-----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, SM83Z2wINvjI8++kTSIakk5qDM4g4KlKvH3t/s5grBhOGClYW47tZMZU1YjMn1XS meNKhW+q85Rr5IpMv6JkRg== 0000912057-00-014009.txt : 20000329 0000912057-00-014009.hdr.sgml : 20000329 ACCESSION NUMBER: 0000912057-00-014009 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 28 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RACKSPACE COM INC CENTRAL INDEX KEY: 0001107694 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-33414 FILM NUMBER: 581042 BUSINESS ADDRESS: STREET 1: 112 E PECAN ST STREET 2: STE 600 CITY: SAN ANTONIO STATE: TX ZIP: 78205 BUSINESS PHONE: 2108924000 MAIL ADDRESS: STREET 1: 112 E PECAN ST STREET 2: STE 600 CITY: SAN ANTONIO STATE: TX ZIP: 78205 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2000 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ RACKSPACE.COM, INC. (Exact name of registrant as specified in its charter) DELAWARE 7389 75-2864797 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification incorporation or organization) Classification Code Number) Number)
------------------------ RACKSPACE.COM, INC. 112 EAST PECAN STREET, SUITE 600 SAN ANTONIO, TEXAS 78205 TELEPHONE: (210) 892-4000 FACSIMILE: (210) 892-4329 (Address, including zip code, and telephone number, including area code, of the registrant's principal executive offices) ------------------------------ GRAHAM M. WESTON CHIEF EXECUTIVE OFFICER 112 EAST PECAN STREET, SUITE 600 SAN ANTONIO, TEXAS 78205 TELEPHONE: (210) 892-4000 FACSIMILE: (210) 892-4329 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: S. MICHAEL DUNN, P.C. JEFFREY A. CHAPMAN, ESQ. MICHELLE KWAN MONTOYA, ESQ. SHARON M. COOPER, ESQ. BROBECK, PHLEGER & HARRISON LLP VINSON & ELKINS L.L.P. 301 CONGRESS AVENUE 2001 ROSS AVENUE SUITE 1200 3700 TRAMMEL CROW CENTER AUSTIN, TEXAS 78701 DALLAS, TEXAS 75201-2925 TELEPHONE: (512) 477-5495 TELEPHONE: (214) 220-7700 FACSIMILE: (512) 477-5813 FACSIMILE: (214) 220-7716
------------------------ Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------------------------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE Common Stock, $0.001 par value per share $65,000,000 $17,160
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o). ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion, Dated March 28, 2000 [LOGO] Shares Common Stock This is an initial public offering of common stock of Rackspace.com, Inc. We anticipate that the initial public offering price will be between $ and $ per share. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "RACK." Investing in our common stock involves risks. See "Risk Factors" beginning on page 7. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Per Share Total --------- ----- Public offering price $ $ Underwriting discounts and commissions $ $ Proceeds, before expenses, to Rackspace.com $ $
The underwriters have the right to purchase up to an additional shares of common stock from us at the public offering price within 30 days from the date of this prospectus to cover over-allotments. Deutsche Banc Alex. Brown Bear, Stearns & Co. Inc. Thomas Weisel Partners LLC The date of this prospectus is , 2000 PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND THE NOTES RELATING TO THOSE STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. RACKSPACE.COM, INC. OUR BUSINESS Rackspace.com is a leading provider of advanced Linux-based Internet hosting services targeted to small- to medium-sized enterprises worldwide. Advanced hosting services enable enterprises to establish and maintain their Internet operations using a dedicated server, networking facilities and technical support provided by a third party, such as Rackspace.com. We offer our customers attractively-priced monthly hosting plans, which include server configuration and deployment, scalable bandwidth options, server maintenance, and installation and support for select operating system and Internet-based applications. Our turnkey service offerings are designed to aid our customers in rapidly implementing their Internet operations. To this end, our service plans can be configured, priced and ordered through the Rackspace.com Configurator at our Web site and we guarantee deployment of a new customer's hosting service within 24 hours of order confirmation. Our customers' dedicated servers are housed within our state-of-the-art data center where we provide around-the-clock monitoring, security and technical support. Additionally, we enable our customers to rapidly upgrade their server hardware and add bandwidth to cost-effectively scale their Internet operations to support their needs as they expand their online activities. As of March 31, 2000, we managed an installed base of over servers within our data center for more than customers, with approximately % of these customers located outside of the United States in over 50 countries around the world. We have developed specific expertise in deploying Internet hosting services based on the Linux operating system, and approximately 80% of our customers have selected Linux-based hosting services. We believe that many small- to medium-sized enterprises prefer Linux-based hosting services due to Linux's reputation for stability and high performance, ease of remote administration and cost advantages. We also provide and support advanced Internet hosting services based on Solaris, Windows NT/2000 and other operating systems. In addition, we have entered into strategic relationships with Red Hat, Perot Systems and Sun Microsystems, among others, in order to accelerate our market penetration and to expand our product and service offerings. OUR MARKET OPPORTUNITY For small- to medium-sized enterprises, outsourcing to a provider of advanced Internet hosting services offers a cost-effective means to establish and maintain dynamic Internet operations. The enterprise pays for the use of the outsourced server or servers and the services provided to it, including bandwidth, network monitoring, server maintenance and technical support. Consequently, the enterprise avoids incurring the up-front capital costs of purchasing and deploying the server hardware and software and the continuing costs for maintaining a staff of technical personnel. International Data Corporation estimates that in the United States the dedicated Web hosting market will grow from $566.0 million in 1998 to approximately $14.0 billion in 2003. 3 OUR SOLUTION Our solution offers our customers: - monthly end-to-end hosting plans that enable customers to cost-effectively establish service with us and to adjust their services without long-term commitment; - rapid deployment of our services, and after deployment, quick upgrades and modifications to their advanced Internet hosting configurations; - scalability to meet our customers' performance and Web traffic requirements; - comprehensive Linux-based service offerings based on our broad knowledge of Linux; - high levels of customer service and technical support; and - a state-of-the-art data center, consisting of a "Cisco-Powered" network with multiple connections to the Internet backbone to help ensure uninterrupted, quality service. OUR STRATEGY Our goal is to become the leading global provider of advanced Linux-based Internet hosting services by capitalizing on the growth in Internet usage and e-business and the trend towards outsourcing of hosting services. Our strategy for accomplishing this objective includes: - leveraging our expertise in Linux to establish ourselves as the leading Linux-based hosting services provider; - building global brand awareness of our company and service offerings through targeted marketing initiatives; - capitalizing on international market opportunities to provide advanced Internet hosting services; - utilizing strategic relationships with third parties that select, or influence the selection of, Internet hosting services providers, including expanding our existing relationships with Red Hat, Perot Systems and Sun Microsystems, among others; - expanding our products and enhanced services to address our customers' needs as their growing Internet operations require more advanced hosting solutions; and - continuing to dedicate significant resources to expand and further develop our customer service and technical support capabilities. HOLDING COMPANY Rackspace, Ltd., a Texas limited partnership, was formed on December 29, 1998, to provide advanced Internet hosting services. To establish our initial business, we acquired substantially all of the assets of Cymitar Technology Group, Inc., a Texas corporation, in December 1998. In contemplation of this public offering, we effected a reorganization of our operating structure by incorporating Rackspace.com, Inc. in Delaware on March 7, 2000 to serve as a holding company. To complete the holding company restructuring, the holders of limited partner interests and the general partner interest in Rackspace, Ltd. have agreed to exchange their respective partnership interests for shares of common stock in Rackspace.com, Inc. Contemporaneously with that exchange, we will contribute the general partner interest and limited partner interests in Rackspace, Ltd. to two wholly-owned subsidiaries. OUR ADDRESS AND TELEPHONE Our principal executive offices are located at 112 East Pecan Street, Suite 600, San Antonio, Texas 78205, and our telephone number is (210) 892-4000. Our World Wide Web address is www.rackspace.com. INFORMATION CONTAINED ON OUR WEB SITE DOES NOT CONSTITUTE PART OF THIS PROSPECTUS. 4 THE OFFERING Common stock offered by Rackspace.com....................... shares Common stock to be outstanding after this offering.......... shares Use of proceeds............................................. We intend to use the net proceeds to fund capital expenditures, including the purchase of computer and networking hardware, the establishment of new data centers, the expansion of our sales and marketing and product development activities and potential acquisitions, and for other general corporate purposes. See "Use of Proceeds" on page 17 for a more detailed description of our use of proceeds. Proposed Nasdaq National Market symbol...................... RACK
Unless otherwise indicated, all information in this prospectus concerning the common stock outstanding is based on the number of shares outstanding as of March 27, 2000, on a pro forma basis to give effect to the completion of the holding company restructuring as if it had occurred on such date, and excludes: - 480,833 shares of common stock issuable upon exercise of options granted to employees outstanding as of March 27, 2000, with a weighted average exercise price of $2.51 per share; - 380,952 shares of common stock issuable upon the exercise of warrants outstanding as of March 27, 2000, which were granted to an investor in a private equity financing in November 1999, with an exercise price of $2.10 per share; - shares reserved for issuance under our 2000 Stock Incentive Plan; - shares to be sold by us if the underwriters' over-allotment option is exercised in full, as described in "Underwriting"; and - 1,952,297 shares of common stock that were issued and sold to investors including Norwest Venture Partners, Sequoia Capital and Red Hat, plus shares of common stock issuable upon the exercise of warrants that were granted to Norwest Venture Partners and Sequoia Capital in a private equity financing completed in March 2000. References in this prospectus to "Rackspace.com," "Rackspace," "we," "us" and "our" refer to Rackspace.com, Inc., a Delaware corporation, and, prior to the reorganization of our corporate structure, Rackspace, Ltd., a Texas limited partnership. See "--Holding Company." 5 SUMMARY FINANCIAL DATA The following table sets forth summary financial and operating data for our predecessor, Cymitar Technology Group, Inc., and our company. You should read this information together with our financial statements and the notes to those statements appearing elsewhere in this prospectus. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
THE PREDECESSOR THE COMPANY --------------------------- --------------------------- PERIOD FROM DECEMBER 29, PERIOD FROM 1998 JANUARY 1, (INCEPTION) YEAR ENDED 1998 THROUGH THROUGH YEAR ENDED DECEMBER 31, DECEMBER 28, DECEMBER 31, DECEMBER 31, 1997 1998 1998 1999 ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Total revenues....................................... $ 72,535 $ 166,632 $ 76 $ 1,700,537 Operating expenses: Cost of revenues................................... 38,895 73,767 -- 513,424 Sales and marketing................................ 648 3,615 -- 1,612,071 General and administrative......................... 47,705 181,260 23 870,155 Product development................................ -- -- -- 52,712 Depreciation and amortization...................... 6,912 12,363 262 261,730 -------- --------- ----- ----------- Total operating expenses........................... 94,160 271,005 285 3,310,092 -------- --------- ----- ----------- Loss from operations (21,625) (104,373) (209) (1,609,555) Other income (expense)............................... (3,247) (7,767) (66) (43,243) -------- --------- ----- ----------- Net loss......................................... $(24,872) $(112,140) $(275) $(1,652,798) ======== ========= ===== ===========
The following table contains a summary of our balance sheet as of December 31, 1999: - on an actual basis; - on a pro forma basis to reflect (1) the completion of the holding company restructuring through the exchange of all limited partner interests and the general partner interest of Rackspace, Ltd. for an aggregate of 14,671,425 shares of our common stock, (2) the net proceeds from the sale of 2,309,440 shares of our as-converted common stock in private placements consummated by us after December 31, 1999 and (3) payment in full of a note receivable in the amount of $750,000 in February 2000; and - on a pro forma as adjusted basis to additionally reflect the net proceeds to us from the sale of shares of our common stock in this offering at an assumed initial public offering price of $ per share.
AS OF DECEMBER 31, 1999 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ----------- ------------ BALANCE SHEET DATA: Cash and cash equivalents................................. $3,794,784 $16,344,784 $ Working capital........................................... 2,735,337 15,285,337 Total assets.............................................. 5,863,786 18,413,786 Total partners' capital/stockholders' equity.............. 4,643,525 17,193,525
6 RISK FACTORS INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW BEFORE YOU PURCHASE ANY OF OUR COMMON STOCK. WHILE WE HAVE DESCRIBED ALL RISKS AND UNCERTAINTIES THAT WE BELIEVE ARE MATERIAL TO OUR BUSINESS, OTHER RISKS AND UNCERTAINTIES THAT AFFECT OUR BUSINESS OPERATIONS MAY ARISE OR BECOME MATERIAL IN THE FUTURE. IF WE CANNOT ADDRESS THE FOLLOWING RISKS AND UNCERTAINTIES EFFECTIVELY, WE COULD BE MATERIALLY AND ADVERSELY AFFECTED. IN THIS EVENT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR A PART OF YOUR INVESTMENT. THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS. SEE "FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS." RISKS RELATED TO OUR BUSINESS OUR BUSINESS AND PROSPECTS ARE DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING HISTORY AND OUR BUSINESS MODEL IS STILL EVOLVING. We began offering advanced Internet hosting services in December 1998. As a result, we have a very short operating history and our business model is still evolving. We may not be able to successfully implement our business plan or adapt it to changes in the market. If we are not able to do so, we will be adversely affected. BECAUSE WE OPERATE IN A NEW AND EVOLVING MARKET WITH UNCERTAIN PROSPECTS FOR GROWTH, WE MAY BE UNABLE TO GROW OUR CUSTOMER BASE AND OUR OPERATING RESULTS MAY SUFFER. Our market is new and rapidly evolving. Growth in demand for, and acceptance of, advanced Linux-based Internet hosting services are highly uncertain. Businesses may not recognize the benefits of outsourcing their Internet hosting needs or they may find it less expensive, more secure or otherwise preferable to host their Internet sites internally. Internet technologies, such as e-commerce applications, which require advanced hosting may not grow as rapidly as we expect. If the market for advanced Linux-based Internet hosting services fails to grow or grows more slowly than we anticipate, we will be adversely affected. Growth in the demand for our products and services may be inhibited and we may be unable to sustain growth in our customer base for a number of reasons, such as: - our inability to market our products and services in a cost-effective manner to new customers; - the inability of customers to differentiate the services we offer from those of our competitors; - the termination of our customer contracts, which are subject to renewal on a monthly basis; - our inability to strengthen awareness of our brand; and - reliability, quality or compatibility problems with our services. IF THE LINUX OPERATING SYSTEM DOES NOT CONTINUE TO GAIN MARKET ACCEPTANCE, WE LIKELY WOULD BE UNABLE TO SUSTAIN OUR REVENUE GROWTH AND OUR BUSINESS WOULD SUFFER. The vast majority of our customers elect to base their servers on the Linux operating system. The Linux operating system has only recently gained broad market acceptance. Our success depends on the continued adoption of Linux, particularly by small- and medium-sized enterprises. If this does not occur, our business will be adversely affected. 7 IF THE NETWORK PROVIDERS UPON WHICH WE RELY FAIL TO PROVIDE ADEQUATE RELIABILITY, CAPACITY OR PERFORMANCE FOR OUR NETWORK, WE COULD LOSE CUSTOMERS AND OUR OPERATING RESULTS COULD SUFFER. Our success partly depends upon the capacity, reliability and performance of our network infrastructure, which relies on the services of Internet backbone providers, consisting of Intermedia, Qwest, SBC Communications, Time Warner Telecom and UUNET. We depend on these companies to provide uninterrupted and error-free service through their telecommunications networks. Some of these providers also are our competitors. As our customers' usage of telecommunications capacity increases, we will need to make additional investments in our bandwidth capacity to maintain adequate data transmission speeds, the availability of which may be limited or the cost of which may be on terms unacceptable to us. If capacity is not available to us as our customers' usage increases, our network may not be able to achieve or maintain sufficiently high data transmission capacity, reliability or performance. In addition, our business would suffer if our network suppliers increased the prices for their services and we were unable to pass along the increased costs to our customers. Any failure on our part or the part of our third-party suppliers to achieve or maintain high data transmission capacity, reliability or performance could significantly reduce customer demand for our services and damage our business. WE COULD EXPERIENCE SYSTEM FAILURES, WHICH COULD HARM OUR BUSINESS AND REPUTATION. To succeed, we must be able to operate our data centers and maintain the operation of our Web site around the clock without interruption or a material decline in service. Our operations depend upon our ability to protect our network infrastructure, equipment and customer files against damage from human error, fire, earthquakes, hurricanes, floods, power loss, telecommunications failures, physical and electronic break-ins, sabotage, intentional acts of vandalism and similar events. Our servers and other network equipment are located in our sole data center in San Antonio, Texas. We do not have a comprehensive disaster recovery plan and the occurrence of a natural disaster or other unanticipated problems at our data center could result in interruptions in the services that we provide to our customers and in the operation of our Web site. We have experienced interruptions in service and at our Web site in the past. We have experienced partial system failures due to routing problems, hard drive failures, database corruption and other computer failures. A future interruption could result in substantial customer dissatisfaction or loss and could necessitate future customer refunds. Our network is subject to various points of failure, and a problem with our routers, switches or other equipment could cause an interruption in the services we provide to some or all of our customers. Any future interruptions could: - cause our customers to seek damages for losses incurred; - require us to replace existing equipment or add redundant facilities; - damage our reputation as a reliable provider of hosting services; - cause existing customers to cancel or elect to not renew their contracts; or - make it more difficult for us to attract new customers. Any of these results could adversely affect our business. OUR BUSINESS AND REPUTATION WILL SUFFER IF WE DO NOT PREVENT SECURITY BREACHES. A fundamental requirement for online business transactions and services is the secure transmission of confidential information over public communications networks. Unauthorized access, computer viruses, accidents, fraudulent service plan orders, intentional misconduct by computer "hackers" and other disruptions can occur. In addition, we may incur significant costs to prevent breaches in security or to alleviate problems caused by breaches. We rely on third-party suppliers to protect our equipment 8 and hardware against breaches in security. We cannot be certain that they will provide adequate security. While we have experienced no material security breaches in the past, any breaches that may occur could result in liability to us, loss of existing customers, harm to our reputation, the deterrence of future customers or an increase in our costs. IF WE ARE UNABLE TO EXPAND OUR NETWORK INFRASTRUCTURE TO MEET INCREASING DEMAND, WE COULD LOSE CUSTOMERS AND OUR OPERATING RESULTS COULD SUFFER. We must continue to expand and adapt our network infrastructure to accommodate an increasing number of customers, larger amounts of information that they wish to transmit and changing customer requirements. We will continually need to address the challenge of scaling our network operations to meet increasing Internet hosting demands while maintaining acceptable performance levels. The expansion of our existing data center and the establishment of new data centers will require substantial financial, operational and management resources. If we are required to expand our network significantly and rapidly, additional stress will be placed upon our network hardware, traffic management systems and hosting facilities, as well as our financial, operational and management resources. Due to the limited deployment of our services to date, the ability of our network to support a substantially larger number of customers at high transmission speeds is unknown. THE FORMATION OF STRATEGIC RELATIONSHIPS IS AN IMPORTANT STRATEGY, AND IF WE FAIL TO ESTABLISH THESE RELATIONSHIPS, OR IF THESE RELATIONSHIPS ARE TERMINATED OR DO NOT FUNCTION AS WE INTEND, OUR BUSINESS MAY SUFFER. In an effort to enhance our sales, support, sourcing and other business functions, we form strategic relationships with select partners. We have formed strategic relationships with Red Hat, Perot Systems and Sun Microsystems. If these or any future strategic relationships are terminated or impaired, our ability to execute our business plan could be impeded. Some of our strategic partners may also provide services that compete with our own, which could increase competitive pressures on our business. WE HAVE A HISTORY OF OPERATING LOSSES, AND WE ANTICIPATE THAT WE WILL CONTINUE TO INCUR SIGNIFICANT OPERATING LOSSES FOR THE FORESEEABLE FUTURE. We have experienced operating losses and negative cash flows from operations in each quarterly and annual period since we commenced our hosting operations in December 1998. For the year ended December 31, 1999, we experienced a net loss of $1.7 million. We expect our operating expenses to increase significantly as we continue to expand our business. We believe that we will need to significantly increase our current staff levels across all areas of our business over the next 12 months. In addition, we expect to incur significant expenses to establish new data centers, support and improve our operational and financial systems, pursue additional channel partners, fund greater levels of research and development and broaden our customer service and support capabilities. We cannot assure you that we will ever be profitable on a quarterly or annual basis, or that if we achieve profitability, it will be sustainable. WE OPERATE IN AN EXTREMELY COMPETITIVE MARKET, AND OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO COMPETE EFFECTIVELY. The market for advanced Internet hosting and colocation services is highly competitive. There are few barriers to entry preventing new competitors from entering this market. We expect that we will face additional competition from our existing competitors as well as new market entrants in the future. Many of our current and potential competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater brand recognition and 9 more established relationships in the industry than we do. As a result, some of these competitors may be able to: - develop and expand their network infrastructures and service offerings more rapidly; - adapt to new or emerging technologies and changes in customer requirements more quickly; - take advantage of acquisition and other opportunities more readily; - devote greater resources to the marketing and sales of their services; and - adopt more aggressive pricing policies. In addition, some of our competitors have entered, and will likely continue to enter, into joint ventures or other arrangements to provide additional services competitive with those provided by us. We believe that the market in which we compete is likely to experience consolidation in the near future, which could result in increased price competition, the formation of strategic relationships across complementary industries, including relationships with our suppliers and channel partners that could limit our access to critical supplies, and other factors that could adversely affect our business. In an effort to gain market share, we expect that competitors will offer hosting services similar to ours at prices lower than ours or with incentives not matched by us. In addition, some of our competitors may be able to provide customers with additional benefits that could reduce the overall costs of their services relative to ours. We may not be able to reduce the pricing of our services or offer incentives in response to the actions of our competitors without an adverse impact on our business. For more information about the competition we face in our market, please see "Business--Competition." WE MAY NOT BE ABLE TO SUCCESSFULLY GROW OUR BUSINESS IF WE ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL HIGHLY SKILLED PERSONNEL. Our success depends on our ability to attract, integrate, motivate, train and retain highly skilled technical personnel and other employees. In particular, we need to attract experienced information technology professionals. We face intense competition for these people and we expect competition to remain intense as the technology industry continues to grow. Even if we expend significant resources to recruit, train and retain qualified personnel, we may not be successful in our efforts. We also must expand our direct and indirect sales operations to increase market awareness of our services and generate increased revenues. We plan to increase our sales force significantly in 2000. Newly-hired employees will require training and it will take time for them to achieve full productivity. We cannot assure you that we will be able to hire enough qualified individuals in the future or that newly-hired employees will achieve necessary levels of productivity. In that event, we would be unable to effectively expand our business and address market opportunities, which would adversely affect our future operating results. FAILURE OF OUR OPERATING AND FINANCIAL SYSTEMS TO KEEP PACE WITH THE ANTICIPATED GROWTH IN OUR BUSINESS COULD RESULT IN CUSTOMER DISSATISFACTION, OPERATING INEFFICIENCIES AND LOST REVENUE OPPORTUNITIES. The rapid growth of our business and our service offerings has placed, and is likely to continue to place, a significant strain on our operating and financial resources. Our future performance will partly depend on our ability to manage our growth effectively, which will require that we further develop our operating and financial system capabilities and controls. We are in the process of implementing new billing and other management information systems. If our information systems are unable to support the demands placed on them by the rapid growth in our business, we may be forced to implement new 10 systems which would be disruptive to our business. If we fail to improve our operational systems or to expand our customer service capabilities to keep pace with the growth of our business, we could experience customer dissatisfaction, cost inefficiencies and lost revenue opportunities, which could harm our operating results. We may not be able to successfully implement these systems when needed or they may not perform reliably. OUR GROWTH DEPENDS ON OUR ABILITY TO EXPAND DATA CENTER CAPACITY TO MEET ANTICIPATED DEMAND. Continuing to expand data center capacity is critical to achieving our business strategy. This expansion will include adding new hardware and software, and further contemplates the opening of additional data centers in the United States, Europe and Asia. Our ability to do so successfully depends on: - anticipating and planning for future demand levels; - having access to sufficient capital; and - locating and securing satisfactory data center sites and implementing the build-out of these sites, all of which may require significant lead time. If we cannot expand capacity effectively, our growth will suffer and we may not be able to adequately meet the needs of our customers, which could result in the loss of customers. WE MAY NOT BE ABLE TO DELIVER OUR SERVICES AND OUR BUSINESS MAY SUFFER IF OUR THIRD-PARTY SUPPLIERS DO NOT PROVIDE US WITH KEY COMPONENTS OF OUR NETWORK INFRASTRUCTURE. We depend on other companies to supply key components of our network infrastructure. Any failure to obtain needed products or services in a timely fashion or at an acceptable cost could adversely affect our business. We buy servers, routers and switches on an as-needed basis and therefore do not carry significant inventories of these items. We also have no guaranteed supply arrangements with our vendors. If this equipment were to become unavailable or available only on terms that are not acceptable to us, we would be forced to find alternative providers of this equipment. The inability to obtain equipment from our existing suppliers on terms acceptable to us would require us to expend time and money to select and obtain new equipment, and to train our personnel to use different equipment and deploy alternative components, which could adversely affect our business. DISRUPTION OF OUR SERVICES CAUSED BY UNKNOWN SOFTWARE DEFECTS COULD HARM OUR BUSINESS AND REPUTATION. Our service offerings depend on complex software, including software licensed from third parties. Complex software often contains defects, particularly when first introduced or when new versions are released. We may not discover software defects that affect our services until after the software is deployed. Although we have not experienced any material software defects to date, it is possible that defects may occur in the future. These defects could cause service interruptions, which could damage our reputation, increase our service costs, cause us to lose revenues, delay market acceptance or divert our development resources. PROVIDING SERVICES TO CUSTOMERS WITH MISSION-CRITICAL INTERNET SITES AND WEB-BASED APPLICATIONS COULD POTENTIALLY EXPOSE US TO LAWSUITS FOR CUSTOMERS' LOST PROFITS OR DAMAGES. Because our advanced Internet hosting services are critical to many of our customers' businesses, any significant disruption in our services could result in lost profits or other indirect or consequential damages to our customers. Our customers are required to sign server order forms which incorporate our standard terms and conditions. Although these terms disclaim our liability for any indirect or consequential damages, a customer could still bring a lawsuit against us claiming lost profits or other 11 consequential damages as the result of a service interruption or other Internet site or application problems that the customer may ascribe to us. We cannot assure you that a court would enforce any limitations on our liability, and the outcome of any lawsuit would depend on the specific facts of the case and legal and policy considerations. In such cases, we could be liable for substantial damage awards. Such damages might exceed our liability insurance by unknown but significant amounts, which could seriously impair our financial condition and adversely affect our business. WE HAVE MANY INTERNATIONAL CUSTOMERS, AND, AS A RESULT, OUR BUSINESS MAY BE ADVERSELY AFFECTED BY POLITICAL AND ECONOMIC CONDITIONS IN FOREIGN MARKETS. In 1999, 33.4% of our revenues were derived from customers located outside of North America. A key element of our strategy is to expand our customer base internationally and successfully operate data centers in foreign markets. Because our international sales are denominated in U.S. dollars, currency fluctuations may deter foreign customers from purchasing our services. In addition, we face risks in servicing customers in foreign markets, such as: - different Internet access fees; - different technology standards; - different privacy, censorship and service provider liability standards and regulations; and - less protective intellectual property laws. Any of these risks could adversely affect our ability to operate or expand internationally, which would limit our ability to grow our business. OUR LIMITED ABILITY OR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE. Third parties may infringe or misappropriate our technology or proprietary rights, which could have an adverse effect on our business. We rely on a combination of copyright, trademark, service mark and trade secret laws to protect our intellectual property. We also have internally developed tools and procedures that are important to our business for which we have no protection. Our competitors or potential competitors may independently develop technologies that are equivalent or superior to the technology upon which we rely. We have entered into contractual arrangements with our employees and generally with contractors, suppliers, distributors and some of our key customers in order to limit access to, and any disclosure of, our proprietary information. However, these measures may not be sufficient to protect our intellectual property. We may need to take legal action to protect our intellectual property rights, which could be costly and divert the attention of our technical and management personnel. WE MAY BE ACCUSED OF INFRINGING THE PROPRIETARY RIGHTS OF OTHERS, WHICH COULD SUBJECT US TO COSTLY AND TIME-CONSUMING LITIGATION. In addition to the technologies we develop or have developed, we license some technologies from third parties and may license additional technologies in the future. Although we have not been accused of infringing the proprietary rights of others in the past, we could become subject to infringement actions based upon our internally-developed technologies or technologies licensed from third parties. Any of these claims, with or without merit, could subject us to costly litigation and divert the attention of our technical and management personnel. In addition, third parties may change the terms of their license agreements in ways that would prevent us from using technologies licensed from them on commercially reasonable terms or that could prevent us from using them at all. We may not be able to replace those technologies with technologies that have the same features or functionality on commercially reasonable terms or at all. 12 OUR BUSINESS COULD BE HARMED IF OUR MANAGEMENT TEAM, WHICH HAS WORKED TOGETHER FOR ONLY A BRIEF TIME, IS UNABLE TO WORK TOGETHER EFFECTIVELY, OR IF WE LOSE THE SERVICES OF KEY PERSONNEL. We recently hired key employees and officers, including our Vice President, Sales and Marketing who joined us in November 1999, our Vice President, Channel Sales and Strategic Alliances who joined us in December 1999 and our Vice President, Operations who joined us in November 1999. As a result, our management team has worked together for only a brief time. We depend on the continued service of our key technical, sales and senior management personnel, including Graham M. Weston, our Chief Executive Officer, Morris A. Miller, our President and Chief Operating Officer, and our founders, Patrick R. Condon, Dirk J. Elmendorf and Richard K. Yoo. Following this offering, we will not maintain key-person insurance on any of our key employees, other than Mr. Weston. In addition, we do not have employment agreements with any of our key employees, other than Messrs. Condon, Elmendorf and Yoo. The terms of the employment agreements with Messrs. Condon, Elmendorf and Yoo are limited and if any key personnel are unable or unwilling to continue in their present positions, our ability to develop, introduce and sell our services could be significantly impaired. OUR HOLDING COMPANY STRUCTURE COULD LIMIT OUR ABILITY TO PAY DIVIDENDS OR MAKE DEBT PAYMENTS. We are a holding company with no operations of our own. Therefore, if our subsidiaries are unable to pay dividends or make distributions to us, we would be unable to make dividend payments to our stockholders or pay any future indebtedness. We do not anticipate paying cash dividends in the foreseeable future. OUR QUARTERLY AND ANNUAL RESULTS MAY FLUCTUATE, WHICH COULD RESULT IN FLUCTUATIONS IN THE PRICE OF OUR COMMON STOCK. Our operating results may fluctuate significantly in the future on a quarterly and annual basis. Because of these fluctuations, comparisons of our operating results from period to period are not necessarily meaningful and should not be relied upon as an indicator of future performance. We expect to continue to experience significant fluctuations as a result of a variety of factors, many of which are outside of our control, including: - the frequency of new customer installations; - our retention of existing customers; - fluctuations in data communications costs; - timing and magnitude of capital expenditures; - costs relating to the expansion of our operations; - changes in our pricing policies or those of our competitors; and - economic conditions specific to the hosting industry, as well as general economic conditions. We plan to increase our operating expenses to develop our business. If our revenues do not increase as quickly as our expenses, our operating results will suffer. For these and other reasons, in future periods our operating results may fall below the expectations of securities analysts or investors, which could negatively affect the market price of our common stock. WE HAVE ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR COMPANY. Certain provisions of our certificate of incorporation and bylaws and the provisions of Delaware law could have the effect of delaying, deferring or preventing an acquisition of our company. For 13 example, our board of directors will be divided into three classes to serve staggered three-year terms, our stockholders will be unable to take action by written consent and our stockholders will be limited in their ability to make proposals at stockholder meetings. For more information about these provisions, you should read "Description of Capital Stock." WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH, AND WE MAY NOT BE ABLE TO OBTAIN IT ON TERMS ACCEPTABLE TO US, IF AT ALL. We believe that our existing capital resources, including the anticipated proceeds of this offering, will enable us to maintain our current and planned operations for at least the next 12 months. However, we may require additional funds during or after that 12-month period. Any required financing may not be available or may be available only on terms that are not favorable to us. Further, if additional funds are raised through the issuance of additional equity securities, the percentage ownership of our stockholders would be diluted. Any new equity securities may have rights, preferences or privileges senior to those of our common stock. RISKS RELATED TO OUR INDUSTRY WE MAY NOT BE ABLE TO ADAPT TO EVOLVING TECHNOLOGIES AND CUSTOMER DEMANDS, WHICH COULD CAUSE OUR BUSINESS TO SUFFER. Our market is characterized by rapidly changing technology, evolving industry standards and frequent new product announcements. These characteristics are magnified by the recent growth of the Internet and the intense competition in our industry. We also are subject to risks from technological changes in the way Internet hosting solutions are marketed and delivered. To be successful, we must adapt to our rapidly changing market by continually improving the performance, features and reliability of our services and modifying our business strategies accordingly. We could also incur substantial costs if we need to modify our services or infrastructure in order to adapt to these changes. Our business would suffer if we fail to respond to these changes in a timely and cost-effective manner. OUR BUSINESS WILL SUFFER IF INTERNET USAGE DOES NOT CONTINUE TO INCREASE, IF THE INTERNET FAILS TO PERFORM RELIABLY OR IF THE INTERNET PROVES NOT TO BE SECURE. Use of the Internet for retrieving, sharing and transferring information among businesses, consumers, suppliers and partners is increasing rapidly. Our success depends on continued growth in the use of the Internet, and we would be adversely affected if Internet use does not continue to grow, particularly among small- to medium-sized enterprises. Internet use and growth may be inhibited for a number of reasons, such as: - inadequate network infrastructure; - concerns about the security of confidential information; - concerns about acts of sabotage, vandalism and other similar events such as the events that adversely impacted the Web sites of Yahoo! and eBay in February 2000; - uncertainty of legal and regulatory issues concerning the use of the Internet; - adoption of onerous laws or governmental regulations; and - lack of availability of cost-effective, reliable, high-speed service. If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth, or its performance and reliability may decline. For example, Web sites have experienced interruptions in service as a result of outages or acts of sabotage, vandalism or other similar events. If these outages or delays occur frequently, use of the Internet as a commercial or 14 business medium could in the future grow more slowly or decline, which would adversely affect our business. In addition, because a number of our services include the transmission of confidential information, we could be materially and adversely affected if Internet users significantly reduce their use of the Internet due to security or privacy concerns. REGULATORY AND LEGAL UNCERTAINTIES COULD RESULT IN SIGNIFICANT COSTS OR POTENTIAL LIABILITY, OR OTHERWISE HARM OUR BUSINESS. Laws and regulations directly applicable to commerce or communications over the Internet are becoming increasingly prevalent. However, many laws affecting the Internet remain largely unsettled. The adoption or modification of laws or regulations relating to the Internet could adversely affect our business, especially if they impose direct costs on us or if they curtail the growth of the Internet. If liability for materials carried on or disseminated through Web sites on the Internet is imposed on hosting services providers, we would be required to implement measures to reduce our exposure to liability. These measures could require us to expend substantial resources or discontinue offering affected services. In addition, liability issues, including as a result of lawsuits, legislation and legislative proposals, could divert management's attention, result in unanticipated expenses and harm our business. If legislation in the U.S. or abroad is adopted that makes transacting business over the Internet less favorable, our business would suffer. See "Business--Government Regulation." RISKS RELATED TO THIS OFFERING WE HAVE BROAD DISCRETION IN HOW WE MAY USE THE PROCEEDS FROM THIS OFFERING AND OUR USE OF THESE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN. We have not allocated the entire net proceeds from this offering for specific purposes. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds of this offering may be used for corporate purposes that do not improve our results of operations or increase our market value. OUR PRINCIPAL STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS WILL OWN APPROXIMATELY % OF OUR COMMON STOCK FOLLOWING THIS OFFERING, WHICH MAY ALLOW THEM TO EXERT INFLUENCE OVER US OR TO PREVENT A CHANGE OF CONTROL. After this offering, our principal stockholders, directors and executive officers will beneficially own, in the aggregate, approximately % of our outstanding common stock. These stockholders, acting together, will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also delay or prevent a change in our control even if beneficial to our stockholders. SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS OUR STOCK PRICE. Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market in the near future. Sales of a substantial number of shares of our common stock after this offering could cause our stock price to fall. In addition, the sale of shares by our stockholders could impair our ability to raise capital through our sale of newly-issued stock. You should read "Shares Eligible for Future Sale" for a more complete discussion of shares that may be sold in the public market in the future. 15 THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK; OUR COMMON STOCK MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS AND ANY VOLATILITY IN OUR STOCK PRICE COULD RESULT IN CLAIMS AGAINST US. Prior to this offering, investors could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after this offering. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. The market price of our common stock may decline below the initial public offering price after this offering. Fluctuations in market price and volume are particularly common among securities of Internet and other technology companies. The market price of our common stock may fluctuate significantly in response to the following factors, some of which are beyond our control: - variations in quarterly operating results; - changes in market valuations of Internet and other technology companies; - our announcement of significant contracts, strategic partnerships, acquisitions, joint ventures or capital commitments; - additions or departures of key personnel; - future sales of common stock; and - changes in financial estimates by securities analysts. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its common stock. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This prospectus contains forward-looking statements. These statements include, among others, statements relating to expenditure levels, the adequacy of capital resources and plans for expansion of our marketing and sales efforts, risk factors, use of proceeds, liquidity, strategy, sales and technology and network operations. These statements may be found under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Forward-looking statements are typically identified by the use of terms such as "may," "will," "expect," "intend," "anticipate," "estimate" and similar words, although some forward-looking statements are expressed differently. You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including without limitation, changes in external competitive market factors, changes in our business strategy or an inability to execute our strategy, unanticipated changes in the hosting industry or in the economy in general and changes in use of the Internet, particularly by small- and medium-sized enterprises. We cannot guarantee future results, levels of activity, performance or achievements. You should also consider carefully the statements under "Risk Factors" and other sections of this prospectus, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements. We undertake no obligation to update this prospectus with respect to new information, future events or otherwise. 16 USE OF PROCEEDS We estimate that the net proceeds from the sale of shares of our common stock in this offering will be approximately $ million, at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters' over-allotment option is exercised in full, we estimate that the net proceeds will be approximately $ million. We intend to use approximately $ million of the net proceeds of this offering to fund capital expenditures associated with the purchase of computer and networking hardware. We also intend to use $ to establish a data center presence in London in the second quarter of 2000, and, in the next 18 months, to establish a data center presence in Asia and a second data center presence in the U.S. We expect to use the balance of the net proceeds for the expansion of our sales and marketing and product development activities, working capital and other general corporate purposes. In addition, we may use some of the net proceeds for strategic investments and acquisitions; however, we have no current agreements or commitments with respect to any acquisition or investments of this type. Our management will have significant flexibility in applying the net proceeds of this offering and may spend the proceeds from this offering in ways that the stockholders may not deem desirable. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the growth of our business. Until we use the net proceeds of this offering for the above purposes, we intend to invest the funds in short-term, investment-grade, interest-bearing securities. We cannot predict whether the proceeds invested will yield a favorable return. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock since inception. We intend to retain any future earnings for developing and expanding our business and do not anticipate paying any cash dividends in the foreseeable future. 17 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1999: - on an actual basis; - on a pro forma basis to reflect (1) the completion of the holding company restructuring through the exchange of all limited partner interests and the general partner interest of Rackspace, Ltd. for an aggregate of 14,671,425 shares of our common stock, (2) the net proceeds from the sale of 2,309,440 shares of our as-converted common stock in private placements consummated after December 31, 1999 and (3) payment in full of a note receivable in the amount of $750,000 in February 2000; and - on a pro forma as adjusted basis to additionally reflect the net proceeds to us from the sale of shares of our common stock in this offering at an assumed initial public offering price of $ per share, and the application of the net proceeds from this offering. This information should be read in conjunction with our financial statements and notes relating to these statements appearing elsewhere in this prospectus.
