings seeking to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized or ratified by the Board of Directors. The right to indemnification conferred in this Section 10.1 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any proceeding in advance of its final disposition (hereinafter an "advancement of expenses"). Any advancement of expenses shall be made only upon delivery to the Corporation of a written undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Section 10.1 and upon delivery to the Corporation of a written affirmation (hereinafter an "affirmation") by the indemnitee of his or her good faith belief that such indemnitee has met the standard of conduct necessary for indemnification by the Corporation pursuant to this Article. 10.2 RIGHT OF INDEMNITEE TO BRING SUIT. If a written claim for indemnification under Section 10.1 of this Article is not paid in full by the Corporation within ninety (90) days after the Corporation's receipt thereof, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful, in whole or in part, in any such suit or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expenses of prosecuting or defending such suit. The indemnitee shall be presumed to be entitled to indemnification under this Article upon submission of a written claim (and, in an action brought to enforce a claim for an advancement of expenses, where the required undertaking and affirmation have been tendered to the Corporation) and thereafter the Corporation shall have the burden of proof to overcome the presumption that the indemnitee is so entitled. Neither the failure of the Corporation (including the Board of Directors, independent legal counsel or the shareholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances nor an actual determination by the Corporation (including the Board of Directors, independent legal counsel or the shareholders) that the indemnitee is not entitled to indemnification shall be a defense to the suit or create a presumption that the indemnitee is not so entitled. 10.3 NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the advancement of expenses conferred in this Article X shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation or Bylaws of the Corporation, general or specific action of the Board of Directors, contract or otherwise. 16. 21 10.4 INSURANCE, CONTRACTS AND FUNDING. The corporation may maintain insurance, at its expense, to protect itself and any individual who is or was a director, officer, employee or agent of the Corporation or who, while a director, officer, employee or agent of the Corporation, is or was serving at the request of the Corporation as a agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any expense, liability or loss asserted against or incurred by the individual in that capacity or arising from the individual's status as a director, officer, employee or agent, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act. The corporation may enter into contracts with any director, officer, employee or agent of the Corporation in furtherance of the provisions of this Article and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article. 10.5 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The corporation may, by action of the Board of Directors, grant rights to indemnification and advancement of expenses to employees and agents of the Corporation with the same scope and effect as the provisions of this Article with respect to the indemnification and advancement of expenses of directors and officers of the Corporation or pursuant to rights granted pursuant to, or provided by, the Washington Business Corporation Act or otherwise. 10.6 PERSONS SERVING OTHER ENTITIES. Any individual who is or was a director, officer or employee of the Corporation who, while a director, officer or employee of the Corporation, is or was serving (a) as a director or officer of another foreign or domestic corporation of which a majority of the shares entitled to vote in the election of its directors is held by the Corporation, (b) as a trustee of an employee benefit plan and the duties of the director or officer to the Corporation also impose duties on, or otherwise involve services by, the director or officer to the plan or to participants in or beneficiaries of the plan or (c) in an executive or management capacity in a foreign or domestic partnership, joint venture, trust or other enterprise of which the Corporation or a wholly owned subsidiary of the Corporation is a general partner or has a majority ownership or interest shall be deemed to be so serving at the request of the Corporation and entitled to indemnification and advancement of expenses under this Article. ARTICLE 11 AMENDMENT OF BYLAWS 11.1 These Bylaws may be altered, amended or repealed and new Bylaws may be adopted by the Board, except that the Board may not repeal or amend any Bylaw that the shareholders have expressly provided, in amending or repealing such Bylaw, may not be amended or repealed by the Board. The shareholders may also alter, amend and repeal these Bylaws or adopt new Bylaws. All Bylaws made by the Board may be amended, repealed, altered or modified by the shareholders. 17. 22 The foregoing Amended and Restated Bylaws were read, approved, and duly adopted by the Board of Directors, of InterNAP Network Services Corporation, on the 22nd day of July 1999, and the Secretary of the Corporation was empowered to authenticate such Bylaws by his signature below. ------------------------------------------- Paul E. McBride Secretary 18. EX-4.1 6 SPECIMEN COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 LOGO INTERNAP NETWORK SERVICES CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON CUSIP SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT is the owner of FULLY-PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF INTERNAP NETWORK SERVICES CORPORATION (the "Corporation") 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. This Certificate and the shares represented hereby are subject to all of the terms and conditions contained in the Amended and Restated Articles of Incorporation and the Amended and Restated Bylaws of the Corporation and all amendments thereto to all of which the holder hereof assents. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. Dated: Chief Executive Officer Secretary and Chief Financial Officer COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY (NEW YORK, NY) TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE 2 INTERNAP NETWORK SERVICES 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: TEN COM - TEN ENT - JT TEN - as tenants in common as tenants by the entireties as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT- Custodian (Cust) (Minor) under Uniform Gifts to Minors Act (State) 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 ZIP CODE OF ASSIGNEE) Shares of the common 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 Company with full power of substitution in the premises. Dated NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH 3 MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. EX-10.1 7 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.1 INTERNAP NETWORK SERVICES CORPORATION INDEMNIFICATION AGREEMENT This INDEMNIFICATION AGREEMENT (this "Agreement") dated as of ____________, 1999 is made between INTERNAP NETWORK SERVICES CORPORATION, a Washington corporation (the "Company"), and ________________ ("Indemnitee"). RECITALS WHEREAS, Indemnitee is a director or officer of the Company and in such capacity is performing valuable services for the Company; WHEREAS, the Company and Indemnitee recognize the difficulty in obtaining directors' and officers' liability insurance and the significant cost of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in litigation subjecting directors and officers to expensive litigation risks at the same time that such liability insurance has been severely limited; WHEREAS, the Company has adopted bylaws (the "Bylaws") providing for indemnification of the officers, directors, agents and employees of the Company to the full extent permitted by the Business Corporation Act of Washington (the "Statute"); WHEREAS, the Bylaws and the Statute specifically provide that they are not exclusive, and thereby contemplate that contracts may be entered into between the Company and its directors and officers with respect to indemnification of such directors and officers; and WHEREAS, to induce Indemnitee to serve or continue to serve as a director or officer of the Company, the Company desires to confirm the contract indemnification rights provided in the Bylaws and agrees to provide the Indemnitee with the benefits contemplated by this Agreement. AGREEMENT In consideration of the recitals above, the mutual covenants and agreements herein contained, and Indemnitee's continued service as a director or officer, as the case may be, of the Company after the date hereof, the parties to this Agreement agree as follows: 1. INDEMNIFICATION OF INDEMNITEE 1.1 SCOPE. The Company agrees to hold harmless and indemnify Indemnitee to the full extent provided under the provisions of the Company's Amended and Restated Articles of Incorporation and the Bylaws, and to the full extent permitted by law, notwithstanding that the basis for such indemnification is not specifically enumerated in this Agreement, the Company's Amended and Restated Articles of Incorporation, the Bylaws, any 1. 2 statute or otherwise. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule regarding the right of a Washington corporation to indemnify a member of its board of directors or an officer, such change, to the extent that it would expand Indemnitee's rights hereunder, shall be included within Indemnitee's rights and the Company's obligations hereunder, and, to the extent that it would narrow Indemnitee's rights or the Company's obligations hereunder, shall not affect or limit the scope of this Agreement; provided, however, that in no event shall any part of this Agreement be construed so as to require indemnification when such indemnification is not permitted by then applicable law. 1.2 NONEXCLUSIVITY. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Amended and Restated Articles of Incorporation, the Bylaws, any agreement, any vote of shareholders or disinterested directors, the Statute, or otherwise, whether as to action in Indemnitee's official capacity or otherwise. 1.3 INCLUDED COVERAGE. If Indemnitee was or is made a party, or is threatened to be made a party, to or is otherwise involved (including, without limitation, as a witness) in any Proceeding (as defined below), the Company shall hold harmless and indemnify Indemnitee from and against any and all losses, claims, damages (compensatory, exemplary, punitive or otherwise), liabilities or expenses, including, without limitation, attorneys' fees, costs, judgments, fines, ERISA excise taxes or penalties, witness fees, amounts paid in settlement and other expenses incurred in connection with the investigation, defense, settlement or approval of such Proceeding (collectively, "Damages"). 1.4 DEFINITION OF PROCEEDING. For purposes of this Agreement, "Proceeding" shall mean any completed, actual, pending or threatened action, suit, claim, hearing or proceeding, whether civil, criminal, arbitrative, administrative, investigative or pursuant to any alternative dispute resolution mechanism (including an action by or in the right of the Company) and whether formal or informal, in which Indemnitee is, was or becomes involved by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company or that, being or having been such a director, officer, employee or agent, Indemnitee is or was serving at the request of the Company as a director, officer, employee, trustee or agent of another corporation or of a partnership, joint venture, trust or other enterprise (collectively, a "Related Company"), including service with respect to an employee benefit plan, whether the basis of such proceeding is alleged action (or inaction) by Indemnitee in an official capacity as a director, officer, employee, trustee or agent or in any other capacity while serving as a director, officer, employee, trustee or agent; provided, however, that, except with respect to an Enforcement Action (defined in Section 3.1 below, an action challenging the Company's determination that Indemnitee is not entitled to indemnification pursuant to Section 1.5, and any other action to enforce the provisions of this Agreement, "Proceeding" shall not include any action, suit, claim or proceeding instituted by or at the direction of Indemnitee unless such action, suit, claim or proceeding is or was authorized by the Company's Board of Directors. 1.5 DETERMINATION OF ENTITLEMENT. In the event that a determination of Indemnitee's entitlement to indemnification is required pursuant to Section 23B.08.550 of the 2. 3 Statute or a successor statute or pursuant to other applicable law, the appropriate decision-maker shall make such determination; provided, however, that Indemnitee shall initially be presumed in all cases to be entitled to indemnification, that Indemnitee may establish a conclusive presumption of any fact necessary to such a determination by delivering to the Company a declaration made under penalty of perjury that such fact is true and that, unless the Company shall deliver to Indemnitee written notice of a determination that Indemnitee is not entitled to indemnification within twenty (20) calendar days after the Company's receipt of Indemnitee's initial written request for indemnification, such determination shall conclusively be deemed to have been made in favor of the Company's provision of indemnification, and that the Company hereby agrees not to assert otherwise. 1.6 CONTRIBUTION. If the indemnification provided under Section 1.1 is unavailable by reason of a court decision, based on grounds other than any of those set forth in paragraphs (b) through (d) of Section 4.1, then, in respect of any Proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding), the Company shall contribute to the amount of Damages (including attorneys' fees) actually and reasonably incurred and paid or payable by Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and Indemnitee on the other from the transaction from which such Proceeding arose and (ii) the relative fault of the Company on the one hand and of Indemnitee on the other in connection with the events that resulted in such Damages as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of Indemnitee on the other shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such Damages. The Company agrees that it would not be just and equitable if contribution pursuant to this Section 1.6 were determined by pro rata allocation or any other method of allocation that does not take account of the foregoing equitable considerations. 1.7 SURVIVAL. The indemnification and contribution provided under this Agreement shall apply to any and all Proceedings, notwithstanding that Indemnitee has ceased to serve the Company or a Related Company and shall continue so long as Indemnitee shall be subject to any possible Proceeding, whether civil, criminal or investigative, by reason of the fact that Indemnitee was a director or officer of the Company or serving in any other capacity referred to in Section 1.4 of this Agreement. 2. EXPENSE ADVANCES. 2.1 GENERALLY. The right to indemnification of Damages conferred by Section 1 shall include the right to have the Company pay Indemnitee's expenses in any Proceeding as such expenses are incurred and in advance of such Proceeding's final disposition (such right, an "Expense Advance"). 2.2 CONDITIONS TO EXPENSE ADVANCE. The Company's obligation to provide an Expense Advance is subject to the following conditions: 3. 4 2.2.1 UNDERTAKING. If the Proceeding arose in connection with Indemnitee's service as a director or an officer of the Company (and not in any other capacity in which Indemnitee rendered service, including service to any Related Company), then Indemnitee or Indemnitee's representative shall have executed and delivered to the Company an undertaking, which need not be secured and shall be accepted without reference to Indemnitee's financial ability to make repayment, by or on behalf of Indemnitee to repay all Expense Advances if it shall ultimately be determined by a final, unappealable decision rendered by a court having jurisdiction over the parties that Indemnitee is not entitled to be indemnified under this Agreement or otherwise. 2.2.2 COOPERATION. Indemnitee shall give the Company such information and cooperation as it may reasonably request and as shall be within Indemnitee's legal power to so provide. 2.2.3 AFFIRMATION. Indemnitee shall furnish, upon request by the Company and if required under applicable law, a written affirmation of Indemnitee's good faith belief that any applicable standards of conduct have been met by Indemnitee. 3. PROCEDURES FOR ENFORCEMENT 3.1 ENFORCEMENT. In the event that any claim for indemnification, whether an Expense Advance or otherwise, is made hereunder and is not paid in full within ninety (90) calendar days after written notice of such claim is delivered to the Company, Indemnitee may, but need not, at any time thereafter bring suit against the Company to recover the unpaid amount of the claim (an "Enforcement Action"). It shall be a defense to any action for which a claim for indemnification is made under Section 1 hereof (other than an action brought to enforce a claim for expenses pursuant to Section 2 hereof, provided that the required undertaking has been tendered to the Company) that Indemnitee is not entitled to indemnification because of the limitations set forth in Section 4 hereof. 3.2 PRESUMPTIONS IN ENFORCEMENT ACTION. In any Enforcement Action, the following presumptions (and limitation on presumptions) shall apply: (a) The Company expressly affirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereunder to induce Indemnitee to continue as a director or officer, as the case may be, of the Company; (b) Neither (i) the failure of the Company (including the Company's Board of Directors, independent or special legal counsel or the Company's shareholders) to have made a determination prior to the commencement of the Enforcement Action that indemnification of Indemnitee is proper in the circumstances nor (ii) an actual determination by the Company, its Board of Directors, independent or special legal counsel or shareholders that Indemnitee is not entitled to indemnification shall be a defense to the Enforcement Action or create a presumption that Indemnitee is not entitled to indemnification hereunder; and 4. 5 (c) If Indemnitee is or was serving as a director or officer of a corporation of which a majority of the shares entitled to vote in the election of its directors is held by the Company or as a partner, trustee or otherwise in an executive or management capacity in a partnership, joint venture, trust or other enterprise of which the Company or a wholly owned subsidiary of the Company is a general partner or has a majority ownership, then such corporation, partnership, joint venture, trust or other enterprise shall conclusively be deemed a Related Company and Indemnitee shall conclusively be deemed to be serving such Related Company at the Company's request. 3.3 ATTORNEYS' FEES AND EXPENSES FOR ENFORCEMENT ACTION. In the event Indemnitee is required to bring an Enforcement Action, the Company shall pay all of Indemnitee's fees and expenses in bringing and pursuing the Enforcement Action (including attorneys' fees at any stage, including on appeal); provided, however, that the Company shall not be required to provide such payment for such attorneys' fees or expenses if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such Enforcement Action was not made in good faith. 4. LIMITATIONS ON INDEMNITY; MUTUAL ACKNOWLEDGMENT 4.1 LIMITATION ON INDEMNITY. No indemnity pursuant to this Agreement shall be provided by the Company: (a) On account of any suit in which a final, unappealable judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company in violation of the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended; (b) For Damages that have been paid directly to Indemnitee by an insurance carrier under a policy of insurance maintained by the Company; (c) With respect to remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (d) On account of Indemnitee's conduct which is finally adjudged by a court having jurisdiction in the matter to have been intentional misconduct, a knowing violation of law or the RCW 23B.08.310 or any successor provision of the Statute, or a transaction from which Indemnitee derived an improper personal benefit; (e) If a final decision by a court having jurisdiction in the matter with no further right of appeal shall determine that such indemnification is not lawful (and, in this respect, both the Company and Indemnitee have been advised that the Securities and Exchange Commission (the "SEC") believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication); or 5. 6 (f) In connection with any proceeding (or part thereof) initiated by Indemnitee, or any proceeding by Indemnitee against the Company or its directors, officers, employees or other indemnitees, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the Company, (iii) such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under the Statute, or (iv) the proceeding is initiated pursuant to Section 3.3 hereof. 4.2 PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Damages in connection with a Proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Damages to which Indemnitee is entitled. 4.3 MUTUAL ACKNOWLEDGMENT. The Company and Indemnitee acknowledge that, in certain instances, federal law or public policy may override applicable state law and prohibit the Company from indemnifying Indemnitee under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the SEC has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Furthermore, Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 5. NOTIFICATION AND DEFENSE OF CLAIM. 5.1 NOTIFICATION. Not later than thirty (30) days after receipt by Indemnitee of notice of the commencement of any Proceeding, Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof; but the omission so to notify the Company will not, however, relieve the Company from any liability which it may have to Indemnitee under this Agreement unless and only to the extent that such omission can be shown to have prejudiced the Company's ability to defend the Proceeding. If, at the time of the receipt of a notice of a claim pursuant to Section 5.1, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies. 6. 7 5.2 DEFENSE OF CLAIM. With respect to any such Proceeding as to which Indemnitee notifies the Company of the commencement thereof: (a) The Company may participate therein at its own expense; (b) The Company, jointly with any other indemnifying party similarly notified, may assume the defense thereof, with counsel satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election so to assume the defense thereof, the Company shall not be liable to Indemnitee under this Agreement for any legal or other expenses (other than reasonable costs of investigation) subsequently incurred by Indemnitee in connection with the defense thereof unless (i) the employment of counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company (or any other person or persons included in the joint defense) and Indemnitee in the conduct of the defense of such action, (iii) the Company shall not, in fact, have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the Company's expense, or (iv) the Company is not financially or legally able to perform its indemnification obligations. The Company shall not be entitled to assume the defense of any proceeding brought by or on behalf of the Company or as to which Indemnitee shall have reasonably made the conclusion provided for in (ii) or (iv) above; (c) The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding effected without its written consent; (d) The Company shall not settle any action or claim in any manner that would impose any penalty or limitation on Indemnitee without Indemnitee's written consent; and (e) Neither the Company nor Indemnitee will unreasonably withhold its, his or her consent to any proposed settlement. 6. SEVERABILITY. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or to fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable, as provided in this Section 6. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify or make contribution to Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 7. 8 7. GOVERNING LAW; BINDING EFFECT; AMENDMENT AND TERMINATION. (a) This Agreement shall be interpreted and enforced in accordance with the laws of the State of Washington. (b) This Agreement shall be binding on Indemnitee and on the Company and its successors and assigns (including any transferee of all or substantially all its assets and any successor by merger or otherwise by operation of law), and shall inure to the benefit of Indemnitee and Indemnitee's heirs, personal representatives and assigns and to the benefit of the Company and its successors and assigns. The Company shall not effect any merger, consolidation, sale of all or substantially all of its assets or other reorganization in which it is not the surviving entity, unless the surviving entity agrees in writing to assure all of the Company's obligations under this Agreement. (c) No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 8. ENTIRE AGREEMENT. This Agreement is the entire agreement of the parties regarding its subject matter and supersedes all prior written or oral communications or agreements. 9. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 10. AMENDMENTS; WAIVERS. Neither this Agreement nor any provision may be amended except by written agreement signed by the parties. No waiver of any breach or default shall be considered valid unless in writing, and no such waiver shall be deemed a waiver of any subsequent breach or default. 8. 9 11. NOTICES. All notices, claims and other communications hereunder shall be in writing and made by hand delivery, registered or certified mail (postage prepaid, return receipt requested), facsimile or overnight air courier guaranteeing next-day delivery: (a) If to the Company, to: InterNAP Network Services Corporation 601 Union Street, Suite 1000 Seattle, WA 98101 Attn: Anthony C. Naughtin with a copy to: Cooley Godward LLP 5200 Carillon Point Kirkland, WA 98033 Attn: Christopher W. Wright, Esq. (b) If to Indemnitee, to the address specified on the last page of this Agreement or to such other address as either party may from time to time furnish to the other party by a notice given in accordance with the provisions of this Section 11. All such notices, claims and communications shall be deemed to have been duly given if (i) personally delivered, at the time delivered, (ii) mailed, five days after dispatched, (iii) sent by facsimile transmission, upon confirmation of receipt, and (iv) sent by any other means, upon receipt. 12. DIRECTORS' AND OFFICERS' INSURANCE. (a) The Company hereby covenants and agrees that, subject to the provisions of Section 12(c) hereof, the Company shall, from a date no later than the closing date of the Company's first registered public offering of the Company's Common Stock pursuant to an effective registration statement under the Securities Act of 1933, as amended, maintain directors' and officers' insurance in full force and effect so long as Indemnitee continues to serve as a director or officer of the Company and thereafter so long as Indemnitee shall be subject to any possible Proceeding. (b) In all policies of directors' and officers' insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits, subject to the same limitations, as are accorded to the Company's directors or officers most favorably insured by such policy. (c) Notwithstanding the foregoing provisions of this Section 12, the Company shall have no obligation to maintain directors' and officers' insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, or the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit. 9. 10 13. SPECIFIC PERFORMANCE. The Company and Indemnitee agree herein that a monetary remedy for breach of this Agreement, at some later date, will be inadequate, impracticable and difficult of proof, and further agree that such breach would cause Indemnitee irreparable harm. Accordingly, the Company and Indemnitee agree that Indemnitee shall be entitled to temporary and permanent injunctive relief to enforce this Agreement without the necessity of proving actual damages or irreparable harm. The Company and Indemnitee further agree that Indemnitee shall be entitled to such injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of posting bond or other undertaking in connection therewith. Any such requirement of bond or undertaking is hereby waived by the Company, and the Company acknowledges that in the absence of such a waiver, a bond or undertaking may be required by the court. 14. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. [Signature Page Follows] 10. 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. COMPANY: INTERNAP NETWORK SERVICES CORPORATION By: ------------------------------------- Its: ------------------------------------ INDEMNITEE: Print name: ----------------------------- Address: ----------------------------- 11. EX-10.2 8 1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN 1 EXHIBIT 10.2 INTERNAP NETWORK SERVICES CORPORATION 1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN ADOPTED BY THE BOARD OF DIRECTORS JULY 22, 1999 APPROVED BY SHAREHOLDERS ________________, 1999 EFFECTIVE DATE: JULY 22, 1999 TERMINATION DATE: JULY 21, 2009 1. PURPOSES. (a) ELIGIBLE OPTION RECIPIENTS. The persons eligible to receive Options are the Non-Employee Directors of the Company. (b) AVAILABLE OPTIONS. The purpose of the Plan is to provide a means by which Non-Employee Directors may be given an opportunity to benefit from increases in value of the Common Stock through the granting of Nonstatutory Stock Options. (c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of its Non-Employee Directors, to secure and retain the services of new Non-Employee Directors and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "ANNUAL GRANT" means an Option granted annually to all Non-Employee Directors who meet the specified criteria pursuant to Subsection 6(b) of the Plan. (c) "ANNUAL MEETING" means the annual meeting of the stockholders of the Company. (d) "BOARD" means the Board of Directors of the Company. (e) "CODE" means the Internal Revenue Code of 1986, as amended. (f) "COMMON STOCK" means the common stock of the Company. (g) "COMPANY" means InterNAP Network Services Corporation, a Washington corporation. (h) "CONSULTANT" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for 1. 2 such services or (ii) who is a member of the Board of Directors of an Affiliate. However, the term "Consultant" shall not include either Directors of the Company who are not compensated by the Company for their services as Directors or Directors of the Company who are merely paid a director's fee by the Company for their services as Directors. (i) "CONTINUOUS SERVICE" means that the Optionholder's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Optionholder's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionholder renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Optionholder renders such service, provided that there is no interruption or termination of the Optionholder's Continuous Service. For example, a change in status from a Non-Employee Director of the Company to a Consultant of an Affiliate or an Employee of the Company will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (j) "DIRECTOR" means a member of the Board of Directors of the Company. (k) "DISABILITY" means the inability of a person, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of that person's position with the Company or an Affiliate of the Company because of the sickness or injury of the person. (l) "EMPLOYEE" means any person employed by the Company or an Affiliate. Mere service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (n) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (o) "INITIAL GRANT" means an Option granted to a Non-Employee Director pursuant to Subsection 6(a) of the Plan. 2. 3 (p) "IPO DATE" means the effective date of the initial public offering of the Common Stock. (q) "NON-EMPLOYEE DIRECTOR" means a Director who is not employed by the Company or an Affiliate. (r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (s) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (t) "OPTION" means a Nonstatutory Stock Option granted pursuant to the Plan. (u) "OPTION AGREEMENT" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (v) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (w) "PLAN" means this InterNAP Network Services Corporation 1999 Non-Employee Directors' Stock Option Plan. (x) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (y) "SECURITIES ACT" means the Securities Act of 1933, as amended. 3. ADMINISTRATION. (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan. The Board may not delegate administration of the Plan to a committee. (b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine the provisions of each Option to the extent not specified in the Plan. (ii) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or an Option as provided in Section 12. 3. 4 (iv) To terminate or suspend the Plan as provided in Section 13. (v) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. 4. SHARES SUBJECT TO THE PLAN. (a) SHARE RESERVE. Subject to the provisions of Section 11 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Options shall not exceed in the aggregate five hundred thousand (500,000) shares of Common Stock. (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not acquired under such Option shall revert to and again become available for issuance under the Plan. (c) SOURCE OF SHARES. The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. Nondiscretionary Options as set forth in Section 6 shall be granted under the Plan to all Non-Employee Directors. 6. NON-DISCRETIONARY GRANTS. (a) INITIAL GRANTS. On the IPO Date, each person who is then a Non-Employee Director shall automatically be granted an Initial Grant to purchase forty thousand (40,000) shares of Common Stock on the terms and conditions set forth herein. After the IPO Date, each person who is elected or appointed for the first time to be a Non-Employee Director shall automatically, upon the date of his or her initial election or appointment to be a Non-Employee Director by the Board or stockholders of the Company, be granted an Initial Grant to purchase forty thousand (40,000) shares of Common Stock on the terms and conditions set forth herein. (b) ANNUAL GRANTS. On the day following each Annual Meeting commencing with the Annual Meeting in 2000, each person who is then a Non-Employee Director and has been a Non-Employee Director for at least six (6) months automatically shall be granted an Annual Grant to purchase ten thousand (10,000) shares of Common Stock on the terms and conditions set forth herein. 7. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as required by the Plan. Each Option shall contain such additional terms and conditions, not inconsistent with the Plan, as the Board shall deem appropriate. Each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: 4. 5 (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) EXERCISE PRICE. The exercise price of each Option shall be one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option may be paid in cash or by check at the time the Option is exercised or, to the extent permitted by the Option Agreement and applicable statutes and regulations, (i) by delivery to the Company of other Common Stock, (ii) according to a deferred payment or other arrangement or (iii) by any other form of legal consideration that may be acceptable to the Board and provided in the Option Agreement. In the case of any deferred payment arrangement (i) interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement and (ii) at any time the Company is incorporated in Delaware, payment of the Common Stock's par value shall not be made by deferred payment. (d) TRANSFERABILITY. An Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (e) VESTING. Options shall be fully vested and exercisable upon receipt. (f) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service, or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (g) EXTENSION OF TERMINATION DATE. If the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in Subsection 7(a) or (ii) the expiration of a period of three (3) months after the termination of the Optionholder's Continuous 5. 6 Service during which the exercise of the Option would not be in violation of such registration requirements. (h) DISABILITY OF OPTIONHOLDER. In the event an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (i) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the three-month period after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the Option upon the Optionholder's death, but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. 8. COVENANTS OF THE COMPANY. (a) AVAILABILITY OF SHARES. During the terms of the Options, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Options. (b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Options and to issue and sell shares of Common Stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Option or any stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Options unless and until such authority is obtained. 9. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Options shall constitute general funds of the Company. 10. MISCELLANEOUS. (a) STOCKHOLDER RIGHTS. No Optionholder shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Option unless and until such Optionholder has satisfied all requirements for exercise of the Option pursuant to its terms. 6. 7 (b) NO SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Optionholder any right to continue to serve the Company as a Non-Employee Director or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (c) INVESTMENT ASSURANCES. The Company may require an Optionholder, as a condition of exercising or acquiring stock under any Option, (i) to give written assurances satisfactory to the Company as to the Optionholder's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (ii) to give written assurances satisfactory to the Company stating that the Optionholder is acquiring the stock subject to the Option for the Optionholder's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (A) the issuance of the shares upon the exercise or acquisition of stock under the Option has been registered under a then currently effective registration statement under the Securities Act or (B) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (d) WITHHOLDING OBLIGATIONS. The Optionholder may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under an Option by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Optionholder by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the Optionholder as a result of the exercise or acquisition of stock under the Option; or (iii) delivering to the Company owned and unencumbered shares of the Common Stock. Notwithstanding the foregoing, the Company shall not be authorized to withhold shares of Common Stock at rates in excess of the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes. 11. ADJUSTMENTS UPON CHANGES IN STOCK. (a) CAPITALIZATION ADJUSTMENTS. If any change is made in the stock subject to the Plan, or subject to any Option, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and 7. 8 maximum number of securities subject both to the Plan pursuant to Subsection 4(a) and to the nondiscretionary Options specified in Section 5, and the outstanding Options will be appropriately adjusted in the class(es) and number of securities and price per share of stock subject to such outstanding Options. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or liquidation of the Company, then all outstanding Options shall terminate immediately prior to such event. (c) CHANGE IN CONTROL. In the event of (i) a sale of all or substantially all of the assets of the Company, (ii) a merger or consolidation in which the Company is not the surviving corporation or (iii) a reverse merger in which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then any surviving corporation or acquiring corporation may assume any Options outstanding under the Plan or may substitute similar Options (including an option to acquire the same consideration paid to the stockholders in the transaction described in this Subsection 11(c)) for those outstanding under the Plan. 12. AMENDMENT OF THE PLAN AND OPTIONS. (a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 11 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy the requirements of Rule 16b-3 or any Nasdaq or securities exchange listing requirements. (b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit any other amendment to the Plan for stockholder approval. (c) NO IMPAIRMENT OF RIGHTS. Rights under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Optionholder and (ii) the Optionholder consents in writing. (d) AMENDMENT OF OPTIONS. The Board at any time, and from time to time, may amend the terms of any one or more Options; provided, however, that the rights under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the Optionholder and (ii) the Optionholder consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. (a) PLAN TERM. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Options may be granted under the Plan while the Plan is suspended or after it is terminated. 8. 9 (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Option granted while the Plan is in effect except with the written consent of the Optionholder. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective on the IPO Date, but no Option shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 15. CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Plan shall be governed by the law of the State of Washington, without regard to such state's conflict of laws rules. 9. EX-10.3 9 1999 NON-EMPLOYEE DIRECTORS' STOCK AGREEMENT 1 EXHIBIT 10.3 INTERNAP NETWORK SERVICES CORPORATION 1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN STOCK OPTION AGREEMENT Pursuant to the 1999 Non-Employee Directors' Stock Option Plan (the "Plan") and this Stock Option Agreement, InterNAP Network Services Corporation (the "Company") has granted you an option under the Plan to purchase __________________________ (________) shares of the Company's Common Stock at an exercise price of $___________ per share. Capitalized terms not defined in this Stock Option Agreement are defined in the Plan. The details of your option are as follows: 1. NUMBER OF SHARES AND EXERCISE PRICE. Pursuant to your option, you may purchase __________________________ (________) shares of the Company's Common Stock at an exercise price of $___________ per share subject to the terms and conditions set forth in this Stock Option Agreement and the Plan. The number of shares and exercise price subject to you option may be adjusted from time to time to reflect Capitalization Adjustments, as provided in the Plan. 2. VESTING. Your option is fully vested. 3. DATE OF GRANT. Your option has been granted effective __________________ (the "Date of Grant"). 4. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or by one or more of the following: (a) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, then pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds (a "cashless exercise"). (b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, then by delivery of already-owned shares of Common Stock (valued at their Fair Market Value on the date of exercise) if (i) either you have held the already-owned shares for the period required to avoid a charge to the Company's reported earnings (generally six months) or you did not acquire the already-owned shares, directly or indirectly from the Company, and (ii) you own the already-owned shares free and clear of any liens, claims, encumbrances or security interests. "Delivery" for these purposes shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, your option may not be exercised by tender to the Company of Common Stock to the extent such 1. 2 tender would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. 5. WHOLE SHARES. Your option may only be exercised for whole shares. 6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, your option may not be exercised unless the shares issuable upon exercise of your option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option must also comply with other applicable laws and regulations governing the option, and the option may not be exercised if the Company determines that the exercise would not be in material compliance with such laws and regulations. 7. TERM. The term of your option commences on the Date of Grant and expires upon the EARLIEST of the following: (a) three (3) months after the termination of your Continuous Service for any reason other than death or Disability; (b) twelve (12) months after the termination of your Continuous Service due to Disability; (c) eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates for any reason; or (d) the tenth (10th) anniversary of the Date of Grant. 8. EXERCISE. (a) You may exercise your option during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. (b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option or (2) the disposition of shares acquired upon such exercise. 9. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. 2. 3 10. OPTION NOT A SERVICE CONTRACT. Your option is not a service contract, and nothing in your option shall obligate the Company or an Affiliate, their respective shareholders, Boards of Directors, officers or employees to continue any relationship that you might have as a Director. 11. WITHHOLDING OBLIGATIONS. (a) At the time your option is exercised, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "cashless exercise" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your option. Notwithstanding the foregoing, the Company shall not be authorized to withhold shares of Common Stock at rates in excess of the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes. (b) Your option is not exercisable unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested. 12. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 13. GOVERNING PLAN DOCUMENT. Your option is subject to all applicable provisions of the Plan, which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control. 3. EX-10.4 10 1999 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.4 INTERNAP NETWORK SERVICES CORPORATION 1999 EMPLOYEE STOCK PURCHASE PLAN ADOPTED BY THE BOARD OF DIRECTORS JULY 22, 1999 APPROVED BY SHAREHOLDERS _______________ , 1999 1. PURPOSE. (a) The purpose of the Plan is to provide a means by which Employees of the Company and certain designated Affiliates may be given an opportunity to purchase shares of the Common Stock of the Company. (b) The Company, by means of the Plan, seeks to retain the services of such Employees, to secure and retain the services of new Employees and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Rights to purchase shares of the Common Stock granted under the Plan be considered options issued under an "employee stock purchase plan," as that term is defined in Section 423(b) of the Code. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the United States Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a Committee appointed by the Board in accordance with subparagraph 3(c) of the Plan. (e) "COMMON STOCK" means the Common Stock of InterNAP Network Services Corporation. (f) "COMPANY" means InterNAP Network Services Corporation, a Washington corporation. (g) "DIRECTOR" means a member of the Board. (h) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set forth in the Offering for eligibility to participate in the Offering. (i) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or an Affiliate of the Company. Neither service as a Director nor payment of a director's fee shall be sufficient to constitute "employment" by the Company or the Affiliate. 1. 2 (j) "EMPLOYEE STOCK PURCHASE PLAN" means a plan that grants rights intended to be options issued under an "employee stock purchase plan," as that term is defined in Section 423(b) of the Code. (k) "EXCHANGE ACT" means the United States Securities Exchange Act of 1934, as amended. (l) "FAIR MARKET VALUE" means the value of a security, as determined in good faith by the Board. If the security is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, then, except as otherwise provided in the Offering, the Fair Market Value of the security shall be the closing sales price (rounded up where necessary to the nearest whole cent) for such security (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the relevant security of the Company) on the trading day prior to the relevant determination date, as reported in The Wall Street Journal or such other source as the Board deems reliable. (m) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (n) "OFFERING" means the grant of Rights to purchase shares of the Common Stock under the Plan to Eligible Employees. (o) "OFFERING DATE" means a date selected by the Board for an Offering to commence. (p) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (q) "PARTICIPANT" means an Eligible Employee who holds an outstanding Right granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Right granted under the Plan. (r) "PLAN" means this InterNAP Network Services Corporation 1999 Employee Stock Purchase Plan. 2. 3 (s) "PURCHASE DATE" means one or more dates established by the Board during an Offering on which Rights granted under the Plan shall be exercised and purchases of shares of the Common Stock carried out in accordance with such Offering. (t) "RIGHT" means an option to purchase shares of the Common Stock granted pursuant to the Plan. (u) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3 as in effect with respect to the Company at the time discretion is being exercised regarding the Plan. (v) "SECURITIES ACT" means the United States Securities Act of 1933, as amended. 3. ADMINISTRATION. (a) The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subparagraph 3(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. (b) The Board (or the Committee) shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine when and how Rights to purchase shares of the Common Stock shall be granted and the provisions of each Offering of such Rights (which need not be identical). (ii) To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan. (iii) To construe and interpret the Plan and Rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iv) To amend the Plan as provided in paragraph 14. (v) To terminate or suspend the Plan as provided in paragraph 16. (vi) Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Company and its Affiliates and to carry out the intent that the Plan be treated as an Employee Stock Purchase Plan. (c) The Board may delegate administration of the Plan to a Committee of the Board composed of two (2) or more members, all of the members of which Committee may be, in the discretion of the Board, Non-Employee Directors and/or Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a 3. 4 subcommittee of two (2) or more Outside Directors any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or such a subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of paragraph 13 relating to adjustments upon changes in securities, the shares of the Common Stock that may be sold pursuant to Rights granted under the Plan shall not exceed in the aggregate one million five hundred thousand (1,500,000) shares of the Common Stock the ("Reserved Shares"). As of the first nine (9) anniversaries of the Effective Date of the Plan, the number of Reserved Shares will be automatically increased by the lesser of (i) two percent (2%) of the total number of shares of Common Stock outstanding on such anniversary date or (ii) one million five hundred thousand (1,500,000) shares. If any Right granted under the Plan shall for any reason terminate without having been exercised, the shares of the Common Stock not purchased under such Right shall again become available for the Plan. (b) The shares of the Common Stock subject to the Plan may be unissued shares of the Common Stock or shares of the Common Stock that have been bought on the open market at prevailing market prices or otherwise. 5. GRANT OF RIGHTS; OFFERING. The Board may from time to time grant or provide for the grant of Rights to purchase shares of the Common Stock under the Plan to Eligible Employees in an Offering on an Offering Date or Dates selected by the Board. Each Offering shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate, which shall comply with the requirements of Section 423(b)(5) of the Code that all Employees granted Rights to purchase shares of the Common Stock under the Plan shall have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the document comprising the Offering or otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in paragraphs 6 through 9, inclusive. 6. ELIGIBILITY. (a) Rights may be granted only to Employees of the Company or, as the Board may designated as provided in subparagraph 3(b), to Employees of an Affiliate. Except as provided in subparagraph 6(b), an Employee shall not be eligible to be granted Rights under the Plan unless, on the Offering Date, such Employee has been in the employ of the Company or the Affiliate, as the case may be, for such continuous period preceding such grant as the Board may require, but in no event shall the required period of continuous employment be equal to or greater than two (2) years. (b) The Board may provide that each person who, during the course of an Offering, first becomes an Eligible Employee will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an Eligible Employee or which occurs 4. 5 thereafter, receive a Right under that Offering, which Right shall thereafter be deemed to be a part of that Offering. Such Right shall have the same characteristics as any Rights originally granted under that Offering, as described herein, except that: (i) the date on which such Right is granted shall be the "Offering Date" of such Right for all purposes, including determination of the exercise price of such Right; (ii) the period of the Offering with respect to such Right shall begin on its Offering Date and end coincident with the end of such Offering; and (iii) the Board may provide that if such person first becomes an Eligible Employee within a specified period of time before the end of the Offering, he or she will not receive any Right under that Offering. (c) No Employee shall be eligible for the grant of any Rights under the Plan if, immediately after any such Rights are granted, such Employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subparagraph 6(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any Employee, and stock which such Employee may purchase under all outstanding rights and options shall be treated as stock owned by such Employee. (d) An Eligible Employee may be granted Rights under the Plan only if such Rights, together with any other Rights granted under all Employee Stock Purchase Plans of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such Eligible Employee's rights to purchase shares of the Common Stock or any Affiliate to accrue at a rate which exceeds twenty five thousand dollars ($25,000) of the fair market value of such shares of the Common Stock (determined at the time such Rights are granted) for each calendar year in which such Rights are outstanding at any time. (e) The Board may provide in an Offering that Employees who are highly compensated Employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate. 7. RIGHTS; PURCHASE PRICE. (a) On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, shall be granted the Right to purchase up to the number of shares of the Common Stock purchasable either: (i) with a percentage designated by the Board not exceeding fifteen percent (15%) of such Employee's Earnings (as defined by the Board in each Offering) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering; or (ii) with a maximum dollar amount designated by the Board that, as the Board determines for a particular Offering, (1) shall be withheld, in whole or in part, from such 5. 6 Employee's Earnings (as defined by the Board in each Offering) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering and/or (2) shall be contributed, in whole or in part, by such Employee during such period. (b) The Board shall establish one or more Purchase Dates during an Offering on which Rights granted under the Plan shall be exercised and purchases of shares of the Common Stock carried out in accordance with such Offering. (c) In connection with each Offering made under the Plan, the Board may specify a maximum number of shares of the Common Stock that may be purchased by any Participant as well as a maximum aggregate number of shares of the Common Stock that may be purchased by all Participants pursuant to such Offering. In addition, in connection with each Offering that contains more than one Purchase Date, the Board may specify a maximum aggregate number of shares of the Common Stock which may be purchased by all Participants on any given Purchase Date under the Offering. If the aggregate purchase of shares of the Common Stock upon exercise of Rights granted under the Offering would exceed any such maximum aggregate amount, the Board shall make a pro rata allocation of the shares of the Common Stock available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable. (d) The purchase price of shares of the Common Stock acquired pursuant to Rights granted under the Plan shall be not less than the lesser of: (i) an amount equal to eighty-five percent (85%) of the fair market value of the shares of the Common Stock on the Offering Date; or (ii) an amount equal to eighty-five percent (85%) of the fair market value of the shares of the Common Stock on the Purchase Date. 8. PARTICIPATION; WITHDRAWAL; TERMINATION. (a) An Eligible Employee may become a Participant in the Plan pursuant to an Offering by delivering a participation agreement to the Company within the time specified in the Offering, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board of such Employee's Earnings during the Offering (as defined in each Offering). The payroll deductions made for each Participant shall be credited to a bookkeeping account for such Participant under the Plan and either may be deposited with the general funds of the Company or may be deposited in a separate account in the name of, and for the benefit of, such Participant with a financial institution designated by the Company. To the extent provided in the Offering, a Participant may reduce (including to zero) or increase such payroll deductions. To the extent provided in the Offering, a Participant may begin such payroll deductions after the beginning of the Offering. A Participant may make additional payments into his or her account only if specifically provided for in the Offering and only if the Participant has not already had the maximum permitted amount withheld during the Offering. (b) At any time during an Offering, a Participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a 6. 7 notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Offering except as provided by the Board in the Offering. Upon such withdrawal from the Offering by a Participant, the Company shall distribute to such Participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire shares of the Common Stock for the Participant) under the Offering, without interest unless otherwise specified in the Offering, and such Participant's interest in that Offering shall be automatically terminated. A Participant's withdrawal from an Offering will have no effect upon such Participant's eligibility to participate in any other Offerings under the Plan but such Participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan. (c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of any participating Employee's employment with the Company or a designated Affiliate for any reason (subject to any post-employment participation period required by law) or other lack of eligibility. The Company shall distribute to such terminated Employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire shares of the Common Stock for the terminated Employee) under the Offering, without interest unless otherwise specified in the Offering. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subparagraph 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. (d) Rights granted under the Plan shall not be transferable by a Participant otherwise than by will or the laws of descent and distribution, or by a beneficiary designation as provided in paragraph 15 and, otherwise during his or her lifetime, shall be exercisable only by the person to whom such Rights are granted. 9. EXERCISE. (a) On each Purchase Date specified therefor in the relevant Offering, each Participant's accumulated payroll deductions and other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of shares of the Common Stock up to the maximum number of shares of the Common Stock permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares of the Common Stock shall be issued upon the exercise of Rights granted under the Plan unless specifically provided for in the Offering. (b) Unless otherwise specifically provided in the Offering, the amount, if any, of accumulated payroll deductions remaining in any Participant's account after the purchase of shares of the Common Stock that is equal to the amount required to purchase one or more whole shares of the Common Stock on the final Purchase Date of the Offering shall be distributed in full to the Participant at the end of the Offering, without interest. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in 7. 8 subparagraph 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. (c) No Rights granted under the Plan may be exercised to any extent unless the shares of the Common Stock to be issued upon such exercise under the Plan (including Rights granted thereunder) are covered by an effective registration statement pursuant to the Securities Act and the Plan is in material compliance with all applicable state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date in any Offering hereunder the Plan is not so registered or in such compliance, no Rights granted under the Plan or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the Plan is subject to such an effective registration statement and such compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If, on the Purchase Date of any Offering hereunder, as delayed to the maximum extent permissible, the Plan is not registered and in such compliance, no Rights granted under the Plan or any Offering shall be exercised and all payroll deductions accumulated during the Offering (reduced to the extent, if any, such deductions have been used to acquire Shares) shall be distributed to the Participants, without interest unless otherwise specified in the Offering. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subparagraph 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. 10. COVENANTS OF THE COMPANY. (a) During the terms of the Rights granted under the Plan, the Company shall ensure that the number of shares of the Common Stock required to satisfy such Rights are available. (b) The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of the Common Stock upon exercise of the Rights granted under the Plan. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of shares of the Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell shares of the Common Stock upon exercise of such Rights unless and until such authority is obtained. 11. USE OF PROCEEDS FROM SHARES. Proceeds from the sale of shares of the Common Stock pursuant to Rights granted under the Plan shall constitute general funds of the Company. 12. RIGHTS AS A SHAREHOLDER. A Participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, shares of the Common Stock subject to Rights granted under the Plan 8. 9 unless and until the Participant's shares of the Common Stock acquired upon exercise of Rights under the Plan are recorded in the books of the Company. 13. ADJUSTMENTS UPON CHANGES IN SECURITIES. (a) If any change is made in the shares of the Common Stock subject to the Plan, or subject to any Right, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of shares of the Common Stock subject to the Plan pursuant to subparagraph 4(a), and the outstanding Rights will be appropriately adjusted in the class(es), number of shares of the Common Stock and purchase limits of such outstanding Rights. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction that does not involve the receipt of consideration by the Company.) (b) In the event of: (i) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (ii) a merger or consolidation in which the Company is not the surviving corporation; or (iii) a reverse merger in which the Company is the surviving corporation but the shares of the Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then: (1) any surviving or acquiring corporation may assume Rights outstanding under the Plan or may substitute similar rights (including a right to acquire the same consideration paid to the Company's shareholders in the transaction described in this subparagraph 13(b)) for those outstanding under the Plan, or (2) in the event any surviving or acquiring corporation does not assume such Rights or substitute similar rights for those outstanding under the Plan, then, as determined by the Board in its sole discretion, such Rights may continue in full force and effect or the Participants' accumulated payroll deductions (exclusive of any accumulated interest which cannot be applied toward the purchase of shares of the Common Stock under the terms of the Offering) may be used to purchase shares of the Common Stock immediately prior to the transaction described above under the ongoing Offering and the Participants' Rights under the ongoing Offering thereafter terminated. 14. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in paragraph 13 relating to adjustments upon changes in securities and except as to minor amendments to benefit the administration of the Plan, to take account of a change in legislation or to obtain or maintain favorable tax, exchange control or regulatory treatment for Participants or the Company or any Affiliate, no amendment shall be effective unless approved by the shareholders of the Company to the extent shareholder approval is necessary for the Plan to satisfy the requirements of Section 423 of the Code, Rule 16b-3 under the Exchange Act and any Nasdaq or other securities exchange listing requirements. Currently under the Code, shareholder approval within twelve (12) months before or after the adoption of the amendment is required where the amendment will: 9. 