DECEMBER 31, 1999 -------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ----------- ----------- Cash and cash equivalents................................ $3,794,784 $16,344,784 $ ========== =========== ======= Partners' capital........................................ 5,393,525 Note receivable for issuance of partnership interest..... (750,000) -- Stockholders' equity: Preferred stock, $.001 par value, 30,000,000 shares authorized, no shares issued and outstanding, actual, pro forma and pro forma as adjusted.................. -- Common stock, $.001 par value, 170,000,000 shares authorized, no shares issued and outstanding, actual; 16,980,865 shares issued and outstanding, pro forma; shares issued and outstanding, pro forma as adjusted............................................. 16,981 Additional paid-in capital............................... 17,176,544 ---------- ----------- ------- Total partners' capital/stockholders' equity........... 4,643,525 17,193,525 ---------- ----------- ------- Total capitalization................................. $4,643,525 $17,193,525 $ ========== =========== =======
The share information set forth above excludes: - 480,833 shares issuable upon the exercise of stock options granted to employees outstanding as of March 27, 2000, with a weighted average exercise price of $2.51 per share; - 380,952 shares of common stock issuable upon the exercise of warrants outstanding as of March 27, 2000, which were granted to investors in a private equity financing in November 1999, with an exercise price of $2.10 per share; - shares of common stock issuable upon the exercise of warrants outstanding to Norwest Venture Partners and Sequoia Capital which were granted in a private equity financing completed in March 2000; and - additional shares of common stock reserved for future issuance under the 2000 Stock Incentive Plan. See "Management--2000 Stock Incentive Plan," "Description of Capital Stock" and Note 7 of Notes to our financial statements. 18 DILUTION Our pro forma net tangible book value at December 31, 1999 was $17.1 million, or $1.01 per share of common stock. Pro forma net tangible book value per share represents the amount of our tangible net assets, which is defined as total assets less intangible assets, less total liabilities, divided by the pro forma number of shares of common stock outstanding as of December 31, 1999, after giving effect to (1) the completion of the holding company restructuring through the exchange of all limited partner interests and the general partner interest of Rackspace, Ltd. for an aggregate of 14,671,425 shares of our common stock, (2) the net proceeds from the sale of 2,309,440 shares of our as-converted common stock in private placements consummated after December 31, 1999 and (3) payment in full of a note receivable in the amount of $750,000 in February 2000. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the application of the estimated net proceeds from the offering, our adjusted pro forma net tangible book value at December 31, 1999 would have been $ million, or $ per share. This amount represents an immediate increase in pro forma net tangible book value to our existing stockholders of $ per share and an immediate dilution to new investors of $ per share. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share at December 31, 1999................................................ $ Increase in pro forma net tangible book value per share attributable to new investors........................... ------- Pro forma net tangible book value per share after this offering.................................................. ------- Dilution per share to new investors......................... $ =======
If the underwriters exercise their over-allotment option in full, our adjusted pro forma net tangible book value at December 31, 1999 would have been $ million, or $ per share, representing an immediate increase in pro forma net tangible book value to our existing stockholders of $ per share and an immediate dilution to new investors of $ per share. The following table summarizes, as of December 31, 1999 and after giving effect to the pro forma adjustments described above, the differences between the number of shares of common stock purchased from us, the aggregate cash consideration paid to us and the average price per share paid by our existing stockholders and by new investors purchasing shares of common stock in this offering. The calculation below is based on an assumed initial public offering price of $ per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ---------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- -------- ----------- -------- --------- Existing stockholders................ 16,980,865 % $18,846,598 % $1.11 New investors........................ % % ---------- ----- ----------- ----- Total.......................... 100% $ 100% ========== ===== =========== =====
The tables and calculations above assume no exercise of outstanding options. At March 27, 2000, there were 480,833 shares of common stock issuable upon exercise of options granted to employees outstanding with a weighted average exercise price of $2.51 per share and shares reserved for future issuance under our 2000 Stock Incentive Plan. In addition, at March 27, 2000, there were 380,952 shares of common stock issuable upon the exercise of warrants granted to an investor in a private equity financing in November 1999, with an exercise price of $2.10 per share. Also, we issued warrants to purchase an aggregate of shares to Norwest Venture Partners and Sequoia Capital in a private equity financing completed in March 2000. To the extent that these options and warrants are exercised, there will be further dilution to new investors. See "Management--2000 Stock Incentive Plan." 19 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included in this prospectus. The selected data presented below under the captions "Statement of Operations Data" and "Balance Sheet Data" as of December 31, 1998 and 1999 and for the period from December 29, 1998 to December 31, 1998 and the year ended December 31, 1999, are derived from the financial statements of Rackspace, Ltd., and the "Statement of Operations Data" for the year ended December 31, 1997 and the period from January 1, 1998 to December 28, 1998 are derived from the financial statements of Cymitar Technology Group, Inc., which financial statements have been audited by KPMG LLP, independent certified public accountants. All of these financial statements and their respective auditors' reports are included elsewhere in this prospectus. The pro forma information regarding net loss per share and weighted average shares outstanding set forth below gives effect to the exchange of all limited partner interests and the general partner interest of Rackspace, Ltd. for shares of our common stock for all periods presented. See our financial statements and the notes to these statements appearing elsewhere in this prospectus for the determination of the number of shares used in computing historical and pro forma basic and diluted net loss per share.
THE PREDECESSOR THE COMPANY --------------------------- ---------------------------- PERIOD FROM PERIOD FROM DECEMBER 29, JANUARY 1, 1998 1998 (INCEPTION) YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31, DECEMBER 28, DECEMBER 31, DECEMBER 31, 1997 1998 1998 1999 ------------ ------------ ------------- ------------ STATEMENT OF OPERATIONS DATA: Total revenues....................................... $ 72,535 $ 166,632 $ 76 $ 1,700,537 Operating expenses: Cost of revenues................................... 38,895 73,767 -- 513,424 Sales and marketing................................ 648 3,615 -- 1,612,071 General and administrative......................... 47,705 181,260 23 870,155 Product development................................ -- -- -- 52,712 Depreciation and amortization...................... 6,912 12,363 262 261,730 -------- --------- ------ ----------- Total operating expenses........................... 94,160 271,005 285 3,310,092 -------- --------- ------ ----------- Loss from operations............................. (21,625) (104,373) (209) (1,609,555) Other income (expense)............................... (3,247) (7,767) (66) (43,243) -------- --------- ------ ----------- Net loss......................................... $(24,872) $(112,140) $ (275) $(1,652,798) ======== ========= ====== ===========
YEAR ENDED DECEMBER 31, 1999 ------------ EARNINGS PER SHARE CALCULATION: Net loss.............................................. $(1,652,798) =========== Basic and diluted net loss per share.................. $ (0.15) =========== Weighted average shares outstanding used in pro forma basic and diluted per share calculation.............. 10,733,098 ===========
AS OF DECEMBER 31, --------------------- 1998 1999 -------- ---------- BALANCE SHEET DATA: Cash and cash equivalents................................. $150,000 $3,794,784 Working capital........................................... 154,232 2,735,337 Total assets.............................................. 343,161 5,863,786 Total partners' capital................................... 192,094 4,643,525
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF RACKSPACE.COM, INC. SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS," "BUSINESS" AND OTHER SECTIONS OF THIS PROSPECTUS. OVERVIEW We provide advanced Linux-based Internet hosting services primarily targeted to small- to medium-sized enterprises worldwide. Through our advanced hosting services, we enable our customers to outsource their Internet operations while allowing them to rapidly upgrade their dedicated server hardware and add bandwidth to support their needs as they expand. Our service offerings are productized as end-to-end turnkey solutions that can be configured, priced and ordered at our Web site. All of our service packages include a built-to-order Internet server which we guarantee will be deployed within 24 hours after order confirmation and which is housed within our state-of-the-art data center with around-the-clock monitoring, security and technical support. As of March 31, 2000, we managed an installed base of over servers within our data center for more than customers, with approximately % of these customers located outside of the United States in over 50 countries around the world. Since inception, we have incurred net losses and experienced negative cash flow from operations. We intend to continue to invest significant resources to enhance our brand identity and aggressively build our customer base worldwide. In addition, we intend to establish additional data centers and expand our network infrastructure, including our customer service and technical support capabilities. As a result, we expect to continue to operate at a net loss and to experience negative cash flows for the foreseeable future. Our ability to achieve profitability and positive cash flow from operations will be dependent upon our ability to expand significantly the number of customers for our services, to retain our customers, to maintain our current prices and to achieve operating efficiencies over a larger subscriber base. CORPORATE RESTRUCTURING Our company, Rackspace.com, Inc., is a newly-formed Delaware corporation that will serve as the successor-in-interest to the business currently conducted by Rackspace, Ltd., a Texas limited partnership. Prior to the completion of this offering, the holders of limited partner interests and the general partner interest in Rackspace, Ltd., as well as holders of options to acquire limited partner interests in Rackspace, Ltd., will exchange their equity interests in Rackspace, Ltd. for shares of our common stock or options, as the case may be. Our operations will continue to be largely conducted by Rackspace, Ltd., with two newly-formed, wholly-owned limited liability companies of Rackspace.com, Inc. serving as its sole limited partner and sole general partner, respectively. Rackspace, Ltd. originally was formed in December 1998 to acquire substantially all of the assets of Cymitar Technology Group, Inc., a Texas corporation that provided information technology consulting services to companies in the San Antonio region. The asset acquisition was completed on December 29, 1998. COMPARABILITY OF RESULTS We began focusing our efforts on our advanced Internet hosting services in December 1998. Prior to that time, our predecessor, Cymitar Technology Group, Inc., was engaged in activities primarily 21 unrelated to our current operations and, accordingly, comparisons of operating results for the year ended December 31, 1997 and the period ended December 28, 1998 with our operating results for the year ended December 31, 1999 are not meaningful and have not been made. REVENUES We derive our revenues primarily from recurring monthly subscriptions for our advanced Internet hosting services, which include the provision of an Internet server, deployment of that server in our data center, an allocated amount of bandwidth, monitoring, security and technical support provided on an around-the-clock, or "24X7," basis. In addition, we derive revenues from: - one-time set-up fees for initial installations; - sales of upgrades for server system hardware and software; - charges assessed for bandwidth usage in excess of the allocated amount under customers' subscription agreements; - other enhanced services that we offer to customers separately from their subscription agreements; - managed colocation services; and - system management services that are not included in subscription plan packages. Monthly subscriptions are invoiced at the outset of the first month's subscription and on approximately the same day in each successive month that the subscription is renewed. Set-up fees also are invoiced at the outset of the monthly subscription. Upgrades, excess bandwidth usage and technical services are invoiced with the following month's subscription payment. Because subscription revenues are prepaid on the first day of the monthly subscription period and because the first day of each subscription period varies from customer to customer, we defer a pro rata portion of each month's billings to the following month. Therefore, we recognize only the revenue earned during the time period in question. Deferred revenue is recorded at the end of each quarter to reflect invoices billed during the last month of the quarter but not recognized as revenue during that quarter. Other fees and charges are recognized at the time the related services and products are provided to the customer. In 1999, 33.4% of our revenues were derived from customers located outside of North America. All of our sales to date have been denominated in U.S. dollars. We believe that a significant portion of our revenues will continue to be derived from customers outside of the U.S. as our services, and in particular, our Linux-based services, receive a high level of acceptance in international markets. OPERATING EXPENSES Our operating expenses are comprised of: - cost of revenues, which consists primarily of the cost of contracting for lines from telecommunication providers to supply our customers with bandwidth, as well as compensation and related expense for customer service and technical support and costs of operating our data center; - sales and marketing, which consists primarily of print and Internet advertising expenses, compensation for sales and marketing personnel and public relations and other marketing expenses; - general and administrative, which consists primarily of corporate compensation and related expenses, professional fees and occupancy costs; 22 - product development, which consists of employee-related expenses and other expenses dedicated towards the development of new service and product offerings for our customers; and - depreciation and amortization, which consists of depreciation of all of our physical assets and amortization of costs for licensed software and goodwill. STOCK-BASED COMPENSATION EXPENSE Commencing with the quarter ending March 31, 2000, we will incur additional operating expense in connection with the grant of options to acquire interests in our company that were made to employees in the first quarter of 2000. As a result of these option grants, we have recorded deferred stock compensation of approximately $ million as of March 31, 2000, representing the difference between the deemed fair value of the equity interests subject to these options and the exercise price at the date of grant. The difference will be amortized over the vesting period of the applicable options, generally three years, which will result in amortization expense of $ in the quarter ending March 31, 2000 and will be amortized thereafter in the amount of approximately $ per quarter. This amortization of deferred stock compensation will be recorded in our financial statements as "Stock-based compensation expense." RESULTS OF OPERATIONS The following table sets forth selected financial data for 1999 set forth as a percentage of revenues in 1999.
YEAR ENDED DECEMBER 31, 1999 ----------------- STATEMENT OF OPERATIONS DATA: Total revenues............................................ 100.0% Operating expenses: Cost of revenues........................................ 30.2 Sales and marketing..................................... 94.8 General and administrative.............................. 51.2 Product development..................................... 3.1 Depreciation and amortization........................... 15.4 ----- Total operating expenses.............................. 194.7 ----- Loss from operations................................ (94.7) Other income (expense).................................... (2.5) ----- Net loss............................................ (97.2)% =====
REVENUES. Revenues in 1999 were $1.7 million. These revenues were derived from customers for our advanced Internet hosting services in 1999. We increased our customer base from 57 at January 31, 1999 to 524 at December 31, 1999. We anticipate that revenue growth in future periods will be derived from new customers of our services as well as service plan upgrades by our existing customers. COST OF REVENUES. Cost of revenues was $513,000 in 1999, representing 30.2% of revenues. Bandwidth costs represented the majority of this amount, with customer service and technical support personnel-related expenses and data center-related and other expenses representing the balance. We anticipate that cost of revenues will increase in both dollar amount and, in the near term, as a percentage of revenues as we establish additional data centers and enter into additional bandwidth contracts to offer hosting services in advance of customer demand for those services. However, in the long term, cost of revenues as a percentage of revenues should eventually stabilize if we are able to 23 achieve greater economies of scale by serving a larger customer base through our network infrastructure and data centers. SALES AND MARKETING. Sales and marketing expense was $1.6 million in 1999, representing 94.8% of revenues. Advertising, public relations and trade show-related marketing expenditures represented the majority of this amount, with compensation and related expenses of our sales and marketing personnel representing the balance. Because we intend to significantly expand our sales and marketing activities in future periods, sales and marketing expense will continue to increase in dollar amount, and may in the short term increase as a percentage of revenues as we develop and expand our marketing initiatives. GENERAL AND ADMINISTRATIVE. General and administrative expense was $870,000 in 1999, representing 51.2% of revenues. We expect that general and administrative expense will increase in dollar amount in future periods as we expand our international operations, but we anticipate that it will decline as a percentage of revenues to the extent that we are able to achieve a larger customer base for our services. PRODUCT DEVELOPMENT. Product development expense was $53,000 in 1999, representing 3.1% of revenues. We anticipate that product development expense will increase in both dollar amount and as a percentage of revenues in the future as a result of our increased emphasis on developing new network and hosting services for our customer base. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $262,000 in 1999, representing 15.4% of revenues. Depreciation and amortization expense related to server hardware and network equipment represented the majority of this amount. We anticipate depreciation and amortization expense to increase in dollar amount as we add new Internet servers to our installed base and establish additional data centers. OTHER INCOME (EXPENSE). Other income (expense) was ($43,000) in 1999, representing 2.5% of revenues. Other income (expense) consisted of interest expense on a note that was converted to equity in the fourth quarter as well as other net interest expense. We anticipate that income included in other income (expense) will increase in amount during the second half of 2000 as a result of interest income from interest-bearing investments that are made with the proceeds of this offering. INCOME TAXES. No provision for federal income taxes has been recorded as we have incurred net operating losses from inception through December 31, 1999 as our operations have been conducted as a limited partnership prior to this offering. Consequently, we have not accumulated a net operating loss that may be used to offset future taxable income. SELECTED QUARTERLY OPERATING RESULTS The following table sets forth unaudited statement of operations data for each of the four quarters in 1999, as well as the percentage of our revenues represented by each item. This data has been derived from unaudited interim financial statements prepared on the same basis as the audited financial statements contained in this prospectus. The interim financial statements include all adjustments, consisting of normal recurring adjustments, that we consider necessary for a fair presentation of this information when considered in conjunction with our financial statements and 24 notes appearing elsewhere in this prospectus. The operating results for any quarter should not be considered indicative of the results for any future period.
QUARTER ENDED ---------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1999 1999 1999 1999 --------- --------- --------- ---------- STATEMENT OF OPERATIONS DATA: Total revenues................................. $125,507 $ 263,483 $ 508,750 $ 802,797 Operating expenses: Cost of revenues............................. 31,232 100,789 104,222 277,181 Sales and marketing.......................... 78,414 253,942 410,300 869,415 General and administrative................... 80,774 156,736 171,393 461,252 Product development.......................... 7,724 9,960 9,960 25,068 Depreciation and amortization................ 20,513 43,235 75,354 122,628 -------- --------- --------- ---------- Total operating expenses................... 218,657 564,662 771,229 1,755,544 -------- --------- --------- ---------- Loss from operations..................... (93,150) (301,179) (262,479) (952,747) Other income (expense)......................... (3,682) (10,022) (19,528) (10,011) -------- --------- --------- ---------- Net loss................................. $(96,832) $(311,201) $(282,007) $ (962,758) ======== ========= ========= ==========
QUARTER ENDED --------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1999 1999 1999 1999 --------- --------- --------- --------- AS A PERCENTAGE OF REVENUES: Total revenues................................... 100.0 % 100.0 % 100.0 % 100.0 % Operating expenses: Cost of revenues............................... 24.9 38.3 20.5 34.5 Sales and marketing............................ 62.5 96.4 80.6 108.3 General and administrative..................... 64.4 59.5 33.7 57.5 Product development............................ 6.2 3.8 2.0 3.1 Depreciation and amortization.................. 16.3 16.4 14.8 15.3 ------- -------- ------- -------- Total operating expenses..................... 174.2 214.3 151.6 218.7 ------- -------- ------- -------- Loss from operations....................... (74.2) (114.3) (51.6) (118.7) Other income (expense)........................... (2.9) (3.8) (3.8) (1.2) ------- -------- ------- -------- Net loss................................... (77.2)% (118.1)% (55.4)% (119.9)% ======= ======== ======= ========
REVENUES. Revenues increased 109.9% during the quarter ended June 30, 1999, 93.1% during the quarter ended September 30, 1999, and 57.8% during the quarter ended December 31, 1999, in each case as compared to the preceding quarter, as a result of significant increases in our customer base during each quarter. COST OF REVENUES. Cost of revenues increased in each quarter and fluctuated as a percentage of revenues. Fluctuations in cost of revenues as a percentage of revenues primarily were attributable to our purchase of additional bandwidth capacity in advance of customer subscriptions for our hosting services. As utilization of bandwidth increases, cost of revenues as a percentage of revenues will tend to decline until we purchase additional bandwidth to support customers' use of our services at which time the percentage will increase, reflecting the reduced utilization of our bandwidth as a percentage of our total available bandwidth. Additionally, cost of revenues should generally increase as a percentage of revenues as we expand our customer service and technical support teams in order to support future growth in our customer base. 25 SALES AND MARKETING. Sales and marketing expense increased significantly during each quarter of 1999 as we increased our sales and marketing staff as well as increased advertising and promotional expenditures during the year. Additionally, sales and marketing expenditures increased as a percentage of revenues to 108.3% during the quarter ended December 31, 1999 from 80.6% during the quarter ended September 30, 1999 as the result of higher spending on targeted print and Internet advertising. GENERAL AND ADMINISTRATIVE. General and administrative expense increased each quarter during 1999 as we significantly increased our general and administrative staffing. The increase in general and administrative expense from the quarter ended September 30, 1999 to the quarter ended December 31, 1999 was primarily the result of increases in recruiting fees and employee-related expenses in that quarter. PRODUCT DEVELOPMENT. Product development expense increased from the quarter ended September 30, 1999 to the quarter ended December 31, 1999 as the result of our increased emphasis on the development of new products and services. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased each quarter during 1999 as the result of additions to our data center infrastructure and the acquisition of new server equipment, which generally corresponds directly to growth in our customer base. For this reason, depreciation and amortization expense remained relatively constant as a percentage of revenues during 1999, ranging from 16.3% of revenues in the quarter ended March 31, 1999 to 14.8% of revenues in the quarter ended September 30, 1999. LIQUIDITY AND CAPITAL RESOURCES We have used cash in our operating and investing activities during all periods since inception. Cash used in operating and investing activities has been funded by permanent contributions to capital, primarily in the form of private placements of equity and debt. During the year ended December 31, 1999, cash used in operations was $439,000. Net cash used in operating activities was primarily the result of operating losses and changes in working capital. Net cash used in investing activities was $1.8 million during the same time period. Net cash used in investing activities primarily resulted from acquisitions of server and related computer hardware as well as network equipment. Although we have plans to invest significantly in property and equipment and recently have made a deposit toward the purchase of $500,000 of networking equipment, we have no further material commitments for such items at this time. Net cash flow provided by financing activities during the year ended December 31, 1999 was $5.9 million. As part of our cash flows from financing activities, during the quarter ended December 31, 1999 $1.6 million of debt was converted to equity and an additional $4.5 million was raised in a private placement of equity. As of December 31, 1999, we had $3.8 million in cash and cash equivalents. Since December 31, 1999, we have raised gross proceeds of $12.6 million through private placements of 2,309,440 limited partner interests in Rackspace, Ltd. to a group of investors and the repayment of a $750,000 note that was issued to us in the November 1999 equity financing. Investors in these financings included Norwest Venture Partners, Sequoia Capital and Red Hat. As of December 31, 1999, we had $16.3 million in cash and cash equivalents, as determined on a pro forma basis to reflect the consummation of these transactions. We believe that our cash balances as of December 31, 1999, the cash received from the private placements of our equity completed in the first quarter of 2000, and the proceeds from this offering will be adequate to meet our funding requirements over the next 12 months. However, after such time, we may require additional external financing for working capital and capital expenditures. We anticipate that further expansion of our operations will cause us to incur negative cash flows on a short-term basis, and therefore require us to use our cash and other liquid resources to support our 26 growth. Our operating and investing activities on a long-term basis may require us to obtain additional equity or debt financing. Although we have no present understandings or commitments with respect to any acquisition of other businesses, products, services or technologies, we intend to evaluate potential acquisitions from time to time. In order to consummate potential acquisitions, we may need additional equity or debt financing in the future. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which will be effective for the fiscal year ending December 31, 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. Although we have not evaluated the impact of FAS 133, we believe the adoption of FAS 133 will not have a material effect on our financial position, results of operations or cash flows as we have not entered into any derivative contracts. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to interest rate risk primarily through our portfolio of cash equivalents. We do not believe that we have significant exposure to market risks associated with changing interest rates as of December 31, 1999 because our intention is to maintain relatively liquid investments. We do not use derivative financial instruments in our operations. 27 BUSINESS Rackspace.com is a leading provider of advanced Linux-based Internet hosting services targeted to small- to medium-sized enterprises worldwide. We offer our customers attractively-priced monthly Internet hosting plans that are productized as end-to-end turnkey solutions that can be configured, priced and ordered through the Rackspace.com Configurator at our Web site. Our service offerings are designed to aid our customers in rapidly implementing their Internet strategies and e-business initiatives. All of our service packages include a dedicated, built-to-order Internet server with pre-installed operating system software and select Internet-based applications, and high bandwidth connections to the Internet. Dedicated servers utilized by our customers are housed within our state-of-the-art data center where we provide around-the-clock monitoring, security and technical support. We guarantee deployment of a new customer's Internet hosting service within 24 hours of order confirmation. Additionally, we enable our customers to cost-effectively scale their Internet operations to support their growing needs by adding bandwidth and rapidly upgrading their server hardware. We have developed specific expertise in deploying Internet hosting services based on the Linux operating system, and approximately 80% of our customers have selected Linux-based hosting services. We believe that customers select the Linux platform due to its reputation for stability and high performance, ease of remote administration and cost advantages. We also provide and support advanced Internet hosting services based on Solaris, Windows NT/2000 and other operating systems. We offer flexible, cost-effective Internet hosting solutions that can be customized and rapidly deployed to meet our customers' specific requirements. We seek to educate small- to medium-sized enterprises worldwide about the benefits of outsourced Internet hosting and to accelerate their purchasing decisions through targeted marketing and our direct and channel sales efforts. In addition, we have entered into strategic relationships with Red Hat, Perot Systems and Sun Microsystems, among others, in order to accelerate our market penetration and to expand our product and service offerings. As of March 31, 2000, we managed an installed base of over servers within our data center for more than customers, with approximately % of these customers located outside of the United States in over 50 countries around the world. INDUSTRY BACKGROUND THE NEED FOR A WEB PRESENCE The Internet has emerged as a global communications medium and traffic on the World Wide Web continues to explode. International Data Corporation, or IDC, estimates that the number of Web users worldwide will grow from 144.0 million in 1998 to 602.4 million in 2003. The Internet also has developed into a critical resource for business. According to IDC, worldwide business-to-business e-commerce is expected to grow from approximately $44.5 billion in 1998 to approximately $1.4 trillion in 2003, representing a 100% compound annual growth rate. To successfully develop an online presence into a competitive advantage, companies seek to rapidly introduce sophisticated Internet services to improve communications with customers, suppliers, employees and business partners and to attract the growing worldwide consumer audience that increasingly uses the Internet to purchase goods and services. According to IDC, in 2003, businesses worldwide will spend approximately $1.5 trillion in technology and non-technology investments to maintain and support the Internet infrastructure. OUTSOURCING OF INTERNET HOSTING SERVICES A large number of enterprises initially created their Web sites for brochure-style marketing and information purposes. Today, enterprises are adding transaction functionality, e-commerce and other complex applications to their Internet operations in an effort to derive substantial revenues from their online activities. The economics of outsourcing hosting services is compelling for many enterprises. We believe that the costs associated with outsourcing a small- to medium-sized enterprise's hosting needs 28 are a small fraction of the costs involved in establishing in-house hosting capabilities. In addition, outsourcing of Internet hosting services provides enterprises with the following benefits: - high-speed and reliable bandwidth; - the ability to rapidly adopt evolving Internet technologies and architectures; - rapid and efficient scaling of e-commerce and Internet application initiatives; - access to qualified and experienced information technology personnel; - the ability to maintain primary focus on their core business operations; - cost-effective advanced hosting solutions; and - reduced risk of hardware obsolescence. Internet hosting services have traditionally been provided in three forms: - SHARED-SERVER HOSTING. In shared-server hosting, two or more enterprises share a third party's Internet server, network connections, software and bandwidth. This method of hosting provides a low-cost means for an enterprise to maintain an Internet presence. Shared-server hosting is attractive for enterprises that maintain Web sites with primarily brochure-style content, as shared-server hosting provides limited storage and processing capabilities, does not offer high bandwidth scalability and poses security risks caused by multiple parties having access to a single server. - COLOCATION HOSTING. Enterprises that own their own Internet servers and software can use colocation hosting to house their servers within an Internet hosting company's shared data center. The enterprise retains responsibility for the installation, management, upgrading and security of its Internet operations. For this reason, colocation generally is a feasible option for enterprises that operate a large number of servers and maintain a staff of technical support personnel within close proximity of the data center. - ADVANCED HOSTING. In advanced hosting, enterprises are provided a complete outsourced Internet hosting solution housed at the Internet hosting company's data center. Advanced hosting includes provision of the Internet server, software, network equipment and services and technical support. In addition, advanced hosting often includes other value-added services such as server clustering and load balancing, private networking options and security management solutions. THE OPPORTUNITY TO PROVIDE INTERNET HOSTING FOR SMALL- TO MEDIUM-SIZED ENTERPRISES According to a report by eMarketer, an online market research firm, there were approximately 7.5 million businesses in the U.S. in 1999, of which 99.5% were categorized as small- to medium-sized firms, I.E., firms with less than 1,000 employees. In addition, according to eMarketer, in 1998: - only 28.0% of small businesses and 54.3% of medium-sized businesses were connected to the Internet; - only 4.2% of small businesses and 32.8% of medium-sized businesses maintained an active Web site; and - only 1.8% of small businesses and 13.3% of medium-sized businesses conducted business online. As these small- to medium-sized enterprises increase their activities in the digital marketplace, Internet hosting services should experience significant increased demand. To date, the market for Internet hosting services targeted to small- to medium-sized enterprises has been largely underserved. Neither shared-server nor colocation hosting effectively addresses these enterprises' needs for dynamic, but cost-effective, Internet operations, yet this market represents a significant opportunity. IDC estimates that, of an approximately $13.0 billion colocation and dedicated Web hosting market that will exist in the U.S. in 2003, small- to medium-sized enterprises will represent 90.1%, or $11.7 billion, of the total. 29 LINUX AND THE WEB In assessing their needs for a reliable and cost-effective infrastructure to support their Internet operations, many enterprises choose to implement hardware and software products that use an open source platform, such as the Linux operating system. The term "open source" refers to software which can be copied, modified and distributed without payment of licensing or associated fees and with few restrictions on use. As an open source platform, the source code for the Linux operating system can be downloaded from the Internet and software developers can write and sell applications based on the Linux software without obligation to pay fees or royalties to any third party. The Linux code itself is continuously maintained and improved by large communities of developers who share information, code and suggestions. Additionally, the open source platform for Linux allows end users to customize the Linux source code to meet their specific requirements. The Linux platform offers companies several important benefits, including: - STABLE AND HIGH PERFORMANCE CHARACTERISTICS. The Linux operating system has established a reputation as a stable platform that is designed to run in continuous mode without interruption. - COST-EFFECTIVE IMPLEMENTATION. Unlike proprietary operating systems, the operating system for Linux is free to anyone and many core software products, such as Linux database software, e-mail and Internet server applications, also are available at no charge. - GREATER INTEROPERABILITY. Due to Linux's growing popularity, equipment manufacturers and software developers increasingly introduce products that are compatible with the Linux platform, which, in turn, provides enterprises with greater flexibility in selecting the most appropriate hardware and software for their needs, including from leading vendors such as IBM, Intel, Oracle, Red Hat and Sun Microsystems. - REMOTE ADMINISTRATION CAPABILITY. The Linux operating system can be administered through simple, quickly transmitted instructions, thereby enabling operators to rapidly administer changes to the server from a remote site over a modem without physically handling the server. Linux has emerged as the leading operating system for the Internet. In an April 1999 Web server survey conducted by Internet Operating System Counter (leb.net/hzo/ioscount), which polls Web sites for operating system information, Linux-based operating systems represented 31% of all Web server installations, making Linux the most commonly used operating system for Web servers. According to IDC, revenue or paid shipments of Linux grew faster than any other server operating environment between 1997 and 1998, and again between 1998 and 1999. THE MARKET OPPORTUNITY For small- to medium-sized enterprises, the outsourcing of their hosting needs to a provider of advanced Internet hosting services offers a cost-effective means to establish and maintain dynamic Internet operations. Advanced Internet hosting involves the dedication of a server, or series of connected servers, to a single customer's Internet operations on an outsourced basis. The customer pays for the use of the outsourced server or servers and the services provided to it, including bandwidth, network monitoring, server maintenance and technical support, without incurring the up-front capital cost for purchasing and deploying the server hardware and software and the continuing costs for maintaining a staff of technical personnel. IDC estimates that in the United States the dedicated Web hosting market will grow from $566.0 million in 1998 to approximately $14.0 billion in 2003. THE RACKSPACE.COM SOLUTION We provide advanced Internet hosting services that offer enterprises a cost-effective outsourcing solution to deploy and maintain their Internet servers within a secure, state-of-the-art data center that provides around-the-clock monitoring, security and technical support. Our month-to-month service plans allow small- to medium-sized enterprises to rapidly establish their online presence efficiently and 30 effectively. Our service plans also provide our customers with a flexible means to scale their Internet server and bandwidth requirements to accommodate rapid changes in demand or pursue new e-business initiatives. Our solutions provide our customers with the following benefits: - FLEXIBLE, COST-EFFECTIVE SOLUTION. We offer end-to-end services that provide a complete outsourced advanced hosting solution at a fraction of the cost typically associated with the purchase of a server and network hardware and its deployment within a data center. A purchase of a service plan typically begins with the prospective customer using the Rackspace.com Configurator on our Web site to custom configure, price and order an Internet server and bandwidth package. We offer our services under month-to-month contracts that permit the customer to adjust its services without a long-term commitment. The short-term nature of the customer's commitment can accelerate the customer's initial decision to outsource its advanced hosting needs to us. Our month-to-month programs also make it easy for a customer to increase the performance of its single server or server cluster without incurring disposition fees or continuing payment obligations on the prior server. - RAPID DEPLOYMENT. We have designed our hosting solutions to support rapid deployment, quick upgrades and fast modifications. We guarantee our new customers that we will configure and launch their Internet servers in our data center within 24 hours of order confirmation. Additionally, we are able to increase a customer's bandwidth upon request, and we typically complete hardware upgrades within 24 hours. In e-commerce, where rapid time to market is a competitive advantage, our rapid deployment capabilities enable our customers to move with confidence in establishing and expanding their Internet operations. - SCALABLE PRODUCT OFFERINGS. We offer our customers hosting solutions that scale to meet their performance and Web traffic needs. Through this scalability, our services minimize the costs and capital risks involved in projecting future Internet hosting needs, including server obsolescence, bandwidth oversizing and Web site outages. - LINUX EXPERTISE. Managing the deployment of business-critical Internet applications requires an in-depth understanding of the underlying software, hardware and network technologies. We believe that we are the leading provider of advanced Internet hosting services that uses Linux as the primary operating system for the vast majority of its dedicated servers. We have broad knowledge of the Linux operating system and Linux-based applications. We use this expertise to offer comprehensive services, including installation, configuration and stress testing of hardware and software, content back-ups and system upgrades. - HIGH LEVEL OF CUSTOMER SERVICE. We believe that our prospective customers highly value customer service and technical support when selecting a hosting provider. We form a support team for each customer to serve as a single point of contact for that customer. Each team is composed of a support specialist to handle routine inquiries and system specialists who are available 24 hours a day, seven days a week. Customer service and standard technical support are provided through e-mail and telephone inquiries handled by people, rather than by automated call answering systems. - GLOBAL DATA CENTER INFRASTRUCTURE. We maintain a data center in our San Antonio facility that uses Cisco networking equipment and the services of multiple Internet backbone providers, consisting of Intermedia, Qwest, SBC Communications, Time Warner Telecom and UUNET. Our data center offers customers burstable bandwidth, which assures them that we will provide sufficient bandwidth to address rapid, unexpected or continuing increases in the demand for data from their housed servers. Our data center provides around-the-clock monitoring, security and technical support, backup power supply, and high-speed and redundant network connectivity to help ensure uninterrupted high performance and data integrity. To further support our global customer base, we intend to establish data centers in Europe and Asia and an additional data center in the United States. 31 STRATEGY Our goal is to become the leading global provider of advanced Linux-based Internet hosting services by capitalizing on the growth in Internet usage, e-commerce and the outsourcing of hosting services. Our strategy for accomplishing this goal includes the following key elements: ESTABLISH RACKSPACE.COM AS THE LEADING LINUX HOSTING SOLUTION. Our technicians have particular expertise in the implementation and support of Linux-based Internet hosting services. As Linux continues to receive broad acceptance as the platform of choice for Internet operations, we believe that enterprises will increasingly view us as the authoritative provider of advanced hosting solutions using the Linux platform. We intend to continue focusing significant resources to further develop and expand our technical proficiency in Linux and firmly establish our position as the authoritative provider of Linux hosting solutions. BUILD GLOBAL BRAND AWARENESS. The market for advanced Internet hosting services is in the early stages of its development and we believe this market is both unformed and uninformed. Therefore, we believe a significant opportunity exists for us, as a leader in this industry, to build brand identity as the premier provider of these services. We intend to inform prospective customers about the benefits of our services by expanding our involvement in trade shows, seminars and workshops, and by conducting marketing programs with our channel partners to develop association of our brand name with their more recognizable names. In this manner, we believe that we will form greater demand for our services that, in turn, will broaden our customer base worldwide. We also intend to generate greater awareness of our brand and service offerings by continuing to engage in technology tradeshows and conferences, outbound telemarketing, direct mail advertisements, targeted advertisements on Web sites and searches directed at hosting services, advertisements in business and technology publications and regional public relations activities. We will pursue these efforts in defined regions in which Internet adoption by enterprises occurs at a rapid pace, such as in North America, Western Europe and select Pacific Rim locations, including Australia, Hong Kong, Japan, Singapore and Taiwan. CAPITALIZE ON INTERNATIONAL MARKET OPPORTUNITIES. Customers with principal offices outside of the United States represented % of our customers as of March 31, 2000. Because the Internet infrastructure has been rapidly established in the U.S. and intense competition among bandwidth providers in the U.S. market has contributed to a relatively lower cost environment than in other countries, many international enterprises elect to maintain their Internet servers in the U.S. In addition, because sites maintained by international enterprises are accessed in significant part by U.S.-based Internet users, the placement of an Internet server in the U.S. enables rapid delivery of content to these users. Linux is also a popular platform for international enterprises due to its ability to be administered through short commands from any remote site over a modem connected to the Internet. We intend to establish data centers in markets outside of the U.S., beginning with a data center in London later this year, as the Internet infrastructure becomes more developed, and pricing among bandwidth providers becomes more competitive, in those markets. We believe that our experience in providing advanced Internet hosting services in the U.S., combined with our technical expertise, brand recognition and focus on Linux, will enable us to compete favorably with other hosting services providers in local markets across the world. UTILIZE STRATEGIC RELATIONSHIPS TO EXPAND MARKET OPPORTUNITIES. A key element of our sales and marketing strategy involves the formation of strategic relationships with third parties that select, or influence the selection of, Internet hosting service providers for end-user enterprises. To this end, we recently established a strategic relationship with Red Hat for proposed joint marketing and product development and with Perot Systems to co-market our services and generate referrals. We will continue to aggressively pursue relationships with other system integrators, e-business consultants, application service providers, Web designers and independent software vendors, particularly Linux software vendors. We believe that these relationships will enable us to promote greater awareness of our products and services with end-user enterprises through co-marketing arrangements. We intend to 32 continue developing relationships with channel partners in key markets around the world in a collaborative and noncompetitive manner. OFFER A BROAD RANGE OF PRODUCTS AND SERVICES TO SERVE THE GROWING NEEDS OF OUR CUSTOMERS. Our advanced Internet hosting services are designed to accommodate the needs of our customers by enabling continuous upgrades of server hardware, bandwidth service and server management options to support the needs of our customers as they progress in the development of their Internet operations. We intend to further expand the products and services that we offer to our global customer base. For example, we intend to establish an additional data center in the U.S. to support redundant data mirroring and remote backup. Furthermore, we intend to establish and expand our relationships with providers of products and services that are complementary to our services in order to offer our customers additional enhanced services. To this end, we have established strategic relationships with Red Hat proposing to provide product development and application testing expertise, with Trident Data Systems to provide advanced security solutions, with Cisco Systems to provide enhanced networking solutions, with SiteLite to provide advanced database administration and monitoring services for the Oracle and Microsoft SQL database applications and with Mercantec and Akopia to provide e-commerce solutions. LEVERAGE CUSTOMER SERVICE CAPABILITIES. We intend to continue to devote significant resources to expand and further develop our customer service and technical support capabilities. We believe that we offer superior customer service and technical support, which increasingly will be critical factors for generating new customer referrals, retaining our existing customers and creating barriers to entry for emerging competitors in our market. We recently launched the Rackspace.com Wizard at our Web site, which simplifies the process of setting up a new Internet-domain configuration. We also intend to expand our online reporting of server performance for our customers so that they can anticipate the need for a server upgrade or replacement, or an increased bandwidth service plan, to remain cost-effective in the use of our services as they grow their online operations. SERVICES Our primary service offering consists of productized, end-to-end, turnkey hosting solutions that are targeted to small- to medium-sized enterprises enabling them to establish, maintain and expand their Internet operations. Each advanced Internet hosting solution consists of a custom-built outsourced server that is housed within our data center. Each outsourced server is dedicated to a single customer for that customer's Internet hosting use. All of our hosting service plans also include: - connectivity to a high-speed network designed with multiple redundant systems; - customer-selected operating system software and standard Internet applications, including e-mail, file transfer protocol and Web server applications; - around-the-clock, or 24X7, monitoring, security and technical support; - remote access administration and management reporting tools; - sophisticated monitoring and alert notification; - uninterrupted power supply through a back-up diesel generator that is capable of supporting the data center's operation should primary power be unavailable; - air-conditioned, and humidity- and static-controlled environment; and - multiple security measures to control physical access to servers within the data center. We also offer customers enhanced services separate from our advanced Internet hosting plans. Please see "--Enhanced Services" below for a description of these services. 33 EASE OF DEPLOYMENT OF OUR ADVANCED HOSTING SERVICES We have made the configuration of a customized Internet server and the selection of an advanced Internet hosting service package a simple, quick and automated process. For most of our prospective customers, the process begins with a visit to our Web site and, in particular, the use of our proprietary Rackspace.com Configurator. The following is the main screen that a user sees when accessing the Rackspace.com Configurator for a Linux-based hosting package: [SCREEN SHOT FROM THE COMPANY'S RACKSPACE.COM CONFIGURATOR WEB PAGE] As indicated in the pull-down menus shown in the boxes above, a prospective customer can select from multiple options underlying each category on the Rackspace.com Configurator set-up page. For example, the customer can select a microprocessor with performance capability ranging from a single 350 MHz processor to dual 750 MHz processors. Other hardware specifications, custom-configured by the customer, include memory requirements, selection of one or more hard drives and interfaces, and optional selection of a tape drive or a redundant array of independent disks, commonly referred to as RAID, configuration. The Rackspace.com Configurator also allows prospective customers to choose a service plan consistent with their needs. Service options include the choice of operating system software, bandwidth ranging from two gigabytes to five terabytes of data transfer per month with bandwidth above that amount purchased on a burstable, or as-used, basis, one or more Internet addresses, system management services, and tape backup and rotation services. Upon the online submission of a selected configuration, the Rackspace.com Configurator instantly generates a price quote for both the monthly service fee and the set-up fee. Thus, the prospective customer can readily explore various alternatives to reach a desired price point as well as illustrate scaling options. Following confirmation of an order for a service plan, a Rackspace.com technician will custom configure the server in our San Antonio facility and then install the server in our data center. Following performance testing of the installed server, we notify the customer that its server is ready for downloading of the customer's software applications. We guarantee that assembly and deployment will be completed within 24 hours of order confirmation. Once deployed, our customer service and technical support personnel provide server management services to support the uninterrupted operation of the server within our data center. Customer service and technical support include around-the-clock monitoring, technical support, automated interval checking of system ports and prompt replacement of defective components without additional charge. ENHANCED SERVICES - PRIVATENET. Our PrivateNet service allows customers with multiple servers to operate their own private internal network among those servers. This feature enables these multiple servers to exchange data exclusively among each other, without transmission over the public Internet. PrivateNet offers a number of benefits to customers with multiple server configurations, including (1) enhanced security through the separation of internal traffic from the public Internet, (2) improved server performance by separating internal processes, such as database access, from external processes, such as requests for data received over the Internet, and (3) reduced cost as there is no charge for bandwidth used for internal PrivateNet transmissions, in contrast to billable transmissions between servers and the public Internet. - THROUGHPUT CLUSTERING. This service provides a higher level of service for customers with multiple servers. By installing a load-balancing switch between the Internet backbone connection and a server array, data requests can be diverted among servers to prevent server overload while providing redundant storage and processing capability. - DATABASE MONITORING. Through our relationship with SiteLite, we offer our customers database administration, monitoring and support services for Oracle and Microsoft SQL database solutions. Although these enhanced services are billed by us, SiteLite provides the services 34 directly to the customer. SiteLite services are offered as an option for our customers through the Rackspace.com Configurator. - E-COMMERCE SOLUTIONS. We partner with Mercantec and Akopia to offer our customers shopping cart, merchant account and credit card processing features and functions for their Web sites' e-commerce initiatives. These e-commerce options are offered to our customers through the Rackspace.com Configurator. - SECURITY AUDITING SERVICES. Through our partnership with Trident Data Systems, we offer customized security auditing services to our customers. As part of these services, we work with Trident to identify, assess and propose corrections to security vulnerabilities on the customer's server. In addition, at the customer's request, we work in conjunction with Trident to implement solutions to address the identified vulnerabilities. MANAGED COLOCATION SERVICES Through our managed colocation services, customers can locate their own Internet servers within our world-class data center, and outsource the monitoring and technical support of their servers to us. The selection of a colocation service plan can be made online at our Web site. PRICING Our hosting services generally are billed on a monthly basis, with a one-time initial setup fee charged at the time the server is configured. Our current customers' monthly service plans range from approximately $200 to $6,500 per month, with the amount varying according to the customer's server specifications, number of servers, bandwidth requirements and selection of enhanced services. The sample screen from the Rackspace.com Configurator presented on page 34 shows typical selections for a small- to medium-sized enterprise that is commencing Internet operations with a Linux-based server. To further simplify the purchasing process for our customers, all service plans, including features and pricing, are described on our Web site. This enables our customers to evaluate the various service offerings without contacting one of our sales representatives, which in turn can shorten the sales cycle, reduce our customer acquisition costs and ultimately enhance customer satisfaction. CUSTOMERS We provide our services to end-user businesses, system integrators, Web site development firms and other organizations. Our customers are located in over 50 countries around the world, including in North America, Europe and select Pacific Rim locations. As of March 31, 2000, our data center housed over Internet servers for more than customers. Our customers are comprised primarily of small- to medium-sized enterprises. As a result, our top 10 customers, in the aggregate, represented less than 15% of our revenues in 1999, and no single customer represented more than 3% of our revenues in 1999. STRATEGIC RELATIONSHIPS - RED HAT. In March 2000, we executed a memorandum of understanding with Red Hat for a proposed joint marketing arrangement. The joint marketing proposal contemplates that we will jointly promote our respective products and services by entering into a "Premier Partner" relationship, which will allow each party to place its marks and information about its products and services on the other party's Web site. As a Premier Partner of Red Hat, we will have prominent placement as an advanced hosting vendor within the Open Source Marketplace to be launched by Red Hat later this year. In addition, the proposal contemplates that Red Hat will distribute Rackspace.com information with its version 7.0 software, which is scheduled for release later this year. We also propose to enter into a strategic alliance agreement with Red Hat under which we will agree with Red Hat to jointly promote each other's products and 35 services through non-Internet marketing initiatives. The proposed arrangement contemplates our payment of an upfront fee and customer referral fees to Red Hat. In addition, Red Hat invested $2.0 million in our March 2000 private placement. - PEROT SYSTEMS. In March 2000, we entered into a distribution agreement with Perot Systems. This agreement provides for (1) customer referrals for our services by Perot Systems, (2) the establishment of a hot-link between the parties' Web sites, (3) the placement of the Rackspace.com Configurator on Perot Systems' primary Web site and (4) the creation of a joint marketing program. We have agreed to pay Perot Systems a fee based upon revenues derived by us under this agreement. - SUN MICROSYSTEMS. We serve as an Embedded Solutions Provider of the Microelectronics Division of Sun Microsystems. Under this arrangement, we custom build servers and provide advanced hosting solutions based on Sun's Solaris platform. As Solaris is an established platform for many enterprise applications, we believe that this relationship will complement our ability to support our customers' needs as they expand their implementation of enterprise applications in Internet-based internal networks, or intranets. - OTHER STRATEGIC RELATIONSHIPS. In addition, we have developed strategic relationships with Trident Data Systems, Mercantec, SiteLite and Akopia to provide enhanced products and services to our customers. For further information, see the section above captioned "--Services--Enhanced Services." MARKETING AND SALES Our marketing efforts are intended to build awareness of our services, create channel partner interest and generate end-user demand. Our marketing activities include participation in technology trade shows and conferences, outbound telemarketing, direct mail advertisements, targeted advertisements on Web sites and searches that are directed at hosting services, advertisements in business and technology publications and regional public relations activities. Additionally, we intend to leverage our current and future strategic relationships through co-marketing and cross-selling campaigns. Our current arrangements with Red Hat, Perot Systems and Sun Microsystems contemplate co-marketing activities that we anticipate will be rolled-out over the next 12 months. As part of our marketing and sales efforts, our Rackspace.com Configurator enables our prospective customers to configure, price and order our services online. The Rackspace.com Configurator complements our marketing efforts by supporting our channel partners as well as our end users when they have questions concerning our services or want to begin service. We believe that the Rackspace.com Configurator enables our channel partners and customers to investigate and choose various configuration options and prices in real time. We employ both a direct and indirect sales model to generate sales of our advanced Internet hosting services. Direct sales are conducted by sales representatives in our San Antonio, Austin, Silicon Valley and London sales offices who field calls generated from referrals and our marketing activities. As of March 31, 2000, our direct sales force consisted of sales representatives. We intend to expand both our outside and inside sales forces as well as our telemarketing activities over the next six months. We also receive direct sales through our Web site via the Rackspace.com Configurator. Our indirect sales efforts focus on the establishment of relationships with channel partners, including: - independent software vendors, such as Red Hat; - information technology service providers, including Perot Systems and other international and regional system integrators and e-business consultants; - hardware manufacturers, such as Sun Microsystems; 36 - application service providers; and - Web site designers and developers. Because we focus on offering advanced Internet hosting services and, therefore, do not provide application development or system integration services, we believe we are not perceived by our channel partners as competitive to them. Typically, these relationships are collaborative, with our channel partners focusing on hardware design and manufacturing, software development, Web site design, development and system integration, while we address the hardware deployment and hosting of the end user's Internet operations. As of March 31, 2000, we have established relationships with channel partners. We believe that a significant percentage of our customers will select our services due to a referral from an existing customer or channel partner. Accordingly, we intend to continue to focus significant resources to offer superior customer service and technical support to attain high levels of customer satisfaction which we believe will lead to future referrals. We believe that referrals, combined with our marketing efforts to establish the Rackspace.com brand, will enable us to attract a significant number of new customers for our hosting services. CUSTOMER SERVICE AND TECHNICAL SUPPORT We believe a critical element of our customer service is providing a high level of responsiveness and technical expertise within our customer service and technical support organizations. To this end, each customer is assigned a customer support team that consists of a support specialist and several systems specialists. The support specialist generally addresses routine inquiries concerning billing, network performance, server upgrade status and similar items. Inquiries that are more technically oriented are referred to a systems specialist. In addition, we recently introduced the Rackspace.com Wizard at our Web site. Through use of the Wizard, a channel partner or customer can analyze the configuration of the server system used by the customer to assist the customer in setting up user accounts, adding new Web sites and expanding domain name server entries. All systems are monitored and maintained on a 24X7 basis. Monitoring includes the transmission of test signals to each server in five-minute intervals to assure that the server is responding to incoming data requests. In many instances we proactively remedy performance issues before they develop into problems for our customers. Furthermore, we provide customer service and technical assistance on a 24X7 basis via telephone and e-mail. Due to the broad scope of our international operations, we maintain a customer service and technical support staff that is proficient in several languages, including Dutch, French, German and Spanish. We strive to respond within 15 minutes or less to reports of business-critical incidents and to less critical incidents within a two-hour period on an internally-prioritized basis. Our customer care system provides support personnel with timely online information regarding the status of all set-up and support activities. Additionally, support personnel have access to information regarding the sales history and current sales activities for each customer account. This integration of support and sales systems enables us to allocate resources with a full knowledge of both new business opportunities and any customer support issues. We believe that this system will support substantially greater economies of scale and quality of service across our customer service and technical support department. DATA CENTER AND NETWORK INFRASTRUCTURE We currently operate a highly secure, fault-tolerant data center consisting of up to approximately 12,000 dedicated square feet ready for expansion. This data center can support up to 10,000 servers in a 24X7 hosted environment. Our network is certified as a Cisco-powered network and, accordingly, most of our networking equipment is supplied by Cisco Systems. We believe that our current location is an advantageous site for our data center due to the general lack of earthquake activity and other 37 natural calamities affecting the local region. We intend to establish a data center presence in London in the second quarter of 2000 to further support our customers in Europe. The security controls, physical infrastructure and network of our data center have been designed to support the rigorous requirements of a robust Internet-serving platform, including: - high levels of physical security measures to prevent unauthorized access to the data center; - redundant and diverse systems to maintain electrical power, air conditioning and network operation; and - high performance Internet connectivity. DATA CENTER SECURITY We maintain three levels of physical security to restrict unauthorized access to the data center. First, the perimeter of our building is secured with a passkey protection system. Security guards are stationed on a 24X7 basis on the ground floor of our building to control use of the elevators and to investigate suspicious activities. Surveillance cameras are also positioned to enable security guards to monitor data center visits. Second, the elevator to the data center floor, along with the doors at the elevator landing, are controlled by additional passkey systems. Finally, the data center uses a biometric hand scanner identification system to limit entrants to people who have received pre-authorization to access the data center. REDUNDANT SYSTEMS Operation of servers in our data center is supported by multiple and diverse redundant systems. The primary utility power is supported by an on-site diesel generator which can generate sufficient power to maintain uninterrupted operation of the data center until primary power is restored. Our air conditioning system also has redundant back-up units. Cabling is run diversely within the data center to overcome problems that may occur due to mechanical failure and electrical interference. Multiple fiber transport connections enter our facility at different building penetration points to prevent network outages caused by construction or other events that are outside of our control. Additionally, we use five Internet backbone providers to help ensure that servers housed within our data center will remain connected to the Internet should any one primary supplier fail to maintain connectivity. We also intend to establish an additional data center in the U.S. to expand our available capacity and maintain a redundant data site that is geographically distant from our primary data center in San Antonio. HIGH PERFORMANCE INTERNET CONNECTIVITY We designed our network to provide high throughput and low latency by deploying high performance routing and switching equipment from Cisco Systems. With one OC-3 and two OC-12 fiber connections, our data center provides approximately 1.5 gigabits per second of available transport connectivity. We attempt to maintain low utilization rates to reduce congestion and to absorb bursts of traffic that our customers' applications may produce. As our San Antonio data center is located near the half-way mark between the major U.S. public peering points on the West Coast and East Coast, we have access to both peering points without being dependent on either of them to route our traffic. Additionally, since we have five Internet backbone providers, we often are able to route traffic to the closest backbone termination point that is available to us without traversing congested public exchange points. COMPETITION The markets in which we operate are highly competitive, and competition is increasing because few apparent substantial barriers to entry exist in the Internet hosting and colocation markets. Although it is impossible to quantify our relative competitive position in our market, many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer 38 operating histories, greater name recognition and more established relationships in the industry than we have. We expect that we will face competition from existing competitors as well as new market entrants in the future. The primary competitive factors in our market are: - quality of service, including network capability, scalability, reliability and functionality; - customer service and technical support; - variety of services and products offered; - technical expertise in developing advanced Internet hosting solutions; - price; - brand name recognition; - Internet system engineering and technical expertise; - timing of introductions of value-added services and products; - network security; - financial resources; and - conformity with industry standards. Our current and potential competitors vary by size and service offerings and by geographic region. These competitors may elect to partner with each other or with focused companies like us to deliver service on Linux or other popular operating system platforms. They include: - other providers of advanced Internet hosting services, including Data Return, Digex, GTE Internetworking, MCI WorldCom (including UUNET) and USWeb/CKS Group; - Internet and application hosting service providers, such as Critical Path, Interliant, Navisite, USINTERNETWORKING and Verio; - colocation providers, including AboveNet, Digital Island, Exodus, GlobalCenter and Globix; - local, regional and international Internet service providers, such as AppliedTheory, Concentric, EarthLink and PSINet; - original equipment manufacturers of servers that have recently introduced hosting services for purchasers of their server products, including Dell and Intel; - local, regional and international telecommunications companies, such as AT&T, British Telecommunications, Cable & Wireless, Qwest, Nippon Telegraph and Telephone and Telecom Italia, and the regional Bell operating companies, including Bell Atlantic and U S WEST; and - system integrators and large information technology outsourcing companies, such as Andersen Consulting, EDS, IBM, Oracle and PricewaterhouseCoopers. We believe that our expertise and primary focus on providing advanced Internet hosting services based on the Linux platform enable us to differentiate ourselves from our competitors. We also believe that our emphasis on customer service, rapid deployment, technical support, and our ability to maintain a service delivery infrastructure that is designed to parallel or surpass the performance provided by Internet backbone providers and other telecommunications carriers will further differentiate us from our competitors. Additionally, we focus our marketing and sales methodologies on enabling customers to custom-configure a server that best addresses their short-term needs and to deploy that server within our data center within 24 hours, which ultimately enhances overall customer satisfaction with our services. INTELLECTUAL PROPERTY RIGHTS We rely on a combination of copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect certain proprietary rights in our data, applications and 39 services. We have no patented technology that would bar competitors from our market. We are in the process of filing federal and international registrations for the trademark "Rackspace.com." In addition, "PrivateNet," "Leader in Linux," "Rackspace.com Configurator" and "Rackspace.com Wizard" are unregistered trademarks of our company. GOVERNMENT REGULATION As a provider of advanced Internet hosting services, we are not currently subject to direct federal, state or local government regulation, other than regulations applicable to businesses generally. We could also, under some circumstances, become subject to foreign laws and regulations. To date, the number of laws and regulations with direct applicability to Internet-related products and services has been relatively limited. Congress enacted the "Digital Millennium Copyright Act," which became effective in October 1998. The Digital Millennium Copyright Act provides a limitation on liability of online service providers for copyright infringement for transmitting, routing or providing connections, transient storage, caching or storage at the direction of a user, if the service provider had no knowledge or awareness that the transmitted or stored material was infringing and meets other specified conditions. Since this law has not been extensively interpreted by U.S. courts and does not apply outside of the U.S., we are unsure of how it will be applied to limit any liability we may face in the future for any possible copyright infringement or copyright-related issues. This law also requires service providers to follow "notice and take-down" procedures and to meet other conditions in order to be able to take advantage of the limitation on liability. We have not yet implemented these procedures, met these conditions or evaluated the cost of complying with them. However, our customers are subject to an acceptable use policy which prohibits them from transmitting, storing or distributing material on or through any of our services which, in our sole judgment is (1) in violation of any U.S. federal, state or local law or regulation, (2) fraudulent online marketing or sales practices or (3) fraudulent customer information, including identification and payment information. Although this policy is designed to promote the security, reliability and privacy of our systems and network, we cannot be certain that our policy will accomplish this goal or effectively limit our liability. Despite enactment of the Digital Millennium Copyright Act, the law relating to the liability of online services companies and Internet access providers for information carried on or disseminated through their networks remains largely unsettled. It is possible claims could be made against online services companies and Internet access providers under both U.S. and foreign law for defamation, obscenity, negligence, copyright or trademark infringement, or other theories based on the nature and content of the materials disseminated through their networks. Several private lawsuits seeking to impose liability upon online services companies and Internet access providers are currently pending. Application of existing, modified or new legislation or regulations to our services and products could materially and adversely affect our business. Although sections of the Communications Decency Act of 1996 that proposed to impose criminal penalties on anyone distributing indecent material to minors over the Internet were held to be unconstitutional by the U.S. Supreme Court, similar laws may be proposed, adopted and upheld. The nature of future legislation and the manner in which it may be interpreted and enforced cannot be fully determined and, therefore, legislation similar to the Communications Decency Act could subject us and/or our customers to potential liability, which in turn could harm our business. The adoption of any of these types of laws or regulations might decrease the growth of the Internet, which, in turn, could decrease the demand for our services or increase our cost of doing business or in some other manner harm our business. Due to the increasing popularity and use of the Internet, it is likely that a number of additional laws and regulations with respect to the Internet may be adopted in foreign jurisdictions, or at the federal, state and local levels, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, 40 information security, access fees and the convergence of traditional telecommunications services with Internet communications. In addition, applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. The vast majority of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. The adoption or application of any laws or regulations of this type might decrease the growth of the Internet, which in turn, could decrease the demand for our services, increase the cost of doing business or in some other manner harm our business. EMPLOYEES As of March 31, 2000, we had employees. None of our employees is covered by collective bargaining agreements. We believe that our relations with our employees are good. FACILITIES Our corporate headquarters are located in San Antonio, Texas and consist of approximately 16,600 square feet of office space that is leased until February 2003. We also maintain sales offices in Austin, Texas, Santa Clara, California and London, with plans to expand our operations in London by establishing a data center presence in the second quarter of 2000. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. 41 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table sets forth information concerning our executive officers, directors and key employees as of March 27, 2000:
NAME AGE POSITION(S) ---- -------- ----------- Graham M. Weston....................... 36 Chief Executive Officer and Director Morris A. Miller....................... 33 President, Chief Operating Officer and Director Quincy J. Lee.......................... 28 Chief Financial Officer and Vice President Andrew May............................. 46 Vice President, Sales and Marketing John J. Miksa.......................... 45 Vice President, Channel Sales and Strategic Alliances Richard K. Yoo......................... 25 Chief Technology Officer David E. Bryce......................... 28 Vice President, Operations Patrick R. Condon...................... 24 Vice President, Business Development Dirk J. Elmendorf...................... 24 Vice President, Product Development
- ------------------------ GRAHAM M. WESTON has served as our Chief Executive Officer since July 1999 and as a director since March 2000. Prior to joining us, Mr. Weston was a founder and principal at Assessment Technologies, Inc., an ad valorem tax consulting firm. Mr. Weston is also Chief Executive Officer of Weston Properties, LLC, a real estate company owning industrial and office properties in Texas. Mr. Weston received a B.S. from Texas A&M University. MORRIS A. MILLER has served as our Chief Operating Officer since July 1999 and as our President and a director since March 2000. From March 1997 to June 1999, Mr. Miller was a managing director for Knightsbridge, LC, an investment management firm. From July 1995 to March 1997, Mr. Miller was a principal in Curtis Hill Publishing Company, a legal software publishing company, which was subsequently acquired. Mr. Miller received a B.A. in psychology from The University of Texas at Austin and a J.D. from Southern Methodist University. QUINCY J. LEE has served as our Chief Financial Officer and Vice President since September 1999. From August 1998 to March 1999, Mr. Lee served as a Vice President of Finance of FlashNet Communications, Inc., an Internet service provider. From September 1997 to August 1998, Mr. Lee worked as an assistant portfolio manager for Kleinheinz Capital, Inc., an investment management firm. Prior to this time, Mr. Lee worked with the corporate finance group of Deloitte & Touche, LLP. Mr. Lee received a B.B.A. in accounting and a B.A. in economics from The University of Texas at Austin and an M.B.A. from Rice University. ANDREW MAY has served as our Vice President, Sales and Marketing since November 1999. From February 1998 to November 1999, Mr. May served as the Worldwide Marketing Director for NCR's Channel Delivery Systems Business. Mr. May also managed NCR's International Public Relations for the Financial Solutions Group. Mr. May served as Marketing Director for Ernst & Young LLP's London-based consulting practice from February 1995 to February 1998. JOHN J. MIKSA has served as our Vice President, Channel Sales and Strategic Alliances since December 1999. From June 1997 to November 1999, Mr. Miksa was responsible for business development for application outsourcing at Computer Sciences Corporation, a consulting firm. From July 1990 to February 1997, Mr. Miksa held various management positions with General Electric Information Services and AMR Corporation, including professional services, marketing, sales and global channel development. Mr. Miksa received a B.S. in computer sciences from the University of West Florida. RICHARD K. YOO is one of our co-founders and has served as our Chief Technology Officer since December 1998. From January 1998 to December 1998, Mr. Yoo was a co-founder and principal of Cymitar Technology Group, Inc., an information technology consulting company. From January 1996 to 42 December 1997, Mr. Yoo was a principal of Cymitar Network Systems, a partnership. Mr. Yoo attended Trinity University from September 1993 to February 1996. DAVID E. BRYCE has served as our Vice President, Operations since November 1999. From January 1995 to November 1999, Mr. Bryce founded and served as a principal for USA EnviroClean, Inc, a commercial services company. While at USA EnviroClean, Mr. Bryce also co-founded and consulted with the Pearl Group, a consulting firm. Mr. Bryce received a B.A. in business administration from Ambassador University. PATRICK R. CONDON is one of our co-founders and has served as Vice President, Business Development since December 1998. Mr. Condon was a co-founder and principal in Cymitar Technology Group, Inc. from June 1998 to December 1998. From May 1997 to June 1998, Mr. Condon was involved in strategic consulting for high technology clients for Focus, Inc., a management consulting company. From February 1996 to January 1997, Mr. Condon worked for Global Village Communication, Inc., a communications hardware company. Mr. Condon received a B.A. in finance from Santa Clara University. DIRK J. ELMENDORF is one of our co-founders and has served as Vice President, Product Development since December 1998. From December 1997 to December 1998, Mr. Elmendorf was a principal in Cymitar Technology Group, Inc. From August 1996 to December 1997, Mr. Elmendorf worked for Cymitar Network Systems. Mr. Elmendorf received a B.A. in international economics from Trinity University. BOARD COMPOSITION Our authorized board of directors is fixed at seven members, with five vacancies existing. Our certificate of incorporation provides that at the first annual meeting of stockholders following this offering, our board of directors will be divided into three classes, Class I, Class II and Class III, each of whose members will serve for a staggered three-year term. Any additional directorships resulting from an increase in the authorized number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. Upon expiration of the term of a class of directors, the directors in that class will be elected for three-year terms at the annual meeting of stockholders in the year in which their term expires. With respect to each class, directors' terms are subject to the election and qualification of their successors, or their death, resignation or removal. This staggered classification of the board of directors may have the effect of delaying or preventing changes in control of our company or our management. BOARD COMMITTEES We will establish an audit committee of the board prior to the effective date of the registration statement for this offering. This committee will review and monitor our internal accounting procedures and the results and scope of the annual audit and other services provided by our independent accountants. The audit committee also will consult with our management and our independent auditors prior to the presentation of financial statements to stockholders and, as appropriate, will initiate inquiries into aspects of our financial affairs. In addition, the audit committee will be responsible for considering and recommending the appointment of, and reviewing fee arrangements with, our independent auditors. We also will establish a compensation committee concurrently with the formation of the audit committee. The compensation committee will recommend, review and oversee the salaries, benefits and stock plans for our directors, executive officers and other employees. The compensation committee also will administer our stock plans. DIRECTOR COMPENSATION Other than reimbursing directors for customary and reasonable expenses of attending board of director or committee meetings, we do not intend to pay cash compensation to our directors. Under 43 our 2000 Stock Incentive Plan, each non-employee board member who first joins our board after , 2000 will automatically receive a grant of an option to purchase shares of common stock at the time of his or her commencement of board service. In addition, on the date of each annual stockholders meeting beginning in 2001, each non-employee member of the board of directors who is to continue to serve as a non-employee board member will be automatically granted an option to purchase shares of common stock. See "--2000 Stock Incentive Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION We did not have a compensation committee during 1999. During that period, the general partner of Rackspace, Ltd. made decisions regarding compensation to our executive officers. None of our executive officers serves on the board of directors or compensation committee of any entity which has one or more executive officers serving as a member of our board of directors or our compensation committee. LIMITATION OF LIABILITY AND INDEMNIFICATION Our certificate of incorporation limits the liability of our directors to us or our stockholders for breaches of the directors' fiduciary duties to the fullest extent permitted by Delaware law. In addition, our certificate of incorporation and bylaws authorize indemnification of directors and officers to the fullest extent permitted by Delaware law. We plan to maintain directors' and officers' liability insurance and will enter into indemnification agreements with all of our directors and executive officers. EXECUTIVE COMPENSATION Our chief executive officer received no compensation during the year ended December 31, 1999. No executive officer had annual compensation in excess of $100,000 during the year ended December 31, 1999. EMPLOYMENT AGREEMENTS We require each of our employees to enter into confidentiality agreements prohibiting the employee from disclosing any of our confidential or proprietary information. 1999 UNIT OPTION PLAN As of March 27, 2000, options to purchase 432,897 limited partner interests were outstanding under our 1999 Unit Option Plan. Upon the completion of this offering, no additional options will be granted under the plan and all outstanding options will be converted, on a one-for-one-basis, into the right to purchase shares of our common stock. Currently outstanding options under this plan will remain outstanding until exercised or until the options terminate or expire in accordance with their terms. The administrator of the 1999 Unit Option Plan is the general partner of Rackspace, Ltd. The administrator of the plan may modify the plan, make interpretations and adopt rules and regulations for carrying out the plan. The plan may be terminated or amended at any time. However, termination or amendment will not adversely affect rights granted under the plan prior to the amendment or termination. Options generally vest one-third on each of the anniversary dates following the grant date. The optionees forfeit their options if they compete with us at any time while the option remains outstanding. Any options granted under this plan will expire on or before seven years from the date of the grant. The options are granted at fair market value which, unless otherwise determined in good faith by the administrator pursuant to its powers set forth in the plan, is deemed to equal the greater of (1) $50,000,000 divided by the number of limited partner interests outstanding, (2) the last purchase price in an arms' length transaction closed within 120 days prior to the date the option is granted, or 44 (3) our annualized revenue based on our revenues for the previous month as the basis for the determination times 10, and then divided by the limited partner interests then outstanding. The options terminate to the extent not vested at the time the optionee is no longer a full-time employee. If the option is vested and exercisable, it must be exercised within 60 days of termination of the optionee's employment. If vested and not exercisable, the option terminates on the 120th day following the last day of the optionee's employment. Options are not transferable, other than upon the death or under the will of the holder or by intestate succession. 2000 STOCK INCENTIVE PLAN The 2000 Stock Incentive Plan is intended to serve as the successor equity incentive program to our 1999 Unit Option Plan. The 2000 Stock Incentive Plan became effective on , 2000. We have authorized shares of common stock for issuance under the 2000 Stock Incentive Plan. The share reserve will automatically be increased on the first trading day of January each calendar year, beginning in January 2001, by a number of shares equal to 1% of the total number of shares of common stock outstanding on the last trading day of the immediately preceding calendar year, but no such annual increase will exceed shares. However, in no event may any one participant in the 2000 Stock Incentive Plan receive option grants or direct stock issuances for more than shares in the aggregate per calendar year. The 2000 Stock Incentive Plan has four separate programs. The first program is the discretionary option grant program under which eligible individuals in our employ or service, including officers, non-employee board members and consultants, may be granted options to purchase shares of our common stock. The second program is the stock issuance program under which eligible individuals may be issued shares of common stock directly, through the purchase of such shares or as a bonus tied to the performance of services. The third program is the salary investment option grant program under which executive officers and other highly compensated employees may elect to apply a portion of their base salary to the acquisition of special below-market stock option grants. The fourth program is the automatic option grant program under which option grants will automatically be made at periodic intervals to eligible non-employee board members. The discretionary option grant and stock issuance programs will be administered by our compensation committee. This committee will determine: - which eligible individuals are to receive option grants or stock issuances; - the time or times when option grants or stock issuances are to be made; - the number of shares subject to each grant or issuance; - the exercise or purchase price for each grant or issuance; - the status of any granted option as either an incentive stock option or a non-statutory stock option under the federal tax laws; - the vesting schedule to be in effect for the option grant or stock issuance; and - the maximum term for which any granted option is to remain outstanding. The committee will also select the executive officers and other highly compensated employees who may participate in the salary investment option grant program in the event that program is activated for one or more calendar years. Neither the compensation committee nor the board will exercise any administrative discretion with respect to option grants made under the salary investment option grant program or under the automatic option grant program for the non-employee board members. The exercise price for options may be paid in cash or in shares of our common stock valued at fair market value on the exercise date. Options may also be exercised through a same-day sale program without any cash outlay by the optionee. In addition, the compensation committee may allow a participant to pay the option exercise price or direct issue price, and any associated withholding taxes 45 incurred in connection with the acquisition of shares, with a full-recourse, interest-bearing promissory note. In the event that we are acquired, whether by merger or asset sale or sale by our stockholders of more than 50% of our voting stock in a transaction recommended by the board of directors, each outstanding option under the discretionary option grant program which is not to be assumed by the successor corporation or otherwise continued will automatically accelerate in full, and all unvested shares under the discretionary option grant and stock issuance programs will immediately vest, except to the extent our repurchase rights with respect to those shares are to be assigned to the successor corporation or otherwise continued in effect. The compensation committee may grant options under the discretionary option grant program which will accelerate in the event of an acquisition even if the options are assumed, or which will accelerate if the optionee's service is subsequently terminated. The compensation committee may grant options and issue shares which accelerate in connection with a hostile change in control effected through a successful tender offer for more than 50% of our outstanding voting stock or by proxy contest for the election of board members, or which accelerate upon a subsequent termination of an individual's service. Stock appreciation rights may be issued under the discretionary option grant program which will provide the holders with the option to surrender their outstanding options for an appreciation distribution from us equal to the fair market value of the vested shares subject to the surrendered option less the aggregate exercise price payable for the shares. Such appreciation distribution may be made in cash or in shares of our common stock. There are currently no outstanding stock appreciation rights. The compensation committee will have the authority to cancel outstanding options under the discretionary option grant program in return for the grant of new options for the same or a different number of option shares with an exercise price per share based upon the fair market value of the common stock on the new grant date. In the event the compensation committee elects to activate the salary investment option grant program for one or more calendar years, each of our executive officers and other highly compensated employees selected for participation may elect to reduce his or her base salary for that calendar year by a specified dollar amount not less than $ nor more than $ . In return, the individual will be automatically granted, on the first trading day in the calendar year for which the salary reduction is to be in effect, a non-statutory option to purchase that number of shares of common stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of our common stock on the grant date. The option exercise price will be equal to one-third of the fair market value of the option shares on the grant date. As a result, the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the salary reduction amount. The option will become exercisable in a series of 12 equal monthly installments over the calendar year for which the salary reduction is to be in effect and will be subject to full and immediate vesting in the event of an acquisition or change in control of our company. Under the automatic option grant program, each individual who first joins our board after , 2000 as a non-employee board member will be automatically granted an option for shares of our common stock at the time of his or her commencement of board service. In addition, on the date of each annual stockholders meeting, beginning with the meeting in the year 2001, each individual who is to continue to serve as a non-employee board member will receive an option grant to purchase shares of our common stock. Each automatic grant will have an exercise price equal to the fair market value per share of our common stock on the grant date and will have a maximum term of 10 years, subject to earlier termination following the optionee's cessation of board service. Each share option will become exercisable upon the optionee's completion of months of board service measured from the option grant date and each share option grant will become exercisable upon the optionee's completion of six months of service measured from the grant date. However, each outstanding option will immediately vest upon an acquisition or change in control or the death or disability of the optionee while serving as a board member. 46 Limited stock appreciation rights will automatically be included as part of each grant made under the automatic option grant and salary investment option grant programs and may be granted to one or more officers as part of their option grants under the discretionary option grant program. Options with this limited stock appreciation right may be surrendered to us upon the successful completion of a hostile tender offer for more than 50% of our outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from us in an amount per surrendered option share equal to the highest price per share of common stock paid in connection with the tender offer less the exercise price payable for the share. The board may amend or modify the 2000 Stock Incentive Plan at any time, subject to any required stockholder approval. The 2000 Stock Incentive Plan will terminate no later than , 2010. 2000 EMPLOYEE STOCK PURCHASE PLAN The 2000 Employee Stock Purchase Plan is designed to allow our eligible employees and any participating subsidiaries to purchase shares of common stock, at semi-annual intervals, through periodic payroll deductions. A total of shares of our common stock are reserved for issuance under the plan. The plan has a series of successive offering periods, each with a maximum duration of 24 months. The initial offering period began in , 2000 and will end on the last business day in . The next offering period will begin on the first business day in , and subsequent offering periods will be set by our compensation committee. Individuals who are eligible employees on the start date of any offering period may enter the plan on that start date or on any subsequent semi-annual entry date, generally February 1 or August 1 each year. Individuals who become eligible employees after the start date of the offering period may join the plan on any subsequent semi-annual entry date within that period. A participant may contribute up to % of his or her cash earnings through payroll deductions and the accumulated payroll deductions will be applied to the purchase of shares on the participant's behalf on each semi-annual purchase date, the last business day in January and July each year. The purchase price per share will be % of the lower of the fair market value of our common stock on the participant's entry date into the offering period or the fair market value on the semi-annual purchase date. In no event, however, may any participant purchase more than shares, nor may all participants in the aggregate purchase more than shares on any one semi-annual purchase date. Should the fair market value of our common stock on any semi-annual purchase date be less than the fair market value on the first day of the offering period, then the current offering period will automatically end and a new offering period will begin, based on the lower fair market value. The board may at any time amend or modify the plan. The plan will terminate no later than the last business day in 2010. 47 CERTAIN TRANSACTIONS OUR FORMATION In connection with the formation of Rackspace, Ltd. in December 1998, Messrs. Condon, Elmendorf and Yoo each received limited partner interests. Trout, Ltd. also received limited partner interests at that time. As part of our holding company restructuring, these limited partner interests will be exchanged for shares of our common stock, which will result in Messrs. Condon, Elmendorf and Yoo and Trout, Ltd. receiving 792,380 shares, 396,190 shares, 3,565,714 shares and 7,279,619 shares of our common stock, respectively. These numbers reflect a 10-for-1 limited partner interest split effected on November 30, 1999. Messrs. Weston and Miller, our directors and executive officers, are the managing members of the general partner of Trout, Ltd and the sole beneficial owners of Trout, Ltd. Macroweb, LC is the general partner of Rackspace, Ltd., and holds the general partner interest in Rackspace, Ltd. which will be converted into 9,904 shares of our common stock in connection with our holding company restructuring. Messrs. Weston and Miller are the managing members of Macroweb, LC. Following the restructuring, Macroweb, LC will no longer serve as the general partner of Rackspace, Ltd. FINANCING PROVIDED BY EXETER FINANCIAL, LC Since our formation in December 1998, we have been financed, in part, by loans made by Exeter Financial, LC an entity affiliated with Messrs. Weston and Miller. Exeter Financial, LC provided us with cash advances in the principal amount of approximately $1.6 million. These cash advances accrued interest at a fixed rate of 8% per year with repayments of the principal and interest due over a five-year period beginning on January 2002. During 1999, Exeter Financial, LC assigned its right to repayment of this indebtedness to Trout, Ltd. On September 29, 1999, Trout, Ltd. converted $1.1 million of indebtedness, representing the amount of principal and interest then outstanding under the credit agreement, into 1,904,762 limited partner interests. This number reflects a 10-for-1 limited partner interest split effected on November 30, 1999. On November 30, 1999, Trout, Ltd. also converted $500,000 of the principal outstanding under the second financial commitment into 238,095 limited partner interests. 2000 PRIVATE PLACEMENT In March 2000, we raised gross proceeds of $11.1 million through a private placement of limited partner interests in Rackspace, Ltd. to a group of investors. The investors in this financing were Norwest Venture Partners VII, L.P., entities affiliated with Sequoia Capital, Red Hat, Inc. and Tailwind Capital Partners 2000, L.P., for 1,015,901, 530,035, 353,357 and 53,004 limited partner interests, respectively. We also have issued Norwest Venture Partners VII, L.P., and entities affiliated with Sequoia Capital warrants to purchase and of our limited partner interests, respectively. In connection with our holding company restructuring, these limited partner interests will be converted into an aggregate of 1,952,297 shares of our common stock. The warrants convert into rights to purchase shares of our common stock upon the completion of our holding company restructuring. Tailwind Capital Partners 2000, L.P. is an affiliate of Thomas Weisel Partners LLC, an underwriter in this offering. 1999 PRIVATE EQUITY FINANCING In connection with our November 30, 1999 financing, we sold an aggregate of 2,766,667 limited partner interests at $2.10 per interest, for a total purchase price of $5.8 million, which includes the conversion into limited partner interests of the principal amount of $500,000 described above. In connection with our holding company restructuring, these limited partner interests will be exchanged for 2,766,667 shares of our common stock. On November 30, 1999, we also granted warrants to Trango 48 Capital, LLC and The Hamilton Companies LLC giving them the right to purchase 380,952 and 238,095 limited partner interests, respectively, at an aggregate exercise price of $800,000 and $500,000, respectively. This warrant will convert into a right to purchase our common stock upon the completion of our holding company restructuring. On January 17, 2000, The Hamilton Companies LLC exercised its right to purchase 238,095 limited partner interests at an aggregate exercise price of $500,000. Quincy Lee, our executive officer, is the managing member of Trango Capital, LLC. Trango Capital, LLC is the general partner of First Inning Investors, L.P., an entity affiliated with Quincy Lee. In connection with the holding company restructuring, these limited partner interests and warrants to acquire limited partner interests will be exchanged on a one-for-one basis for shares of our common stock, with fractional interests rounded to the nearest whole share. The following table shows affiliates of our executive officers, directors and our 5% stockholders who participated in this private equity investment.
OFFICERS, DIRECTORS AND NUMBER OF SHARES PERCENT 5% STOCKHOLDERS RELATIONSHIP TO US BENEFICIALLY OWNED OWNED - -------------------------------- ------------------------------------- ------------------- --------- Trout, Ltd. Entity affiliated with Graham Weston 7,279,619 42.9% and Morris Miller Isom Capital Partners I, L.P. Principal stockholder 1,219,048 7.2 First Inning Investors, L.P. Entity affiliated with Quincy Lee 619,048 3.6 Beaulieu River Capital LC Entity affiliated with Graham Weston 357,143 2.1 (formerly, Weston Investment Interests, LC) MiniPat & Company, Ltd. Entity affiliated with Patrick Condon 95,238 *
- ------------------------ * less than 1% Beaulieu River Capital LC, formerly Weston Investment Interests, LC, incident to purchasing 357,143 limited partner interests in connection with our November 30, 1999 financing, delivered to us a promissory note with an interest rate of 8% per year which was paid in full on February 18, 2000. Mr. Weston is the managing member of Beaulieu River Capital LC. Patrick Condon, an executive officer, serves as the general partner of MiniPat & Company, Ltd. See "Principal Stockholders" for a discussion of the beneficial ownership of our directors, executive officers and 5% stockholders. LEASES During 1999, we leased our corporate offices in San Antonio, Texas from the Santa Clara Land Company, an entity affiliated with Graham Weston, for approximately $3,000 per month. On February 22, 2000, we entered into a three-year lease agreement with Santa Clara Land Company. This agreement provides for monthly rent of approximately $12,000, $16,000 and $31,000 in 2000, 2001 and 2002, respectively. REGISTRATION RIGHTS After 180 days from the date of this prospectus, each of Isom Capital Partners I, L.P., First Inning Investors, L.P., MiniPat & Company, Ltd., The Hamilton Companies LLC, Beaulieu River Capital LC, 2M Technology Ventures, L.P., Red Hat, Inc., Norwest Venture Partners VII, L.P., entities affiliated with Sequoia Capital and Tailwind Capital Partners 2000, L.P. will have the right to demand that we register the 4,838,012 shares of our common stock held by them prior to this offering. Trout, Ltd. will also have the right to participate in this demand with respect to the 238,095 shares of common stock held by it. Trango Capital, LLC, Norwest Venture Partners VII, L.P. and entities affiliated with Sequoia Capital 49 also have the right to include the shares that are subject to their respective warrants in any demand registration. See "Description of Capital Stock--Registration Rights" for a description of these registration rights. PURCHASE AGREEMENT In December 1998, Rackspace, Ltd. acquired substantially all of the assets of Cymitar Technology Group, Inc. for approximately $192,000. This purchase price represented the aggregate amount of liabilities assumed by it under the terms of the asset purchase and sale agreement. At that time, Messrs. Condon, Elmendorf and Yoo, who are executive officers, were officers and significant stockholders of Cymitar Technology Group, Inc. DIRECTED SHARE PROGRAM The underwriters have reserved for sale, at the initial offering price, up to shares of our common stock for directors, employees and other persons associated with us who have expressed an interest in purchasing common shares in this offering. OPTION GRANTS TO DIRECTORS AND EXECUTIVE OFFICERS In the first quarter of 2000, we issued options to several of our directors and executive officers. Our non-employee directors also will receive grants under our 2000 Stock Incentive Plan. See "Management--Director Compensation," "--2000 Stock Incentive Plan" and "Principal Stockholders." INDEMNIFICATION AGREEMENTS We will enter into indemnification agreements with each of our executive officers and directors prior to the effective date of the registration statement for this offering. FUTURE TRANSACTIONS All future transactions between us and our executive officers, directors and affiliates will be approved by a majority of the independent members or disinterested members of our board of directors and will be on terms no less favorable than that which could be obtained from unrelated third parties. 50 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of March 27, 2000, on a pro forma basis to reflect the completion of the holding company restructuring and on a pro forma as adjusted basis to reflect the sale of common stock offered by us in this offering for: - each person known by us to beneficially own more than 5% of our common stock; - our chief executive officer; - each of our directors; and - all of our executive officers and directors as a group. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In general, a person who has voting power or investment power with respect to securities is treated as a beneficial owner of those securities. Shares subject to options or rights currently exercisable or exercisable within 60 days of March 27, 2000 are considered beneficially owned by the person holding these options or rights. Unless otherwise indicated, the address for each 5% stockholder listed in the table is c/o Rackspace.com, Inc., 112 East Pecan Street, Suite 600, San Antonio, Texas 78205. The post-offering ownership percentages in the table below assume that the underwriters will not exercise their over-allotment option to purchase additional shares from us.