10 (i) Increase the number of shares of the Common Stock reserved for Rights under the Plan; (ii) Modify the provisions as to eligibility for participation in the Plan to the extent such modification requires shareholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3; or (iii) Modify the Plan in any other way if such modification requires shareholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3. (b) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Employee Stock Purchase Plans and/or to bring the Plan and/or Rights granted under it into compliance therewith. (c) Rights and obligations under any Rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan, except with the consent of the person to whom such Rights were granted, or except as necessary to comply with any laws or governmental regulations, or except as necessary to ensure that the Plan and/or Rights granted under the Plan comply with the requirements of Section 423 of the Code. 15. DESIGNATION OF BENEFICIARY. (a) A Participant may file a written designation of a beneficiary who is to receive any shares of the Common Stock and/or cash, if any, from the Participant's account under the Plan in the event of such Participant's death subsequent to the end of an Offering but prior to delivery to the Participant of such shares of the Common Stock and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's account under the Plan in the event of such Participant's death during an Offering. (b) The Participant may change such designation of beneficiary at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such shares of the Common Stock and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such shares of the Common Stock and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board in its discretion may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate at the time that all of the shares of the Common Stock subject to the Plan's reserve, as increased and/or adjusted from time to time, have been issued 10. 11 under the terms of the Plan. No Rights may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Rights granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except as expressly provided in the Plan or with the consent of the person to whom such Rights were granted, or except as necessary to comply with any laws or governmental regulation, or except as necessary to ensure that the Plan and/or Rights granted under the Plan comply with the requirements of Section 423 of the Code. 17. EFFECTIVE DATE OF PLAN. The Plan shall become effective simultaneously with the effectiveness of the Company's registration statement under the Securities Act with respect to the initial public offering of shares of the Company's Common Stock (the "Effective Date"), but no Rights granted under the Plan shall be exercised unless and until the Plan has been approved by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted by the Board, which date may be prior to the Effective Date set. 11. EX-10.5 11 1998 STOCK OPTION/STOCK ISSUANCE PLAN 1 EXHIBIT 10.5 Exhibit A to Notice of Grant of Stock Option INTERNAP NETWORK SERVICES CORP. 1998 STOCK OPTION/STOCK ISSUANCE PLAN ARTICLE I GENERAL PROVISIONS SECTION 1. PURPOSE This 1998 Stock Option/Stock Issuance Plan is intended to promote the interests of InterNAP Network Services Corp. (the "Corporation") by providing eligible individuals who are responsible for the management, growth and financial success of the Corporation or who otherwise render valuable services to the Corporation with the opportunity to acquire a proprietary interest, or increase their proprietary interest, in the Corporation and thereby encourage them to remain in the service of the Corporation. Capitalized terms used herein shall have the meanings ascribed to such terms in Section 6 of this Article I. SECTION 2. STRUCTURE OF THE PLAN The Plan shall be divided into two separate components: the Option Grant Program specified in Article II and the Stock Issuance Program specified in Article III. The provisions of Articles I and IV of the Plan shall apply to both the Option Grant Program and the Stock Issuance Program and shall accordingly govern the interests of all individuals in the Plan. SECTION 3. ADMINISTRATION OF THE PLAN (a) The Plan shall be administered by the Board. The Board at any time may appoint a Committee and delegate to such Committee some or all of the administrative powers allocated to the Board pursuant to the provisions of the Plan. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board at any time may terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee. (b) The Plan Administrator (either the Board or the Committee, to the extent the Committee is at the time responsible for the administration of the Plan) shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for the proper plan administration and to make such determinations under, and issue such interpretations of, the Plan and any outstanding option grants or share issuances as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any outstanding option or share issuance. 2 SECTION 4. OPTION GRANTS AND SHARE ISSUANCES (a) The persons eligible to receive option grants pursuant to the Option Grant Program (each an "Optionee") and/or share issuances under the Stock Issuance Program (each a "Participant") are limited to the following: (1) key employees (including officers and directors) of the Corporation (or its Parent or Subsidiary corporations, if any) who render services that contribute to the success and growth of the Corporation (or its Parent or Subsidiary corporations), or that reasonably may be anticipated to contribute to the future success and growth of the Corporation (or its Parent or Subsidiary corporations); (2) the non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary corporations; and (3) those consultants or independent contractors who provide valuable services to the Corporation (or its Parent or Subsidiary corporations, if any). (b) The Plan Administrator shall have full authority to determine: (i) with respect to the option grants made under the Plan, which eligible individuals are to receive option grants, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times at which each granted option is to become exercisable and the maximum term for which the option may remain outstanding, and (ii) with respect to share issuances under the Stock Issuance Program, the number of shares to be issued to each Participant, the vesting schedule (if any) to be applicable to the issued shares, and the consideration to be paid by the individual for such shares. (c) The Plan Administrator shall have the absolute discretion either to grant options in accordance with Article II of the Plan or to effect share issuances in accordance with Article III of the Plan. SECTION 5. STOCK SUBJECT TO THE PLAN (a) The stock issuable under the Plan shall be shares of the Corporation's authorized but unissued or reacquired Common Stock (the "Common Stock"). The maximum number of shares that may be issued over the term of the Plan shall not exceed four million thirty-five thousand (4,035,000) shares of Common Stock. The total number of shares issuable under the Plan shall be subject to adjustment from time to time in accordance with the provisions of Section 5(c). (b) Shares subject to (i) the portion of one or more outstanding options that are not exercised or surrendered prior to expiration or termination and (ii) outstanding options canceled in accordance with the cancellation-regrant provisions of Section 5 of Article II will be available for subsequent option grants or stock issuances under the Plan. Shares issued under either the Option Grant Program or the Stock Issuance Program (whether as vested or unvested shares) that are repurchased by the Corporation shall not be available for subsequent option grants or stock issuances under the Plan. 2 3 (c) In the event any change is made to the Common Stock issuable under the Plan by reason of any stock dividend, stock split, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) the aggregate number and/or class of shares issuable under the Plan and (ii) the aggregate number and/or class of shares and the option price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. (d) Common Stock issuable under the Plan, whether under the Option Grant Program or the Stock Issuance Program, may be subject to such restrictions on transfer, repurchase rights or other restrictions as may be determined by the Plan Administrator. SECTION 6. DEFINITIONS The following definitions shall apply to the respective capitalized terms used herein: Board means the Board of Directors of InterNAP Network Services Corp. Code means the Internal Revenue Code of 1986, as amended. Committee means either the Compensation Committee of the Board or another committee comprised of two or more members thereof and appointed pursuant to the Plan to function as the Plan Administrator. Corporation means InterNAP Network Services Corp., a Washington corporation. Corporate Transaction means one or more of the following transactions: (a) a merger or consolidation in which the Corporation is not the surviving entity, except for a transaction the principal purpose of which is to change the state of the Corporation's incorporation, (b) any reverse merger in which the Corporation is the surviving entity but in which fifty percent (50%) or more of the Corporation's outstanding voting stock is transferred to holders different from those who held the stock immediately prior to such merger, or (c) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation. Employee means an individual who is in the employ of the Corporation or one or more Parent or Subsidiary corporations. An optionee shall be considered to be an Employee for so long as such individual remains in the employ of the Corporation or one or more Parent or Subsidiary corporations, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. 3 4 Exercise Date shall be the date on which written notice of the exercise of an outstanding option under the Plan is delivered to the Corporation. Such exercise shall be effected pursuant to a stock purchase agreement incorporating any repurchase rights or first refusal rights retained by the Corporation with respect to the Common Stock purchased under the option. Fair Market Value of a share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (a) If the Common Stock is at the time listed or admitted to trading on any stock exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock. If there is no reported sale of Common Stock on such exchange on the date in question, then the Fair Market Value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. (b) If the Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded in the over-the-counter market, the Fair Market Value shall be the mean between the highest bid and the lowest asked prices (or if such information is available the closing selling price) per share of Common Stock on the date in question in the over-the-counter market, as such prices are reported by the National Association of Securities Dealers through its NASDAQ National Market System or any successor system. If there are no reported bid and asked prices (or closing selling price) for the Common Stock on the date in question, then the mean between the highest bid and lowest asked prices (or closing selling price) on the last preceding date for which such quotations exist shall be determinative of Fair Market Value. (c) If the Common Stock is at the time neither listed nor admitted to trading on any stock exchange nor traded in the over-the-counter market, or if the Plan Administrator determines that the valuation provisions of subsections (a) and (b) above will not result in a true and accurate valuation of the Common Stock, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate under the circumstances. Incentive Option means an incentive stock option that satisfies the requirements of Section 422 of the Code. Non-Statutory Option means an option not intended to meet the statutory requirements prescribed for an Incentive Option. Parent corporation means any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 4 5 Permanent Disability means the inability of an individual to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expect to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. Plan means this 1998 Stock Option/Stock Issuance Plan. Plan Administrator means the Board or the Committee, to the extent the Committee is responsible for plan administration in accordance with Article I, Section 3. Service means the performance of services for the Corporation or one or more Parent or Subsidiary corporations by an individual in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant or advisor, unless a different meaning is specified in the option agreement evidencing the option grant, the purchase agreement evidencing the purchased option shares or the issuance agreement evidencing any direct stock issuance. An optionee shall be deemed to remain in Service for so long as such individual renders services to the Corporation or any Parent or Subsidiary corporation on a periodic basis in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant or advisor. Subsidiary corporation means each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Ten Percent Shareholder means the owner of stock (as determined under Section 424(d) of the Code) possessing ten percent (10%) or more of the total combined voting power of all classes of stock of the Corporation or any Parent or Subsidiary corporation. ARTICLE II OPTION GRANT PROGRAM SECTION 1. TERMS AND CONDITIONS OF OPTIONS Options granted pursuant to the Plan shall be authorized by action of the Plan Administrator and, at the discretion of the Plan Administrator, may be either Incentive Options or Non-Statutory Options. Each granted option shall be evidenced by one or more instruments in the form approved by the Plan Administrator; provided, that each such instrument shall comply with and incorporate the terms and conditions specified below. In addition, each instrument evidencing an Incentive Option shall be subject to the applicable provisions of Section 2 of this Article II. (a) OPTION PRICE. (1) The option price per share shall be fixed by the Plan Administrator. 5 6 (2) The option price shall become immediately due upon exercise of the option, and subject to the provisions of Article IV, Section 2, shall be payable in cash or check drawn to the Corporation's order. Should the Corporation's outstanding Common Stock be registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act") at the time the option is exercised, then the option price may also be paid as follows: (A) in shares of Common Stock held by the optionee for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date; or (B) through a special sale and remittance procedure pursuant to which the Optionee is to (i) provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds, an amount sufficient to cover the aggregate option price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Corporation by reason of such purchase and (ii) concurrently provide written directives to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to effect the sale transaction. (b) TERM AND EXERCISE OF OPTIONS. Each option granted under the Plan shall be exercisable at such time or times, during such period, and for such number of shares as shall be determined by the Plan Administrator and set forth in the notice of grant and stock option agreement evidencing such option. No option granted under the Plan, however, shall have a term in excess of ten (10) years from the grant date. During the lifetime of the Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable by the Optionee otherwise than by will or by the laws of descent and distribution following the Optionee's death. (c) TERMINATION OF SERVICE. (1) Should the Optionee cease to remain in Service for any reason (including death or Permanent Disability) while holding one or more outstanding options under the Plan, then except to the extent otherwise provided pursuant to Section 6 of this Article II, each such option shall remain exercisable for the limited period of time (not to exceed twelve (12) months after the date of such cessation of Service) specified by the Plan Administrator in the option agreement. In no event, however, shall any such option be exercisable after the specified expiration date of the option term. During such limited period of exercisability, the option may not be exercised for more than that number of shares (if any) for which such option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of such period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be exercisable. (2) Any option granted to an Optionee under the Plan and exercisable in whole or in part on the date of the Optionee's death may be subsequently exercised by the 6 7 personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. The maximum number of shares for which such option may be exercised shall be limited to the number of shares (if any) for which the option is exercisable on the date of the Optionee's cessation of Service. Any such exercise of the option must be effected prior to the earlier of the first anniversary of the date of the Optionee's death or the specified expiration date of the option term. Upon the occurrence of either such event, the option shall terminate and cease to be exercisable. (3) Notwithstanding subsections (1) and (2) above, the Plan Administrator shall have discretion, exercisable either at the time the option is granted or at the time the Optionee ceases Service, to allow one or more outstanding options held by the Optionee to be exercised, during the limited period of exercisability following the Optionee's cessation of Service, not only with respect to the number of shares for which the option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more subsequent installments of purchasable shares for which the option otherwise would have become exercisable had such cessation of Service not occurred. (4) Notwithstanding any provision of this Article II or any other provision of this Plan to the contrary, any options granted under this Plan shall terminate as of the date the Optionee ceases to be in the Service of the Corporation if the Optionee was terminated for "cause" or could have been terminated for "cause." If the Optionee has an employment or consulting agreement with the Corporation, the term "cause" shall have the meaning given that term in such employment or consulting agreement. If the Optionee does not have an employment or consulting agreement with the Corporation, or if such agreement does not define the term "cause," the term "cause" shall mean: (A) misconduct or dishonesty that materially adversely affects the Corporation, including without limitation (i) an act materially in conflict with the financial interests of the Corporation, (ii) an act that could damage the reputation or customer relations of the Corporation, (iii) an act that could subject the Corporation to liability, (iv) an act constituting sexual harassment or other violation of the civil rights of coworkers, (v) failure to obey any lawful instruction of the Board or any officer of the Corporation and (vi) failure to comply with, or perform any duty required under, the terms of any confidentiality, inventions or non-competition agreement the Optionee may have with the Corporation, or (B) acts constituting the unauthorized disclosure of any of the trade secrets or confidential information of the Corporation, unfair competition with the Corporation or the inducement of any customer of the Corporation to breach any contract with the Corporation. The right to exercise any option shall be suspended automatically during the pendency of any investigation by the Board or its designee, and/or any negotiations by the Board or its designee and the Optionee, regarding any actual or alleged act or omission by the Optionee of the type described in this section. (d) SHAREHOLDER RIGHTS. An Optionee shall have none of the rights of a shareholder with respect to any shares covered by the option until such Optionee shall have exercised the option and paid the option price. 7 8 (e) REPURCHASE RIGHTS. The shares of Common Stock issued under the Plan shall be subject to certain repurchase rights of the Corporation in accordance with the following provisions: (1) (A) The Plan Administrator shall have the discretion to authorize the issuance of unvested shares of Common Stock under the Plan. Should the optionee cease Service or should the Corporation consummate a Corporate Transaction while the optionee is holding such unvested shares, the Corporation shall have the right to repurchase, at the option price paid per share, all or (at the discretion of the Corporation and with the consent of the Optionee) any portion of those such shares. The terms and conditions upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in an instrument evidencing such right. (B) The repurchase right shall be assignable to any person or entity selected by the Corporation, including one or more of the Corporation's shareholders. If the selected assignee is other than a Parent or Subsidiary corporation, however, then the assignee must make a cash payment to the Corporation, upon the assignment of the repurchase right, in an amount equal to the amount by which the Fair Market Value of the unvested shares at the time subject to the assigned right exceeds the aggregate repurchase price payable for such unvested shares. (C) Upon the occurrence of a Corporate Transaction, the Plan Administrator may, at its sole discretion, (i) terminate all or any outstanding repurchase rights under the Plan and thereby cause the shares subject to such rights to vest immediately in full, (ii) arrange for all or any of the repurchase rights to be assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction or (iii) exercise the Corporation's right to repurchase any unvested shares contemporaneously with the consummation of the Corporate Transaction if such right is provided in the instrument pursuant to which such unvested shares were issued. (2) Until such time as the Corporation's outstanding shares of Common Stock are first registered under Section 12(g) of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed sale or other disposition by the Optionee (or any successor in interest by reason of purchase, gift or other mode of transfer) of any shares of Common Stock issued under the Plan. Such right of first refusal shall be exercisable by the Corporation (or its assignees) in accordance with the terms and conditions established by the Plan Administrator and set forth in the instrument evidencing such right. SECTION 2. INCENTIVE OPTIONS The terms and conditions specified below shall be applicable to all Incentive Options granted under the Plan. Incentive Options may be granted only to individuals who are Employees. Options that are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the following terms and conditions. 8 9 (a) OPTION PRICE. The option price per share of the Common Stock subject to an Incentive Option shall in no event be less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the grant date; provided, if the individual to whom the option is granted is at the time a Ten Percent Shareholder, then the option price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the grant date. (b) DOLLAR LIMITATION. The aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which one or more options granted to any Employee under this Plan (or any other option plan of the Corporation or any Parent or Subsidiary corporation) may for the first time become exercisable as incentive stock options under the Federal tax laws during any one calendar year shall not exceed the sum of one hundred thousand dollars ($100,000). To the extent the Employee holds two or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability thereof as Incentive Options under the Federal tax laws shall be applied on the basis of the order in which such options are granted. (c) OPTION TERM FOR TEN PERCENT SHAREHOLDER. No option granted to a Ten Percent Shareholder shall have a term in excess of five (5) years from the grant date. Except as modified by the preceding provisions of this Section 2, all the provisions of the Plan shall be applicable to the Incentive Options granted hereunder. SECTION 3. CORPORATE TRANSACTION (a) In connection with any Corporate Transaction, the Plan Administrator, in its sole discretion, may (i) accelerate each or any outstanding option under the Plan so that each or any such option, immediately prior to the specified effective date for such Corporate Transaction, shall become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares, (ii) arrange for each or any outstanding option either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof, (iii) arrange for the option to be replaced by a comparable cash incentive program of the successor corporation based on the option spread (the amount by which the Fair Market Value of the shares of Common Stock subject at the time to the option exceeds the option price payable for such shares), or (iv) take none of the actions described in clauses (i), (ii) or (iii) above and allow the option to terminate as provided in Section 4(b) below. The determination of comparability under clauses (ii) and (iii) above shall be made by the Plan Administrator, and such determination shall be final, binding and conclusive. (b) In the event of any Corporate Transaction, each option outstanding under the Plan shall terminate upon the consummation of such Corporate Transaction and cease to be exercisable, unless the Plan Administrator takes one of the actions set forth in Section 4(a) above. 9 10 (c) If the outstanding options under the Plan are assumed by the successor corporation (or parent thereof) in the Corporate Transaction or are otherwise to continue in effect following such Corporate Transaction, then each such assumed or continuing option, immediately after such Corporate Transaction, shall be appropriately adjusted to apply and pertain to the number and class of securities or other property that would have been issuable to the option holder, in consummation of the Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the option price payable per share, provided the aggregate option price payable for such securities or other property shall remain the same. In addition, the number and class of securities or other property available for issuance under the Plan following the consummation of such Corporate Transaction shall be appropriately adjusted. (d) The exercisability as incentive stock options under the Federal tax laws of any options accelerated in connection with the Corporate Transaction shall remain subject to the applicable dollar limitation of subsection 2(b) of this Article II. (e) The grant of options under this Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. SECTION 4. CANCELLATION AND NEW GRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected Optionees, the cancellation of any or all outstanding options under the Plan and to grant in substitution therefor new options under the Plan covering the same or different numbers of shares of Common Stock but having, in the case of an Incentive Option, an option price per share not less than one hundred percent (100%) of such Fair Market Value per share of Common Stock on the new grant date, or, in the case of a Ten Percent Shareholder, not less than one hundred and ten percent (110%) of such Fair Market Value. SECTION 5. EXTENSION OF EXERCISE PERIOD The Plan Administrator shall have full power and authority to extend (either at the time the option is granted or at any time that the option remains outstanding) the period of time for which the option is to remain exercisable following the Optionee's cessation of Service, from the limited period set forth in the option agreement, to such greater period of time as the Plan Administrator may deem appropriate under the circumstances. In no event, however, shall such option be exercisable after the specified expiration date of the option term. 10 11 ARTICLE III STOCK ISSUANCE PROGRAM SECTION 1. TERMS AND CONDITIONS OF STOCK ISSUANCES Shares of Common Stock shall be issuable under the Stock Issuance Program through direct and immediate issuances without any intervening stock option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement ("Issuance Agreement") that complies with the terms and conditions of this Article III. (a) ISSUE PRICE. (1) Shares may, in the absolute discretion of the Plan Administrator, be issued for consideration with a value less than one-hundred percent (100%) of the Fair Market Value of the issued shares. (2) Shares shall be issued under the Plan for such consideration as the Plan Administrator shall from time to time determine, provided that in no event shall shares be issued for consideration other than: (A) cash or check payable to the Corporation, (B) a promissory note in favor of the Corporation, which may be subject to cancellation by the Corporation in whole or in part upon such terms and conditions as the Plan Administrator shall specify, or (C) services rendered. (b) VESTING SCHEDULE. (1) In the discretion of the Plan Administrator, the interest of a Participant in the shares of Common Stock issued to such Participant under the Plan may be fully and immediately vested upon issuance or may vest in one or more installments in accordance with the vesting provisions of subsection (b)(4) below. Except as otherwise provided in subsection (b)(2), the Participant may not transfer any issued shares in which such Participant does not have a vested interest. Accordingly, all unvested shares issued under the Plan shall bear the restrictive legend specified in Article IV, Section 1, until such legend is removed in accordance with such section. Regardless of whether or not a Participant's interest in such shares is vested, such Participant shall be entitled to exercise all the rights of a shareholder with respect to the shares of Common Stock issued to Participant hereunder, including the right to vote such shares and to receive any cash dividends or other distributions paid or made with respect to such shares. Any new, additional or different shares of stock or other property (including money paid other than as a regular cash dividend) that the holder of unvested Common Stock may have the right to receive with respect to such unvested shares by reason of a stock dividend, stock split, reclassification or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration therefor shall be issued subject to (i) the same vesting requirements under subsection (b)(4) applicable to the unvested 11 12 Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. (2) As used in this Article III, the term "transfer" shall include (without limitation) any sale, pledge, encumbrance, gift or other disposition of such shares. A Participant shall have the right to make a gift of unvested shares acquired under the Stock Issuance Program to Participant's spouse, parents or issue or to a trust established for such spouse, parents or issue, provided the donee of such shares delivers to the Corporation, at the time of such donee's acquisition of the gifted shares, a written agreement to be bound by all the provisions of the Plan and the Issuance Agreement executed by the Participant. (3) Should the Participant cease Service for any reason while Participant's interest in the Common Stock remains unvested, then the Corporation shall have the right to repurchase, at the original purchase price paid by the Participant, all or (at the discretion of the Corporation and with the consent of the Participant) any portion of the shares in which the Participant is not at the time vested, and the Participant shall thereafter cease to have any further shareholder rights with respect to the repurchased shares. (4) Any shares of Common Stock issued under the Stock Issuance Program that are not vested at the time of such issuance shall vest in one or more installments thereafter. The elements of the vesting schedule, specifically, the performance or service objectives to be completed or achieved, the number of installments in which the shares are to vest, the interval or intervals (if any) that are to lapse between installments and the effect that death, Permanent Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, shall be determined by the Plan Administrator and specified in the Issuance Agreement. (5) In its discretion, the Plan Administrator may elect not to exercise, in whole or in part, its repurchase rights with respect to any unvested Common Stock or other assets that would otherwise at the time be subject to repurchase pursuant to the provisions of subsection (b)(3) above. Such an election shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the election applies. (6) No shares of Common Stock or other assets shall be issued or delivered under this Plan unless and until, in the opinion of counsel for the Corporation (or its successor in the event of any Corporate Transaction), there shall have been compliance with all applicable requirements of the securities exchange on which stock of the same class is then listed and all other requirements of Federal and state law or of any regulatory bodies having jurisdiction over such issuance and delivery. (c) RIGHT OF FIRST REFUSAL. The Plan Administrator may also in its discretion establish as a term and condition of the issuance of one or more shares of Common Stock under the Stock Issuance Program that the Corporation shall have a right of first refusal with respect to any proposed disposition by the Participant (or any successor in interest by reason of purchase, gift or other mode of transfer) of one or more shares of such Common Stock. Such right of first refusal shall be exercisable by the Corporation (or its assignees) in accordance with the terms and conditions specified in the instrument evidencing such right. 12 13 SECTION 2. CORPORATE TRANSACTION Upon the occurrence of a Corporate Transaction, the Plan Administrator, in its discretion, may (i) terminate all or any outstanding repurchase rights under this Article III of the Plan and thereby cause the shares subject to such rights to vest immediately in full, (ii) arrange for all or any of the repurchase rights to be assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction or (iii) exercise the Corporation's right to repurchase any unvested shares contemporaneously with the consummation of the Corporate Transaction if such right is provided in the Issuance Agreement pursuant to which such unvested shares were issued. ARTICLE IV MISCELLANEOUS SECTION 1. STOCK LEGENDS. Each certificate representing shares of Common Stock (or other securities) issued pursuant to the Plan shall bear restrictive legends substantially as follows: (1) "The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold, offered for sale, pledged or hypothecated in the absence of an effective registration statement for the shares under said Act and laws or an opinion of counsel satisfactory to the Corporation that such registration is not required with respect to such sale or offer." (2) "This certificate and the shares represented hereby may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in conformity with the terms of written agreements between the Company and the registered holder of the shares (or the predecessor in interest to the shares). Upon written request, the Company will furnish without charge a copy of such agreements to the holder hereof." SECTION 2. LOANS (a) The Plan Administrator, in its discretion, may assist any Optionee or Participant (including an Optionee or Participant who is an officer or director of the Corporation) in the exercise of one or more options granted to such Optionee under the Article II Option Grant Program or the purchase of one or more shares issued to such Participant under the Article III Stock Issuance Program, including the satisfaction of any Federal and State income and employment tax obligations arising therefrom, by (1) authorizing the extension of a loan from the Corporation to such Optionee or Participant, or (2) permitting the Optionee or Participant to pay the option price or purchase price for the purchased Common Stock in installments over a period of years. 13 14 (b) The terms of any loan or installment method of payment (including the interest rate and terms of repayment applicable thereto) shall be established by the Plan Administrator. Loans or installment payments may be granted with or without security or collateral; provided, that any loan made to a consultant or other non-employee advisor must be secured by property other than the purchased shares of Common Stock. In all events the maximum credit available to each Optionee or Participant may not exceed the sum of (i) the aggregate option price or purchase price payable for the purchased shares (less the par value of such shares rounded up to the nearest whole cent) plus (ii) any Federal and State income and employment tax liability incurred by the Optionee or Participant in connection with such exercise or purchase. (c) The Plan Administrator, in its discretion, may determine that one or more loans extended under the financial assistance program shall be subject to forgiveness by the Corporation in whole or in part upon such terms and conditions as the Board deems appropriate. SECTION 3. AMENDMENT OF THE PLAN AND AWARDS (a) The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects whatsoever; provided, that no such amendment or modification shall adversely affect the rights and obligations of an Optionee with respect to options at the time outstanding under the Plan, nor adversely affect the rights of any Participant with respect to Common Stock issued under the Plan prior to such action, unless the Optionee or Participant consents to such amendment. In addition, the Board shall not, without the approval of the Corporation's shareholders, amend the Plan to (i) materially increase the maximum number of shares issuable under the Plan (except for permissible adjustments under Article I, Section 5(c)), (ii) materially increase the benefits accruing to individuals who participate in the Plan, or (iii) materially modify the eligibility requirements for participation in the Plan. (b) Options to purchase shares of Common Stock may be granted under the Option Grant Program and shares of Common Stock may be issued under the Stock Issuance Program, which in both instances are in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under the Option Grant Program or the Stock Issuance Program are held in escrow until the Corporation's shareholders approve an amendment that sufficiently increases the number of shares of Common Stock available for issuance under the Plan. If such shareholder approval is not obtained within twelve (12) months after the date the initial excess stock option grants or direct stock issuances are made, then any unexercised options representing such excess shall terminate and cease to be exercisable and the Corporation shall promptly refund to the Optionees and Participants the option or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) thereon for the period the shares were held in escrow. SECTION 4. EFFECTIVE DATE AND TERM OF PLAN (a) The Plan shall become effective when adopted by the Board, but no option granted under the Plan shall become exercisable, and no shares shall be issuable under the Stock Issuance Program, unless and until the Plan shall have been approved by the Corporation's 14 15 shareholders. If such shareholder approval is not obtained within twelve (12) months after the date of the Board's adoption of the Plan, then all options previously granted under the Plan shall terminate, and no further options shall be granted and no shares shall be issued under the Stock Issuance Program. Subject to such limitation, the Plan Administrator may grant options under the Plan at any time after the effective date and before the date fixed herein for termination of the Plan. (b) The Plan shall terminate upon the earlier of (i) ten years after the adoption of the Plan or (ii) the date on which all shares available for issuance under the Plan have been issued or canceled pursuant to the exercise of options granted under Article II or the issuance of shares under Article III. If the date of termination is determined under clause (i) above, then no options outstanding on such date under Article II and no shares issued and outstanding on such date under Article III shall be affected by the termination of the Plan, and such securities shall thereafter continue to have force and effect in accordance with the provisions of the stock option agreements evidencing such Article II options and the stock purchase agreements evidencing the issuance of such Article III shares. SECTION 5. USE OF PROCEEDS Any cash proceeds received by the Corporation from the issuance of shares of Common Stock under the Plan shall be used for general corporate purposes. SECTION 6. WITHHOLDING The Corporation's obligation to deliver shares upon the exercise of any options granted under Article II or upon the purchase of any shares issued under Article III shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. SECTION 7. REGULATORY APPROVALS The implementation of the Plan, the granting of any options under the Option Grant Program, the issuance of any shares under the Stock Issuance Program, and the issuance of Common Stock upon the exercise of the option grants made hereunder shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it, and the Common Stock issued pursuant to it. 15 EX-10.6 12 1998 STOCK OPTION AGREEMENT 1 EXHIBIT 10.6 INTERNAP NETWORK SERVICES CORP. STOCK OPTION AGREEMENT Unless the context clearly indicates otherwise, capitalized terms used in this Agreement shall have the meanings assigned to such terms in Section 21 of this Agreement. WHEREAS, the Board of Directors of the Company has adopted the Plan for the purpose of attracting and retaining the services of selected key employees (including officers and directors), non-employee members of the Board and consultants and other independent contractors who contribute to the financial success of the Company; and WHEREAS, Optionee is an individual who is to render valuable services to the Company, and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Company's grant of a stock option to Optionee; NOW, THEREFORE, it is agreed as follows: 1. GRANT OF OPTION. Subject to and upon the terms and conditions set forth in this Agreement and the Plan, the Company hereby grants to Optionee, as of the Grant Date, a stock option to purchase up to that number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term and at the Option Price per share specified in the Grant Notice. 2. OPTION TERM. This Option shall expire at the close of business on the Expiration Date specified in the Grant Notice, unless sooner terminated in accordance with Section 5, 6 or 18 hereof; provided, in no event shall this option have a maximum term in excess of ten (10) years measured from the Grant Date. 3. NONTRANSFERABILITY. This option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following the Optionee's death and may be exercised, during Optionee's lifetime, only by Optionee. 4. DATES OF EXERCISE. This option may not be exercised in whole or in part at any time prior to the time the Plan is approved by the Company's shareholders in accordance with Section 18 hereof. Provided such shareholder approval is obtained, this option shall thereupon become exercisable for the Option Shares as specified in the Grant Notice. If the option becomes exercisable in installments, such installments shall accumulate and the option shall remain exercisable for such installments until the Expiration Date or the sooner termination of the option term under Section 5 or 6 of this Agreement. 5. ACCELERATED TERMINATION OF OPTION TERM. The option term specified in Section 2 above shall terminate (and this option shall cease to be exercisable) prior to the Expiration Date should any of the following provisions become applicable: (a) Except as otherwise provided in subsection (b) or (c) below, should Optionee cease to remain in Service while this option is outstanding, then the period for exercising this option shall be reduced to a three (3)-month period commencing with the date of 2 such cessation of Service, but in no event shall this option be exercisable at any time after the Expiration Date. Upon the expiration of such three (3)-month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (b) Should Optionee die while this option is outstanding, then the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the law of descent and distribution shall have the right to exercise this option. Such right shall lapse, and this option shall cease to be exercisable, upon the earlier of (i) the expiration of the twelve (12) month period measured from the date of Optionee's death or (ii) the Expiration Date. Upon the expiration of such twelve (12) month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (c) Should Optionee become Permanently Disabled and cease by reason thereof to remain in Service while this option is outstanding, then the Optionee shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date. Upon the expiration of such limited period of exercisability or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (d) During the limited period of exercisability applicable under subsections (a), (b) or (c) above, this option may be exercised for any or all of the Option Shares in which the Optionee, at the time of cessation of Service, is vested in accordance with the exercise/vesting provisions specified in the Grant Notice or the special acceleration provisions of Section 6 of this Agreement. (e) Notwithstanding any provision of this Section 5 or any other provision of this Agreement or the Plan to the contrary, any options granted under the Plan shall terminate as of the date Optionee ceases to be in the Service of the Company if Optionee was terminated for "cause" or could have been terminated for "cause." If Optionee has an employment or consulting agreement with the Company, the term "cause" shall have the meaning given that term in the employment or consulting agreement. If Optionee does not have such an agreement with the Company, or if such agreement does not define the term "cause," the term "cause" shall mean: (1) misconduct or dishonesty that materially adversely affects the Company, including without limitation (i) an act materially in conflict with the financial interests of the Company, (ii) an act that could damage the reputation or customer relations of the Company, (iii) an act that could subject the Company to liability, (iv) an act constituting sexual harassment or other violation of the civil rights of coworkers, (v) failure to obey any lawful instruction of the Board or any officer of the Company, and (vi) failure to comply with, or perform any duty required under the terms of any confidentiality, inventions or non-competition agreement Optionee may have with the Company, or (2) acts constituting the unauthorized disclosure of any of the trade secrets or confidential information of the Company, unfair competition with the Company or the inducement of any customer of the Company to breach any contract with the Company. The right to exercise any option shall be suspended automatically during the pendency of any investigation by the Board or its designee, and/or any negotiations by the Board or its designee and Optionee, regarding any actual or alleged act or omission by Optionee of the type described in this subsection. 2. 3 6. CORPORATE TRANSACTION. (a) In connection with any Corporate Transaction, the Plan Administrator, in its sole discretion, may (i) accelerate this option so that this option, immediately prior to the specified effective date for such Corporate Transaction, shall become fully exercisable with respect to all of the Option Shares and may be exercised for all or any portion of such shares, (ii) arrange for this option either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof, (iii) arrange for this option to be replaced by a comparable cash incentive program of the successor corporation based on the option spread (the amount by which the Fair Market Value of the shares of Common Stock subject at the time to the option exceeds the Option Price payable for such shares) or (iv) take none of the actions described in clauses (i), (ii) or (iii) above and allow this option to terminate as provided in Section 6(b) below. The determination of comparability under clauses (ii) and (iii) above shall be made by the Plan Administrator, and its determination shall be final and conclusive. (b) This option shall terminate upon the consummation of any Corporate Transaction, unless the Plan Administrator takes one of the actions set forth in Section 6(a) above. (c) The exercisability of this option as an incentive stock option under the Federal tax laws (if designated as such in the Grant Notice), in connection with any such Corporate Transaction, shall be subject to the applicable dollar limitation of Section 19 below. (d) This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 7. ADJUSTMENT IN OPTION SHARES. (a) In the event any change is made to the Company's outstanding Common Stock by reason of any stock split, stock dividend, combination of shares, exchange of shares, or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to the total number of Option Shares subject to this option and the Option Price payable per share in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. (b) If this option is to be assumed or is otherwise to remain outstanding after a Corporate Transaction, then this option shall be appropriately adjusted to apply and pertain to the number and class of securities that would have been issuable to the Optionee in the consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Option Price payable per share, provided the aggregate Option Price payable hereunder shall remain the same. 8. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not have any of the rights of a shareholder with respect to the Option Shares until such individual shall have exercised the option and paid the Option Price. 3. 4 9. MANNER OF EXERCISING OPTION. (a) In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or other person authorized to exercise this option must take the following actions: (1) Execute and deliver to the Secretary of the Company the Purchase Agreement; (2) Pay the aggregate Option Price for the purchased shares either by full payment in cash or check, or any other form approved by the Plan Administrator at the time of exercise in accordance with the provisions of Section 15. (3) Furnish to the Company appropriate documentation that the person or persons exercising the option (if other than Optionee) have the right to exercise this option. (b) Should the Company's outstanding common stock be registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), at the time the option is exercised, then the Option Price may also be paid as follows: (1) in shares of the Common Stock held by the Optionee for the requisite period necessary to avoid a charge to the Company's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date; or (2) through a special sale and remittance procedure pursuant to which the Optionee (i) is to provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Company, out of the sale proceeds, an amount sufficient to cover the aggregate Option Price payable for the purchased shares plus all applicable Federal and state income and employment taxes required to be withheld by the Company by reason of such purchase and (ii) concurrently provides written directives to the Company to deliver the certificates for the purchased shares directly to such broker-dealer in order to effect the sale transaction. (c) Except to the extent the special sale and remittance procedure is utilized to exercise this option, or as otherwise permitted by the Plan Administrator pursuant to Section 15, payment of the Option Price must accompany the delivery of the Purchase Agreement. As soon after such payment as practical, the Company shall mail or deliver to Optionee (or to the other person or persons exercising this option) a certificate or certificates representing the shares so purchased and paid for, with the appropriate legends affixed thereto. (d) In no event may this option be exercised for any fractional shares. 10. RIGHTS OF FIRST REFUSAL/REPURCHASE RIGHTS. THE OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THIS OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF FIRST REFUSAL OF THE COMPANY AND ITS ASSIGNS IN CONNECTION WITH ANY PROPOSED TRANSFER OF ANY SUCH SHARES IN ACCORDANCE WITH 4. 5 THE TERMS AND CONDITIONS SPECIFIED IN THE 1998 STOCK OPTION/STOCK ISSUANCE PLAN AND THE STOCK PURCHASE AGREEMENT. ADDITIONALLY, THE GRANT NOTICE MAY GRANT THE COMPANY THE RIGHT TO REPURCHASE ANY SHARES ACQUIRED UNDER THIS OPTION, WHICH RIGHT SHALL LAPSE OVER TIME BASED UPON THE OPTIONEE'S LENGTH OF SERVICE TO THE COMPANY. 11. COMPLIANCE WITH LAWS AND REGULATIONS. (a) The exercise of this option and the issuance of Option Shares upon such exercise shall be subject to compliance by the Company and the Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which shares of the Company's Common Stock may be listed at the time of such exercise and issuance. (b) In connection with the exercise of this option, Optionee shall execute and deliver to the Company such representations in writing as may be requested by the Company in order for it to comply with the applicable requirements of Federal and state securities laws. 12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Sections 3 and 6 above, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of Optionee and the successors and assigns of the Company. 13. LIABILITY OF COMPANY. (a) If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock that may be issued under the Plan without shareholder approval, then this option shall be void with respect to such excess shares, unless shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the applicable provisions of the Plan. (b) The inability of the Company to obtain approval from any regulatory body having authority the Company deems necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Company of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Company shall use its best efforts to obtain all such approvals. 14. NOTICES. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Company in care of the Corporate Secretary at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice, or at such other address as the Optionee shall have furnished the Company in writing at least ten (10) days in advance of its effective date. All notices shall be deemed to have been given or delivered upon personal delivery or 5. 6 forty-eight hours after deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 15. LOANS. The Plan Administrator, in its discretion and without any obligation to do so, may assist the Optionee in the exercise of this option by authorizing the extension of a loan to the Optionee from the Company or permitting the Optionee to pay the option price for the purchased Common Stock in installments over a period of years. The terms of any such loan or installment method of payment (including the interest rate, the requirements for collateral and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. 16. CONSTRUCTION. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option. 17. GOVERNING LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of Washington without resort to its choice of law rules. 18. SHAREHOLDER APPROVAL. The grant of this option is subject to approval of the Plan by the Company's shareholders within twelve (12) months after the adoption of the Plan by the Board. NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT TO THE CONTRARY, THIS OPTION MAY NOT BE EXERCISED IN WHOLE OR IN PART UNTIL SUCH SHAREHOLDER APPROVAL IS OBTAINED. In the event that such shareholder approval is not obtained, then this option shall terminate in its entirety and the Optionee shall have no rights to acquire any Option Shares hereunder. 19. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the event this option is designated an incentive stock option in the Grant Notice, the following terms and conditions shall also apply to the grant: (a) This option shall cease to qualify for favorable tax treatment as an incentive stock option under the Federal tax laws if (and to the extent) this option is exercised for one or more Option Shares: (i) more than three (3) months after the date the Optionee ceases to be an Employee for any reason other than death or Permanent Disability or (ii) more than one (1) year after the date the Optionee ceases to be an Employee by reason of Permanent Disability. (b) In the event this option is designated as immediately exercisable in the Grant Notice, then except in the event of a Corporate Transaction, this option shall not become exercisable in the calendar year in which granted if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which this option would otherwise first become exercisable in such calendar year, when added to the aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which one or more other post-1986 incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Company or any Parent or Subsidiary corporations) first become exercisable during the same calendar year, would exceed one hundred thousand dollars ($100,000). To the extent the exercisability of this option is 6. 7 deferred by reason of the foregoing limitation, the deferred portion first will become exercisable in the first calendar year or years thereafter in which the one hundred thousand dollar ($100,000) limitation of this Section 19(b) would not be contravened. (c) In the event this option is designated as an installment option in the Grant Notice, no installment under this option shall qualify for favorable tax treatment as an incentive stock option under the Federal tax laws if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which such installment first becomes exercisable hereunder, when added to the aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which this option or one or more other post-1986 incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Company or any Parent or Subsidiary corporations) first become exercisable during the same calendar year, would exceed one hundred thousand dollars ($100,000). (d) Should the exercisability of this option be accelerated upon a Corporate Transaction, then this option shall qualify for favorable tax treatment as an incentive stock option under the Federal tax laws only to the extent the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which this option first becomes exercisable in the calendar year in which the Corporate Transaction occurs does not, when added to the aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which this option or one or more other post-1986 incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Company or any Parent or Subsidiary corporations) first become exercisable during the same calendar year, exceed one hundred thousand dollars ($100,000). (e) To the extent this option should fail to qualify as an incentive stock option under the Federal tax laws, the Optionee will recognize compensation income in connection with the acquisition of one or more Option Shares hereunder, and the Optionee must make appropriate arrangements for the satisfaction of all Federal, state or local income tax withholding requirements and Federal social security employee tax requirements applicable to such compensation income. 20. ADDITIONAL TERMS APPLICABLE TO A NON-STATUTORY STOCK OPTION. In the event this option is designated a non-statutory stock option in the Grant Notice, Optionee hereby agrees to make appropriate arrangements with the Company for the satisfaction of all Federal, state or local income tax withholding requirements and Federal social security employee tax requirements applicable to the exercise of this option. 21. DEFINITIONS. The following definitions shall apply to the respective capitalized terms used herein: BOARD means the Board of Directors of InterNAP Network Services Corp. CODE means the Internal Revenue Code of 1986, as amended. COMMON STOCK means the Common Stock of InterNAP Network Services Corp. 7. 8 COMPANY means InterNAP Network Services Corp., a Washington corporation. CORPORATE TRANSACTION means one or more of the following transactions: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state of the Company's incorporation, (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company, or (iii) any reverse merger in which the Company is the surviving entity but in which fifty percent (50%) or more of the Company's outstanding voting stock is transferred to holders different from those who held the stock immediately prior to such merger. EMPLOYEE means an individual who is in the employ of the Company or any Parent or Subsidiary corporation. An optionee shall be considered to be an Employee for so long as such individual remains in the employ of the Company or any Parent or Subsidiary corporation, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. EXERCISE DATE shall be date on which the executed Purchase Agreement for one or more Option Shares is delivered to the Company in accordance with Section 9 of this Agreement. EXPIRATION DATE means the date specified in the Grant Notice as the date on which the option shall terminate (unless sooner terminated under the Plan or pursuant hereto). FAIR MARKET VALUE of a share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (a) If the Common Stock is at the time listed or admitted to trading on any stock exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock. If there is no reported sale of Common Stock on such exchange on the date in question, then the Fair Market Value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. (b) If the Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded in the over-the-counter market, the Fair Market Value shall be the mean between the highest bid and the lowest asked prices (or if such information is available the closing selling price) per share of Common Stock on the date in question in the over-the-counter market, as such prices are reported by the National Association of Securities Dealers through its NASDAQ National Market System or any successor system. If there are no reported bid and asked prices (or closing selling price) for the Common Stock on the date in question, then the mean between the highest bid and lowest asked prices (or closing selling price) on the last preceding date for which such quotations exist shall be determinative of Fair Market Value. (c) If the Common Stock is at the time neither listed nor admitted to trading on any stock exchange nor traded in the over-the-counter market, or if the Plan Administrator otherwise determines that the valuation provisions of subsections (a) and (b) above will not result in a true and accurate valuation of the Common Stock, then the Fair Market Value shall be 8. 9 determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate under the circumstances. GRANT DATE means the date specified in the Grant Notice as the date on which the option was granted to the Optionee under the Plan. GRANT NOTICE means the Notice of Grant of Stock Option which accompanies this Agreement. INCENTIVE STOCK OPTION means an incentive stock option which satisfies the requirements of Section 422 of the Code. NON-STATUTORY STOCK OPTION means an option not intended to meet the statutory requirements prescribed for an Incentive Stock Option. OPTION SHARES means the total number of shares of Common Stock indicated in the Grant Notice as purchasable under this option. OPTIONEE means the individual identified in the Grant Notice as the person to whom this option has been granted under the Plan. OPTION PRICE means the price indicated in the Grant Notice as the exercise price per share to be paid by the Optionee for the exercise of this option. PARENT corporation means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, provided each such corporation in the unbroken chain (other than the Company) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. PERMANENTLY DISABLED or Permanent Disability means the inability of an individual to engage in any substantial gainful activity by reason of any medically-determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. PLAN means the 1998 Stock Option/Stock Issuance Plan of the Company, in the form of Exhibit A to the Grant Notice. PLAN ADMINISTRATOR means either the Board or a committee of two or more Board members, to the extent such committee may at the time be responsible for plan administration. PURCHASE AGREEMENT means the stock purchase agreement, in substantially the form of Exhibit C to the Grant Notice, which is to be executed in connection with the exercise of this option for one or more Option Shares. SERVICE means the performance of services for the Company or any Parent or Subsidiary corporation by an individual in the capacity of an Employee, a non-employee member 9. 10 of the board of directors or an independent consultant or advisor. Accordingly, the Optionee shall be deemed to remain in Service for so long as such individual renders services to the Company or any Parent or Subsidiary corporation on a periodic basis in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant or advisor. SUBSIDIARY corporation means each corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 10. EX-10.7 13 1999 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.7 INTERNAP NETWORK SERVICES CORPORATION 1999 EQUITY INCENTIVE PLAN ADOPTED JUNE 19, 1999 APPROVED BY SHAREHOLDERS _______________, ______ TERMINATION DATE: _______________, 2009 1. PURPOSES. (a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock Awards are the Employees, Directors and Consultants of the Company and its Affiliates. (b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means by which eligible recipients of Stock Awards may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to acquire restricted stock. (c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Stock Awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CAUSE" shall have such meaning as is defined in the Optionholder's employment or consulting agreement with the Company. If the Optionholder does not have an employment or consulting agreement with the Company, or if such agreement does not define the term "cause," then the term "cause" shall mean: (i) misconduct or dishonesty that materially adversely affects the Company, including without limitation (A) an act materially in conflict with the financial interests of the Corporation, (B) an act that could damage the reputation or customer relations of the Company, (C) an act that could subject the Company to liability, (D) an act constituting sexual harassment or other violation of the civil rights of coworkers, (E) failure to obey any lawful instruction of the Board or any officer of the Company and (F) failure to comply with, or perform any duty required under, the terms of any confidentiality, inventions or non-competition agreement the Optionholder may have with the Company, or (ii) acts constituting the unauthorized disclosure of any of the trade secrets or confidential information of the 1. 