PERCENTAGE OF BENEFICIAL NUMBER OF OWNERSHIP SHARES ------------------------- BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING - ------------------------ ------------ ---------- ------------ Graham M. Weston (1)........................................ 7,662,539 45.1% % Morris A. Miller (2)........................................ 7,305,396 43.0 Richard K. Yoo.............................................. 3,565,714 21.0 Quincy J. Lee (3)........................................... 1,000,000 5.8 Patrick R. Condon (4)....................................... 895,713 5.3 Trout, Ltd. ................................................ 7,279,619 42.9 Isom Capital Partners I, L.P. .............................. 1,219,048 7.2 Norwest Venture Partners VII, L.P. (5)...................... 1,015,901 6.0 All executive officers and directors as a group (nine persons) (6).............................................. 13,562,990 77.8% %
- ------------------------ (1) Includes 15,873 shares issuable upon the exercise of stock options. Also includes 7,279,619 shares held of record by Trout, Ltd. Mr. Weston serves as a managing member of the general partner of Trout, Ltd. Also includes 357,143 and 9,904 shares held of record by Beaulieu River Capital LC and Macroweb, LC, respectively, for which Mr. Weston is a managing member. Mr. Weston disclaims beneficial ownership of the shares held by Trout, Ltd., Macroweb, LC and Beaulieu River Capital LC, except to the extent of his pecuniary interest in these shares. (2) Includes 15,873 shares issuable upon the exercise of stock options. Also includes 7,279,619 shares held of record by Trout, Ltd. Mr. Miller serves as a managing member of the general partner of Trout, Ltd. Also includes 9,904 shares held of record by Macroweb, LC for which Mr. Miller is a managing member. Mr. Miller disclaims beneficial ownership of the shares held by Trout, Ltd. and Macroweb, LC, except to the extent of his pecuniary interest in these shares. (3) Includes 619,048 shares held of record by First Inning Investors, L.P. Also includes 380,952 shares issuable upon the exercise of an outstanding warrant held by Trango Capital, LLC. Mr. Lee is the managing member of Trango Capital, LLC, the general partner of First Inning Investors, L.P. 51 Mr. Lee disclaims beneficial ownership of the shares held by First Inning Investors, L.P. and Trango Capital, LLC, except to the extent of his pecuniary interest in these shares. (4) Includes 8,095 shares issuable upon the exercise of stock options. Includes 95,238 shares held of record by MiniPat & Company, Ltd. for which Mr. Condon serves as the general partner. Mr. Condon disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest in these shares. (5) Includes shares issuable upon the exercise of an outstanding warrant. The address for this stockholder is 245 Lyton Street, Palo Alto, California 94301-1426. (6) Includes 447,754 shares issuable upon the exercise of stock options and warrants. 52 DESCRIPTION OF CAPITAL STOCK GENERAL Upon completion of this offering, our authorized capital stock will consist of 170,000,000 shares of common stock, par value $0.001 per share, and 30,000,000 shares of preferred stock, par value $0.001 per share. The following is a summary of material terms of the common stock and preferred stock. The following summary is qualified by reference to our certificate of incorporation and our bylaws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part. COMMON STOCK As of March 27, 2000, assuming the completion of our holding company restructuring, there were 16,980,865 shares of common stock outstanding that were held of record by 18 stockholders. Based upon the number of shares outstanding as of that date and after giving effect to the sale of shares of common stock to the public under this prospectus, there will be shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option, upon the closing of this offering. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to limitations under Delaware law and preferences that may apply to any outstanding shares of preferred stock, holders of common stock are entitled to receive ratably such dividends or other distributions, if any, as may be declared by our board of directors out of funds legally available. In the event of our liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the liquidation preference of any outstanding preferred stock. The common stock has no cumulative, preemptive, conversion or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be issued upon completion of the offering will be, validly issued, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. PREFERRED STOCK Our certificate of incorporation provides that our board of directors may establish one or more classes or series of preferred stock having the number of shares and relative voting rights, dividend rates, liquidation preferences, and other rights, preferences, and limitations as may be fixed by the board without further stockholder approval. The holders of our preferred stock may be entitled to preferences over common stockholders with respect to dividends, liquidation, dissolution or our winding up in such amounts as are established by our board of directors when issuing such shares. The issuance of our preferred stock may have the effect of delaying, deferring or preventing a change in control of our company without further action by the stockholders and may adversely affect voting and other rights of holders of our common stock. In addition, issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of the outstanding shares of our voting stock. At present, we have no plans to issue any shares of preferred stock. REGISTRATION RIGHTS According to the terms of a registration rights agreement, beginning 180 days after the closing of this offering, some of our stockholders who will hold, in the aggregate, 5,457,059 shares of common stock, which amount includes 380,952 shares, shares and shares that may be purchased by Trango Capital, LLC, Norwest Venture Partners VII, L.P. and entities affiliated with Sequoia Capital, respectively, under outstanding warrants, may require us to file a registration statement under the Securities Act of 1933 with respect to the resale of their shares. To demand this 53 registration, investors holding an aggregate of at least 2,728,531 shares must request that the registration statement register the resale of all or part of their shares. Additionally, some of our stockholders who will hold, in the aggregate, 5,457,059 shares of common stock will have "piggyback" registration rights with respect to the future registration of our shares of common stock under the Securities Act. If we propose to register any shares of common stock under the Securities Act, the holders of shares having piggyback registration rights are entitled to receive notice of that registration and are entitled to include their shares in the registration. These registration rights are subject to conditions and limitations, including the right of the underwriters of an offering to limit the number of shares of common stock to be included in the registration. We generally are required to bear all of the expenses of registrations under the registration rights agreement, except underwriting discounts and commissions. The registration rights agreement also contains our commitment to indemnify the holders of registration rights for losses they may incur in connection with registrations under the agreement. Registration of any of the shares of common stock held by security holders with registration rights would result in those shares becoming freely tradeable without restriction under the Securities Act. ANTI-TAKEOVER EFFECTS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW Various provisions of our certificate of incorporation and our bylaws could have the effect of delaying or preventing a third party from acquiring our company, even if the acquisition would benefit our stockholders. These provisions are intended to ensure that our board of directors will have sufficient time to act in what the board of directors believes to be in the best interests of our company and stockholders. These provisions could delay or frustrate the assumption of control of our company by the holder or holders of a large block of common stock, and could also discourage or make more difficult a merger, tender offer, or proxy contest that a stockholder may consider in its best interest, including acquisition offers that might result in a premium over the market price for the shares held by stockholders. These provisions of our certificate of incorporation and bylaws are summarized in the following paragraphs. CLASSIFIED BOARD OF DIRECTORS. Our certificate of incorporation provides that at the first annual meeting following our initial public offering, our board of directors will be divided into three classes of directors, as nearly equal in size as is practicable, serving staggered three-year terms. As a result, approximately one-third of the board of directors will be elected each year. These provisions, when coupled with the provisions of our certificate of incorporation and bylaws authorizing our board of directors to fill vacant directorships or increase the size of our board, may deter a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors. STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. Our certificate of incorporation provides that stockholders may not take action by written consent, but only at a duly called annual or special meeting of stockholders. Our certificate of incorporation further provides that special meetings of stockholders may be called only by the chairman of the board, the chief executive officer or a majority of our board of directors. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. Our bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must provide us with timely written notice of their proposals. To be timely, a stockholder's notice must be delivered to or mailed and received at our principal executive offices not less than 120 days before the date we released the notice of annual meeting to stockholders in connection with the previous year's annual meeting. If, however, no meeting was held in the prior year or the date of the annual meeting has been changed by more than 30 days from the date contemplated in the notice of annual meeting, then notice by the stockholder, in order to be timely, must be received a reasonable time before we release the notice of annual meeting to stockholders. Our bylaws will also specify certain requirements as to the form and 54 content of a stockholder's notice. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual meeting of stockholders. AUTHORIZED BUT UNISSUED SHARES. Following this offering, we will have a significant number of authorized but unissued shares of common stock and preferred stock. These shares will be available for future issuance without stockholder approval, subject to various limitations imposed by the Nasdaq National Market. These additional shares may be used for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could render it more difficult, or discourage an attempt, to obtain control of our company by means of a proxy contest, tender offer, merger or other transaction. SUPERMAJORITY VOTE PROVISIONS. The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless a corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our certificate of incorporation will impose supermajority vote requirements in connection with the amendment of certain provisions of our certificate of incorporation, including the provisions relating to the classified board of directors and the elimination of action by written consent of stockholders. INDEMNIFICATION. Our certificate of incorporation and bylaws permit us to indemnify our directors and officers to the fullest extent permitted by Delaware law. In addition, our certificate of incorporation limits the personal liability of our board members for breaches by the directors of their fiduciary duties to the fullest extent permitted under Delaware law. DELAWARE LAW. We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibit a Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date that the stockholder became an interested stockholder, unless: - prior to that time, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; - upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by directors and executive officers; or - on or after that date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least two-thirds of our outstanding voting stock which is not owned by the interested stockholder. For purposes of Section 203, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years prior to the date of determination whether the person is an "interested stockholder," did own, 15% or more of the corporation's voting stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services, LLC. NASDAQ NATIONAL MARKET LISTING We have applied to list our common stock on the Nasdaq National Market under the trading symbol "RACK." 55 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of our common stock in the public market could adversely affect the prevailing market prices of our common stock. Upon the consummation of this offering, we will have outstanding an aggregate of shares of common stock, based on the number of shares outstanding at March 27, 2000 and assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding warrants and stock options. Of these shares, all shares being sold in this offering will be freely tradeable without restriction or further registration under the Securities Act unless these shares are purchased by our "affiliates" as the term is defined in Rule 144 under the Securities Act. The following table summarizes the time frames in which issued and outstanding common stock will be eligible for sale in the public market after this offering:
NUMBER OF SHARES DATE - ---------------- ------------------------------------------------- After the date of this prospectus, freely tradeable shares sold in this offering. After 180 days from the date of this prospectus, shares are eligible for sale in the public market under Rule 144 (subject, in some cases, to volume limitations), Rule 144(k) or Rule 701. At various times more than 180 days from the date of this prospectus, when these shares have been held for more than one year and may be sold in accordance with Rule 144.
Shares of common stock held by our existing stockholders are "restricted securities" as defined in Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which rules are summarized below. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year will be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of our common stock then outstanding, which will equal approximately shares outstanding immediately after the offering, or - the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions, notice requirements and the availability of current public information about us. RULE 144(K) Under Rule 144(k), a person who is not an affiliate of our company at any time during the three months preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of certain prior owners other than an affiliate, is entitled to sell these shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the closing of this offering. 56 RULE 701 In general, under Rule 701 as currently in effect, each of our employees, consultants or advisors who purchases shares from us in connection with a compensatory stock plan or other written agreement is eligible to resell these shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144. LOCK-UP AGREEMENTS All of our directors, executive officers and stockholders of our common stock prior to the offering have signed lock-up agreements with the underwriters, which generally require them not to transfer or otherwise dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock for 180 days after the date of this prospectus, except under limited circumstances. See "Underwriting--Lock-up." REGISTRATION RIGHTS After this offering, the holders of 5,457,059 shares of our common stock and shares issuable upon the exercise of outstanding options will be entitled to certain rights with respect to the registration of those shares under the Securities Act. See "Description of Capital Stock--Registration Rights." After any registration and resale under a registration statement, these shares will be freely tradeable without restriction under the Securities Act. These sales could have a material adverse effect on the trading price of our common stock. FORM S-8 We intend to file a registration statement on Form S-8 under the Securities Act covering shares of common stock reserved for issuance under our stock option plans and employee stock purchase plan and the shares reserved for issuance upon exercise of outstanding non-plan options. We expect this registration statement to be filed and to become effective as soon as practicable after the effective date of this offering. 57 UNDERWRITING We intend to offer our common stock through a number of underwriters. Deutsche Bank Securities Inc., Bear, Stearns & Co. Inc. and Thomas Weisel Partners LLC are acting as representatives of each of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement among us and the representatives on behalf of the underwriters, we have agreed to sell to the underwriters, and each of the underwriters severally and not jointly has agreed to purchase from us, the number of shares of common stock set forth opposite its name below.
NUMBER OF UNDERWRITER SHARES - ----------- --------- Deutsche Bank Securities Inc................................ Bear, Stearns & Co. Inc..................................... Thomas Weisel Partners LLC.................................. -------- Total................................................. ========
The several underwriters have agreed, subject to the terms and conditions set forth in the underwriting agreement, to purchase all of the shares of common stock being sold pursuant to the underwriting agreement if any of the shares of common stock being sold under the terms of the agreement are purchased. In the event of a default by an underwriter, the underwriting agreement provides that, in certain circumstances, the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated. We have agreed to indemnify the underwriters against liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities. The shares of common stock are being offered by the underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by counsel for the underwriters and other conditions. The underwriters reserve the right to withdraw, cancel or modify the offer and to reject orders in whole or in part. Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners has been named as a lead or co-manager on 152 filed public offerings of equity securities, of which 108 have been completed, and has acted as a syndicate member in an additional 77 public offerings of equity securities. The limited partners of Tailwind Capital Partners 2000, L.P. are employees of Thomas Weisel Partners LLC. Tailwind Capital Partners purchased 53,004 limited partner interests representing limited partner interests in Rackspace, Ltd. in March 2000 for an aggregate purchase price of $300,000, which units will be converted into 53,004 shares of our common stock prior to this offering. COMMISSIONS AND DISCOUNTS The representatives have advised us that the underwriters propose initially to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share of common stock. The underwriters may allow, and the dealers may reallow, a discount not in excess of $ per share of common stock on sales to other dealers. After the initial public offering, the public offering price, concession and discount may change. 58 The following table shows the per share and total public offering price, underwriting discount to be paid by us to the underwriters and the proceeds before expenses to us. This information is presented assuming either no exercise or full exercise by the underwriters of the over-allotment option.
PER SHARE WITHOUT OPTION WITH OPTION --------- -------------- ----------- Public offering price..................................... $ $ $ Underwriting discount..................................... $ $ $ Proceeds, before expenses, to us.......................... $ $ $
The expenses of the offering, exclusive of the underwriting discount, are estimated at $ and are payable by us. OVER-ALLOTMENT OPTION We have granted an option to the underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of additional shares of our common stock at the public offering price set forth on the cover page of this prospectus, less the underwriting discount. The underwriters may exercise this option solely to cover over-allotments, if any, made on the sale of our common stock offered in this offering. To the extent that the underwriters exercise this option, each underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares of our common stock proportionate to the underwriters' initial amount reflected in the foregoing table. RESERVED SHARES At our request, the underwriters have reserved for sale, at the initial public offering price, up to of the shares offered in this offering to be sold to some of our directors, officers, employees, distributors, dealers, business associates and related persons. The number of shares of our common stock available for sale to the general public will be reduced to the extent that those persons purchase the reserved shares. Any reserved shares that are not orally confirmed for purchase within one day of the pricing of the offering will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. LOCK-UP We and our executive officers and directors and all existing stockholders have agreed, subject to certain exceptions, without the prior written consent of Deutsche Bank Securities Inc. on behalf of the underwriters for a period of 180 days after the date of this prospectus, not to directly or indirectly: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of or otherwise dispose of or transfer any shares of our common stock or securities convertible into or exchangeable or exercisable for or repayable with our common stock, whether now owned or later acquired by the person executing the agreement or with respect to which the person executing the agreement later acquires the power of disposition, or file a registration statement under the Securities Act with respect to any shares of our common stock; or - enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of our common stock whether any swap or transaction is to be settled by delivery of our common stock or other securities, in cash or otherwise. 59 NASDAQ NATIONAL MARKET QUOTATION We have applied for quotation of our common stock on the Nasdaq National Market under the symbol "RACK." Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations between us and the representatives. The factors to be considered in determining the initial public offering price, in addition to prevailing market conditions, will be the valuation multiples of publicly traded companies that the representatives believe to be comparable to us, our financial information, our history, our prospects, the industry in which we compete, and an assessment of our management, its past and present operations, the prospects for, and timing of, our future revenue, the present state of our development, and the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. There can be no assurance that an active trading market will develop for our common stock or that our common stock will trade in the public market subsequent to the offering at or above the initial public offering price. PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS Until the distribution of our common stock is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters to bid for and purchase our common stock. As an exception to these rules, the representatives are permitted to engage in transactions that stabilize the price of our common stock. These transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of our common stock. If the underwriters create a short position in our common stock in connection with the offering, that is, if they sell more shares of our common stock than are set forth on the cover page of this prospectus, the representatives may reduce that short position by purchasing our common stock in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The representatives may also impose a penalty bid on underwriters. This means that if the representatives purchase shares of our common stock in the open market to reduce the underwriters' short position or to stabilize the price of our common stock, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of these purchases. The imposition of a penalty bid might also have an effect on the price of our common stock to the extent that it discourages resales of our common stock. Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters makes any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice. 60 LEGAL MATTERS The validity of the common stock in this offering will be passed upon for us by Brobeck, Phleger & Harrison LLP, Austin, Texas. We have agreed to issue a warrant to Brobeck, Phleger & Harrison LLP to purchase 17,667 shares of common stock with an exercise price of $5.66 per share. Certain legal matters in connection with this offering will be passed upon for the underwriters by Vinson & Elkins L.L.P., Dallas, Texas. EXPERTS The financial statements of Rackspace, Ltd. as of December 31, 1998 and 1999 and for the period from December 29, 1998 (inception) to December 31, 1998 and the year ended December 31, 1999, and the financial statements of Cymitar Technology Group, Inc. for the year ended December 31, 1997 and the period from January 1, 1998 to December 28, 1998 have been included in this prospectus and the registration statement of which this prospectus is a part in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere in this prospectus, and upon the authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT RACKSPACE.COM We have filed with the Securities and Exchange Commission a registration statement on Form S-1, including exhibits and schedules, under the Securities Act of 1933 with respect to the shares of common stock to be sold in this offering. This prospectus does not contain all the information included in the registration statement and the exhibits thereto. For further information about us and the shares of our common stock to be sold in this offering, please refer to this registration statement. Complete exhibits have been or will be filed with our registration statement on Form S-1. As a result of this offering, we will be subject to the information and reporting requirements of the Securities Exchange Act of 1934, and will file and furnish to our stockholders annual reports containing financial statements audited by our independent auditors, make available to our stockholders quarterly reports containing unaudited financial data for the first three quarters of each fiscal year, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any contract, agreement or other document referred to in this prospectus and any portion of our registration statement or any other information from our filings at the Securities and Exchange Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain regional offices. You can request copies of these documents, upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information about the public reference rooms. Our filings with the Securities and Exchange Commission, including our registration statement, are also available to you without charge at the Securities and Exchange Commission's Web site, http://www.sec.gov. 61 INDEX TO RACKSPACE.COM, INC. FINANCIAL STATEMENTS Independent Auditors' Report................................ F-2 Balance Sheets at December 31, 1998 and 1999................ F-3 Statements of Operations.................................... F-4 The Company -- For the period from December 29, 1998 (inception) to December 31, 1998 and for the year ended December 31, 1999 The Predecessor -- For the year ended December 31, 1997 and for the period from January 1, 1998 to December 28, 1998 Statements of Changes in Partners' Capital/Stockholders' Equity.................................................... F-5 The Company -- For the period from December 29, 1998 (inception) to December 31, 1998 and for the year ended December 31, 1999 The Predecessor -- For the year ended December 31, 1997 and for the period from January 1, 1998 to December 28, 1998 Statements of Cash Flows.................................... F-6 The Company -- For the period from December 29, 1998 (inception) to December 31, 1998 and for the year ended December 31, 1999 The Predecessor -- For the year ended December 31, 1997 and for the period from January 1, 1998 to December 28, 1998 Notes to Financial Statements............................... F-7
F-1 The Board of Directors Rackspace, Ltd. When certain of the transactions referred to in note 7 of the Notes to Financial Statements have been consummated, we will be in a position to render the following report. KPMG LLP San Antonio, Texas March 27, 2000 INDEPENDENT AUDITORS' REPORT The Board of Directors Rackspace, Ltd. We have audited the accompanying balance sheets of Rackspace, Ltd. (dba Rackspace.com) (the "Company") as of December 31, 1998 and 1999 and the related statements of operations, partners' capital, and cash flows for the period from December 29, 1998 (inception) to December 31, 1998 and the year ended December 31, 1999 and the statement of operations, stockholders' equity and cash flows of Cymitar Technology Group, Inc. (the Company's Predecessor) for the year ended December 31, 1997 and the period from January 1, 1998 to December 28, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rackspace, Ltd. as of December 31, 1998 and 1999, and the results of its operations and its cash flows for the period from December 29, 1998 (inception) to December 31, 1998 and the year ended December 31, 1999 and the results of operations and cash flows of Cymitar Technology Group, Inc. for the year ended December 31, 1997 and the period from January 1, 1998 to December 28, 1998, in conformity with generally accepted accounting principles. San Antonio, Texas February 29, 2000, except as to Note 7 which is as of . F-2 RACKSPACE, LTD. BALANCE SHEETS
DECEMBER 31, 1999 PRO FORMA DECEMBER 31, STOCKHOLDERS' -------------------- EQUITY 1998 1999 (NOTE 7) -------- --------- ------------- ASSETS Current assets: Cash and cash equivalents................................. $150,000 3,794,784 Accounts receivable, net of allowance for doubtful accounts of $51,016 in 1999 and none in 1998............ 5,233 136,260 Interest receivable--related party........................ -- 4,932 Prepaid expenses and deposits............................. -- 19,622 -------- --------- Total current assets.................................. 155,233 3,955,598 Property and equipment, net................................. 70,623 1,666,139 Goodwill, at cost, less accumulated amortization............ 117,305 99,805 Other assets................................................ -- 142,244 -------- --------- Total assets.......................................... $343,161 5,863,786 ======== ========= LIABILITIES AND PARTNERS' CAPITAL/STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... 896 974,961 Deferred revenue.......................................... -- 150,083 Accrued expenses.......................................... 105 95,217 -------- --------- Total current liabilities............................. 1,001 1,220,261 Note payable and accrued interest--related party............ 150,066 -- -------- --------- Total liabilities..................................... 151,067 1,220,261 Partners' capital/stockholders' equity: Partners' capital......................................... 192,094 5,393,525 Note receivable for issuance of partnership interest...... -- (750,000) (750,000) Stockholders' equity--pro forma: Preferred stock, $0.001 par value, 30,000,000 shares authorized; no shares issued and outstanding.......... -- Common stock, $0.001 par value, 170,000,000 shares authorized; 14,671,425 shares issued and outstanding........................................... 14,671 Additonal paid-in capital............................... 5,378,854 -------- --------- ---------- Total partners' capital/stockholders' equity.......... 192,094 4,643,525 4,643,525 -------- --------- ========== Total liabilities and partners' capital/stockholders' equity.............................................. $343,161 5,863,786 ======== =========
See accompanying notes to financial statements. F-3 RACKSPACE, LTD. STATEMENTS OF OPERATIONS
THE PREDECESSOR THE COMPANY --------------------------- --------------------------- PERIOD FROM DECEMBER 29, PERIOD FROM 1998 JANUARY 1, (INCEPTION) YEAR ENDED 1998 TO TO YEAR ENDED DECEMBER 31, DECEMBER 28, DECEMBER 31, DECEMBER 31, 1997 1998 1998 1999 ------------ ------------ ------------ ------------ Total Revenues.............................. $ 72,535 166,632 76 1,700,537 -------- --------- ----- ---------- Operating expenses: Cost of revenues.......................... 38,895 73,767 -- 513,424 Sales and marketing....................... 648 3,615 -- 1,612,071 General and administrative................ 47,705 181,260 23 870,155 Product development....................... -- -- -- 52,712 Depreciation and amortization............. 6,912 12,363 262 261,730 -------- --------- ----- ---------- Total operating expenses.............. 94,160 271,005 285 3,310,092 -------- --------- ----- ---------- Loss from operations.................. (21,625) (104,373) (209) (1,609,555) -------- --------- ----- ---------- Other income (expense): Interest expense.......................... (3,247) (7,767) (66) (53,112) Other income, net......................... -- -- -- 9,869 -------- --------- ----- ---------- (3,247) (7,767) (66) (43,243) -------- --------- ----- ---------- Net loss.............................. $(24,872) (112,140) (275) (1,652,798) ======== ========= ===== ========== Pro forma basic and diluted net loss per common share (unaudited)................ $ (0.15) ========== Shares used in computing pro forma basic and diluted net loss per common share (unaudited)............................. 10,733,098 ==========
See accompanying notes to financial statements. F-4 RACKSPACE, LTD. STATEMENTS OF PARTNERS' CAPITAL/STOCKHOLDERS' EQUITY
NOTE PARTNERS' RECEIVABLE FOR CONTRIBUTIONS ISSUANCE OF COMMON STOCK ADDITIONAL ----------------------- PARTNERSHIP ------------------- PAID IN ACCUMULATED UNITS AMOUNT INTEREST SHARES AMOUNT CAPITAL DEFICIT ---------- ---------- -------------- -------- -------- ---------- ------------ Balance at December 31, 1996... -- $ -- -- 1,000 $5,552 -- (8,582) Net loss....................... -- -- -- -- -- -- (24,872) ---------- ---------- -------- ----- ------ --- ---------- Balance at December 31, 1997... -- -- -- 1,000 5,552 -- (33,454) Net loss....................... -- -- -- -- -- -- (112,140) ---------- ---------- -------- ----- ------ --- ---------- Balance of Predecessor at December 28, 1998............ -- -- -- 1,000 5,552 -- (145,594) ========== ========== ======== ===== ====== === ========== Formation of the Company and initial contribution--at inception (December 29, 1998)........................ 10,000,000 $ 192,369 -- -- -- -- -- Net loss for the period from December 29, 1998 to December 31, 1998............ -- (275) -- -- -- -- -- ---------- ---------- -------- ----- ------ --- ---------- Balance at December 31, 1998... 10,000,000 $ 192,094 -- -- -- -- -- Cash contribution.............. -- 7,631 -- -- -- -- -- Conversion of advances on credit agreement and accrued interest to partnership interest..................... 1,904,762 1,082,532 -- -- -- -- -- Conversion of advances on credit agreement to partnership interest......... 238,095 500,000 -- -- -- -- -- Sale of partnership interest for cash and note receivable, net of related costs......... 2,528,571 5,264,066 (750,000) -- -- -- -- Net loss....................... -- (1,652,798) -- -- ---------- ---------- -------- ----- ------ --- ---------- Balance at December 31, 1999... 14,671,428 $5,393,525 (750,000) -- $ -- -- -- ========== ========== ======== ===== ====== === ========== TOTAL PARTNERS' CAPITAL/ STOCKHOLDERS' EQUITY ------------- Balance at December 31, 1996... (3,030) Net loss....................... (24,872) ---------- Balance at December 31, 1997... (27,902) Net loss....................... (112,140) ---------- Balance of Predecessor at December 28, 1998............ (140,042) ========== Formation of the Company and initial contribution--at inception (December 29, 1998)........................ 192,369 Net loss for the period from December 29, 1998 to December 31, 1998............ (275) ---------- Balance at December 31, 1998... 192,094 Cash contribution.............. 7,631 Conversion of advances on credit agreement and accrued interest to partnership interest..................... 1,082,532 Conversion of advances on credit agreement to partnership interest......... 500,000 Sale of partnership interest for cash and note receivable, net of related costs......... 4,514,066 Net loss....................... (1,652,798) ---------- Balance at December 31, 1999... 4,643,525 ==========
See accompanying notes to financial statements. F-5 RACKSPACE, LTD. STATEMENTS OF CASH FLOWS
THE PREDECESSOR THE COMPANY --------------------------- ----------------------------- PERIOD FROM PERIOD FROM DECEMBER 29, JANUARY 1, 1998 YEAR ENDED 1998 TO (INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 28, DECEMBER 31, DECEMBER 31, 1997 1998 1998 1999 ------------ ------------ -------------- ------------ Cash flows from operating activities: Net loss.................................. $(24,872) (112,140) (275) (1,652,798) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization......... 6,912 12,363 262 261,730 Interest accrued on credit agreement........................... 886 7,642 66 53,112 Changes in operating assets and liabilities: Receivables......................... (2,146) 1,875 (76) (135,959) Prepaid expenses and other assets... -- -- -- (163,661) Accounts payable and accrued expenses.......................... (5,956) 51,145 1,001 1,048,530 Deferred revenues................... 1,543 10,052 -- 150,083 -------- -------- ------- ---------- Net cash provided by (used in) operating activities............ (23,633) (29,063) 978 (438,963) Cash flows from investing activities: Acquisition of property and equipment..... (5,531) (47,359) (978) (1,837,950) -------- -------- ------- ---------- Net cash used in investing activities...................... (5,531) (47,359) (978) (1,837,950) -------- -------- ------- ---------- Cash flows from financing activities: Sale of partnership interests, net........ -- -- -- 4,514,066 Advances on credit agreement.............. 47,460 70,000 150,000 1,400,000 Partner contribution...................... -- -- -- 7,631 -------- -------- ------- ---------- Net cash provided by financing activities...................... 47,460 70,000 150,000 5,921,697 -------- -------- ------- ---------- Increase (decrease) in cash and cash equivalents................ 18,296 (6,422) 150,000 3,644,784 Cash and equivalents, beginning of period... 887 19,183 -- 150,000 -------- -------- ------- ---------- Cash and cash equivalents, end of period.... $ 19,183 12,761 150,000 3,794,784 ======== ======== ======= ========== Supplemental disclosures of non-cash transactions: Purchase of certain assets of Predecessor for assumption of liabilities........... $ -- -- 192,369 -- ======== ======== ======= ========== Conversion of advances on credit agreement and accrued interest to partnership interest................................ $ -- -- -- 1,582,532 ======== ======== ======= ========== Sale of partnership interest for note receivable.............................. $ -- -- -- 750,000 ======== ======== ======= ==========
See accompanying notes to consolidated financial statements. F-6 RACKSPACE, LTD. NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (A) ORGANIZATION AND DESCRIPTION OF BUSINESS Rackspace, Ltd. (the "Company"), a Texas limited partnership, was formed on December 29, 1998 to provide advanced Internet hosting services. The Company, at its formation, was owned by Macroweb, LC, a Texas limited liability company (the "General Partner"), Trout, Ltd., a Texas limited partnership, Richard Yoo, Patrick Condon, and Dirk Elmendorf (collectively, the "Limited Partners"). The Company provides advanced Linux-based Internet hosting services primarily targeted to small- to medium-sized enterprises worldwide. Through the Company's hosting services, customers are offered a means to outsource their Internet operations while enabling them to rapidly add bandwidth and upgrade their dedicated server hardware to support their needs as they expand. Upon formation, 10,000,000 partner interests were issued. Concurrent with the formation, the Company entered into an asset purchase and sale agreement with Cymitar Technology Group, Inc. ("Cymitar" or "the Predecessor"), a Texas corporation, whereby the Company purchased substantially all of the assets of Cymitar by assuming substantially all of its outstanding liabilities which aggregated $192,369 on the date of the agreement (December 29, 1998). The transaction was accounted for under the purchase method. The purchase price was allocated principally to computer equipment, software and other equipment at their estimated fair values, and the excess of cost over the fair value of net assets acquired of $117,451 was recognized as goodwill which is being amortized over seven years. The significant accounting policies and practices utilized by the Predecessor were consistent with those utilized by the Company. (B) LIQUIDITY The Company has incurred net operating losses and negative cash flows from operations since its inception. Such losses are due primarily to the Company's efforts to aggressively expand its customer base through targeted marketing and advertising initiatives. The Company expects that it will continue to incur net losses as it expends substantial additional resources in an attempt to rapidly increase its market share. There can be no assurance that the Company will achieve or sustain profitability or positive cash flow from its operations. The Company may need to obtain additional debt or equity financing to fund its operations. (C) CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid interest-bearing instruments with original maturities of three months or less to be cash equivalents. Cash balances at December 31, 1999 consisted of bank deposits and overnight money market accounts. Cash balances at December 31, 1998 consisted of bank deposits. (D) PROPERTY AND EQUIPMENT Equipment and leasehold improvements are recorded at cost. Depreciation is provided over the estimated useful lives of the assets, ranging from 3 to 7 years, using the straight line method. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset. F-7 RACKSPACE, LTD. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) (E) OTHER ASSETS Other assets are comprised primarily of deposits and software licenses which are amortized over the license term. (F) INCOME TAXES As a partnership, the Company is not directly liable for federal income taxes. For federal income tax purposes, the partnership's tax attributes are passed through to the partners and included on their individual returns. Subsequent to the reorganization discussed in note 8, the Company will account for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "ACCOUNTING FOR INCOME TAXES." Had the Company applied the provisions of SFAS No. 109 for the period from inception through December 31, 1999, the Company would have recorded a deferred tax asset, subject to a 100% valuation allowance. This pro forma net deferred tax asset (pro forma to exclude the effect of tax losses which passed through to the former partners) is principally comprised of deferred revenue. (G) REVENUE RECOGNITION Revenues consist primarily of recurring monthly fees from customer use of Internet servers and related services and from set-up fees. Contracts are generally month-to-month; however, customers have the option of entering into contracts for longer periods. Revenues from these contracts are recognized as services are provided. Payments received and billings in advance of providing services are deferred until the services are provided. Set-up fees are nonrefundable and are separately priced from the use of Internet servers and related services and are recognized at the time a new customer account is created and the set-up process is completed. Set-up costs consist primarily of labor by technical support personnel to configure the customer's Internet server and to activate the new service. The Company has no obligation to perform any future set-up services and no additional set-up services are necessary following expiration of the initial contract period and upon renewal of the contract by the customer. (H) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (I) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company accounts for long-lived assets, including goodwill, in accordance with the provisions of SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF." This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured F-8 RACKSPACE, LTD. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. (J) ADVERTISING AND MARKETING COSTS The Company charges advertising and marketing costs to expense in the period incurred. Advertising expenses for the year ended December 31, 1997, the period from January 1, 1998 to December 28, 1998, the period from inception to December 31, 1998 and the year ended December 31, 1999 were approximately $1,000, $4,000, $-0- and $1,497,000, respectively. (K) STOCK-BASED COMPENSATION Following the reorganization discussed in note 7, the Company will apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related interpretations, in accounting for its stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company will adopt the disclosure provisions of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION." There were no options issued or outstanding at December 31, 1999. (L) PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE Following the reorganization discussed in note 7, the Company will compute net loss per share in accordance with the provisions of SFAS No. 128, "EARNINGS PER SHARE." Under the provisions of SFAS No. 128, basic and diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. The calculation of diluted net loss per share excludes all shares of common stock issuable upon exercise of employee stock options as the effect of the exercise would be antidilutive. (M) COMPREHENSIVE INCOME (LOSS) The Company reports comprehensive income (loss) in accordance with SFAS No. 130, "REPORTING COMPREHENSIVE INCOME." In each period presented, comprehensive net loss does not differ from the reported net loss. (N) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," which will be effective for the Company's fiscal year ending December 31, 2001. This statement establishes accounting and reporting standards requiring that each derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company has not evaluated the impact of SFAS No. 133; however, it believes the adoption of SFAS No. 133 will not have a material effect on its financial position, results of operations, or cash flows as it has not entered into any derivative contracts. F-9 RACKSPACE, LTD. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (2) PROPERTY AND EQUIPMENT A summary of property and equipment at December 31, 1998 and December 31, 1999 is as follows:
1998 1999 -------- --------- Internet access and computer equipment.................. $65,516 1,662,333 Office equipment........................................ 5,223 102,316 Leasehold improvements.................................. -- 144,040 ------- --------- 70,739 1,908,689 Less accumulated depreciation and amortization.......... 116 242,550 ------- --------- $70,623 1,666,139 ======= =========
(3) PARTNERS' CAPITAL Pursuant to the second amendment to the partnership agreement dated November 30, 1999, the Company declared a ten-for-one split of all limited partner interests outstanding prior to November 30, 1999. Limited partner interests for all periods presented have been adjusted to reflect this split. Under this amendment, certain key personnel were given the option of receiving, in lieu of their salary, options to acquire limited partner interests commencing at the beginning of each calendar quarter of 2000. No options were granted as of December 31, 1999. Pursuant to a Subscription Agreement (the "Agreement") dated November 30, 1999, between the Company and private investors, some of whom were officers and equity holders of the Company, the Company sold 2,766,667 limited partner interests for $2.10 per limited partner interest. The Agreement provided for the issuance of the limited partner interests for $4,560,000 in cash, conversion of $500,000 of advances due under the Company's credit agreement and receipt of a $750,000 short-term promissory note from an entity principally owned by one of the investors who is also an officer. Subsequent to December 31, 1999, the note was paid in full. The Agreement also provided certain of the investors warrants to invest an additional $1,300,000 at the same price per limited partner interest for a period beginning November 30, 1999 through December 31, 2001. The Agreement provides the investors anti-dilution rights whereby if the Company issues any additional limited partner interests, other than to employees pursuant to an option agreement or as compensation for services rendered, or incident to an acquisition of assets in which more than 700,000 limited partner interests are issued to the seller, and the purchase price per limited partner interest is less than $2.10, the Company will issue the investors additional limited partner interests in an amount which provides them with the same ownership percentage as was held by them on November 30, 1999. (4) DEBT The Company entered into credit agreements with Exeter Financial, L.C. ("Exeter"), a financial institution owned by the principal owners of Trout, Ltd., to provide for cash advances in the form of term notes of not more than $1,550,000 bearing interest at a fixed rate of 8% per annum. Total cash advances under the credit agreements amounted to $1,550,000. Trout, Ltd. subsequently acquired the rights to the debt from Exeter. Pursuant to amendments to the partnership agreement, the partners agreed to convert the $1,550,000 in outstanding principal and $32,532 of accrued but unpaid interest in exchange for 2,142,857 limited partner interests. Interest expense of $66 and $53,112 for the period F-10 RACKSPACE, LTD. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (4) DEBT (CONTINUED) ended December 31, 1998 and for the year ended December 31, 1999, respectively, was incurred under these related party advances. (5) COMMITMENTS The Company leased its office space on a month-to-month basis through December 31, 1999 from an entity controlled by a principal owner of Trout, Ltd. The Company and this entity entered into a lease agreement in February 2000 which expires in February 2003 and requires the Company to pay all maintenance and insurance. The Company recognized approximately $38,000 in rental expense for the year ended December 31, 1999 under this lease arrangement. The Company has also entered into agreements for dedicated Internet access service with multiple network vendors. The agreements vary from one to five years and provide for penalties for early termination. The agreements are generally subject to a master contract which allows for service order upgrades at the Company's request. Monthly billings are increased based on usage levels. Future minimum payments under these commitments are:
YEAR ENDING RELATED DECEMBER 31, TOTAL PARTY - ------------ ---------- -------- 2000................................................. $ 904,432 120,000 2001................................................. 672,076 184,000 2002................................................. 518,967 333,510 2003................................................. 219,902 60,302 2004................................................. 146,300 -- ---------- ------- Total.................................................. $2,461,677 697,812 ========== =======
Additionally, the Company entered into an agreement to purchase equipment in December 1999 and paid approximately $106,000 (included in other assets at December 31, 1999) as a down payment. The agreement is non-cancelable and the Company is obligated for the remaining balance of $320,000 at December 31, 1999. This amount, including $117,000 for a related service agreement, became due when the equipment was delivered in February 2000. (6) GEOGRAPHIC AND OTHER FINANCIAL INFORMATION The Company operates in one segment to provide dedicated servers and related services to its customers. Total export revenues consisted of sales from the Company's U.S. operation to customers in other geographic regions. No geographical information is provided for 1997 and 1998 as the Company's operations were limited to North America. The following is a summary of revenues by geographic area for the year ended December 31, 1999:
NORTH AMERICA EUROPE ASIA OTHER TOTAL ------------- -------- -------- -------- ---------- Revenues.............................. $1,132,954 325,695 180,741 61,147 1,700,537 ========== ======== ======== ======== ==========
During the year ended December 31, 1999, the Company charged $91,883 to its allowance for doubtful accounts and wrote off $40,867 of accounts receivable. F-11 RACKSPACE, LTD. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (7) SUBSEQUENT EVENTS (A) CORPORATE REORGANIZATION In 2000, the Company's partners authorized the reorganization of the partnership into a corporation prior to and in anticipation of the Company's initial public offering. Upon the consummation of the reorganization, the corporation will be authorized to issue 170,000,000 shares of $0.001 par value common stock of which 14,671,425 shares will be issued to the existing partners. The Company also authorized 30,000,000 shares of preferred stock, par value $0.001. (B) STOCK-BASED COMPENSATION ARRANGEMENTS The Company has adopted the 1999 Unit Option Plan. The plan authorizes grants of options to purchase limited partner interests at fair market value as determined by the general partner of Rackspace, Ltd. Options have seven year terms and vest over three years. Subsequent to December 31, 1999, options to purchase 432,897 limited partner interests of the Company under this plan were issued to employees at a weighted exercise price of $2.56. The 2000 Stock Incentive Plan was adopted in 2000, as the successor to the 1999 Unit Option Plan. The 2000 Stock Incentive Plan will provide for four separate programs. The first program is the discretionary option grant program under which eligible individuals as defined and including officers, non-employee board members and consultants, may be granted options to purchase shares of common stock. The second program is the stock issuance program under which eligible individuals may be issued shares of common stock directly, through the purchase of such shares or as a bonus tied to the performance of services. The third program is the salary investment option grant program under which executive officers and other highly compensated employees may elect to apply a portion of their base salary to the acquisition of special below-market stock option grants. The fourth program is the automatic option grant program under which option grants will automatically be made at periodic intervals to eligible non-employee board members. Commencing on January 1, 2000, certain key personnel exercised their right to forgo salary in exchange for 47,936 options to acquire limited partner interests at an exercise price of $0.01 per partner interest. Options vest immediately. The Company adopted an Employee Stock Purchase Plan in 2000. Under the plan, shares of the Company's common stock may be purchased at six-month intervals at % of the lower of the fair market value on the first or the last day of each six-month period. (C) CAPITAL AND OTHER TRANSACTIONS In January 2000, the Company sold 238,095 limited partner interests at $2.10 per partner interest pursuant to the Subscription Agreement dated November 30, 1999 (note 3) for cash. The Company also sold 119,048 limited partner interests at $2.10 per partner interest to another investor for cash effective January 17, 2000. In March 2000, the Company sold 1,952,297 limited partner interests at $5.66 per partner interest to certain investors for cash. In addition, two of the investors were granted warrants to purchase $6 million in additional partner interests at a price equal to the greater of $18.24 or the price which is at the mid-point of the filing range of the Company's anticipated initial public offering. F-12 RACKSPACE, LTD. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (7) SUBSEQUENT EVENTS (CONTINUED) In March 2000, the Company executed a memorandum of understanding with Red Hat for a proposed joint marketing arrangement. The proposed arrangement contemplates the payment of an upfront fee and customer referral fees to Red Hat over a 12 month period. (D) PRO FORMA EARNINGS PER SHARE The pro forma information regarding net loss per share and weighted average shares outstanding set forth below gives effect to the treatment of partner interests as shares of common stock.
YEAR ENDED DECEMBER 31, 1999 ------------ Numerator: Net loss available to common stockholders................. $(1,652,798) =========== Denominator: Weighted average number of shares of common stock outstanding............................................. 10,733,098 =========== Pro forma basic and diluted net loss per share.............. $ (0.15) ===========
F-13 Back Cover [Description of Graphics] You may rely only on the information contained in this prospectus. We have not authorized anyone to provide information different from that contained in this prospectus. Neither the delivery of this prospectus nor the sale of common stock means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these shares in any circumstances under which the offer or solicitation is unlawful. TABLE OF CONTENTS
Page -------- Prospectus Summary................ 3 Risk Factors...................... 7 Forward-Looking Statements and Associated Risks................ 16 Use Of Proceeds................... 17 Dividend Policy................... 17 Capitalization.................... 18 Dilution.......................... 19 Selected Financial Data........... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations....... 21 Business.......................... 28 Management........................ 42 Certain Transactions.............. 48 Principal Stockholders............ 51 Description of Capital Stock...... 53 Shares Eligible for Future Sale... 56 Underwriting...................... 58 Legal Matters..................... 61 Experts........................... 61 Where You Can Find Additional Information About Rackspace..... 61 Index to Rackspace.Com, Inc. Financial Statements............ F-1
Dealer Prospectus Delivery Obligation: Until , 2000 (25 days after the date of this prospectus), all dealers that buy, sell or trade in these shares of common stock, whether or not participating in this offering, may be required to deliver a prospectus. Dealers are also obligated to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. [LOGO] Shares Common Stock Deutsche Banc Alex. Brown Bear, Stearns & Co. Inc. Thomas Weisel Partners LLC Prospectus , 2000 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than the underwriting discount, payable by us in connection with the sale of common stock being registered under this registration statement. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC registration fee........................................ $17,160 NASD fee.................................................... 7,000 Nasdaq National Market listing fee.......................... 95,000 Printing and engraving expenses............................. * Legal fees and expenses..................................... * Accounting fees and expenses................................ * Blue sky fees and expenses.................................. * Transfer agent fees......................................... * Miscellaneous............................................... * Total................................................. $ *
- ------------------------ * To be filed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The following discussion assumes that our reorganization has occurred. Section 145 of the Delaware General Corporation Law (the "DGCL") provides, in effect, that any person made a party to any action by reason of the fact that he is or was our director, officer, employee or agent may, and in certain cases must, be indemnified by us against, in the case of a non-derivative action, judgments, fines, amounts paid in settlement and reasonable expenses (including attorneys' fees) incurred by him as a result of such action, and in the case of a derivative action, against expenses (including attorneys' fees), if in either type of action he acted in good faith and in a manner he reasonably believed to be in or not opposed to our best interests. This indemnification does not apply, in a derivative action, to matters as to which it is adjudged that the director, officer, employee or agent is liable to us, unless upon court order it is determined that, despite such adjudication of liability, but in view of all the circumstances of the case, he is fairly and reasonably entitled to indemnity for expenses, and, in a non-derivative action, to any criminal proceeding in which such person had reasonable cause to believe his conduct was unlawful. Article VI of our Certificate of Incorporation provides that no director shall be liable to us or our stockholders for monetary damages for breaches of the director's fiduciary duties to the fullest extent permitted by the DGCL. Reference is made to Section 8 of the underwriting agreement to be filed as Exhibit 1.1 hereto, pursuant to which the underwriters have agreed to indemnify our officers and directors against certain liabilities under the Securities Act of 1933. We intend to enter into Indemnity Agreements with each director and certain of our officers, a form of which is filed as Exhibit 10.1 to this registration statement. Pursuant to these agreements, we will be obligated, to the extent permitted by applicable law, to indemnify these persons against all expenses, judgments, fines and penalties incurred in connection with the defense or settlement of any actions brought against them by reason of the fact that they were our directors or officers or assumed II-1 certain responsibilities at our direction. We also intend to purchase directors' and officers' liability insurance in order to limit our exposure to liability for indemnification of directors and officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since our inception in December 1998, we have issued and sold unregistered securities in the following transactions: (1) On December 29, 1998, we issued 999,000 limited partner interests to our founders and an entity affiliated with our executive officers. We also issued 1,000 general partner interests to our general partner. (2) On September 29, 1999 we issued 190,476 limited partner interests to an entity affiliated with our executive officers upon the conversion of outstanding indebtedness under a promissory note in the approximate amount of $1.1 million. (3) On November 30, 1999 we issued an aggregate of 2,766,667 limited partner interests to entities affiliated with our executive officers and other purchasers in a private placement for an aggregate purchase price of $5.8 million. The purchase price for the limited partner interests consisted of cash in the approximate amount of $4.6 million, a promissory note for $750,000 and the conversion of principal outstanding under a promissory note in the amount of $500,000. We also effected a 10-for-1 limited partner interest split incident to this private placement. (4) Commencing on January 1, 2000 through April 30, 2000, Graham Weston, Morris Miller, Pat Condon and Dirk Elmendorf exercised their right to forgo salary in exchange for options to acquire additional limited partner interests. Pursuant to an agreement, these individuals have elected to forgo salary during this four-month period, and receive options to acquire 47,936 limited partner interests at $.01 per limited partner interest. (5) On January 17, 2000 we issued 238,095 limited partner interests to an investor pursuant to the exercise of an option for an aggregate purchase price of $500,000. Effective the same date, we also issued 119,047 limited partner interests to an investor for $250,000. (6) On January 1, 2000 we issued options to two of our executive officers for an aggregate of 271,672 limited partner interests at $2.10 per limited partner interest. (7) On February 15, 2000 we issued to our employees options to acquire an aggregate of 107,171 limited partner interests at $3.33 per limited partner interest. In addition we issued options to one of our executive officers for an aggregate of 54,054 limited partner interests at $3.33 per limited partner interest. (8) On March 27, 2000, we issued an aggregate of 1,952,297 limited partner interests to investors in a private placement for an aggregate purchase price of $11.1 million. We also issued warrants for limited partner interests. The limited partners of Tailwind Capital Partners 2000, L.P., an investor in this private placement, are employees of Thomas Weisel Partners LLC, an underwriter in this offering. The above securities were offered and sold by the registrant in reliance upon exemptions from registration pursuant to either (1) Section 4(2) of the Securities Act of 1933, as amended, as transactions not involving any public offering or (2) Rule 701 promulgated under the Securities Act of 1933, as amended. No underwriters were involved in connection with the sales of securities referred to in this Item 15, except as described in (8) above. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 1.1* -- Form of Underwriting Agreement. 3.1+ -- Certificate of Incorporation of Rackspace.com, Inc. 3.2+ -- Bylaws of Rackspace.com, Inc. 4.1+ -- Specimen Stock Certificate. 5.1* -- Opinion of Brobeck, Phleger & Harrison LLP. 10.1* -- Form of Indemnity Agreement by and between Rackspace.com, Inc. and each of its directors and executive officers. 10.2+ -- Lease Agreement between Rackspace, Ltd. and Santa Clara Land Company dated February 22, 2000 for the premises located in San Antonio, Texas. 10.3+ -- Confidential Anti-Dilution Agreement by and among Rackspace, Ltd. and the investors named therein dated November 30, 1999 and Amendment thereto dated February 22, 2000. 10.4+ -- Credit Agreement between Rackspace, Ltd and Exeter Financial, LC dated December 29, 1998. 10.5+ -- Support Agreement dated December 29, 1998 between Rackspace, Ltd., Morris A. Miller, Graham M. Weston, Richard Yoo, Dirk Elmendorf and Patrick Condon and First Amendment thereto dated November 30, 1999 and Second Amendment thereto dated February 22, 2000 and as amended by Exhibit 10.21. 10.6+ -- Employment Agreement between Rackspace, Ltd. and Richard Yoo dated December 29, 1998. 10.7+ -- Employment Agreement between Rackspace, Ltd. and Dirk Elmendorf dated December 29, 1998. 10.8+ -- Employment Agreement between Rackspace, Ltd., and Patrick Condon dated December 29, 1998. 10.9+ -- Asset Purchase and Sale Agreement dated December 29, 1998 between Cymitar Technology Group, Inc., Richard Yoo, Dirk Elmendorf and Patrick Condon. 10.10+ -- Transfer Agreement between Rackspace, Ltd., Richard Yoo, Dirk Elmendorf and Patrick Condon dated December 29, 1998. 10.11+ -- Agreement of Limited Partnership of Rackspace, Ltd, dated December 29, 1998, First Amendment dated September 29, 1999, Second Amendment dated November 30, 1999, Third Amendment dated February 22, 2000 and Fourth Amendment dated March 27, 2000. 10.12+ -- Warrant between Rackspace, Ltd. and Trango Capital, LLC, dated November 30, 1999. 10.13+ -- Registration Rights Agreement dated November 30, 1999 between Rackspace, Ltd. and the securityholders named therein and Amendment thereto dated February 22, 2000 and as amended by Exhibit 10.21.
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EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 10.14+ -- Promissory Note dated November 30, 1999 between Beaulieu River Capital LC and Rackspace, Ltd. for $750,000. 10.15+ -- Second Financial Commitment between Rackspace, Ltd. and Exeter Financial, LC dated September 29, 1999. 10.16+ -- 1999 Unit Option Plan. 10.17+ -- Form of Unit Option Agreement for Stock Unit Plan. 10.18* -- 2000 Stock Incentive Plan. 10.19* -- 2000 Employee Stock Purchase Plan. 10.20+ -- Promissory Note dated December 29, 1998 between Exeter Financial, LC and Rackspace, Ltd. for $150,000. 10.21+ -- Agreement of Existing Partners of Rackspace Ltd. to Facilitate Public Offering dated March 27, 2000. 10.22+ -- Warrant between Rackspace, Ltd. and Norwest Venture Partners, dated March 27, 2000. 10.23+ -- Warrant between Rackspace, Ltd. and Sequoia Capital Franchise Fund dated March 27, 2000. 10.24+ -- Warrant between Rackspace, Ltd. and Sequoia Capital Franchise Partners dated March 27, 2000. 21.1+ -- List of Subsidiaries. 23.1+ -- Consent of KPMG LLP. 23.2* -- Consent of Brobeck, Phleger & Harrison LLP (Included in Exhibit 5.1). 27.1+ -- Financial Data Schedule.
- ------------------------ + filed herewith * to be filed by amendment (b) Financial Statement Schedules Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or the related notes. ITEM 17. UNDERTAKINGS The undersigned hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the DGCL, our Certificate of Incorporation, our Bylaws, the underwriting agreement or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by one of our directors, officers, or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-4 We hereby undertake that: 1. For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. 2. For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, we have duly caused this registration statement to be signed on our behalf by the undersigned, thereunto duly authorized, in San Antonio, Texas, on March 28, 2000. RACKSPACE.COM, INC. By: /s/ GRAHAM M. WESTON ----------------------------------------- Graham M. Weston Chief Executive Officer and Director
POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Graham M. Weston and Quincy J. Lee, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to sign any registration statement for the same offering covered by this registration statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
NAME TITLE DATE ---- ----- ---- /s/ GRAHAM M. WESTON Chief Executive Officer and - ------------------------------------------- Director (principal March 28, 2000 Graham M. Weston executive officer) /s/ MORRIS A. MILLER - ------------------------------------------- President, Chief Operating March 28, 2000 Morris A. Miller Officer and Director /s/ QUINCY J. LEE Chief Financial Officer - ------------------------------------------- (principal accounting and March 28, 2000 Quincy J. Lee financial officer)
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EX-3.1 2 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF RACKSPACE.COM, INC. ARTICLE I The name of this Corporation shall be "Rackspace.com, Inc." (hereinafter referred to as the "CORPORATION"). ARTICLE II The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent at that address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. ARTICLE IV The Corporation's capital stock shall be comprised as follows: A. AUTHORIZED SHARES. The aggregate number of shares that the Corporation shall have the authority to issue is Two Hundred Million (200,000,000) shares. Of such authorized shares, One Hundred Seventy Million (170,000,000) shares shall be Common Stock, par value $0.001 per share, and Thirty Million (30,000,000) shares shall be Preferred Stock, par value $0.001 per share. B. COMMON STOCK. Each share of Common Stock shall have one vote on each matter submitted to a vote of the stockholders of the Corporation. Subject to the provisions of applicable law and the rights of the holders of the outstanding shares of Preferred Stock, if any, the holders of shares of Common Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation, out of the assets of the Corporation legally available therefor, dividends or other distributions, whether payable in cash, property or securities of the Corporation. The holders of shares of Common Stock shall be entitled to receive, in proportion to the number of shares of Common Stock held, the net assets of the Corporation upon dissolution after any preferential amounts required to be paid or distributed to holders of outstanding shares of Preferred Stock, if any, are so paid or distributed. C. PREFERRED STOCK. 1. SERIES. The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more series. The description of shares of each additional series of Preferred Stock, including any designations, preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption shall be as set forth in resolutions adopted by the Board of Directors. 2. RIGHTS AND PREFERENCES. The Board of Directors is expressly authorized, at any time, by adopting resolutions providing for the issuance of, or providing for a change in the number of, shares of any particular series of Preferred Stock and, if and to the extent from time to time required by law, by filing certificates of amendment or designation which are effective without stockholder action, to increase or decrease the number of shares included in each series of Preferred Stock, but not below the number of shares then issued, and to set in any one or more respects the designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms and conditions of redemption relating to the shares of each such series. The authority of the Board of Directors with respect to each series of Preferred Stock shall include, but not be limited to, setting or changing the following: (a) the dividend rate, if any, on shares of such series, the times of payment and the date from which dividends shall be accumulated, if dividends are to be cumulative; (b) whether the shares of such series shall be redeemable and, if so, the redemption price and the terms and conditions of such redemption; (c) the obligation, if any, of the Corporation to redeem shares of such series pursuant to a sinking fund; (d) whether shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class of classes and, if so, the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (e) whether the shares of such series shall have voting rights, in addition to the voting rights provided by law, and, if so, the extent of such voting rights; (f) the rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding-up of the Corporation; and (g) any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series. ARTICLE V The name and address of the incorporator of the Corporation is: Quincy J. Lee Rackspace, Ltd. 112 East Pecan Street, Suite 600 San Antonio, Texas 78205 ARTICLE VI A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (a) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the Delaware General Corporation Law or (d) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this ARTICLE VI to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law as so amended. Any repeal or modification of the foregoing provisions of this ARTICLE VI by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE VII The Corporation may indemnify to the fullest extent permitted by law, any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that such person is or was a director, officer or employee of the Corporation or any predecessor of the Corporation or serves or served at any other corporation or enterprise as a director, officer or employee at the request of the Corporation or any predecessor to the Corporation. ARTICLE VIII The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the Bylaws of the Corporation. ARTICLE IX Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE X Election of directors at an annual or special meeting of stockholders need not be by written ballot unless the Bylaws of the Corporation shall so provide. ARTICLE XI A. At each annual meeting of stockholders, directors of the Corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified. At the first annual meeting of stockholders following the closing of the initial public offering (the "FIRST PUBLIC COMPANY ANNUAL MEETING") of the Corporation's capital stock pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (the "INITIAL PUBLIC OFFERING"), the directors of the Corporation shall be divided into three classes as nearly equal in size as is practicable, hereby designated as Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the next succeeding annual meeting of stockholders, the term of office of the initial Class II directors shall expire at the second succeeding annual meeting of stockholders and the term of office of the initial Class III directors shall expire at the third succeeding annual meeting of stockholders. For the purposes hereof, the initial Class I, Class II and Class III directors shall be those directors designated and elected at the First Public Company Annual Meeting. At each annual meeting after the First Public Company Annual Meeting, directors to replace those of a Class whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting and until their respective successors shall have been duly elected and qualified. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable. B. Vacancies occurring on the Board of Directors for any reason may be filled by vote of a majority of the remaining members of the Board of Directors, although less than a quorum, at a meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy shall hold office until the next succeeding annual meeting of stockholders of the Corporation and until his or her successor shall have been duly elected and qualified. C. After the Initial Public Offering, prior to the natural expiration of his term of office and subject to applicable laws, no duly-appointed director may be removed unless cause is shown and then only by affirmative vote of two thirds (2/3rds) of the shares entitled to vote thereon, voting together as a single class. ARTICLE XII In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. ARTICLE XIII Effective upon the closing of the Initial Public Offering, stockholders of the Corporation may not take action by written consent in lieu of a meeting but must take any actions at a duly called annual or special meeting. A special meeting of stockholders may be called only by the Chairman of the Board of Directors, the Corporation's Chief Executive Officer or by a majority of the Board of Directors. ARTICLE XIV Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of the capital stock required by law or this Certificate of Incorporation, the affirmative vote of the holders of at least two thirds (2/3rds) of the combined voting power of all of the then-outstanding shares of the Corporation entitled to vote shall be required to alter, amend or repeal ARTICLES VI, VII, XI or XIII or this ARTICLE XIV, or any provisions thereof. ARTICLE XIV The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation. * * * * * * THE UNDERSIGNED, BEING THE SOLE INCORPORATOR NAMED HEREIN, FOR THE PURPOSE OF FORMING THE CORPORATION TO DO BUSINESS BOTH WITHIN AND WITHOUT THE STATE OF DELAWARE AND PURSUANT TO THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE, DOES MAKE AND FILE THIS CERTIFICATE OF INCORPORATION OF RACKSPACE.COM, INC. HEREBY DECLARING AND CERTIFYING THAT THE FACTS HEREIN STATED ARE TRUE, AND ACCORDINGLY HAS HEREUNTO SET HIS HAND THIS 7TH DAY OF MARCH, 2000. /s/ Quincy J. Lee ------------------------------ Quincy J. Lee Sole Incorporator EX-3.2 3 EXHIBIT 3.2 BYLAWS OF RACKSPACE.COM, INC., A DELAWARE CORPORATION TABLE OF CONTENTS
PAGE ARTICLE I. Offices..................................................................1 Section 1.1 Registered Office........................................1 Section 1.2 Other Offices............................................1 ARTICLE II. Corporate Seal..........................................................1 ARTICLE III. Stockholders' Meetings.................................................1 Section 3.1 Place of Meetings........................................1 Section 3.2 Annual Meeting...........................................2 Section 3.3 Special Meetings.........................................4 Section 3.4 Notice of Meetings.......................................4 Section 3.5 Quorum...................................................4 Section 3.6 Adjournment and Notice of Adjourned Meetings.............5 Section 3.7 Voting Rights............................................5 Section 3.8 Joint Owners of Stock....................................5 Section 3.9 List of Stockholders.....................................5 Section 3.10 No Action Without Meeting................................6 Section 3.11 Organization.............................................6 ARTICLE IV. Directors...............................................................7 Section 4.1 Number and Term of Office; Classification................7 Section 4.2 Powers...................................................7 Section 4.3 Vacancies................................................7 Section 4.4 Resignation..............................................8 Section 4.5 Removal..................................................8 Section 4.6 Meetings.................................................8 Section 4.7 Quorum and Voting........................................9 Section 4.8 Action Without Meeting...................................9 Section 4.9 Fees and Compensation....................................9 Section 4.10 Committees..............................................10 ARTICLE V. Officers................................................................11 Section 5.1 Officers Designated.....................................11 Section 5.2 Tenure and Duties of Officers...........................11 Section 5.3 Delegation of Authority.................................14 Section 5.4 Resignations............................................14 Section 5.5 Removal.................................................14 ARTICLE VI. Execution of Corporate Instruments and Voting of Securities Owned by the Corporation.....................................................14 Section 6.1 Execution of Corporate Instruments......................14 Section 6.2 Voting of Securities Owned by the Corporation...........15 ii ARTICLE VII. Shares of Stock.......................................................15 Section 7.1 Form and Execution of Certificates......................15 Section 7.2 Lost Certificates.......................................16 Section 7.3 Transfers...............................................16 Section 7.4 Fixing Record Dates.....................................16 Section 7.5 Registered Stockholders.................................17 ARTICLE VIII. Other Securities of the Corporation..................................17 Section 8.1 Execution of Other Securities...........................17 ARTICLE IX. Dividends..............................................................18 Section 9.1 Declaration of Dividends................................18 Section 9.2 Dividend Reserve........................................18 ARTICLE X. Fiscal Year.............................................................18 ARTICLE XI. Indemnification of Directors, Officers, Employees and Other Agents.....18 Section 11.1 Directors and Executive Officers........................18 Section 11.2 Other Officers, Employees and Other Agents..............19 Section 11.3 Good Faith..............................................19 Section 11.4 Expenses................................................19 Section 11.5 Enforcement.............................................20 Section 11.6 Non-Exclusivity of Rights...............................20 Section 11.7 Survival of Rights......................................20 Section 11.8 Insurance...............................................20 Section 11.9 Amendments..............................................21 Section 11.10 Savings Clause..........................................21 Section 11.11 Certain Definitions.....................................21 ARTICLE XII. Notices...............................................................22 Section 12.1 Notice to Stockholders..................................22 Section 12.2 Notice to Directors.....................................22 Section 12.3 Address Unknown.........................................22 Section 12.4 Affidavit of Mailing....................................22 Section 12.5 Time Notices Deemed Given...............................22 Section 12.6 Failure to Receive Notice...............................22 Section 12.7 Notice to Person with Whom Communication Is Unlawful....23 Section 12.8 Notice to Person with Undeliverable Address.............23 ARTICLE XIII. Amendments...........................................................23 Section 13.1 Amendments..............................................23 Section 13.2 Application of Bylaws...................................24 ARTICLE XIV. Loans to Officers.....................................................24
iii BYLAWS OF RACKSPACE.COM, INC., A DELAWARE CORPORATION - -------------------------------------------------------------------------------- ARTICLE I. OFFICES SECTION 1.1 REGISTERED OFFICE. The registered office of the corporation shall be the registered office named in the certificate of incorporation of the corporation, or such other office as may be designated from time to time by the Board of Directors in the manner provided by law. SECTION 1.2 OTHER OFFICES. The corporation may have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. The books of the corporation may be kept (subject to any provision contained in the Delaware General Corporation Law) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in these Bylaws. ARTICLE II. CORPORATE SEAL The corporate seal shall consist of a die bearing the name of the corporation. Said seal may be used by causing it, or a facsimile thereof, to be impressed, affixed or reproduced. ARTICLE III. STOCKHOLDERS' MEETINGS SECTION 3.1 PLACE OF MEETINGS. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the principal executive offices of the corporation. SECTION 3.2 ANNUAL MEETING. (a) The annual meeting of the stockholders of the corporation, for the purpose of election of Directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors; (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors; or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received by the Secretary of the corporation not later than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the date of the proxy statement delivered to stockholders in connection with the preceding year's annual meeting; provided, however, that if either (i) the date of the annual meeting is advanced more than thirty (30) days or delayed (other than as a result of adjournment) more than sixty (60) days from such an anniversary date or (ii) no proxy statement was delivered to stockholders in connection with the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the corporation. To be in proper form, a stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice or introduce the business specified in the notice; (iii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business; (iv) the class and number of shares of the corporation which are beneficially owned by the stockholder; (v) any material interest of the stockholder in such business; and (vi) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 2 1934, as amended (the "Exchange Act"), in such stockholder's capacity as a proponent of a stockholder proposal. The chairman of the meeting shall determine whether any business proposed to be transacted by the stockholders has been properly brought before the meeting and, if any proposed business has not been properly brought before the meeting, the chairman shall declare that such proposed business shall not be presented for stockholder action at the meeting. For purposes of this Section 3.2, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. Notwithstanding any provision in this Section 3.2 to the contrary, requests for inclusion of proposals in the corporation's proxy statement made pursuant to Rule 14a-8 under the Exchange Act shall be deemed to have been delivered in a timely manner if delivered in accordance with such Rule. Notwithstanding compliance with the requirements of this Section 3.2, the chairman presiding at any meeting of the stockholders may, in his sole discretion, refuse to allow a stockholder or stockholder representative to present any proposal which the corporation would not be required to include in a proxy statement under any rule promulgated by the Securities and Exchange Commission. (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of Directors at the meeting who complies with the notice procedures set forth in this paragraph. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 3.2. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a Director: (A) the name, age, business address and residence address of such person; (B) the principal occupation or employment of such person; (C) the class and number of shares of the corporation which are beneficially owned by such person; (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder; and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a Director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 3.2. At the request of the Board of Directors, any person nominated by a stockholder for election as a Director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the corporation unless nominated in accordance with the procedures set forth in this paragraph. The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if the chairman should so determine, the chairman shall so declare at the meeting, and the defective nomination shall be disregarded. 3 SECTION 3.3 SPECIAL MEETINGS. (a) Special meetings of the stockholders of the corporation may only be called, for any purpose or purposes, by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized Directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). (b) No business may be transacted at such special meeting otherwise than specified in the resolution calling for the meeting. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request other than any actions effected prior to an Initial Public Offering (as defined below). Upon determination of the time and place of the meeting, notice shall be given to the stockholders entitled to vote, in accordance with the provisions of Section 3.4 of these Bylaws. If the notice is not given within sixty (60) days after the receipt of the request, the person or persons requesting the meeting may set the time and place of the meeting and give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing or affecting the time when a meeting of stockholders may be held. SECTION 3.4 NOTICE OF MEETINGS. Except as otherwise provided by law or the certificate of incorporation of the corporation, as the same may be amended or restated from time to time and including any certificates of designation thereunder (hereinafter, the "Certificate of Incorporation"), and for actions effected prior to an Initial Public Offering (for which no notice need be given) written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date, time and purpose or purposes of the meeting. Notice of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. SECTION 3.5 QUORUM. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by duly authorized proxy, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all actions taken by the holders of a majority of the votes cast, excluding abstentions, at any meeting at which a quorum is present shall be valid and binding upon the corporation; provided, 4 however, that Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of Directors. Where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority (plurality, in the case of the election of Directors) of shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. SECTION 3.6 ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes, excluding abstentions. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 3.7 VOTING RIGHTS. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 7.5 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his duly authorized agent, which proxy shall be filed with the Secretary at or before the meeting at which it is to be used. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. Elections of Directors need not be by written ballot, unless otherwise provided in the Certificate of Incorporation. SECTION 3.8 JOINT OWNERS OF STOCK. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; or (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the Delaware General Corporation Law, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of clause (c) shall be a majority or even-split in interest. SECTION 3.9 LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to 5 vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof and may be inspected by any stockholder who is present. SECTION 3.10 NO ACTION WITHOUT MEETING. Effective upon the closing of the corporation's initial public offering of its capital stock pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (the "Initial Public Offering"), the stockholders of the corporation may not take action by written consent without a meeting and must take any actions at a duly called annual or special meeting. SECTION 3.11 ORGANIZATION. (a) At every meeting of stockholders, unless another officer of the corporation has been appointed by the Board of Directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed, is absent, or designates the next senior officer present to so act, the President, or, if the President is absent, the most senior Vice President present, or, in the absence of any such officer, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. (b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. 6 ARTICLE IV. DIRECTORS SECTION 4.1 NUMBER AND TERM OF OFFICE; CLASSIFICATION. (a) The number of directors which shall constitute the whole Board of Directors shall be determined from time to time by the Board of Directors (provided that no decrease in the number of directors which would have the effect of shortening the term of an incumbent director may be made by the Board of Directors), provided that the number of directors shall be not less than one (1). At each annual meeting of stockholders, Directors of the corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified or until such Director's earlier death, resignation or due removal; except that if any such election shall not be so held, such election shall take place at a stockholders' meeting called and held in accordance with the Delaware General Corporation Law. Directors need not be stockholders unless so required by the Certificate of Incorporation. If, for any reason, the Directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. (b) At the first annual meeting of stockholders following the closing of the Initial Public Offering (the "First Public Company Annual Meeting"), the Directors of the corporation shall be divided into three classes as nearly equal in size as is practicable, hereby designated Class I, Class II and Class III. The initial Class I, Class II and Class III directors shall be those directors designated and elected at the First Public Company Annual Meeting. The term of office of the initial Class I directors shall expire at the next succeeding annual meeting of stockholders, the term of office of the initial Class II directors shall expire at the second succeeding annual meeting of stockholders, and the term of office of the initial Class III directors shall expire at the third succeeding annual meeting of stockholders. At each annual meeting of stockholders following the First Public Company Annual Meeting, Directors to replace those of the Class whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting and until their respective successors shall have been duly elected and qualified. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable. SECTION 4.2 POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. SECTION 4.3 VACANCIES. Vacancies occurring on the Board of Directors may be filled by vote of a majority of the remaining members of the Board of Directors, although less than a quorum. Each Director so elected shall hold office for the unexpired portion of the term of the Director or newly created directorship whose place shall be vacant and until his or her successor shall have been duly elected and qualified or until such Director's earlier death, resignation or due removal. A vacancy in the Board of Directors shall be deemed to exist under this Section 4.3 in the case of (i) the death, removal or resignation of any Director; (ii) an 7 increase in the authorized number of Directors pursuant to Section 4.1(a) above; or (iii) if the stockholders fail at any meeting of stockholders at which Directors are to be elected (including any meeting referred to in Section 4.6 below) to elect the number of Directors then constituting the whole Board of Directors. SECTION 4.4 RESIGNATION. Any Director may resign at any time by delivering his or her written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more Directors shall resign from the Board of Directors, effective at a future date, a majority of the Directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. SECTION 4.5 REMOVAL. At a special meeting of stockholders called for such purpose and in the manner provided herein, subject to any limitations imposed by law or the Certificate of Incorporation, the Board of Directors, or any individual Director, may only be removed from office for cause, and a new Director or Directors shall be elected by a vote of stockholders holding two-thirds (2/3) of the outstanding shares entitled to vote at an election of Directors. SECTION 4.6 MEETINGS. (a) ANNUAL MEETINGS. Unless the Board shall determine otherwise, the annual meeting of the Board of Directors shall be held immediately before or after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) REGULAR MEETINGS. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the principal executive offices of the corporation. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been designated by resolution of the Board of Directors or the written consent of all directors. (c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, and subject to the notice requirements contained herein, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the Chief Executive Officer or a majority of the Directors. (d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear 8 each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (e) NOTICE OF MEETINGS. Written notice of the time and place of all special meetings of the Board of Directors shall be given at least one (1) day before the date of the meeting. Such notice need not state the purpose or purposes of such meeting, except as may otherwise be required by law or provided for in the Certificate of Incorporation or these Bylaws. Notice of any meeting may be waived in writing at any time before or after the meeting and will be deemed waived by any Director by attendance thereat, except when the Director attends the meeting solely for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (f) WAIVER OF NOTICE. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after meeting, each of the Directors not present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 4.7 QUORUM AND VOTING. (a) Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Article XI hereof, for which a quorum shall be one-third of the exact number of Directors fixed from time to time in accordance with Section 4.1 hereof, but not less than one (1), a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time in accordance with Section 4.1 of these Bylaws, but not less than one (1); provided, however, at any meeting whether a quorum be present or otherwise, a majority of the Directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by a vote of the majority of the Directors present, unless a different vote is required by law, the Certificate of Incorporation or these Bylaws. SECTION 4.8 ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. SECTION 4.9 FEES AND COMPENSATION. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any 9 meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. SECTION 4.10 COMMITTEES. (a) EXECUTIVE COMMITTEE. The Board of Directors may by resolution passed by a majority of the whole Board of Directors appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and specifically granted by the Board of Directors, shall have, and may exercise when the Board of Directors is not in session, all powers of the Board of Directors in the management of the business and affairs of the corporation except such committee shall not have the power or authority to amend the Certificate of Incorporation, to adopt an agreement of merger or consolidation, to recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, to recommend to the stockholders of the corporation a dissolution of the corporation or a revocation of a dissolution, or to amend these Bylaws. (b) OTHER COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall such committee have the powers denied to the Executive Committee in these Bylaws. (c) TERM. Each member of a committee of the Board of Directors shall serve a term on the committee coexistent with such member's term on the Board of Directors. The Board of Directors, subject to the provisions of paragraphs (a) and (b) of this Section 4.10 may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his or her death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) MEETINGS. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 4.10 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings 10 of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any Director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any Director by attendance thereat, except when the Director attends such special meeting solely for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. (e) ORGANIZATION. The Chairman of the Board shall preside at every meeting of the Board of Directors, if present. In the case of any meeting, if there is no Chairman of the Board or if the Chairman is not present, the Vice Chairman (if there be one) shall preside, or if there be no Vice Chairman or if the Vice Chairman is not present, a chairman chosen by a majority of the Directors present shall act as chairman of such meeting. The Secretary of the corporation or, in the absence of the Secretary, any person appointed by the Chairman shall act as secretary of the meeting. ARTICLE V. OFFICERS SECTION 5.1 OFFICERS DESIGNATED. The officers of the corporation shall include a President and a Secretary, and, if and when designated by the Board of Directors, Chairman of the Board of Directors, one or more executive and non-executive Vice Presidents (any one or more of which executive Vice Presidents may be designated as Executive Vice President or Senior Vice President or a similar title), and a Treasurer. The Board of Directors also may, at its discretion, create additional officers and assign such duties to those offices as it may deem appropriate from time to time, which offices may include a Vice Chairman of the Board of Directors, a Chief Executive Officer, a Chief Operating Officer, a Chief Financial Officer, one or more Assistant Secretaries and Assistant Treasurers, and one or more other officers which may be created at the discretion of the Board of Directors. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. SECTION 5.2 TENURE AND DUTIES OF OFFICERS. (a) GENERAL. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the 11 vacancy may be filled by the Board of Directors. Except for the Chairman of the Board and the Vice Chairman of the Board, no officer need be a director. (b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors, when present, shall preside at all meetings of the Board of Directors and, unless the Chairman has designated the next senior officer to so preside, at all meetings of the stockholders. The Chairman of the Board of Directors shall perform other duties commonly incident to such office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (c) POWERS AND DUTIES OF THE VICE CHAIRMAN OF THE BOARD. The Board of Directors may but is not required to assign areas of responsibility to a Vice Chairman of the Board, and, in such event, and subject to the overall direction of the Chairman of the Board and the Board of Directors, the Vice Chairman of the Board shall be responsible for supervising the management of the affairs of the corporation and its subsidiaries within the area or areas assigned and shall monitor and review on behalf of the Board of Directors all functions within such corresponding area or areas of the corporation and each such subsidiary of the corporation. In the absence of the President, or in the event of the President's inability or refusal to act, the Vice Chairman of the Board shall perform the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. Further, the Vice Chairman of the Board shall have such other powers and duties as designated in accordance with these Bylaws and as from time to time may be assigned to the Vice Chairman of the Board by the Board of Directors or the Chairman of the Board. (d) DUTIES OF PRESIDENT. Unless the Board of Directors otherwise determines (including by election of Chief Executive Officer) and subject to the provisions of paragraph (e) below, the President shall be the chief executive and chief operating officer of the corporation. Unless the Board of Directors otherwise determines, he shall, in the absence of the Chairman of the Board or Vice Chairman of the Board or if there be no Chairman of the Board or Vice Chairman of the Board, preside at all meetings of the stockholders and (should he be a director) of the Board of Directors. The President shall have such other powers and duties as designated in accordance with these Bylaws and as from time to time may be assigned to him by the Board of Directors. (e) DUTIES OF THE CHIEF EXECUTIVE AND CHIEF OPERATING OFFICERS. Subject to the control of the Board of Directors, the chief executive officer shall have general executive charge, management and control, of the properties, business and operations of the corporation with all such powers as may be reasonably incident to such responsibilities; and subject to the control of the chief executive officer, the chief operating officer shall have general operating charge, management and control, of the properties, business and operations of the corporation with all such powers as may be reasonably incident to such responsibilities. (f) DUTIES OF VICE PRESIDENTS. Vice Presidents, by virtue of their appointment as such, shall not necessarily be deemed to be executive officers of the corporation, such status as an executive officer only being conferred if and to the extent such Vice President is placed in charge of a principal business unit, division or function (E.G., sales, administration or finance) or performs a policy-making function for the corporation (within the meaning of Section 16 of the 12 1934 Act and the rules and regulations promulgated thereunder). Each executive Vice President shall at all times possess, and upon the authority of the President or the chief executive officer any non-executive Vice President shall from time to time possess, power to sign all certificates, contracts and other instruments of the corporation, except as otherwise limited pursuant to Article VI hereof or by the Chairman of the Board, the President, chief executive officer or the Vice Chairman of the Board. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (g) DUTIES OF SECRETARY. The Secretary shall keep the minutes of all meetings of the Board of Directors, committees of the Board of Directors and the stockholders, in books provided for that purpose; shall attend to the giving and serving of all notices; may in the name of the corporation affix the seal of the corporation to all contracts and attest the affixation of the seal of the corporation thereto; may sign with the other appointed officers all certificates for shares of capital stock of the corporation; and shall have charge of the certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct, all of which shall at all reasonable times be open to inspection of any director upon application at the office of the corporation during business hours. The Secretary shall perform all other duties given in these Bylaws and other duties commonly incident to such office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The chief executive officer may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to such office and shall also perform such other duties and have such other powers as the Board of Directors or the chief executive officer, shall designate from time to time. (h) ASSISTANT SECRETARIES. Each Assistant Secretary shall have the usual powers and duties pertaining to such offices, together with such other powers and duties as designated in these Bylaws and as from time to time may be assigned to an Assistant Secretary by the Board of Directors, the Chairman of the Board, the President, the Vice Chairman of the Board, or the Secretary. The Assistant Secretaries shall exercise the powers of the Secretary during that officer's absence or inability or refusal to act. (i) DUTIES OF TREASURER. (i) The Treasurer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, chief executive officer, if one be designated, the Chief Financial Officer. The Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Treasurer shall perform other duties commonly incident to such office and shall also perform such other duties and have such other powers as the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board or the President shall designate from time to time. 13 (ii) In absence of a designated Chief Financial Officer, unless otherwise determined by the Board of Directors or chief executive officer, the Treasurer shall serve as the chief financial officer subject to control of the chief executive officer. (iii) The Chief Financial Officer, if any be designated, may, but need not serve as the Treasurer. (j) ASSISTANT TREASURERS. Each Assistant Treasurer shall have the usual powers and duties pertaining to such office, together with such other powers and duties as designated in these Bylaws and as from time to time may be assigned to each Assistant Treasurer by the Board of Directors, the Chairman of the Board, the President, the Vice Chairman of the Board, or the Treasurer. The Assistant Treasurers shall exercise the powers of the Treasurer during that officer's absence or inability or refusal to act. SECTION 5.3 DELEGATION OF AUTHORITY. For any reason that the Board of Directors may deem sufficient, the Board of Directors may, except where otherwise provided by statute, delegate the powers or duties of any officer to any other person, and may authorize any officer to delegate specified duties of such office to any other person. Any such delegation or authorization by the Board shall be effected from time to time by resolution of the Board of Directors. SECTION 5.4 RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer. SECTION 5.5 REMOVAL. Any officer may be removed from office at any time, either with or without cause, by the vote or written consent of a majority of the Directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. ARTICLE VI. EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION SECTION 6.1 EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. 14 Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, the President, Chief Executive Officer or any executive Vice President and if any be designated, Chief Financial Officer, Treasurer, Assistant Secretary or Assistant Treasurer, and upon the authority conferred by the Board of Directors, President or Chief Executive Officer, any non-executive Vice President, and by the Secretary. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. SECTION 6.2 VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman or Vice Chairman of the Board of Directors, Chief Executive Officer, the President, or any executive Vice President. ARTICLE VII. SHARES OF STOCK SECTION 7.1 FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman or Vice Chairman of the Board of Directors, the Chief Executive Officer, the President or any executive Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, certifying the number of shares and the class or series owned by him in the corporation. Where such certificate is countersigned by a transfer agent other than the corporation or its employee, or by a registrar other than the corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may 15 be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. SECTION 7.2 LOST CERTIFICATES. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 7.3 TRANSFERS. (a) Transfers of record of shares of stock of the corporation shall be made only on its books by the holders thereof, in person or by attorney duly authorized and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. Upon surrender to the corporation or a transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The Board of Directors shall have the power and authority to make all such other rules and regulations as they may deem expedient concerning the issue, transfer and registration or the replacement of certificates for shares of capital stock of the corporation. (b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the Delaware General Corporation Law. SECTION 7.4 FIXING RECORD DATES. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 16 (b) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed by the Board of Directors, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 7.5 REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VIII. OTHER SECURITIES OF THE CORPORATION SECTION 8.1 EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate ecurities of the corporation, other than stock certificates (covered in Section 7.1), may be signed by the Chairman or Vice Chairman of the Board of Directors, the Chief Executive Officer, the President or any executive Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before any bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. 17 ARTICLE IX. DIVIDENDS SECTION 9.1 DECLARATION OF DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. SECTION 9.2 DIVIDEND RESERVE. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X. FISCAL YEAR The fiscal year of the corporation shall be the calendar year, unless otherwise fixed by resolution of the Board of Directors. ARTICLE XI. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS SECTION 11.1 DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify its Directors and executive officers to the fullest extent not prohibited by the Delaware General Corporation Law; PROVIDED, HOWEVER, that the corporation may limit the extent of such indemnification by individual contracts with its Directors and executive officers; and, PROVIDED, FURTHER, that the corporation shall not be required to indemnify any Director or executive officer in connection with any proceeding (or part thereof) initiated by such person or any proceeding by such person against the corporation or its Directors, officers, employees or other agents unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, or (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law. 18 SECTION 11.2 OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall have power to indemnify its other officers, employees and other agents as set forth in the Delaware General Corporation Law. SECTION 11.3 GOOD FAITH. (a) For purposes of any determination under this Article XI, a Director or executive officer shall be deemed to have acted in good faith and in a manner such officer reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, to have had no reasonable cause to believe that such officer's conduct was unlawful, if such officer's action is based on information, opinions, reports and statements, including financial statements and other financial data, in each case prepared or presented by: (i) one or more officers or employees of the corporation whom the Director or executive officer believed to be reliable and competent in the matters presented; (ii) counsel, independent accountants or other persons as to matters which the Director or executive officer believed to be within such person's professional competence; and (iii) with respect to a Director, a committee of the Board upon which such Director does not serve, as to matters within such committee's designated authority, which committee the Director believes to merit confidence; so long as, in each case, the Director or executive officer acts without knowledge that would cause such reliance to be unwarranted. (b) The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal proceeding, that such person had reasonable cause to believe that his conduct was unlawful. (c) The provisions of this Section 11.3 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth by the Delaware General Corporation Law. SECTION 11.4 EXPENSES. The corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by any Director or executive officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Article XI or otherwise. 19 Notwithstanding the foregoing, unless otherwise determined pursuant to Section 11.5 of this Article XI, no advance shall be made by the corporation if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. SECTION 11.5 ENFORCEMENT. Without the necessity of entering into an express contract, all rights to indemnification and advances to Directors and executive officers under this Article XI shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the Director or executive officer. Any right to indemnification or advances granted by this Article XI to a Director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, also shall be entitled to be paid the expense of prosecuting his claim. The corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because such person has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. SECTION 11.6 NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Article XI shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its Directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law. SECTION 11.7 SURVIVAL OF RIGHTS. The rights conferred on any person by this Article XI shall continue as to a person who has ceased to be a Director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 11.8 INSURANCE. To the fullest extent permitted by the Delaware General Corporation Law, the corporation, upon approval by the Board of Directors, may purchase 20 insurance on behalf of any person required or permitted to be indemnified pursuant to this Article XI. SECTION 11.9 AMENDMENTS. Any repeal or modification of this Article XI shall only be prospective and shall not affect the rights under this Article XI in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. SECTION 11.10 SAVINGS CLAUSE. If this Article XI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Director and executive officer to the full extent not prohibited by any applicable portion of this Article XI that shall not have been invalidated, or by any other applicable law. SECTION 11.11 CERTAIN DEFINITIONS. For the purposes of this Article XI, the following definitions shall apply: (a) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (b) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. (c) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article XI with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (d) References to a "director," "officer," "employee," or "agent" of the corporation shall include without limitation, situations where such person is serving at the request of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (e) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, 21 or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article XI. ARTICLE XII. NOTICES SECTION 12.1 NOTICE TO STOCKHOLDERS. Unless the Certificate of Incorporation requires otherwise, whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to such stockholder's last known post office address as shown by the stock record of the corporation or its transfer agent. SECTION 12.2 NOTICE TO DIRECTORS. Any notice required to be given to any Director may be given by the method stated in Section 12.1, or by facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such Director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such Director. It shall not be necessary that the same method of giving notice be employed in respect of all Directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. SECTION 12.3 ADDRESS UNKNOWN. If no address of a stockholder or Director be known, notice may be sent to the principal executive officer of the corporation. SECTION 12.4 AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or Director or Directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. SECTION 12.5 TIME NOTICES DEEMED GIVEN. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing, and all notices given by facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at the time of transmission. SECTION 12.6 FAILURE TO RECEIVE NOTICE. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any Director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent such person in the manner above provided, shall not be 22 affected or extended in any manner by the failure of such stockholder or such Director to receive such notice. SECTION 12.7 NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. SECTION 12.8 NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve-month period, have been mailed addressed to such person at such person's address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth such person's then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph. ARTICLE XIII. AMENDMENTS SECTION 13.1 AMENDMENTS. Except as otherwise provided in the Certificate of Incorporation, these Bylaws may be altered, amended or repealed, or new Bylaws may be adopted, by the holders of a majority of the outstanding voting shares or by the Board of Directors, when such power is conferred upon the Board of Directors by the Certificate of Incorporation, at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new Bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal Bylaws is conferred upon the Board of Directors by the Certificate of Incorporation, it shall not divest or limit the power of the stockholders to adopt, amend or repeal Bylaws. 23 SECTION 13.2 APPLICATION OF BYLAWS. In the event that any provisions of these Bylaws is or may be in conflict with any law of the United States, of the state of incorporation of the corporation or of any other governmental body or power having jurisdiction over this corporation, or over the subject matter to which such provision of these Bylaws applies, or may apply, such provision of these Bylaws shall be inoperative to the extent only that the operation thereof unavoidably conflicts with such law, and shall in all other respects be in full force and effect. ARTICLE XIV. LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this Bylaw shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under statute. 24
EX-4.1 4 EXHIBIT 4.1 INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE COMMON STOCK COMMON STOCK NUMBER SHARES C [LOGO] SEE REVERSE FOR THIS CERTIFICATE IS TRANSFERABLE RACKSPACE.COM, INC. CERTAIN DEFINITIONS IN NEW YORK, NY AND RIDGEFIELD PARK, NJ CUSIP 750086 10 0 THIS CERTIFIES THAT is the owner of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.001 PER SHARE, OF RACKSPACE.COM, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed or accompanied by a proper assignment. This Certificate and the shares represented hereby are issued and shall be held subject to all of the provisions of the Certificate of Incorporation and Bylaws of the Corporation and all amendments thereof, copies of which are on file with the Transfer Agent, to all of which the holder by the acceptance hereof assents. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: Rackspace.com, Inc. Countersigned and Registered: CORPORATE ChaseMellon Shareholder Services, L.L.C. SEAL Transfer Agent PRESIDENT SECRETARY Delaware and Registrar By Authorized Signature
Rackspace.com, Inc. The Corporation shall furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporation's Secretary at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM-as tenants in common UNIF GIFT MIN ACT-......................Custodian................. (Cust) (Minor) TEN ENT-as tenants by the entireties under Uniform Gifts to Minors JT TEN-as joint tenants with right of Act............................................. survivorship and not as tenants (State) in common UNIF TRF MIN ACT-.......................Custodian (until age......) (Cust) .....................under Uniform Transfers (Minor) to Minors Act................................... (State) Additional abbreviations may also be used though not in the above list. For Value Received, __________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE. _____________________________________________________________________________________________________ _______________________________________________________________________________________________Shares of the Capital Stock represented by the within Certificate and do hereby irrevocably constitute and appoint _____________________________________________________________________________________________ _____________________________________________________________________________________________Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated ________________________ X__________________________________ (SIGNATURE) NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN --> UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT X__________________________________ OR ANY CHANGE WHATEVER. (SIGNATURE) __________________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANK), STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-16. __________________________________________ SIGNATURE(S) GUARANTEED BY: __________________________________________
EX-10.2 5 EXHIBIT 10.2 OFFICE BUILDING LEASE AGREEMENT LANDLORD: SANTA CLARA LAND COMPANY, LTD. TENANT: RACKSPACE.COM ********* DATED: Feb. 22, 2000 BASIC LEASE INFORMATION Lease Date: February 22, 2000 Tenant: rackspace.com Address of Tenant: 112 E. Pecan, Suite 600 San Antonio, Texas 78205 Contact: Morris A. Miller Landlord: Santa Clara Land Company, Ltd. Address of Landlord: 112 East Pecan, Suite 700 San Antonio, Texas 78205 PREMISES: Suite No. 600 which is located in the office building and parking garage to be (or which has been) constructed on land described as Lot 15, N.C.B. 139, , National Bank Subdivision, San Antonio, Bexar County, Texas, and known as Weston Centre, San Antonio, Texas (the "Building"). LEASE TERM: The period commencing on March 1, 2000 (or on such earlier date as tenant may occupy the premises with Landlord's prior written consent) (the "commencement date"), and continuing for thirty-six (36) calendar months thereafter; provided, however, if the term of this lease is deemed to have commenced on a date other than the first day of a calendar month, the lease term shall consist of said number of calendar months in addition to the remainder of the calendar month during which this lease is deemed to have commenced. BASIC RENTAL: As Basic Rental for the lease and use of the Premises, Tenant will pay Landlord, in lawful money of the United States, at the building office, or to such other party at such other address as Landlord may from time to time designate, without demand, deduction or abatement the sums set forth in the following rent schedule: FROM TO MONTHLY BASE RENTAL ---- -- ------------------- March 1, 2000 February 28, 2001 $12,000.00 March 1, 2001 February 28, 2002 $16,000.00 March 1, 2002 February 28, 2003 $30,151.00 SECURITY DEPOSIT $ N/A TENANT'S PROPORTIONATE SHARE: The percentage which expresses the ratio between the number of rentable square feet comprising the premises (16,446) and the number of rentable square feet of the Building (490,871), which, for the purposes of this lease, shall be 3.35%; provided, however, that the actual number of rentable square feet comprising the premises is subject to reasonable adjustment per final working drawings for the construction of the improvements to the premises, which adjustment, if made, will also effect an adjustment to Tenant's proportionate share. PERMITTED USE: General Office The foregoing Basic Lease Information is hereby incorporated into and made a part of the lease identified hereinabove. Each reference in the lease to any of the information and definitions set forth in the basic lease information shall mean and refer to the information and definitions hereinabove set forth and shall bemused in conjunction with and limited by all references thereto in the provisions of the lease. In the event of any conflict between any Basic Lease Information and the lease, the lease shall control. LANDLORD TENANT SANTA CLARA LAND COMPANY, LTD. rackspace.com By: Wiltshire Holdings L.C., General Partner BY: /s/ Graham Weston BY: /s/ Morris A. Miller, COO --------------------------- -------------------------- Graham Weston Morris A. Miller Manager Chief Operating Officer
TABLE OF CONTENTS Page ---- 1. Definitions and Basic Provisions......................................1 2. Lease Grant...........................................................1 3. Rent..................................................................1 4. Landlord's Obligations................................................2 5. Rental Adjustment.....................................................3 6. Leasehold Improvements................................................5 7. Use...................................................................5 8. Tenant's Repairs and Alterations......................................5 9. Assignment and Subletting.............................................5 10. Indemnity.............................................................6 11. Subordination.........................................................7 12. Rules and Regulations.................................................7 13. Inspection............................................................7 14. Condemnation..........................................................7 15. Fire or Other Casualty................................................7 16. Holding Over..........................................................8 17. Taxes.................................................................8 18. Events of Default.....................................................8 19. Remedies..............................................................9 20. Surrender of Premises.................................................9 21. Attorney's Fees......................................................10 22. Landlord's Lien......................................................10 23. Mechanic's Lien......................................................10 24. No Subrogation Liability Insurance...................................10 25. Substitution Space...................................................11 26. Brokerage............................................................12 27. Change of Building Name..............................................12 28. Estoppel Certificates................................................12 29. Notices..............................................................12 30. Force Majeure........................................................12 31. Separability.........................................................12 32. Amendments; Binding Effect...........................................12 33. Quiet Enjoyment......................................................13 34. Gender...............................................................13 35. Joint and Several Liability..........................................13 36. Personal Liability...................................................13 37. Certain Rights Reserved by Landlord..................................13 38. Notice to Lender.....................................................14 39. Captions.............................................................14 40. Miscellaneous........................................................14 41. Lender Approval......................................................14 42. Exhibits and Attachments.............................................14 43. Special Provisions...................................................14 Exhibit A.............................Outline of Premises Exhibit B...........................Rules and Regulations
OFFICE BUILDING LEASE AGREEMENT THIS LEASE AGREEMENT is entered into as of the 22nd day of February, 2000, by and between Santa Clara Land Company, Ltd (hereinafter called "Landlord') and rackspace.com (hereinafter called "Tenant"). WITNESSETH: 1. DEFINITIONS AND BASIC PROVISIONS: The definitions and basic provisions set forth in the Basic Lease Information (the "Basic Lease Information executed by Landlord and Tenant contemporaneously herewith are incorporated herein by reference for all purposes and shall be used in conjunction with and limited by the reference thereto in the provisions of this lease. In the event of any conflict between a provision in the Basic Lease Information on the one hand, and a provision in this Lease or its exhibit on the other hand, the latter will control. 2. LEASE GRANT. Landlord, in consideration of the rent to be paid and the other covenants and agreements to be performed by Tenant and upon the terms hereinafter stated, does hereby lease, demise and let unto Tenant the premises, as defined in the Basic Lease Information and generally outlined on the plan attached hereto as Exhibit A, commencing on the Commencement Date and ending on the last day of the lease term, unless sooner terminated as herein provided. If this lease is executed before the premises become vacant, or otherwise available and ready for occupancy, or if any present tenant or occupant of the premises holds over, and Landlord cannot acquire possession of the premises prior to the Commencement Date of this lease, Landlord shall not be deemed to be in default hereunder, and Tenant agrees to accept possession of the premises on such date as Landlord is able to tender the same, which shall be deemed to be the Commencement Date of this lease for all purposes, and this lease shall continue for the lease term specified in the Basic Lease Information. By occupying the premises, Tenant shall be deemed to have accepted the same as suitable for the purpose herein intended and to have acknowledged that the same comply fully with Landlord's obligations, notwithstanding that certain "punch list" type items may not have been completed. Within ten (10) days after a written request of Landlord, Tenant agrees to give Landlord a letter confirming the Commencement Date and certifying that Tenant has accepted delivery of the premises and that the condition of the premises complies with Landlord's obligations hereunder. 3. RENT. In consideration of this lease, Tenant promises and agrees to pay Landlord the Basic Rental defined in the Basic Lease Information (subject to adjustment as hereinafter provided) without deduction or setoff, for each month of the entire lease term. One such monthly installment together with the security deposit shall be payable by Tenant to Landlord contemporaneously with the execution of this lease, and a like monthly installment shall be due and payable without demand beginning on the first day of the calendar month following the expiration of the first full calendar month of the lease term and continuing thereafter on or before the first day of each succeeding calendar month during the term hereof. Rent for any fractional month at the beginning of the lease term shall be prorated based on one three hundred sixty-fifth (1/365) of the current annual Basic Rental for each day of the partial month this lease is in effect, and shall be due and payable on or before the date on which Tenant certifies that it has accepted the premises pursuant to Paragraph 2 hereof. In the event any installment of the Basic Rental, or any other sums which become owing by Tenant to Landlord under the provisions hereof is not received within ten (10) days after the due date thereof (without in any way implying Landlord's consent to such late payment), Tenant, to the extent permitted by law, agrees to pay, in addition to said installment of the Basic Rental or such other sums owed, a late payment charge equal to ten percent (10%) of the installment of the Basic Rental or such other sums owed, it being understood that said late payment charge shall constitute liquidated damages and shall be for the purpose of reimbursing Landlord for the additional costs and expenses which Landlord presently expects to incur in connection with the handling and processing of late installment payments of the Basic Rental and such other sums which become owing by Tenant to Landlord hereunder. Landlord and Tenant expressly covenant and agree that in the event of any such late payment(s) by Tenant, the damages so resulting to Landlord will be difficult to ascertain precisely, and that the foregoing charge constitutes a reasonable and good faith estimate by the parties of the extent of such damages. Notwithstanding the foregoing, the foregoing late charges shall not 1 apply to any sums which may have been advanced by Landlord to or for the benefit of Tenant pursuant to the provisions of this lease, it being understood that such sums shall bear interest, which Tenant hereby agrees to pay to Landlord, at the maximum rate of interest permitted by law to be charged Tenant for the use or forbearance of such money. The security deposit (as defined in the Basic Lease Information) shall be held by Landlord without liability for interest and as security for the performance by Tenant of Tenant's covenants and obligations under this lease, it being expressly understood that such deposit shall not be considered an advance payment of rental or a measure of Landlord's damages in case of default by Tenant. Upon the occurrence of any event of default by Tenant, Landlord may, from time to time, without prejudice to any other remedy, use such deposit to the extent necessary to make good any arrearages of rent and any other damage, injury, expense or liability caused to Landlord by such event of default. Following any such application of the security deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the security deposit to its original amount. If Tenant is not then in default hereunder, any remaining balance of such deposit shall be returned by Landlord to Tenant within a reasonable period of time after the termination of this lease. If Landlord transfers its interest in the premises during the lease term, Landlord may assign the security deposit to the transferee and thereafter shall have no further liability for the return of such security deposit. 4. LANDLORD'S OBLIGATIONS. (a) Subject to the limitations hereinafter set forth, Landlord agrees to furnish Tenant while occupying the premises and while Tenant is not in default under this lease, facilities to provide (i) water (hot, cold and refrigerated) at those points of supply provided for general use of tenants in the Building; (ii) heated and refrigerated air conditioning in season, at such times as Landlord normally furnishes these services to all tenants of the Building, and at such temperatures and in such amounts as are reasonably considered by Landlord to be standard, such service at hours other than those established by Landlord as standard to be furnished only at the written request of Tenant, who shall bear the entire cost thereof; (iii) janitorial service to the premises on weekdays other than holidays for Building standard installations (it being understood that Landlord reserves the right to bill Tenant separately for extra janitorial service required by reason of nonstandard installations) and such window washing as may from time to time in the Landlord's judgment be reasonably required; (iv) operator-less passenger elevators for ingress and egress to the floor on which the premises are located, in common with other tenants, provided that Landlord may reasonably limit the number of elevators to be in operation at times other than during customary business hours for the Building and on holidays. In addition, Landlord agrees at its cost and expense to maintain the public and common areas of the Building, such as lobbies, stairs, corridors and restrooms, in reasonably good order and condition, except for damage occasioned by Tenant, or its employees, agents, or invitees. If Tenant shall desire any of the services specified in this Paragraph 4 at any time other than times herein designated, such service or services shall be supplied to Tenant only at the written request of Tenant delivered to Landlord before 3:00 p.m. on the business day preceding such extra usage, and Tenant shall pay to Landlord as additional rent the cost of such service or services immediately upon receipt of a bill therefor. (b) Landlord shall make available to Tenant facilities to provide all electrical current required by Tenant in its use and occupancy of the premises and further shall make available electric lighting and current for the common areas of the Building in the manner and to the extent deemed by Landlord to be standard. The obligation of the Landlord hereunder to make available such utilities shall be subject to the rules and regulations of the supplier of such utilities and of any municipal or other governmental authority regulating the business of providing such utility service. Landlord shall not in any wise be liable or responsible to Tenant for any loss or damage or expense which Tenant may sustain or incur if either the quantity or character of any utility service is changed or is no longer available or is no longer suitable for Tenant's requirements. At any time when Landlord is making such utility service available to the premises pursuant to this paragraph, Landlord may, at its option, upon not less than thirty (30) days prior written notice to Tenant, discontinue the availability of such utility service. If Landlord gives any such notice of discontinuance, Landlord shall make all the necessary arrangements with the public utility supplying the utilities to the neighborhood with respect to obtaining such utility service to the premises, but Tenant will contract directly with such public utility for the supplying of such utility service to the premises. 2 (c) In the event that any utility service is submetered to any tenant's premises, Tenant's proportionate share for purposes of computing charges for utilities for which Tenant is not submetered shall be adjusted by Landlord so that it shall be a fraction, the numerator of which is the number of rentable square feet comprising Tenant's premises not separately metered and the denominator of which is the number of rentable square feet comprising the premises of all tenants not separately metered with respect to such utility. (d) Tenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of existing feeders to the Building or the risers or wiring installations. Any riser or risers or wiring to meet Tenant's excess electrical requirements will be installed by Landlord at the sole cost and expense of Tenant (if, in Landlord's sole judgment, the same are necessary and will not cause permanent damage or injury to the Building or the premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations, repairs or expense or interfere with or disturb other tenants or occupants). In the event Tenant's use of electrical current (i) exceeds 110 volt power, or (ii) exceeds that required for routine lighting and operation of general office machines (such as typewriters, dictating equipment, desk model adding machines and the like) which use 110 volt electrical power, then Tenant shall also pay on demand the cost of any such excess. Without Landlord's prior written consent, Tenant shall not install any data processing or computer equipment in the premises or any other equipment which shall require for its use other than the normal electrical current or other utility service. Whenever heat generating machines or equipment (other than general office machines as described hereinbefore) are used in the premises by Tenant which affect the temperature otherwise maintained by the air conditioning system or otherwise overload any utility, Landlord shall have the right to install supplemental air conditioning units or other supplemental equipment in the premises, and the cost thereof, including the cost of installation, operation, use and maintenance, shall be paid by Tenant to Landlord on demand. (e) Tenant will be billed monthly for all above standard utility service and other sums due and all such charges shall be considered due upon delivery of such bill and be deemed as so much additional rent due from Tenant to Landlord. The rate charged by Landlord shall not exceed the rate prevailing for Tenant as a user as established by the applicable rate classification published from time to time by the local electric power company or other utility supplier. (f) Failure to any extent to make available, or any slowdown, stoppage or interruption of, these defined services resulting from any cause (including, but not limited to, Landlord's compliance with (i) any voluntary or similar governmental or business guidelines now or hereafter published or (ii) any requirements now or hereafter established by any governmental agency, board or bureau having jurisdiction over the operation and maintenance of the Building) shall not render Landlord liable in any respect for damages to either person, property or business, nor be construed an eviction of Tenant or work an abatement of rent, nor relieve Tenant from fulfillment of any covenant or agreement hereof. Should any equipment or machinery furnished by Landlord break down or for any cause cease to function properly, Landlord shall use reasonable diligence to repair same promptly, but Tenant shall have no claim for abatement of rent or damages on account of any interruption in service occasioned thereby or resulting therefrom. (g) Notwithstanding any expiration or termination of this lease prior to the lease expiration date, Tenant's obligations to pay any and all additional rent pursuant to this Paragraph 4 shall continue and shall cover all periods up to such early expiration or termination date of this lease; provided however, if Landlord terminates this lease without waiving Landlord's right to seek damages against Tenant, Tenant's obligation to pay any and all additional rent pursuant to this Paragraph 4 shall not terminate as a result thereof. Tenant's obligation to pay any and all additional rent or other sums owing by Tenant to Landlord under this lease shall survive any expiration or termination of this lease. 5. RENTAL ADJUSTMENT. (1) Adjustments in Basic Rental. Tenant hereby agrees to pay to Landlord the Basic Rental specified in the Basic Lease Information adjusted in the following manner without deduction or set-off: 3 (a) For the purposes or this Lease the term "Basic Cost" shall mean any and all costs, expenses and disbursements of every kind and character (subject to the limitations set forth below) which Landlord shall incur, pay or become obligated to pay in connection with the ownership of any estate or interest in, operation, maintenance, repair, replacement, and security of the Building and Parking Garage, determined in accordance with generally accepted accounting principles consistently applied, including but not limited to the following: (i) Wages and salaries (including management fees) of all employees engaged in the operation, repair, replacement, maintenance, and security of the Building, including taxes, insurance and benefits relating thereto. (ii) All supplies and materials used in the operation, maintenance, repair, replacement, and security of the Building. (iii) Annual cost of all capital improvements made to the Building which although capital in nature can reasonably be expected to reduce the normal operating costs of the Building, as well as all capital improvements made in order to comply with any statutes, rules, regulations or directives hereafter promulgated by any governmental authority relating to energy, conservation, public safety or security. (iv) Cost of all utilities, other than the cost of electricity supplied to tenants of the Building which is actually reimbursed to Landlord by such tenants. (v) Cost of all maintenance and service agreements on equipment, including alarm service, window cleaning and elevator maintenance. (vi) Cost of casualty and liability insurance applicable to the Building and Landlord's personal property used in connection therewith. (vii) "Taxes" as defined in Paragraph 17. (viii) Cost of repairs, replacements, and general maintenance of the Building, other than replacement of the roof, foundation and exterior walls of the Building. (ix) Cost of service or maintenance contracts with independent contractors for the operation, maintenance, repair, replacement, or security of the Building. There are specifically excluded from the definition of the term "Basic Cost" expenses for capital improvements made to the Building, other than capital improvements described in subparagraph (iii) above and except for items which, though capital for accounting purposes, are properly considered maintenance and repair items, such as painting of common areas, replacement of carpet in elevator lobbies, and the like; electricity costs paid by Tenant pursuant to paragraph 4 of this lease; expenses for repair, replacements and general maintenance paid by proceeds of insurance or by Tenant or other third parties, and alterations attributable solely to tenants of the Building other than Tenant; interest, amortization or other payments on loans to Landlord; depreciation of the Building; leasing commissions; and income, excess profits or franchise taxes or other such taxes imposed on or measured by the income of Landlord from the operation of the Building. (b) Tenant shall during the term of this lease pay as additional rent an amount (per each square foot of rentable area within the leased premises) equal to the excess ("Excess") from time to time of actual Basic Cost per rentable square foot in the Building over the actual Basic Cost per calendar year 2000. Landlord, at its option, may collect such additional rent in a lump sum, to be due and payable within thirty (30) days after Landlord furnishes to Tenant a statement of actual Basic Cost for the previous year per paragraph (c) below, or beginning with January 1 of the first full calendar year following the Rental Commencement Date, and on each January 1 thereafter. Landlord shall also have the option to make a good faith estimate of the Excess for each upcoming calendar year and upon thirty (30) days' written notice to Tenant may require the monthly payment 4 of such additional rent equal to 1/12 of such estimate. Any amounts paid based on such an estimate shall be subject to adjustment pursuant to subparagraph (c) when actual Basic Cost is available for each calendar year. For the purposes of calculating the additional rental payment hereunder with respect to any fractional calendar year during the term of this lease, Landlord may either (i) estimate Basic Cost for the portion of the lease term during such partial year, or (ii) estimate Basic Cost for the entire calendar year and reduce the same to an amount bearing the same proportion to the full amount of estimated Basic Cost for such year as the number of days in such fractional calendar year bears to the total number of days in such full calendar year. (c) By April 1 of each calendar year during Tenant's occupancy, or as soon thereafter as practicable, Landlord shall furnish to Tenant a statement of Landlord's actual Basic Cost for the previous year adjusted as provided in subparagraph (d). If for any calendar year additional rent collected for the prior year as a result of Landlord's estimate of Basic Cost is in excess of the additional rent actually due during such prior year, then Landlord shall refund to Tenant any overpayment. Likewise, Tenant shall pay to Landlord, on demand, any underpayment with respect to the prior year. (d) With respect to any calendar year or partial calendar year during the term of this lease in which the Building is not occupied to the extent of ninety-five percent (95%) of the rentable area thereof, the Basic Cost for such period shall, for the purposes hereof, be increased to the amount which would have been incurred had the Building been occupied to the extent of ninety-five percent (95%) of the rentable area thereof. 6. LEASEHOLD IMPROVEMENTS. Improvements to the premises shall be installed at the cost and expense of Tenant (which shall be payable on demand by Landlord), but only in accordance with plans and specifications which have been previously submitted to and approved in writing by Landlord, such work to be performed only by Landlord or by contractors and subcontractors approved in writing by Landlord, it being understood that Tenant shall procure and maintain and shall cause such contractors, subcontractors and other persons engaged by or on behalf of Tenant to procure and maintain, insurance coverage against such risks, in such amounts and with such companies as Landlord may require in connection with the installation of such improvements. Landlord has made no representations as to the conditions of the premises or the Building or to remodel, repair or decorate, except as expressly set forth herein. 7. USE. Tenant shall use the premises only for the permitted use (as defined in the Basic Lease Information). Tenant will not occupy or use the premises, or permit any portion of the premises to be occupied or used, for any business or purpose other than the permitted use or for any use or purpose which is unlawful in part or in whole or deemed to be disreputable in any manner or extra hazardous on account of fire, nor permit anything to be done which will in any way increase the rate of insurance on the Building or contents; and in the event that, by reason of acts of Tenant, there shall be any increase in rate of insurance on the Building or contents created by Tenant's acts or conduct of business, then such acts of Tenant shall be deemed to be an event of default hereunder and Tenant hereby agrees to pay to Landlord the amount of such increase on demand and acceptance of such payment shall not constitute a waiver of any of Landlord's other rights provided herein. Tenant will conduct its business and control its agents, employees and invitees in such a manner as not to create any nuisance, nor interfere with, annoy or disturb other tenants or Landlord in the management of the Building. Tenant will maintain the premises in a clean, healthful and safe condition and will comply with all laws, ordinances, orders, rules and regulations (state, federal, municipal and other agencies or bodies having any jurisdiction thereof) with reference to the use, condition or occupancy of the premises. Tenant will not, without the prior written consent of Landlord, paint, install lighting or decorations, or install any signs, window or door lettering or advertising media of any type on or about the premises or any part thereof. 8. TENANT'S REPAIRS AND ALTERATIONS. Tenant will not in any manner deface or injure the Building, and will pay the cost of repairing any damage or injury done to the Building or any part thereof by Tenant or Tenant's agents, employees, or invitees. Tenant shall throughout the lease term take good care of the premises and keep them free from waste and nuisance of any kind. Tenant agrees to keep the premises, including all fixtures installed by Tenant and any plate glass and special store fronts, in good condition and make all necessary non-structural repairs except those caused by fire, casualty or acts of God covered by Landlord's fire 5 insurance policy covering the Building. The performance by Tenant of its obligations to maintain and make repairs shall be conducted only by contractors and subcontractors approved in writing by Landlord, it being understood that Tenant shall procure and maintain and shall cause such contractors and subcontractors engaged by or on behalf of Tenant to procure and maintain insurance coverage against such risks, in such amounts and with such companies as Landlord may require in connection with any such maintenance and repair. If Tenant fails to make such repairs within fifteen (15) days after the occurrence of the damage or injury, Landlord may at its option make such repair, and Tenant shall, upon demand therefor, pay Landlord for the cost thereof. At the end or other termination of this lease, Tenant shall deliver up the premises with all improvements located thereon (except as otherwise herein provided) in good repair and condition, reasonable wear and tear excepted, and shall deliver to Landlord all keys to the premises. Tenant will not make or allow to be made any alterations or physical additions in or to the premises without the prior written consent of Landlord. All alterations, additions or improvements (whether temporary or permanent in character) made in or upon the premises, either by Landlord or Tenant, shall be Landlord's property on termination of this lease and shall remain on the premises without compensation to Tenant. All furniture, movable trade fixtures and equipment installed by Tenant may be removed by Tenant at the termination of this lease if Tenant so elects, and shall be so removed if required by Landlord, or if not so removed shall, at the option of Landlord, become the property of Landlord. All such installations, removals and restoration shall be accomplished in a good workmanlike manner so as not to damage the premises or the primary structure or structural qualities of the Building or the plumbing, electrical lines or other utilities. 9. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not, without the prior written consent of Landlord, which consent not to be unreasonably withheld (i) assign or in any manner transfer this Lease or any estate or interest therein, or (ii) permit any assignment of this Lease or any estate or interest therein, by operation of law, or (iii) sublet the leased Premises or any part thereof, or (iv) grant any license, concession or other right of occupancy of any portion of the leased Premises, or (v) permit the use of the leased Premises by any parties other than Tenant, its agents and employees and any such act without Landlord's prior written consent shall be void and of no effect. Consent by Landlord to one or more assignments or sublettings shall not operate as a waiver of Landlord's rights as to any subsequent assignments and sublettings. Notwithstanding any assignment or subletting, Tenant and any guarantor of Tenant's obligations under this Lease shall at all times remain fully responsible and liable for the payment of the rent herein specified and for compliance with all of Tenant's other obligations under this Lease. If an event of default, as hereinafter defined, should occur while the leased Premises or any part thereof are then assigned or sublet, Landlord, in addition to any other remedies herein provided or provided by law, may at its option collect directly from such assignee or sublessee all rents becoming due to Tenant under such assignment or sublease and apply such rent against any sums due to Landlord by Tenant hereunder, and Tenant hereby authorizes and directs any such assignee or sublessee to make such payments of rent directly to Landlord upon receipt of notice from Landlord. No direct collection, by Landlord from any such assignee or sublessee shall be construed to constitute a novation or a release of Tenant or any guarantor of Tenant from the further performance of its obligations hereunder. Receipt by Landlord of rent from any assignee, sublessee or occupant of the leased Premises shall not be deemed a waiver of the covenant of this Lease contained against assignment and subletting or a release of Tenant under this Lease. The receipt by Landlord from any such assignee or sublessee obligated to make payments of rent shall be a full and complete release, discharge, and acquittance to such assignee or sublessee to the extent of any such amount of rent so paid to Landlord. Landlord is authorized and empowered, on behalf of Tenant, to endorse the name of Tenant upon any check, draft, or other instrument payable to Tenant evidencing payment of rent, or any part thereof, and to receive and apply the proceeds therefrom in accordance with the terms hereof. Tenant shall not mortgage, pledge or otherwise encumber its interest in this Lease or in the leased Premises. (b) If Tenant requests Landlord's consent to an assignment of the Lease or subletting of all or a part of the Premises, it shall submit to Landlord, in writing, the name of the proposed assignee or subtenant and the nature and character of the business of the proposed assignee or subtenant, the term, use, rental rate and other particulars of the proposed subletting or assignment, including without limitation, evidence 6 satisfactory to Landlord that the proposed subtenant or assignee is financially responsible and will immediately occupy and thereafter use the Premises (or any sublet portion thereof) for the remainder of the lease term (or for the entire term of the sublease, if shorter). Landlord shall have the option (to be exercised within ten (10) days after submission of Tenant's written request) to cancel this Lease (or the applicable portion thereof as to a partial subletting) as of the commencement date stated in the above mentioned subletting or assignment. If Landlord elects to cancel this Lease as stated, then the term of this Lease, and the tenancy and occupancy of the leased Premises by Tenant thereunder, shall cease, terminate, expire and come to an end with respect to that portion of the Premises so assigned or sublet as if the cancellation date were the original termination date of this Lease and Tenant shall pay to Landlord all costs or charges which are the responsibility of Tenant hereunder with respect to that portion of the Premises so assigned or sublet, and Tenant shall, at its own cost and expense, discharge in full any outstanding commission obligation of Landlord with respect to this Lease, or any part hereof so canceled. Thereafter Landlord may lease the Premises to the prospective subtenant or assignee without liability to Tenant. If Landlord does not thus cancel this Lease, the terms and provisions of paragraph (a) hereof will apply. (c) If Landlord consents to any subletting or assignment by Tenant as herein provided, and subsequently any rents received by Tenant under any such sublease are in excess of the rent payable by Tenant under this Lease, or any additional consideration is paid to Tenant by the assignee under any such assignment, then Landlord may, at its option, either (i) declare such excess rents under any sublease or such additional consideration for an assignment to be due and payable by Tenant to Landlord as additional rent hereunder, or (ii) elect to cancel this Lease as provided in paragraph (b) hereof. (d) Landlord shall have the right to transfer, assign or convey, in whole or in part, the Building and any and all of its rights under this Lease, and in the event Landlord assigns its rights under this Lease, Landlord shall thereby be released from any further obligations hereunder, and Tenant agrees to look solely to such successor in interest of Landlord for performance of such obligations. (e) Tenant shall not offer the Premises for lease, assignment or sublease (without implying the consent of Landlord to offer the Premises for any purposes) at a rental rate less than the then "current building rental rate," which is the rental rate for space in the Building offered by Landlord to third parties. In the event there is any controversy or question as to the current building rental rate offered by Landlord, Landlord shall be the sole and exclusive determinate of such rental rate. In the event Tenant shall enter into a lease, assignment or sublease of the Premises (without implying the consent of Landlord thereto) and the rental rate is other than the current building rental rate, Landlord, in addition to any other right or remedy available to Landlord may (1) terminate this Lease, (2) terminate the Lease, assignment or sublease, (3) increase the rental rate under this Lease to the current building rental rate as determined by Landlord, or (4) increase the rental rate under the Lease, assignment or sublease to the current building rental rate as determined by Landlord, and keep the excess, if any for itself as additional rent. (f) Tenant shall not offer the Premises for lease, assignment or sublease (without implying the consent of Landlord to offer the Premises for any such purposes) to any tenant or subtenant of the Building. In the event Tenant shall enter into a lease, assignment or sublease of the Premises (without implying the consent of Landlord thereto) with a current tenant of the Building, Landlord, in addition to any other right or remedy available to Landlord may (1) terminate this Lease, (2) terminate the lease, assignment or sublease, (3) increase the rental rate under this Lease to the current building rental rate as determined by Landlord, or (4) increase the rental rate under the lease, assignment or sublease to the current building rental crate as determined by Landlord, and keep the excess, if any for itself as additional rent. (g) Tenant will not sublease from any tenant of the Building. (h) Notwithstanding any provision of this Lease to the contrary, Tenant may assign or otherwise transfer any portion of this Lease, or sublet any portion of the Premises, to an entity which is the parent company of Tenant, a wholly owned subsidiary of Tenant, or an entity with entirely common ownership with Tenant, without the prior consent of Landlord, but with written notice to Landlord. 7 10. INDEMNITY. Landlord shall not be liable for and Tenant will indemnify and save harmless Landlord of and from all fines, suits, claims, demands, losses and actions (including attorney's fees) for any injury to person or damage to or loss of property on or about the premises caused by the negligence or misconduct of or breach of this lease by, Tenant, its employees, subtenants, invitees or other persons entering the premises or the Building under express or implied invitation of Tenant, or arising out of Tenant's use of the premises. Landlord shall not be liable or responsible for any loss or damage to any property or death or injury to any person occasioned by theft, fire, act of God, public enemy, criminal conduct of third parties, injunction, riot, strike, insurrection, war, court order, requisition or other action by any governmental body or authority, by other tenants of the Building or any other matter beyond the control of Landlord, or for any injury or damage or inconvenience which may arise through repair or alteration of any part of the Building, or failure to make repairs, or from any cause whatever. 11. SUBORDINATION. This lease and all rights of Tenant hereunder are subject and subordinate to any deeds of trust, mortgages or other instruments of security, as well as to any ground leases or primary leases, that now or hereafter cover all or any part of the Building, the land situated beneath the Building or any interest of Landlord therein, and to any and all advances made on the security thereof, and to any and all increases, renewals, modifications, consolidations, replacements and extensions of any of such deeds of trust, mortgages, instruments of security or leases. This provision is hereby declared by Landlord and Tenant to be self-operative and no further instrument shall be required to effect such subordination of this lease. Tenant shall, however, upon demand at any time or times execute, acknowledge and deliver to Landlord any and all instruments and certificates that in the judgment of Landlord or Landlord's mortgagee may be necessary or proper to confirm or evidence such subordination. Notwithstanding the generality of the foregoing provisions of this Paragraph 11, Tenant agrees that any such mortgagee shall have the right at any time to subordinate any such deeds of trust, mortgages or other instruments of security to this lease on such terms and subject to such conditions as such mortgagee may deem appropriate in its discretion. Tenant further covenants and agrees upon demand by Landlord's mortgagee at any time, before or after the institution of any proceedings for the foreclosure of any such deeds of trust, mortgages or other instruments of security, or sale of the Building pursuant to any such deeds of trust, mortgages or other instruments of security, to attorn to such purchaser upon any such sale and to recognize such purchaser as Landlord under this lease. The agreement of Tenant to attorn upon demand of Landlord's mortgagee contained in the immediately preceding sentence shall survive any such foreclosure sale or trustee's sale. Tenant shall upon demand at any time or times, before or after any such foreclosure sale or trustee's sale, execute, acknowledge and deliver to Landlord's mortgagee any and all instruments and certificates that in the judgment of Landlord's mortgagee may be necessary or proper to confirm or evidence such attornment, and Tenant hereby irrevocably authorizes Landlord's mortgagee to execute, acknowledge and deliver any such instruments and certificates on Tenant's behalf. 