2 Company, unfair competition with the Company or the inducement of any customer of the Company to breach any contract with the Company. The right to exercise any Option shall be suspended automatically during the pendency of any investigation by the Board or its designee, and/or any negotiations by the Board or its designee and the Optionholder, regarding any actual or alleged act or omission by the Optionholder of the type described in this section. (d) "CODE" means the Internal Revenue Code of 1986, as amended. (e) "COMMITTEE" means a committee of one or more members of the Board appointed by the Board in accordance with subsection 3(c). (f) "COMMON STOCK" means the common stock of the Company. (g) "COMPANY" means InterNAP Network Services Corporation, a Washington corporation. (h) "CONSULTANT" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) who is a member of the Board of Directors of an Affiliate. However, the term "Consultant" shall not include either Directors who are not compensated by the Company for their services as Directors or Directors who are merely paid a director's fee by the Company for their services as Directors. (i) "CONTINUOUS SERVICE" means that the Participant's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Participant's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant's Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or a Director will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (j) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (k) "DIRECTOR" means a member of the Board of Directors of the Company. (l) "DISABILITY" means (i) before the Listing Date, the inability of a person, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of that person's position with the Company or an Affiliate of the Company because of the sickness or 2. 3 injury of the person and (ii) after the Listing Date, the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. (m) "EMPLOYEE" means any person employed by the Company or an Affiliate. Mere service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (o) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the NASDAQ National Market or the NASDAQ SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (iii) Prior to the Listing Date, the value of the Common Stock shall be determined in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations. (p) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (q) "LISTING DATE" means the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system if such securities exchange or interdealer quotation system has been certified in accordance with the provisions of Section 25100(o) of the California Corporate Securities Law of 1968. (r) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or a subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or a subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K and is not engaged in a 3. 4 business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (s) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (t) "OFFICER" means (i) before the Listing Date, any person designated by the Company as an officer and (ii) on and after the Listing Date, a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (u) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan. (v) "OPTION AGREEMENT" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (w) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (x) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (y) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award. (z) "PLAN" means this InterNAP Network Services Corporation 1999 Equity Incentive Plan. (aa) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (bb) "SECURITIES ACT" means the Securities Act of 1933, as amended. (cc) "STOCK AWARD" means any right granted under the Plan, including an Option, a stock bonus and a right to acquire restricted stock. 4. 5 (dd) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (ee) "TEN PERCENT SHAREHOLDER" means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates. 3. ADMINISTRATION. (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). Any interpretation of the Plan by the Board and any decision by the Board under the Plan shall be final and binding on all persons. (b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; what type or combination of types of Stock Award shall be granted; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive Common Stock pursuant to a Stock Award; and the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person. (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or a Stock Award as provided in Section 12. (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) DELEGATION TO COMMITTEE. (i) GENERAL. The Board may delegate administration of the Plan to a Committee or Committees of one (1) or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or 5. 6 subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. (ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED. At such time as the Common Stock is publicly traded, in the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, and/or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such authority, the Board or the Committee may (1) delegate to a committee of one or more members of the Board who are not Outside Directors the authority to grant Stock Awards to eligible persons who are either (a) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award or (b) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code and/or) (2) delegate to a committee of one or more members of the Board who are not Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act. 4. SHARES SUBJECT TO THE PLAN. (a) SHARE RESERVE. Subject to the provisions of Section 11 relating to adjustments upon changes in Common Stock, the Common Stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate six million five hundred thousand (6,500,000) shares of Common Stock. As of the first nine (9) anniversaries of the effective date of the Plan, the number of shares of Common Stock that may be issued pursuant to Stock Awards will automatically be increased by the lesser of (i) three and one-half percent (3 1/2%) of the total number of shares of Common Stock outstanding on such anniversary date, or (ii) six million five hundred thousand (6,500,000) shares. (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the shares of Common Stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. (c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. (d) SHARE RESERVE LIMITATION. Prior to the Listing Date and to the extent then required by Section 260.140.45 of Title 10 of the California Code of Regulations, the total number of shares of Common Stock issuable upon exercise of all outstanding Options and the total number of shares of Common Stock provided for under any stock bonus or similar plan of the Company shall not exceed the applicable percentage as calculated in accordance with the conditions and exclusions of Section 260.140.45 of Title 10 of the California Code of Regulations, based on the shares of Common Stock of the Company that are outstanding at the time the calculation is made. 6. 7 5. ELIGIBILITY. (a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be granted only to Employees. Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. (b) TEN PERCENT SHAREHOLDERS. (i) A Ten Percent Shareholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. (ii) Prior to the Listing Date, a Ten Percent Shareholder shall not be granted a Nonstatutory Stock Option unless the exercise price of such Option is at least (i) one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant or (ii) such lower percentage of the Fair Market Value of the Common Stock at the date of grant as is permitted by Section 260.140.41 of Title 10 of the California Code of Regulations at the time of the grant of the Option. (iii) Prior to the Listing Date, a Ten Percent Shareholder shall not be granted a restricted stock award unless the purchase price of the restricted stock is at least (i) one hundred percent (100%) of the Fair Market Value of the Common Stock at the date of grant or (ii) such lower percentage of the Fair Market Value of the Common Stock at the date of grant as is permitted by Section 260.140.41 of Title 10 of the California Code of Regulations at the time of the grant of the Option. (c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 11 relating to adjustments upon changes in the shares of Common Stock, no Employee shall be eligible to be granted Options covering more than three million (3,000,000) shares of Common Stock during any calendar year. This subsection 5(c) shall not apply prior to the Listing Date and, following the Listing Date, this subsection 5(c) shall not apply until (i) the earliest of: (1) the first material modification of the Plan (including any increase in the number of shares of Common Stock reserved for issuance under the Plan in accordance with Section 4); (2) the issuance of all of the shares of Common Stock reserved for issuance under the Plan; (3) the expiration of the Plan; or (4) the first meeting of shareholders at which Directors are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security under Section 12 of the Exchange Act; or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. (d) CONSULTANTS. (i) Prior to the Listing Date, a Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, either the offer or the sale of the Company's securities to such Consultant is not exempt under Rule 701 of the Securities Act ("Rule 701") because of the nature of the services that the Consultant is providing to the Company, or because the Consultant 7. 8 is not a natural person, or as otherwise provided by Rule 701, unless the Company determines that such grant need not comply with the requirements of Rule 701 and will satisfy another exemption under the Securities Act as well as comply with the securities laws of all other relevant jurisdictions. (ii) From and after the Listing Date, a Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, a Form S-8 Registration Statement under the Securities Act ("Form S-8") is not available to register either the offer or the sale of the Company's securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, or because the Consultant is not a natural person, or as otherwise provided by the rules governing the use of Form S-8, unless the Company determines both (i) that such grant (A) shall be registered in another manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or (B) does not require registration under the Securities Act in order to comply with the requirements of the Securities Act, if applicable, and (ii) that such grant complies with the securities laws of all other relevant jurisdictions. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will be issued for shares of Common Stock purchased on exercise of each type of Option. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, no Option granted prior to the Listing Date shall be exercisable after the expiration of ten (10) years from the date it was granted, and no Incentive Stock Option granted on or after the Listing Date shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, the exercise price of each Nonstatutory Stock Option granted prior to the Listing Date shall be not less than eighty-five percent (85%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. The exercise price of each Nonstatutory Stock Option granted on or after the Listing 8. 9 Date shall be not less than eighty-five percent (85%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (d) CONSIDERATION. The purchase price of Common Stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option (or subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the Company of other Common Stock, (2) according to a deferred payment or other similar arrangement with the Optionholder (including an arrangement involving a promissory note issued by the Optionholder) or (3) in any other form of legal consideration that may be acceptable to the Board; provided, however, that at any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock Option granted prior to the Listing Date shall not be transferable except by will or by the laws of descent and distribution and, to the extent provided in the Option Agreement, to such further extent as permitted by Section 260.140.41(d) of Title 10 of the California Code of Regulations at the time of the grant of the Option, and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. A Nonstatutory Stock Option granted on or after the Listing Date shall be transferable to the extent provided in the Option Agreement. If the Nonstatutory Stock Option does not provide for transferability, then the Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (g) VESTING GENERALLY. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on 9. 10 the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 6(g) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised. (h) MINIMUM VESTING PRIOR TO THE LISTING DATE. Notwithstanding the foregoing subsection 6(g), to the extent that the following restrictions on vesting are required by Section 260.140.41(f) of Title 10 of the California Code of Regulations at the time of the grant of the Option, then: (i) Options granted prior to the Listing Date to an Employee who is not an Officer, Director or Consultant shall provide for vesting of the total number of shares of Common Stock at a rate of at least twenty percent (20%) per year over five (5) years from the date the Option was granted, subject to reasonable conditions such as continued employment; and (ii) Options granted prior to the Listing Date to Officers, Directors or Consultants may be made fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Company. (i) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability or for Cause), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement, which period shall not be less than thirty (30) days for Options granted prior to the Listing Date unless such termination is for cause), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. In the event an Optionholder's Continuous Service terminates for Cause, then his or her Option shall terminate immediately upon such event. (j) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability or for Cause) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in subsection 6(a) or (ii) the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (k) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the 10. 11 date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement, which period shall not be less than six (6) months for Options granted prior to the Listing Date) or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (l) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement, which period shall not be less than six (6) months for Options granted prior to the Listing Date) or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. (m) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Subject to the "Repurchase Limitation" in subsection 10(h), any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. (n) RIGHT OF REPURCHASE. Subject to the "Repurchase Limitation" in subsection 10(h), the Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to repurchase all or any part of the vested shares of Common Stock acquired by the Optionholder pursuant to the exercise of the Option. (o) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to exercise a right of first refusal following receipt of notice from the Optionholder of the intent to transfer all or any part of the shares of Common Stock received upon the exercise of the Option. Except as expressly provided in this subsection 6(o), such right of first refusal shall otherwise comply with any applicable provisions of the Bylaws of the Company. (p) RE-LOAD OPTIONS. Without in any way limiting the authority of the Board to make or not to make grants of Options hereunder, the Board shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionholder to a further Option (a "Re-Load Option") in the event the Optionholder exercises the Option evidenced by the Option Agreement, in whole or in part, by surrendering other shares of 11. 12 Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option shall (i) provide for a number of shares of Common Stock equal to the number of shares of Common Stock surrendered as part or all of the exercise price of such Option; (ii) have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (iii) have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option shall be subject to the same exercise price and term provisions heretofore described for Options under the Plan. Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on the exercisability of Incentive Stock Options described in subsection 10(d) and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares of Common Stock under subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options under subsection 5(c) and shall be subject to such other terms and conditions as the Board may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS. (a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus agreements may change from time to time, and the terms and conditions of separate stock bonus agreements need not be identical, but each stock bonus agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) CONSIDERATION. A stock bonus may be awarded in consideration for past services actually rendered to the Company or an Affiliate for its benefit. (ii) VESTING. Subject to the "Repurchase Limitation" in subsection 10(h), shares of Common Stock awarded under the stock bonus agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to the "Repurchase Limitation" in subsection 10(h), in the event a Participant's Continuous Service terminates, the Company may reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the stock bonus agreement. (iv) TRANSFERABILITY. For a stock bonus award made before the Listing Date, rights to acquire shares of Common Stock under the stock bonus agreement shall not be 12. 13 transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. For a stock bonus award made on or after the Listing Date, rights to acquire shares of Common Stock under the stock bonus agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the stock bonus agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the stock bonus agreement remains subject to the terms of the stock bonus agreement. (b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of the restricted stock purchase agreements may change from time to time, and the terms and conditions of separate restricted stock purchase agreements need not be identical, but each restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) PURCHASE PRICE. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, the purchase price under each restricted stock purchase agreement shall be such amount as the Board shall determine and designate in such restricted stock purchase agreement. For restricted stock awards made prior to the Listing Date, the purchase price shall not be less than eighty-five percent (85%) of the Common Stock's Fair Market Value on the date such award is made or at the time the purchase is consummated. For restricted stock awards made on or after the Listing Date, the purchase price shall not be less than eighty-five percent (85%) of the Common Stock's Fair Market Value on the date such award is made or at the time the purchase is consummated. (ii) CONSIDERATION. The purchase price of Common Stock acquired pursuant to the restricted stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board, according to a deferred payment or other similar arrangement with the Participant; or (iii) in any other form of legal consideration that may be acceptable to the Board in its discretion; provided, however, that at any time that the Company is incorporated in Delaware, then payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. (iii) VESTING. Subject to the "Repurchase Limitation" in subsection 10(h), shares of Common Stock acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to the "Repurchase Limitation" in subsection 10(h), in the event a Participant's Continuous Service terminates, the Company may repurchase or otherwise reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the restricted stock purchase agreement. 13. 14 (v) TRANSFERABILITY. For a restricted stock award made before the Listing Date, rights to acquire shares of Common Stock under the restricted stock purchase agreement shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. For a restricted stock award made on or after the Listing Date, rights to acquire shares of Common Stock under the restricted stock purchase agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the restricted stock purchase agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the restricted stock purchase agreement remains subject to the terms of the restricted stock purchase agreement. 8. COVENANTS OF THE COMPANY. (a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards. (b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. 9. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to Stock Awards shall constitute general funds of the Company. 10. MISCELLANEOUS. (a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) SHAREHOLDER RIGHTS. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms. 14. 15 (c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) INVESTMENT ASSURANCES. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (iii) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act or (iv) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock. (f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a Stock Award Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock under a Stock Award by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Participant as a result of the exercise or acquisition of Common Stock under the Stock Award in an amount not to exceed the minimum amount of tax 15. 16 required to be withheld by law; or (iii) delivering to the Company owned and unencumbered shares of Common Stock. Notwithstanding the foregoing, the Company shall not be authorized to withhold shares of Common Stock at rates in excess of the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes. (g) INFORMATION OBLIGATION. Prior to the Listing Date, to the extent required by Section 260.140.46 of Title 10 of the California Code of Regulations, the Company shall deliver financial statements to Participants at least annually. This subsection 10(g) shall not apply to key Employees whose duties in connection with the Company assure them access to equivalent information. (h) REPURCHASE LIMITATION. The terms of any repurchase option shall be specified in the Stock Award and may be either at Fair Market Value at the time of repurchase or at not less than the original purchase price. To the extent required by Section 260.140.41 and Section 260.140.42 of Title 10 of the California Code of Regulations at the time a Stock Award is made, any repurchase option contained in a Stock Award granted prior to the Listing Date to a person who is not an Officer, Director or Consultant shall be upon the terms described below: (i) FAIR MARKET VALUE. If the repurchase option gives the Company the right to repurchase the shares of Common Stock upon termination of employment at not less than the Fair Market Value of the shares of Common Stock to be purchased on the date of termination of Continuous Service, then (i) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the shares of Common Stock within ninety (90) days of termination of Continuous Service (or in the case of shares of Common Stock issued upon exercise of Stock Awards after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Company and the Participant (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code regarding "qualified small business stock") and (ii) the right terminates when the shares of Common Stock become publicly traded. (ii) ORIGINAL PURCHASE PRICE. If the repurchase option gives the Company the right to repurchase the shares of Common Stock upon termination of Continuous Service at the original purchase price, then (i) the right to repurchase at the original purchase price shall lapse at the rate of at least twenty percent (20%) of the shares of Common Stock per year over five (5) years from the date the Stock Award is granted (without respect to the date the Stock Award was exercised or became exercisable) and (ii) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the shares of Common Stock within ninety (90) days of termination of Continuous Service (or in the case of shares of Common Stock issued upon exercise of Options after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Company and the Participant (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code regarding "qualified small business stock"). 11. ADJUSTMENTS UPON CHANGES IN STOCK. 16. 17 (a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common Stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to subsection 4(a) and the maximum number of securities subject to award to any person pursuant to subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or liquidation of the Company, then all outstanding Stock Awards shall terminate immediately prior to such event. (c) CERTAIN CHANGES IN CONTROL. In the event of (i) a sale, lease or other disposition of all or substantially all of the assets of the Company, (ii) a merger or consolidation in which the Company is not the surviving corporation or (iii) a reverse merger in which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise (collectively, a "Change in Control"), then any surviving corporation or acquiring corporation may assume or continue any Stock Awards outstanding under the Plan or may substitute similar stock awards (including an award to acquire the same consideration paid to the shareholders in the transaction described in this subsection 11(c)) for those outstanding under the Plan. In the event any surviving corporation or acquiring corporation refuses to assume or continue such Stock Awards or to substitute similar stock awards for those outstanding under the Plan, then with respect to Stock Awards held by Participants whose Continuous Service has not terminated, the vesting of such Stock Awards (and, if applicable, the time during which such Stock Awards may be exercised) shall be accelerated in full, and the Stock Awards shall terminate if not exercised (if applicable) at or prior to such event. With respect to any other Stock Awards outstanding under the Plan, such Stock Awards shall terminate if not exercised (if applicable) prior to such event. (d) TERMINATION OF SERVICE FOLLOWING A CHANGE IN CONTROL. Unless otherwise specified in the applicable Stock Award Agreement, in the event of the occurrence of a Change in Control and provided that a Participant's Stock Award remains in effect following such Change in Control or is assumed, continued or substituted for any similar stock award in connection with the Change in Control, then, if such Participant's Continuous Service is terminated by the Company without Cause within thirteen (13) months following the effective date of the Change in Control, all Stock Awards held by such Participant (or any substituted stock awards) shall, as of the date of such termination of Continuous Service, vest in full and become fully exercisable (if applicable) to the extent not previously vested or exercisable. Such Stock Awards shall remain exercisable until they expire in accordance with their terms. 17. 18 (e) SECURITIES ACQUISITION. After the Listing Date, in the event of an acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or an Affiliate) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of Directors, then with respect to Stock Awards held by Participants whose Continuous Service has not terminated, the vesting of such Stock Awards (and, if applicable, the time during which such Stock Awards may be exercised) shall be accelerated in full. Such Stock Awards shall remain exercisable until they expire in accordance with their terms. (f) PARACHUTE PAYMENTS. If any payment or benefit Optionholder would receive in connection with a Change in Control from the Company or otherwise ("Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then such Payment shall be reduced to the Reduced Amount. The "Reduced Amount" shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in Optionholder's receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting "parachute payments" is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the following order unless the Optionholder elects in writing a different order (provided, however, that such election shall be subject to Company approval if made on or after the effective date of the Change of Control): reduction of cash payments; cancellation of accelerated vesting of stock awards; reduction of employee benefits. In the event that acceleration of vesting of stock award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of the Optionholder's stock awards unless the Optionholder elects in writing a different order for cancellation. The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Change in Control shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder. The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and Optionholder within fifteen (15) calendar days after the date on which Optionholder's right to a Payment arises (if requested at that time by the Company or Optionholder) or at such other time as requested by 18. 19 the Company or Optionholder. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish the Company and Optionholder with an opinion reasonably acceptable to Optionholder that no Excise Tax will be imposed with respect to such Payment. Any good faith determination of the accounting firm made hereunder shall be final, binding and conclusive upon the Company and Optionholder. 12. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 11 relating to adjustments upon changes in Common Stock, no amendment shall be effective unless approved by the shareholders of the Company to the extent shareholder approval is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any NASDAQ or securities exchange listing requirements. (b) SHAREHOLDER APPROVAL. The Board may, in its sole discretion, submit any other amendment to the Plan for shareholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. (e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards; provided, however, that the rights under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. (a) PLAN TERM. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the shareholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. 19. 20 (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the Participant. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Stock Award shall be exercised (or, in the case of a stock bonus, shall be granted) unless and until the Plan has been approved by the shareholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 15. CHOICE OF LAW. The law of the State of Washington shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules. 20. EX-10.8 14 1999 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT 1 EXHIBIT 10.8 INTERNAP NETWORK SERVICES CORPORATION 1999 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT (INCENTIVE AND NONSTATUTORY STOCK OPTIONS) Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock Option Agreement, InterNAP Network Services Corporation (the "Company") has granted you an option under its 1999 Equity Incentive Plan (the "Plan") to purchase the number of shares of the Company's Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. 2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments, as provided in the Plan. 3. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in your Grant Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise" of your option is permitted) and subject to the provisions of your option, you may elect at any time that is both (i) during the period of your Continuous Service and (ii) during the term of your option, to exercise all or part of your option, including the nonvested portion of your option; provided, however, that: (a) a partial exercise of your option shall be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock; (b) any shares of Common Stock so purchased from installments that have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Company's form of Early Exercise Stock Purchase Agreement; and (c) you shall enter into the Company's form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred. 4. ISO EXERCISE LIMITATION. (a) The aggregate Fair Market Value of the shares of Common Stock with respect to which you may exercise your option for the first time during any calendar year, when 1. 2 added to the aggregate Fair Market Value of the shares of Common Stock subject to any other options designated as Incentive Stock Options and granted to you under any stock option plan of the Company or an Affiliate prior to the Date of Grant with respect to which such options are exercisable for the first time during the same calendar year, shall not exceed $100,000 (the "ISO Exercise Limitation") unless applicable law requires that your option be exercisable sooner.(1) (b) The ISO Exercise Limitation shall terminate, and you may fully exercise your option, as to all shares of Common Stock subject to your option for which your option would have been exercisable in the absence of the ISO Exercise Limitation upon the earlier of the following events: (i) the date of termination of your Continuous Service, (ii) the day immediately prior to the effective date of a Change in Control (as defined in the Plan) in which your option is not assumed or substituted for as provided in the Plan, or (iii) the day that is ten (10) days prior to the Expiration Date of your option. Upon such termination of the ISO Exercise Limitation, your option shall be deemed a Nonstatutory Stock Option to the extent of the number of shares of Common Stock subject to your option that would otherwise then exceed the ISO Exercise Limitation. 5. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner PERMITTED BY YOUR GRANT NOTICE, which may include one or more of the following: (a) In the Company's sole discretion at the time your option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. (b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to the Company's reported earnings (generally six months) or that you did not acquire, directly or - -------- (1) For purposes of this provision, your options designated as Incentive Stock Options shall be taken into account in the order in which they were granted to you, and the Fair Market Value of shares of Common Stock shall be determined as of the time the option with respect to such shares of Common Stock is granted. If Section 422 of the Code is amended to provide for a different limitation from that set forth in this provision, the ISO Exercise Limitation shall be deemed amended effective as of the date required or permitted by such amendment to the Code. 2. 3 indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. "Delivery" for these purposes, in the sole discretion of the Company at the time you exercise your option, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. 6. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock. 7. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option must also comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations. 8. TERM. The term of your option commences on the Date of Grant and expires upon the EARLIEST of the following: (a) immediately upon the termination of your Continuous Service for Cause; (b) three (3) months after the termination of your Continuous Service for any reason other than Cause, Disability or death, provided that if during any part of such three- (3-) month period you may not exercise your option solely because of the condition set forth in the preceding paragraph relating to "Securities Law Compliance," your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; (c) twelve (12) months after the termination of your Continuous Service due to your Disability; (d) twelve (12) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates for reason other than Cause; (e) the Expiration Date indicated in your Grant Notice; or (f) the tenth (10th) anniversary of the Date of Grant. If your option is an incentive stock option, note that, to obtain the federal income tax advantages associated with an "incentive stock option," the Code requires that at all times 3. 4 beginning on the date of grant of your option and ending on the day three (3) months before the date of your option's exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or Disability. The Company has provided for extended exercisability of your option under certain circumstances for your benefit but cannot guarantee that your option will necessarily be treated as an "incentive stock option" if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your option more than three (3) months after the date your employment terminates. 9. EXERCISE. (a) You may exercise the vested portion of your option (and the unvested portion of your option if your Grant Notice so permits) during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. (b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise. (c) If your option is an incentive stock option, by exercising your option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your option that occurs within two (2) years after the date of your option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option. (d) By exercising your option you agree that the Company (or a representative of the underwriter(s)) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, require that you not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company held by you, for a period of time specified by the underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act. You further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to your shares of Common Stock until the end of such period. 10. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, 4. 5 you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. 11. RIGHT OF FIRST REFUSAL. Shares of Common Stock that you acquire upon exercise of your option are subject to any right of first refusal that may be described in the Company's bylaws in effect at such time the Company elects to exercise its right. The Company's right of first refusal shall expire on the Listing Date. 12. RIGHT OF REPURCHASE. To the extent provided in the Company's bylaws as amended from time to time, the Company shall have the right to repurchase all or any part of the shares of Common Stock you acquire pursuant to the exercise of your option. 13. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective shareholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 14. WITHHOLDING OBLIGATIONS. (a) At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "cashless exercise" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your option. (b) Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable conditions or restrictions of law, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law. If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility. 5. 6 (c) You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein. 15. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 16. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control. 6. EX-10.9 15 LEASE AGREEMENT 1 EXHIBIT 10.9 TWO UNION SQUARE SEATTLE, WASHINGTON OFFICE LEASE TABLE OF CONTENTS BASIC LEASE INFORMATION........................................................1 RENT PAYMENT...................................................................2 ANNUAL RENT ADJUSTMENT (OPERATING EXPENSES)....................................4 REAL PROPERTY DESCRIPTION AND TAXES............................................5 POSSESSION.....................................................................5 ACCEPTANCE AND CARE OF PREMISES................................................6 ALTERATIONS....................................................................6 INSPECTION AND REPAIRS.........................................................7 SERVICES BY LESSOR.............................................................7 FIRE OR OTHER CASUALTY.........................................................9 WAIVER OF SUBROGATION.........................................................10 USES..........................................................................10 SIGNS AND ADVERTISING.........................................................10 ACCIDENTS AND INDEMNITY.......................................................11 LIENS AND INSOLVENCY..........................................................12 DEFAULT AND RE-ENTRY..........................................................12 REMOVAL OF PROPERTY AND REPLACEMENT OF NON-STANDARD ITEMS.....................12 NON-WAIVER....................................................................13 COSTS AND ATTORNEYS' FEES.....................................................13 PRIORITY......................................................................13 CONDEMNATION..................................................................13 ASSIGNMENT AND SUBLETTING.....................................................14 RULES, REGULATIONS AND MISCELLANEOUS..........................................16 SUCCESSORS....................................................................19 SHARED TENANT SERVICES........................................................19 AMERICAN DISABILITIES ACT (ADA) COMPLIANCE....................................19 OPTION TO EXTEND..............................................................20 FIRST RIGHT TO LEASE..........................................................22 PARKING.......................................................................23 LESSEE IMPROVEMENT ALLOWANCE..................................................23 INTERNAP NETWORK SERVICES, INC., LESSEE 2 TWO UNION SQUARE SEATTLE, WASHINGTON OFFICE LEASE THIS LEASE, made this June 11, 1998 between: UNION SQUARE LIMITED PARTNERSHIP, a Washington Limited Partnership, (Lessor) and INTERNAP NETWORK SERVICES, INC., a Washington corporation (Lessee). Lessee, in consideration of this Lease, covenants and agrees with Lessor as follows: 1. BASIC LEASE INFORMATION 1.1 Leased Premises. Lessee hereby leases from Lessor, Room(s) 1001-1037 (the Leased Premises) as outlined in red on the attached print marked Exhibit A in the Building at Seattle, Washington, known as Two Union Square (the Building), and situated on the real property described in Section 4 (the Land). 1.2 Floor Areas. For purposes of this Lease, the usable area of the Leased Premises is deemed to be 19,225 square feet. The rentable area of the Leased Premises is deemed to be 20,675 square feet. The Leased Premises are deemed to be 1.96132 percent of the rentable area of the Building. In the event a portion of the Building is damaged or any other event or change occurs which alters the usable or rentable areas of the Leased Premises or the Building, Lessor may appropriately adjust the foregoing areas and percent. Usable and rentable areas shall mean such areas as defined generally by the Building Owners and Managers Association International in its "Standard Method for Measuring Floor Area in Office Buildings" (American National Standard ANSIZ 65.1-1996). Whenever areas are herein referred to generally, it shall mean rentable area. Lessee has undertaken such examination of rentable and usable areas of the Building as it desires and agrees with the areas set forth above. 1.3 Term. The lease term shall be five (5) years, commencing August 15, 1998, and ending August 14, 2003, subject to Lessee's rights in Section 27. 1.4 Rent. The Base Monthly Rent, payable without demand in advance on the first day of each calendar month, shall be: $46,088.00 commencing Sept. 15, 1998 and ending August 31, 2000. $48,242.00 commencing Sept., 1, 2000 and ending August 14, 2003. 3 1.5 Base Indices Consumer Price Index for September 1998. Cost of electricity per kilowatt-hour (average) for 12 months ending September 30, 1998. Janitorial hourly labor rate as of September 30, 1998. Operating Cost Adjustment Base: $6.87 per sq. ft., per yr. The first rent adjustment pursuant to Section 3 will be January 1, 2000. 1.6 Use. The Leased Premises shall be used only for the purposes of a business office. 1.7 Lessee's Address for Notices if Other Than the Leased Premises: 1.8 Lessor's Address for Notices and Payment of Rent: UNICO Properties, Inc. Rainier Tower 1301 5th Avenue, Suite 3500 Seattle, WA 98101-2647 1.9 Exhibits and Other Attachments Which are Part of the Lease: Exhibit A: Print with Leased Premises outlined in red on standard floor plan. Exhibit B: Initial Improvement of Leased Premises. Exhibit C: Janitorial Service. 1.10 Security Deposit: $46,088.00 2. RENT PAYMENT Lessee shall pay the Base Monthly Rent and other charges provided for in this Lease, in lawful money of the United States on or before their specified due dates to Lessor at the address specified in Section 1.8, or to such other party or at such other place as Lessor may hereafter from time to time designate in writing. All rent which is five (5) days past due shall bear interest at the rate of one percent (1%) per month from the date rent is due until paid. If the maximum annual rate of interest permitted by applicable law shall be less than the rate of interest provided 2 4 for herein, then all past due payments of rent shall bear interest at the maximum rate permitted by applicable law from due date until paid. Lessee acknowledges that late payment by Lessee to Lessor of rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and economically impractical to ascertain. Therefore, if any payment of rent due from Lessee is not received by Lessor within 10 days after the due date, Lessee shall pay to Lessor (in addition to the interest above provided) a late charge of Fifty Dollars ($50). The parties agree that this late charge represents a fair and reasonable estimate of the costs that Lessor will incur by reason of late payment by Lessee and is in addition to any interest charges on past due rent. The term "rent" when used in this Lease shall include Base Monthly Rent and all other amounts however designated payable by Lessee to Lessor hereunder. 3. ANNUAL RENT ADJUSTMENT (OPERATING EXPENSES) 3.1 A portion of the initial rental rate shall be adjusted January 1 of each year during the term of this Lease commencing 2000. Three separate indicators, each to be factored separately by one-third of the Operating Cost Adjustment Base, are used to provide a reasonably broad base to determine the amount of such adjustment. These indicators are the Consumer Price Index, the cost of electricity and janitorial hourly labor rate. 3.2 The base indices for the Consumer Price Index, the cost of electricity and janitorial hourly labor rate, shall be as stated in Section 1.5. Succeeding indices for each of these indices will be calculated annually thereafter, using the succeeding data for the month of September, 12-month period ending September 30, and September 30, respectively. The ratio that each succeeding index bears to its base index shall be reduced by 1.00 and multiplied by one-third of the Operating Cost Adjustment Base, and by the rentable area of the Leased Premises. Each January 1, commencing the calendar year specified in Section 1.5, the Base Monthly Rent otherwise provided for in this Lease shall be increased by 1/12th the sum of the amounts so determined. In no event shall the Base Monthly Rent be decreased. 3.3 The Consumer Price Index to be used shall be the Consumer Price Index for all urban consumers, U.S. city average, all items, series 1982-84 equals 100 (as published by the U.S. Department of Labor, Bureau of Statistics). If this index is revised or changed (as, for example, by taking the average index for different years as the base figure of 100), the base index shall be adjusted accordingly. If this index is discontinued, the index promulgated by the Department of Labor, which most closely approximates the above-referenced index, shall be used and the base index shall be adjusted accordingly. 3.4 The cost of electricity to be used shall be the average cost to Lessor per kilowatt-hour of electricity consumed in the Building for the 12-month periods ending the September 30 specified in Section 1.5 and each September 30 thereafter. 3.5 The janitorial hourly labor rate to be used shall be the hourly compensation paid to persons employed as janitors in the Building, including all applicable taxes and fringe benefits payable by employers. 3 5 4. REAL PROPERTY DESCRIPTION AND TAXES 4.1 The legal description of the Land is: Commencing at the most southwesterly corner of Lot 12, of Block 61, Addition to Town of Seattle (commonly known as A.A. Denny's Fifth Addition to City of Seattle), according to plat recorded in Volume 1 of Plats, page 89, in King County, Washington; thence north 30 degrees 37'08" west along the westerly line of said block 119.84 feet, to the true point of beginning; thence north 59 degrees 20'00" east 105.15 feet; thence north 30 degrees 40'32" west 38.89 feet; thence north 59 degrees 23'00" east 14.80 feet; thence north 30 degrees 37'00" west 0.55 feet; thence north 59 degrees 20'14" east 135.80 feet to the easterly line of said block; thence south 30 degrees 35'43" east 116.45 feet to the westerly margin of Interstate No. 5; thence north 59 degrees 24'17" east 33.00 feet to the centerline of vacated Seventh Avenue; thence north 30 degrees 35'43" west along said centerline 311.89 feet to the southerly margin of Union Street as created by City of Seattle Ordinance No. 18188; thence south 59 degrees 22'04" west along said southerly margin 288.79 feet to the easterly margin of Sixth Avenue; thence south 30 degrees 37'08" east 234.99 feet to the true point of beginning; and Lots 1, 4, 5 and 8 in Block 64, of said addition except the portions thereof condemned under King County Superior Court Cause Nos. 62589, 570519 and 566654; together with portion of vacated alley and Seventh Avenue lying adjacent to and abutting thereon as provided by Ordinance Nos. 107299 and 111138, respectively, of the City of Seattle, and portion of vacated alley conveyed to Lessor by deed recorded under King County Receiving No. 8010090702. 4.2 Lessor shall pay all real property taxes and assessments which may be levied against the Building and the Land. If the amount of such real property taxes and assessment installments payable in any calendar year during the lease term exceeds the amount thereof payable during the calendar year the lease term commences, then on April 1 and October 1 of each such year, Lessee shall pay Lessor an amount equal to one-half of such excess multiplied by the percentage in Section 1.2. Upon Lessee's request, Lessor shall furnish copies of the real property tax statement for the year in which the additional payment is requested and the year the lease term commenced. The foregoing charges constitute additional rent, which shall be deemed to accrue uniformly during the calendar year in which the payment is due. Payment under the provisions of this Section for the year the lease term ends shall be prorated, based on reasonable projections of the increase through the termination of this Lease and shall be due thirty (30) days before such termination. 5. POSSESSION 5.1 In the event of the inability of Lessor to deliver possession of the Leased Premises or any portion thereof, at the time of the commencement of the term of this Lease, Lessor shall not be liable for any damage caused thereby, nor shall this Lease thereby become void or voidable. Lessee shall not be liable for payment of any rent until such time as Lessor can deliver possession, 4 6 except as may be otherwise provided in an Exhibit to this Lease. If Lessor shall deliver possession of the Leased Premises to Lessee prior to the commencement date of this Lease and Lessee agrees to accept the same at such time, both Lessor and Lessee agree to be bound by all provisions and obligations of this Lease during the period of occupancy prior to commencement, including the payment of rent at the same monthly rate, prorated for the prior period. 5.2 Notwithstanding the foregoing, Lessor will proceed diligently and in good faith to complete all of the tenant improvement work as outlined in Section 30 and Exhibit B and to deliver the Leased Premises to Lessee in a substantially completed condition on August 15, 1998 subject to delays caused by Lessee or its agents; strikes or labor disputes; material shortages; fire or other casualty; acts of God or other causes beyond Lessor's control for which rent shall not commence until substantial completion of the tenant improvement work. In the event of a delay caused by Lessee, the substantial completion date shall be extended by the number of days of said delay. However, rent shall commence on August 15, 1998 if such delay is caused by Lessee. In the event Lessor is unable to deliver the Leased Premises to Lessee by October 1, 1998 (and said delay was not caused by Lessee), then Lessee, upon thirty (30) days prior notice may cancel the Lease on the date specified in such notice, unless the Lease Premises are substantially completed by said date. 6. ACCEPTANCE AND CARE OF PREMISES 6.1 Taking of possession of the Leased Premises by Lessee shall be conclusive evidence the Leased Premises were, on that date, in good, clean and tenantable condition, except for latent defects and punch list items not yet completed. 6.2 Lessee shall keep the Leased Premises neat and clean and in a sanitary condition and shall at all times preserve them in as good condition and repair as they now are, or may hereafter be put into, reasonable use and wear and damage by fire or other unavoidable casualty excepted. All damage or injury done to the Leased Premises by Lessee or by any persons who may be in or upon the Leased Premises with the consent of Lessee, including the cracking or breaking of glass of any windows and doors, shall be paid for by Lessee and Lessee shall pay for all damage to the Building caused by Lessee's misuse of the Leased Premises or the appurtenances thereto. Lessee shall not put any curtains, draperies or other hangings on or beside the windows in the Leased Premises without first obtaining Lessor's consent. If Lessee shall fail to keep and preserve the Leased Premises in said condition and state of repair Lessor may at its option put or cause the same to be put into the condition and state of repair agreed upon, and in such case Lessee, on demand, shall pay the cost thereof. 7. ALTERATIONS Lessee shall design the Tenant Work so they will comply with then applicable laws at the commencement of the lease term. Lessee shall not make any alterations, additions or improvements in or to the Leased Premises, or make changes to locks on doors, or add, disturb or in any way change any plumbing or wiring therein, without the prior written consent of Lessor, which shall not be unreasonably withheld. Lessor may require that any such work be performed 5 7 by Lessor's employees or contractor(s) employed by Lessor. Lessor, at its option, may at its own expense make any repairs, alterations or improvements which Lessor may deem necessary or advisable for the preservation, safety or improvement of the Leased Premises or the Building, provided only that Lessee shall at all times have reasonable access and use of the Leased Premises. Lessee shall, at its own expense, make any alterations, additions or improvements to the Leased Premises, which are required by law during the term of this Lease. Lessor's approval concerning the initial improvement or any subsequent alteration, addition or improvement of the Leased Premises is for Lessor's benefit only and shall not create any responsibility or liability on the part of Lessor for design sufficiency or compliance with applicable laws. 8. INSPECTION AND REPAIRS Lessor shall have the right with reasonable notice, except in emergencies to inspect the Leased Premises at all reasonable times and the right to enter the same for the purpose of cleaning, repairing, altering or improving the same, or the Building, but nothing contained in this Lease shall be construed so as to impose any obligation on Lessor to make any repairs, alterations or improvements except as expressly provided in Section 9. 9. SERVICES BY LESSOR Lessor will, at its expense, provided Lessee is not in default, furnish Lessee with the following services and utilities: (a) Elevator service during normal business hours of the Building (8:00 a.m. to 6:00 p.m. -- Monday through Friday and 9:00 a.m. to 1:00 p.m. -- Saturday, except legal holidays generally observed in the State of Washington) and the service of at least one elevator during all other hours. (b) Heating and air cooling to maintain a temperature condition which in Lessor's reasonable judgment provides for comfortable occupancy of the Leased Premises during normal business hours of the Building, under normal business operations, provided Lessee complies with Lessor's instructions regarding use of drapes and thermostats and Lessee does not utilize heat generating machines or equipment other than normal office equipment in normal quantities, such as Desktop PC's, printers, and fax machines, which affect the temperature otherwise maintained by the air cooling system. Upon request Lessor shall make available at Lessee's expense after hours heat or air cooling. The minimum use of after hours heat or air cooling and the cost thereof shall be determined by Lessor and confirmed in writing to Lessee, as the same may change from time to time. In addition to any and all other rights and remedies which Lessor may invoke for a violation or breach of this Lease, Lessor may discontinue said heating and air cooling service without any abatement of rent whatsoever. (c) Water for drinking, lavatory and toilet purposes. (d) Electricity for building standard lighting and operation of low power usage office machines in quantities usually furnished by Lessor to tenants in the Building for general office use. 6 8 Low power usage machines are typewriters, desk top calculators, desk top computer terminals and similar equipment with similar power requirements which operate on 110 volt circuits. (e) Janitorial service and window washing. This service includes vacuum cleaning of carpets and cleaning of Building standard vinyl composition tile, but no other services with respect to carpets or non-standard floor coverings. Shampoo or similar cleaning of carpets and repair and replacement of carpets shall be Lessee's responsibility and at Lessee's expense. (f) Maintain the exterior window blinds or draperies, windows, doors, floors, walls, ceilings, plumbing and plumbing fixtures, and electrical distribution system and lighting fixtures in good condition and repair, except for damage caused by Lessee, its employees, agents, invitees or visitors, and except that such service will not be provided as to any of the foregoing items that are not standard for the Building. Lessor shall maintain, repair, replace and keep in a first-class condition comparable to other first-class or Class A office buildings in the downtown Seattle, Washington area, the Common Areas (including, without limitation, the lobbies, elevators, stairs, parking areas, grounds, loading areas and corridors), the roofs, foundations, load-bearing elements, conduits and structural walls and other structural elements of the Building, the underground utility and sewer pipes of the Building, all base building mechanical, electrical, plumbing, HVAC system, access control system and the sprinkler system and other fire and life-safety systems, as well as window blinds and draperies. All repairs and maintenance required of Lessor pursuant to this Section or elsewhere in the Lease shall be performed in accordance with standards applicable to comparable first-class office buildings in the downtown Seattle, Washington area, and performed in a timely and diligent fashion. Lessor agrees to diligently attend to any routine repairs or maintenance needs brought to its attention by Lessee as soon as reasonably practicable. Lessor shall coordinate all maintenance and repair work with respect to the Leased Premises with Lessee and shall perform the same in a manner to minimize to the extend possible any disruption of Lessee's business activities. (g) Replacement of burned out fluorescent tubes in light fixtures which are standard for the Building. Burned out bulbs, tubes or other light sources in fixtures which are not standard for the Building will be replaced by Lessor at Lessee's expense. 9.2 Lessor shall use reasonable diligence to remedy an interruption in the furnishing of such services and utilities. If, however, any governmental authority imposes regulations, controls or other restrictions upon Lessor or the Building which would require a change in the services provided by Lessor under this Lease, Lessor may comply with such regulations, controls or other restrictions, including without limitation, curtailment, rationing or restrictions on the use of electricity or any other form of energy serving the Leased Premises. Lessee will cooperate and do such things as are reasonably necessary to enable Lessor to comply with such regulations, controls or other restrictions. 9.3 Whenever heat generating machines or equipment other than low power usage machines, or lighting other than building standard lights are used in the Leased Premises by Lessee which affect the temperature otherwise maintained by the air cooling system, Lessor shall have the right to install supplementary air cooling units in the Leased Premises, and the cost 7 9 thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Lessee to Lessor upon billing by Lessor. Lessor may impose a reasonable charge for utilities and services, including without limitation, air cooling, electric current and water, required to be provided the Leased Premises by reason of, (a) any substantial recurrent use of the Leased Premises at any time other than the hours of 8:00 a.m. to 6:00 p.m., Monday through Friday, (b) any use beyond what Lessor agrees to furnish as described above, (c) electricity used by equipment designated by Lessor as high power usage equipment or (d) the installation, maintenance, repair, replacement or operation of supplementary air cooling equipment, additional electrical systems or other equipment required by reason of special electrical, heating, cooling or ventilating requirements of equipment used by Lessee at the Leased Premises. High power usage equipment includes without limitation, data processing machines, punch card machines, computers and machines which operate on 220 volt circuits. Lessee shall not install or operate high power usage equipment on the Leased Premises without Lessor's prior written consent, which may be refused unless Lessee confirms in writing its obligation to pay the additional charges necessitated by such equipment. At Lessor's option, separate meters for such utilities and services may be installed for the Leased Premises and Lessee upon demand therefor, shall immediately pay Lessor for the installation, maintenance, repair and replacement of such meters. 9.4 Lessor does not warrant that any of the services and utilities referred to above will be free from interruption. Interruption of services and utilities shall not be deemed an eviction or disturbance of Lessee's use and possession of the Leased Premises or any part thereof or render Lessor liable to Lessee for damages, or relieve Lessee from performance of Lessee's obligations under this Lease. In the event there is an interruption in heating, cooling, electricity, water or elevator services to the Leased Premises which materially disrupts Lessee's ability to conduct business within the Leased Premises and such interruption was not caused by Lessee, Lessor shall diligently pursue the remedy of such interruption and in the event said interruption is in excess of five (5) days and is not caused by Lessee, then on the sixth (6th) day following such interruption, all rent shall be abated until such services are restored. In the event such interruption cannot be remedied within thirty (30) days of such interruption and such interruption was not caused by Lessee, then, upon five (5) days written notice to Lessor, Lessee may cancel the Lease unless within such five (5) day period Lessor remedies the interruption. 10. FIRE OR OTHER CASUALTY In the event the Building or the Leased Premises shall be destroyed or rendered untenantable, either wholly or in part, by fire or other casualty, Lessor may, at its option, restore the Building or Leased Premises to as near their previous condition as is reasonably possible, and in the meantime the rent shall be abated in the same proportion as the untenantable portion of the Leased Premises bears to the whole thereof; but unless Lessor, within sixty (60) days after the happening of any such casualty, shall notify Lessee of its election to so restore, this Lease shall thereupon terminate and end. Such restoration by Lessor shall not include replacement of furniture, equipment or other items that do not become part of the Building or any improvements to the Leased Premises in excess of those provided for in the allowance for building standard items. 