12. RULES AND REGULATIONS. Tenant and Tenant's agents, employees, and invitees will comply fully with all requirements of the rules and regulations of the Building and related facilities which are attached hereto as Exhibit B, and made a part hereof as though fully set out herein. Landlord shall at all times have the right to change such rules and regulations or to promulgate other rules and regulations in such manner as may be deemed advisable for safety, care, or cleanliness of the Building and related facilities or premises, and for preservation of good order therein, all of which rules and regulations, changes and amendments will be forwarded to Tenant in writing and shall be carried out and observed by Tenant. Tenant shall further be responsible for the compliance with such rules and regulations by the employees, servants, agents, visitors and invitees of Tenant. 13. INSPECTION. Landlord or its officers, agents and representatives shall have the right to enter into and upon any and all parts of the premises at all reasonable hours (or, in any emergency, at any hour) to (a) inspect same or clean or make repairs or alterations or additions as Landlord may deem necessary (but without any obligation to do so, except as expressly provided for herein) or (b) show the premises to prospective tenants, purchasers or lenders; and Tenant shall not be entitled to any abatement or reduction of rent by reason thereof, nor shall such be deemed to be an actual or constructive eviction. 8 14. CONDEMNATION. If the premises or any part thereof, or if the Building or any portion of the Building leaving the remainder of the Building unsuitable for use as an office building comparable to its use on the Commencement Date of this lease, shall be taken or condemned in whole or in part for public purposes, or sold in lieu of condemnation, then the lease term shall, at the sole option of Landlord, forthwith cease and terminate; all compensation awarded for any taking (or sale proceeds in lieu thereof) shall be the property of Landlord, and Tenant shall have no claim thereto, the same being hereby expressly waived by Tenant. 15. FIRE OR OTHER CASUALTY. In the event that the Building should be totally destroyed by fire, tornado or other casualty or in the event the premises or the Building should be so damaged that rebuilding or repairs cannot be completed within one hundred eighty (180) days after the date of such damage, Landlord may at its option terminate this lease, in which event the rent shall be abated during the unexpired portion of this lease effective with the date of such damage. In the event the Building or the premises should be damaged by fire, tornado or other casualty covered by Landlord's insurance, but only to such extent that rebuilding or repairs can be completed within one hundred eighty (180) days after the date of such damage, or if the damage should be more serious but Landlord does not elect to terminate this lease, in either such event Landlord shall within sixty (60) days after the date of such damage commence to rebuild or repair the Building and/or the premises and shall proceed with reasonable diligence to restore the Building and/or premises to substantially the same condition in which it was immediately prior to the happening of the casualty, except that Landlord shall not be required to rebuild, repair or replace any part of the furniture, equipment, fixtures and other improvements which may have been placed by Tenant or other tenants within the Building or the premises. Landlord shall allow Tenant a fair diminution of rent during the time the premises are unfit for occupancy. In the event any mortgagee under a deed of trust, security agreement or mortgage on the Building should require that any insurance proceeds be used to retire the mortgage debt, Landlord shall have no obligation to rebuild and this lease shall terminate upon notice to Tenant. Except as hereinafter provided, any insurance which may be carried by Landlord or Tenant against loss or damage to the Building or to the premises shall be for the sole benefit of the party carrying such insurance and under its sole control. 16. HOLDING OVER. Should Tenant, or any of its successors in interest, hold over the premises, or any part thereof, after the expiration of the lease term, unless otherwise agreed in writing by Landlord, such holding over shall constitute and be construed as a tenancy at will only, at a daily rental equal to the daily rent payable for the last month of the lease term plus fifty percent (50%) of such amount. The inclusion of the preceding sentence shall not be construed as Landlord's consent for Tenant to hold over. 17. TAXES. (a) Landlord shall pay before they become delinquent all taxes, assessments and governmental charges of any kind and nature whatsoever (hereinafter collectively referred to as "Taxes") lawfully levied or assessed against the Building and the grounds, parking areas, driveways and alleys around the Building. In addition, the term "Taxes" shall include any reasonable fees, expenses and costs incurred by Landlord in its efforts to insure a fair and equitable tax burden on the land and the Building and in connection with any protest by Landlord of any assessments, levies or the tax rate. (b) If at any time during the term of this lease, the present method of taxation shall be changed so that in lieu of the whole or any part of any tax assessments or governmental charges levied, assessed or imposed on real estate and the improvements thereon, there shall be levied, assessed or imposed on Landlord a capital levy or other tax directly on the rents received therefrom and/or a franchise tax, assessment, levy or charge measured by or based, in whole or in part, upon such rents for the present or any future building on the premises, then all such taxes, assessments, levies or charges, or the part thereof so measured or based, shall be deemed to be included within the term "Taxes" for the purposes hereof. (c) Tenant shall be liable for all taxes levied or assessed against personal property, furniture or fixtures placed by Tenant in the premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and if Landlord elects to pay the same or if the assessed value of Landlord's 9 property is increased by inclusion of personal property, furniture or fixtures placed by Tenant in the premises, and Landlord elects to pay the taxes based on such increases, Tenant shall pay to Landlord upon demand that part of such taxes for which Tenant is primarily liable hereunder. 18. EVENTS OF DEFAULT. The following events shall be deemed to be events of default by Tenant under this lease: (a) Tenant shall fail to pay when due any rental or other sums payable by Tenant hereunder (or under any other lease now or hereafter executed by Tenant in connection with space in the Building). (b) Tenant shall fail to comply with or observe any other provisions of this lease (or any other lease now or hereafter executed by Tenant in connection with space in the Building). (c) Tenant or any guarantor of Tenant's obligations hereunder shall make an assignment for the benefit of creditors. (d) Any petition shall be filed by or against Tenant or any guarantor of Tenant's obligation hereunder under any section or chapter of the National Bankruptcy Act as amended, or under any similar law or statute of the United States or any State thereof, or Tenant or any guarantor of Tenant's obligations hereunder shall be adjudged bankrupt or insolvent in proceedings filed thereunder. (e) A receiver or Trustee shall be appointed for all or substantially all of the assets of Tenant or any guarantor of Tenant's obligations hereunder. (f) Tenant shall desert or vacate any portion of the premises. 19. REMEDIES. Upon the occurrence of any event of default specified in this lease, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever: (a) Terminate this lease in which event Tenant shall immediately surrender the premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession and expel or remove Tenant and any other person who may be occupying said premises or any part thereof, without being liable for prosecution or any claim for damages therefor; and Tenant agrees to pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the premises on satisfactory terms or otherwise, including the loss of rental for the remainder of the lease term. (b) Enter upon and take possession of the premises and expel or remove Tenant and any other person who may be occupying the premises or any part thereof, without being liable for prosecution or any claim for damages therefor, and if Landlord so elects, relet the premises on such terms as Landlord shall deem advisable and receive the rent therefor; and Tenant agrees to pay to Landlord on demand any deficiency that may arise by reason of such reletting for the remainder of the lease term. (c) Enter upon the premises without being liable for prosecution or any claim for damages therefor, and do whatever Tenant is obligated to do under the terms of this lease; and Tenant agrees to reimburse Landlord on demand for any expenses which Landlord may incur in thus effecting compliance with Tenant's obligations under this lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to the Tenant from such action. No reentry or taking possession of the premises by Landlord shall be construed as an election on its part to terminate this lease, unless a written notice of such intention be given to Tenant. Notwithstanding any such reletting or reentry or taking possession, Landlord may at any time thereafter elect to terminate this lease for a previous default. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law, nor shall pursuit of any remedy herein 10 provided constitute a forfeiture or waiver of any rent due to Landlord hereunder or of any damages occurring to Landlord by reason of the violation of any of the terms, provisions and covenants herein contained. Landlord's acceptance of rent following an event of default hereunder shall not be construed as LandLord's waiver of such event of default. No waiver by Landlord of any violation or breach of any of the terms, provisions, and covenants herein contained shall be deemed or construed to constitute a waiver of any other violation or default. The loss or damage that Landlord may suffer by reason of termination of this lease or the deficiency from any reletting as provided for above shall include the expense of repossession and any repairs or remodeling undertaken by Landlord following repossession. Should Landlord at any time terminate this lease for any default, in addition to any other remedy Landlord may have, Landlord may recover from Tenant all damages Landlord may incur by reason of such default, including the cost of recovering the premises and the loss of rental for the remainder of the lease term. In the event that Landlord enters upon and takes possession of the premises due to the Tenant's default in payment of rent, the Landlord is expressly authorized to change the lock on the door to the premises, and shall not be required to place written notice on the Tenant's front door nor to furnish a new key to the Tenant. It is further agreed that all rights and remedies of both the Landlord and the Tenant shall be governed by this lease, and not by Section 93.002(a)-(g) of the Texas Property Code, which shall have no applicability to this lease. 20. SURRENDER OF PREMISES. No act or thing done by Landlord or its agents during the term hereby granted shall be deemed an acceptance of a surrender of the premises, and no agreement to accept a surrender of the premises shall be valid unless the same be made in writing and signed by Landlord. 21. ATTORNEY'S FEES. In case it should be necessary or proper for Landlord to bring any action under this lease or to consult or place said lease, or any amount payable by Tenant hereunder, with an attorney concerning or for the enforcement of any of Landlord's rights hereunder, then Tenant agrees in each and any such case to pay to Landlord a reasonable attorney's fee. 22. LANDLORD'S LIEN. In addition to the statutory Landlord's lien, Landlord shall have, at all times, and Tenant hereby grants to Landlord, a contractual Landlord's lien and a valid security interest to secure payment of all rentals and other sums of money becoming due hereunder from Tenant, and to secure payment loss which Landlord may suffer by reason of the breach by Tenant of any damages or covenant, agreement or condition contained herein, upon all goods, wares, equipment, fixtures, furniture, improvements and other personal property of Tenant presently or which may hereafter be situated on the premises, and all proceeds therefrom, and such property shall not be removed therefrom without the consent of Landlord until all arrearages in rent as well as all other sums of money then due to Landlord hereunder shall first have been paid and discharged and all the covenants, agreements and conditions hereof have been fully complied with and performed by Tenant. Upon the occurrence of an event of default by Tenant, Landlord may, in addition to any other remedies provided herein, enter upon the premises and take possession of any goods, wares, equipment, fixtures, furniture, improvements and other personal property of Tenant situated on the premises, without liability for trespass or conversion, and sell the same at public or private sale, with or without having such property at the sale, after giving Tenant reasonable notice of the time and place of any public sale or of the time after which any private sale is to be made, at which sale Landlord or its assigns may, pursuant to its contractual Landlord's lien or its security interest, purchase unless otherwise prohibited by law. Unless otherwise provided by law, and without intending to exclude any other manner of giving Tenant reasonable notice, the requirements of reasonable notice shall be met if such notice is given in the manner prescribed in Paragraph 29 of this lease at least five (5) days before the time of sale. The proceeds from any such disposition, less any and all expenses connected with the taking of possession, holding and selling of the property (including reasonable attorney's fees and other expenses), shall be applied as a credit against the indebtedness secured by the security interest granted in this Paragraph 22. Any surplus shall be paid to Tenant or as otherwise required by law; and Tenant shall pay any deficiencies forthwith. Upon request by Landlord, Tenant agrees to execute and deliver to Landlofd a financing statement in form sufficient to perfect the security interest of Landlord in the aforementioned property and proceeds thereof under the provisions of the Uniform Commercial Code in force in the State of Texas. The statutory lien for rent is not hereby waived, 11 the contractual Landlord's lien and the security interest herein granted being in addition and supplementary thereto. 23. MECHANIC'S LEINS. Tenant will not permit any mechanic's lien or liens to be placed upon the premises or the Building or improvements thereon during the lease term caused by or resulting from any work performed, materials furnished or obligation incurred by or at the request of Tenant, and in the case of the filing of any such lien Tenant will promptly pay same. If default in payment thereof shall continue for twenty (20) days after written notice thereof from Landlord to Tenant, Landlord shall have the right and privliege at Landlord's option of paying the same or any portion thereof without inquiry as to the validity thereof, and any amounts so paid, including expenses and interest, shall be so much additional indebtedness hereunder due by Tenant to Landlord and shall be repaid to Landlord immediately on rendition of a bill therefor. 24. NO SUBROGATION-LIABILITY INSURANCE. (a) Each party hereto hereby waives any cause of action it might have against the other party on account of any loss or damage that is insured against under any insurance policy (to the extent that such loss or damage is recoverable under such insurance policy) that covers the Building, the premises, Landlord's or Tenant's fixtures, personal property, leasehold improvements or business and which names Landlord or Tenant, as the case may be, as a party insured, it being understood and agreed that this provision is cumulative of Paragraph 10 hereof. Each party hereto agrees that it will request its insurance carrier to endorse all applicable policies waiving the carrier's rights of recovery under subrogation or otherwise against the other party. (b) Tenant shall procure and maintain throughout the lease term a policy or policies of insurance at its sole cost and expense and in amounts of not less than a combined single limit of $1,000,000 or such other amounts as Landlord may from time to time require, insuring Tenant and Landlord against any and all liability to the extent obtainable for injury to or death of a person or persons or damage to property occasioned by or arising out of or in connection with the use, operation and occupancy of the premises. Tenant shall furnish a certificate of insurance and such other evidence satisfactory to Landlord of the maintenance of all insurance coverage required hereunder, and Tenant shall obtain a written obligation on the part of each insurance company to notify Landlord at least thirty (30) days prior to cancellation or material change of any such insurance. Such certificates or other evidence of insurance coverage to be delivered no later than the date on which Tenant takes possession of the leased premises for any purpose and thereafter no later than ten (10) days prior to expiration of existing policies. All insurance policies required of Tenant shall be written on an occurrence basis. 25. SUBSTITUTION SPACE. Intentionally Deleted 26. BROKERAGE. Tenant warrants that it has had no dealing with any broker or agent in connection with the negotiation or execution of this lease and Tenant agrees to indemnify Landlord against all costs, expenses, attorneys' fees or other liability for commissions or other compensation or charges claimed by any broker or agent claiming the same by, through or under Tenant. 27. CHANGE OF BUILDING NAME. Landlord reserves the right at any time to change the name by which the Building is designated. 28. ESTOPPEL CERTIFICATES. Tenant agrees to furnish from time to time when requested by Landlord, the holder of any deed of trust or mortgage or the lessor under any ground lease covering all or any part of the Building or the improvements therein or the premises or any interest of Landlord therein, a certificate signed by Tenant confirming and containing such factual certifications and representations deemed appropriate by Landlord, the holder of any deed of trust or mortgage or the lessor under any ground lease covering all or any part of the Building or the improvements therein or the premises or any interest of Landlord therein, and Tenant shall within ten (10) days following receipt of said proposed certificate from Landlord, return a fully 12 executed copy of said certificate to Landlord. In the event Tenant shall fail to return a fully executed copy of such certificate to Landlord within the foregoing ten-day period, then Tenant shall be deemed to have approved and confirmed all of the terms, certifications and representations contained in such certificate. 29. NOTICES. Each provision of this Agreement, or of any applicable governmental laws, ordinances, regulations, and other requirements with reference to the sending, mailing or delivery of any notice, or with reference to the making of any payment by Tenant to Landlord, shall be deemed to be complied with when and if the following steps are taken: (a) All rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord in Bexar County, Texas, at the address set forth in the Basic Lease Information or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. (b) Any notice or document required to be delivered hereunder shall be deemed to be delivered if actually received and whether or not received when deposited in the United States mail, postage prepaid, certified or registered mail (with or without return receipt requested), addressed to the parties hereto at the respective addresses set forth in the Basic Lease Information or at such other address as either of said parties have theretofore specified by written notice delivered in accordance herewith. 30. FORCE MAJEURE. Whenever a period of time is herein prescribed for action to be taken by Landlord, Landlord shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions any other causes of any kind whatsoever which are beyond the reasonable control of Landlord. 31. SEPARABILITY. If any clause or provision of this lease is illegal, invalid or unenforceable under present or future laws effective during the lease term, then and in that event, it is the intention of the parties hereto that the remainder of this lease shall not be affected thereby, and it is also the intention of the parties to this lease that in lieu of each clause or provision of this lease that is illegal, invalid or unenforceable, there be added as a part of this lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. 32. AMENDMENTS; BINDING EFFECT. This lease may not be altered, changed or amended, except by instrument in writing signed by both parties hereto. No provision of this lease shall be deemed to have been waived by Landlord unless such waiver be in writing signed by Landlord and addressed to Tenant, nor shall any custom or practice which may evolve between the parties in the administration of the terms hereof be construed to waive or lessen the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms hereof. The terms and conditions contained in this lease shall apply to, inure to the benefit of, and be binding upon the parties hereto, and upon their respective successors in interest and legal representatives, except as otherwise herein expressly provided. 33. QUIET ENJOYMENT. Provided Tenant has performed all of the terms and conditions of this lease, including the payment of rent, to be performed by Tenant, Tenant shall peaceably and quietly hold and enjoy the premises for the lease term, without hindrance from Landlord, subject to the terms and conditions of this lease. 34. GENDER. Words of any gender used in this lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. 35. JOINT AND SEVERAL LIABILITY. If there be more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several. If there be a guarantor of tenant's obligations hereunder, the obligations hereunder imposed upon Tenant shall be the joint and several obligations of Tenant and such guarantor and Landlord need not first proceed against Tenant before proceeding against such guarantor nor 13 shall any such guarantor be released from its guaranty for any reason whatsoever, including without limitation, in case of any amendments hereto, waivers hereof or failure to give such guarantor any notices hereunder. 36. PERSONAL LIABILITY. The liability of Landlord to Tenant for any default by Landlord under the terms of this lease shall be limited to the interest of Landlord in the Building and the land and Landlord shall not be personally liable for any deficiency. This clause shall not be deemed to limit or deny any remedies which Tenant may have in the event of default by Landlord hereunder which do not involve the personal liability of Landlord. 37. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord shall have the following rights, exercisable without notice and without liability to Tenant for damage or injury to property, persons or business and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession or giving rise to any claim for setoff or abatement of rent: (a) To decorate and make repairs, alterations, additions, changes or improvements, whether structural or otherwise, in and about the Building, or any part thereof, and for such purposes to enter the leased premises and, during the continuance of any such work to temporarily close doors, entry-ways, public space and corridors in the Building, to interrupt or temporarily suspend Building services and facilities and to change the arrangement and location of entrances or passageways, doors and doorways, corridors, elevators, stairs, toilets, or other public parts of the Building, all without abatement of rent or affecting any of Tenant's obligations hereunder, so long as the premises are reasonably accessible. (b) To have and retain a paramount title to the leased premises free and clear of any act of Tenant purporting to burden or encumber them. (c) To grant to anyone the exclusive right to conduct any business or render any service in or to the Building, provided such exclusive right shall not operate to exclude Tenant from the use expressly permitted herein. (d) To prohibit the placing of vending or dispensing machines of any kind in or about the premises without the prior written permission of Landlord. (e) To have access for Landlord and other tenants of the Building to any mail chutes located on the premises according to the rules of the United States Postal Service. (f) To take all such reasonable measures as Landlord may deem advisable for the security of the Building and its occupants, including without limitation, the search of all persons entering or leaving the Building, the evacuation of the Building for cause, suspected cause, or for drill purposes, the temporary denial of access to the Building, and the closing of the Building after normal business hours and on Saturdays, Sundays and holidays, subject, however, to Tenant's right to admittance when the Building is closed after normal business hours under such reasonable regulations as Landlord may prescribe from time to time which may include by way of example but not of limitation, that persons entering or leaving the Building, whether or not during normal business hours, identify themselves to a security officer by registration or otherwise and that such persons establish their right to enter or leave the Building. 38. NOTICE TO LENDER. If the premises or the Building or any part thereof are at any time subject to a first mortgage or a first deed of trust or other similar instruments and this lease or the rentals are assigned to such mortgagee, trustee or beneficiary and the Tenant is given written notice thereof, including the post office address of such assignee, then the Tenant shall not terminate this lease or abate rentals for any default on the part of the Landlord without first giving written notice by certified or registered mail, return receipt requested to such assignee, specifying the default in reasonable detail, and affording such assignee a reasonable opportunity to make performance, at its election, for and on behalf of the Landlord. 14 39. CAPTIONS. The captions contained in this lease are for convenience of reference only and in no way limit or enlarge the terms and conditions of this lease. 40. MISCELLANEOUS. (a) Any approval by Landlord or Landlord's architects and/or engineers of any of Tenant's drawings, plans and specifications which are prepared in connection with any construction of improvements in the premises shall not in any way be construed or operate to bind Landlord or to constitute a representation or warranty of Landlord as to the adequacy or sufficiency of such drawings, plans and specifications, or the improvements to which they relate, for any use, purpose, or condition, but such approval shall merely be the consent of Landlord as may be required hereunder in connection with Tenant's construction of improvements in the leased premises in accordance with such drawings, plans and specifications. (b) Each and every covenant and agreement contained in this lease is, and shall be construed to be, a separate and independent covenant and agreement. (c) There shall be no merger of this lease or of the leasehold estate hereby created with the fee estate in the leased premises or any part thereof by reason of the fact that the same person may acquire or hold, directly or indirectly, this lease or the leasehold estate hereby created or any interest in this lease or in such leasehold estate as well as the fee estate in the leasehold premises or any interest in such fee estate. (d) Neither Landlord nor Landlord's agents or brokers have made any representations or promises with respect to the premises, the Building or the land except as herein expressly set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this lease. (e) The submission of this lease to Tenant shall not be construed as an offer, nor shall Tenant have any rights with respect thereto unless and until Landlord shall, or shall cause its managing agent to, execute a copy of this lease and deliver the same to Tenant. (f) In no event shall Landlord, including any successor or assignee of all or a portion of Landlord's interest in the Building, be personally liable or accountable with respect to any provision of this Lease. If Landlord shall be in breach or default with respect to any obligation hereunder or otherwise, Tenant agrees to look for satisfaction solely to Landlord's interest in the Building. 41. LENDER APPROVAL. This lease is subject to Landlord's lender approval. If Landlord can obtain said approval only upon the basis of modifications of the terms and provisions of this lease, Landlord shall have the right to cancel this lease if Tenant refuses to approve in writing any such modification within fifteen (15) days after Landlord's request therefor. If such right to cancel is exercised, this lease shall thereafter be null and void, and security deposited hereunder shall be returned to Tenant and neither party shall have any liability to the other by reason of such cancellation. 42. EXHIBITS AND ATTACHMENTS. All exhibits, attachments, riders and addenda referred to in this lease and the exhibits listed hereinbelow are incorporated into this lease and made apart hereof for all intents and purposes. Exhibit A: Outline of Premises Exhibit B: Rules and Regulations 15 43. SPECIAL PROVISIONS. PARKING: Provided Tenant is not in default hereunder, Tenant shall be permitted to use the parking garage associated with the Building during the lease term for the parking of one (1) monthly parking permit for each 800 square feet of rentable area leased in the Building at the current building rate, conditions and regulations as are from time to time charged or applicable to patrons of said parking garage for space similarly situated within said parking garage plus State and Local Taxes; provided, however, the failure, for any reason, of Landlord to provide or make available such parking spaces to Tenant or the inability of Tenant to utilize said parking spaces shall under no circumstances be deemed a default by Landlord as to permit Tenant to terminate this Lease, in whole or in part, or to have any claim or cause of action against Landlord as a result thereof, the same being hereby expressly waived by Tenant. TERMINATION RIGHT: At the end of the First (1st) year of the Lease Term, Tenant shall have a one time option to "buy-out" the remaining term of the Lease and thereby obtain a termination of this Lease on the terms and provisions stated herein. Provided the proposed buy-out is coincident to Tenant providing at least one hundred twenty (120) days prior written notice by Tenant to Landlord of the proposed effective date of termination. Tenant may terminate this Lease by payment of a "Cancellation Fee" to Landlord consisting of the following: (1) All unamortized costs associated with the Lease including unamortized brokerage commissions, the costs of improvements, architectural fees and the cost of legal fees incurred by Landlord associated with the termination of this Lease, which may include the cost of review by legal counsel of related documents and matters, plus (2) a fee equal to three (3) months Basic Rental. The costs associated with the Lease shall be amortized in equal instalments over the initial Lease Term at a rate of twelve percent (12%) per annum. In the event Tenant gives Landlord such buy-out notice in accordance with the terms hereof. Landlord shall provide to Tenant within thirty (30) days of receipt of such notice, a calculation of the amount due by Tenant to Landlord representing the Cancellation Fee. Tenant shall, within thirty (30) days after of receipt of such notice, pay Landlord the Cancellation Fee or Tenant shall be deemed to have waived the right to exercise this buy-out and this Lease shall remain in full force. DATED AS OF THE DATE FIRST ABOVE WRITTEN. LANDLORD: TENANT: SANTA CLARA LAND COMPANY, LTD. RACKSPACE.COM By: Wiltshire Holdings L.C., Its General Partner BY: /s/ Graham Weston BY: /s/ Morris A. Miller COO ------------------------- ------------------------- Graham Weston Morris A. Miller Manager Chief Operating Officer TITLE: ------------- 16 EXHIBIT "A" OUTLINE OF PREMISES [GRAPHIC] EXHIBIT "B" BUILDING RULES AND REGULATIONS The following rules and regulations shall apply, where applicable, to the premises, the Building, the parking garage associated therewith, the land situated beneath the Building and the appurtenances thereto: 1. Sidewalks, doorways, vestibules, halls, stairways and other similar areas shall not be obstructed by tenants or used by any tenant for any purpose other than ingress and egress to and from the leased premises and for going from one to another part of the Building. 2. Plumbing, fixtures and appliances shall be used only for the purposes for which designed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed therein. Damage resulting to any such fixtures or appliances from misuse by a tenant or such tenant's agents, employees or invitees, shall be paid by such tenant, and Landlord shall not in any case be responsible therefor. 3. No signs, advertisements or notices shall be painted or affixed on or to any windows or doors or other part of the building except of such color, size and style and in such places as shall be first approved in writing by Landlord. No nails, hooks or screws shall be driven or inserted in any part of the Building except by the Building maintenance personnel nor shall any part of the Building be defaced by tenants. No curtains or other window treatments shall be placed between the glass and the Building standard window treatments. 4. Landlord will provide and maintain an alphabetical directory board for all tenants in the first floor (main lobby) of the Building and no other directory shall be permitted unless previously consented to by Landlord in writing. The cost of directory strips shall be borne by Tenant. 5. Landlord shall provide all locks for doors in each tenant's leased premises, at the cost of such tenant, and no tenant shall place any additional lock or locks on any door in its leased area without Landlord's prior written consent. Landlord shall furnish a reasonable number of keys to the locks on the doors in each tenant's leased premises to each tenant, at the cost of such tenant, and the tenants shall not have any duplicate keys made. 6. With respect to work being performed by tenants in any leased premises with the approval of Landlord, all tenants will refer all contractors, contractors' representatives and installation technicians rendering any service to them to Landlord for Landlord's supervision, approval and control before the performance of any contractual services. This provision shall apply to all work performed in the Building including, but not limited to, installations of telephones, telegraph equipment, electrical devices and attachments, doors, entranceways, and any and all installations of every nature affecting floors, walls, woodwork trim, windows, ceilings, equipment and any other physical portion of the Building. 7. Movement in or out of the Building of furniture or office equipment, or dispatch or receipt by tenants of any bulky material, merchandise or materials which requires use of elevators or stairways, or movement through the Building entrances or lobby shall be restricted to such hours as Landlord shall designate. All such movements shall be under the supervision of Landlord and in the manner agreed between the tenants and Landlord by prearrangement before performance. Such prearrangement initiated by a tenant will include determination by Landlord, and subject to its decision and control, as to the time, method, and routing of movement and as to limitations for safety or other concern which may prohibit any article, equipment or any other item from being brought into the Building. The tenants are to assume all risks as to the damage to articles moved and injury to persons or public engaged or not engaged in such movement, including equipment, property and personnel of Landlord if damaged or injured as a result of acts in connection with carrying out this service for a tenant from the time of entering the property to completion of work; and Landlord shall not be liable for acts of any person engaged in, or any damage or loss to any of said property or persons resulting from, any act in connection with such service performed for a tenant. 8. Landlord shall have the power to prescribe the weight and positition of safes and other heavy equipment or items, which shall in all cases, to distribute weight, stand on supporting devices approved by Landlord. All 18 damages done to the Building by the installation or removal of any property of a tenant, or done by a tenant's property while in the Building, shall be repaired at the expense of such tenant. 9. A tenant shall notify the Building Manager when safes or other heavy equipment are to be taken in or out of the Building, and the moving shall be done under the supervision of the Building Manager, after written permission from Landlord. Persons employed to move such property must be acceptable to Landlord. 10. Corridor doors, when not in use, shall be kept closed. 11. Each tenant shall cooperate with Landlord's employees in keeping its leased premises neat and clean. Tenant shall not employ any person for the purpose of such cleaning other than the Building's cleaning and maintenance personnel. 12. Landlord shall be in no way responsible to the tenants, their agents, employees, or invitees for any loss of property from the leased premises or public areas or for any damages to any property thereon from any cause whatsoever. 13. To insure orderly operation of the Building, no ice, mineral or other water, towels, newspapers, etc. shall be delivered to any leased area except by persons appointed or approved by Landlord in writing. 14. Should a tenant require telegraphic, telephonic, annunciator or other communication service, Landlord will direct the electrician where and how wires are to be introduced and placed and none shall be introduced or placed except as Landlord shall direct. Electric current shall not be used for power or heating without Landlord's prior written permission. 15. Tenant shall not make or permit any improper, objectionable or unpleasant noises or odors in the Building or otherwise interfere in any way with other tenants or persons having business with them. 16. Nothing shall be swept or thrown into the corridors, halls, elevator shafts or stairways. No birds or animals shall be brought into or kept in, on or about any tenant's leased premises. 17. No machinery of any kind shall be operated by any tenant on its leased area without the prior written consent of Landlord, nor shall any tenant use or keep in the Building any inflammable or explosive fluid or substance. 18. No portion of any tenant's leased premises shall at any time be used or occupied as sleeping or lodging quarters. 19. Landlord will not be responsible for lost or stolen personal property, money or jewelry from tenant's leased premises or public or common areas regardless of whether such loss occurs when the area is locked against entry or not. 20. Landlord reserves the right to rescind any of these rules and regulations and to make such other and further rules and regulations as in its judgment shall from time to time be needful for the safety, protection, care and cleaniness of the Building, the operation thereof, the preservation of good order therein and the protection and comfort of the tenants and their agents, employees and invitees, which rules and regulations, when made and written notice thereof is given to a tenant, shall be binding upon it in like manner as it originally herein prescribed. 19
EX-10.3 6 EXHIBIT 10.3 CONFIDENTIAL ANTI-DILUTION AGREEMENT This Agreement is made this 30th day of November, 1999, by and between Rackspace, Ltd., a Texas limited partnership, Macroweb, LC, its general partner, Trout, Ltd., a Texas limited partnership ("Trout"), Weston Investment Interests, LC, a Nevada limited liability company ("Weston"), MiniPat & Company, Ltd. ("MiniPat"), Patrick R. Condon ("Condon"), Richard Yoo ("Yoo") and Dirk Elmendorf ("Elmendorf") and First Inning Investors, L.P. ("First Inning"), Isom Capital Partners I, L.P.("Isom") and Hamilton Companies, LLC ("Hamilton"). This Agreement, which provides Weston, First Inning, Isom, Hamilton, MiniPat and Trout (collectively, the "Second Amendment Investors") limited protections against dilution with respect to the Units in the Partnership purchased by them under the terms of the Second Amendment to Agreement of Limited Partnership of Rackspace, Ltd, is made by the parties hereto to induce the Second Amendment Investors to purchase Units in the Partnership. THE PARTIES AGREE AS FOLLOWS: 1. TERM. This agreement applies to any equity investment made in the Partnership between the date hereof and August 30, 2000, provided that this agreement shall terminate prior to August 30, 2000 upon the closing of an offering of equity in the Partnership whereby more than $1,500,000.00 in cash is raised provided that the purchase price per Unit is not less than $2.10, adjusted by any split or reverse split in the number of Units of the Partnership which occurs after the date hereof("as Adjusted"). The period during which this Agreement is in effect is referred to as the "Term". 2. ANTI-DILUTION RIGHTS. To the extent that during the Term the Partnership issues any additional Units (the "Additional Units") (other than an issuance pursuant to an option agreement with an employee or otherwise to compensate an employee, or incident to an acquisition of assets by the Partnership in which more than 700,000 Units, as Adjusted, are issued to the seller of such assets), and the purchase price per Unit is less than $2.10 (as determined without regard to the operation of this Agreement and the issuance of Adjusting Units), as Adjusted ("Dilutive Transaction"), contemporaneously with the Dilutive Transaction, the Partnership will issue the Second Amendment Investors additional Units in the Partnership in an amount which provides them with the Ownership Percentage Interest which they would have held in the Partnership represented by the Units purchased by them on this date (for the purposes of calculating such Ownership Percentage Interest, the 238,095 Units to be purchase by Hamilton under the option contained in the Second Amendment shall be treated as if the option were exercised on this date, but only to the extent that Hamilton exercises such option), had the Additional Units been sold at $2.10 per Unit, as Adjusted ("Adjusting Units"). As a result of this adjustment, the new investor(s) under the Dilutive Transaction will also receive Adjusting Units in an amount necessary to provide him with the Ownership Percentage Interest in the Partnership contemplated by the Dilutive Transaction. Adjusting Units shall not be subject to any pre-emptive rights contained in the Agreement of Limited Partnership of Rackspace, Ltd. For example: Assume that six months after the date of this agreement a new investor is willing to invest $2,000,000.00 in exchange for 10% of Rackspace. Assuming there are 15 Million Units outstanding, if this agreement were not in effect, the new investor would receive 1,666,666 units at $1.20 per unit and the aggregate units outstanding would be l6,666,666. Because the per unit price for the new investment is less than $2.10, the proposed investment would be a Dilutive Transaction. Had the Dilutive Transaction been at $2.10 per unit, 952,380.95 additional units would have been issued to the new investor ($2,000,000 divided by $2.10) and 15,952,380.95 aggregate units would have been outstanding (15,000,000 plus 952,380.95). Assuming the Second Amendment Investors owned 7,500,000 or 50% of the units outstanding before the Dilutive Transaction, if the new units were sold at $2.10 per unit the Second Amended Investors would hold 47.01492% of the outstanding units (7,500,000 is 47.0492% of 15,952,380.95). The Second Amended Investors would hold only 45.00l8% of the units outstanding if the Dilutive Transaction were to occur without adjustment (7,500,000 is 45.0018% of 16,666,666). Consequently, under the terms of this agreement the Second Amendment Investors must receive enough Adjustment Units to own 47.01492% of the aggregate outstanding units after the Dilutive Transaction and the new investor must receive enough Adjustment Units after the Dilutive Transaction to own 10% of the aggregate outstanding units after the Dilutive Transaction. In this example since the Second Amendment Investors are entitled to hold 47.0192% of the aggregate units and the new investor is entitled to own 10% of the aggregate units after the Dilutive Transaction, the holders of the 7,500,000 units not held by the Second Amendment Investors pre Dilutive Transaction can only hold 42.98508% of the aggregate units after the Dilutive Transaction (100% less 57.0192%). Consequently, the outstanding units after the Dilutive Transaction must be 17,447,914 (7,500,000 is 42.98508% of 17,447,914), and 1,744,791.4 (10%) must be held by the new investor and 8,203,122.8 (47.01492%) must be held by the Second Amended Investors. To accomplish this the new investor must be issued 78,125.4 Adjustment Units (1,747,914 minus 1,666,666) and the Second Amended Investors must be issued 703,122.8 Adjustment Units (8,203,122.8 minus 7,500,000). 3. CONFIDENTIALITY. The parties to this agreement agree to keep its terms strictly confidential and not to disclose the terms hereof to any third party other than the equity holders of such parties without the consent of the General Partner (or any successor entity to the Partnership); provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. IN WITNESS WHEREOF, THE PARTIES HERETO HAVE DULY EXECUTED AND DELIVERED THIS AGREEMENT ON THE DATE FIRST WRITTEN ABOVE. RACKSPACE, LTD. By: Macroweb, LC, general partner By: /s/ Morris Miller, member --------------------------- By: /s/ Graham Weston, manager --------------------------- Macroweb, LC, By: /s/ Morris Miller, member --------------------------- Its: member --------------------------- Trout, Ltd. Macroweb, LC, general partner By: /s/ Morris Miller, member --------------------------- Its: member --------------------------- MiniPat & Company, Ltd. Patrick R. Condon, general partner By: /s/ Patrick R. Condon --------------------------- /s/ Patrick R. Condon --------------------------- Patrick Condon /s/ Richard Yoo --------------------------- Richard Yoo /s/ Dirk Elmendorf --------------------------- Dirk Elmendorf First Inning Investors, L.P. By: Trango Capital, L.L.C., its general partner By: /s/ Quincy Lee ----------------------- Quincy Lee, manager Isom Capital Partners I, L.P. By: BESK Funding, Inc. its general partner By: /s/ S. James Bishken --------------------------- S. James Bishken, President Hamilton Companies, LLC By: /s/ Frederick C. Hamilton -------------------------- Title: President ------------------ Weston Investment Interests, LC By: /s/ Graham Weston --------------------------- Its: manager --------------------------- First Inning Investors, L.P. By: Trango Capital, L.L.C., its general partner By: /s/ Quincy Lee --------------------------- Quincy Lee, manager Isom Capital Partners I, L.P. By: BESK Funding, Inc. its general partner By: /s/ S. James Bishken --------------------------- S. James Bishken, President The Hamilton Companies, LLC By: /s/ Frederick C. Hamilton --------------------------- Title: President and Manager ------------------------ Weston Investment Interests, LC By: /s/ Graham Weston --------------------------- Its: manager --------------------------- AMENDMENT TO CONFIDENTIAL ANTI-DILUTION AGREEMENT This Amendment to Confidential Anti-Dilution Agreement (hereinafter referred to as the "Amendment") is made this 22nd day of February, 2000, by and among Rackspace, Ltd. (the "Partnership"), Macroweb, LC, a Texas limited liability company (the "General Partner" or "Macroweb"), Trout, Ltd., a Texas limited partnership ("Trout"), Richard Yoo ("Yoo"), Patrick Condon ("Condon") and Dirk Elmendorf ("Elmendorf"), Isom Capital Partners I, L.P. ("Isom"), First Inning Investors, L.P. ("First Inning"), The Hamilton Companies LLC, a Colorado limited liability company ("Hamilton"), Weston Investment Interest, L.L.C., a Nevada limited liability company ("Weston Entity"), MiniPat & Company, Ltd., a Texas limited partnership ("MiniPat")(Macroweb, Trout, Yoo, Condon, Elmendorf, Isom, First Inning, Hamilton, Weston Entity and MiniPat are sometimes referred to herein as the "Existing Partners") and 2M Technology Ventures, L.P. (the "New Partner" or "2M"). This Amendment amends the Confidential Anti-Dilution Agreement dated November 30, 1999 (hereinafter referred to as the "Agreement"). Except as amended by this Amendment, the terms of the Agreement shall continue in full force and effect. Capitalized terms used herein shall, unless otherwise specified, have the meanings assigned to them in the Agreement. The parties to this Amendment agree that for the purposes of the Agreement, 2M shall be included as a "Second Amendment Investor" and as such shall have the same rights and benefits under the Agreement as those parties who were originally named in the Agreement as Second Amendment Investors. In addition, 2M agrees to be bound by the terms and conditions contained in the Agreement, including but not limited to the confidentiality provisions contained in the Agreement. Executed as of the date first written above. RACKSPACE, LTD. By: Macroweb, LC, general partner By: /s/ Graham Weston --------------------------- Member By: /s/ Morris A. Miller --------------------------- Member Macroweb, LC /s/ Morris A. Miller --------------------------------------- Morris A. Miller, Member /s/ Graham M. Weston --------------------------------------- Graham M. Weston, Member LIMITED PARTNERS: /s/ Richard Yoo ----------------------------------------- Richard Yoo /s/ Dirk Elmendorf ----------------------------------------- Dirk Elmendorf /s/ Patrick Condon ----------------------------------------- Patrick Condon Trout, Ltd. By: Knightsbridge, L.C.,General Partner By: /s/ Graham Weston ---------------------------------- Its: manager --------------------------------- Isom Capital Partners I, L.P. By: BESK Funding, Inc., General Partner By: /s/ S. James Bishkin ---------------------------------- S. James Bishkin President First Inning Investors, L.P. By: Trango Capital L.L.C., General Partner By: /s/ Quincy J. Lee ----------------------------- Quincy J. Lee, Manager The Hamilton Companies LLC By: /s/ Frederick C. Hamilton --------------------------------------- Title: President ------------------------------------ Weston Investment Interest, L.L.C. By: /s/ Graham Weston --------------------------------------- MiniPat & Company, Ltd. By: /s/ Patrick Condon --------------------------------------- Title: President ------------------------------------ 2M Technology Ventures, L.P. By: 2M Technology Group, L.L.C., Its: General Partner By: /s/ Steven D. Leeke ------------------------------ EX-10.4 7 EXHIBIT 10.4 CREDIT AGREEMENT This Agreement is made this 29th day of December, 1998, by and between Rackspace, Ltd., a Texas limited partnership ("Borrower") and Exeter Financial, LC, a Texas limited liability company ("Lender"), Graham Weston and Morris Miller. Contemporaneously with the execution of this Agreement, Borrower has borrowed from Lender and Lender has loaned to Borrower, $150,000.00 (the "First Loan"), which First Loan is secured by all of the assets of the Borrower. Incident to the First Loan, Borrower has delivered to Lender a fully executed Promissory Note (the "First Note") and Security Agreement (the "Security Agreement"), and UCC-1 financing statement. In consideration for the Loan and the security interest received by the Lender in the Borrower's assets, Lender agrees to advance and Morris Miller and Graham Weston agree to cause Lender to advance, or advance personally, in lieu thereof, an additional $400,000.00 upon written request of the Borrower (the "Second Loan"). At the request of Richard Yoo, President of the Borrower, the Second Loan may be advanced in one lump sum of $400,000.00, or it may be made in more than one advances; provided, however, that the parties agree that the full $400,000.00 shall be advanced on or before July 1, 1999. The Lender shall advance the amounts requested by Borrower within ten (10) business days of receipt of written request. Each advance made under this Agreement shall be evidenced by a promissory note in substantially the same form as the First Note, to be prepared by Lender and in a form satisfactory to Lender and Borrower. Such promissory notes shall have the same payment provisions and interest rates, so that payments under such notes shall commence on January 1, 2002, and equal payments of principal and interest shall be made over the five year period following January 1, 2002 with a final Maturity Date of January 1, 2007. BORROWER: RACKSPACE, LTD. By: Macroweb, LC, general partner By: /s/ Morris Miller ------------------------ Its: member ------------------------ LENDER: EXETER FINANCIAL, LC /s/ Morris Miller ---------------------- By: /s/ Morris Miller Morris A. Miller ------------------- Its: member /s/ Graham Weston ------------------- ---------------------- Graham Weston EX-10.5 8 EXHIBIT 10.5 Support Agreement This Agreement is made this 29th day of December 1998, by and between Graham M. Weston ("Weston") and Morris A. Miller ("Miller") (collectively, "G&M"), Rackspace, Ltd., a Texas limited partnership (the "Partnership") and Richard Yoo, Dirk Elmendorf and Pat Condon (collectively, the "Class A Limited Partners"). G&M represent to the Class A Limited Partners that they own 100% of the limited partner interests of Trout, Ltd. ("Trout") and are the sole members of Macroweb, LC, which are Partners of the Partnership and as such, G&M derive a benefit from the success of the Partnership. The Class A Limited Partners of the Partnership have agreed to become limited partners of the Partnership based in part upon the commitments made in this Agreement by G&M. G&M agree as follows: 1. RIGHT OF FIRST REFUSAL. G&M may not propose to make any sale, transfer (which shall include a merger, statutory exchange, consolidation or recapitalization of Trout or Macroweb), assignment or other disposition of all or any part of their membership interests in Macroweb, LC or the Trout Interests in Trout (such interests desired to be sold, transferred, pledged or assigned are referred to as the "Controlling Units offered for Sale") except by sale of cash or a combination of cash and promissory notes. Prior to making such disposition, Weston or Miller, as the case may be, shall first offer the Controlling Units Offered for Sale to the Class A Limited Partners, in proportion to their Ownership Interests in the Partnership under the same terms and conditions as the proposed sale (the "Terms of Sale"). Miller and/or Weston, as the case may be, shall provide to the Class A Limited Partners all available information regarding the proposed sale and the proposed purchaser, as may be reasonably requested by the Class A Limited Partners. The Class A Limited Partners shall have four business days from the receipt of such written offer to (i) elect in writing to purchase all of the Controlling Units Offered for Sale (in proportion to their Ownership Interests in the Partnership, or in whatever other proportion they may otherwise agree), and (ii) make available to Miller and/or Weston, as the case may be, at the offices of Macroweb, LC, an amount equal to ten (10%) percent of the purchase price of the Controlling Units Offered for Sale as a non-refundable deposit; provided that, in lieu of such deposit, the Class A Limited Partners may pledge (under a pledge agreement reasonably acceptable to Miller and/or Weston, as the case may be) their Units as security for their obligation to pay an amount equal to 10% of the purchase price of the Controlling Units Offered for Sale as a non-refundable deposit. Payment for the Controlling Units Offered for Sale shall be made in accordance with the Terms of Sale. To the extent that the Terms of Sale provide for a note or notes, the Class A Limited Partners, to the extent they desire to purchase all of the Controlling Units Offered for Sale, shall be required to provide substantially the same credit worthiness as the proposed purchaser. If the Class A Limited Partners do not elect to purchase all of the Controlling 1 Units Offered for Sale, or otherwise fail to provide substantially the same credit worthiness as the proposed purchaser, Miller and/or Weston, as the case may be, shall be free to sell all the Controlling Units Offered for Sale for a period of sixty (60) days after the expiration of the Class A Limited Partners' option, provided that any such sale must be made under the same terms and conditions as the Terms of Sale. In addition, G&M covenant that, so long as G&M controls Macroweb and Trout and Macroweb is the General Partner of the Partnership, Macroweb will not issue any additional membership interests, and Trout will not issue any additional limited partner interest that would result in it losing control of Trout, to anyone other than Miller or Weston, so that Miller and Weston will own 100% of such interests in Macroweb and control Trout. 