8 10 11. WAIVER OF SUBROGATION Anything in this Lease to the contrary notwithstanding, Lessor and Lessee each hereby waives any and all claims against the other, its agents, officers, directors, shareholders or employees, for loss or damage to the Leased Premises or the Building, or any personal property of such party therein, that is caused by or results from fire and other perils insured against under (a) the normal fire with extended coverage property insurance policies, or (b) the standard business interruption insurance policies, carried by the parties and in force at the time of damage or loss. Each party shall cause each such insurance policy obtained by it to provide that the insurance company waives all right to recovery by way of subrogation against the other party in connection with any such damage or loss. 12. USES The Leased Premises are to be used only for the uses specified in Section 1.6 hereof, and for no other business or purpose without the prior written consent of Lessor. Lessee shall comply with all applicable laws, ordinances, rules and regulations in its use and occupancy of the Leased Premises, including those related to the use and disposal of hazardous substances and materials, and shall indemnify and hold Lessor harmless from any loss or damage resulting therefrom. Lessee shall not allow anything to be done in the Leased Premises which will increase the existing rate of insurance on the Building, and will immediately reimburse Lessor for any such resulting increase. Lessee shall not commit or allow to be committed any waste upon the Leased Premises, or any public or private nuisance or other act or thing which disturbs the quiet enjoyment of any other tenant in the Building. Lessee shall not, without the prior written consent of Lessor, use any apparatus, machinery or device in or about the Leased Premises which will cause any substantial noise or vibration. If any of Lessee's office machines and equipment should disturb the quiet enjoyment of any other tenant in the Building, then Lessee shall provide adequate insulation, or take such other action as may be necessary to eliminate the disturbance. Lessee shall comply with all laws relating to its use of the Leased Premises. 13. SIGNS AND ADVERTISING Except for Lessee's signage in the elevator lobby of the 10th floor, or in its reception area, Lessee shall not inscribe any inscription or post, place, or in any manner display any sign, notice, picture, placard or poster, or any advertising matter whatsoever, anywhere in or about the Leased Premises or the Building at places visible (either directly or indirectly as an outline or shadow on a glass pane) from anywhere outside the Leased Premises without first obtaining Lessor's written consent thereto. Any such consent by Lessor shall be upon the understanding and condition that Lessee will remove the same at the expiration or sooner termination of this Lease and Lessee shall pay Lessor the cost to repair any damage to the Leased Premises or the Building caused thereby. Lessor shall have the right to prohibit any advertising by Lessee which, in its opinion, tends to impair the reputation of the Building as a first-class shopping, business or professional area. 9 11 14. ACCIDENTS AND INDEMNITY 14.1 Lessee shall protect, defend, indemnify and hold Lessor harmless from all loss, damage, liability or expense, including attorneys' fees, resulting from any injury to any person or any loss of or damage to any property caused by or resulting from any act, omission or negligence of Lessee or any officer, employee, agent, contractor, invitee, or visitor of Lessee in or about the Leased Premises or the Building, but the foregoing provision shall not be construed to make Lessee responsible for loss, damage, liability or expense resulting from injuries to third parties caused by any act, omission or negligence of Lessor, or of any officer, employee, agent, contractor, invitee or visitor of Lessor. Lessor shall not be liable for any loss or damage to person or property sustained by Lessee, or other persons, which may be caused by the Building or the Leased Premises, or any appurtenances thereto, being out of repair, or by the bursting or leakage of any water, gas, sewer or steam pipe, or by theft, or by any act of neglect of any tenant or occupant of the Building, or of any other person, or by any other cause of whatsoever nature except for Lessor's gross negligence. 14.2 Subject to the provisions of Section 11 above, Lessor shall protect, defend, indemnify and hold Lessee harmless from all loss, damage, liability or expense, including reasonable attorneys' fees, resulting from any injury to any person or any loss of or damage to any property caused by or resulting from any act, omission or gross negligence of Lessor or any officer, employee, agent, contractor, customers or visitors of Lessor in the Building, but the foregoing provision shall not be construed to make Lessor responsible for loss, damage, liability or expense resulting from injuries to third parties caused by an act, omission or negligence of Lessee, or of any officer, employee, agent, contractor, customers or visitors of Lessee. 14.3 Liability Insurance. Lessee shall, throughout the term of this Lease and any renewal hereof, at its own expense, keep and maintain in full force and effect, a policy of commercial general liability insurance including a contractural liability endorsement covering Lessee's obligations under this Lease, insuring Lessee's activities upon, in or about the Leased Premises or the Building against claims of bodily injury or death or property damage or loss with a limit of not less than One Million Dollars ($1,000,000) combined single limit. 14.4 Property Insurance. Lessee shall, throughout the term of this Lease and any renewal hereof, at its own expense, keep and maintain in full force and effect, what is commonly referred to as "all risk" coverage insurance (but excluding earthquake and flood) on Lessee's leasehold improvements and personal property and equipment in the Leased Premises in an amount not less than the current One Hundred Percent (100%) replacement value thereof. 14.5 Insurance Policy Requirements. All insurance under this Section 14 shall be with companies satisfactory to Lessor and authorized to do business in Washington, and Lessor shall be named as an additional insured on all such policies of Lessee. No insurance policy required hereunder shall be cancelled or reduced in coverage and each insurance policy shall provide that it is not subject to cancellation or a reduction in coverage except after thirty (30) days prior written notice to Lessor. Lessee shall deliver to Lessor prior to commencement of the lease term and from time to time thereafter, copies of policies of such insurance or certificates evidencing the 10 12 existence and amounts of same and naming Lessor as an additional insured thereunder. In no event shall the limits of any insurance policy required hereunder be considered as limiting the liability of Lessee under this Lease. 15. LIENS AND INSOLVENCY Lessee shall keep the Leased Premises and the Building free from any liens arising out of any work performed, materials ordered or obligations incurred by Lessee. If Lessee becomes insolvent, voluntarily or involuntarily bankrupt, or if a receiver, or assignee or other liquidating officer is appointed for the business of Lessee, then Lessor, at its option, may immediately or any time thereafter terminate Lessee's right of possession under this Lease. 16. DEFAULT AND RE-ENTRY Lessee covenants as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions by Lessee to be kept and performed and that this Lease is made upon the condition of such performance. Except for a default under the preceding Section 15 for which immediate right of termination is given to Lessor, if Lessee fails to pay any installment of rent within three (3) days after written notice, or to perform any other covenant under this Lease within thirty (30) days after written notice from Lessor stating the nature of the default, Lessor may terminate this Lease and re-enter and take possession of the Leased Premises using such force as may be necessary; provided that if the nature of such default other than for non-payment of rent is such that the same cannot reasonably be cured within such thirty-day period, Lessee shall not be deemed to be in default if Lessee shall within such period commence such cure and thereafter diligently prosecute the same to completion. If Lessor elects to terminate this Lease, Lessor may declare all rent owing for the remainder of the Term immediately due and payable, less the amount Lessee proves could reasonably be collected during such period. Notwithstanding such retaking of possession by Lessor and/or termination of this Lease, Lessee's liability for the rent provided herein shall not be extinguished for the balance of the term of this Lease, and Lessee shall make good to Lessor any deficiency arising from a reletting of the Leased Premises at a lesser rental, plus the reasonable costs and expenses of renovating or altering the Leased Premises and the reasonable costs and expenses of reletting the Leased Premises, including but not limited to, lease commissions, tenant improvements, etc. Lessee shall pay any such deficiency each month as the amount thereof is ascertained by Lessor. If Lessor retakes possession, Lessor shall have the right to let any other available space in the Building before reletting or attempting to relet the Leased Premises, and such action shall not relieve Lessee of any of its obligations hereunder. All remedies provided herein are cumulative and are in addition to those provided by law. 17. REMOVAL OF PROPERTY AND REPLACEMENT OF NON-STANDARD ITEMS Upon the expiration or termination of the lease term, Lessee shall at its expense remove Lessee's goods and effects and those of all persons claiming under Lessee. Lessee shall also be required to remove all data and telecommunications cabling installed for use by Lessee in or 11 13 around the Leased Premises (including Building telecommunication closets and risers). Any property left in the Leased Premises after the expiration or termination of the lease term shall be deemed to have been abandoned and the property of Lessor to dispose of as Lessor deems expedient at Lessee's expense. 18. NON-WAIVER Failure of Lessor to insist, in any one or more instances, upon strict performance of any term, covenant or condition of this Lease, or to exercise any option herein contained, shall not be construed as a waiver, or a relinquishment for the future, of such term, covenant, condition or option, but the same shall continue and remain in full force and effect. The receipt by Lessor of rents with knowledge of a breach of any of the terms, covenants or conditions of this Lease to be kept or performed by Lessee shall not be deemed a waiver of such breach, and Lessor shall not be deemed to have waived any provision of this Lease unless expressed in writing and signed by Lessor. 19. COSTS AND ATTORNEYS' FEES To the extent permitted by law, in any action or proceeding brought by either party against the other under this Lease, the substantially prevailing party shall be entitled to recover from the other party its actual professional fees (such as appraisers', accountants' and attorneys' fees), investigation costs, and other legal expenses and court costs incurred by the prevailing party in such action or proceeding, in such amounts as the presiding court deems reasonable. 20. PRIORITY Lessee agrees that this Lease shall be subordinate to any first mortgages or deeds of trust that may hereafter be placed upon the Leased Premises or the Building containing the same, and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacement and extensions thereof provided that such mortgagee agrees not to disturb Lessee's possession of the Leased Premises (except in the event of a default by Lessee beyond applicable cure periods). Within fifteen (15) days after written request from Lessor, Lessee shall execute any documents that may be reasonably necessary or desirable to effectuate the subordination of this Lease to any such mortgages or deeds of trust and shall execute estoppel certificates as requested by Lessor from time to time in the standard form of any such mortgagee or beneficiary. 21. CONDEMNATION If all of the Leased Premises or such portions of the Building as may be required for the reasonable use of the Leased Premises, are taken by eminent domain, this Lease shall automatically terminate as of the date Lessee is required to vacate the Leased Premises and all rent shall be paid to that date. In case of a taking of a part of the Leased Premises, or a portion of the Building not required for the reasonable use of the Leased Premises, then this Lease shall continue in full force and effect and the rent shall be equitably reduced based on the proportion by which the floor area of the Leased Premises is reduced, such rent reduction to be effective as of 12 14 the date possession of such portion is delivered to the condemning authority. Lessor reserves all rights to damages to the Leased Premises for any taking by eminent domain, and Lessee hereby assigns to Lessor any right Lessee may have to such damages or award, and Lessee shall make no claim against Lessor for damages for termination of the leasehold interest or interference with Lessee's business. Lessee shall have the right, however, to claim and recover from the condemning authority compensation for any loss to which Lessee may be put for Lessee's moving expenses and for the interruption of or damage to Lessee's business, provided, that such damages may be claimed only if they are awarded separately in the eminent domain proceeding and not as part of the damages recoverable by Lessor. 22. ASSIGNMENT AND SUBLETTING 22.1 Lessee shall not, without the prior written consent of Lessor which shall not be unreasonably withheld, assign this Lease or any interest therein, or sublet the Leased Premises or any part thereof, or permit the use of the Leased Premises by any party other than Lessee or mortgage or otherwise transfer this Lease (collectively "transfer"). Such consent shall be entirely discretionary with Lessor, except as otherwise provided in Section 22.5. Consent to one such transfer shall not destroy or waive this provision, and all subsequent transfers shall likewise be made only upon obtaining prior written consent of Lessor. Sublessees or assignees shall become directly liable to Lessor for all obligations of Lessee hereunder, without relieving Lessee of any liability. 22.2 If Lessee wishes to assign this Lease or sublet the Leased Premises or any part thereof, Lessee shall first given written notice ("Lessee's Notice") to Lessor of its intention to do so, which notice shall contain the name of the proposed assignee or subtenant (collectively "transferee"), the nature of the proposed transferee's business to be carried on in the Leased Premises and the terms and provisions of the proposed assignment or sublease. Lessee shall also provide Lessor with a copy of the proposed assignment or sublease when it is available and such financial and other information with respect to the proposed transferee and transfer that Lessor may reasonably require. At any time within thirty (30) days after Lessor's receipt of Lessee's Notice, Lessor may by written notice ("Lessor's Notice") to Lessee elect to, (a) recapture the affected space by terminating this Lease as to the portion of the Leased Premises covered by the proposed sublease or assignment effective upon a date specified in Lessor's Notice, which date shall not be earlier than thirty (30) days nor later than sixty (60) days after Lessor's Notice, with a proportionate reduction of all rights and obligations of Lessee hereunder that are based on the area of the Leased Premises, (b) consent to the proposed sublease or assignment, or (c) disapprove the proposed sublease or assignment. If Lessor's Notice states Lessor elects to exercise the recapture option described above, Lessee shall have the option for a period of ten (10) days after receipt of Lessor's Notice, by written notice to Lessor within such period, to withdraw Lessee's Notice of proposed transfer and not proceed with the proposed sublease or assignment. 22.3 Whether or not Lessor consents to a proposed transfer, Lessee shall reimburse Lessor on demand for any and all reasonable costs that may be incurred by Lessor in connection 13 15 with any proposed transfer including, without limitation, the reasonable cost of investigating the acceptability of the proposed transferee and attorneys' fees incurred in connection with each proposed transfer not to exceed Five Hundred and 00/100 dollars ($500.00) per occurrence. 22.4 If Lessor consents to any proposed assignment or sublease, (a) Lessee may enter into same, but only upon the specific terms and conditions set forth in Lessee's Notice, (b) any sublease or assignment shall be subject to, and in full compliance with, all of the terms and provisions of this Lease, (c) the consent by Lessor to any assignment of sublease shall not relieve Lessee of any obligation under this Lease, (d) each transferee shall assume all obligations of Lessee under this Lease and shall be and remain jointly and severally liable with Lessee for the payment of rent, and the performance of all of the terms, covenants, conditions and agreements herein contained on Lessee's part to be performed, (e) no assignment shall be binding on Lessor unless Lessee and the transferee shall deliver to Lessor a counterpart of the assignment that contains a covenant of assumption by the transferee satisfactory to Lessor and is otherwise satisfactory in form and substance to Lessor, and (f) any rent or other consideration accruing to Lessee as the result of such assignment of sublease which is in excess of the rent then being paid by Lessee for the portion of the Leased Premises affected by the assignment or sublease, shall be paid by Lessee to Lessor monthly as additional rent. 22.5 Notwithstanding the foregoing, in the event of a proposed assignment or sublease, if Lessor does not exercise its option to recapture under Section 22.3, then Lessor will not unreasonably withhold its consent thereto if (a) Lessee is not then in default hereunder, (b) the proposed transferee will continuously occupy and use the Leased Premises for the term of the transfer, (c) the use by the proposed transferee will be a business office consistent in quality to and otherwise compatible with the other tenants in the Building, (d) the proposed transferee is reputable and of sound financial condition, and (e) the use by the proposed transferee will not violate any rights of exclusivity granted to other tenants or any other restrictions on use to which Lessor is subject. 22.6 Notwithstanding anything to the contrary in this Lease, so long as such transfer is not effectuated as part of a transaction or series of transfers orchestrated in order to effect a transfer of this Lease (or Lessee's interest herein) in isolation to Lessee's other leasehold interests and assets, Lessor's written consent shall not be required for any sublease, assignment or other transfer of this Lease to any other entity which (i) controls, is controlled by or is under common control with Lessee, or (ii) is controlled by Lessee's parent company, or (iii) which purchases all or substantially all of the assets of Lessee, or (iv) which purchases all or substantially all of the stock of Lessee, provided, however, that in such event Lessee shall continue to remain fully liable under the Lease on a joint and several basis with the assignee or acquiror of such assets or stock. Lessee shall be required to give Lessor at least thirty (30) days written notice in advance of any such sublease or assignment, except with respect to transfers by operation of law occasioned through a sale of publicly traded shares in Lessee. Sales of publicly traded stock in Lessee shall not constitute a transfer for purposes of this Lease. 22.7 Any option(s) granted to Lessee in this Lease or any option(s) granted to Lessee in any amendments to this Lease, to the extent that said option(s) have not been exercised, shall 14 16 terminate and be voided in the event this Lease or any portion thereof is assigned, or any part of the Leased Premises are sublet, or all or any portion of Lessee's interest in the Leased Premises are otherwise transferred. 22.8 Lessor understands that Lessee desires to sublease a portion of the Leased Premises and therefore not withstanding anything contrary contained herein, Lessee shall have the rights to sublease the space set forth in Exhibit D attached hereto during the Lease Term without Lessor's right to recapture as set forth in Section 22.2(a). 23. RULES, REGULATIONS AND MISCELLANEOUS 23.1 Lessee shall use the Leased Premises and the public areas in the Building in accordance with such reasonable rules and regulations as may from time to time be adopted by Lessor for the general safety, care and cleanliness of the Leased Premises or the Building, and the preservation of good order therein, and shall cause Lessee's employees, agents, invitees and visitors to abide by such rules and regulations; provided that such rules and regulations do not unreasonably interfere with the Lessee's use of the Leased Premises and Building. 23.2 Lessee shall not place any boxes, cartons, or other rubbish in the corridors or other public areas of the Building. 23.3 Lessor does not guarantee the continued present status of light or air over any premises adjoining or in the vicinity of the Building. Any diminution or shutting off of light, air or view by any structure which may be erected on lands near or adjacent to the Building shall in no way affect this Lease or impose any liability on Lessor. 23.4 Lessee shall conserve heat, air-conditioning, water and electricity and shall use due care in the use of the Leased Premises and of the public areas in the Building, and without qualifying the foregoing, shall not neglect or misuse water fixtures, electric lights and heating and air-conditioning apparatus. 23.5 Lessor shall not other than during normal business hours admit to the Leased Premises the Lessee or any of the Lessee's agents or employees or other persons claiming the right of admittance. 23.6 Lessee shall peaceably and quietly enjoy the Leased Premises so long as it pays the rent payable by it hereunder and is not in default in performing all the provisions of this Lease. 23.7 The titles to sections of this Lease are for convenience only and shall have no effect upon the construction or interpretation of any part thereof. This Lease shall be governed by the laws of the State of Washington. 23.8 All notices under this Lease shall be in writing and delivered in person or sent by registered or certified mail to Lessor at the same place rent payments are made, and to Lessee at the Leased Premises, or such addresses as may hereafter be designated by either party in writing. 15 17 Notices mailed as aforesaid shall be deemed given on the date of actual receipt or rejection of the notice. 23.9 The rent herein is exclusive of any sales, business and occupation, gross receipts or other tax based on rents or tax upon this Lease or tax upon or measured by the number of employees of Lessee or the area of the Leased Premises or any similar tax or charge. If any such tax or charge be hereafter enacted, Lessee shall reimburse to Lessor the amount thereof together with each Base Monthly Rent payment. If it shall not be lawful for Lessee so to reimburse Lessor, the Base Monthly Rent payable to Lessor under this Lease shall be revised to net Lessor the same net rental after imposition of any such tax or charge upon Lessor as would have been payable to Lessor prior to the imposition of such tax or charge. Lessee shall not be liable to reimburse Lessor for any federal income tax. 23.10 Lessee shall not place any plants, sculptures or other items so as to be located wholly or partially in the public corridor portions of the Building without Lessor's prior written approval. 23.11 All improvements, alterations or additions which may be made by either of the parties hereto upon the Leased Premises, except movable office furnishings, shall become part of the Building when made, and shall remain upon and be surrendered with the Leased Premises as a part thereof. The maintenance and care of such improvements shall be the responsibility of Lessee, except as otherwise provided in Section 9. For example, Lessor shall vacuum, but Lessee shall shampoo, repair and replace carpets. Wall paneling, partitions, closets, built-in cabinets, sinks, doors, however attached, floor coverings and other built-in units of all kinds are a partial listing of improvements that become property of Lessor as aforesaid. Wall hung office furniture, refrigerator/sink units and other electrical appliances may be removed by Lessee provided the reasonably estimated amount to cap plumbing and repair screw holes or other damage is paid by Lessee to Lessor prior to such removal and such removal does not cause any material damage to the property. 23.12 The freight elevator shall not be used by Lessee or others to move furniture, supplies or other items to or from the Leased Premises unless Lessee prior to such use has scheduled and coordinated such use with Lessor's Service Department. Lessee shall not permit passenger elevators to be used to move furniture, supplies or other items to or from the Lease Premises. Lessee shall cause its suppliers and other providers to comply with the foregoing provisions. 23.13 The name of the Building may at any time be changed by Lessor. 23.14 This Lease is the final and complete expression of the parties' agreement and no representations, promises or agreements, oral or otherwise, between the parties not embodied herein shall be of any force and effect. Neither this Lease nor any provision hereof may be changed, waived, discharged or terminated orally, but only by instrument in writing executed by Lessor and Lessee. 16 18 23.15 UNICO Properties, Inc. (UNICO) is Lessor's manager and rental agent in all matters concerning this Lease and the Leased Premises, and the Lessee, until notified in writing to the contrary by either the Lessor or UNICO or the Assignee of Lessor's interest under this Lease, shall recognize such agency and pay all rental, furnish all statements, and give any notice which the Lessee may be under the duty of giving hereunder, or may elect to give hereunder, to UNICO at its office in the City of Seattle, King County, Washington, instead of to the Lessor. As long as such agency shall exist, the rights and options extended to Lessor shall be deemed extended to UNICO, and each and every other term and provision of this Lease which is in any way beneficial to the Lessor, including especially every stipulation against liability, or limiting liability, shall inure to the benefit of UNICO and its agents and shall be applicable to UNICO and its agents in the same manner and as fully and with the same effect as to Lessor. Whenever Lessor's consent is required, Lessee shall request such consent from UNICO. The consent of UNICO shall be deemed the consent of UNICO and Lessor. 23.16 Lessee agrees to look only to the equity of Lessor in the Building and the Land and not to Lessor personally with respect to any obligations or payments due or which may become due from lessor hereunder, and no other property or assets of Lessor or any partner, joint venturer, member, officer, director, shareholder, agent, or employee of Lessor, disclosed or undisclosed, shall be subject for the satisfaction of Lessee's claims under or with respect to this Lease, and no partner, member, officer, director, agent or employee of Lessor shall be personally liable in any manner or to any extent in connection with this Lease. If at any time the holder of Lessor's interests hereunder is a partnership, limited liability company or joint venture, a deficit in the capital account of any partner, member or joint venturer shall not be considered an asset of such partnership, limited liability company or joint venture. In the event of a sale or conveyance by Lessor of the Building, the same shall operate to release Lessor from any and all obligations and liabilities on the part of Lessor accruing from and after the effective date of the sale or conveyance as long as the Transferee receives the entire security deposit and expressly assumes all future obligations of Lessor hereunder. 23.17 Broker Commission Lessee shall defend, indemnify and hold Lessor harmless from all claims and liabilities or expenses arising from agreements or other arrangements made by or on behalf of Lessee with any brokers, finders or other persons, except for a commission of Three and 50/100 dollars ($3.50) per rentable square feet, which will be paid to Grubb & Ellis by Lessor, one-half upon signing of the Lease and one-half upon the occupancy of the Leased Premises by Lessee. 23.19 Security Deposit Lessee has deposited the sum specified in Section 1.10 with Lessor. Lessor shall pay the remaining balance thereof to Lessee, inclusive of one-half of the interest accrued, within thirty (30) days after the expiration or prior termination of the lease term, or any extension thereof, if Lessee has fully performed all of its obligations under this Lease. Lessor may withdraw from the deposit the amount of any unpaid rent or additional rent or other charges not paid to Lessee when due, and Lessee shall immediately redeposit an amount equal to that so withdrawn. 17 19 23.20 Holdover If Lessee remains in possession of all or part of the Leased Premises after the expiration of the term of this Lease, with or without Lessor's written consent, for each month or partial month of such possession, Lessee shall pay Lessor an amount equal to one hundred fifty percent of the Base Monthly Rent payable hereunder immediately prior to the expiration of the term. Such holdover by Lessee shall not be deemed an extension of the term or the grant by Lessor to Lessee of a month to month tenancy. Lessee shall also indemnify and hold Lessor harmless from all loss, cost, liability and expense incurred by Lessor if Lessee remains in such possession of all or part of the Leased Premises without Lessor's prior written consent. 23.21 Recording Neither Lessor nor Lessee shall record this Lease or any memorandum thereof. 23.22 Directory Board Lessor shall, throughout the term of this Lease, maintain a directory board in the main lobby of the Building which shall list Lessee, and up to ten (10) of Lessee's employees. The cost of said designations shall be at Lessor's expense for the initial ten (10) designations and at Lessee's expense thereafter. 23.23 Authority Each individual executing this Lease on behalf of Lessee represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Lessee and that this Lease is binding on Lessee in accordance with its terms. 24. SUCCESSORS All the covenants, agreements, terms and conditions contained in this Lease shall apply to and be binding upon Lessor and Lessee and their respective heirs, executors, administrators, successors and assigns. 25. SHARED TENANT SERVICES Lessee acknowledges that any provision of telecommunications and office automation services and equipment ("Shared Tenant Services") by a third party provider, including but not limited to Shared Technologies Inc., its agents, affiliates and successors (collectively the "Provider") is entirely separate and distinct from this Lease agreement and that Lessor has no duty of performance concerning the provision of Shared Tenant Services. Lessee hereby agrees to look solely to the provider for any failure in the provision of Shared Tenant Services. 26. AMERICANS WITH DISABILITIES ACT (ADA) COMPLIANCE Lessor and Lessee acknowledge that, in accordance with the provisions of the Americans with Disabilities Act (the "ADA"), responsibility for compliance with the terms and conditions of Title III of the ADA may be allocated as between Lessor and Lessee. Notwithstanding anything to the contrary contained in the Lease, Lessor and Lessee agree that the responsibility for compliance with the ADA (including, without limitation, the removal of architectural and communications barriers and the provision of auxiliary aids and services to the extent required) shall be allocated as follows: (i) Lessee shall be responsible for compliance with the provisions of 18 20 Title III of the ADA for any construction, renovations, alterations and repairs made within the Leased Premises if such construction, renovations, alterations and repairs are made by Lessee, at its expense without the assistance of the Lessor; (ii) Lessee shall be responsible for compliance with the provisions of Title III of the ADA for all construction, renovations, alterations and repairs Lessor makes within the Leased Premises, whether at Lessor's or Lessee's expense; and (iii) Lessor shall be responsible for compliance with the provisions of Title III of the ADA for all exterior and interior areas of the Building including the elevator lobby and restrooms located on the 10th floor not included within the Leased Premises. Lessor agrees to indemnify and hold Lessee harmless from and against any claims, damages, costs and liabilities arising out of Lessor's failure, or alleged failure, as the case may be, to comply with Title III of the ADA, which indemnification obligation shall survive the expiration or termination of this Lease. Lessee agrees to indemnify and hold Lessor harmless from and against any claims, damages, costs and liabilities arising out of Lessee's failure, or alleged failure, as the case may be, to comply with Title III of the ADA, which indemnification obligation shall survive the expiration or termination of this Lease. Lessor and Lessee each agree that the allocation of responsibility for ADA compliance shall not require Lessor or Lessee to supervise, monitor or otherwise review the compliance activities of the other with respect to its assumed responsibilities for ADA compliance as set forth in this Section. The allocation of responsibility for ADA compliance between Lessor and Lessee, and the obligations of Lessor and Lessee established by such allocations, shall supersede any other provisions of the Lease that may contradict or otherwise differ from the requirements of this Section. 27. OPTION TO EXTEND 27.1 Lessee may extend the term of this lease for one (1) additional term(s) of five (5) years provided Lessee fully satisfies the conditions hereafter stated. If so extended, this lease shall continue as though the extended term were part of the original term except the base monthly rent pursuant to Section 1.4 shall be the Market Rate for like space in like buildings. Lessee's right to extend the lease as above stated is subject to the following conditions: (a) Lessee shall give lessor six (6) months prior written notice pursuant to this section of the Lease. Lessor shall, within thirty (30) days thereafter, provide notification of the proposed rental rate for the extended term. (b) Lessee shall not be in default under the Lease when said notice is given. (c) This Lease shall be in full force and effect when said notice is given. (d) Lessee shall have confirmed in writing Lessee's obligation to pay the base monthly rent required by Lessor for the extended term within thirty (30) days of notification by Lessor of said rental rate. (e) Upon receipt of Lessee's acknowledgement, Lessor shall prepare an amendment modifying the lease. 19 21 MARKET RATE 27.2 As used in this lease, the term "Market Rate" at any point in time shall mean the annual rate of base monthly rent per rentable square foot being quoted by owners to renewing tenants (and being accepted by such renewing tenants) at such points in time (i) for space in the Building and for space in other office buildings in the downtown Seattle Central Business District that are comparable to the Building in age, class and quality, which space is comparable in size, location, configuration, view (to the extent relevant) and degree of existing leasehold improvements paid for by Lessor in the space in the Building to be leased by Lessee with respect to which such rate is to apply; and (ii) for a lease term of substantially the same duration and commencement date as the Extended Term. For purposes of this lease, Market Rate (determined without reduction for concessions) shall not be reduced by reason of any concessions which are related to costs that would be incurred if Lessee were then first moving into the Leased Premises instead of renewing its existing lease. For example, Market Rate shall not be reduced for concessions related to leasehold improvements to the extent such concessions would be used to improve the leased space (virgin or otherwise) for tenant improvements then in place in the leased premises, for broker fees, or for other costs or concessions typically incurred by landlords for new tenants but not for renewal tenants. Market Rate (determined without reduction for concessions) may be reduced by reason of concessions then being granted to renewing tenants such as rent abatements or refurbishment allowances, with the amount of such concessions spread over the full term of the extended term. Should Lessee not agree with Lessor's quoted rate it shall provide said rejection in writing to Lessor and Lessor and Lessee shall attempt to agree on a single arbitrator within fifteen (15) days thereafter as described below and subject to the rights granted to Lessor under Section 27 outlined herein. 27.3 Should Lessor and Lessee be unable to agree on the base monthly rent for the extended term within thirty (30) days of notification from Lessor of the rental rate, and if Lessor does not elect within fifteen (15) days thereafter to have the Market Rate determined by arbitration, then Lessee may rescind its exercise of this option to extend by written notice to Lessor within thirty (30) days thereafter. Should Lessor elect within fifteen (15) days thereafter to have Market Rate determined by arbitration, Lessee may within three (3) days of such election rescind its option to extend. Such arbitration shall be before one (1) disinterested and experienced arbitrator if one can be agreed upon, otherwise before three (3) disinterested and experienced arbitrators, one named by Lessor, one by Lessee, and one by the two thus chosen; provided, that if said two arbitrators cannot agree upon a third arbitrator within fifteen (15) days after they have been named, then a third arbitrator shall be appointed by the presiding judge of the King County Washington Superior Court upon motion of either Lessor or Lessee. A "disinterested and experienced arbitrator" shall be a person (a) who shall not have a direct or indirect financial interest in the decisions to be made by the arbitrator(s); (b) who shall not be an officer, director, employee, or agent of Lessor or Lessee, and (c) who shall have at least five (5) years 20 22 professional or business experience in the Seattle market with respect to the management and leasing of commercial real estate as a property manager, broker or other capacity. The arbitrator(s) shall determine the Market Rate for the extended term. Except as may be otherwise provided in this Lease, the arbitrator(s) shall conduct the arbitration proceedings in accordance with the then currently published rules of the American Arbitration Association applicable to commercial arbitration's. Except as may be otherwise provided in this lease, the arbitrator(s) designated and acting under this lease shall make his or their award in strict conformity with such rules and shall have no power to depart from or change any of the provisions thereof. All arbitration's proceedings hereunder shall be conducted in Seattle, Washington. The appointment or arbitrators shall be signified in writing by each party to the other. If Lessor or Lessee shall fail to so appoint an arbitrator for a period of fifteen (15) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party not in default hereunder shall appoint a second arbitrator, and the two so appointed shall appoint a third arbitrator. The arbitrator(s), after being duly sworn to perform his or their duties with impartiality and fidelity shall proceed to determine the Market Rate for the extended term. The arbitration hearing shall be conducted and the decision of the arbitrator(s) shall be rendered within sixty (60) days after their appointment, and such decision shall be in writing and in duplicate, one counterpart thereof to be delivered to each of the parties hereto. The decision of the arbitrator(s) shall be binding, final and conclusive on the parties. Fees of the arbitrator(s) and the expenses incident to the proceeding shall be borne equally between Lessor and Lessee if a single arbitrator is used. If three arbitrators are used, each party shall pay the fees and costs of the arbitrator selected by it and the parties shall share equally in the fees and costs of the third arbitrator. Fees of the respective counsel engaged by the parties, and fees of expert witnesses or other witnesses called by parties shall be paid by the respective party engaging such counsel or calling or engaging such witness. 28. FIRST RIGHT TO LEASE Lessee shall have the first right to lease as additional space any available vacant space on the 9th and 11th floors, subject to rights previously granted to existing tenants (the FRL Space). If Lessor desires to lease the space in question to a third party or take it off the market for any reason whatsoever, Lessor shall notify Lessee of its intent along with the economic terms by which Lessee may acquire the FRL space. Lessee shall have ten (10) days after receipt of each such notice to advise Lessor in writing whether or not it will add additional space to the leased premises. Failure to do so shall be deemed an election not to add any FRL Space. If Lessee does not elect to add any FRL space, then Lessor may lease the FRL Space in question to a third party or take it off the market for any reason whatsoever. Lessee's right under this Section 28 shall apply at any time that Lessor desires to lease the space in question to a third party or to take the space off the market during the Lease term. When FRL Space has been added to the leased premises, Lessee shall pay base monthly rent and additional rent under Section 3 and 4 for the added space under market terms and conditions. Within three (3) days after receipt of Lessee's election or notice to lease FRL Space, Lessor will give Lessee written notice of the base monthly rent required for the additional space in a form which may be signed by Lessee confirming Lessee's obligation to pay said base monthly rent for the FRL Space added to the leased premises. Upon the execution of a lease for the additional space, Lessor and Lessee shall diligently commence and pursue the completion of tenant improvement drawings for the additional space so that the tenant improvement work can be priced and commenced within forty-five (45) days after Lessee exercises the option to acquire additional space. 21 23 Lessee's right to lease the FRL Space is subject to the following additional conditions: (a) Lessee shall not be in default under the Lease when said notice is given. (b) This Lease shall be in full force and effect when said notice is given. (c) Prior to occupancy of the FRL Space, Lessee shall have confirmed in writing Lessee's obligation to pay the base monthly rent for the FRL Space. (d) This lease has not been assigned or all or part of the leased premises sublet, except as permitted under Section 22.6. (e) Subject to rights granted to third parties, prior to the execution of the Lease. 29. PARKING Lessor shall make available ten (10) monthly parking permits three (3) of which must be designated carpool parking, which will be located in the Union Square Garage during the lease term. The charges for such parking shall be at the prevailing monthly rates during the term of this lease and paid by Lessee to the operator of the garage wherein such parking is provided. The rates are subject to change during the lease term. 30. TENANT IMPROVEMENT ALLOWANCE Lessor shall provide Lessee with a tenant improvement allowance of Ten and 00/100 dollars ($10.00) per usable square foot for tenant improvements, architectural and engineering fees. Lessor shall provide all of the tenant improvement work and shall bid out such work to at least three (3) subcontractors in each trade. Lessor's overhead and profit shall be limited to five percent (5%) of the total project cost. 22 24 IN WITNESS WHEREOF, this Lease has been executed by Lessor and Lessee as of the day and year first above set forth. LESSEE: LESSOR: InterNAP NETWORK SERVICES, INC., UNION SQUARE LIMITED a Washington corporation PARTNERSHIP, a Washington Limited Partnership By UNICO PROPERTIES, INC. (Manager and authorized rental agent for Union Square Limited Partnership) By /s/ PAUL E. McBRIDE ---------------------------------- Its VP Finance & Administration --------------------------------- By /s/ JOHN SCHOETTLER ---------------------------------- John Schoettler, Vice President 23 25 LESSOR'S ACKNOWLEDGEMENT STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this 18th day of June, 1998, before me personally appeared John Schoettler, to me known to be the Vice President of UNICO PROPERTIES, INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED PARTNERSHIP, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. [NOTARY SEAL] /s/ SHEILAH C. SABALZA --------------------------------------- Sheilah C. Sabalza Notary Public in and for the State of Washington, residing at Seattle. My commission expires: 4-02-2002. 26 LESSEE'S CORPORATE ACKNOWLEDGEMENT STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this 17th day of June, 1998, before me personally appeared Paul McBride to me known to be the CFO of InterNAP NETWORK SERVICES INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. [NOTARY SEAL] /s/ KAZUMI TAKEUCHI --------------------------------------- (Print name) Kazumi Takeuchi Notary Public in and for the State of Washington, residing at Seattle. My commission expires: 3-12-00. 27 [TWO UNION SQUARE FLOOR PLAN] InterNAP NETWORK SERVICES, INC. FLOOR 37 EXHIBIT A 28 EXHIBIT B IMPROVEMENTS OF LEASED PREMISES LESSOR: UNION SQUARE LIMITED PARTNERSHIP LESSEE: InterNAP NETWORK SERVICES, INC. PREMISES: ROOMS 1001-1037 ONE UNION SQUARE Lessor at its expense has provided the shell and core of the Building and certain improvements on the floors on which the Leased Premises are located, all as more fully set forth in Section 1 of this Exhibit. Lessor is to also provide an allowance as provided in Section 3 of this Exhibit and Section 30 of the Lease for improvements to the Leased Premises, which are in addition to those provided by Lessor pursuant to Section 1 of this Exhibit, all as more fully set forth in this Exhibit. The allowance amount for Section 3 and Section 30 and the dates for submission of plans and documents to Lessor pursuant to Section 4.3 are as follows: The Section 3 allowance amount is Ten and 00/100 dollars and 00/100 dollars ($10.00) per usable square foot of Leased Premises (19,225 S.F.) for a total allowance of One Hundred Ninety-Two Thousand Two Hundred Fifty and 00/100 dollars ($192,250.00). The Section 4.3 delivery dates are: A.) Schematic Plans - ------------------------------ B.) Final Preliminary Plans - ------------------------------ C.) Final Contract Documents - June 19, 1998 1. Basic Building Improvements (Shell and Core). Lessor has at its expense furnished and installed the following improvements in accordance with plans and specifications for the Building on the floors upon which the Leased Premises are located: (a) Finished elevator lobby to match building standard specifications including carpeting. The typical elevator lobby has painted walls, carpeted floors, painted elevator doors and jambs, and wall sconce lighting fixtures. (b) All items which are standard for the Building and located within the core area of the Building finished to the specifications for the Building, including but not limited to core walls, electrical distribution equipment and conduits, heating and air conditioning equipment and ducting, a women's lavatory, a men's lavatory, drinking fountain, and fire and life safety equipment. 1 29 (c) Exterior walls and exterior windows for the Building. The interior of such exterior walls, the exterior of the core walls and all structural elements within the Leased Premises (except cross- bracing on Floors 35, 36 and 37) shall be ready to receive Lessee specified finishes. (d) The rigid ducting and standard size variable air volume air terminal units for interior and exterior zone heating and air cooling in accordance with the Building standard layout for the floor upon which the Leased Premises are located. The standard number of such air terminal units is twelve (12) units for the entire Fourth Floor and twenty (20) units for each other entire floor. Such improvements by the Lessor include the individually controlled central fan unit located in each floor's mechanical room allowing for separate floor-by-floor air conditioning control and operation but do not include the round low pressure run out ducting, flexible ducting and diffusers. (e) Electric service to the electrical room located within the core of the building and sufficient capacity to meet Lessee's requirements, not to exceed 4.5 watts per usable square foot (including lighting) and any limits imposed by applicable codes, laws and regulations. Two electrical power loops are provided on each floor of the Building. One loop is for building standard 277/480 volt lighting and the other loop is available for tenant 110 volt power or special power requirements. (f) Telephone service to the telephone closet located within the core area of the Building. (g) Concrete floor ready to receive carpet. The floors typically will have a partition load capacity of 20 pounds per square foot. The live load capacity is 80 pounds per square foot for a zone extending approximately 24 feet out from the core and 50 pounds per square foot on the remainder of the floor, all as more fully specified by Lessor's Architect. (h) Basic sprinkler distribution grid in accordance with Building standard layout for the floor. (i) A vertical condenser water loop to provide water for supplementary air cooling equipment (if any) installed in the Leased Premises. The hook-up to said loop and reasonable charge for said water shall be at Lessee's expense. If Lessee, with Lessor's consent, changes surface finishes from those specified for the Building, requires changes to the heating and cooling and electrical systems which are standard for the Building, or makes any other departure from the specifications or standards for the Building with respect to any of the foregoing items, the additional cost of such change or other departure shall be at the Lessee's expense as a charge to Tenant Work pursuant to Section 2 of this Exhibit. Throughout the Exhibit, items which are not Building Standard items are sometimes referred to as special items or special improvements. 2. Additional Improvements (Tenant Work). Improvements or modifications to the Leased Premises which are in addition to those existing improvements or as provided for in Section 1 of this Exhibit are herein sometimes described as Tenant Work. Tenant Work shall be at Lessee's expense but shall be paid for by Lessor to the extent of the 2 30 allowance provided for in Section 3 of this Exhibit. The same procedure shall pertain to any matters referred to in this Exhibit as being at Lessee's expense or a charge to Tenant Work. If the costs for Tenant Work and expenses or charges to Tenant Work exceed said allowance, the excess shall be paid by Lessee. Tenant Work and costs charged to Tenant Work if applicable shall include without limitation: (a) All partitioning within the Leased Premises, and the walls separating the Leased Premises from the public corridor. (b) Paint or other wall coverings approved by Lessor. Painted walls shall receive at least one prime coat and one semi-gloss finish coat. Lessee shall use a brand of paint specified by Lessor as standard for the Building or an equivalent brand approved in advance by Lessor. (c) Doors and door hardware. (d) Finish ceiling, including suspension system and hangers. (e) Cabinetry, millwork or other built-ins. (f) Carpeting or other floor covering. (g) Blinds for exterior windows as designated by Lessor. (h) Lighting fixtures, including Building standard fixtures and all other fixtures, and all switching, all in accordance with applicable Seattle codes. (i) Electrical receptacles, wiring from junction boxes located above suspended ceiling to light fixtures and any other electrical items which are in addition to those furnished by Lessor pursuant to Section 1 of this Exhibit. (j) Telephone and data outlets and any other communication equipment not furnished by Lessor pursuant to Section 1. (k) Air terminal units in excess of the standard number for the Leased Premises. The standard number for an entire floor is 12 on the Fourth Floor and 20 on all other floors. All related ducting, round low pressure run out ducting, flexible ducting, diffusers and any other items for heating or air cooling which are not furnished by the Lessor pursuant to Section 1 of this Exhibit. (l) Modifications to sprinkler distribution system identified in Section 1 and installation of sprinkler heads, emergency speakers, fire extinguishers and cabinets within the Leased Premises, including any specialized fire suppression system such as halon. (m) Interfloor stairs within the Leased Premises. (n) Vertical lifts for books, files, mail distribution, etc. 3 31 (o) Plumbing and fixtures including private toilets, showers, lavatories, sinks and lunchroom or kitchen equipment. (p) Emergency power equipment for Lessee's equipment. (q) All demolition and removal of debris for any item of work installed pursuant to Section 1 or Section 2 of this Exhibit which Lessee with Lessor's consent, subsequently requests Lessor to remove. (r) Any structural modification to the Building. (s) The fees of architects, engineers, consultants and contractors, including Lessor's Architect and Lessor's contractor, for services with respect to the Leased Premises. (t) All applicable Washington State sales tax. (u) Fees and expenses for all permits, including building, special energy and structural modification permits and other governmental fees. (v) Any other costs referred to in this Exhibit as being at Lessee's expense or a charge to Tenant Work. Whether, and the extent to which, any of Lessee's requirements exceed the improvements to be provided by Lessor pursuant to Section 1 shall be determined by Lessor's Architect, which determination shall be conclusive. 3. Tenant Improvement Allowance. Lessor shall provide an allowance for Tenant Work in the Leased Premises equal to the amount specified at page 1 of this Exhibit. The allowance shall be used to pay costs for Tenant Work, by crediting or paying the amount of the allowance against amounts due for the Tenant Work, all in accordance with Section 5.2 of this Exhibit. Any unused allowance shall be retained by Lessor. 4. Design of Tenant Improvements. 4.1 Lessor's Architect. Lessor has engaged the services of an architect, mechanical engineer and electrical engineer (herein collectively "Lessor's Architect") to provide certain professional services required for the improvement of the Leased Premises and other portions of the Building. Lessor's Architect shall provide all mechanical and electrical engineering services required to prepare the engineering plans described in Section 4.3.C. of this Exhibit and the services described in Section 4.6 of this Exhibit. All structural engineering services required with respect to the Leased Premises shall be provided by Lessor's structural engineer as provided in subsection (10) of Section 4.3.C. 4.2 Lessee's Architect. At Lessee's expense as a charge to Tenant Work, Lessee may retain the services of a qualified architect/office planner (Lessee's Architect), licensed to practice architecture in the State of Washington, and approved by Lessor, to provide all architectural services related to the tenant improvements, except for those services which by the express provisions of this Exhibit are to be provided by Lessor's Architect or Lessor's structural engineer. Lessee's Architect shall timely prepare all plans and specifications described in Section 4.3 of this Exhibit (except the 4 32 engineering drawings described in Sections 4.3.C. (3), (4) and (10)). Lessee's Architect shall timely provide Lessor's Architect or Lessor's structural engineer, as the case may be, with all information, plans or specifications which are necessary to prepare the engineering drawings described in Sections 4.3.C. (3), (4) and (10) of this Exhibit. 4.3 Plans for Tenant Work. The Schematic Plans, Final Preliminary Plans and Final Contract Documents shall be subject to Lessor's and Lessee's approval. Such plans shall be compatible with the basic plans and specifications for the Building and when submitted to Lessor for its approval shall clearly show any proposed modifications to the plans and specifications for the Building. Lessee shall (a) provide timely and adequate information, direction and approval of plans and specifications to Lessor's Architect and (b) work with Lessor's Architect and submit the following plans or documents to Lessor for Lessor's approval on or before the respective dates specified at page 1 of this Exhibit: A. Schematic Plans. The Schematic Plan(s) shall generally describe all areas within the Leased Premises. Rooms or areas shall be identified by name or function with special furniture or equipment shown or described. Special features including without limitations relights, lunch rooms, coffee bars, computer rooms, shall also be noted on the Schematic Plans. These plans are to be the basis for the Final Preliminary Plans. B. Final Preliminary Plans. The Final Preliminary Plans submitted for interim approval shall show all partition layout indicating partition type and identifying each room and its function. The floor plan must also clearly identify and locate equipment and fixtures requiring plumbing or other special mechanical systems, area(s) subject to above normal floor loads, special openings in the floor, special electrical requirements and any other major or special features, including an outline specification of special finishes. These plans are to be the basis for the Final Contract Documents. On or before the later of the 10th day of June, 1998, the Lessee's Architect shall prepare the Final Preliminary Plans and submit the same to Lessor for approval. Within three (3) days following Lessor's receipt of the Final Preliminary Plans, Lessor or Lessor's Architect shall provide Lessee and Lessee's Architect with (i) a list of its objections, modifications, deletions or qualifications to the same (but Lessor agrees that it shall not unreasonably withhold, condition or delay its consent to any improvements which do not adversely affect any base building systems) and (ii) a schedule of items constituting "long-lead" items (as defined below). For purposes hereof, the term "long-lead" items shall mean any items or material element thereof which Lessor's Architect reasonably believes, due to long-lead time for fabrication or delivery, will not be available at the Premises in time to be completed or installed prior to the originally scheduled Commencement Date. C. Final Contract Documents. Lessee and Lessee's Architect shall have nine (9) days from receipt of Lessor's list of objections, modifications, deletions, or qualifications to (a) substitute materials to eliminate any long-lead items and (b) cause the architect and the engineer to prepare and deliver to Lessor and Lessor's Architect the Final Contract Documents, which shall be based on the final Preliminary Plans but shall conform to Lessor's objections, modifications, deletions, or qualifications. No plans and specifications shall 5 33 constitute the Final Contract Documents hereunder unless and until the same have been approved in writing by both Lessor and Lessee. The Final Contract Documents shall be prepared in accordance with the standards adopted by Lessor including scale, common symbols, legends and abbreviations together with information required to obtain permits. The drawings shall be prepared using the "pin bar" system for compatibility with other building drawings. The Final Contract Documents shall be approved and signed by the Lessee and Lessor's Architect prior to submittal to Lessor and approved and signed by Lessor prior to submittal to Lessor's contractor for pricing, and shall include: (1) Architectural Floor Plan(s): A plan, fully dimensioned, showing partition layout and type, identifying each room with a number and each door with a number, and the location, nature and extent of floor finishes, casework, relights, etc. Plumbing locations and requirements shall be shown on this plan. (2) Reflected Ceiling Plan(s): A plan showing all building standard and/or special ceiling conditions and materials. This plan shall also include the location and type of all building standard and special light fixtures including switching together with a legend indicating fixture type, quantity of fixtures, connected wattage of each fixture as necessary for compliance with the lighting power budget of Seattle's codes and any other applicable laws and regulations. (3) Electrical and Telephone Outlet Plan(s): A plan locating all power and telephone requirements dimensioned to give exact location of outlet and height above concrete slabs if locations are critical. This plan shall identify all dedicated circuits and identify all power outlets greater than 120 volts. For equipment used in outlets which require dedicated circuits and/or which require greater than 120 volts, identify the type of equipment, the manufacturer's name and manufacturer's model number and provide power requirements and other technical specifications. The plan shall also show modifications to basic system, circuit identification, conduit size, the number and size of wires, all in compliance with applicable Seattle codes or other applicable laws and regulations. (4) Mechanical Plan(s), HVAC, and Plumbing: A plan which clearly shows the basic HVAC system, modifications to the basic system if required, any special cooling or stand-alone systems, all supply air diffusers, thermostats and return air grills. All plumbing information shall be complete for final installation, including the fixture schedule and specifications. (5) Furniture Layout: Basic layout showing furniture locations. (6) Millwork Details: Complete elevations and details of all special millwork including but not limited to cabinets, paneling, trim, bookcases and special doors and jambs. (7) Hardware and Keying Schedules: Complete specifications for all special hardware shall be provided. (Note: Key ways in special locks must be compatible with building master key system.) The keying schedule must indicate which doors are locked and which keys open each lock, together with a symbol indicating which side of the door is to be locked to prohibit entry. 6 34 (8) Room Finish and Color Schedule: Provide on the drawings complete information showing location and specification for all finishes including wall, floor covering, base, ceiling and special conditions. (9) Construction Note and Specifications: Provide all required special notes and complete specifications, including instruction for bidders, special conditions incorporating the AIA standard form of general conditions or such modifications thereof as are designated or approved by Lessor and technical specifications for all special improvements. (10) Structural Modifications: If Lessee's tenant improvements include interfloor stairways, increased floor loading or any other items which require structural modifications, Lessor's structural engineer for the Building shall be engaged to perform all required structural engineering services. The cost of such services shall be a charge to Tenant Work. A drawing shall be prepared showing the extent of structural modification necessary and a separate building permit shall be obtained for this phase of work. 4.4 Contract Administration. Lessor's Architect shall provide construction administration during the execution of Tenant Work on the Leased Premises and will observe progress of such work, attend necessary contractor coordination meetings, advise Lessee and Lessor on status and progress payments, prepare a punchlist for any construction deficiencies at completion and certify the Leased Premises ready for occupancy. Lessee's architect may also provide construction administration services to Lessee and shall coordinate its activities with Lessor's architect. 4.5 Delays. Lessee shall be responsible for delays and additional costs in completion of Tenant Work and any damages or other costs incurred by Lessor which are caused by (a) Lessee's failure to provide adequate information and direction to Lessee's Architect or failure to timely perform its obligations in order to meet the plan delivery dates set forth in Section 4.3 of this Exhibit, (b) Lessee's failure to timely authorize Lessor to proceed with the Tenant Work, (c) changes made to any of Lessee's Plans after the specified Delivery Date for Final Contract Documents, (d) delays in delivery of special materials or (e) delays requested by Lessee. The costs of any such delay or damage shall be a charge to Tenant Work. Lessee shall further be responsible for such delays as provided in Section 5.6 of this Exhibit. 4.6 Additional Services by Lessor's Architect. Certain services with respect to Tenant Work shall be provided by Lessor's Architect and charged to Tenant Work in addition to those provided for in Section 4.1. Lessor's Architect shall: (a) Provide Lessee's Architect with information about the Building and background drawings for execution of the Tenant Work as reasonably requested by Lessee's Architect. (b) Provide mechanical engineering and required engineering drawings for (1) sizing of feeder ducts and placement of diffusers and thermostats, (2) computer rooms or areas which are supplied HVAC service only off the basic HVAC system for the Building, and (3) specifications for sinks and related plumbing such as service to coffee machines, sinks, dishwashers and hot water tanks. (c) Provide electrical engineering and required engineering drawings for building standard items and typical desk top office equipment and copiers. 7 35 (d) Review all plans and specifications required under Section 3.3 and assist Lessee's Architect regarding compliance with the requirements of Building systems and codes related to Tenant Work. Notwithstanding such review and assistance, Lessee's Architect is responsible for compliance with such requirements and codes. (e) Provide coordination with the Lessor, and/or Lessee's Architect and Lessor's contractor, as applicable, throughout the design, pricing and construction of the Tenant Work, transmit shop drawings and submittals pertaining to special items to Lessee's Architect as requested, and provide contract administration as provided in Section 3.4, such administration to be coordinated with Lessee's Architect. (f) Obtain the blanket building permit for tenant improvement construction in the office portions of the Building and transmit the Final Contract Documents to the Department of Construction and Land Use ("DCLU") for review and approval. Lessee's Architect shall be responsible for all changes required as a result of such review by DCLU. All other permits, including without limitation electrical, mechanical, plumbing, energy code and structural permits shall be obtained by subcontractors or Lessee's Architect. The foregoing architectural services by Lessor's Architect are included as a charge to Tenant Work. Additional mechanical and electrical engineering services, if required, shall be provided by Lessor's Architect and the reasonable charges for same shall be in addition to the foregoing charge and at Lessee's expense as a charge to Tenant Work. Examples of such additional services include mechanical engineering services for food service kitchens, private toilet facilities, exercise rooms, computer rooms or areas that are cooled utilizing the vertical chilled water loop for the Building, stand alone cooling systems, special exhaust systems and special fire suppression systems, and electrical engineering services for integrated lighting controls, computer wiring or networking, computer room design, lighting design beyond building standard, control circuitry, and sound and/or paging systems. 5. Construction of Tenant Improvements. 5.1 Authorization to Proceed. Lessor shall engage a general contractor licensed in the State of Washington to perform all Tenant Work pursuant to a standard AIA "cost plus" contract, pursuant to which such contractor shall receive a fee equal to five percent (5%) of the hard costs of construction billed by all subcontractors for such general contractor's profit, overhead and general conditions. Lessor shall cause the general contractor to construct the Tenant Work (i) strictly in accordance with the Final Contract Documents, (ii) using new materials, (iii) in good and workmanlike manner and (iv) in compliance with all applicable laws, ordinances, rules and regulations. Lessor's general contractor shall, in all events, warrant all Tenant Work against defects for a period of one year. If any subcontractor warranty extends beyond one (1) year, Lessee shall benefit by such warranty. Notwithstanding the foregoing, at Lessor's election some or all of the Tenant Work may be (a) priced and subcontracts with respect thereto awarded on the basis of unit price arrangements or similar arrangements negotiated by Lessor's contractor with respect to such work in the Building, or (b) performed by Lessor or an affiliate or agent of Lessor provided the price is not above market for similar work and which is subject to Lessee's reasonable approval. Any other subcontract work will be competitively bid. Subcontract work which is to be competitively bid shall be submitted to at least three (3) subcontractors selected and approved by Lessor, Lessee and Lessor's contractor and may be 8 36 bid independently or together with similar work for other tenants in the Building. Such subcontractors shall only employ and use union labor in and about the Building and Land. After they have been completed, the Final Contract Documents shall be promptly submitted to such subcontractors for bids. Bids will be reviewed by Lessor, Lessee and Lessor's contractor and subcontracts awarded as they mutually agree. The bidding process shall be "open book", in which, prior to commencing work and awarding any subcontracts, Lessor's contractor shall submit a list of detailed prices (itemized to set forth all pertinent information with respect to each bid, such as profit, overhead, general conditions, contingencies, etc.) for Lessee's approval sufficient to allow for Lessee's review and comment and subsequent modification. If the price of Tenant Work exceeds the allowance in Section 3 of this Exhibit, Lessee may in such authorization delete any or all items of extra cost; provided however, if Lessor, acting reasonably, deems these changes to be extensive, Lessor may refuse to accept the authorization to proceed until all changes have been incorporated in revised Final Contract Documents signed by Lessee, approved and signed by Lessor, priced by Lessor, and written acceptance of the revised price has been received by Lessor from Lessee. In the absence of written authorization to proceed, Lessor shall not be obligated to commence work on the Leased Premises. 5.2 Payments. Lessor's contractor shall complete the improvements to the Leased Premises (Tenant Work) in accordance with the approved Final Contract Documents. Lessor shall pay for the cost of Tenant Work up to the amount of the allowance described in Section 3. Lessor shall submit monthly progress billings to Lessee for costs which exceed or are not included in said allowance, which shall be payable within ten (10) days after receipt. Final billing shall be rendered and payable within ten (10) days after acceptance of the Leased Premises by Lessee in accordance with the terms of the Lease. 5.3 Final Plans and Modifications. If Lessee shall request any change from the approved Final Contract Documents, Lessee shall request such change in writing to Lessor and such request shall be accompanied by all plans and specifications necessary to show and explain changes from the approved Final Contract Documents. After receiving this information, Lessor shall give Lessee a written price for the cost to incorporate the changes in Lessee's Final Contract Documents. If Lessee approves such price in writing, Lessor shall have such Final Contract Documents changes made and the cost thereof shall be a charge to Tenant Work. Within a reasonable time after completion of such changes in the Final Contract Documents, Lessor shall obtain and notify Lessee in writing of the construction cost, if any, which shall be chargeable or credited to Lessee as a result of such change. The cost for such change, whether chargeable or credited to Lessee shall include a Lessor coordination fee equal to five percent (5%) of the amount of such change. Lessee shall within five (5) days notify Lessor in writing to proceed with such change. In the absence of such notice, Lessor shall proceed in accordance with the previously approved Final Contract Documents before such change was requested. Tenant shall also be responsible for any demolition work required as a result of the change. 5.4 Lessee's Entry to Leased Premises. Lessee's entry to the Leased Premises for any purpose prior to commencement of the lease term shall be scheduled in advance with Lessor and shall be subject to all the terms and conditions of the Lease, except the payment of rent. Lessee's entry shall mean entry by Lessee its officers, contractors, office planner, licensees, agents, servants, employees, guests, invitees or visitors. 5.5 Lessee's Telephone. Lessee is responsible for Lessee's telephone service. Lessee shall select Lessee's telephone system. Information concerning telephone equipment size, manufacturer, technical specifications, special requirements and other information requested by Lessor's Architect 9 37 shall be provided by Lessee to Lessor's Architect during the planning phase. Lessee shall coordinate installation of the telephone system with Lessor's tenant construction coordinator during the construction phase. Notwithstanding anything to the contrary contained herein, Lessee shall be totally responsible for the installation of telephone wiring and equipment, all subject to Lessor's approval. 5.6 Commencement of Lease Term. The lease term shall not commence until Lessor has substantially completed all work to be performed by Lessor under the provisions of this Exhibit, except for the completion or correction of items on the Architect's punch list. If Lessor shall be delayed, however, in substantially completing said work as a result of: (i) Lessee's failure to provide sufficient information to Lessor's Architect to allow timely delivery of the plans and specifications identified in Section 4.2 of this Exhibit; or (ii) Lessee's failure to approve plans and specifications and price by the dates or within the time periods required by the lease (including this Exhibit); or (iii) Lessee's change(s) in Final Preliminary Plans or Final Contract Documents after they have been approved by Lessor; or (iv) Lessee's requests for materials, finishes or installations other than the building standard items and improvements specified by Lessor for the building; or (v) Delays in delivery of special materials; or (vi) Lessee's failure to timely perform any of its other obligations under the lease (including this Exhibit), then the reasonable costs of such delays to Lessor shall be a charge to Tenant Work and Lessor shall be deemed to have delivered possession of the Leased Premises to Lessee and the lease term shall commence on (a) the date Lessor would have substantially completed the work if it was not so delayed, or (b) the Lease Commencement Date otherwise provided for in this Lease, whichever is later. 6. General Provisions. The following provisions shall be applicable to all Tenant Work. (a) Lessee shall be responsible for the design, function and maintenance of all special improvements made to the Leased Premises. (b) In order to expedite construction of Tenant Work, Lessor has prepurchased all building standard core area items and may prepurchase the following items as standard for the Building: (1) Ceiling suspension system and ceiling tile. (2) 2'0" x 2-0" recessed florescent light fixtures with frame. (3) Doors, jambs, or hardware. (4) Air terminal units and VAV boxes including thermostats. 10 38 (5) Diffusers and grills. If the Lessor approves the substitution of any special items for any of the prepurchased Building Standard items, then (i) If after such substitution, the prepurchase quantity of Building Standard items is not sufficient to complete the remainder of the Building, then only an amount equal to the cost of the substituted item will be charged to the allowance provided pursuant to Section 3 of this Exhibit; or (ii) If after such substitution, the prepurchase quantity of Building Standard items exceeds the quantity required to complete the Building, then to the extent of such excess quantity, an amount equal to the cost of both the substituted item and the Building Standard item shall be charged to the allowance provided pursuant to Section 3 of this Exhibit. (c) Lessee shall be responsible for any increase in energy cost, as additional rent, for all special lighting and any lighting not governed by Seattle's Energy Code and such lighting shall not be installed without the prior approval of the Lessor. Lamp or bulb replacement for special lights shall be charged to Lessee as a service charge. (d) Lessee shall not install sunscreens or other materials between the blinds on exterior windows or visible from the exterior window of the Leased Premises. (e) In addition to other requirements in the Lease, signs or signage proposed by Lessee shall comply in all respects with Lessor's sign policies for the Building. (f) If any Tenant Work or any other installation (including furniture, fixtures and equipment) within the Leased Premises (hereinafter collectively referred to as such work) is to be performed at any time by someone other than the Lessor's contractor or subcontractor, then the following terms and conditions shall apply: (1) All such work shall be subject to the prior approval of the Lessor. Lessee shall be responsible to coordinate and schedule such work with the Lessor's Tenant Construction Coordinator. (2) All costs and expenses of such work shall be paid by Lessee unless otherwise mutually agreed. (3) All such work shall be performed by union labor licensed to perform such work within the City of Seattle. (4) All such work shall conform to written standards or rules and regulations of the Lessor. 11 39 (5) Lessee shall at no time permit anything to be done whereby the Building or the land upon which it is located may be subjected to any mechanic's or other liens or encumbrances arising out of the Tenant Work. (6) If the performance of such work requires additional services or facilities (including, but not limited to, elevator services, hoisting, utilities, cleanup or other cleaning services, trash removal from the Leased Premises and site of the Building, field supervision or ordering materials) be provided, Lessee shall pay Lessor (or Lessor's contractor, if directed to do so by Lessor) a reasonable charge therefore which shall not exceed the direct additional costs to provide such services plus a markup of ten percent (10%) thereon. (7) Lessor shall have no responsibility for such work. Lessee shall remedy at Lessee's expense and be responsible for any and all defects in such work. Lessee shall reimburse Lessor for any extra expense incurred by Lessor by reason of faulty work done by Lessee or Lessee's contractor(s), by reason of delays caused by such work, or by reason of inadequate clean up. (8) Lessee shall at its sole expense comply with all applicable laws and all regulations and requirements of municipal or other governmental bodies exercising authority over such work and this compliance shall include the filing of plans and other documents as required and the procuring of all required licenses or permits. (9) If any shutdown of plumbing, electrical, fire and life safety equipment or air conditioning equipment becomes necessary, Lessee shall notify Lessor and Lessor will determine when such shutdown may be made. Any such shutdown shall be done only if an agent or employee of Lessor is present. The expense of such employee or agent shall be charged to Tenant Work if it was incurred primarily because of the Tenant Work being performed by Lessee's contractor. In the case of a shutdown of fire and life safety equipment, it shall be Lessee's responsibility to obtain all necessary fire department and other governmental approvals. (10) Any complaints by other tenants or Lessor regarding noise, fumes or odors are to be remedied immediately or alteration operations are to cease until said noise, fumes or odors are abated. (11) Lessee or Lessee's contractor shall not install plumbing, mechanical, electrical wiring or fixtures, acoustical or integrated ceilings, unless prior written approval is obtained from Lessor. In addition to the foregoing, all data processing and other special electrical equipment shall be installed only under the coordination supervision of Lessor and Lessor's electrical contractor (i.e., in the presence of and in a manner approved by Lessor or Lessor's electrical contractor). Lessor and Lessor's electrical contractor shall not incur any obligations or liability to Lessee or Lessee's contractors or others as a result of such coordination supervision. Such coordination supervision by Lessor or Lessor's electrical contractor shall be at Lessee's expense. (12) Lessee agrees to be entirely responsible for the balancing of any heating, ventilating or air conditioning system installed by Lessee. Such balancing shall be 12 40 performed only by a contractor or contractors approved in writing in advance by Lessor. (13) Lessee shall be responsible for any delay in completion of Tenant Work as a result of such work. (g) If Lessee requests to install any fixtures, furniture or equipment in the Leased Premises or perform any alterations, additions or improvements to the Leased Premises which are in addition to or subsequent to the Tenant Work, and Lessor consents to such requests, the terms and conditions of this Exhibit (excluding Section 3) shall pertain to all such work. (h) If the Lease provides for adding space to the Leased Premises at Lessee's election or otherwise after commencement of the lease term, all improvements to such additional space shall be performed generally in accordance with this Exhibit, except (a) the Tenant Improvement Allowance, if any, shall be the allowance specified for such additional space in the Lease; (b) the Final Contract Documents described in Section 4.2.C for the improvements to such additional space shall be delivered to Lessor no later than 160 days prior to the scheduled occupancy date for such space or such greater time that Lessor reasonably determines is necessary to enable such additional space to be ready for occupancy by the scheduled occupancy date; (c) at Lessor's election Lessor may provide all or part of the services to be provided by Lessor's Architect; and (d) at Lessor's election, Lessor, or an affiliate or agent of Lessor, may directly perform the work to be performed by Lessor's contractor and subcontractors, and in such event the charges for such work shall include usual and customary contractor mark-ups and be subject to Lessee's reasonable approval. The parties shall proceed diligently to enable and cause such improvements to be completed by the scheduled occupancy date. If the date of actual completion is delayed as a result of (a) Lessee's failure to timely provide and approve Final Contract Documents, (b) changes ordered by Lessee after approval of Final Contract Documents, (c) delays in delivery of special materials selected by Lessee, or (d) Lessee's failure to proceed diligently and timely perform its obligations with respect to such additional work, then lease term with respect to such space shall commence the date such work would have been substantially completed if not so delayed or the scheduled occupancy date, whichever is later. 13 41 EXHIBIT C JANITORIAL SERVICE PERFORMED BY UNICO 1. Empty all waste receptacles nightly. 2. Vacuum all traffic areas nightly including elevator lobbies. 3. Vacuum entire office weekly. 4. Dust office furniture, files, fixtures, window sills and all other horizontal surfaces nightly. 5. Spot clean glass furniture tops nightly. 6. Spot clean finger marks and smudges from vertical surfaces nightly. 7. Spot clean small spillages on carpet on request. 8. Dust all telephones as needed. 9. Remove all lint and physical dirt from fabric chairs on request. 10. All glass partitions and relite doors are spot washed nightly. 11. Lobby furniture including magazines and ashtrays are to be organized nightly. 12. Burned out lights are to be reported to the UNICO Service Center nightly. 13. Dust mop hardwood floors nightly. 14. Dust mop vinyl comp tile floors nightly. 15. Damp mop vinyl comp tile floors weekly. 16. Wax vinyl comp tile floors monthly. 17. Clean restrooms nightly. Items on desks or credenzas are not to be moved while cleaning. Computers, typewriters, copy machines or other electrical equipment are not to be unplugged. Only items in waste containers are to be discarded unless marked by the tenant to be thrown away. Tenant interior doors found locked upon the janitors arrival are to be locked after the area has been cleaned if red-dot system is used. EXHIBIT C 42 MONTH TO MONTH LEASE THIS LEASE, made this 8th day of September, 1998, between INTERNAP NETWORK SERVICES, INC. (LESSOR) AND CONTINENTAL, INC. (LESSEE) Lessee, in consideration of this lease, covenants and agrees with Lessor as follows: Lessee hereby rents from Lessor, Rooms 1001 (the Premises) in the Two Union Square Building (the Building), Seattle, King County, Washington, as a month-to-month tenant commencing the 8th day of September, 1998. Lessee shall pay Lessor monthly rent without demand and in advance, on the first day of each calendar month as follows: $1,397.50. The area of the Premises is deemed to be 1,200 usable square feet, approximately 1,290 rentable square feet as shown on the attached Exhibit "A". The term shall be from the Commencement Date until 11:59 p.m. on December 31, 1998. Thereafter the Lease is month to month. The rental period hereunder is a calendar month. If this rental agreement commences on other than the first day of a calendar month, the rental for that calendar month shall be prorated. All rent which is past due shall bear interest at the rate of one percent per month from the date rent is due until paid. If the maximum annual rate of interest permitted by applicable law shall be less than the rate of interest provided for herein, then all past due payments of rent shall bear interest at the maximum rate permitted by applicable law from due date until paid. Lessee acknowledges that late payment by Lessee to Lessor of rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and economically impractical to ascertain. Therefore, if any payment of rent due from Lessee is not received by Lessor within ten (10) days after the due date, Lessee shall pay to Lessor (in addition to the interest above provided) a late charge of Fifty Dollars ($50.00) or two percent (2%) of the overdue rent, whichever shall be greater. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Lessor will incur by reason of late payment by Lessee and is in addition to any interest charges on past due rent. The Premises are to be used for storage of Lessee's office furniture and equipment. The Premises have been inspected and are accepted by Lessee in their present condition and Lessee shall at all times keep the Premises neat, and in a sanitary condition and except for reasonable wear and tear and damage by fire or other unavoidable casualty shall at all times preserve the Premises in as good repair as they now are. Lessee shall not make any alterations, additions or improvements in or to the Premises or add, disturb or in any way change any plumbing or wiring therein, without the prior written consent of Lessor. Lessee shall provide and install, at Lessee's sole cost and expense, a demising wall then access door to the Premises as shall be mutually agreed between the parties. Lessee shall also remove the demising wall and door at the termination of the Lease at Lessee's sole cost and expense. 43 Lessee shall defend and hold Lessor harmless from all loss, damage, liability or expense resulting from any injury to any person or any loss of or damage to any property caused by or resulting from any act or omission of Lessee or any agent, employee, invitee, or visitor of Lessee in or about the Premises of the Building. Lessor shall not be liable for any injury, loss or damage to person or property sustained by lessee, or other persons, which may be caused by the building or the Premises, or any appurtenances thereto, being out of repair, or by the bursting or leakage of any water, gas, sewer or steam pipe, or by theft, or by any act of neglect of any tenant or occupant of the Building, or of any other person, or by any other cause of whatsoever nature unless due to Lessor's gross negligence. Lessee agrees to exercise reasonable care in and around the Premises so as not to damage common areas, walls, floors, etc. Lessor shall furnish heat, light to the extent that such services are provided by the Building but shall not be liable in damages or otherwise should these services be interrupted by fire, accident, strike, riot, the making of necessary repairs or improvements, or any other cause whatsoever. After December 31, 1998 this tenancy may be terminated at any time by twenty (20) days prior written notice by Lessor or thirty (30) days prior written notice by Lessee preceding the end of the monthly rental period as provided by law, or as otherwise provided by law. In the event of litigation between the parties hereto declaratory or otherwise, for the enforcement of any of the covenants, terms and conditions of this agreement, the losing party shall pay the costs thereof and reasonable attorneys' fees incurred by the prevailing party, which shall be determined and taxed by the Court as part of the costs of such action. Anything in this Lease to the contrary notwithstanding, Lessor and Lessee each hereby waives any and all claims against the other, its agents, officers, directors, shareholders or employees, for loss or damage to the leased Premises or the Building, or any personal property of such party therein, that is caused by or results from fire and other perils insured against under (a) the normal fire with extended coverage insurance policies, or (b) the standard business interruption insurance policies, carried by the parties and in force at the time of damage or loss. Each party shall cause each such insurance policy obtained by it to provide that the insurance company waives all right to recovery by way of subrogation against the other party in connection with any such damage of loss. IN WITNESS WHEREOF, this lease has been executed by Lessor and Lessee as of the day and year first above set forth. LESSEE: LESSOR: CONTINENTAL, INC. INTERNAP NETWORK SERVICES, INC. By: /s/ HOWARD H. BELL By: /s/ PAUL E. McBRIDE --------------------------- ------------------------------------- Howard H. Bell Its: Executive Vice President Its: VP Finance & Administration Date: 9-8-98 Date: 9-8-98 44 Suite 1001 [GRAPH] EXHIBIT "A" 45 SECOND AMENDMENT TO LEASE Lessor: Union Square Limited Partnership Lessee: InterNAP Network Services, Inc. Premises: Commonly referred to as Suite 1000 in the Two Union Square Building as more particularly described in the Lease. Date of this Amendment: April 6, 1999 Lessor and Lessee are parties to the Lease dated June 11, 1998 as modified November 2, 1998 and desire to further amend the Lease as follows: 1. Section 1.1 Leased Premises. That part of Section 1.1 reading Rooms 1001-37 is modified to read the Rooms; 1001-37, Rooms 901-37, Rooms 1501-37 (Additional Premises) effective July 1, 1999 for Rooms 901-37, and August 1, 1999 for Rooms 1501-37 as outlined in red on the attached Exhibit A. 2. Section 1.2 Floor Areas. That part of Section 1.2 reading 19,225 usable square feet; 20,675 rentable square feet, changed to read 38,450 usable square feet; 41,350 rentable square feet effective July 1, 1999, and 56,722 usable square feet; 61,893 rentable square feet effective August 1, 1999. 3. Section 1.2 Floor Areas. That part of Section 1.2 reading 1.96132 percent of the rentable area of the Building changed to read 5.49463 percent of the Building. 4. Section 1.4 Rent. Rent is hereby amended to read as follows: Commencing July 1, 1999 and ending July 31, 1999 the base monthly rent shall be $70,208.00 Commencing August 1, 1999 and ending January 31, 2000 the base monthly rent shall be $121,566.00 Commencing February 1, 2000 and ending June 30, 2000 the base monthly rent shall be $147,399.00 Commencing July 1, 2000 and ending August 31, 2000 the base monthly rent shall be $149,122.00 Commencing September 1, 2000 and ending June 30, 2001 the base monthly rent shall be $151,276.00 Commencing July 1, 2001 and ending July 31, 2001 the base monthly rent shall be $152,999.00 46 Commencing August 1, 2001 and ending June 30, 2002 the base monthly rent shall be $156,423.00 Commencing July 1, 2000 and ending June 30, 2003 the base monthly rent shall be $159,868.00 Commencing July 1, 2003 and ending July 31, 2003 the base monthly rent shall be $161,591.00 Commencing August 1, 2003 and ending September 30, 2003 the base monthly rent shall be $165,015.00 5. Section 1.5 Base Indices. The Additional Premises shall have a base year of 1998 with regards to Annual Operating Expense and Tax increases with an Operating Cost Adjustment Base amount of $6.87. Lessees' first adjustment year shall be January 1,2000, however, Lessee's first adjustment with regards to the Additional Premises located on the 9th floor, for Sections 3 & 4 shall be limited to 50% of the 9th floor Additional Premises (10,337 rsf). 6. The rent as specified in Section 1.2 as outlined herein represents a "pocket space" of 10,338 rentable square feet on the 9th floor, for which rent and operating expenses/ taxes shall not be charged during the months July 1, 1999 - January 31, 2000. 7. Section 28 First Right to Lease is revised to read the 11th floor only. 8. Section 29 Parking is revised to read "thirty (30) monthly parking permits three (3) of which must be designated carpool parking" effective July 1, 1999. 9. Lessor shall provide Lessee with a tenant improvement allowance of $9/usf ($165,555) for improvements to the 9th floor Additional Premises. Since time is of the essence in completing the tenant improvement work on the 9th floor, Lessee and Lessor shall diligently pursue the completion of their respective work in keeping with the attached schedule marked Exhibit B. 10. Lessee shall have the right to sublease the 15th floor in keeping with the terms and conditions outlined in Section 22 of the Lease, however, Lessor agrees not to exercise its right of recapture as provided in Section 22 of the Lease. In addition, in the event the sublease term commences prior to the August 1, 1999 rent commencement date for the 15th floor, Lessor agrees to waive rent and other costs for the prior period, however, rent shall commence August 1, 1999 as provided herein. Section 22.4(f) shall be revised to read that "any rent or other consideration accruing to Lessee as the result of such assignment or sublease which is in excess of the rent then being paid by Lessee, net of cost associated with the sublease shall be split equally between Lessor and Lessee monthly as additional rent". 11. All other terms and conditions are to remain the same. 47 Lessee: Lessor: InterNAP Network Services, Inc. Union Square Limited Partnership, a Washington Limited Partnership By Unico Properties, Inc. (Manager and authorized rental agent for Union Square Limited Partnership) By /s/ Paul E. McBride By /s/ Donald M. Wise --------------------------------- --------------------------------- Its V.P. Finance Administration Its Senior Vice President -------------------------------- -------------------------------- Date 4/9/99 Date 4/9/99 ------------------------------- ------------------------------- 48 LESSOR'S ACKNOWLEDGEMENT STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this 9th day of April, 1999, before me personally appeared Donald M. Wise, to me known to be the Senior Vice President of UNICO PROPERTIES, INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED PARTNERSHIP, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. SEAL /s/ Shielah C. Sabalza State of Washington ------------------------------------ Shielah C. Sabalza Notary Public in and for the State of Washington, residing at Seattle. My commission expires April 2, 2002 49 [DIAGRAM] Two Union Square - ----------------- Floor 9 50 [DIAGRAM] Two Union Square - ----------------- Floor 10 51 March 17, 1999 Arne Gillam Director of Leasing, Union Square 601 Union Street, Suite 1710 Seattle, WA 98101 RE: PROPOSED INTERNAP CONSTRUCTION SCHEDULE, 9th FLOOR TWO UNION SQUARE Dear Arne, I recently spoke with Corr Pearce of InterNAP to discuss the upcoming construction project within the 9th floor of Two Union Square. He confirmed that Tom Duke will be developing the architectural plans and upon their release would like three general contractors to bid the project. At that time no date for the release of the construction documents from Tom Duke had been established. It is my understanding that the lease commencement date for InterNap will be July 1. To meet this date I would propose the following schedule. This schedule is only a guideline, for I cannot determine the scope of work nor the lead-time for any special materials Tom Duke may propose.
Date Task Duration - ---- ---- -------- July 1 Day One of Occupation NA June 30 InterNAP Move One Day June 28 Furniture Installation Three Days June 24 Construction Punch Work Two Days June 23 Construction Complete NA May 3 Construction Commencement Eight Weeks April 26 Bid Qualifying and Cost Approval One Week Receive Construction Permit April 26 Bids Due for GC's One Day April 12 Begin GC Bidding Two Weeks April 9 InterNAP Approved CD's Due NA
52 [DIAGRAM] Two Union Square - ----------------- Floor 15 53 Arne Gillam Director of Leasing, Union Square InterNAP Construction Schedule Page 2 April 5 Preliminary CD's Due NA Submit to Engineering for Design A firm construction schedule will be requested of each general contractor upon the submittal of the bids. Please contact me with any questions you may have. Thanks, /s/ David Easton - ------------------------------------- David Easton Union Square Construction Manager 54 THIRD AMENDMENT TO LEASE Lessor: Union Square Limited Partnership Lessee: InterNAP Network Services, Inc. Premises: Commonly referred to as Suite 1000 in the Two Union Square Building as more particularly described in the Lease. Date of this Amendment: July 1, 1999 Lessor and Lessee are parties to the Lease dated June 11, 1998, as amended November 2, 1998 and April 6, 1999, and desire to amend the Lease as follows: 1. Section 1.1 Leased Premises reading Rooms 1001-37, Rooms 901-37, and Rooms 1501-37 changed to read Rooms 1001-37, Rooms 901-37, Rooms 1501-37, and Rooms 624-37, 601-09 as outlined in red on the attached Exhibit A. 2. Section 1.2 Floor Areas reading 56,722 usable square feet, 61,893 rentable square feet shall be changed to read 67,240 usable square feet, 74,094 rentable square feet effective October 1, 1999. 3. Section 1.2 Floor Areas shall be changed from 5.49463 percent of the Building, to 6.57778 percent of the Building. For purposes of Sections 3 & 4 12,201 rsf, or 1.08316 percent of the Building shall have a 1999 base year for calculating increases in accordance with the provisions of Sections 3 & 4. 4. Section 1.4 Rent is hereby amended as follows: Commencing October 1, 1999 and ending January 31, 2000 the base monthly rent shall be $150,035. Commencing February 1, 2000 and ending June 30, 2000 the base monthly rent shall be $175,868. Commencing July 1, 2000 and ending August 31, 2000 the base monthly rent shall be $177,591. Commencing September 1, 2000 and ending September 30, 2000 the base monthly rent shall be $179,745. Commencing October 1, 2000 and ending June 31, 2001 the base monthly rent shall be $180,762. 55 Commencing July 1, 2001 and ending July 31, 2001 the base monthly rent shall be $182,485. Commencing August 1, 2001 and ending June 30, 2002 the base monthly rent shall be $185,909. Commencing July 1, 2002 and ending September 30, 2002 the base monthly rent shall be $189,354. Commencing October 1, 2002 and ending June 30, 2003 the base monthly rent shall be $190,371. Commencing July 1, 2003 and ending July 31, 2003 the base monthly rent shall be $192,094. Commencing August 1, 2003 and ending September 30, 2003 the base monthly rent shall be $195,518. 5. Section 29 Parking is revised to read 38 monthly parking permits upon the full execution of the Third Amendment to Lease. 6. Lessor shall provide Lessee with a tenant improvement allowance of $8/usf ($84,144) for improvements to the 6th floor additional premises. 7. Section 28 First Right to Lease is revised to read the 11th floor and the remainder of the 6th floor, subject to rights granted to third parties. All other terms and conditions of the Lease are to remain the same. Lessee: Lessor: InterNAP Network Services, Inc. Union Square Limited Partnership, a Washington Limited Partnership By Unico Properties, Inc. (Manager and authorized rental agent for Union Square Limited Partnership) By: /s/ Paul E. McBride By: /s/ Donald M. Wise --------------------------------- ------------------------------------ Its: Chief Financial Officer Its: Sr. V.P. -------------------------------- ----------------------------------- Date 7/2/99 Date 7/9/99 -------------------------------- ----------------------------------- 56 LESSOR'S ACKNOWLEDGEMENT STATE OF WASHINGTON) ) S8. COUNTY OF KING ) On this 9th day of July, 1999, before me personally appeared Donald M. Wise, to me known to be the Senior Vice President of UNICO PROPERTIES, INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED PARTNERSHIP, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ SHIELAH C. SABALZA -------------------------------------- Shielah C. Sabalza [NOTARY SEAL] Notary Public in and for the State of Washington, residing at Seattle. My commission expires April 2, 2002. 57 LESSEE'S CORPORATE ACKNOWLEDGEMENT STATE OF WASHINGTON) ) ss. COUNTY OF KING ) On this 2nd day of July, 1999, before me personally appeared Paul McBride to me known to be the Chief Financial Officer, the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. --------------------------------------- NOTARY (Print Name) Francene Charette PUBLIC Notary Public in and for the State of SEAL Washington, residing at King County My commission expires 9/21/02. 58 [DIAGRAM] Two Union Square - ----------------- Floor 6 EX-10.10 16 LEASE AGREEMENT DATED JUNE 1, 1996 1 EXHIBIT 10.10 AGREEMENT TO LEASE This Agreement ("Lease"), as of the 1st day of June, 1996 is by and between SIXTH & VIRGINIA PROPERTIES, a Washington General Partnership, hereinafter called "Owner," and InterNAP Network Services, L.L.C., a Washington Limited Liability corporation, hereinafter called "Tenant." 1. NONSTANDARD PROVISIONS The following constitute the nonstandard provisions of this Lease and are referred to elsewhere herein. a. FLOOR OF THE WESTIN BUILDING ON WHICH PREMISES ARE LOCATED: 8 b. AGREED FLOOR AREA OF PREMISES: Five thousand eight hundred fifty four (5854) square feet that includes an allowance for core and/or common areas used by Tenant. c. THE TERM OF THIS LEASE (hereinafter "Lease Term") shall be Five (5) years and shall commence on the 1st day of June, 1996, and end on the 31st day of May, 2001. d. MONTHLY BASE RENT: June 1, 1996 - May 31, 1997 $8781 June 1, 1997 - May 31, 1998 $9269 June 1, 1998 - May 31, 1999 $9757 June 1, 1999 - May 31, 2000 $10,245 June 1, 2000 - May 31, 2001 $10,732 e. RENT PER DAY during any occupancy prior to commencement of Lease Term: none f. Reimbursement to Owner for Special Improvements: Total tenant improvement costs and utility upgrades are projected to cost $137,775.00. Owner and Tenant agree to split the cost of such improvements described in exhibit C. Tenant agrees to pay interest at 10% per annum on any amounts paid for by Owner. One half of the Tenant Improvement balance held by the Owner plus any accrued interest at 10% per annum will be paid on the first day of the second year of the lease. The remaining balance plus accrued interest at 10% per annum will be paid on the first day of the third year. g. USE PERMITTED ON PREMISES: Internet communications facilities and general office use. h. TENANT'S ADDRESS FOR NOTICES IF OTHER THAN PREMISES: none i. TENANT'S BILLING ADDRESS IF OTHER THAN PREMISES: n/a 1 2 j. PARKING: During the Lease Term, Owner shall provide Tenant with unreserved parking space for five (5) automobiles in The Westin Building Garage. The space shall be made available during periods of typical office use from 7:00 a.m. to 6:00 p.m. five days per week, Monday through Friday, and at other times for the person to whom such space is regularly rented who wishes to work in building. Tenant shall pay in advance the charge established by Owner for said spaces, in addition to rent hereunder. If Tenant fails to timely pay such charge, Owner may by written notice to Tenant elect either to proceed as provided in Article 14 or to cease to provide the foregoing parking spaces. Upon initial occupancy of Garage, the charge for these spaces shall be $138.00 per month (including tax). From time to time during this Lease, the charge for spaces shall be increased to the then-prevailing rate for similar service in the immediate area. Owner shall maintain the right to pass on to Tenant all applicable parking taxes. k. RELOCATION OF PREMISES: Owner shall have the right to relocate the Premises in Building on the following terms and conditions: 1) The floor area of the new location shall be approximately the same as the floor area of the original location; 2) Tenant will be reimbursed for all reasonable expenses incurred in connection with the relocation, including but not limited to the net cost of putting the new Premises in the same condition as the original location, moving, signage, telephone & computer equipment relocation and reasonable quantities of new stationery; 3) Owner shall give Tenant at least Ninety (90) days written notice of relocation. l. SECURITY DEPOSIT: Concurrently with the execution of this Lease, Tenant shall deliver to Owner a sum equal to Seventeen Thousand Five Hundred Sixty two Dollars ($17,562.00), this as security for the performance by Tenant of every covenant and condition of this Lease. Upon payment of deposit, Tenant shall request and Owner shall deliver to Tenant a written receipt therefor. Deposit may be commingled with other funds of Owner and shall bear no interest. If Tenant shall default with respect to any covenant or condition of this Lease, including but not limited to the payment of rent, Owner may apply the whole or any part of deposit to the payment of any sum in default or any other sum which Owner may be required to spend by reason of Tenant's default. Should Tenant comply with all of the covenants and conditions of this Lease, deposit shall be returned to Tenant (or, at the option of Owner, to the last assignee of Tenant's interest in this Lease) at the expiration of the term hereof. Tenant shall not move into Premises until said deposit has been paid to Owner. m. SIGNAGE: Owner will provide signage, according to building standards, to Tenant with Tenant's business name at Three (3) separate locations: 1) Main Lobby Directory - Sixth Avenue 2) Third Floor Lobby Directory - Skybridge entrance from Garage 3) Elevator Lobby Directory on Tenant's floor 2 3 n. HOLDING OVER: If Tenant shall continue its occupancy of the Premises after the expiration of the Lease Term, the occupancy shall not be deemed to extend or renew the term of this Lease, and such occupancy shall constitute a tenancy from month to month, subject to all of the terms of this Lease, except the term, and except that the Rent for each month of continued occupancy shall be double the Rent for the last full month of the Lease Term. Tenant shall also be liable for Owner's incidental and consequential damages sustained by virtue of Tenant's holding. o. SQUARE FOOTAGE ADJUSTMENT: Owner and Tenant agree that reasonable attempts have been made to determine the correct square footage used in this Lease. Owner grants Tenant the option to remeasure and challenge the new premises square footage calculation at Tenant's expense. If Tenant's square footage calculation differs from the number used in this Lease, Owner will remeasure at Owner's expense to determine which calculation is correct. Owner and Tenant agree that any challenge of the square footage calculation must be carried out within one month of the commencement date. After that time, Owner and Tenant agree to mutually waive any and all rights, claims, or liabilities against each other as it relates to the calculation of square footages to determine rents and other costs in this Lease. p. MEET-ME ROOM ACCESS Tenant shall have the right to share usage of the 19th floor Meet-Me Room and associated wiring conduit. Owner shall supervise the maintenance of the room by tenant-users and shall use all reasonable means to ensure this facility is always available to Tenant. Tenant agrees to abide by the regulations set jointly by owners and tenant-users or, should its practices conflict with those regulations, to vacate immediately upon written request. As in Article 7, Owner shall not be liable for damages nor shall the rental herein be abated for failure to furnish or interruption in service in this facility. For Meet-Me Room usage, Tenant shall pay a one-time usage fee of Five Hundred Dollars ($500.00) no later than Thirty (30) days following Commencement Date and a recurring monthly charge of $50.00 per DSX panel installed within the room. q. CABLE RIGHT OF WAY Owner gives to Tenant the right of way to install cable from the Premises to the "Meet Me Room" on the 19th floor. Such installation is at Tenant's expense and subject to limitations and exclusions presented within Lease. Such installation must be coordinated with and approved by The Westin Building Engineer. Cabling to areas of the building other than the Meet-Me Room shall be governed by the same terms and conditions set forth above but shall additionally be subject to monthly recurring charges as established by Owner for all other cable run by users throughout the building. r. CLASS "A" ENTRY Tenant acknowledges owners requirement for the premises to have an entry that is compatible with the Class "A" image of the building. Tenant shall cooperate with Owner in developing an entry plan that meets Owner's need for appearance and Tenant's need for privacy and control. Owner agrees that the common areas of the floor specifically the lobby and restrooms will be renovated within a reasonable time consistent with the class A image. s. OPTION TO EXTEND: Provided that Tenant is not in default hereunder at the time of the exercise of the Option to Extend and/or at the commencement of the extended term, Tenant shall have the option to extend the term of this lease beyond the Initial Term for an additional period of Five (5) years (the "Extended Term") subject to expansion rights of a full floor tenant on the 7th or 9th floors. In this event however tenant shall first have the option to renew this lease by taking the entire eighth floor. The option provided hereunder shall be exercised, if at all, only by 3 4 written notice to Owner not later than August 31, 2000. The same terms and conditions applicable to the Initial Term of this Lease shall apply during the Extended Term, except that the monthly Rent shall be an amount equal to the product of (1) the agreed floor area of the Premises multiplied by (2) the monthly rent per rentable square foot established by Owner, in its reasonable judgment, for new leases in the Building for substantially equivalent size and located space as of the date of Tenant's exercise of its Option to Extend. t. EQUIPMENT AND FIXTURES: Owner and Tenant agree that the premises contains the following mechanical systems: specialized HVAC system to include two (2) twenty (20) ton Liebert floor mounted air conditioning units and associated piping; specialized fire protection system consisting of a halon system and hydraulic preaction valve; and a domestic water backup system for the HVAC units. These systems are to be considered fixtures which Tenant shall take possession of and have the right to use. Tenant shall be responsible for maintaining the systems and preserving their functionality through out their normal life cycle. Should any of the components of these systems fail and require replacement, Tenant shall at its option and its expense, replace necessary components or restructure the system to eliminate the unwanted component in a manner approved by the Building Engineer. If Tenant elects to replace components at substantial capital cost, it shall have the option to designate such components as trade fixtures which Tenant will then be entitled to remove upon expiration of this Lease and vacation of the Premises. 2 EXHIBITS The following Drawings and Special Provisions are attached hereto as exhibits and made a part of this Lease: Exhibit A -- Floor plan of the Westin Building, herein called "Building." Exhibit B -- Site plan showing relation and location of Building and Westin Building Garage. Exhibit C -- Details of Premises Approved by Owner and Tenant. 3 PREMISES Owner hereby leases to Tenant, and Tenant hereby leases of Owner, upon the terms and conditions herein set forth, those certain Premises, described in Article 1(a) and (b) and shown outlined in red on the standard floor plan attached hereto marked "Exhibit A" and made a part hereof in that certain Building, known as the Westin Building situated in the City of Seattle, County of King, State of Washington, at Sixth Avenue and Virginia Street, and located on the following real property: Lots 11 and 12 (less portion for street), Block 15 of Addition to town of Seattle, as laid off by Heirs of Sarah A. Bell, deceased (commonly known as Heirs of Sarah A. Bell's Addition to the City of Seattle), as per plat recorded in Volume I of plats, page 103, records of King County, Washington. The areas so leased are hereinafter called "Premises." 4 RENT Tenant covenants and agrees to pay Owner the monthly rent which is set forth in Article 1(d) to be adjusted as provided elsewhere in this Lease, in United States currency in advance on or before the first day of each calendar month during said term, at the office of Owner in Building or at such other place as Owner may from time to time designate in writing. It is agreed that since collection of any amount past due imposes an 4 5 administrative cost on Owner, in addition to all other sums that may be charged by Owner hereunder, Tenant shall pay to Owner a sum equal to Five Cents ($0.05) for every Dollar not paid when due. 5 USE Premises may be used only for the purpose set forth in Article 1(g) and for no other purpose or purposes without the written consent of Owner. No use shall be made of Premises, nor act done in or about Premises, which is unlawful, or which may increase the existing rate of insurance upon Building. Tenant shall not commit or allow to be committed any waste upon Premises, or any public or private nuisance or other act or thing which disturbs the quiet enjoyment of any other tenant in Building, nor shall Tenant, without the written consent of Owner, use any apparatus, machinery or device in or about Premises that shall cause any substantial noise or vibration. If any of Tenant's office machines and equipment should disturb the quiet enjoyment of any other tenant in Building, then Tenant shall provide adequate insulation or take such other action as may be necessary to eliminate the disturbance. Tenant shall observe such reasonable rules and regulations as may be adopted by Owner for the safety, care and cleanliness of Premises or Building and the preservation of good order therein. 6 POSSESSION In the event of Owner's inability to deliver possession of Premises ready for occupancy at the commencement of the Lease Term, Owner shall not be liable for any damage caused thereby, except as otherwise expressly stated herein, nor shall this Lease become void or voidable, nor shall the Lease Term be extended, but in such event, no rental shall be payable by Tenant to Owner for any portion of the Lease Term prior to actual delivery to Tenant of possession of Premises ready for occupancy by Tenant unless Tenant shall have failed to meet its obligations under Article 23 or unless the term of this Lease does not commence on or before July 1, 1996 without fault on the part of Tenant in which event Tenant's sole remedy shall be to cancel the Lease by giving thirty (30) days written notice of its said election to Owner. If Tenant, with Owner's permission, enters into possession of Premises prior to commencement of the Lease Term, all of the terms and conditions of this Lease shall apply during such prior period, except that rental shall be the amount set forth in article 1(e) for each calendar day during such prior period. 7 SERVICES PROVIDED BY OWNER Owner shall, at its sole cost and expense, maintain Premises and the public and common areas of Building, such as lobbies, stairs, landscaping, corridors and restrooms, together with the Westin Building Garage, in reasonably good order and condition except for damage occasioned by the act of Tenant. Owner, at its sole cost, shall furnish Premises from 7:00 a.m. to 6:00 p.m. Monday through Friday (exclusive of holidays), hereinafter called "Standard Work Week," with electricity for lighting and the operating of office machines, heat and air conditioning as may be reasonably required for the occupation of Premises, and shall provide elevator service, lighting replacement, toilet room supplies, window washing with reasonable frequency, and daily janitorial service on the basis of a Standard Work Week during the times and in the manner that such janitorial services are customarily furnished in general office buildings in the area. Owner shall not be liable for damages, nor shall the rental herein reserved be abated, for failure to furnish or delay in furnishing any of the foregoing services, when such failure or delay is caused by accident or conditions beyond the control of Owner, or by labor disturbances or labor disputes of any character, or by inability to secure fuel, supplies, machinery, equipment or labor after reasonable efforts to do so, or by the making of improvements or necessary repairs to Premises or Building, nor shall the temporary failure to furnish any of such services be construed as an eviction of Tenant or relieve Tenant from the duty of observing and performing any of the provisions of this Lease. Tenant acknowledges that the 24-hour nature of its business exceeds the Standard Work Week described above. Owner shall at Tenant's cost install a meter in the electrical system supplying Tenant's equipment room, measure usage and bill Tenant monthly at the same rate, including demand charges, billed by Seattle City Light plus a monthly billing fee of $10.00. Additionally, Tenant shall pay for all other expenses incurred by Owner as a result of Tenant using Premises in excess of Standard Work Week. 8 REPAIRS AND ALTERATIONS Tenant agrees by taking possession of the Premises that Premises are then in a tenantable and good condition, that Tenant will take good care of Premises, and the same will not be altered or in any way changed without the written consent of Owner. Tenant hereby waives any right to make repairs at Owner's 5 6 expense. Tenant shall not make changes to locks on doors or add, disturb, or in any way change any plumbing or wiring without first obtaining written consent of Owner. All damages or injury done to the Premises by Tenant, or by any persons who may be in or upon Premises with the consent of Tenant, shall be paid for by Tenant and Tenant shall pay for all damages to Building caused by Tenant's misuse of Premises or the appurtenances thereto. All other repairs to Premises necessary to maintain Premises in a tenantable and good condition shall be done by or under the direction of Owner and at Owner's expense except as otherwise specifically provided herein. Tenant shall pay for the replacement of Special Improvements as provided in Article 23 and the replacement of doors or windows of Premises which are cracked or broken by Tenant, its employees, agents, or invitees, and Tenant shall not put any curtains, draperies or other hangings on or beside the windows in Premises without first obtaining Owner's consent. Owner agrees that it will repaint the interior of Premises at least once every five years with a color mutually agreed upon between Tenant and Owner. Owner may make any alterations or improvements which Owner may deem necessary for the preservation, safety or improvement of Premises or Building. All alterations, additions and improvements, except trade fixtures installed by Tenant and which are removable without damage to Building, shall become the property of Owner. Tenant shall, at the termination of this Lease by the expiration of time or otherwise, surrender and deliver up Premises to Owner in as good condition as when received by Tenant from Owner, reasonable use and wear and damage by fire or other casualty excepted. Should Owner be required to make changes or additions to Building or Westin Building Garage at any time during the term of this Lease as a result of any law, rule, code or regulation which becomes effective after the Commencement Date, the Tenant shall pay on demand by Owner, as additional rent, a monthly charge equal to the area of Premises as stated in Article 1(b) divided by 350,000 times 1 and 1/3 percent of the cost of the change or addition. Such additional rent shall commence upon substantial completion of each such change or addition and shall continue to the end of the term of this Lease. 9 ENTRY AND INSPECTION Tenant will permit Owner and its agents to enter into and upon Premises at all reasonable times for the purpose of inspecting the same or for the purpose of cleaning, repairing, altering or improving Premises or Building and when reasonably necessary may close entrances, doors, corridors, elevators or other facilities without liability to Tenant by reason of such closure and without such action by Owner being construed as an eviction of Tenant or relieving the Tenant from the duty of observing and performing any of the provisions of this Lease. Owner shall have the right to enter Premises for the purpose of showing Premises to prospective tenants for a period of 180 days prior to the expiration of the Lease Term. 10 DAMAGE OR DESTRUCTION If Premises or Building are damaged by fire, wind, or other such casualty, the damage shall be repaired by and at the expense of Owner, provided such repairs (to restore Premises to usable condition) can be made within sixty (60) days after the occurrence of such damage without the payment of overtime or other premiums, and until such repairs are completed, the rent shall be abated in proportion to the part of Premises which is unusable by Tenant in the conduct of its business (but there shall be no abatement of rent by reason of any portion of Premises being unusable for a period equal to one day or less). If such repairs cannot be made within sixty (60) days, Owner may, at its option, make them within a reasonable time, and in such event this Lease shall continue in effect and the rent shall be abated in the manner provided above. Owner's election to make repairs must be evidenced by written notice to Tenant within thirty (30) days after the occurrence of the damage. If Owner does not elect to make such repairs that cannot be made within sixty (60) days, then either party may, by written notice to the other, terminate this Lease. A total destruction of Building shall automatically terminate this Lease. 11 ADVERTISING Tenant shall not inscribe any inscription, post, place, or in any manner display any sign, notice, picture, placard or poster, or any advertising matter whatsoever, anywhere in or about Premises or Building at places visible (either directly or indirectly as an outline or shadow on a glass pane) from any where outside Premises without first obtaining Owner's written consent thereto. 12 INDEMNITY, LOSS AND WAIVER OF SUBROGATION Tenant shall defend and indemnify Owner and save it harmless from and against any and all liability, damages, costs, or expenses, including attorneys' fees, arising from any act, omission or negligence of Tenant or the officers, contractors, licensees, agents, servants, employees, guests, invitees, or visitors of Tenant in or about Building, or arising from any accident, injury, or damage, howsoever and by 6 7 whomsoever caused, to any person or property, occurring in or about Premises, provided that the foregoing provision shall not be construed to make Tenant responsible for loss, damage, liability, or expense resulting from injuries to third parties caused by the negligence of Owner or of any officer, contractor, licensee, agent, servant, or employee of Owner. Owner shall not be responsible for providing security and Tenant hereby releases Owner from any claim for damage or loss of property that may arise as a result of vandalism or theft in Building or Westin Building Garage. Owner and Tenant each release the other from responsibility for, and waive their entire claim of recovery for (i) any loss or damage to the real or personal property of either located anywhere in Building and Westin Building Garage, arising out of or incident to the occurrence of any of the perils which may be covered by a fire and lightning insurance policy, with extended coverage endorsement in common use in the Seattle locality or (ii) loss resulting from business interruption at Premises or loss of rental income from Building, arising out of or incident to the occurrence of any of the perils that may be covered by a business interruption insurance policy and by the loss of rental income insurance policy in common use in the Seattle locality. To the extent that such risks under (i) and (ii) are in fact covered by insurance, each party shall cause its insurance carriers to consent to such waiver and to waive all rights of subrogation against the other party. 13 LIENS AND INSOLVENCY Tenant shall keep Premises and Building free from any liens or encumbrances arising out of any work performed by Tenant, materials furnished by Tenant, or obligations incurred by Tenant. Owner may terminate this Lease by giving Tenant notice of its election to do so, if; (i) Tenant files a voluntary petition in bankruptcy, or for reorganization under the bankruptcy laws, or is adjudged a bankrupt by a court of competent jurisdiction, (ii) if Tenant makes an assignment for the benefit of creditors, or if a receiver is appointed for Tenant's business, or (iii) any other action is taken by or against Tenant under any State or Federal insolvency or bankruptcy act. No interest in this Lease or estate hereby created in favor of Tenant shall pass by operation of law under any such bankruptcy or insolvency act to any person whomsoever without the prior express written consent of Owner. Any purported transfer in violation of this Article shall constitute a default by Tenant. 14 DEFAULT AND RE-ENTRY Except for a default under the preceding paragraph for which immediate right of termination is given to Owner, if Tenant fails to pay any installment of rent when due (plus interest on past due amounts at the maximum legal rate from the date due) after 3 days written notice, or to perform any other covenant under this Lease within thirty (30) days after written notice from Owner stating the nature of the default, Owner may re-enter and take possession of Premises using all reasonable force to do so; provided, however, that if the nature of such default other than for non-payment of rent is such that the same cannot reasonably be cured within such thirty-day period, Tenant shall not be deemed to be in default if Tenant shall within such period commence such cure and thereafter diligently prosecute the same to completion. Notwithstanding such retaking of possession by Owner, Tenant's liability for the rent provided herein shall not be extinguished for the balance of the term of this Lease. Upon such re-entry, Owner may elect either (i) to terminate this Lease, in which event Tenant shall immediately pay to Owner a sum equal to that by which the then cash value of the total rent reserved under this Lease for the balance of the Lease Term exceeds the reasonable rental value of the Premises for the balance of the Lease Term plus costs incident to releasing the Premises including, but not limited to remodeling expenses, attorney's fees and real estate commissions; or (ii) without terminating this Lease, to relet all or any part of the Premises as the agent of and for the account of Tenant upon such terms and conditions as Owner may deem advisable, in which event the rents received on such reletting shall be applied first to the expenses of reletting and collection, including necessary renovation and alteration of Premises, reasonable attorney's fees and real estate commissions paid, and thereafter to payment of all sums due to or to become due Owner hereunder, and if a sufficient sum shall not be thus realized to pay such sums and other charges, Tenant shall pay Owner any deficiency monthly, and Owner may bring an action therefor as such monthly deficiency shall arise. In the event of any such retaking of possession of Premises by Owner as herein provided, Tenant shall remove all personal property located thereon and, upon failure to do so upon demand of Owner, Owner may, in addition to any other remedies allowed by law, remove and store the same in any such place selected by Owner, including but not limited to a public warehouse, at the expense and risk of Tenant. If Tenant shall fail to pay any sums due hereunder or the cost of storing any such property after it has been stored for a period of thirty (30) days or more, Owner may sell any or all such property at public or private sale and shall apply the proceeds of such sale first, to the cost of such sale; second, to the payment of the charges for storage, if any; and third, to the payment of any other sums of money which may be due from Tenant to Owner under the terms of this Lease, and the balance, if any, to Tenant. Tenant hereby waives all claims for damages that may be caused by Owner's lawfully re-entering and taking possession of Premises or lawfully removing and storing or selling the property of Tenant as herein 7 8 provided, and will save Owner harmless from loss, costs, or damages occasioned thereby, and such lawful re-entry shall not be considered or construed to be a forcible entry. 15 SURRENDER OF POSSESSION Upon expiration of the term of this Lease, whether by lapse of time or otherwise, Tenant shall promptly and peacefully surrender Premises to Owner. 16 COSTS AND ATTORNEYS' FEES If Tenant or Owner shall bring any action for any relief against the other, declaratory or otherwise, arising out of this Lease, including any suit by Owner for the recovery of rent or possession of Premises, the losing party shall pay the successful party a reasonable sum for attorneys' fees in such suit, and such attorneys' fees shall be deemed to have accrued on the commencement of such action. 17 NON-WAIVER Waiver by Either Party of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant, or condition, or of any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Owner shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant, or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted regardless of Owner's knowledge of such preceding breach at the time of acceptance of such rent. 18 ASSIGNMENT AND SUBLETTING Tenant shall not assign this Lease or sublet Premises or any part thereof without first obtaining Owner's written consent, which shall not be unreasonably withheld. No such assignment or subletting shall relieve Tenant of Tenant's liability under the Lease, except, if at the time of such assignment or subletting, Tenant establishes to the reasonable satisfaction of Owner that such assignee or sublessee is of satisfactory financial responsibility at least equal to that of Tenant and the Guarantors at the time Tenant executed the Lease. Consent to any such assignment or subletting shall not operate as a waiver of the necessity for a consent to any subsequent assignment, and the terms of such consent shall be binding upon any person holding by, under or through Tenant. In no event shall a sublessee of Tenant sublet or assign any interest in this Lease. In the event of an assignment or subletting that requires Owner's time and/or expense, Tenant shall reasonably compensate Owner for such expenses. Notwithstanding anything to the contrary herein, Owner's consent shall not be required for the following transfers: a) An assignment, sublease or other transfer of Tenant's interest in the Lease to any other entity with which Tenant is affiliated or under common control, provided the Owner is notified not later than ten (10) days after the effective date of such event; b) An assignment or transfer of this Lease to any person or entity acquiring by asset or stock transfer, consolidation, merger, liquidation, spin-off or reorganization, all or substantially all of the assets of Tenant; provided, that the assignee or transferee agrees to assume and perform all obligations of Tenant under this Lease and that immediately following such acquisition the assignee's or transferees net worth equals the net worth of Tenant on the date immediately preceding such assignment or transfer; and provided further that Owner is notified not later than ten (10) days after the effective date of such event; c) Any (i) public offering of the stock of Tenant pursuant to the Securities Act of 1933 and/or the Securities Exchange Act of 1934 as amended, or (ii) transfer of stock between shareholders of Tenant, or (iii) sale of additional shares of 8 9 stock to individuals or entities currently not shareholders of Tenant; provided, that immediately following such offering, transfer or sales the net worth of Tenant equals or exceeds the net worth of Tenant on the date immediately preceding such offering, transfer or sale or d) the mortgage, pledge, hypothecation or encumbrance of any of the stock of Tenant. 19 SUCCESSORS All of the covenants, agreements, terms and conditions contained in this Lease shall apply to and be binding upon Owner and Tenant and their respective heirs, executors, administrators, successors and assigns. 20 TAX ON RENTAL If any governmental authority or unit under any present or future law effective at any time during the term of this Lease shall in any manner levy a tax on rentals payable under this Lease or on rentals accruing from use of Premises under this Lease, or a tax in any form against Owner because of or measured by income derived from the leasing or rental of Premises, the amount of the next succeeding month's rent following payment of such tax by Owner shall be increased by an amount equal to such tax paid by Owner, and for Tenant's default in paying the rent thus revised, Owner shall have the same remedies as upon failure to pay rent. Tenant shall not be liable to pay any amount because of income tax of a general nature applicable to Owner's various interests or sources of income. In the event that it shall not be lawful for Tenant to pay such tax, the rental payable to Owner under this Lease shall be revised to net Owner the same net rental after imposition of any such tax as would have been payable to Owner prior to the imposition of any such tax. 21 PRIORITY This Lease shall automatically be subordinate to any mortgage or deed of trust heretofore or hereafter placed upon Building, to any and all advances made or to be made thereunder, to the interest on the obligations secured thereby, and to all renewals, replacements and extensions thereof; provided, however, that in the event of foreclosure of any such mortgage or deed of trust or exercise of the power of sale thereunder, Tenant shall attorn to the purchaser of Building at such foreclosure or sale and recognize such purchaser as Owner under this Lease if so requested by such purchaser. If any mortgagee or beneficiary elects to have this Lease superior to its mortgage or deed of trust and gives notice of its election to Tenant, then this Lease shall thereupon become superior to the lien of such mortgage or deed of trust, whether this Lease is dated or recorded before or after the mortgage or deed of trust. Within fifteen days of presentation, Tenant shall execute, acknowledge, and deliver to Owner (i) any reasonable subordination or nondisturbance agreement or other instrument that Owner may require to carry out the provisions of this article, and (ii) any reasonable estoppel certificate requested by Owner from time to time in the standard form of any such mortgagee or beneficiary certifying in writing, if such be true, that Tenant shall be in occupancy, that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications) and the dates to which the rent and other charges shall have been paid, and that there shall be no rental offsets or claims. 22 CONDEMNATION If the whole of Premises, or if such portion of either Premises or the facilities in Building as may be required for the reasonable use of Premises, shall be taken by virtue of any condemnation or notice of condemnation or eminent domain proceeding, or by purchase in lieu thereof, or for public or quasipublic use, directly or indirectly, this Lease shall automatically terminate as of the date of such condemnation, or purchase in lieu of condemnation, or as of the date possession is taken by the condemning authority, whichever is earlier. Current rent shall be apportioned as of the date of such termination. In case of a taking of a part of Premises or a portion of the facilities in Building not required for the reasonable use of Premises, then this Lease shall continue in full force and effect and the rental shall be equitably reduced based on the proportion by which the rentable area of Premises is reduced, such rent reduction to be effective on the date of such partial taking. No award of any partial or entire taking shall be apportioned, and Tenant hereby assigns to Owner any award which may be made in such taking or condemnation together with any and all rights of Tenant now or hereafter arising in or to the same or any part thereof, provided, however, that nothing herein shall be deemed to give Owner any interest in, or to require Tenant to assign to Owner, any award made to Tenant for the taking of personal property or fixtures belonging to Tenant, for the interruption of or damage to Tenant's business or for Tenant's moving expenses. 9 10 23 SPECIAL IMPROVEMENTS The term "Special Improvements" as used in this Lease refers to all improvements to Premises, whether provided at the expense of Owner or Tenant, other than accoustical ceilings, lighting fixtures, air conditioning grilles, air ducts and temperature controls, draperies, corridor and demising partitions, and concrete floor ready for pad and carpet. Tenant shall reimburse Owner for Owner's necessary expense of repairing or replacing all Special Improvements to maintain Special Improvements in first-class condition. Tenant shall pay Owner that certain sum as set forth in Article 1(f) as payment for certain of Special Improvements made to Premises. In addition, Tenant shall pay Owner for installation of any additional Special Improvements if they have been installed by Owner pursuant to Tenant's request. Where Special Improvements are to be installed by Owner, Tenant shall give Owner written notice of its final color selection and all other details of its office layout in sufficient time to permit Owner's completion of all work by the commencement date hereunder using its normal crews on a regular time basis, and such notice shall in any event be given not later than fifteen working days before such commencement date. 24 REAL PROPERTY TAXES Owner shall pay all real property taxes and assessments that may be levied against Building and the underlying land. If the amount of such real property taxes and assessments shall, in any calendar year during the Lease Term, exceed the amount of real property taxes and assessments payable for the calendar year 1996, then on the tax payment dates in 1997 and on these dates of each succeeding year, Tenant shall reimburse Owner for Tenant's proportionate share of such increase based upon the ratio which area of Premises, as set forth in Article 1(b), bears to 350,000 square feet. Owner shall submit to Tenant, if so requested by Tenant, a copy of the real property tax statement for the year in which payment is requested. The foregoing charges constitute additional rent that shall be deemed to have accrued uniformly during the calendar year in which payment is due. The final payment under the provision of this Article shall be prorated based on reasonable projections of the increase through the termination of this Lease and shall be due thirty days before such termination. 25 ANNUAL RENT ADJUSTMENT To partially compensate for the effect of inflation, a portion of the rental rate (viz. $7.50 per square foot per year) shall be adjusted to reflect reductions, if any, in the purchasing power of the dollar. Three separate generic elements of cost (namely: labor, materials and energy) shall be deemed to be representative of all operational costs. Indices for measuring changes in the dollar value for each of these cost elements shall be: janitorial hourly labor rate, Consumer Price Index, and the average cost per kilowatt-hour of electricity (including without limitation all demand charges), respectively. Changes in each of these shall adjust rent as provided below: Generic Element's Cost Element of Cost Index Share --------------- ----- -------------- 1. Labor Janitorial rate $3.00 2. Material C.P.I. $3.00 3. Energy Average kwh cost $1.50
The base index for each of these indices shall be established from data for the month of September of the year preceding the year in which this Lease commences. Indices for each succeeding year shall be calculated annually using September experience data, and the ratio that these annual indices bear to their respective base index shall be reduced by 1.00 then multiplied by the individual element's cost share as specified in Items 1, 2 and 3 above, and by the area of Premises as set forth in Article 1(b). Each January 1, following the calendar year in which the Lease becomes effective, the Monthly Rent in Article 1(d) shall be increased by one-twelfth (1/12) of the sum of the amounts so determined. No changes in the rent as specified above shall take place during the calendar year in which the Lease Term commences. The janitorial hourly labor rate shall be that as established by the Hotel Employees Restaurant Employees, Union Local No. 8 for journeymen janitors including all applicable taxes and fringe benefits payable by employers. The labor rate to be used as a base index for this Lease shall be $12.72. The Consumer Price Index to be used shall be the Revised Consumer Price Index for Urban Wage Earners and Clerical Workers, U.S. City Average, All-Items Series (1982-1984 = 100), as published by the U.S. Department of Labor, Bureau of Statistics. If this index is revised or changed (as, for example, by taking the average index for different years as the base figure of 100), the base index shall be adjusted accordingly. In the event such index is discontinued, the index promulgated by the Department of Labor most closely 10 11 approximating the above referenced index shall be used as the base index. The Consumer Price Index to be used as the base index for this Lease shall be 150.6. The cost per kilowatt-hour of electricity consumed in the Westin Building (including seasonal factors and any tax or surcharge that may be imposed), shall be determined by dividing the total amount billed to Account No. 171001453015 for the supply of electricity consumed primarily during the month of September by the consumption shown in the billing column entitled "Consumption kwh/kvarh." The cost to be used as a base index for this Lease shall be $.036 per kilowatt-hour. 26 NOTICES All notices under this Lease shall be in writing and delivered in person or sent by registered or certified mail to Owner at its offices in Building and to Tenant at Premises, or to such other place as may be set forth in Article 1(h) or hereafter designated by either party in writing. 27 NAME OF BUILDING Owner reserves the right in its sole discretion to change the name of Building from that specified in Article 3. 28 CONSTRUCTION The titles to articles of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. This Lease shall be construed and governed by the law of the State of Washington. 29 TIME OF ESSENCE Time is of the essence of this Lease. 30 FORCE MAJEUR In the event either Owner or Tenant shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lockouts, labor troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war or any reason of a like nature, not the fault of the party delayed in performing work or doing acts required under the terms of this Lease, then performance of such act shall be excused for the period of such delay, provided that the provisions hereof shall not operate to excuse Tenant from prompt payment of rent or any other payments required by Tenant hereunder. IN WITNESS WHEREOF, Owner and Tenant have signed this Lease on the dates noted below. OWNER: TENANT: SIXTH & VIRGINIA PROPERTIES InterNAP Network Services L.L.C. A Washington General Partnership A Washington Limited Liability By Clise Properties, Inc., a Partner Corporation By /s/ A. M. CLISE By /s/ ANTHONY C. NAUGHTIN ---------------------------------- ---------------------------------- Its President Its President/CEO -------------------------------- ---------------------------------- Date 6-10-96 Date 6-6-96 -------------------------------- -------------------------------- By Clise Company, a Partner By Retail Realty, Inc. By /s/ A. M. CLISE ---------------------------------- Its President -------------------------------- Date 6-10-96 -------------------------------- 11 12 GUARANTEE For and in consideration of execution of this Lease, Big Sandy Telecommunications, Inc., as the primary guarantor of first recourse in the event that Tenant defaults on any of its obligations under this Lease, guarantees the performance of all obligations of Tenant and Tenant's Successors as said obligations exist under all terms and conditions of this Lease and any modifications thereto. In further consideration of execution of this Lease, Anthony Naughtin and Paul McBride, as Corporate Officers of Tenant shall be secondary guarantors of next recourse in the event that Tenant defaults on any of its obligations under this Lease, and the primary guarantor is unable to guarantee performance of such obligations on behalf of the Tenant. The obligations of Anthony Naughtin and Paul McBride as secondary guarantors shall cease after Tenant completes reimbursement to Owner of Owner's tenant improvement outlay on the 1st day of the third year of the term of this Lease. Big Sandy Telecommunications, Inc.'s obligation may be modified or removed as part of an assignment transaction that Owner must consent to under this Lease. /s/ ROBERT J. LINDAY, JR., President ------------------------------------- Big Sandy Telecommunications, Inc., /s/ PAUL MCBRIDE ------------------------------------- Paul McBride /s/ ANTHONY NAUGHTIN ------------------------------------- Anthony Naughtin State of Washington ) County of King ) I certify that I know or have satisfactory evidence that A. M. Clise is the person who appeared before me and said person acknowledged that he signed this instrument, on oath stated that he was authorized to execute the instrument and acknowledged it as the President of CLISE PROPERTIES, INC., a partner of SIXTH & VIRGINIA PROPERTIES, a Washington general partnership, to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated 6/10/96 /s/ JENNIFER A. RICHARDS ------------------------------------------------ Notary Public in and for the State of Washington My appointment expires 2-7-99 Jennifer A. Richards State of Washington ) County of King ) I certify that I know or have satisfactory evidence that A. M. Clise is the person who appeared before me and said person acknowledged that he signed this instrument, on oath stated that he was authorized to execute the instrument and acknowledged it as the President of RETAIL REALTY, INC., a partner of CLISE COMPANY, a partnership, for and on behalf of CLISE COMPANY, which in turn is a partner of SIXTH & VIRGINIA PROPERTIES, a Washington general partnership, to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated 6/10/96 /s/ JENNIFER A. RICHARDS ------------------------------------------------ Notary Public in and for the State of Washington My appointment expires 2-7-99 Jennifer A. Richards 12 13 EXHIBIT A [Floor Plan] 14 EXHIBIT B [Site Plan] 15 EXHIBIT C [Floor Plan] 16 RENT ANALYSIS AND PROPOSAL
- ------------------------------------------------------------------------------------------------------------------------------------ Statistics - ------------------------------------------------------------------------------------------------------------------------------------ USF 5,117 Total base rent $ 654,275 Total TI's $ 137,774.83 RSF 5,054 Ave. annual rent $ 130,855 T TI's per RSF $ 23.54 Lease terms (yrs) 5 Ave. monthly rent $ 10,905 Amort per year $ 27,554.97 Ave. rent per RSF $ 20.00 Acceleration rate 0.00% Amort per RSF $ 4.71 - ------------------------------------------------------------------------------------------------------------------------------------ - -------------------------------------------------------------------------------------------------- Description Cost Sixth & Virginia InterNAP - -------------------------------------------------------------------------------------------------- Demo $ 2,800.00 $ 2,800.00 - -------------------------------------------------------------------------------------------------- Construction/permit fees $ 650.00 650.00 - -------------------------------------------------------------------------------------------------- Doors/hardware $ 3,000.00 $ 3,000.00 - -------------------------------------------------------------------------------------------------- Cabinets/shelving $ 1,800.00 $ 1,800.00 - -------------------------------------------------------------------------------------------------- Refiles $ 5,740.00 $ 5,740.00 - -------------------------------------------------------------------------------------------------- Partitions $ 9,976.00 $ 9,976.00 - -------------------------------------------------------------------------------------------------- Ceiling $ 4,068.00 $ 4,068.00 - -------------------------------------------------------------------------------------------------- Carpet $ 6,800.00 $ 6,800.00 - -------------------------------------------------------------------------------------------------- Painting $ 2,800.00 $ 2,800.00 - -------------------------------------------------------------------------------------------------- Draperies $ 2,500.00 $ 2,500.00 - -------------------------------------------------------------------------------------------------- Sprinklers $ 3,000.00 $ 3,000.00 - -------------------------------------------------------------------------------------------------- HVAC - Office $ 14,250.00 $ 3,315.50 $ 10,934.50 - -------------------------------------------------------------------------------------------------- HVAC - Computer room $ 30,465.00 $ 30,465.00 - -------------------------------------------------------------------------------------------------- Electrical $ 12,250.00 $ 4,950.00 $ 7,300.00 - -------------------------------------------------------------------------------------------------- Signage $ 150.00 $ 150.00 - -------------------------------------------------------------------------------------------------- Access floor ramp $ 1,500.00 $ 1,500.00 - -------------------------------------------------------------------------------------------------- Cleanup $ 1,050.00 $ 1,050.00 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- InterNAP [PIE CHART] Sixth & Subtotal $ 102,799.00 $ 51,399.50 $ 51,399.50 50% Virginia - -------------------------------------------------------------------------------------------------- 50% W/17% $ 17,475.83 $ 17,475.83 - -------------------------------------------------------------------------------------------------- AC Backup $ 12,500.00 - -------------------------------------------------------------------------------------------------- Misc. Electrical $ 5,000.00 - -------------------------------------------------------------------------------------------------- TOTAL $ 120,274.83 $ 66,875.33 $ 68,899.50 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Cost per RSF $ 20.55 $ 11.77 $ 11.77 - -------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------ Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 5-Year Total - ------------------------------------------------------------------------------------------------------------------------------------ Base $ 20.00 $ 20.00 $ 20.00 $ 20.00 $ 20.00 $ 100.00 TI's $ 2.35 $ 2.35 $ 2.35 $ 2.35 $ 2.35 $ 11.77 Total $ 22.35 $ 22.35 $ 22.35 $ 22.35 $ 22.35 $ 111.77 Net Increase $ -- $ -- $ -- $ -- $ -- RSF 5,854 5,854 5,854 5,854 5,854 Annual Rent 130,855 $ 130,855 $ 130,855 $ 130,855 $ 130,855 $ 654,275.33 Monthly Rent $ 10,905 $ 10,905 $ 10,905 $ 10,905 $ 10,905 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 5-Year Total - ------------------------------------------------------------------------------------------------------------------------------------ Base $ 18.00 $ 19.00 $ 20.00 $ 21.00 $ 22.00 $ 100.00 TI's $ -- Total $ 18.00 $ 19.00 $ 20.00 $ 21.00 $ 22.00 $ 100.00 Net Increase $ -- $ 1.00 $ 1.00 $ 1.00 $ 1.00 RSF 5,854 5,854 5,854 5,854 5,854 Annual TI Payment* $ 41,325 $ 37,881 Annual Rent $ 105,372 $ 152,551 $ 154,961 $ 122,934 $ 128,788 $ 654,606.63 Monthly Rent $ 8,781 $ 9,269 $ 9,757 $ 10,245 $ 10,732 - ------------------------------------------------------------------------------------------------------------------------------------
*Lump sum payment at beginning of lease year. TI allowance accrues interest at 10% per year. Exhibit C 1 EX-10.11 17 FORM OF EMPLOYEE CONFIDENTIALITY AGREEMENT 1 EXHIBIT 10.11 INTERNAP NETWORK SERVICES CORP. EMPLOYEE CONFIDENTIALITY, NONRAIDING AND NONCOMPETITION AGREEMENT In consideration of my hire and continued employment by InterNAP Network Services Corporation ("InterNAP"), the continued compensation of me by InterNAP during my employment, and the disclosure to me of InterNAP's confidential and proprietary information, I agree to the following terms and conditions. 1. Employment. Employment will begin on (date of hire). While employed by InterNAP, I shall devote my entire working time, attention, abilities and efforts to InterNAP's business and affairs, faithfully and diligently serve InterNAP's interests, and refrain from engaging in any business or employment activity, except those which do not interfere with my normal activities on InterNAP's behalf and are not with business entities which compete directly with InterNAP. My precise services may be extended or curtailed, from time to time, at the direction of InterNAP, and I shall assume and perform such further reasonable responsibilities and duties as may be assigned to me from time to time by InterNAP. 2. Termination. My employment may be terminated by either InterNAP or me at any time and for any reason, or for no reason, in either party's sole and absolute discretion. 3. Payment. I understand and agree that I will be compensated for my services as follows: (a) Base Salary. A base annual salary of (salary), payable in equal semi-monthly installments on approximately the 1st and 15th day of each month. 4. Confidentiality and Nondisclosure. I agree that information not generally known to the public to which I will be exposed as a result of my being employed by InterNAP is confidential information that belongs to InterNAP. This includes information developed by me, alone or with others, or entrusted to InterNAP by its customers or others. InterNAP's confidential information includes, without limitation, information relating to InterNAP's trade secrets, research and development, inventions, know-how, software, procedures, accounting, marketing, sales, creative and marketing strategies, employee salaries and compensation, and the identities of customers and active prospects to the extent not publicly disclosed (collectively, "Confidential Information"). I will hold InterNAP's Confidential Information in strict confidence, and not disclose or use it except as authorized by InterNAP and for InterNAP's benefit. I further acknowledge and agree that in order to enable InterNAP to perform services for its customers or clients, such customers or clients may furnish to InterNAP certain Confidential Information, that the goodwill afforded to InterNAP depends upon InterNAP and its employees preserving the confidentiality of such information, and that such information shall be treated as Confidential Information of InterNAP for all purposes under this Agreement. 5. Noncompetition. I recognize and agree that InterNAP has many substantial, legitimate business interests that can be protected only by my agreement not to compete with InterNAP under certain circumstances. These interests include, without limitation, InterNAP's contacts and relationships with its clients and active prospects, InterNAP's reputation and goodwill in the industry, and InterNAP's rights in its Confidential Information. Therefore, I agree that during the term of my employment with InterNAP and for a period of one (1) year after my employment ends for any reason whatsoever, I shall not, voluntarily or involuntarily, directly or indirectly, on my own behalf or on the behalf of another, approach, solicit, accept, receive or do work in the area of Inter/Intranet connectivity and hosting services for any account that was a client or active prospect of 2 InterNAP, its parent or subsidiaries during the twelve (12) month period immediately preceding the date my employment with InterNAP ends. I may not, should the opportunity arise, accept a position of employment with any of the above specified clients or active prospects. I also agree that during the term of my employment with InterNAP and for a period of one (1) year after my employment ends for any reason whatsoever, I shall not employ or seek to employ any person employed by InterNAP nor solicit or induce any such person to leave InterNAP. 6. Injunctive Relief. I acknowledge that the breach or threatened breach of the above noncompetition and/or nondisclosure provisions would cause irreparable injury to InterNAP that could not be adequately compensated by money damages. InterNAP may obtain a restraining order and/or injunction prohibiting my breach or threatened breach of the noncompetition and/or nondisclosure provisions, in addition to any other legal or equitable remedies that may be available. I agree that the above noncompetition provision, including its duration, scope and geographic extent, is fair and reasonably necessary to protect InterNAP's client relationships, goodwill, Confidential Information and other protectable interests. 7. Possession. I agree that upon request by InterNAP, and in any event upon termination of employment for any reason, I shall turn over to InterNAP all documents, notes, papers, data, files, office supplies or other material or work product in my possession or under my control which was created pursuant to, is connected with or derived from my services to InterNAP, or which is related in any manner to InterNAP's business activities or research and development efforts, whether or not such material is currently in my possession. 8. Waiver of Breach. The waiver of any breach of any provision of this Agreement or the failure to enforce any provision shall not be construed as a waiver of any later breach by any party. 9. Enforcement and Severability. If any portion of this Agreement becomes invalid or unenforceable, the rest of the Agreement shall be construed as if the invalid or unenforceable portion was omitted. The noncompetition and nondisclosure provisions shall be enforceable against me notwithstanding the existence of any claim I may have against InterNAP. 10. Governing Law. This Agreement shall be governed by the internal laws of the state of Washington without giving effect to provisions related to choice of laws or conflict of laws. Venue and jurisdiction of any lawsuit involving this Agreement or my employment shall exist exclusively in state and federal courts in King County, Washington, unless injunctive relief is sought by InterNAP, and in InterNAP's judgment, may not be effective unless obtained in some other venue. 11. Attorneys' Fees. In any lawsuit arising out of or relating to this Agreement or my employment, including without limitation arising from any alleged tort or statutory violation, the prevailing party shall recover its reasonable costs and attorneys' fees, including on appeal. 12. General. This Agreement may be modified, supplemented and/or amended only by a writing that both I and InterNAP sign. This Agreement, as it may be so amended, is the complete and final expression of my agreement with InterNAP on the subjects covered, and shall control over any other statement, representation or agreement on these subjects. I have read this Agreement before signing it, and I acknowledge receipt of a signed copy. ------------------------------------- (employee name) ------------------------------------- Date EX-10.12 18 FORM OF STOCK PURCHASE WARRANT 1 Exhibit 10.12 NEITHER THE SECURITY EVIDENCED BY THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE LAW, AND NO INTEREST HEREIN OR THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING SAID SECURITIES, (B) THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE HOLDER OF SAID SECURITIES (REASONABLY SATISFACTORY TO LEGAL COUNSEL FOR THE COMPANY) STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR (C) THE COMPANY OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION. No. W. WARRANT TO PURCHASE ISSUED: SHARES OF CAPITAL STOCK INTERNAP CORPORATION STOCK PURCHASE WARRANT THIS IS TO CERTIFY that, for value received and subject to the terms and conditions hereof, a, or such person to whom this Warrant is transferred pursuant to Section 8 hereof (the "Holder"), is entitled to purchase fully paid and nonassessable shares of the Capital Stock (the "Warrant Stock") of INTERNAP CORPORATION, a Washington corporation (the "Company"), issued to additional outside investors in an equity financing of the Company in the amount of at least $2,000,000 (excluding conversion of all then outstanding convertible promissory notes issued by the Company) (the "Financing") in the amount determined in accordance with Section 2 and at a price per share (the "Exercise Price") paid by the outside investors in the Financing (such number of shares of Warrant Stock and the Exercise Price being subject to adjustment as provided herein). This Warrant is issued in connection with the extension of a loan to the Company by evidenced by that certain Convertible Promissory Note of even date in the amount of $16,667.00, a copy of which is attached hereto (the "Note"). This Warrant is subject to the following additional terms and conditions: 1. TERM Subject to the terms hereof, this Warrant may be exercised at any time and from time to time in whole or in part from and after the date of issuance of this Warrant and on or before September 1, 2002 (the "Exercise Period"). Upon a merger, consolidation, acquisition of all or 1 2 substantially all of the property or stock, reorganization or liquidation of the Company (collectively, a "Reorganization") during the Exercise Period, as a result of which the shareholders of the Company receive cash, stock or other property in exchange for their shares of Warrant Stock, this Warrant shall be cancelled and all rights granted hereunder shall terminate; provided, however, that the Company shall have delivered to the Holder notice of the Reorganization no less than ten (10) business days before the date scheduled for the Reorganization and that the Holder shall have the right immediately prior to the Reorganization to exercise this Warrant. 2. NUMBER OF SHARES Subject to the terms hereof, the maximum number of shares of Warrant Stock the Holder shall be entitled to purchase pursuant to this Warrant shall be equal to (x) the quotient of the Coverage Amount (as defined below) divided by the Exercise Price plus (y) the Prior Accrual (as defined below). The "Coverage Amount" shall be the factor calculated by multiplying the balance of principal and accrued but unpaid interest owing on the Note immediately prior to the earlier to occur of (a) the Financing or (b) the discharge of the Note by payment in full (the "Note Event"), by the number set forth in the table below corresponding to the one month period following the date hereof within which the Note Event occurs. The "Prior Accrual" shall be the sum of the number of shares of Warrant Stock equal to the Coverage Amount divided by the Exercise Price for each month preceding the month in which the Note Event occurs. 0.046875 First Month (October 20 through November 19, 1997) 0.078125 Second Month (November 20 through December 19, 1997) 0.109375 Third Month (December 20 through January 19, 1998) 0.140625 Fourth Month (January 20 through February 19, 1998) 0.171875 Fifth Month (February 20 through March 19, 1998) 0.203125 Sixth Month (March 20 through April 19, 1998) In the event the Note Event does not occur on or before April 19, 1998, the Holder shall nevertheless be entitled to the full number of shares of Warrant Stock determined as though the Note Event did occur in the Sixth Month, and the Holder shall be entitled to exercise this Warrant in accordance with its terms at such time as the Financing occurs if on or before October 20, 1998, or the Exercise Price is otherwise agreed upon by the Company and the Holder in accordance with Section 5(b). Furthermore, the Company and the Holder agree that if the Note remains outstanding after the end of Sixth Month, the Holder shall be entitled to additional shares of Warrant Stock, and the Company and the Holder shall negotiate the amount of such additional shares in good faith, taking into consideration the formula set forth above. 3. METHOD OF EXERCISE 3.1 CASH EXERCISE This Warrant may be exercised in whole or in part by delivering to the Company (a) the form of Election to Purchase attached hereto duly completed and executed by the Holder, (b) this Warrant certificate, and (c) a bank check payable to the Company in the amount of the Exercise 2 3 Price multiplied by the number of shares for which this Warrant is being exercised (the "Purchase Price"). 3.2 NET ISSUE EXERCISE Notwithstanding any provisions herein to the contrary, if the fair market value of one share of Warrant Stock is greater than the Exercise Price of such share (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant together with the duly completed and executed Election to Purchase and notice of such election, in which event the Company shall issue to the Holder a number of shares of Warrant Stock computed using the following formula: Y (A-B) ------- X = A Where X = the number of shares of Warrant Stock to be issued to the Holder Y = the number of shares of Warrant Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation) A = the fair market value of one share of the Warrant Stock (at the date of such calculation) B = the Exercise Price (as adjusted to the date of such calculation) For purposes of the above calculation, the fair market value of one share of Warrant Stock shall be determined by the Company's Board of Directors in good faith; provided, however, that where there exists a public market for the Warrant Stock at the time of such exercise, the fair market value per share shall be the average of the closing bid and asked prices of the Warrant Stock quoted in the Over-The-Counter Market Summary or the last reported sale price of the Warrant Stock or the closing price quoted on the Nasdaq National Market or on any exchange on which the Warrant Stock is listed, whichever is applicable, as published in the Western Edition of The Wall Street Journal for the five (5) trading days prior to the date of determination of fair market value. Notwithstanding the foregoing, in the event the Warrant is exercised in connection with the Company's initial public offering of Warrant Stock, the fair market value per share will be the per share offering price to the public of the Company's initial public offering. 4. DELIVERY OF STOCK CERTIFICATES Within ten (10) days after the payment of the Purchase Price following the exercise of this Warrant (in whole or in part), the Company at its expense shall issue in the name of and deliver to the Holder (a) a certificate or certificates for the number of fully paid and nonassessable shares of 3 4 Warrant Stock to which the holder shall be entitled upon such exercise and payment, and (b) a new Warrant of like tenor to purchase up to that number of shares of Warrant Stock, if any, not previously purchased by the Holder if this Warrant has not expired. The Holder shall for all purposes be deemed to have become the holder of record of such shares of Warrant Stock on the date by which this Warrant was surrendered and payment of the Purchase Price was made, irrespective of the date of delivery of the certificate or certificates representing the Warrant Stock; provided that, if the date by which such surrender and payment is made is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of record of such shares of Warrant Stock at the close of business on the next succeeding date on which the stock transfer books are open. 5. COVENANTS AS TO WARRANT STOCK (a) The Company covenants and agrees that all the shares of Warrant Stock issued pursuant to the terms of this Warrant will, upon their issuance, be validly issued and outstanding, fully paid and nonassessable and free from all taxes, liens and changes with respect to the issue thereof. The Company further covenants and agrees that the Company will at all times have authorized and reserved a sufficient number of shares of Warrant Stock to provide for the exercise of the rights represented by this Warrant. (b) In the event the Financing does not occur on or before October 20, 1998, and the Holder desires to exercise this Warrant, the Warrant Stock shall be the class of Capital Stock most recently issued by the Company, and the Company and the Holder shall negotiate the amount of the Exercise Price in good faith, based upon previous issuances of the Company's securities, the financial performance of the Company and the market conditions then prevailing. 6. ADJUSTMENTS TO WARRANT (a) If after the Exercise Price is fixed in connection with the Financing on or before October 20, 1998, or is determined in accordance with Section 5(b), the Company shall issue any shares of its Warrant Stock as a stock dividend or subdivide the number of outstanding shares of Warrant Stock into a greater number of shares, then, in either such case, the Exercise Price in effect before such dividend or subdivision shall be proportionately reduced and the number of shares of Warrant Stock at that time purchasable pursuant to this Warrant shall be proportionately increased; and, conversely, if the Company shall decrease the number of outstanding shares of Warrant Stock by combining such shares into a smaller number of shares, then the Exercise Price in effect before such combination shall be proportionately increased the number of shares of Warrant Stock at that time purchasable pursuant to this Warrant shall be proportionately decreased. When any adjustment is required to be made in the Exercise Price pursuant to this Section 6, the number of shares of Warrant Stock purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment. 4 5 (b) In case of any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant) or any similar corporate reorganization on or after the date hereof (excluding a Reorganization, as defined in Section 1), then and in each such case the Holder, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger or conveyance, shall be entitled to received, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which the Holder would have been entitled upon such consummation if the Holder has exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in Section 6(a); and in each such case, the terms of this Section 6 shall be applicable to the shares of stock or other securities properly receivable upon the exercise of this Warrant after such consummation. (c) When any adjustment is required to be made in the Exercise Price, the Company shall promptly mail to the Holder a certificate setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following the occurrence of any of the events specified in Section 6(a) or (b) above. (d) In order to avoid doubt, it is acknowledged that the Holder shall be entitled to the benefit of all adjustments in the number of shares of Common Stock of the Company issuable upon conversion of the Warrant Stock of the Company which occur prior to the exercise of this Warrant, including without limitation, any increase in the number of shares of Common Stock issuable upon conversion as a result of a dilutive issuance of capital stock. 7. FRACTIONAL SHARES No fractional shares shall be issued upon the exercise of this Warrant. In lieu of fractional shares, the Company shall pay the Holder a sum in cash equal to the fair market value of the fractional shares (as determined by the Company's Board of Directors) on the date of exercise. 8. RESTRICTIONS ON TRANSFER Neither this Warrant nor the Warrant Stock may be transferred unless (a) such transfer is registered under the Securities Act of 1933, as amended (the "Securities Act"), and any applicable state securities or blue sky laws, (b) the Company has received a legal opinion reasonably satisfactory to the Company to the effect that the transfer is exempt from the prospectus delivery and registration requirements of the Securities Act and any applicable state securities or blue sky laws, or (c) the Company otherwise satisfies itself that such transfer is exempt from registration. 9. LEGEND A legend setting forth or referring to the above restrictions shall be placed on this Warrant, any replacement hereof or any certificate representing the Warrant Stock, and a stop transfer restriction or other shall be placed on the books of the Company and with any transfer agent until such securities may be legally sold or otherwise transferred. 5 6 10. HOLDER AS OWNER The Company may deem and treat the holder of record of this Warrant as the absolute owner hereof for all purposes unless the Company is given notice to the contrary. 11. NO SHAREHOLDER RIGHTS This Warrant shall not entitle the Holder to any voting rights or any other rights as a shareholder of the Company or to any other rights whatsoever except the rights stated herein; and no dividend or interest shall be payable or shall accrue in respect of this Warrant or the Warrant Stock, until and to the extent that this Warrant shall be exercised. 12. REGISTRATION RIGHTS The Company agrees that the Holder shall be entitled to the same registration rights, rights of information and right of first refusal granted to the outside investors in the Financing, and the Warrant Stock to be issued upon exercise of this Warrant shall be included in any agreement granting any of such rights; provided however, in the event no such rights are granted to the outside investors in the Financing, the Company hereby agrees to grant the Holder standard piggyback registration rights with respect to registrations by the Company or its securities and shall enter into an agreement with the Holder setting forth such rights. 13. CONSTRUCTION The validity and interpretation of the terms and provisions of this Warrant shall be governed by the laws of the State of Washington. The description headings of the several section of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions thereof. 14. EXCHANGE OF WARRANT This Warrant is exchangeable upon the surrender hereof by the Holder at the office of the Company for new Warrants of like tenor representing in the aggregate the rights to subscribe for any purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by the Holder at the time of such surrender. 15. LOST WARRANT CERTIFICATE If this Warrant is lost, stolen, mutilated or destroyed, the Company shall issue a new Warrant of like denomination, tenor and date as this Warrant, subject to the Company's right to require the Holder to give the Company a bond or other satisfactory security sufficient to indemnify the Company against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft, mutilation or destruction of this Warrant or the issuance of such new Warrant. 6 7 16. WAIVERS AND AMENDMENTS This Warrant or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 17. NOTICES All notices or other communications required or permitted hereunder shall be in writing and shall be delivered by personal delivery, confirmed facsimile, reputable overnight courier service, or mailed by United States mail, first-class postage prepaid, or by registered or certified mail with return receipt requested, addressed as follows: If to the Holder: To the address last furnished in writing to the Company by the Holder If to the Company: InterNAP Corporation 2001 Sixth Avenue, Suite 800 Seattle, Washington 98121 Facsimile: 206/256/9580 Each of the foregoing parties shall be entitled to specify a different address by giving five (5) days' advance written notice as aforesaid to the other parties. 18. INVESTMENT INTENT By accepting this Warrant, the Holder represents that it is acquiring this Warrant for investment and not with a view to, or for sale in connection with, any distribution thereof. IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above. INTERNAP CORPORATION ----------------------------------- Paul E. McBride Vice President, Finance and Administration 7 8 ELECTION TO PURCHASE To: InterNAP Corporation 2001 Sixth Avenue, Suite 800 Seattle, Washington 98121 Attn: Paul E. McBride The undersigned hereby irrevocably elects to purchase _________ shares of __________ Stock issuable upon the exercise of the within Warrants, and requests that certificates for such shares shall be issued in the name of and delivered to the address of the undersigned, at the address stated below and, if said number of shares shall not be all the shares which may be purchased pursuant to the within Warrants, that new Warrants evidencing the right to purchase the balance of such shares be registered in the name of, and delivered to, the undersigned at the address stated below. The undersigned hereby agrees with and represents to InterNAP Corporation that said shares of the _______ Stock are acquired for investment and not with a view to, or for sale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended. Payment enclosed in the amount of $________ . Dated: ____________ , 19__ Name of holder of Warrants: ______________________________________________ (please print) Address: _______________________________________________ _______________________________________________ _______________________________________________ Signature: ________________________________________________ 8 EX-10.13 19 PREFERRED STOCK PURCHASE WARRANT 1 EXHIBIT 10.13 NEITHER THIS WARRANT NOR THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR THE LAWS OF ANY STATE. NO SALE, TRANSFER OR OTHER DISPOSITION OF THIS WARRANT OR SUCH SHARES MAY BE EFFECTED WITHOUT (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT RELATED THERETO, (II) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, OR (III) THE COMPANY OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION. INTERNAP NETWORK SERVICES CORPORATION PREFERRED STOCK PURCHASE WARRANT Date of Issuance: December 15, 1998 FOR VALUE RECEIVED, InterNAP Network Services Corporation, a Washington corporation (the "Company"), hereby grants to Bob Kingsbook (the "Purchaser") or its registered assigns (the "Registered Holder") the right to purchase from the Company 8,333 shares of Warrant Stock at a price per share of $.60 (as adjusted from time to time hereunder, the "Exercise Price"). This Warrant was issued pursuant to the terms of the Warrant Purchase Agreement, dated as of the date hereof (the "Purchase Agreement"), between the Company and the Purchaser. Certain capitalized terms used herein are defined in Section 5 hereof. The amount and kind of securities obtainable pursuant to the rights granted hereunder and the purchase price for such securities are subject to adjustment pursuant to the provisions contained in this Warrant. This Warrant is subject to the following provisions: Section 1. Exercise of Warrant. A. Exercise Period. The Registered Holder may exercise, in whole or in part, the purchase rights represented by this Warrant at any time and from time to time after the Date of Issuance to and including the later of (i) the tenth anniversary of the final acceptance of equipment by the Company under the Equipment Financing with the Purchaser and (ii) the fifth anniversary of the consummation of the public offering of the Company's Common Stock registered under the Securities Act of 1933 (the "Exercise Period"). The Company shall give the Registered Holder written notice of the expiration of the Exercise Period at least 30 days but not more than 90 days prior to the end of the Exercise Period. 2 B. Exercise Procedure. (i) This Warrant shall be deemed to have been exercised when the Company has received all of the following items (the "Exercise Time"): (a) a completed Exercise Agreement, as described in paragraph 1C below, executed by the Person exercising all or part of the purchase rights represented by this Warrant (the "Purchaser"); (b) this Warrant; (c) if this Warrant is not registered in the name of the Purchaser, an Assignment or Assignments in the form set forth in Exhibit II hereto evidencing the assignment of this Warrant to the Purchaser, in which case the Registered Holder shall have complied with the provisions set forth in Section 7 hereof, and (d) either (1) a check payable to the Company in an amount equal to the product of the Exercise Price multiplied by the number of shares of Warrant Stock being purchased upon such exercise (the "Aggregate Exercise Price"), (2) the surrender to the Company of debt or equity securities of the Company having a Market Price equal to the Aggregate Exercise Price of the Warrant Stock being purchased upon such exercise (provided that for purposes of this subparagraph, the Market Price of any note or other debt security or any preferred stock shall be deemed to be equal to the aggregate outstanding principal amount or liquidation value thereof plus all accrued and unpaid interest thereon or accrued or declared and unpaid dividends thereon) or (3) a written notice to the Company that the Purchaser is exercising the Warrant (or a portion thereof) by authorizing the Company to withhold from issuance a number of shares of Warrant Stock issuable upon such exercise of the Warrant which when multiplied by the Market Price of the Warrant Stock is equal to the Aggregate Exercise Price (and such withheld shares shall no longer be issuable under this Warrant). (ii) Certificates for shares of Warrant Stock purchased upon exercise of this Warrant shall be delivered by the Company to the Purchaser promptly after the date of the Exercise Time. Unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Company shall prepare a new Warrant, substantially identical hereto, representing the rights formerly represented by this Warrant which have not expired or been exercised and shall promptly deliver such new Warrant to the Person designated for delivery in the Exercise Agreement. (iii) The Warrant Stock issuable upon the exercise of this Warrant shall be deemed to have been issued to the Purchaser at the Exercise Time, and the Purchaser shall be deemed for all purposes to have become the record holder of such Warrant Stock at the Exercise Time. (iv) The issuance of certificates for shares of Warrant Stock upon exercise of this Warrant shall be made without charge to the Registered Holder or the Purchaser for any -2- 3 issuance tax in respect thereof or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Warrant Stock. Each share of Warrant Stock issuable upon exercise of this Warrant shall, upon payment of the Exercise Price therefor, be fully paid and nonassessable and free from all liens and charges with respect to the issuance thereof. (v) The Company shall not close its books against the transfer of this Warrant or of any share of Warrant Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. The Company shall from time to time take all such action as may be necessary to assure that the par value per share of the unissued Warrant Stock acquirable upon exercise of this Warrant is at all times equal to or less than the Exercise Price then in effect. (vi) The Company shall assist and cooperate with any Registered Holder or Purchaser required to make any governmental filings or obtain any governmental approvals prior to or in connection with any exercise of this Warrant (including, without limitation, making any filings required to be made by the Company). (vii) Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a registered public offering or the sale of the Company, the exercise of any portion of this Warrant may, at the election of the holder hereof, be conditioned upon the consummation of the public offering or the sale of the Company in which case such exercise shall not be deemed to be effective until the consummation of such transaction. (viii) The Company shall at all times reserve and keep available out of its authorized but unissued shares of Warrant Stock solely for the purpose of issuance upon the exercise of the Warrants, such number of shares of Warrant Stock issuable upon the exercise of this Warrant. The Company shall take all such actions as may be necessary to assure that all such shares of Warrant Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Warrant Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). The Company shall not take any action which would cause the number of authorized but unissued shares of Warrant Stock to be less than the number of such shares required to be reserved hereunder for issuance upon exercise of this Warrant. C. Exercise Agreement. Upon any exercise of this Warrant, the Exercise Agreement shall be substantially in the form set forth in Exhibit I hereto, except that if the shares of Warrant Stock are not to be issued in the name of the Person in whose name this Warrant is registered, the Exercise Agreement shall also state the name of the Person to whom the certificates for the shares of Warrant Stock are to be issued, and if the number of shares of Warrant Stock to be issued does not include all the shares of Warrant Stock purchasable hereunder, it shall also state the name of the Person to whom a new Warrant for the unexercised portion of the rights hereunder is to be delivered. Such Exercise Agreement shall be dated the actual date of execution thereof. D. Conversion of the Series B Preferred. Notwithstanding any other provision of this Warrant, if all of the issued and outstanding shares of the Company's Series B Preferred are converted automatically into shares of Common Stock pursuant to Section 3(b) of the Company's -3- 4 Certificate of Incorporation (the "Automatic Conversion"), this Warrant shall no longer be exercisable into shares of Series B Preferred but immediately upon the consummation of the Automatic Conversion shall become exercisable into a number of shares of Common Stock equal to the number of shares of Common Stock issuable upon conversion of the shares of Series B Preferred issuable upon the exercise of this Warrant as of the consummation of such event at an Exercise Price equal to the Series B Conversion Price (as defined under the Company's Certificate of Incorporation) in effect as of the consummation of such event. Following the occurrence of the Automatic Conversion, the provisions of this Warrant shall continue to apply to the Warrant Stock which shall then be Common Stock. Section 2. Adjustment of Exercise Price and Number of Shares. The Exercise Price and the number of shares of Warrant Stock issuable upon exercise of this Warrant shall be subject to adjustment from time to time as provided in this Section 2. A. Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) the Warrant Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of shares of Warrant Stock obtainable upon exercise of this Warrant shall be proportionately increased, and if the Company at any time combines (by reverse stock split or otherwise) the Warrant Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of shares of Warrant Stock obtainable upon exercise of this Warrant shall be proportionately decreased. B. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets or other transaction, which in each case is effected in such a way that the holders of Warrant Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Warrant Stock is referred to herein as "Organic Change." Prior to the consummation of any Organic Change, the Company and Holder shall make appropriate provision (in form and substance satisfactory to the Registered Holder of this Warrant) to insure that the Registered Holder shall thereupon receive or thereafter have the right to acquire and receive, in lieu of or addition to (as the case may be) the shares of Warrant Stock immediately theretofore acquirable and receivable upon the exercise of such holder's Warrant, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Warrant Stock immediately theretofore acquirable and receivable upon exercise of such holder's Warrant had such Organic Change not taken place. In any such applicable case, the Company shall make appropriate provision (in form and substance satisfactory to the Registered Holder of this Warrant) with respect to such holders' rights and interests to insure that the provisions of this Section 2 and Sections 3 and 4 hereof shall thereafter be applicable to this Warrant. C. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided for by such provisions, then the Company's board of directors shall make an appropriate adjustment in the Exercise Price and the number of shares of Warrant Stock obtainable upon exercise of this Warrant so as to protect the rights of the holder of -4- 5 this Warrant; provided that no such adjustment shall increase the Exercise Price or decrease the number of shares of Warrant Stock obtainable as otherwise determined pursuant to this Section 2. D. Notices. (i) Immediately upon any adjustment of the Exercise Price, the Company shall give written notice thereof to the Registered Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company shall give written notice to the Registered Holder at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Company shall also give written notice to the Registered Holders at least 20 days prior to the date on which any Organic Change, dissolution or liquidation shall take place. Section 3. Liquidating Dividends. If the Company declares or pays a dividend upon the Preferred Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied) (a "Liquidating Dividend"), then the Company shall pay to the Registered Holder of this Warrant at the time of payment thereof the Liquidating Dividend which would have been paid to such Registered Holder on the Warrant Stock had this Warrant been fully exercised immediately prior to the date on which a record is taken for such Liquidating Dividend, or, if no record is taken, the date as of which the record holders of Preferred Stock entitled to such dividends are to be determined. Section 4. General Information Covenants. A. Information Rights. The Company shall deliver to the Registered Holder (i) within 120 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company as of the end of such year and a consolidated statement of income, retained earnings and cash flows for such year, which year-end financial reports shall be in reasonable detail and certified by independent public accountants of nationally recognized standing selected by the Company, and (ii) within 45 days after the end of each fiscal quarter, unaudited consolidated statements of income, retained earnings and cash flows of the Company for such quarter and a consolidated balance sheet as of the end of such quarter, which shall be certified by the Company's chief financial officer. In addition, the Company shall deliver to the Registered Holder any other information or data generally provided by the Company to its stockholders or which the Registered Holder reasonably requests. The Company shall permit representatives of the Registered Holder to visit the Company's and its subsidiaries' facilities, inspect their books and records and discuss their business affairs with their officers and key employees, in each case during reasonable business hours and in a manner not disruptive to their business operations. The Company's obligations under this Section 4A shall terminate at such time that the Company -5- 6 becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. B. Notices. The Company shall give written notice to the Registered Holder of (i) any declaration or payment of dividends or distributions on the Series B Preferred or the Common Stock at least 15 days prior to the record date therefor (or the payment date if no record date is taken), (ii) any liquidation, dissolution or winding up of the Company at least 30 days prior to the date thereof, (iii) the filing of any registration statement with the Securities and Exchange Commission covering the Common Stock promptly after such filing and (iv) the occurrence of any material adverse change affecting the Company promptly after the Company's discovery or otherwise obtaining knowledge thereof. C. Current Public Information. At all times after the Company has filed a registration statement with the Securities and Exchange Commission pursuant to the requirements of either the Securities Act or the Securities Exchange Act, the Company shall file all reports required to be filed by it under the Securities Act and the Securities Exchange Act of 1934 and the rules and regulations adopted by the Securities and Exchange Commission thereunder and shall take such further action as the Registered Holder may reasonably request, all to the extent required to enable the Registered Holder to sell Restricted Securities as defined in Rule 144 of the Securities and Exchange Commission pursuant to (i) Rule 144 adopted by the Securities and Exchange Commission under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission or (ii) a registration statement on Form S-2 or S-3 or any similar registration form hereafter adopted by the Securities and Exchange Commission. Upon request, the Company shall deliver to the Registered Holder a written statement as to whether it has complied with such requirements. Section 5. Definitions. The following terms have meanings set forth below. "Common Stock" means, collectively, the Company's Common Stock and any capital stock of any class of the Company hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. "Equipment Financing" has the meaning set forth in the Purchase Agreement. "Market Price" means as to any security the average of the closing prices of such security's sales on all domestic securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 p.m., New York time, on such day, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the date as of which "Market Price" is being determined and the -6- 7 20 consecutive business days prior to such day, provided that if such security is listed on any domestic securities exchange the term "business days" as used in this sentence means business days on which such exchange is open for trading. If at any time such security is not listed on any domestic securities exchange or quoted in the NASDAQ System or the domestic over-the-counter market, the "Market Price" shall be the fair value thereof determined by the Company's Board of Directors, provided that if within a reasonable period of time the Registered Holder disagrees with such determination such fair value shall be determined by an appraiser jointly selected by the Company and the Registered Holder of this Warrant. The determination of such appraiser shall be final and binding on the Company and the Registered Holder, and the Company and the Registered Holder shall each be responsible for one-half of the fees and expenses of such appraiser. "Person" means an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an unincorporated organization and a government or any department or agency thereof. "Series B Preferred" means the Company's Series B Preferred Stock, par value $0.001 per share. "Warrant Stock" means the Company Series B Preferred; provided that if there is a change such that the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the type or class of securities so issuable, then the term "Warrant Stock" shall mean one share of the security issuable upon exercise of the Warrants if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. Other capitalized terms used in this Warrant but not defined herein shall have the meanings set forth in the Purchase Agreement. Section 6. No Voting Rights; Limitations of Liability. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. No provision hereof, in the absence of affirmative action by the Registered Holder to purchase Warrant Stock, and no enumeration herein of the rights or privileges of the Registered Holder shall give rise to any liability of such holder for the Exercise Price of Warrants Stock acquirable by exercise hereof or as a stockholder of the Company. Section 7. Warrant Transferable. Subject to the transfer conditions referred to in the legend endorsed hereon and all applicable state and federal securities laws, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Registered Holder, upon surrender of this Warrant with a properly executed Assignment (in the form of Exhibit II hereto) at the principal office of the Company. Section 8. Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the Registered Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the purchase rights hereunder, and each of such new Warrants shall represent such portion of such rights as is -7- 8 designated by the Registered Holder at the time of such surrender; provided, however, that in no event shall more than five (5) Warrants be issued and outstanding. The date the Company initially issues this Warrant shall be deemed to be the "Date of Issuance" hereof regardless of the number of times new certificates representing the unexpired and unexercised rights formerly represented by this Warrant shall be issued. Section 9. Replacement. Upon receipt of evidence reasonably satisfactory to the Company (an affidavit of the Registered Holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing this Warrant, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Company (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Company shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 10. Notices. Except as otherwise expressly provided herein, all notices referred to in this Warrant shall be in writing and shall be delivered personally, sent by reputable overnight courier service (charges prepaid) or sent by registered or certified mail, return receipt requested, postage prepaid and shall be deemed to have been given when so delivered, sent or deposited in the U.S. Mail (i) to the Company, at its principal executive offices and (ii) to the Registered Holder of this Warrant, at such holder's address as it appears in the records of the Company (unless otherwise indicated by any such holder). Section 11. Amendment and Waiver. Except as otherwise provided herein, the provisions of this Warrant may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Registered Holder. Section 12. Remedies. The Company stipulates that the remedies at law of the Purchaser in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate to the fullest extent permitted by law, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. Section 13. Enforcement Costs. If any party to, or beneficiary of, this Warrant seeks to enforce its rights hereunder by legal proceedings or otherwise, then the non-prevailing party shall pay all reasonable costs and expenses incurred by the prevailing party, including, without limitation, all reasonable attorneys' fees (including the allocable costs of in-house counsel). Section 14. Descriptive Headings: Governing Law. The descriptive headings of the several Sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The corporation laws of the State of Washington shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be -8- 9 governed by the internal law of the State of Washington without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Washington or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Washington. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated the Date of Issuance hereof. INTERNAP NETWORK SERVICES CORPORATION By: /s/ Paul E. McBride ------------------------------- Its: ------------------------------ (Corporate Seal) Attest: /s/ Paul E. McBride - ----------------------------- Secretary -9- 10 EXHIBIT I EXERCISE AGREEMENT To: Dated: The undersigned, pursuant to the provisions set forth in the attached Warrant (Certificate No. W-____), hereby agrees to subscribe for the purchase of __________ shares of the Warrant Stock covered by such Warrant and makes payment herewith in full therefor at the price per share provided by such Warrant. Signature _______________________ Address _________________________ EXHIBIT II ASSIGNMENT FOR VALUE RECEIVED, ______________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (Certificate No. W-____) with respect to the number of shares of the Warrant Stock covered thereby set forth below, unto: Names of Assignee Address No. of Shares Dated: _________________ Signature _______________________ _______________________ Witness _________________________ -10- EX-10.14 20 PREFERRED STOCK PURCHASE WARRANT 1 EXHIBIT 10.14 NEITHER THIS WARRANT NOR THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR THE LAWS OF ANY STATE. NO SALE, TRANSFER OR OTHER DISPOSITION OF THIS WARRANT OR SUCH SHARES MAY BE EFFECTED WITHOUT (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT RELATED THERETO, (II) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, OR (III) THE COMPANY OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION. INTERNAP NETWORK SERVICES CORPORATION PREFERRED STOCK PURCHASE WARRANT Date of Issuance: September 1, 1998 FOR VALUE RECEIVED, InterNAP Network Services Corporation, a Washington corporation (the "Company"), hereby grants to Phoenix Leasing Incorporated (the "Purchaser") or its registered assigns (the "Registered Holder") the right to purchase from the Company 75,001 shares of Warrant Stock at a price per share of $.60 (as adjusted from time to time hereunder, the "Exercise Price"). This Warrant was issued pursuant to the terms of the Warrant Purchase Agreement, dated as of the date hereof (the "Purchase Agreement"), between the Company and the Purchaser. Certain capitalized terms used herein are defined in Section 5 hereof. The amount and kind of securities obtainable pursuant to the rights granted hereunder and the purchase price for such securities are subject to adjustment pursuant to the provisions contained in this Warrant. This Warrant is subject to the following provisions: Section 1. Exercise of Warrant. A. Exercise Period. The Registered Holder may exercise, in whole or in part, the purchase rights represented by this Warrant at any time and from time to time after the Date of Issuance to and including the later of (i) the tenth anniversary of the final acceptance of equipment by the Company under the Equipment Financing with the Purchaser and (ii) the fifth anniversary of the consummation of the public offering of the Company's Common Stock registered under the Securities Act of 1933 (the "Exercise Period"). The Company shall give the Registered Holder written notice of the expiration of the Exercise Period at least 30 days but not more than 90 days prior to the end of the Exercise Period. 2 B. Exercise Procedure. (i) This Warrant shall be deemed to have been exercised when the Company has received all of the following items (the "Exercise Time"): (a) a completed Exercise Agreement, as described in paragraph 1C below, executed by the Person exercising all or part of the purchase rights represented by this Warrant (the "Purchaser"); (b) this Warrant; (c) if this Warrant is not registered in the name of the Purchaser, an Assignment or Assignments in the form set forth in Exhibit II hereto evidencing the assignment of this Warrant to the Purchaser, in which case the Registered Holder shall have complied with the provisions set forth in Section 7 hereof; and (d) either (1) a check payable to the Company in an amount equal to the product of the Exercise Price multiplied by the number of shares of Warrant Stock being purchased upon such exercise (the "Aggregate Exercise Price"), (2) the surrender to the Company of debt or equity securities of the Company having a Market Price equal to the Aggregate Exercise Price of the Warrant Stock being purchased upon such exercise (provided that for purposes of this subparagraph, the Market Price of any note or other debt security or any preferred stock shall be deemed to be equal to the aggregate outstanding principal amount or liquidation value thereof plus all accrued and unpaid interest thereon or accrued or declared and unpaid dividends thereon) or (3) a written notice to the Company that the Purchaser is exercising the Warrant (or a portion thereof) by authorizing the Company to withhold from issuance a number of shares of Warrant Stock issuable upon such exercise of the Warrant which when multiplied by the Market Price of the Warrant Stock is equal to the Aggregate Exercise Price (and such withheld shares shall no longer be issuable under this Warrant). (ii) Certificate for shares of Warrant Stock purchased upon exercise of this Warrant shall be delivered by the Company to the Purchaser promptly after the date of the Exercise Time. Unless this Warrant has expired or all of the purchaser rights represented hereby have been exercised, the Company, shall prepare a new Warrant, substantially identical hereto, representing the rights formerly represented by this Warrant which have not expired or been exercised and shall promptly deliver such new Warrant to the Person designated for delivery in the Exercise Agreement. (iii) The Warrant Stock issuable upon the exercise of this Warrant shall be deemed to have been issued to the Purchaser at the Exercise Time, and the Purchaser shall be deemed for all purposes to have become the record holder of such Warrant Stock at the Exercise Time. -2- 3 (iv) The issuance of certificates for shares of Warrant Stock upon exercise of this Warrant shall be made without charge to the Registered Holder or the Purchaser for any issuance tax in respect thereof or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Warrant Stock. Each share of Warrant Stock issuable upon exercise of this Warrant shall, upon payment of the Exercise Price therefor, be fully paid and nonassessable and free from all liens and charges with respect to the issuance thereof. (v) The Company shall not close its books against the transfer of this Warrant or of any share of Warrant Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. The Company shall from time to time take all such action as may be necessary to assure that the par value per share of the unissued Warrant Stock acquirable upon exercise of this Warrant is at all times equal to or less than the Exercise Price then in effect. (vi) The Company shall assist and cooperate with any Registered Holder or Purchaser required to make any governmental filings or obtain any governmental approvals prior to or in connection with any exercise of this Warrant (including, without limitation, making any filings required to be made by the Company). (vii) Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a registered public offering or the sale of the Company, the exercise of any portion of this Warrant may, at the election of the holder hereof, be conditioned upon the consummation of the public offering or the sale of the Company in which case such exercise shall not be deemed to be effective until the consummation of such transaction. (viii) The Company shall at all times reserve and keep available out of its authorized but unissued shares of Warrant Stock solely for the purpose of issuance upon the exercise of the Warrants, such number of shares of Warrant Stock issuable upon the exercise of this Warrant. The Company shall take all such actions as may be necessary to assure that all such shares of Warrant Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Warrant Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). The Company shall not take any action which would cause the number of authorized but unissued shares of Warrant Stock to be less than the number of such shares required to be reserved hereunder for issuance upon exercise of this Warrant. C. Exercise Agreement. Upon any exercise of this Warrant, the Exercise Agreement shall be substantially in the form set forth in Exhibit I hereto, except that if the shares of Warrant Stock are not to be issued in the name of the Person in whose name this Warrant is registered, the Exercise Agreement shall also state the name of the Person to whom the certificates for the shares of Warrant Stock are to be issued, and if the number of shares of Warrant Stock to be issued does not include all the shares of Warrant Stock purchasable hereunder, it shall also state -3- 4 the name of the Person to whom a new Warrant for the unexercised portion of the rights hereunder is to be delivered. Such Exercise Agreement shall be dated the actual date of execution thereof. D. Conversion of the Series B Preferred. Notwithstanding any other provision of this Warrant, if all of the issued and outstanding shares of the Company's Series B Preferred are converted automatically into shares of Common Stock pursuant to Section 3(b) of the Company's Certificate of Incorporation (the "Automatic Conversion"), this Warrant shall no longer be exercisable into shares of Series B Preferred but immediately upon the consummation of the Automatic Conversion shall become exercisable into a number of shares of Common Stock equal to the number of shares of Common Stock issuable upon conversion of the shares of Series B Preferred issuable upon exercise of this Warrant as of the consummation of such event at an Exercise Price equal to the Series B Conversion Price (as defined under the Company's Certificate of Incorporation) in effect as of the consummation of such event. Following the occurrence of the Automatic Conversion, the provisions of this Warrant shall continue to apply to the Warrant Stock which shall then be Common Stock. Section 2. Adjustment of Exercise Price and Number of Shares. The Exercise Price and the number of shares of Warrant Stock issuable upon exercise of this Warrant shall be subject to adjustment from time to time as provided in this Section 2. A. Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) the Warrant Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of shares of Warrant Stock obtainable upon exercise of this Warrant shall be proportionately increased, and if the Company at any time combines (by reverse stock split or otherwise) the Warrant Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of shares of Warrant Stock obtainable upon exercise of this Warrant shall be proportionately decreased. B. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets or other transaction, which in each case is effected in such a way that the holders of Warrant Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Warrant Stock is referred to herein as "Organic Change." Prior to the consummation of any Organic Change, the Company and Holder shall make appropriate provision (in form and substance satisfactory to the Registered Holder of this Warrant) to insure that the Registered Holder shall thereupon receive or thereafter have the right to acquire and receive, in lieu of or addition to (as the case may be) the shares of Warrant Stock immediately theretofore acquirable and receivable upon the exercise of such holder's Warrant, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Warrant Stock immediately theretofore acquirable and receivable upon exercise of such holder's Warrant had such Organic Change not taken place. In any such applicable case, the Company shall make appropriate provision (in form -4- 5 and substance satisfactory to the Registered Holder of this Warrant) with respect to such holders' rights and interests to insure that the provisions of this Section 2 and Sections 3 and 4 hereof shall thereafter be applicable to this Warrant. C. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided for by such provisions, then the Company's board of directors shall make an appropriate adjustment in the Exercise Price and the number of shares of Warrant Stock obtainable upon exercise of this Warrant so as to protect the rights of the holder of this Warrant; provided that no such adjustment shall increase the Exercise Price or decrease the number of shares of Warrant Stock obtainable as otherwise determined pursuant to this Section 2. D. Notices. (i) Immediately upon any adjustment of the Exercise Price, the Company shall give written notice thereof to the Registered Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company shall give written notice to the Registered Holder at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Company shall also give written notice to the Registered Holders at least 20 days prior to the date on which any Organic Change, dissolution or liquidation shall take place. Section 3. Liquidating Dividends. If the Company declares or pays a dividend upon the Preferred Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied)(a "Liquidating Dividend"), then the Company shall pay to the Registered Holder of this Warrant at the time of payment thereof the Liquidating Dividend which would have been paid to such Registered Holder on the Warrant Stock had this Warrant been fully exercised immediately prior to the date on which a record is taken for such Liquidating Dividend, or, if no record is taken, the date as of which the record holders of Preferred Stock entitled to such dividends are to be determined. Section 4. General Information Covenants. A. Information Rights. The Company shall deliver to the Registered Holder (i) within 120 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company as of the end of such year and a consolidated statement of income, retained earnings and cash flows for such year, which year-end financial reports shall be in reasonable detail and certified by independent public accountants of nationally recognized standing selected by the Company, and (ii) within 45 days after the end of each fiscal quarter, unaudited -5- 6 consolidated statements of income, retained earnings and cash flows of the Company for such quarter and a consolidated balance sheet as of the end of such quarter, which shall be certified by the Company's chief financial officer. In addition, the Company shall deliver to the Registered Holder any other information or data generally provided by the Company to its stockholders or which the Registered Holder reasonably requests. The Company shall permit representatives of the Registered Holder to visit the Company's and its subsidiaries' facilities, inspect their books and records and discuss their business affairs with their officers and key employees, in each case during reasonable business hours and in a manner not disruptive to their business operations. The Company's obligations under this Section 4A. shall terminate at such time that the Company becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. B. Notices. The Company shall give written notice to the Registered Holder of (i) any declaration or payment of dividends or distributions on the Series B Preferred or the Common Stock at least 15 days prior to the record date therefor (or the payment date if no record date is taken), (ii) any liquidation, dissolution or winding up of the Company at least 30 days prior to the date thereof, (iii) the filing of any registration statement with the Securities and Exchange Commission covering the Common Stock promptly after such filing and (iv) the occurrence of any material adverse change affecting the Company promptly after the Company's discovery or otherwise obtaining knowledge thereof. C. Current Public Information. At all times after the Company has filed a registration statement with the Securities and Exchange Commission pursuant to the requirements of either the Securities Act or the Securities Exchange Act, the Company shall file all reports required to be filed by it under the Securities Act and the Securities Exchange Act of 1934 and the rules and regulations adopted by the Securities and Exchange Commission thereunder and shall take such further action as the Registered Holder may reasonably request, all to the extent required to enable the Registered Holder to sell Restricted Securities as defined in Rule 144 of the Securities and Exchange Commission pursuant to (i) Rule 144 adopted by the Securities and Exchange Commission under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission or (ii) a registration statement on Form S-2 or S-3 or any similar registration form hereafter adopted by the Securities and Exchange Commission. Upon request, the Company shall deliver to the Registered Holder a written statement as to whether it has complied with such requirements. Section 5. Definitions. The following terms have meanings set forth below: "Common Stock" means, collectively, the Company's Common Stock and any capital stock of any class of the Company hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. "Equipment Financing" has the meaning set forth in the Purchase Agreement. -6- 7 "Market Price" means as to any security the average of the closing prices of such security's sales on all domestic securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 p.m., New York time, on such day, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the date as of which "Market Price" is being determined and the 20 consecutive business days prior to such day; provided that if such security is listed on any domestic securities exchange the term "business days" as used in this sentence means business days on which such exchange is open for trading. If at any time such security is not listed on any domestic securities exchange or quoted in the NASDAQ System or the domestic over-the-counter market, the "Market Price" shall be the fair value thereof determined by the Company's Board of Directors, provided that if within a reasonable period of time the Registered Holder disagrees with such determination such fair value shall be determined by an appraiser jointly selected by the Company and the Registered Holder of this Warrant. The determination of such appraiser shall be final and binding on the Company and the Registered Holder, and the Company and the Registered Holder shall each be responsible for one-half of the fees and expenses of such appraiser. "Person" means an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an unincorporated organization and a government or any department or agency thereof. "Series B Preferred" means the Company's Series B Preferred Stock, par value $0.001 per share. "Warrant Stock" means the Company Series B Preferred; provided that if there is a change such that the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the type or class of securities so issuable, then the term "Warrant Stock" shall mean one share of the security issuable upon exercise of the Warrants if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. Other capitalized terms used in this Warrant but not defined herein shall have the meanings set forth in the Purchase Agreement. Section 6. No Voting Rights; Limitations of Liability. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. No provision hereof, in the absence of affirmative action by the Registered Holder to purchase Warrant Stock, and no enumeration herein of the rights or privileges of the Registered Holder shall give rise to any liability of such holder for the Exercise Price of Warrant Stock acquirable by exercise hereof or as a stockholder of the Company. -7- 8 Section 7. Warrant Transferable. Subject to the transfer conditions referred to in the legend endorsed hereon and all applicable state and federal securities laws, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Registered Holder, upon surrender of this Warrant with a properly executed Assignment (in the form of Exhibit II hereto) at the principal office of the Company. Section 8. Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the Registered Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the purchase rights hereunder, and each of such new Warrants shall represent such portion of such rights as is designated by the Registered Holder at the time of such surrender; provided, however, that in no event shall more than five (5) Warrants be issued and outstanding. The date the Company initially issues this Warrant shall be deemed to be the "Date of Issuance" hereof regardless of the number of times new certificates representing the unexpired and unexercised rights formerly represented by this Warrant shall be issued. Section 9. Replacement. Upon receipt of evidence reasonably satisfactory to the Company (an affidavit of the Registered Holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing this Warrant, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Company (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Company shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 10. Notices. Except as otherwise expressly provided herein, all notices referred to in this Warrant shall be in writing and shall be delivered personally, sent by reputable overnight courier service (charges prepaid) or sent by registered or certified mail, return receipt requested, postage prepaid and shall be deemed to have been given when so delivered, sent or deposited in the U.S. Mail (i) to the Company, at its principal executive offices and (ii) to the Registered Holder of this Warrant, at such holder's address as it appears in the records of the Company (unless otherwise indicated by any such holder). Section 11. Amendment and Waiver. Except as otherwise provided herein, the provisions of this Warrant may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Registered Holder. Section 12. Remedies. The Company stipulates that the remedies at law of the Purchaser in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate to the fullest extent permitted by law, and that such terms may be specifically enforced by a decree for the -8- 9 specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. Section 13. Enforcement Costs. If any party to, or beneficiary of, this Warrant seeks to enforce its rights hereunder by legal proceedings or otherwise, then the non-prevailing party shall pay all reasonable costs and expenses incurred by the prevailing party, including, without limitation, all reasonable attorneys' fees (including the allocable costs of in-house counsel). Section 14. Descriptive Headings; Governing Law. The descriptive headings of the several Sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The corporation laws of the State of Washington shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by the internal law of the State of Washington without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Washington or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Washington. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated the Date of Issuance hereof. INTERNAP NETWORK SERVICES CORPORATION By: /s/ PAUL E. MCBRIDE ------------------------------- Its: VP Finance & Administration ------------------------------- (Corporate Seal) Attest: /s/ PAUL E. MCBRIDE - -------------------------------- Secretary -9- 10 EXHIBIT I EXERCISE AGREEMENT To: Dated: The undersigned, pursuant to the provisions set forth in the attached Warrant (Certificate No. W-_____), hereby agrees to subscribe for the purchase of _________ shares of the Warrant Stock covered by such Warrant and makes payment herewith in full therefor at the price per share provided by such Warrant. Signature ------------------------ Address -------------------------- EXHIBIT II ASSIGNMENT FOR VALUE RECEIVED, ____________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (Certificate No. W-_____) with respect to the number of shares of the Warrant Stock covered thereby set forth below, unto: Names of Assignee Address No. of Shares Dated: Signature ---------------- ------------------------ ------------------------ Witness -------------------------- -10- EX-10.15 21 PREFERRED STOCK PURCHASE WARRANT 1 EXHIBIT 10.15 Neither this warrant nor the shares of stock issuable upon exercise hereof have been registered under the Securities Act of 1933, as amended (the "Act"). No sale, transfer or other disposition of this warrant or such shares may be effected without (i) an effective registration statement under the Act related thereto, (ii) an opinion of counsel for the holder, reasonably satisfactory to the Company, or (iii) the Company otherwise satisfies itself that such transaction is exempt from registration. INTERNAP NETWORK SERVICES CORPORATION PREFERRED STOCK PURCHASE WARRANT Date of Issuance: May 5, 1998 Certificate No. PW-2 FOR VALUE RECEIVED, InterNAP Network Services Corporation, a Washington corporation (the "Company"), hereby grants to First Portland Corporation (the "Purchaser") or its registered assigns (the "Registered Holder") the right to purchase from the Company 41,667 shares of Warrant Stock at a price per share of $.60 (as adjusted from time to time hereunder, the "Exercise Price"). This Warrant was issued pursuant to the terms of the Warrant Purchase Agreement, dated as of March __, 1998 (the "Purchase Agreement"), between the Company and the Purchaser. Certain capitalized terms used herein are defined in Section 5 hereof. The amount and kind of securities obtainable pursuant to the rights granted hereunder and the purchase price for such securities are subject to adjustments pursuant to the provisions contained in this Warrant. This Warrant is subject to the following provisions: Section 1. Exercise of Warrant. 1A. Exercise Period. The Registered Holder may exercise, in whole or in part, the purchase rights represented by this Warrant at any time and from time to time after the Date of Issuance to and including the later of (i) the tenth anniversary of the final acceptance of equipment by the Company under the Equipment Financing with the Purchaser and (ii) the fifth anniversary of the consummation of the public offering of the Company's Common Stock registered under the Securities Act of 1933 (the "Exercise Period"). The Company shall give the Registered Holder written notice of the expiration of the Exercise Period at 2 least 30 days but not more than 90 days prior to the end of the Exercise Period. 1B. Exercise Procedure. (i) This Warrant shall be deemed to have been exercised when the Company has received all of the following items (the "Exercise Time"); (a) a completed Exercise Agreement, as described in paragraph 1C below, executed by the Person exercising all or part of the purchase rights represented by this Warrant (the "Purchaser"); (b) this Warrant; (c) if this Warrant is not registered in the name of the Purchaser, an Assignment or Assignments in the form set forth in Exhibit II hereto evidencing the assignment of this Warrant to the Purchaser, in which case the Registered Holder shall have complied with the provisions set forth in Section 7 hereof; and (d) either (1) a check payable to the Company in an amount equal to the product of the Exercise Price multiplied by the number of shares of Warrant Stock being purchased upon such exercise (the "Aggregate Exercise Price"), (2) the surrender to the Company of debt or equity securities of the Company having a Market Price equal to the Aggregate Exercise Price of the Warrant Stock being purchased upon such exercise (provided that for purposes of this subparagraph, the Market Price of any note or other debt security or any preferred stock shall be deemed to be equal to the aggregate outstanding principal amount or liquidation value thereof plus all accrued and unpaid interest thereon or accrued or declared and unpaid dividends thereon) or (3) a written notice to the Company that the Purchaser is exercising the Warrant (or a portion thereof) by authorizing the Company to withhold from issuance a number of shares of Warrant Stock issuable upon such exercise of the Warrant which when multiplied by the Market Price of the Warrant Stock is equal to the Aggregate Exercise Price (and such withheld shares shall no longer be issuable under this Warrant). (ii) Certificates for shares of Warrant Stock purchased upon exercise of this Warrant shall be delivered by the Company to the Purchaser within five business days after the date of the Exercise Time. Unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Company -2- 3 shall prepare a new Warrant, substantially identical hereto, representing the rights formerly represented by this Warrant which have not expired or been exercised and shall, within such five-day period, deliver such new Warrant to the Person designated for delivery in the Exercise Agreement. (iii) The Warrant Stock issuable upon the exercise of this Warrant shall be deemed to have been issued to the Purchaser at the Exercise Time, and the Purchaser shall be deemed for all purposes to have become the record holder of such Warrant Stock at the Exercise Time. (iv) The issuance of certificates for shares of Warrant Stock upon exercise of this Warrant shall be made without charge to the Registered Holder or the Purchaser for any issuance tax in respect thereof or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Warrant Stock. Each share of Warrant Stock issuable upon exercise of this Warrant shall, upon payment of the Exercise Price therefor, be fully paid and nonassessable and free from all liens and charges with respect to the issuance thereof. (v) The Company shall not close its books against the transfer of this Warrant or of any share of Warrant Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. The Company shall from time to time take all such action as may be necessary to assure that the par value per share of the unissued Warrant Stock acquirable upon exercise of this Warrant is at all times equal to or less than the Exercise Price then in effect. (vi) The Company shall assist and cooperate with any Registered Holder or Purchaser required to make any governmental filings or obtain any governmental approvals prior to or in connection with any exercise of this Warrant (including, without limitation, making any filings required to be made by the Company). (vii) Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a registered public offering or the sale of the Company, the exercise of any portion of this Warrant may, at the election of the holder hereof, be conditioned upon the consummation of the public offering or the sale of the Company in which case such exercise shall not be deemed to be effective until the consummation of such transaction. (viii) The Company shall at all times reserve and keep available out of its authorized but unissued shares of Warrant Stock solely for the purpose of issuance upon the exercise of the -3- 4 Warrants, such number of shares of Warrant Stock issuable upon the exercise of this Warrant. The Company shall take all such actions as may be necessary to assure that all such shares of Warrant Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Warrant Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). The Company shall not take any action which would cause the number of authorized but unissued shares of Warrant Stock to be less than the number of such shares required to be reserved hereunder for issuance upon exercise of this Warrant. 1C. Exercise Agreement. Upon any exercise of this Warrant, the Exercise Agreement shall be substantially in the form set forth in Exhibit I hereto, except that if the shares of Warrant Stock are not to be issued in the name of the Person in whose name this Warrant is registered, the Exercise Agreement shall also state the name of the Person to whom the certificates for the shares of Warrant Stock are to be issued, and if the number of shares of Warrant Stock to be issued does not include all the shares of Warrant Stock purchasable hereunder, it shall also state the name of the Person to whom a new Warrant for the unexercised portion of the rights hereunder is to be delivered. Such Exercise Agreement shall be dated the actual date of execution thereof. 1D. Conversion of the Series B Preferred. Notwithstanding any other provision of this Warrant, if all of the issued and outstanding shares of the Company's Series B Preferred are converted automatically into shares of Common Stock pursuant to Section 3(b) of the Company's Certificate of Incorporation (the "Automatic Conversion"), this Warrant shall no longer be exercisable into shares of Series B Preferred but immediately upon the consummation of the Automatic Conversion shall become exercisable into a number of shares of Common Stock equal to the number of shares of Common Stock issuable upon conversion of the shares of Series B Preferred issuable upon exercise of this Warrant as of the consummation of such event at an Exercise Price equal to the Series B Conversion Price (as defined under the Company's Certificate of Incorporation) in effect as of the consummation of such event. Following the occurrence of the Automatic Conversion, the provisions of this Warrant shall continue to apply to the Warrant Stock which shall then be Common Stock. Section 2. Adjustment of Exercise Price and Number of Shares. The Exercise Price and the number of shares of Warrant Stock issuable upon exercise of this Warrant shall be subject to adjustment from time to time as provided in this Section 2. -4- 5 2A. Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) the Warrant Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of shares of Warrant Stock obtainable upon exercise of this Warrant shall be proportionately increased, and if the Company at any time combines (by reverse stock split or otherwise) the Warrant Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of shares of Warrant Stock obtainable upon exercise of this Warrant shall be proportionately decreased. 2B. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets or other transaction, which in each case is effected in such a way that the holders of Warrant Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Warrant Stock is referred to herein as "Organic Change." Prior to the consummation of any Organic Change, the Company shall make appropriate provision (in form and substance satisfactory to the Registered Holder of this Warrant) to insure that the Registered Holder shall thereafter have the right to acquire and receive, in lieu of or addition to (as the case may be) the shares of Warrant Stock immediately theretofore acquirable and receivable upon the exercise of such holder's Warrant, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Warrant Stock immediately theretofore acquirable and receivable upon exercise of such holder's Warrant had such Organic Change not taken place. In any such case, the Company shall make appropriate provision (in form and substance satisfactory to the Registered Holder of this Warrant) with respect to such holders' rights and interests to insure that the provisions of this Section 2 and Sections 3 and 4 hereof shall thereafter be applicable to this Warrant. The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument (in form and substance satisfactory to the Registered Holder of this Warrant), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. 2C. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided for by such provisions, then the Company's board of -5- 6 directors shall make an appropriate adjustment in the Exercise Price and the number of shares of Warrant Stock obtainable upon exercise of this Warrant so as to protect the rights of the holder of this Warrant; provided that no such adjustment shall increase the Exercise Price or decrease the number of shares of Warrant Stock obtainable as otherwise determined pursuant to this Section 2. 2D. Notices. (i) Immediately upon any adjustment of the Exercise Price, the Company shall give written notice thereof to the Registered Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company shall give written notice to the Registered Holder at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Company shall also give written notice to the Registered Holders at least 20 days prior to the date on which any Organic Change, dissolution or liquidation shall take place. Section 3. Liquidating Dividends. If the Company declares or pays a dividend upon the Preferred Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied) (a "Liquidating Dividend"), then the Company shall pay to the Registered Holder of this Warrant at the time of payment thereof the Liquidating Dividend which would have been paid to such Registered Holder on the Warrant Stock had this Warrant been fully exercised immediately prior to the date on which a record is taken for such Liquidating Dividend, or, if no record is taken, the date as of which the record holders of Preferred Stock entitled to such dividends are to be determined. Section 4. Purchase Rights. If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of Preferred Stock (the "Purchase Rights"), then the Registered Holder of this Warrant shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the Aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Warrant Stock acquirable upon complete exercise of this Warrant immediately -6- 7 before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Preferred Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 5. Definitions. The following terms have meanings set forth below: "Common Stock" means, collectively, the Company's Common Stock and any capital stock of any class of the Company hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. "Equipment Financing" has the meaning set forth in the Purchase Agreement. "Market Price" means as to any security the average of the closing prices of such security's sales on all domestic securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, on such day, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which "Market Price" is being determined and the 20 consecutive business days prior to such day; provided that if such security is listed on any domestic securities exchange the term "business days" as used in this sentence means business days on which such exchange is open for trading. If at any time such security is not listed on any domestic securities exchange or quoted in the NASDAQ System or the domestic over-the-counter market, the "Market Price" shall be the fair value thereof determined jointly by the Company and the Registered Holder of this Warrant; provided that if such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an appraiser jointly selected by the Company and the Registered Holder of this Warrant. The determination of such appraiser shall be final and binding on the Company and the Registered Holder, and the fees and expenses of such appraiser shall be paid by the Company. -7- 8 "Person" means an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an unincorporated organization and a government or any department or agency thereof. "Series B Preferred" means the Company's Series B Preferred Stock, par value $0.001 per share. "Warrant Stock" means the Company's Series B Preferred; provided that if there is a change such that the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the type or class of securities so issuable, then the term "Warrant Stock" shall mean one share of the security issuable upon exercise of the Warrants if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. Other capitalized terms used in this Warrant but not defined herein shall have the meanings set forth in the Purchase Agreement. Section 6. No Voting Rights; Limitations on Liability. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. No provision hereof, in the absence of affirmative action by the Registered Holder to purchase Warrant Stock, and no enumeration herein of the rights or privileges of the Registered Holder shall give rise to any liability of such holder for the Exercise Price of Warrant Stock acquirable by exercise hereof or as a stockholder of the Company. Section 7. Warrant Transferable. Subject to the transfer conditions referred to in the legend endorsed hereon, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Registered Holder, upon surrender of this Warrant with a properly executed Assignment (in the form of Exhibit II hereto) at the principal office of the Company. Section 8. Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the Registered Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the purchase rights hereunder, and each of such new Warrants shall represent such portion of such rights as is designated by the Registered Holder at the time of such surrender. The date the Company initially issues this Warrant shall be deemed to be the "Date of Issuance" hereof regardless of the number of times new -8- 9 certificates representing the unexpired and unexercised rights formerly represented by this Warrant shall be issued. Section 9. Replacement. Upon receipt of evidence reasonably satisfactory to the Company (an affidavit of the Registered Holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing this Warrant, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Company (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Company shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 10. Notices. Except as otherwise expressly provided herein, all notices referred to in this Warrant shall be in writing and shall be delivered personally, sent by reputable overnight courier service (charges prepaid) or sent by registered or certified mail, return receipt requested, postage prepaid and shall be deemed to have been given when so delivered, sent or deposited in the U.S. Mail (i) to the Company, at its principal executive offices and (ii) to the Registered Holder of this Warrant, at such holder's address as it appears in the records of the Company (unless otherwise indicated by any such holder). Section 11. Amendment and Waiver. Except as otherwise provided herein, the provisions of this Warrant may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Registered Holder. Section 12. Descriptive Headings; Governing Law. The descriptive headings of the several Sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The corporation laws of the State of Washington shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by the internal law of the State of Washington without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Washington or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Washington. * * * * * * -9- 10 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated the Date of Issuance hereof. INTERNAP NETWORK SERVICES CORPORATION By /s/ Paul E. McBride ------------------------------------ Its VP Finance & Administration ------------------------------------ [Corporate Seal] Attest: - ------------------------------------ Secretary -10- 11 EXHIBIT I EXERCISE AGREEMENT To: Dated: The undersigned, pursuant to the provisions set forth in the attached Warrant (Certificate No. W-__), hereby agrees to subscribe for the purchase of __________ shares of the Warrant Stock covered by such Warrant and makes payment herewith in full therefor at the price per share provided by such Warrant. Signature ____________________________ Address ______________________________ EXHIBIT II ASSIGNMENT FOR VALUE RECEIVED, _______________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (Certificate No. W-________) with respect to the number of shares of the Warrant Stock covered thereby set forth below, unto: Names of Assignee Address No. of Shares Dated: Signature ____________________________ ____________________________ Witness ____________________________ -11- EX-10.16 22 PREFERRED STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.16 NEITHER THE SECURITY EVIDENCED BY THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE LAW, AND NO INTEREST HEREIN OR THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING SAID SECURITIES, (B) THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE HOLDER OF SAID SECURITIES (REASONABLY SATISFACTORY TO LEGAL COUNSEL FOR THE COMPANY) STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR (C) THE COMPANY OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION. No. W-____ WARRANT TO PURCHASE ISSUED: December 24, 1998 315,600 SHARES OF SERIES B PREFERRED STOCK INTERNAP NETWORK SERVICES CORP. SERIES B PREFERRED STOCK PURCHASE WARRANT THIS IS TO CERTIFY that, for value received and subject to the terms and conditions hereof, ROBERT SHURTLEFF, JR., or such person to whom this Warrant is transferred pursuant to Section 8 hereof (the "Holder"), is entitled to purchase three hundred fifteen thousand six hundred (315,600) fully paid and nonassessable shares of the Series B Preferred Stock (the "Warrant Stock") of INTERNAP NETWORK SERVICES CORP., a Washington corporation (the "Company"), at a price of sixty cents ($0.60) per share (the "Exercise Price"). Warrant Nos. W-1 and W-3 were each issued to the Holder by the Company as of February 13, 1997 (the "Initial Warrants") in connection with the extension of a loan to the Company by Robert Shurtleff, Jr. evidenced by that certain Securable Convertible Promissory Note of even date in the amount of $125,000.00. As of December 24, 1998, the Holder exercised the Initial Warrants for an aggregate of one hundred sixteen thousand one hundred sixty-six (116,666) shares of Warrant Stock (the "Exercise"). As a result of the Exercise, the Initial Warrants are to be cancelled in their entirety and replaced by this Warrant, which represents the remaining number of shares of Warrant Stock available to the Holder under the Initial Warrants after giving effect to the Exercise. This Warrant is subject to the following additional terms and conditions: 1. TERM Subject to the terms hereof, this Warrant may be exercised at any time and from time to time in whole or in part from and after the date of issuance of this Warrant and on or before February 13, 2002 (the "Exercise Period"). Upon a merger, consolidation, acquisition of all or substantially all of the property or stock, reorganization or liquidation of the Company 1. 2 (collectively, a "Reorganization") during the Exercise Period, as a result of which the shareholders of the Company receive cash, stock or other property in exchange for their shares of Warrant Stock, this Warrant shall be canceled and all rights granted hereunder shall terminate; provided, however, that the Company shall have delivered to the Holder notice of the Reorganization no less than ten (10) business days before the date scheduled for the Reorganization and that the Holder shall have the right immediately prior to the Reorganization to exercise this Warrant. 2. NUMBER OF SHARES Subject to the terms hereof, the maximum number of shares of Warrant Stock the Holder shall be entitled to purchase pursuant to this Warrant shall be three hundred fifteen thousands six hundred (315,600). 3. METHOD OF EXERCISE 3.1 CASH EXERCISE This Warrant may be exercised in whole or part by delivering to the Company (a) the form of Election to Purchase attached hereto duly completed and executed by the Holder, (b) this Warrant certificate, and (c) a bank check payable to the Company in the amount of the Exercise Price multiplied by the number of shares for which this Warrant is being exercised (the "Purchase Price"). 3.2 NET ISSUE EXERCISE Notwithstanding any provisions herein to the contrary, if the fair market value of one share of Warrant Stock is greater than the Exercise Price of such share (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant together with the duly completed and executed Election to Purchase and notice of such election, in which event the Company shall issue to the Holder a number of shares of Warrant Stock computed using the following formula: Y (A-B) X= ------- A Where X = the number of shares of Warrant Stock to be issued to the Holder Y = the number of shares of Warrant Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date such calculation) A = fair market value of one share of the Warrant Stock (at the date of such calculation) B = the Exercise Price (as adjusted to the date of such calculation) 2. 3 For purposes of the above calculation, the fair market value of one share of Warrant Stock shall be determined by the Company's Board of Directors in good faith; provided, however, that where there exists a public market for the Warrant Stock at the time of such exercise, the fair market value per share shall be the average of the closing bid and asked prices of the Warrant Stock quoted in the Over-The-Counter Market Summary or the last reported sale price of the Warrant Stock or the closing price quoted on the Nasdaq National Market or on any exchange on which the Warrant Stock is listed, whichever is applicable, as published in the Western Edition of The Wall Street Journal for the five (5) trading days prior to the date of determination of fair market value. Notwithstanding the foregoing, in the event the Warrant is exercised in connection with the Company's initial public offering of Warrant Stock, the fair market value per share shall be the per share offering price to the public of the Company's initial public offering. 4. DELIVERY OF STOCK CERTIFICATES Within ten (10) days after the payment of the Purchase Price following the exercise of this Warrant (in whole or in part), the Company at its expense shall issue in the name of and deliver to the Holder (a) a certificate or certificates for the number of fully paid and nonassessable shares of Warrant Stock to which the Holder shall be entitled upon such exercise and payment, and (b) a new Warrant of like tenor to purchase up to that number of shares of Warrant Stock, if any, not previously purchased by the Holder if this Warrant has not expired. The Holder shall for all purposes be deemed to have become the holder of record of such shares of Warrant Stock on the date by which this Warrant was surrendered and payment of the Purchase Price was made, irrespective of the date of delivery of the certificate or certificates representing thc Warrant Stock; provided that, if the date by which such surrender and payment is made is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become thc holder of record of such shares of Warrant Stock at the close of business on the next succeeding date on which the stock transfer books are open. 5. COVENANTS AS TO WARRANT STOCK (a) The Company covenants and agrees that all the shares of Warrant Stock issued pursuant to the terms of this Warrant will, upon their issuance, be validly issued and outstanding, fully paid and nonassessable and free from all taxes, liens and changes with respect to the issue thereof. The Company further covenants and agrees that the Company will at all times have authorized and reserved a sufficient number of shares of Warrant Stock to provide for the exercise of the rights represented by this Warrant. 6. ADJUSTMENTS TO WARRANT (a) If the Company shall issue any shares of its Warrant Stock as a stock dividend or subdivide the number of outstanding shares of Warrant Stock into a greater number of shares, then, in either such case, the Exercise Price in effect before such dividend or subdivision shall be proportionately reduced and the number of shares of Warrant Stock at that time purchasable 3. 4 pursuant to this Warrant shall be proportionately increased; and, conversely, if the Company shall decrease the number of outstanding shares of Warrant Stock by combining such shares into a smaller number of shares, then the Exercise Price in effect before such combination shall be proportionately increased and the number of shares of Warrant Stock at that time purchasable pursuant to this Warrant shall be proportionately decreased. When any adjustment is required to be made in the Exercise Price pursuant to this Section 6, the number of shares of Warrant Stock purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment. (b) In case of any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant) or any similar corporate reorganization on or after the date hereof (excluding a Reorganization, as defined in Section 1), then and in each such case the Holder, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which the Holder would have been entitled upon such consummation if the Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in Section 6(a); and in each such case, the terms of this Section 6 shall be applicable to the shares of stock or other securities properly receivable upon the exercise of this Warrant after such consummation. (c) When any adjustment is required to be made in the Exercise Price, the Company shall promptly mail to the Holder a certificate setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following the occurrence of any of the events specified in Section 6(a) or (b) above. (d) In order to avoid doubt, it is acknowledged that the Holder shall be entitled to the benefit of all adjustments in the number of shares of Common Stock of the Company issuable upon conversion of the Warrant Stock of the Company which occur prior to the exercise of this Warrant, including without limitation, any increase in the number of shares of Common Stock issuable upon conversion as a result of a dilutive issuance of capital stock. 7. FRACTIONAL SHARES No fractional shares shall be issued upon the exercise of this Warrant. In lieu of fractional shares, the Company shall pay the Holder a sum in cash equal to the fair market value of the fractional shares (as determined by the Company's Board of Directors) on the date of exercise. 8. RESTRICTIONS ON TRANSFER Neither this Warrant nor the Warrant Stock may be transferred unless (a) such transfer is registered under the Securities Act of 1933, as amended (the "Securities Act"), and any applicable state securities or blue sky laws, (b) the Company has received a legal opinion reasonably satisfactory to the Company to the effect that the transfer is exempt from the prospectus delivery and registration requirements of the Securities Act and any applicable state 4. 5 securities or blue sky laws, or (c) the Company otherwise satisfies itself that such transfer is exempt from registration. 9. LEGEND A legend setting forth or referring m the above restrictions shall be placed on this Warrant, any replacement hereof or any certificate representing the Warrant Stock, and a stop transfer restriction or order shall be placed on the books of the Company and with any transfer agent until such securities may be legally sold or otherwise transferred. 10. HOLDER AS OWNER The Company may deem and treat the holder of record of this Warrant as the absolute owner hereof for all purposes unless the Company is given notice to the contrary. 11. NO SHAREHOLDER RIGHTS This Warrant shall not entitle the Holder to any voting rights or any other rights as a shareholder of the Company or to any other rights whatsoever except the rights stated herein; and no dividend or interest shall be payable or shall accrue in respect of this Warrant or the Warrant Stock, until and to the extent that this Warrant shall be exercised. 12. CONSTRUCTION The validity and interpretation of the terms and provisions of this Warrant shall be governed by the laws of the State of Washington. The descriptive headings of the several sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions thereof. 13. EXCHANGE OF WARRANT This Warrant is exchangeable upon the surrender hereof by the Holder at the office of the Company for new Warrants of like tenor representing in the aggregate the rights to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by the Holder at the time of such surrender. 14. LOST WARRANT CERTIFICATE If this Warrant is lost, stolen, mutilated or destroyed, the Company shall issue a new Warrant of like denomination, tenor and date as this Warrant, subject to the Company's right to require the Holder to give the Company a bond or other satisfactory security sufficient to indemnify the Company against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft, mutilation or destruction of this Warrant or the issuance of such new Warrant. 5. 6 15. WAIVERS AND AMENDMENTS This Warrant or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 16. NOTICES All notices or other communications required or permitted hereunder shall be in writing and shall be delivered by personal delivery, confirmed facsimile, reputable overnight courier service, or mailed by United States mail, first-class postage prepaid, or by registered or certified mail with return receipt requested, addressed as follows: If to the Holder: To the address last furnished in writing to the Company by the Holder If to the Company: InterNAP Network Services Corp. 2001 Sixth Avenue, Suite 800 Seattle, Washington 98121 Facsimile: 206/256-9580 Each of the foregoing parties shall be entitled to specify a different address by giving five (5) days' advance written notice as aforesaid to the other parties. 17. INVESTMENT INTENT By accepting this Warrant, the Holder represents that it is acquiring this Warrant for investment and not with a view to, or for sale in connection with, any distribution thereof. [signature page to follow] 6. 7 IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above. INTERNAP NETWORK SERVICES CORP. /s/ Paul E. McBride ------------------------------------------ Paul E. McBride Vice President, Finance and Administration 7. 8 ELECTION TO PURCHASE To: InterNAP Network Service Corp. 2001 Sixth Avenue, Suite 800 Seattle, Washington 98121 Attn: Paul E. McBride The undersigned hereby irrevocably elects to purchase ____________________ shares of __________________ Stock issuable upon the exercise of the within Warrants, and requests that certificates for such shares shall be issued in the name of and delivered to the address of the undersigned, at the address stated below and, if said number of shares shall not be all the shares which may be purchased pursuant to the within Warrants, that new Warrants evidencing the right to purchase the balance of such shares be registered in the name of, and delivered to, the undersigned at the address stated below. The undersigned hereby agrees with and represents to InterNAP Network Services Corp. that said shares of the ______________________ Stock are acquired for investment and not with a view to, or for sale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended. Payment enclosed in the amount of $________________________. Dated: ________________, 19__ Name of holder of Warrants:___________________________________________ (please print) Address: ___________________________________________ ___________________________________________ ___________________________________________ Signature: ___________________________________________ 1. EX-10.17 23 AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT 1 EXHIBIT 10.17 INTERNAP NETWORK SERVICES CORPORATION AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT JANUARY 28, 1999 2 TABLE OF CONTENTS
PAGE ---- SECTION 1 GENERAL.......................................................................1 1.1 Definitions...................................................................1 SECTION 2 RESTRICTIONS ON TRANSFER; REGISTRATION........................................3 2.1 Restrictions On Transfer......................................................3 2.2 Demand Registration...........................................................4 2.3 Piggyback Registrations.......................................................5 2.4 Form S-3 Registration.........................................................7 2.5 Expenses Of Registration......................................................8 2.6 Obligations Of The Company....................................................8 2.7 Termination Of Registration Rights............................................9 2.8 Delay Of Registration; Furnishing Information................................10 2.9 Indemnification..............................................................10 2.10 Assignment Of Registration Rights............................................12 2.11 Amendment Of Registration Rights.............................................12 2.12 Limitation On Subsequent Registration Rights.................................12 2.13 "Market Stand-Off" Agreement.................................................13 2.14 Rule 144 Reporting...........................................................13 SECTION 3 COVENANTS OF THE COMPANY.....................................................14 3.1 Basic Financial Information And Reporting....................................14 3.2 Inspection Rights............................................................15 3.3 Confidentiality Of Records...................................................15 3.4 Reservation Of Common Stock..................................................15 3.5 Stock Vesting................................................................15 3.6 Board Election Rights........................................................15 3.7 Employee Confidentiality, Nonraiding and Noncompetition Agreement............15 3.8 Directors' Liability And Indemnification.....................................16 3.9 Board Of Directors Approval..................................................16 3.10 Real Property Holding Corporation............................................16 3.11 Qualified Small Business Stock...............................................16 3.12 Termination Of Covenants.....................................................17 3.13 Visitation Rights............................................................17
i 3 TABLE OF CONTENTS (CONTINUED)
PAGE ---- SECTION 4 RIGHT TO MAINTAIN INTEREST...................................................17 4.1 Subsequent Offerings.........................................................17 4.2 Exercise Of Rights...........................................................18 4.3 Issuance Of Equity Securities To Other Persons...............................18 4.4 Termination Of Rights To Maintain Interest...................................18 4.5 Transfer Of Rights To Maintain Interest......................................18 4.6 Excluded Securities..........................................................18 SECTION 5 MISCELLANEOUS................................................................19 5.1 Governing Law................................................................19 5.2 Survival.....................................................................19 5.3 Successors and Assigns.......................................................19 5.4 Entire Agreement.............................................................20 5.5 Severability.................................................................20 5.6 Amendment and Waiver.........................................................20 5.7 Delays or Omissions..........................................................20 5.8 Notices......................................................................20 5.9 Attorneys' Fees..............................................................21 5.10 Titles and Subtitles.........................................................21 5.11 Counterparts.................................................................21
ii 4 INTERNAP NETWORK SERVICES CORPORATION AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is entered into as of the 28 day of January, 1999, by and among INTERNAP NETWORK SERVICES CORPORATION, a Washington corporation (the "Company") and (i) the purchasers of the Company's Series C Preferred Stock ("Series C Stock") set forth on Exhibit A of that certain Series C Preferred Stock Purchase Agreement of even date herewith (the "Purchase Agreement") and Exhibit A hereto, (ii) the holders of the Company's Series B Preferred Stock ("Series B Stock"), and (iii) the individuals holding the Company's common stock ("Common Stock") and Series A Preferred Stock ("Series A Stock") set forth on Exhibit B hereto (the "Founders"). The parties described in clauses (ii) and (iii) shall be referred to hereinafter, collectively, as the "Prior Shareholders." The purchasers of the Series C Stock shall be referred to hereinafter as the "Investors" and each individually as an "Investor." RECITALS WHEREAS, the Company has issued Series A Stock and Series B Stock and has granted registration rights to the holders thereof pursuant to Section 2 of that certain Investor Rights Agreement dated October 29, 1997, as amended on December 29, 1997 and March 1, 1998 (the "Prior Agreement"); WHEREAS, the Company proposes to sell and issue up to twenty nine million six hundred twenty-nine thousand six hundred thirty (29,629,630) shares of its Series C Stock pursuant to the Purchase Agreement; WHEREAS, as a condition of entering into the Purchase Agreement, the Investors have requested that the Company extend to them registration rights, information rights and other rights as set forth below; and WHEREAS, the Company, the Founders and the undersigned holders of Series B Stock desire to amend and restate the Prior Agreement and to accept the rights and obligations created pursuant hereto which shall supersede the Prior Agreement. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement and in the Purchase Agreement, the parties mutually agree as follows: SECTION 1 GENERAL 1.1 DEFINITIONS. As used in this Agreement the following terms shall have the following respective meanings: "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 5 "FORM S-3" means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. "FOUNDERS" means all holders of Common Stock and Series A Preferred Stock as of the date of this agreement and their authorized transferees. "FOUNDERS' STOCK" means all Common Stock and Series A Preferred Stock of the Company held by the Founders, upon the Closing, and any Common Stock issued or issuable with respect to such Common Stock upon any recapitalizations, stock splits, stock dividends or similar distributions. "HOLDER" means any holder of outstanding Registrable Securities that have not been sold to the public, but only if such holder is an Investor or a holder of Series B Stock (or, solely with regards to Sections 2.3, 2.5, 2.8(b), 2.9, 2.13 and 5.6(b), a Founder) or an assignee or transferee of registration rights in accordance with Section 2.10 hereof. "INITIATING HOLDERS" means Holders who in the aggregate hold at least forty percent (40%) of the Registrable Securities. "INITIAL OFFERING" means the Company's first firm commitment underwritten public offering of its Common Stock registered under the Securities Act. "REGISTER," "REGISTERED" AND "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. "REGISTRABLE SECURITIES" means (a) Common Stock of the Company issued or issuable upon conversion of the Shares; and (b) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such above-described securities. For purposes of the registration rights granted to holders of Company securities pursuant to Section 2.3 hereof and for purposes of the obligations imposed upon holders of Registrable Securities under Sections 2.9 and 2.13, but not for the definition of Initiating Holders or for purposes of Section 5.6(a), "Registrable Securities" shall include Founders' Stock. Notwithstanding the foregoing, Registrable Securities shall not include any securities sold by a person to the public either pursuant to a registration statement or Rule 144 or sold in a private transaction in which the transferor's rights under Section 2 of this Agreement are not assigned. "REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of shares determined by calculating the total number of shares of the Company's Common Stock that are Registrable Securities and either (a) are then issued and outstanding or (b) are issuable pursuant to then exercisable or convertible securities. "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with Sections 2.2, 2.3 and 2.4 hereof, including, without limitation, all registration 2 6 and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements not to exceed Fifteen Thousand Dollars ($15,000) of a single special counsel for the Holders, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "SEC" OR "COMMISSION" means the Securities and Exchange Commission. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities pursuant to this Agreement, as well as fees and disbursements of legal counsel for the selling Holders, except as to those included in Registration Expenses, as defined above. "SHARES" shall mean (i) the Company's Series B Stock held by the Prior Shareholders as of the date hereof listed on Exhibit B hereto and their permitted assigns, and (ii) the Company's Series C Stock issued pursuant to the Purchase Agreement and held by the Investors listed on Exhibit A hereto and their permitted assigns. SECTION 2 RESTRICTIONS ON TRANSFER; REGISTRATION 2.1 RESTRICTIONS ON TRANSFER (a) Each Holder agrees not to make any disposition of all or any portion of the Shares or Registrable Securities unless and until: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) The transferee has agreed in writing to be bound by the terms of this Agreement, (B) such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (iii) Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder which is (A) a partnership to its partners or former partners in accordance with partnership interests, (B) a corporation to its shareholders in accordance with their interest in the corporation, (C) a limited liability company to its members or former members in accordance with their interest in the limited liability company, (D) to the Holder's family member or trust for the benefit of an individual Holder or (E) an "affiliate (as defined in the Securities Act) of such Holder, provided that such affiliate is an "accredited investor" (as defined in the Securities Act); 3 7 provided that in each case the transferee will be subject to the terms of this Agreement to the same extent as if he or she were an original Holder hereunder. (b) Each certificate representing Shares or Registrable Securities shall (unless otherwise permitted by the provisions of the Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws or as provided elsewhere in this Agreement): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. (c) The Company shall be obligated to reissue promptly unlegended certificates at the request of any holder thereof if the holder shall have obtained an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. (d) Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal. 2.2 DEMAND REGISTRATION (a) Subject to the conditions of this Section 2.2, if the Company shall receive a written request from the Initiating Holders that the Company file a registration statement under the Securities Act covering the registration of at least twenty-five percent (25%) of the Registrable Securities held by such Initiating Holders and having an aggregate offering price to the public in excess of five million dollars ($5,000,000) (a "Qualified Public Offering"), then the Company shall, within thirty (30) days of the receipt thereof, give written notice of such request to all Holders and, subject to the limitations of this Section 2.2, use its best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. (b) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2.2 or any request pursuant to Section 2.4 and the Company shall include such information in the written notice referred to in Section 2.2(a) or Section 2.4(a), as applicable. In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such 4 8 Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 2.2 or Section 2.4, if the underwriter advises the Company that marketing factors require a limitation of the number of securities to be underwritten (including Registrable Securities) then the Company shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated to the Holders of such Registrable Securities on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Initiating Holders but not including the Founders). Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. (c) The Company shall not be required to effect a registration pursuant to this Section 2.2: (i) prior to October 29, 2001; (ii) after the Company has effected two (2) registrations pursuant to this Section 2.2, and such registrations have been declared or ordered effective; (iii) during the period starting with the date of the filing of, and ending on the date one hundred eighty (180) days following the effective date of the registration statement pertaining to the Initial Offering; provided that the Company makes reasonable good faith efforts to cause such registration statement to become effective; (iv) if within thirty (30) days of receipt of a written request from Initiating Holders pursuant to Section 2.2(a), the Company gives notice to the Holders of the Company's intention to make its Initial Offering within ninety (90) days; or (v) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 2.2, a certificate signed by the Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for one period of not more than ninety (90) days after receipt of the request of the Initiating Holders; provided that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period. 2.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of Registrable Securities in writing at least thirty (30) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to employee benefit plans or with respect to corporate reorganizations or other transactions under Rule 145 of the Securities Act) and will afford each such Holder an opportunity to include in such registration statement all or 5 9 part of such Registrable Securities held by such Holder; provided, however, that no Holder shall be eligible to so participate in such registration if such Holder could have sold such Registrable Securities on an unrestricted basis pursuant to Rule 144 of the Securities Act during the four-week period immediately preceding the effectiveness of such registration; provided further, that such participation right shall not be granted to any Holders following the fifth anniversary of the closing of the Initial Offering. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within fifteen (15) days after the above-described notice from the Company, so notify the Company in writing. Such notice shall state the intended method of disposition of the Registrable Securities by such Holder. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. (a) UNDERWRITING. If the registration statement under which the Company gives notice under this Section 2.3 is for an underwritten offering, the Company shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder to be included in a registration pursuant to this Section 2.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of the Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated, first, to the Company; second, to the Holders who are (x) Investors, (y) holders of Series B Stock, and (z) Robert J. Lunday, Jr. on a pro rata basis based on the total number of Registrable Securities held by such Holders and Mr. Lunday; third, to Robert J. Lunday, Jr.; fourth, to Holders who are Founders (other than Mr. Lunday) on a pro rata basis based on the total number of Registrable Securities held by such Holders; and fifth, to any other shareholders of the Company (other than a Holder) on a pro rata basis. No such reduction shall (i) reduce the securities being offered by the Company for its own account to be included in the registration and underwriting, or (ii) reduce the amount of securities of Robert J. Lunday, Jr. and the selling Holders who are Investors or holders of Series B Stock to below twenty-five percent (25%) of the total amount of securities to be included in such registration, unless such offering is the Initial Offering and such registration does not include shares of any other selling shareholders, in which event any or all of the Registrable Securities of the Holders (including Mr. Lunday) may be excluded in accordance with the preceding sentence. In no event will shares of any other selling shareholder be included in such registration which would reduce the number of shares which may be included by Holders without the written consent of Holders of not less than sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities proposed to be sold in the offering. (b) RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in 6 10 such registration. The Registration Expenses of such withdrawn registration shall be borne by the Company in accordance with Section 2.5 hereof. 2.4 FORM S-3 REGISTRATION. In case the Company shall receive from any Holder or Holders of at least fifteen percent (15%) of the Registrable Securities a written request or requests that the Company effect a registration on Form S-3 (or any successor to Form S-3) or any similar short-form registration statement and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders of Registrable Securities; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 2.4: (i) if Form S-3 (or any successor or similar form) is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public, net of underwriting costs, of less than five hundred thousand dollars ($500,000); (iii) if the Company shall furnish to the Holders a certificate signed by the Chairman of the Board of Directors of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for one period of not more than ninety (90) days after receipt of the request of the Holder or Holders under this Section 2.4; provided, that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period; (iv) if the Company has, within the six (6) month period preceding the date of such request, already effected one (1) registration on Form S-3 for the Holders pursuant to this Section 2.4; or (v) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. 7 11 (c) Subject to the foregoing, the Company shall file a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Subject to Section 2.5 below, all Selling Expenses incurred in connection with registrations requested pursuant to this Section 2.4 shall be paid by the selling Holders pro rata in proportion to the number of shares sold by each, and by the Company, if it participates in such registration, pro rata in proportion to the number of shares sold by it. 2.5 EXPENSES OF REGISTRATION. Except as specifically provided herein, all Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 2.2 or any registration under Section 2.3 or Section 2.4 herein shall be borne by the Company. All Selling Expenses incurred in connection with any registrations under those sections, shall be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 2.2 or 2.4, the request of which has been subsequently withdrawn by the Holders requesting such registration unless (a) the withdrawal is based upon material adverse information concerning the Company of which the Holders requesting such registration were not aware at the time of such request or (b) the Holders of a majority of Registrable Securities agree to forfeit their right to one requested registration pursuant to Section 2.2 or Section 2.4, as applicable, in which event such right shall be forfeited by all Holders. If the Holders are required to pay the Registration Expenses, such expenses shall be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. If the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to clause (a) above, then the Holders shall not forfeit their rights pursuant to Section 2.2 or Section 2.4 to a demand registration. 2.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to ninety (90) days or, if earlier, until the Holder or Holders have completed the distribution related thereto. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. 8 12 (d) Use all reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Furnish, at the request of a majority of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders requesting registration of Registrable Securities. 2.7 TERMINATION OF REGISTRATION RIGHTS. All registration rights granted under this Section 2 shall terminate and be of no further force and effect five (5) years after the date of the Company's Initial Offering. In addition, a Holder's registration rights shall expire if (a) the Company has completed its Initial Offering and is subject to the provisions of the Exchange Act, (b) such Holder (together with its affiliates, partners and former partners) holds less than one percent (1%) of the Company's outstanding Common Stock (treating all share of convertible Preferred Stock on an as converted basis) and (c) all Registrable Securities held by and issuable to such Holder (and its affiliates, partners and former partners) may be sold under Rule 144 during any ninety (90) day period. 9 13 2.8 DELAY OF REGISTRATION; FURNISHING INFORMATION (a) No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2. (b) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 2.2, 2.3 or 2.4 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. (c) The Company shall have no obligation with respect to any registration requested pursuant to Section 2.2 or Section 2.4 if, due to the operation of subsection 2.2(b), the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to originally trigger the Company's obligation to initiate such registration as specified in Section 2.2 or Section 2.4, whichever is applicable. 2.9 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under Sections 2.2, 2.3 or 2.4: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers, directors and legal counsel of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, officer, director, legal counsel, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 2.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written 10 14 information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, legal counsel, underwriter or controlling person of such Holder. (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration qualifications or compliance is being effected, indemnify and hold harmless the Company, each of its directors, officers and legal counsel, and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, legal counsel, controlling person, underwriter or other Holder, or partner, officer, director, legal counsel or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this Section 2.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this Section 2.9 exceed the proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 2.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.9. 11 15 (d) If the indemnification provided for in this Section 2.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a Holder hereunder exceed the proceeds from the offering received by such Holder. (e) The obligations of the Company and Holders under this Section 2.9 shall survive completion of any offering of Registrable Securities in a registration statement and the termination of this Agreement. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. 2.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 2 may be assigned by a Holder to a transferee or assignee of Registrable Securities which (a) previously holds Registrable Securities, (b) is a subsidiary, parent, general partner, limited partner or retired partner of a Holder, or is a Holder's family member or trust for the benefit of an individual Holder or (c) acquires at least Seventy-Five Thousand (75,000) shares of Registrable Securities (as adjusted for stock splits and combinations); provided, however, (i) the transferor shall, within ten (10) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (ii) such transferee shall agree to be subject to all restrictions set forth in this Agreement. 2.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 2 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of at least sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this Section 2.11 shall be binding upon each Holder and the Company. By acceptance of any benefits under this Article 2, Holders of Registrable Securities hereby agree to be bound by the provisions hereunder. 2.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of this Agreement, the Company shall not, without the prior written consent of the Holders of sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would 12 16 allow such holder or prospective holder in any registration filed under this Section 2, unless under the terms of such agreement, such holder or prospective holder may include such securities only to the extent that the inclusion of its securities will not reduce the amount of Registrable Securities of the Holders which is included. 2.13 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that such Holder shall not sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by such Holder (other than those included in the registration) for a period specified by the representative of the underwriters of Common Stock (or other securities) of the Company not to exceed one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act, provided that all officers, directors and affiliates of the Company and holders of at least two percent (2%) of the Company's voting securities enter into similar agreements. Each Holder agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter which are consistent with the foregoing or which are necessary to give further effect thereto. In addition, if requested by the Company or the representative of the underwriters of Common Stock (or other securities) of the Company, each Holder shall provide, within ten (10) days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company's securities pursuant to a registration statement filed under the Securities Act. The obligations described in this Section 2.13 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of said one hundred eighty (180) day period. 2.14 RULE 144 REPORTING. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; and (c) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Securities Act and with the reporting requirements of the Exchange Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. 13 17 2.15 REGISTRATION RIGHTS UNDER PRIOR AGREEMENT. The registration rights contained in this Agreement set forth the sole and entire agreement among the Company and the Prior Shareholders on the subject matter hereof and supersede any and all rights granted and covenants made under the Prior Agreement (and the undersigned parties to the Prior Agreement hereby amend such agreements such that the registration rights provided for herein shall apply to all parties under the Prior Agreement). SECTION 3 COVENANTS OF THE COMPANY 3.1 BASIC FINANCIAL INFORMATION AND REPORTING (a) The Company will maintain true books and records of account in which full and correct entries will be made of all its business transactions pursuant to a system of accounting established and administered in accordance with generally accepted accounting principles consistently applied, and will set aside on its books all such proper accruals and reserves as shall be required under generally accepted accounting principles consistently applied. (b) As soon as practicable after the end of each fiscal year of the Company, and in any event within one hundred twenty (120) days thereafter, the Company will furnish each Investor and holder of Series B Stock a consolidated balance sheet of the Company, as at the end of such fiscal year, and a consolidated statement of income and a consolidated statement of cash flows of the Company, for such year, all prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail. Such financial statements shall be accompanied by a report and opinion thereon by independent public accountants of national standing selected by the Company's Board of Directors. (c) The Company will furnish each Investor and holder of Series B Stock, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a consolidated balance sheet of the Company as of the end of each such quarterly period, and a consolidated statement of income and a consolidated statement of cash flows of the Company for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made. (d) So long as an Investor or holder of Series B Stock (with its affiliates) shall own at least Four Hundred Thousand (400,000) shares of Registrable Securities (as adjusted for stock splits and combinations) (each, a "Major Investor), the Company will furnish each such Major Investor (i) at least thirty (30) days prior to the beginning of each fiscal year, an annual budget and operating plans for such fiscal year (broken down by month) (and as soon as available, any subsequent revisions thereto); and (ii) as soon as practicable after the end of each month, and in any event within forty-five (45) days thereafter, a consolidated balance sheet as of the end of each such month, and a consolidated statement of income and a consolidated statement of cash flows of the Company for such month and for the current fiscal year to date, including a comparison to plan figures for such period, prepared in accordance with generally 14 18 accepted accounting principles consistently applied, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made. 3.2 INSPECTION RIGHTS. Each Investor and holder of Series B Stock shall have the right to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss the affairs, finances and accounts of the Company or any of its subsidiaries with its officers, and to review such information as is reasonably requested all at such reasonable times and as often as may be reasonably requested; provided, however, that the Company shall not be obligated to disclose information about the Company to a competitor of the Company. 3.3 CONFIDENTIALITY OF RECORDS. Each Investor and holder of Series B Stock agrees to use, and to use its best efforts to insure that its authorized representatives use, the same degree of care as such Investor and holder of Series B Stock uses to protect its own confidential information to keep confidential any information furnished to it which the Company identifies as being confidential or proprietary (so long as such information is not in the public domain), except that such Investor and holder of Series B Stock may disclose such proprietary or confidential information to any partner, subsidiary or parent of such Investor and holder of Series B Stock for the purpose of evaluating its investment in the Company as long as such partner, subsidiary or parent is advised of the confidentiality provisions of this Section 3.3. 3.4 RESERVATION OF COMMON STOCK. The Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion of the Preferred Stock, all Common Stock issuable from time to time upon such conversion. 3.5 STOCK VESTING. Unless otherwise approved by the Board of Directors, all stock options and other stock equivalents issued after the date of this Agreement to employees, directors, consultants and other service providers shall be subject to vesting as follows: (a) twenty-five percent (25%) of such stock shall vest at the end of the first year following the earlier of the date of issuance or such person's services commencement date with the company, and (b) seventy-five percent (75%) of such stock shall vest in equal monthly increments over the remaining three (3) years. With respect to any shares of stock purchased by any such person, the Company's repurchase option shall provide that upon such person's termination of employment or service with the Company, with or without cause, the Company or its assignee (to the extent permissible under applicable securities laws and other laws) shall have the option to purchase at cost any unvested shares of stock held by such person. 3.6 BOARD ELECTION RIGHTS. For so long as H&Q InterNAP Investors, LP and TI Ventures, LP ("H&Q") collectively hold at least one million (1,000,000) shares of Registrable Securities, H&Q shall have the right to designate one (1) nominee to be elected to the Board of Directors at each election of directors. For so long as Morgan Stanley Venture Partners ("MSVP") holds at least one million (1,000,000) shares of Registrable Securities, MSVP shall have the right to designate one (1) nominee to be elected to the Board of Directors at each election of directors. 3.7 EMPLOYEE CONFIDENTIALITY, NONRAIDING AND NONCOMPETITION AGREEMENT. The Company shall require all employees and consultants to execute and deliver an Employee Confidentiality, Nonraiding and Noncompetition Agreement and an Employee Inventions 15 19 Agreement in the forms attached as Exhibit F-1 and F-2, respectively, to the Purchase Agreement or Proprietary Information and Inventions Agreement. 3.8 DIRECTORS' LIABILITY AND INDEMNIFICATION. The Company's Articles of Incorporation and Bylaws shall provide (a) for elimination of the liability of director to the maximum extent permitted by law and (b) for indemnification of directors for acts on behalf of the Company to the maximum extent permitted by law. 3.9 BOARD OF DIRECTORS APPROVAL. The Company shall not, without the approval of a majority of the Board of Directors, with all directors voting, take any of the following actions: (a) incur any debt or obligation, including capital lease or purchase obligations, in excess of two hundred fifty thousand dollars ($250,000); (b) initiate or establish any compensation program or plan, including any program or plan concerning the base salary or bonus of officers; (c) establish any stock option plans or programs or award any stock options pursuant to such programs or plans; (d) hire or appoint any officers of the Company; (e) enter into any agreement for the purchase or lease of any real estate; or (f) implement or revise any annual budget or other operating plan. 3.10 REAL PROPERTY HOLDING CORPORATION. The Company covenants that it will operate in a manner such that it will not become a "United States real property holding corporation" ("USRPHC") as that term is defined in Section 897(c)(2) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the "Code"). The Company agrees to make determinations as to its status as a USRPHC, and will file statements concerning those determinations with the Internal Revenue Service, in the manner and at the times required under Reg. Section 1.897-2(h), or any supplementary or successor provision thereto. Within thirty (30) days of a request from an Investor or any of its partners, the Company will inform the requesting party, in the manner set forth in Reg. Section 1.897- 2(h)(1)(iv) or any supplementary or successor provision thereto, whether that party's interest in the Company constitutes a United States real property interest (within the meaning of Section 897(c)(1) of the Code and the regulations thereunder) and whether the Company has provided to the Internal Revenue Service all required notices as to its USRPHC status. 3.11 QUALIFIED SMALL BUSINESS STOCK. The Company covenants that so long as any of the shares of Series C Preferred Stock, or the Common Stock into which such shares are converted, are held by an Investor (or authorized transferee in whose hands such shares or Common Stock are eligible to qualify as Qualified Small Business Stock as defined in Section 1202(c) of the Code), it will use commercially reasonable efforts (including complying with any applicable filing or reporting requirements imposed by the Code on issuers of Qualified Small Business Stock) to cause such shares of Series C Preferred Stock, or the Common Stock into which they are converted, to qualify as Qualified Small Business Stock; provided, however, 16 20 that "commercially reasonable efforts" as used in this Section 3.29 shall not be construed to require the Company to operate its business in a manner that would adversely affect its business, limit its future prospects or alter the timing or resource allocation related to its planned operations or financing activities. 3.12 TERMINATION OF COVENANTS. All covenants of the Company contained in this Section 3 of this Agreement shall expire and terminate as to each Investor and holder of Series B Stock upon the earlier of (i) the effective date of the registration statement pertaining to the Initial Offering or (ii) upon (a) the sale, lease or other disposition of all or substantially all of the assets of the Company or (b) an acquisition of the Company by another corporation or entity by consolidation, merger or other reorganization in which the holders of the Company's outstanding voting stock immediately prior to such transaction own, immediately after such transaction, securities representing less than fifty percent (50%) of the voting power of the corporation or other entity surviving such transaction, provided that this Section 3.11(ii)(b) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Company (a "Change in Control"). 3.13 VISITATION RIGHTS. So long as Fidelity Investors II Limited Partnership and FTT Ventures Inc. or their affiliates (collectively, "Fidelity") shall own 666,667 shares of Series C Preferred Stock, the Company shall allow one representative designated by Fidelity to attend all meetings of the Company's Board of Directors in a nonvoting capacity, and in connection therewith, the Company shall give such representative copies of all notices, minutes, consents and other materials, financial or otherwise, which the Company provides to its Board of Directors; provided, however, that the Company reserves the right to exclude such representative from access to any material or meeting or portion thereof if the Company believes upon advice of counsel that such exclusion is reasonably necessary to preserve the attorney-client privilege, to protect highly confidential proprietary information or for other similar reasons. SECTION 4 RIGHT TO MAINTAIN INTEREST 4.1 SUBSEQUENT OFFERINGS. Each Investor and holder of Series B Stock shall have a right to purchase its Pro Rata Share (as defined herein) of all Equity Securities, as defined below, that the Company may, from time to time, propose to sell and issue after the date of this Agreement, other than the Equity Securities excluded by Section 4.6 hereof. The Company may, at its election, sell such Investor and holder of Series B Stock its Pro Rata Amount of Equity Securities at the initial closing of the sale of Equity Securities or at a subsequent closing of which shall take place within ninety (90) days of the initial closing. The Pro Rata Share of an Investor and holder of Series B Stock shall be equal to the ratio of (a) the number of shares of the Company's Common Stock (including all shares of Common Stock issued or issuable upon conversion of the Preferred Stock) which such Investor and holder of Series B Stock is deemed to hold immediately prior to the issuance of such Equity Securities to (b) the total number of shares of the Company's outstanding Common Stock (including all shares of Common Stock issued or issuable upon conversion of the Preferred Stock) immediately prior to the issuance of the Equity Securities. The term "Equity Securities" shall mean (i) any Common Stock, Preferred Stock or other security of the Company, (ii) any security convertible, with or without consideration, into any Common Stock, Preferred Stock or other security (including any option to purchase such a convertible security), (iii) any security carrying any warrant or right to 17 21 subscribe to or purchase any Common Stock, Preferred Stock or other security or (iv) any such warrant or right. 4.2 EXERCISE OF RIGHTS. If the Company proposes to issue any Equity Securities, it shall give each Investor and holder of Series B Stock written notice before such issuance or within ten (10) days thereafter, describing the type of Equity Securities, the price and number of shares and the general terms and conditions upon which the Company proposes to issue or has issued the same. Each Investor and holder of Series B Stock shall have thirty (30) days from the giving of such notice to agree to purchase up to the amount of Equity Securities equal to Pro Rata Share of such Equity Securities of the Investor and holder of Series B Stock for the price and upon the general terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of Equity Securities to be purchased. Any such purchase shall occur at the initial closing of the sale of Equity Securities or, at the Company's election, at a subsequent closing within ninety (90) days of the initial closing. Notwithstanding the foregoing, the Company shall not be required to offer or sell such Equity Securities to any Investor and holder of Series B Stock who would cause the Company to be in violation of applicable federal securities laws by virtue of such offer or sale. 4.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If not all of the Investors and holders of Series B Stock elect to purchase their Pro Rata Share of the Equity Securities, then the Company shall promptly notify in writing the Investors and holders of Series B Stock who do so elect and shall offer such Investors and holders of Series B Stock the right to acquire such unsubscribed shares. Each Investor and holder of Series B Stock shall have fifteen (15) days after receipt of such notice to notify the Company of its election to purchase all or a portion thereof of the unsubscribed shares. If the Investors and holders of Series B Stock fail to exercise in full the right to maintain interest within said forty-five (45) day period set forth in Section 4.2 and 4.3, the Company shall have ninety (90) days thereafter to sell the Equity Securities in respect of which the rights of the Investors and holders of Series B Stock were not exercised, at a price and upon general terms and conditions no more favorable to the purchasers thereof than specified in the Company's notice to the Investors and holders of Series B Stock pursuant to Section 4.2 hereof. If the Company has not sold such Equity Securities within ninety (90) days of the notice provided pursuant to Section 4.2, the Company shall not thereafter issue or sell any Equity Securities without first offering such securities to the Investors and holders of Series B Stock in the manner provided above. 4.4 TERMINATION OF RIGHTS TO MAINTAIN INTEREST. The rights to maintain interest established by this Section 4 shall not apply to, and shall terminate upon (i) the effective date of the registration statement pertaining to the Initial Offering or (ii) a Change in Control. 4.5 TRANSFER OF RIGHTS TO MAINTAIN INTEREST. The rights to maintain interest of each Investor and holder of Series B Stock under this Section 4 may be transferred to the same parties, subject to the same restrictions as any transfer of registration rights pursuant to Section 2.10. 4.6 EXCLUDED SECURITIES. The rights to maintain interest established by this Section 4 shall have no application to any of the following Equity Securities: 18 22 (a) shares of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued or to be issued to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary, pursuant to stock purchase or stock option plans or other arrangements that are approved by a majority of the entire Board of Directors; (b) stock issued pursuant to any rights or agreements outstanding as of the date of this Agreement, options and warrants outstanding as of the date of this Agreement; and stock issued pursuant to any such rights or agreements granted after the date of this Agreement, provided that the rights to maintain interest established by this Section 4 applied with respect to the initial sale or grant by the Company of such rights or agreements; (c) capital stock or warrants or options to purchase capital stock issued in connection with bona fide acquisitions, mergers or similar transactions, the terms of which are approved by a majority of the entire Board of Directors of the Corporation; (d) shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization by the Company; (e) shares of Common Stock issued upon conversion of the Shares; (f) capital stock, or options or warrants to purchase capital stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or any similar transactions approved by a majority of the entire Board of Directors; and (g) shares of Common Stock issued in a public offering prior to or in connection with which all outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock will be converted to Common Stock. SECTION 5 MISCELLANEOUS 5.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Washington as applied to agreements among Washington residents entered into and to be performed entirely within Washington. 5.2 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 5.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the 19 23 transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price. 5.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules hereto, the Purchase Agreement and the other documents delivered pursuant thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 5.5 SEVERABILITY. In case any provision of the Agreement shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 5.6 AMENDMENT AND WAIVER (a) Except as otherwise expressly provided and subject to Section 5.6(b) below, this Agreement may be amended or modified only upon the written consent of the Company and the Holders of at least sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities. (b) Except as otherwise expressly provided, no amendment or modification of this Agreement shall adversely affect the rights of the Holders under this Agreement without the written consent of the Holders of at least sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities. (c) Notwithstanding the foregoing, this Agreement may be amended with only the written consent of the Company to include additional purchasers of Shares as "Investors," "Holders" and parties hereto. 5.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any Holder upon any breach, default or noncompliance of the Company under this Agreement shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on any Holder's part of any breach, default or noncompliance under the Agreement or any waiver on such Holder's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law or otherwise afforded to Holders, shall be cumulative and not alternative. 5.8 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All 20 24 communications shall be sent to the party to be notified at the address as set forth on the signature pages hereof or Exhibit A or Exhibit B hereto or at such other address as such party may designate by ten (10) days advance written notice to the other parties hereto. 5.9 ATTORNEYS' FEES. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 5.10 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 5.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 21 25 IN WITNESS WHEREOF, the parties hereto have executed this Investor Rights Agreement as of the date set forth in the first paragraph hereof. COMPANY: INTERNAP NETWORK SERVICES CORPORATION By: /s/ PAUL E. MCBRIDE ------------------------------------ Name: Paul E. McBride ---------------------------------- Title: Vice President, Finance & Admin. --------------------------------- 26 INVESTORS: MORGAN STANLEY VENTURE PARTNERS III, L.P. By: Morgan Stanley Venture Partners III, L.L.C. Its:General Partner By: Morgan Stanley Venture Capital III, Inc. Its: Institutional Managing Member By: /s/ WILLIAM J. HARDING ----------------------------------- Name: --------------------------------- Title: -------------------------------- MORGAN STANLEY VENTURE INVESTORS III, L.P. By: Morgan Stanley Venture Partners III, L.L.C. Its:General Partner By: Morgan Stanley Venture Capital III, Inc. Its: Institutional Managing Member By: /s/ WILLIAM J. HARDING ----------------------------------- Name: --------------------------------- Title: -------------------------------- THE MORGAN STANLEY VENTURE PARTNERS ENTREPRENEUR FUND, L.P. By: Morgan Stanley Venture Partners III, L.L.C. Its:General Partner By: Morgan Stanley Venture Capital III, Inc. Its: Institutional Managing Member By: /s/ WILLIAM J. HARDING ----------------------------------- Name: --------------------------------- Title: -------------------------------- 27 OAK INVESTMENT PARTNERS VIII, LIMITED PARTNERSHIP By: Oak Associates VIII, LLC Its:General Partner By: /s/ FREDRIC W. HARMAN ---------------------------------------- Fredric W. Harman Managing Member OAK VIII AFFILIATE FUND, LIMITED PARTNERSHIP By: Oak VIII Affiliates, LLC Its:General Partner By: /s/ FREDRIC W. HARMAN ---------------------------------------- Fredric W. Harman Managing Member FIDELITY INVESTORS II LIMITED PARTNERSHIP By: Fidelity Investors Management, LLC Its:General Partner By: /s/ DONALD HEATON ---------------------------------------- Name: Don Heaton -------------------------------------- Title: VP & Treasurer ------------------------------------- FTT VENTURES LIMITED By: /s/ ROB KETTERSON ---------------------------------------- Name: Rob Ketterson -------------------------------------- Title: Vice President ------------------------------------- 28 GC&H INVESTMENTS By: /s/ JOHN L. CARDOZA ---------------------------------------- Name: John L. Cardoza -------------------------------------- Title: Executive Partner ------------------------------------- 25 29 KIRLAN VENTURE CAPITAL, INC. By: /s/ Daniel C. Regis ---------------------------------------- Name: Daniel C. Regis -------------------------------------- Title: President ------------------------------------- /s/ John P. Morbeck ------------------------------------------- JOHN P. MORBECK /s/ Daniel C. Regis ------------------------------------------- DANIEL C. REGIS 30 SERIES B PREFERRED SHAREHOLDERS: PS CAPITAL VENTURES, L.P. By: PS Capital, Inc. By: /s/ Kenneth I. Starr ---------------------------------------- Kenneth I. Starr Vice President PS CAPITAL VENTURES, L.P. By: PS Capital, Inc. By: /s/ Kenneth I. Starr ---------------------------------------- Kenneth I. Starr Vice President /s/ Lawrence W. Cohen ------------------------------------------- LAWRENCE W. COHEN /s/ David Cornfield ------------------------------------------- DAVID CORNFIELD /s/ Dennis Cuccia ------------------------------------------- DENNIS CUCCIA /s/ Peter Cuccia ------------------------------------------- PETER CUCCIA THOMAS J. CUCCIA AND VICTORIA ADAMS-CUCCIA, AS JOINT TENANTS By: /s/ Thomas J. Cuccia ---------------------------------------- THOMAS J. CUCCIA By: ---------------------------------------- VICTORIA ADAMS-CUCCIA 31 THE STEVEN J. GOODMAN REVOCABLE LIVING TRUST By: /s/ STEVEN J. GOODMAN ---------------------------------------- Name: STEVEN J. GOODMAN -------------------------------------- Title: Trustee ------------------------------------- THE STEVEN J. GOODMAN CHARITABLE REMAINDER TRUST By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- /s/ JOE PRUSKOWSKI ------------------------------------------- JOE PRUSKOWSKI VICTOR AND TERRY INCE TRUST By: /s/ VICTOR A. INCE ---------------------------------------- Name: VICTOR A. INCE -------------------------------------- Title: ------------------------------------- /s/ DAN NEWELL ------------------------------------------- DAN NEWELL /s/ ROBERT D. SHURTLEFF, JR. ------------------------------------------- ROBERT D. SHURTLEFF, JR. /s/ TODD WARREN ------------------------------------------- TODD WARREN 32 H&Q INTERNAP INVESTORS, LP By: /s/ JACKIE BERTERRETCHE ---------------------------------------- Name: Jackie Berterretche -------------------------------------- Title: Attorney-in-Fact ------------------------------------- TI VENTURES, LP By: /s/ JACKIE BERTERRETCHE -------------------------------------------- Name: Jackie Berterretche ------------------------------------------ Title: Attorney-in-Fact ----------------------------------------- KIRLAN I By: Kirlan Venture Capital, Inc. Its: General Partner By: /s/ DANIEL C. REGIS --------------------------------------------- Name: DANIEL C. REGIS ------------------------------------------- Title: President of Kirlan Venture Capital, Inc. ------------------------------------------ KIRLAN VENTURE PARTNERS II, L.P. By: Kirlan Venture Capital, Inc. Its: By: -------------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- 33 VULCAN VENTURES INCORPORATED By: /s/ WILLIAM D. SAVOY ---------------------------------------- Name: William D. Savoy -------------------------------------- Title: Vice President ------------------------------------- ADELSON INVESTORS, LLC By: /s/ PAUL NADEL ---------------------------------------- Name: Paul Nadel -------------------------------------- Title: Managing Member ------------------------------------- GAK LIMITED By: /s/ HORACE HERTZ ---------------------------------------- Name: Horace Hertz -------------------------------------- Title: General Partner ------------------------------------- DOLL TECHNOLOGY AFFILIATES FUND, LP By: Doll Technology Investment Management, L.L.C. its General Partner By: /s/ DIXON R. DOLL ---------------------------------------- Name: Dixon R. Doll -------------------------------------- Title: Managing Member ------------------------------------- DOLL TECHNOLOGY AFFILIATES FUND, LP By: Doll Technology Investment Management, L.L.C. its General Partner By: /s/ DIXON R. DOLL ---------------------------------------- Name: Dixon R. Doll -------------------------------------- Title: Managing Member ------------------------------------- 34 DOLL TECHNOLOGY SIDE FUND, LP By: Doll Technology Investment Management, L.L.C. General Partner By: /s/ DIXON R. DOLL ---------------------------------------- Name: Dixon R. Doll -------------------------------------- Title: Managing Member ------------------------------------- BRINC LLC By: /s/ RICHARD TAIT ---------------------------------------- Name: Richard Tait -------------------------------------- Title: Member ------------------------------------- SHURTLEFF FAMILY TRUST ROBERT D. SHURTLEFF, SR. AND NANCY H. SHURTLEFF TRUSTEES By: /s/ ROBERT D. SHURTLEFF ---------------------------------------- Name: Robert D. Shurtleff -------------------------------------- Title: Trustee ------------------------------------- By: /s/ NANCY H. SHURTLEFF ---------------------------------------- Name: Nancy H. Shurtleff -------------------------------------- Title: Trustee ------------------------------------- /s/ RICHARD SAADA ------------------------------------------- RICHARD SAADA /s/ TOM PHILLIPS ------------------------------------------- TOM PHILLIPS /s/ PEGGY PHILLIPS ------------------------------------------- PEGGY PHILLIPS /s/ ERIC LOCKARD ------------------------------------------- ERIC LOCKARD 35 /s/ PAUL CANNIFF ------------------------------------------- PAUL CANNIFF /s/ MARK SMITH ------------------------------------------- MARK SMITH ------------------------------------------- BARBARA BOWEN /s/ ROBERT JULL ------------------------------------------- ROBERT JULL /s/ RUSTY WILLIAMS ------------------------------------------- RUSTY WILLIAMS /s/ ELIZABETH DUN ------------------------------------------- ELIZABETH DUN /s/ ALAN NORMAN ------------------------------------------- ALAN NORMAN /s/ JOAN HABER MELLEA ------------------------------------------- JOAN HABER MELLEA 36 SERIES A PREFERRED SHAREHOLDERS: /s/ ROBERT J. LUNDAY, JR. ------------------------------------------- ROBERT J. LUNDAY, JR. /s/ ROBERT LUNDAY ------------------------------------------- ROBERT LUNDAY /s/ PAUL E. MCBRIDE ------------------------------------------- PAUL E. MCBRIDE /s/ SUSAN E. MCBRIDE ------------------------------------------- SUSAN MCBRIDE PAUL E. MCBRIDE, CUSTODIAN FBO EMILY A. MCBRIDE UTMA By: /s/ PAUL E. MCBRIDE ---------------------------------------- Name: PAUL E. MCBRIDE -------------------------------------- Title: Custodian ------------------------------------- PAUL E. MCBRIDE, CUSTODIAN FBO SETH L. MCBRIDE UTMA By: /s/ PAUL E. MCBRIDE ---------------------------------------- Name: PAUL E. MCBRIDE -------------------------------------- Title: Custodian ------------------------------------- 37 COMMON STOCK SHAREHOLDERS: /s/ ANTHONY C. NAUGHTIN ------------------------------------------- ANTHONY C. NAUGHTIN /s/ CHRISTOPHER D. WHEELER ------------------------------------------- CHRISTOPHER D. WHEELER /s/ PAUL E. MCBRIDE ------------------------------------------- PAUL E. MCBRIDE /s/ JAMES P. BOCINSKY ------------------------------------------- JAMES P. BOCINSKY /s/ OPHIR RONEN ------------------------------------------- OPHIR RONEN /s/ TIM HINDERLITER ------------------------------------------- TIM HINDERLITER /s/ LORRAINE PETRIE ------------------------------------------- LORRAINE PETRIE /s/ JON KIRK ------------------------------------------- JON KIRK 38 FOUNDERS: /s/ ROBERT J. LUNDAY, JR. ------------------------------------------- ROBERT J. LUNDAY, JR. /s/ PAUL E. MCBRIDE ------------------------------------------- PAUL E. MCBRIDE /s/ ANTHONY C. NAUGHTIN ------------------------------------------- ANTHONY C. NAUGHTIN /s/ CHRISTOPHER D. WHEELER ------------------------------------------- CHRISTOPHER D. WHEELER 39 Exhibit A INVESTORS 40 Exhibit B PRIOR SHAREHOLDERS SERIES B PREFERRED SHAREHOLDERS H&Q InterNAP Partners, LP TI Ventures, LP Kirlan I Kirlan Venture Partners II, L.P. PS Capital Holdings, L.P. Vulcan Ventures Incorporated Adelson Investors, LLC Lawrence W. Cohen David Cornfield Dennis Cuccia Peter Cuccia Thomas J. Cuccia GAK Limited The Steven J. Goodman Revocable Living Trust Steven J. Goodman Charitable Remainder Trust Victor and Terry Ince Trust Dan Newell Robert D. Shurtleff, Jr. Todd Warren Doll Technology Investment Fund BRINC LLC Joe Pruskowski Richard Saada Tom and Peggy Phillips Eric Lockard Paul Canniff Mark Smith Barbara Bowen Robert Jull Rusty Williams Doll Technology Affiliates Fund, LP Doll Technology Side Fund, LP Shurtleff Family Trust, Robert D. Shurtleff, Sr. and Nancy H. Shurtleff Trustees Elizabeth Dunn Alan Norman Joan Haber 41 SERIES A PREFERRED SHAREHOLDERS Robert Lunday Robert J. Lunday, Jr. Paul E. McBride Susan McBride Paul E. McBride, Custodian FBO Emily A. McBride, UTMA Paul E. McBride, Custodian FBO Seth L. McBride, UTMA COMMON STOCK SHAREHOLDERS Anthony C. Naughtin Christopher D. Wheeler Paul E. McBride James P. Bocinsky Ophir Ronen Tim Hinderliter Lorraine Petrie Jon Kirk FOUNDERS Robert J. Lunday, Jr. Paul E. McBride Anthony C. Naughtin Christopher D. Wheeler EX-10.18 24 SHAREHOLDER AGREEMENT, DATED OCTOBER 1, 1997 1 EXHIBIT 10.18 INTERNAP NETWORK SERVICES, INC. SHAREHOLDERS AGREEMENT THIS SHAREHOLDERS AGREEMENT (this "Agreement") is made and entered into as of October 1, 1997, by and among ANTHONY C. NAUGHTIN, PAUL E. MCBRIDE, CHRISTOPHER D. WHEELER, JAMES BOCINSKY, OPHIR RONEN, TIM HINDERLITER, JON KIRK and LORRAINE PETRIE (collectively, the "Founders"), ROBERT J. LUNDAY, JR. ("Lunday") and InterNAP CORPORATION, a Washington corporation (the "Company"). Lunday and the Founders are sometimes referred to herein, collectively, as "Shareholders" or, individually as "Shareholder." RECITALS A. On its formation, the Company issued 3,333,333 shares of its common stock ("Common Stock") to the Founders and 6,666,667 shares of its Series A Preferred Stock ("Series A Preferred Stock") to Lunday in exchange for the assignment by the Founders and Lunday of all of their ownership interests in InterNAP Network Services, L.L.C. (the "LLC"). B. In conjunction with the dissolution of the LLC, the Shareholders desire to enter into an agreement pertaining to the Common Stock, the Series A Preferred Stock and certain other matters. AGREEMENT NOW, THEREFORE, in consideration of the above, the mutual promises and covenants contained herein, and other good and valuable consideration, the parties hereto agree as follows: 1. Restriction on Transfer of Shares. Each Shareholder acknowledges and agrees that the Common Stock or Series A Preferred Stock owned by such Shareholder is subject to restrictions on transfer and a right of first refusal in favor of the Company and the other Shareholders, as set forth in the Bylaws of the Company. 2. Options on Founders' Shares. (a) In the event that a Founder resigns from employment by the Company or is terminated by the Company for cause (the "Departing Founder") before May 1, 1999 (the "Vesting Date"), then the other Founders (the "Remaining Founders") shall have the option to purchase, and the Departing Founder shall be obligated to sell, the Unvested Shares of the Departing Founder at a price of $0.0006 per share. For purposes of this Agreement, a termination of employment by reason of (i) the breach by a Founder of such Founder's Employee Confidentiality, Nonraiding and Noncompetition Agreement, (ii) the malfeasance of willful misconduct of a Founder, or (iii) the commission by a Founder of a crime involving moral turpitude, shall be deemed a termination "for cause." The foregoing option may be exercised by the Remaining Founders by written notice to the Departing Founder given within thirty (30) days of the termination of the Departing Founder's employment. If there is more than one Remaining Founder who desires to purchase such Unvested -1- 2 Shares, the Remaining Founders may divide the Unvested Shares in any manner to which they all agree. In the absence of unanimous agreement, the Unvested Shares shall be divided among the Remaining Founders in proportion to their relative shareholdings, as set forth on Exhibit A attached and made a part hereof. (b) For purposes of subsection (a) above, the shares of Common Stock issued to a Founder on the formation of the Company shall be deemed "Unvested Shares" on the termination of such Founder's employment to the extent such shares are not fully vested as herein provided. As of October 1, 1997, 47.09% of the shares of Common Stock owned by each Founder shall be deemed fully vested. An additional 2.77% of such shares shall become fully vested on the last day of each calendar month commencing October 31, 1997 and continuing until the Vesting Date, at which time all such shares shall be deemed fully vested. (c) The provisions of this Section 2 shall only apply to Common Stock currently owned by a Founder. Any additional shares of capital stock acquired hereafter by any Founder, including shares purchased pursuant to this Section, shall be free from the application of this Section. 3. Options on Lunday's Shares. Lunday hereby grants to each Founder the option to purchase his or her Pro Rata Share of 5,000,000 of the 6,666,667 shares of Series B Preferred Stock (or the Common Stock into which such shares have been converted, appropriately adjusted for stock splits, recapitalizations, and the like) owned by Lunday at the date hereof at a price of $1.26 per share; provided that such option shall terminate as to any Founder on the earlier to occur of: (a) the voluntary resignation of such Founder from employment by the Company; (b) the termination of employment of such Founder by the Company for cause; (c) the date 90 days following the termination of such Founder's employment for any reason other than those specified in (a) and (b) above, including death, disability or termination by the Company without cause; and (d) April 30, 2001. For purposes of this Section, a Founder's "Pro Rata Share" shall be equal to the product obtained by multiplying 5,000,000 by a fraction, the numerator of which is the number of shares of Common Stock owned by such Founder on the date hereof, and the denominator of which is total number of shares of Common Stock owned on the date hereof by all Founders who are then eligible to purchase pursuant hereto. The full purchase price for each shares shall be tendered to Lunday upon exercise of the Option, unless the parties otherwise agree. 4. Notices. Any notice, demand, or communication required or permitted to be given under this Agreement shall be delivered personally to the party to whom directed, or mailed by registered or certified mail, postage and charges prepaid, to the addresses set forth below: If to the Company: InterNAP Corp. 2001 Sixth Avenue Suite 800 Seattle, WA 98121 If to Lunday: Robert J. Lunday, Jr. 17660 SE 296th Street Covington, WA 98042 -2- 3 If to Founders: Anthony C. Naughtin 6526 - 142nd Place SW Edmonds, WA 98026 Paul E. McBride 24202 SE 38th Place Issaquah, WA 98029 Christopher D. Wheeler 1711 East Olive Way #202 Seattle, WA 98102 James Bocinsky 24214 SE 18th Place Issaquah, WA 98029 Ophir Ronen 4720 Ninth Ave. NE, #3 Seattle, WA 98105 Tim Hinderliter 801 Spring Street, Apt. B-810 Seattle, WA 98104 Jon Kirk 2461 - 20th Ave. E. Seattle, WA 98112 Lorraine Petrie 5723 - 285th Avenue SE Issaquah, WA 98027 Except as otherwise provided herein, any such notice shall be deemed to be given when personally delivered or, if mailed as provided herein, three (3) business days after the date of mailing. A party may change its or his address for the purposes of notices hereunder by giving notice to the others specifying such changed address in the manner specified in this paragraph 4. 5. Legend. (a) Concurrently with the execution of this Agreement, there shall be imprinted or otherwise placed, on certificates representing the shares of Common Stock and Series A Preferred Stock owned by the Shareholders (the "Shares") the following restrictive legend (the "Legend"): - 3 - 4 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A SHAREHOLDERS AGREEMENT WHICH PLACES CERTAIN RESTRICTIONS ON THE SHARES REPRESENTED HEREBY. ANY PERSON ACCEPTING ANY INTEREST IN SUCH SHARES SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SUCH AGREEMENT. A COPY OF SUCH SHAREHOLDERS AGREEMENT WILL BE FURNISHED TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS. (b) The Company agrees that, during the term of this Agreement, it will not remove, and will not permit to be removed (upon registration of transfer, reissuance of otherwise), the Legend from any such certificate and will place or cause to be placed the Legend on any new certificate issued to represent Shares theretofore represented by a certificate carrying the Legend. 6. Successors. The provisions of this Agreement shall be binding upon the successors in interest to any of the Shareholders. The Company shall not permit the transfer of any of the Shares on its books or issue a new certificate representing any of the Shares unless and until the person to whom such security is to be transferred shall have executed a written agreement, substantially in the form of this Agreement, pursuant to which such person becomes a party to this Agreement and agrees to be bound by all provisions hereof as if such person were a Shareholder. 7. Specific Performance. The parties hereto hereby declare that it is impossible to measure in money the damages which will accrue to a party hereto or to their heirs, personal representatives, or assigns by reason of a failure to perform any of the obligations under this Agreement and agree that the terms of this Agreement shall be specifically enforceable. If any party hereto or his heirs, personal representatives, or assigns institutes any action or proceeding to specifically enforce the provisions hereof, any person against whom such action or proceeding is brought hereby waives the claim or defense therein that such party or such personal representative has an adequate remedy at law, and such person shall not offer in any such action or proceeding the claim or defense that such remedy at law exists. 8. Governing Law. This Agreement, and the rights of the parties hereto, shall be governed by and construed in accordance with the laws of the State of Washington as such laws apply to agreements among Washington residents made and to be performed entirely within the State of Washington. 9. Amendment. This Amendment may be amended only by an instrument in writing signed by the parties hereto. 10. Severability. If any provision of this Agreement is held to be invalid or unenforceable, the validity and enforceability of the remaining provisions of this Agreement shall not be affected thereby. - 4 - 5 11. Successors. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, assigns, administrators, executors and other legal representatives. 12. Counterparts. This Agreement may be executed in one or more counterparts, all of which will be deemed an original but all of which together shall constitute one and the same agreement. 13. Waiver. No waivers of any breach of this Agreement extended by any party hereto to any other party shall be construed as a waiver of any rights or remedies of any other party hereto or with respect to any subsequent breach. 14. Attorneys' Fees. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party shall be entitled to all costs and expenses of maintaining such suit or action, including reasonable attorneys' fees. 15. Entire Agreement. This Agreement and the Exhibit hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. EXECUTED by the undersigned, effective as of the date first above written. THE COMPANY: INTERNAP CORP. By /s/ ANTHONY C. NAUGHTIN --------------------------- Anthony C. Naughtin President LUNDAY: /s/ ROBERT J. LUNDAY, JR. --------------------------- ROBERT J. LUNDAY, JR. FOUNDERS: /s/ ANTHONY C. NAUGHTIN --------------------------- ANTHONY C. NAUGHTIN -5- 6 /s/ PAUL E. MCBRIDE ---------------------------- PAUL E. MCBRIDE /s/ CHRISTOPHER D. WHEELER ---------------------------- CHRISTOPHER D. WHEELER /s/ JAMES BOCINSKY ---------------------------- JAMES BOCINSKY /s/ OPHIR RONEN ---------------------------- OPHIR RONEN /s/ TIM HINDERLITER ---------------------------- TIM HINDERLITER /s/ JON KIRK ---------------------------- JON KIRK /s/ LORRAINE PETRIE ---------------------------- LORRAINE PETRIE -6- 7 SPOUSAL CONSENT I AM THE SPOUSE OF AN INDIVIDUAL SIGNING THIS AGREEMENT. I HAVE BEEN GIVEN THE OPPORTUNITY TO READ THIS AGREEMENT, TO CONSULT WITH AN ATTORNEY CONCERNING ITS CONTENTS AND IMPORT, AND TO ASK QUESTIONS OF ANY PERSONS WITHOUT RESTRICTION CONCERNING ANY MATTERS CONTAINED HEREIN WHICH I DO NOT UNDERSTAND; AND I HAVE EITHER TAKEN SUCH ACTIONS OR HEREBY WAIVE MY RIGHT TO DO SO. I UNDERSTAND THAT BY SIGNING THIS CONSENT OF SPOUSE MY RIGHTS AND INTERESTS MAY BE AFFECTED. I AGREE TO BE FULLY BOUND BY ALL THE TERMS OF THIS AGREEMENT. /s/ MAUREN BOCINSKY ------------------- ------------------- ------------------- ------------------- ------------------- - 7 - 8 SPOUSAL CONSENT I AM THE SPOUSE OF AN INDIVIDUAL SIGNING THIS AGREEMENT. I HAVE BEEN GIVEN THE OPPORTUNITY TO READ THIS AGREEMENT, TO CONSULT WITH AN ATTORNEY CONCERNING ITS CONTENTS AND IMPORT, AND TO ASK QUESTIONS OF ANY PERSONS WITHOUT RESTRICTION CONCERNING ANY MATTERS CONTAINED HEREIN WHICH I DO NOT UNDERSTAND; AND I HAVE EITHER TAKEN SUCH ACTIONS OR HEREBY WAIVE MY RIGHT TO DO SO. I UNDERSTAND THAT BY SIGNING THIS CONSENT OF SPOUSE MY RIGHTS AND INTERESTS MAY BE AFFECTED. I AGREE TO BE FULLY BOUND BY ALL THE TERMS OF THIS AGREEMENT. /s/ T. PETRIE ------------------- ------------------- ------------------- ------------------- ------------------- - 7 - 9 SPOUSAL CONSENT I AM THE SPOUSE OF AN INDIVIDUAL SIGNING THIS AGREEMENT. I HAVE BEEN GIVEN THE OPPORTUNITY TO READ THIS AGREEMENT, TO CONSULT WITH AN ATTORNEY CONCERNING ITS CONTENTS AND IMPORT, AND TO ASK QUESTIONS OF ANY PERSONS WITHOUT RESTRICTION CONCERNING ANY MATTERS CONTAINED HEREIN WHICH I DO NOT UNDERSTAND; AND I HAVE EITHER TAKEN SUCH ACTIONS OR HEREBY WAIVE MY RIGHT TO DO SO. I UNDERSTAND THAT BY SIGNING THIS CONSENT OF SPOUSE MY RIGHTS AND INTERESTS MAY BE AFFECTED. I AGREE TO BE FULLY BOUND BY ALL THE TERMS OF THIS AGREEMENT. /s/ BARBARA A. LUNDAY --------------------- --------------------- --------------------- --------------------- --------------------- - 7 - 10 SPOUSAL CONSENT I AM THE SPOUSE OF AN INDIVIDUAL SIGNING THIS AGREEMENT. I HAVE BEEN GIVEN THE OPPORTUNITY TO READ THIS AGREEMENT, TO CONSULT WITH AN ATTORNEY CONCERNING ITS CONTENTS AND IMPORT, AND TO ASK QUESTIONS OF ANY PERSONS WITHOUT RESTRICTION CONCERNING ANY MATTERS CONTAINED HEREIN WHICH I DO NOT UNDERSTAND; AND I HAVE EITHER TAKEN SUCH ACTIONS OR HEREBY WAIVE MY RIGHT TO DO SO. I UNDERSTAND THAT BY SIGNING THIS CONSENT OF SPOUSE MY RIGHTS AND INTERESTS MAY BE AFFECTED. I AGREE TO BE FULLY BOUND BY ALL THE TERMS OF THIS AGREEMENT. /s/ SUSAN MCBRIDE ------------------- ------------------- ------------------- ------------------- ------------------- - 7 - 11 SPOUSAL CONSENT I AM THE SPOUSE OF AN INDIVIDUAL SIGNING THIS AGREEMENT. I HAVE BEEN GIVEN THE OPPORTUNITY TO READ THIS AGREEMENT, TO CONSULT WITH AN ATTORNEY CONCERNING ITS CONTENTS AND IMPORT, AND TO ASK QUESTIONS OF ANY PERSONS WITHOUT RESTRICTION CONCERNING ANY MATTERS CONTAINED HEREIN WHICH I DO NOT UNDERSTAND; AND I HAVE EITHER TAKEN SUCH ACTIONS OR HEREBY WAIVE MY RIGHT TO DO SO. I UNDERSTAND THAT BY SIGNING THIS CONSENT OF SPOUSE MY RIGHTS AND INTERESTS MAY BE AFFECTED. I AGREE TO BE FULLY BOUND BY ALL THE TERMS OF THIS AGREEMENT. /s/ IOLAMTHE SALANT RONEN ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- - 7 - 12 SPOUSAL CONSENT I AM THE SPOUSE OF AN INDIVIDUAL SIGNING THIS AGREEMENT. I HAVE BEEN GIVEN THE OPPORTUNITY TO READ THIS AGREEMENT, TO CONSULT WITH AN ATTORNEY CONCERNING ITS CONTENTS AND IMPORT, AND TO ASK QUESTIONS OF ANY PERSONS WITHOUT RESTRICTION CONCERNING ANY MATTERS CONTAINED HEREIN WHICH I DO NOT UNDERSTAND; AND I HAVE EITHER TAKEN SUCH ACTIONS OR HEREBY WAIVE MY RIGHT TO DO SO. I UNDERSTAND THAT BY SIGNING THIS CONSENT OF SPOUSE MY RIGHTS AND INTERESTS MAY BE AFFECTED. I AGREE TO BE FULLY BOUND BY ALL THE TERMS OF THIS AGREEMENT. /s/ ELIZABETH F. NAUGHTIN ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- - 7 - EX-23.1 25 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated April 2, 1999 relating to the financial statements of InterNAP Network Services Corporation, which appear in such Registration Statement. We also consent to the reference to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Seattle, Washington July 28, 1999 EX-27.1 26 FINANCIAL DATA SCHEDULE
5 1000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 3,301 9,995 1,655 78 0 15,070 15,975 2,310 30,830 6,780 6,776 0 50 4 17,220 30,830 3,410 3,410 0 19,862 (303) 58 147 (16,149) 0 0 0 0 0 (16,149) (4.78) (4.78)
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