2. TIME AND ATTENTION. Miller and Weston agree at such times as may be requested by the Partnership from time to time, to provide the Partnership with time and attention to assist the Partnership to succeed in its business endeavors. The Partnership and the Class A Limited Partners acknowledge that Miller and Weston have several additional business interests, and as such the amount of time which may be spend by Miller and Weston for the benefit of the Partnership is limited. 3. BOARD OF DIRECTORS. Miller and Weston agree to cause Macroweb, LC to have a board of directors which will have a minimum of three positions. Miller and Weston agree to name one of the Class A Limited Partners to Macroweb, LC's board of directors for so long as they are employed by the Partnership or own, in aggregate, 15% of the Ownership Percentage Interests of the Partnership. 4. LOCATION OF SERVERS AND OFFICE. Miller and Weston agree to use their reasonable best efforts to secure a location for the Partnership's data center and offices at favorable rent. 5. INDEMNITY. Miller and Weston agree to take whatever action is necessary to ensure that Richard Yoo incurs no financial loss or expense related to the office lease at 9828 Lorene Lane, San Antonio, Texas 78216, including indemnifying him for any amounts he is required to pay thereon. 6. NON-COMPETITION. Miller and Weston agree that they will not, directly or indirectly (whether through any affiliate, family member or otherwise), compete with the core business of the Partnership (whatever such core business shall be at such time) anywhere in the world for so long as they control the general partner of the Partnership, and for a period of one year thereafter. 7. PROPRIETARY INFORMATION/BUSINESS OPPORTUNITIES. Miller and Weston acknowledge and agree that the Partnership has and will continue to develop proprietary information which is essential for the success of the Partnership. Such information, includes but is not limited to marketing plans, strategies, financial data, customer lists, supplier lists, source code, business ideas (collectively, the "Confidential Information", whether oral or embodied in documents (including writings, drawings, graphs, charts, photographs, phonorecords, video recordings, 2 and other data compilations from which information can be obtained) or tangible things. Miller and Weston agree to keep the Confidential Information secret at all times, and not to disclose such information to any third party without the consent of the General Partner of the Partnership. Miller and Weston shall be prohibited from using the Confidential Information for any purpose other than the purpose of the Partnership. Miller and Weston agree to promptly bring to the attention of the General Partner and the Partnership, any business opportunity which become known to them which relates to Partnership's core business activity at the time, which is currently, commercially developing the Concept (as defined in the Agreement of Limited Partnership of Rackspace, Ltd.). 8. SEVERABILITY. If any covenant contained in this agreement, or any part thereof, is hereafter construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect, without regard to the invalid portion or portions. If any covenant in this agreement, or any part thereof, is held to be unenforceable because of its duration or its geographic scope, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such covenant to the longest duration and to the greatest geographical scope which is permitted, and, in said reduced form, such covenant shall then be enforced. 9. NOTICE. Any notice required in this Agreement shall be provided in the manner and to the parties set forth in the Agreement of Limited Partnership of Rackspace, Ltd. of even date herewith. 10. PERSONAL LIABILITY OF WESTON AND MILLER. The parties hereto agree that under no circumstances shall Miller or Weston have any personal liability to any of the parties hereto, except to the extent under an agreement executed individually by Miller or Weston. With the exception of this agreement and the "Credit Agreement" executed contemporaneously herewith, there are no agreements between Miller and/or Weston, individually, and the parties hereto. Therefore, no oral agreement between Miller or Weston and any of the parties hereto shall be valid unless evidenced in writing and signed by the parties hereto. Rackspace, Ltd. By: Macroweb, LC By: /s/ Morris Miller ---------------------- Its: member ---------------------- Morris A. Miller /s/ Morris Miller ------------------------ 3 Graham M. Weston /s/ Graham M. Weston ------------------------ Richard Yoo /s/ Richard Yoo ------------------------ Dirk Elmendorf /s/ Dirk Elmendorf ------------------------ Pat Condon /s/ Pat Condon ------------------------ 4 AMENDMENT TO SUPPORT AGREEMENT This Amendment to Support Agreement is made this 30th day of November, 1999, by and between Graham M. Weston ("Weston"), Morris A. Miller ("Miller") (collectively, "G&M") and Richard Yoo ("Yoo"), MiniPat & Company, Ltd. ("MiniPat") and Dirk Elmendorf ("Elmendorf) (collectively, the "Class A Limited Partners") and The Hamilton Companies, LLC ("Hamilton"), Weston Investment Interests, LLC. ("Weston"), Isom Capital Partners I, L.P. ("Isom"), and First Inning Investors, L.P. ("First Inning") (Isom, Weston, Hamilton, MiniPat and First Inning are sometimes referred to herein as the "New Limited Partners"). This Agreement amends the Support Agreement dated December 29, 1998 between the Existing Partners (the "Support Agreement"). Except as amended by this Agreement, the terms of the Support Agreement shall continue in full force and effect. 1. Additional Parties. The parties hereby amend the Support Agreement to include the New Limited Partners as parties to the Support Agreement. 2. Amendment to Paragraph 1. For the purposes of paragraph 1, in all instances which refer to the Class A Limited Partners or to a Class A Limited Partner, it shall read to include both the Class A Limited Partners and the Class C Limited Partners. In addition, any sale or transfer between Miller and Weston of the membership interests in Macroweb or the Trout Interests shall not be subject to the right of first refusal and may be made without restriction. Miller and Weston shall also have the right to make transfers to their family members ("Transferees", which include spouses, children, parents, grandparents, grandchildren, and including family members by adoption) without subjecting the transfer to the right of first refusal, however, any transfer made by such Transferee shall be subject to the rights of first refusal contained herein. Miller and Weston shall also have the right to make transfers of Trout Interests (in addition to transfers made to Transferees) up to an amount equal to forty percent (40%) of the outstanding Trout Interests and such transfers shall not be subject to the rights of first refusal contained in Paragraph 1. In addition, any holder of a right of first refusal under Paragraph 1 shall have 15 days, rather than 4 business days to accept or reject the offer to purchase the Controlling Units offered for Sale. 3. New Paragraph 11. This Agreement shall terminate upon the dissolution or termination of Rackspace, Ltd., including but not limited to any dissolution or termination resulting from the merger of Rackspace, Ltd. into any other entity, or any dissolution or termination resulting from the sale of all or substantially all of the assets of Rackspace, Ltd. In addition, the rights of first refusal contained in Paragraph 1 shall no longer apply to the Trout Interests if Trout is no longer a limited partner of Rackspace, Ltd. and shall no longer apply to the membership interests in Macroweb, LC if Macroweb, LC is no longer the general partner of Rackspace, Ltd. The above notwithstanding, to the extent that Rackspace, Ltd. is dissolved or terminated as a result of a merger or other combination wherein the same or substantially the same owners own the successor entity (the "Successor") as own Rackspace, Ltd., this Agreement shall continue in effect, and shall continue until the earlier to occur of the dissolution or termination of the Successor, or a public offering of the shares of the Successor. 4. First Inning agrees that it will not permit any of its ownership interests (whether represented as stock, membership interests, partnership interests or otherwise) to be transferred to a third party unless after such transfer, Quincy Lee (either directly or through his control over Trango Capital, L.L.C.) will continue to have the right to exercise control over all matters pertaining to First Inning. Isom agrees that it will not permit any of its ownership interests (whether represented as stock, membership interests, partnership interests or otherwise) to be transferred to a third party unless after such transfer, S. James Bishkin (either directly or through his control over BESK Funding, Inc.) will continue to have the right to exercise control over all matters pertaining to Isom. MiniPat agrees that it will not permit any of its ownership interests (whether represented as stock, membership interests, partnership interests or otherwise) to be transferred to a third party unless after such transfer, Condon (either directly or through his control over MiniPat, will continue to have the right to exercise control over all matters pertaining to MiniPat. Weston agrees that it will not permit any of its ownership interests (whether represented as stock, membership interests, partnership interests or otherwise) to be transferred to a third party unless after such transfer, Graham M. Weston (either directly or through his control over Weston will continue to have the right to exercise control over all matters pertaining to Weston. 5. This agreement may be signed in multiple original counterparts, each of which shall be deemed an original and all of which shall constitute one agreement, and the signatures of any party to any counterpart shall be deemed to be a signature to, and may be appended to, any other counterpart. 6. Notwithstanding anything in this Agreement to the contrary, a party to this Amendment to Support Agreement ("Existing Party") may assign any right of first refusal it has to acquire an interest in Trout or Macroweb to any (i) current limited partner, partner, shareholder or member of such Existing Party, or an Affiliate of such Person, or an entity controlled by such Persons or their Affiliates, or (ii) another Person upon the prior consent of Macroweb and Trout in their sole discretion (a "Current Affiliate") and provide Macroweb and Trout written notice of such assignment within five (5) Business Days. Upon any such assignment, the Current Affiliate shall be subject to the rights, obligations, and restrictions provided in the Support Agreement (as amended) with respect to exercising any such rights. /s/ Morris A. Miller ----------------------------- Morris A. Miller /s/ Graham M. Weston ----------------------------- Graham M. Weston /s/ Patrick R. Condon ----------------------------- Patrick R. Condon /s/ Richard Yoo ----------------------------- Richard Yoo /s/ Dirk Elmendorf ----------------------------- Dirk Elmendorf MiniPat & Company, Ltd. By: /s/ Patrick R. Condon ------------------------- General Partner Trout, Ltd. By: Knightsbridge, L.C., General Partner By: /s/ Morris Miller, member -------------------------- Its: member -------------------------- Isom Capital Partners I, L.P. By: BESK Funding, Inc., General Partner By: /s/ S. James Bishkin ---------------------- S. James Bishkin President SECOND AMENDMENT TO SUPPORT AGREEMENT This Second Amendment to Support Agreement is made this 22nd day of February, 2000, by and between Graham M. Weston ("Weston"), Morris A. Miller ("Miller") (collectively, "G&M") and Richard Yoo ("Yoo"), MiniPat & Company, Ltd. ("MiniPat") and Dirk Elmendorf (AElmendorf) (collectively, the "Class A Limited Partners") and The Hamilton Companies LLC ("Hamilton"), Weston Investment Interest, L.L.C. ("Weston"), Isom Capital Partners I, L.P. ("Isom"), and First Inning Investors, L.P. ("First Inning") (Isom, Weston, Hamilton, MiniPat and First Inning are sometimes referred to herein as the "Class C Limited Partners") and 2M Technology Ventures, L.P. ("2M"). This Agreement amends the Support Agreement dated December 29, 1998, as amended (the "Support Agreement"). Except as amended by this Agreement and the Amendment to Support Agreement dated November 30, 1999, the terms of the Support Agreement shall continue in full force and effect. 1. Additional Party. The parties hereby amend the Support Agreement to include 2M as a Class C Limited Partner under the terms of the Support Agreement, as amended. 2. 2M agrees that it will not permit any of its ownership interests (whether represented as stock, membership interests, partnership interests or otherwise) to be transferred to a third party unless after such transfer, Morton H. Meyerson or Steven D. Leeke (either directly or indirectly), or their respective heirs or beneficiaries under their respective wills (including without limitation any trusts thereunder), will continue to have the right to exercise control over all matters pertaining to 2M; provided, however, that the restriction contained in this paragraph 2 shall terminate upon the earlier to occur of (i) June 30, 2001, or (ii) immediately before the effective date of an initial public offering of (x) any successor entity of the Partnership, or (y) any entity that holds a majority of the outstanding equity interest in the Partnership. 3. This agreement may be signed in multiple original counterparts, each of which shall be deemed an original and all of which shall constitute one agreement, and the signatures of any party to any counterpart shall be deemed to be a signature to, and may be appended to, any other counterpart. /s/ Morris A. Miller ---------------------- Morris A. Miller /s/ Graham M. Weston ---------------------- Graham M. Weston /s/ Patrick R. Condon ---------------------- Patrick R. Condon /s/ Richard Yoo ---------------------- Richard Yoo /s/ Dirk Elmendorf ---------------------- Dirk Elmendorf MiniPat & Company, Ltd. By: /s/ Patrick R. Condon ---------------------- General Partner Trout, Ltd. By: Knightsbridge, L.C.,General Partner By: /s/ Graham M. Weston --------------------- Its: Member --------------------- Isom Capital Partners I, L.P. By: BESK Funding, Inc., General Partner By: /s/ S. James Bishkin --------------------- S. James Bishkin President First Inning Investors, L.P. By: Trango Capital L.L.C., General Partner By: /s/ Quincy J. Lee ---------------------- Quincy J. Lee, Manager The Hamilton Companies LLC By: /s/ Frederic C. Hamilton ------------------------- Its: President ------------------------- Weston Investment Interest, L.L.C. By: /s/ Graham M. Weston ------------------------ Its: Manager ------------------------ 2M Technology Ventures, L.P. By: 2M Technology Group, L.L.C. Its: General Partner By: /s/ Steven D. Leeke ---------------------- EX-10.6 9 EXHIBIT 10.6 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") made and entered into effective as of the 29th day of December, 1998 by and between Rackspace, Ltd., a Texas Limited Partnership (the "Company"), and Richard Yoo ("Employee"). WITNESSETH: WHEREAS, Employee and the Company desire that the Company engage the services of Employee; and WHEREAS, Employee desires to serve in the employment of the Company on the terms and conditions set forth below; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee to serve as the President and CEO of the Company, and Employee hereby accepts such employment, upon the terms and conditions set forth herein. 2. TERM. The initial term of Employee's employment shall commence on the effective date of this Agreement and shall continue through January 1, 2003. On January 1, 2003 and each anniversary of such date thereafter, the Employee's term of employment shall automatically renew thereafter for successive one-year terms unless either party to this Agreement has notified the other party in writing at least thirty (30) days prior to the end of such four-year initial term or any such one-year renewal term, as applicable, that it elects to terminate the employment of the Employee as of the end of any such term. Notwithstanding the foregoing, the term of this Agreement is subject to earlier termination as hereinafter provided. The period of time during which Employee is employed under this Agreement through the effective date of any termination of such employment is hereinafter referred to as the "Term". 3. DUTIES. During the Term, Employee agrees that he will devote his full business time, attention and energies to the business of the Company and to the performance of his duties hereunder which shall include such duties as from time to time are assigned to him by the General Partner of the Company. However, the Employee shall be entitled to engage in business activities unrelated to the business of the Company, provided that, in the Company's discretion reasonably applied, such activities do not interfere with the Employee's obligations under this Agreement, the Company is given prior written notice of Employee's desire to engage in such activities, and to the extent such business activities constitute a business opportunity of the Company, the Company has elected not to pursue such activities. 1 4. COMPENSATION. (a) BASE COMPENSATION. During the Term, the Company shall pay to Employee a salary in the amount of $3,000.00 per month, subject to annual adjustment by the General Partner but in no event less than $3,000.00 per month. Such monthly salary shall be payable monthly or in such other installments as the parties may mutually agree. During the Term, the Company shall also reimburse Employee for all reasonable expenses incurred on behalf of the Company in accordance with its then existing reimbursement policies. (b) FRINGE BENEFITS AND VACATION. During the Term, Employee shall be entitled to the standard employee benefits available to other management personnel of the Company in comparable positions (which shall include at least the benefits listed on Exhibit A attached hereto); provided, however, that the receipt of such fringe benefits by Employee shall be subject to the Company's eligibility and enrollment requirements pertaining to such benefit programs and to the further qualifications set forth on Exhibit A hereto. During each 12 month period of Employee's employment Employee shall be entitled to two (2) weeks of paid vacation. (c) BONUS. To the extent that the total annual compensation of Employee for the initial four year Term is less than $51,000.00 per year, Employee shall receive a bonus payment equal to the difference between the actual annual compensation and $51,000.00. However, the bonus will be paid, only if and to the extent that the Partnership repays all principal owing to Exeter Financial, LC incident to borrowings by the Company which are a minimum of $550,000.00, but which may reach $1,050,000.00. 5. INVENTIONS AND PATENTS. Employee agrees that all intellectual property (including, without limitation, inventions, copyrights, new contributions, ideas, and discoveries, whether patentable or not) conceived or made by him during the term shall belong to the Company, provided that such intellectual property arise out of Employee's employment by the Company, are related to the Company's business, or are created with the use of the facilities or materials of the Company. 6. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES. (a) CONFIDENTIALITY. In view of the fact that Employee's work with the Company will bring him into close contact with many confidential affairs of the Company, including matters of a business nature such as information about costs, profits, markets, sales, trade secrets, potential patents and other business ideas, customer lists, plans for future developments, business opportunities, and information of any other kind not known within any industry in which the Company operates (hereinafter, collectively, "Confidential Matters"), Employee agrees: (i) To keep secret all Confidential Matters of the Company and of any subsidiaries and affiliates of the Company and not to disclose them to anyone outside of the Company or its subsidiaries or affiliates, or otherwise use them or use his knowledge of them for his own benefit, including, without limitation, use of the trade names or trademarks of the Company, either during or after the Term, except with the Company's prior written consent; and 2 (ii) To deliver promptly to the Company at the termination of the Term, or at any time the Company may request, all memoranda, notices, records, reports and other documents (and all copies thereof) relating to the business of the Company or any of its subsidiaries or affiliates, including, but not limited to, Confidential Matters, which he may then possess or have under his control. Notwithstanding any of the foregoing, the term "Confidential Matters" does not include information which (i) Employee is compelled to disclose by judicial or administrative process, or in the opinion of his counsel, by other mandatory requirements of law, or (ii) is or becomes generally available to the public other than as a result of any disclosure by Employee. (b) COMPETITIVE ACTIVITIES. During Employee's employment and for a period of (i) six (6) months following the effective date of a termination of Employee's employment "without cause", or as a result of his disability, (ii) eighteen (18) months following the effective date of a termination of Employee's employment in the event Employee resigns or is terminated for Cause, Employee shall not, directly or indirectly, or through any subsidiary or affiliate, own, consult, advise, manage, operate, join, or control, or participate in the ownership, management, operation, or control of, or be connected with in any manner (including but not limited to acting as an employee or independent contractor), any business, person, firm, or corporation, which (i) provides or intends to provide the same services as the Company is otherwise competitive with the Company's products or services; or (ii) is engaged in or intends to engage in any line(s) of business that would be competitive with any other lines of business that the Company has made a decision to engage in prior to the termination of Employee's employment with the Company. This covenant is made to protect the Company's proprietary and confidential information. In addition, the covenant is made contemporaneously with and as independent consideration for, the execution of the Agreement of Limited Partnership of Rackspace, Ltd. of which Employee is a limited partner. Due to the nature of the Company's business (which involves internet products and services), it is not practical to impose a geographical limitation on the prohibitions contained herein. At the end of the Employee's employment, the Company shall provide the Employee with a written list of the business activities which the Company is engaged in or which the Company has made a decision to become engaged in. If any covenant contained in this Section 6(b), or any part thereof, is hereafter construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect, without regard to the invalid portion or portions. If any covenant in this Section 6(b), or any part thereof, is held to be unenforceable because of its duration or its geographic scope, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such covenant to the longest duration and to the greatest geographical scope which is permitted, and, in said reduced form, such covenant shall then be enforced. 7. REMEDIES FOR BREACH. Notwithstanding the provisions of Section 10 hereof, if Employee breaches, or threatens to breach, any of the provisions of Section 6 hereof, the Company shall have the following rights and remedies, in addition to any others, each of which shall be independent of the other and severally enforceable: 3 (i) The right to have the provisions of Section 6 of this Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that monetary damages will not provide an adequate remedy to the Company; (ii) The right to obtain an injunction to prevent the Employee from taking actions prohibited by this Agreement without the requirement of posting a bond, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that monetary damages will not provide an adequate remedy to the Company; (iii) The right and remedy to require Employee to pay all damages resulting from such breach; and (iv) The right to terminate Employee's employment for "Cause" pursuant to Section 8 hereof. 8. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. Employee's employment shall automatically terminate upon the death or disability of Employee. Disability shall mean an infirmity preventing Employee from performing in any material respect his duties for at least 120 days (whether or not consecutive) during any one-year period. (b) TERMINATION FOR CAUSE. The Company may terminate Employee's employment at any time for "Cause" in accordance with the procedures provided below. Termination by the Company for "Cause" shall be limited to termination upon (i) the material neglect or inattention by Employee of his duties hereunder after a written warning of such material neglect or inattention of his duties, or (ii) the engaging by Employee in conduct that is materially and demonstrably injurious to the Company, monetarily or otherwise, which shall be deemed to include violating any material term of this Agreement. Prior to the Company's exercising its right to terminate Employee's employment for Cause, the Company shall give thirty (30) days prior written notice to Employee of the specific action proposed to be taken and the grounds therefor and a reasonable opportunity for Employee to respond thereto to the Company and to cure such situation. (c) OTHER TERMINATION. The Company shall have the right to terminate Employee's employment at any time without Cause by giving at least thirty (30) days prior written notice to Employee of the Company's election to terminate the Employee's employment. If the Company terminates the Employee's employment at the end of the four year initial term (whether with or without cause) or any time after the four year initial term, Employee shall only be entitled to his salary and benefits through the date of termination and no more. If the Company terminates the Employee's employment without Cause during the initial four year Term or in the event that Employee's employment is terminated due to Disability during the initial four year Term, and the Company receives from the Employee a full release of all claims in a form satisfactory to the 4 Company the Company shall pay Employee an amount equal to three months salary as severance pay based upon the monthly salary then in effect. 9. EFFECT OF TERMINATION. Upon the termination of Employee's employment, the rights of Employee which shall have accrued prior to the date of such termination shall not be affected in any way. Except as provided in Section 8(c) hereof, Employee shall not have any rights which have not previously accrued upon termination of his employment. Section 6 hereof shall survive any termination of Employee's employment. 10. MEDIATION & BINDING ARBITRATION. Except with respect to the provisions of Sections 6 and 7 hereof which shall not be subject to binding arbitration, the Company and Employee agree that all other disputes, controversies or claims that may arise between them (including their agents and employees) including, without limitation, any dispute, controversy or claim as to the interpretation or enforcement of any of the provisions of this Agreement, shall be submitted first to mediation and then to binding arbitration in the city of San Antonio, Texas in accordance with the rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. (a) MEDIATION. If a controversy or claim arises between the parties then that controversy or claim will be mediated within one month of its identification by the parties. (b) BINDING ARBITRATION. In the event that the parties cannot resolve their dispute by mediation within one month, the parties then agree to bring the dispute to binding arbitration within one month of the conclusion of the mediation. 11. COMMUNICATIONS. Any notice, request or other communication required or permitted by this Agreement to be mailed, given or delivered to Employee shall be in writing, addressed to him at his address shown below or at such other address as he shall have furnished from time to time to the Company for the purposes hereof; and any payment to Employee under this Agreement may be made by check delivered to him or mailed to or delivered at such address. Any notice, request or other communication required or permitted by this Agreement to be given to the Company is to be in writing, addressed to the Company at the address of its principal office in San Antonio, Texas, or at such other address as the Company shall have furnished to Employee for the purposes hereof. 12. AMENDMENTS. This Agreement may be amended or modified only by a written instrument executed by the parties hereto. 13. BINDING EFFECT. This Agreement shall be binding upon, and shall inure to the benefit of, Employee; the obligations of Employee hereunder are personal and this Agreement may not be assigned by Employee. This Agreement shall be binding upon, and shall inure to the benefit of, the Company and shall also bind and inure to the benefit of any successor of the Company by merger or consolidation or any assignee or transferee of all or substantially all of its properties, but, except to any such successor or assignor of the Company, this Agreement may not be assigned by the Company. 5 14. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 15. SEVERABILITY. If any provision of this Agreement shall, to any extent, be invalid or unenforceable, the remainder of this Agreement shall not be affected, and each term hereof shall be valid and shall be enforced to the extent permitted by law. 16. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which is to be deemed an original, but all of which, together, constitute one and the same instrument. EXECUTED as of the day and year first above written. RACKSPACE, LTD. By: MACROWEB, LC By: /s/ Morris Miller -------------------------- Its: Member ------------------------- RICHARD YOO By: /s/ Richard Yoo --------------------------- Address: Richard Yoo ------------------------------ 100 Lorenz #102 ------------------------------ San Antonio, TX 78209 ------------------------------ 6 Exhibit A 1. Health/medical/dental insurance for Employee. 7 EX-10.7 10 EXHIBIT 10.7 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") made and entered into effective as of the 29th day of December, 1998 by and between Rackspace, Ltd., a Texas Limited Partnership (the "Company"), and Dirk Elmendorf ("Employee"). WITNESSETH: WHEREAS, Employee and the Company desire that the Company engage the services of Employee; and WHEREAS, Employee desires to serve in the employment of the Company on the terms and conditions set forth below; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee to serve as the Chief Technology Evangelist of the Company, and Employee hereby accepts such employment, upon the terms and conditions set forth herein. 2. TERM. The initial term of Employee's employment shall commence on the effective date of this Agreement and shall continue through January 1, 2003. On January 1, 2003 and each anniversary of such date thereafter, the Employee's term of employment shall automatically renew thereafter for successive one-year terms unless either party to this Agreement has notified the other party in writing at least thirty (30) days prior to the end of such four-year initial term or any such one-year renewal term, as applicable, that it elects to terminate the employment of the Employee as of the end of any such term. Notwithstanding the foregoing, the term of this Agreement is subject to earlier termination as hereinafter provided. The period of time during which Employee is employed under this Agreement through the effective date of any termination of such employment is hereinafter referred to as the "Term". 3. DUTIES. During the Term, Employee agrees that he will devote his full business time, attention and energies to the business of the Company and to the performance of his duties hereunder which shall include such duties as from time to time are assigned to him by the General Partner of the Company. However, the Employee shall be entitled to engage in business activities unrelated to the business of the Company, provided that, in the Company's discretion reasonably applied, such activities do not interfere with the Employee's obligations under this Agreement, the Company is given prior written notice of Employee's desire to engage in such activities, and to the extent such business activities constitute a business opportunity of the Company, the Company has elected not to pursue such activities. 4. COMPENSATION. (a) BASE COMPENSATION. During the Term, the Company shall pay to Employee a salary in the amount of $3,000.00 per month, subject to annual adjustment by the General Partner but in no event less than $3,000.00 per month. Such monthly salary shall be payable monthly or in such other installments as the parties may mutually agree. During the Term, the Company shall also reimburse Employee for all reasonable expenses incurred on behalf of the Company in accordance with its then existing reimbursement policies. (b) FRINGE BENEFITS AND VACATION. During the Term, Employee shall be entitled to the standard employee benefits available to other management personnel of the Company in comparable positions (which shall include at least the benefits listed on Exhibit A attached hereto); provided, however, that the receipt of such fringe benefits by Employee shall be subject to the Company's eligibility and enrollment requirements pertaining to such benefit programs and to the further qualifications set forth on Exhibit A hereto. During each 12 month period of Employee's employment Employee shall be entitled to two (2) weeks of paid vacation. (c) BONUS. To the extent that the total annual compensation of Employee for the initial four year Term is less than $51,000.00 per year, Employee shall receive a bonus payment equal to the difference between the actual annual compensation and $51,000.00. However, the bonus will be paid, only if and to the extent that the Partnership repays all principal owing to Exeter Financial, LC incident to borrowings by the Company which are a minimum of $550,000.00, but which may reach $1,050,000.00. 5. INVENTIONS AND PATENTS. Employee agrees that all intellectual property (including, without limitation, inventions, copyrights, new contributions, ideas, and discoveries, whether patentable or not) conceived or made by him during the term shall belong to the Company, provided that such intellectual property arise out of Employee's employment by the Company, are related to the Company's business, or are created with the use of the facilities or materials of the Company. 6. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES. (a) CONFIDENTIALITY. In view of the fact that Employee's work with the Company will bring him into close contact with many confidential affairs of the Company, including matters of a business nature such as information about costs, profits, markets, sales, trade secrets, potential patents and other business ideas, customer lists, plans for future developments, business opportunities, and information of any other kind not known within any industry in which the Company operates (hereinafter, collectively, "Confidential Matters"), Employee agrees: (i) To keep secret all Confidential Matters of the Company and of any subsidiaries and affiliates of the Company and not to disclose them to anyone outside of the Company or its subsidiaries or affiliates, or otherwise use them or use his knowledge of them for his own benefit, including, without limitation, use of the trade names or trademarks of the Company, either during or after the Term, except with the Company's prior written consent; and (ii) To deliver promptly to the Company at the termination of the Term, or at any time the Company may request, all memoranda, notices, records, reports and other documents (and all copies thereof) relating to the business of the Company or any of its subsidiaries or affiliates, including, but not limited to, Confidential Matters, which he may then possess or have under his control. Notwithstanding any of the foregoing, the term "Confidential Matters" does not include information which (i) Employee is compelled to disclose by judicial or administrative process, or in the opinion of his counsel, by other mandatory requirements of law, or (ii) is or becomes generally available to the public other than as a result of any disclosure by Employee. (b) COMPETITIVE ACTIVITIES. During Employee's employment and for a period of (i) six (6) months following the effective date of a termination of Employee's employment "without cause", or as a result of his disability, (ii) eighteen (18) months following the effective date of a termination of Employee's employment in the event Employee resigns or is terminated for Cause, Employee shall not, directly or indirectly, or through any subsidiary or affiliate, own, consult, advise, manage, operate, join, or control, or participate in the ownership, management, operation, or control of, or be connected with in any manner (including but not limited to acting as an employee or independent contractor), any business, person, firm, or corporation, which (i) provides or intends to provide the same services as the Company or is otherwise competitive with the Company's products or services; or (ii) is engaged in or intends to engage in any line(s) of business that would be competitive with any other lines of business that the Company has made a decision to engage in prior to the termination of Employee's employment with the Company. This covenant is made to protect the Company's proprietary and confidential information. In addition, the covenant is made contemporaneously with and as independent consideration for, the execution of the Agreement of Limited Partnership of Rackspace, Ltd. of which Employee is a limited partner. Due to the nature of the Company's business (which involves internet products and services), it is not practical to impose a geographical limitation on the prohibitions contained herein. At the end of the Employee's employment, the Company shall provide the Employee with a written list of the business activities which the Company is engaged in or which the Company has made a decision to become engaged in. If any covenant contained in this Section 6(b), or any part thereof, is hereafter construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect, without regard to the invalid portion or portions. If any covenant in this Section 6(b), or any part thereof, is held to be unenforceable because of its duration or its geographic scope, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such covenant to the longest duration and to the greatest geographical scope which is permitted, and, in said reduced form, such covenant shall then be enforced. 7. REMEDIES FOR BREACH. Notwithstanding the provisions of Section 10 hereof, if Employee breaches, or threatens to breach, any of the provisions of Section 6 hereof, the Company shall have the following rights and remedies, in addition to any others, each of which shall be independent of the other and severally enforceable: (i) The right to have the provisions of Section 6 of this Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that monetary damages will not provide an adequate remedy to the Company; (ii) The right to obtain an injunction to prevent the Employee from taking actions prohibited by this Agreement without the requirement of posting a bond, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that monetary damages will not provide an adequate remedy to the Company; (iii) The right and remedy to require Employee to pay all damages resulting from such breach; and (iv) The right to terminate Employee's employment for "Cause" pursuant to Section 8 hereof. 8. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. Employee's employment shall automatically terminate upon the death or disability of Employee. Disability shall mean an infirmity preventing Employee from performing in any material respect his duties for at least 120 days (whether or not consecutive) during any one-year period. (b) TERMINATION FOR CAUSE. The Company may terminate Employee's employment at any time for "Cause" in accordance with the procedures provided below. Termination by the Company for "Cause" shall be limited to termination upon (i) the material neglect or inattention by Employee of his duties hereunder after a written warning of such material neglect or inattention of his duties, or (ii) the engaging by Employee in conduct that is materially and demonstrably injurious to the Company, monetarily or otherwise, which shall be deemed to include violating any material term of this Agreement. Prior to the Company's exercising its right to terminate Employee's employment for Cause, the Company shall give thirty (30) days prior written notice to Employee of the specific action proposed to be taken and the grounds therefor and a reasonable opportunity for Employee to respond thereto to the Company and to cure such situation. (c) OTHER TERMINATION. The Company shall have the right to terminate Employee's employment at any time without Cause by giving at least thirty (30) days prior written notice to Employee of the Company's election to terminate the Employee's employment. If the Company terminates the Employee's employment at the end of the four year initial term (whether with or without cause) or any time after the four year initial term, Employee shall only be entitled to his salary and benefits through the date of termination and no more. If the Company terminates the Employee's employment without Cause during the initial four year Term or in the event that Employee's employment is terminated due to Disability during the initial four year Term, and the Company receives from the Employee a full release of all claims in a form satisfactory to the Company the Company shall pay Employee an amount equal to three months salary as severance pay based upon the monthly salary then in effect. 9. EFFECT OF TERMINATION. Upon the termination of Employee's employment, the rights of Employee which shall have accrued prior to the date of such termination shall not be affected in any way. Except as provided in Section 8(c) hereof, Employee shall not have any rights which have not previously accrued upon termination of his employment. Section 6 hereof shall survive any termination of Employee's employment. 10. MEDIATION & BINDING ARBITRATION. Except with respect to the provisions of Sections 6 and 7 hereof which shall not be subject to binding arbitration, the Company and Employee agree that all other disputes, controversies or claims that may arise between them (including their agents and employees) including, without limitation, any dispute, controversy or claim as to the interpretation or enforcement of any of the provisions of this Agreement, shall be submitted first to mediation and then to binding arbitration in the city of San Antonio, Texas in accordance with the rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. (a) MEDIATION. If a controversy or claim arises between the parties then that controversy or claim will be mediated within one month of its identification by the parties. (b) BINDING ARBITRATION. In the event that the parties cannot resolve their dispute by mediation within one month, the parties then agree to bring the dispute to binding arbitration within one month of the conclusion of the mediation. 11. COMMUNICATIONS. Any notice, request or other communication required or permitted by this Agreement to be mailed, given or delivered to Employee shall be in writing, addressed to him at his address shown below or at such other address as he shall have furnished from time to time to the Company for the purposes hereof; and any payment to Employee under this Agreement may be made by check delivered to him or mailed to or delivered at such address. Any notice, request or other communication required or permitted by this Agreement to be given to the Company is to be in writing, addressed to the Company at the address of its principal office in San Antonio, Texas, or at such other address as the Company shall have furnished to Employee for the purposes hereof. 12. AMENDMENTS. This Agreement may be amended or modified only by a written instrument executed by the parties hereto. 13. BINDING EFFECT. This Agreement shall be binding upon, and shall inure to the benefit of Employee; the obligations of Employee hereunder are personal and this Agreement may not be assigned by Employee. This Agreement shall be binding upon, and shall inure to the benefit of, the Company and shall also bind and inure to the benefit of any successor of the Company by merger or consolidation or any assignee or transferee of all or substantially all of its properties, but, except to any such successor or assignor of the Company, this Agreement may not be assigned by the Company. 14. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 15. SEVERABILITY. If any provision of this Agreement shall, to any extent, be invalid or unenforceable, the remainder of this Agreement shall not be affected, and each term hereof shall be valid and shall be enforced to the extent permitted by law. 16. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which is to be deemed an original, but all of which, together, constitute one and the same instrument. EXECUTED as of the day and year first above written. RACKSPACE, LTD. By: MACROWEB, LC By: /s/ Morris Miller ----------------------- Its: member ----------------------- DIRK ELMENDORF By: /s/ Dirk Elmendorf ----------------------------- Address: --------------------------------- 12221 Blanco Rd #2303 --------------------------------- San Antonio, TX 78216 --------------------------------- Exhibit A 1. Health/medical/dental insurance for Employee. EX-10.8 11 EXHIBIT 10.8 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") made and entered into effective as of the 29th day of December, 1998 by and between Rackspace, Ltd., a Texas Limited Partnership (the "Company"), and Pat Condon ("Employee"). W I T N E S S E T H: WHEREAS, Employee and the Company desire that the Company engage the services of Employee; and WHEREAS, Employee desires to serve in the employment of the Company on the terms and conditions set forth below; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee to serve as the Chief Operating Officer of the Company, and Employee hereby accepts such employment, upon the terms and conditions set forth herein. 2. TERM. The initial term of Employee's employment shall commence on the effective date of this Agreement and shall continue through January 1, 2003. On January 1, 2003 and each anniversary of such date thereafter, the Employee's term of employment shall automatically renew thereafter for successive one-year terms unless either party to this Agreement has notified the other party in writing at least thirty (30) days prior to the end of such four-year initial term or any such one-year renewal term, as applicable, that it elects to terminate the employment of the Employee as of the end of any such term. Notwithstanding the foregoing, the term of this Agreement is subject to earlier termination as hereinafter provided. The period of time during which Employee is employed under this Agreement through the effective date of any termination of such employment is hereinafter referred to as the "Term". 3. DUTIES. During the Term, Employee agrees that he will devote his full business time, attention and energies to the business of the Company and to the performance of his duties hereunder which shall include such duties as from time to time are assigned to him by the General Partner of the Company. However, the Employee shall be entitled to engage in business activities unrelated to the business of the Company, provided that, in the Company's discretion reasonably applied, such activities do not interfere with the Employee's obligations under this Agreement, the Company is given prior written notice of Employee's desire to engage in such activities, and to the extent such business activities constitute a business opportunity of the Company, the Company has elected not to pursue such activities. 4. COMPENSATION. (a) BASE COMPENSATION. During the Term, the Company shall pay to Employee a salary in the amount of $3,000.00 per month, subject to annual adjustment by the General Partner but in no event less than $3,000.00 per month. Such monthly salary shall be payable monthly or in such other installments as the parties may mutually agree. During the Term, the Company shall also reimburse Employee for all reasonable expenses incurred on behalf of the Company in accordance with its then existing reimbursement policies. (b) FRINGE BENEFITS AND VACATION. During the Term, Employee shall be entitled to the standard employee benefits available to other management personnel of the Company in comparable positions (which shall include at least the benefits listed on Exhibit A attached hereto); provided, however, that the receipt of such fringe benefits by Employee shall be subject to the Company's eligibility and enrollment requirements pertaining to such benefit programs and to the further qualifications set forth on Exhibit A hereto. During each 12 month period of Employee's employment Employee shall be entitled to two (2) weeks of paid vacation. (c) BONUS. To the extent that the total annual compensation of Employee for the initial four year Term is less than $51,000.00 per year, Employee shall receive a bonus payment equal to the difference between the actual annual compensation and $51,000.00. However, the bonus will be paid, only if and to the extent that the Partnership repays all principal owing to Exeter Financial, LC incident to borrowings by the Company which are a minimum of $550,000.00, but which may reach $1,050,000.00. 5. INVENTIONS AND PATENTS. Employee agrees that all intellectual property (including, without limitation, inventions, copyrights, new contributions, ideas, and discoveries, whether patentable or not) conceived or made by him during the term shall belong to the Company, provided that such intellectual property arise out of Employee's employment by the Company, are related to the Company's business, or are created with the use of the facilities or materials of the Company. 6. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES. (a) CONFIDENTIALITY. In view of the fact that Employee's work with the Company will bring him into close contact with many confidential affairs of the Company, including matters of a business nature such as information about costs, profits, markets, sales, trade secrets, potential patents and other business ideas, customer lists, plans for future developments, business opportunities, and information of any other kind not known within any industry in which the Company operates (hereinafter, collectively, "Confidential Matters"), Employee agrees: (i) To keep secret all Confidential Matters of the Company and of any subsidiaries and affiliates of the Company and not to disclose them to anyone outside of the Company or its subsidiaries or affiliates, or otherwise use them or use his knowledge of them for his own benefit, including, without limitation, use of the trade names or trademarks of the Company, either during or after the Term, except with the Company's prior written consent; and (ii) To deliver promptly to the Company at the termination of the Term, or at any time the Company may request, all memoranda, notices, records, reports and other documents (and all copies thereof) relating to the business of the Company or any of its subsidiaries or affiliates, including, but not limited to, Confidential Matters, which he may then possess or have under his control. Notwithstanding any of the foregoing, the term "Confidential Matters" does not include information which (i) Employee is compelled to disclose by judicial or administrative process, or in the opinion of his counsel, by other mandatory requirements of law, or (ii) is or becomes generally available to the public other than as a result of any disclosure by Employee. (b) COMPETITIVE ACTIVITIES. During Employee's employment and for a period of(i) six (6) months following the effective date of a termination of Employee's employment "without cause", or as a result of his disability, (ii) eighteen (18) months following the effective date of a termination of Employee's employment in the event Employee resigns or is terminated for Cause, Employee shall not, directly or indirectly, or through any subsidiary or affiliate, own, consult, advise, manage, operate, join, or control, or participate in the ownership, management, operation, or control of, or be connected with in any manner (including but not limited to acting as an employee or independent contractor), any business, person, firm, or corporation, which (i) provides or intends to provide the same services as the Company or is otherwise competitive with the Company's products or services; or (ii) is engaged in or intends to engage in any line(s) of business that would be competitive with any other lines of business that the Company has made a decision to engage in prior to the termination of Employee's employment with the Company. This covenant is made to protect the Company's proprietary and confidential information. In addition, the covenant is made contemporaneously with and as independent consideration for, the execution of the Agreement of Limited Partnership of Rackspace, Ltd. of which Employee is a limited partner. Due to the nature of the Company's business (which involves internet products and services), it is not practical to impose a geographical limitation on the prohibitions contained herein. At the end of the Employee's employment, the Company shall provide the Employee with a written list of the business activities which the Company is engaged in or which the Company has made a decision to become engaged in. If any covenant contained in this Section 6(b), or any part thereof; is hereafter construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect, without regard to the invalid portion or portions. If any covenant in this Section 6(b), or any part thereof, is held to be unenforceable because of its duration or its geographic scope, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such covenant to the longest duration and to the greatest geographical scope which is permitted, and, in said reduced form, such covenant shall then be enforced. 7. REMEDIES FOR BREACH. Notwithstanding the provisions of Section 10 hereof, if Employee breaches, or threatens to breach, any of the provisions of Section 6 hereof, the Company shall have the following rights and remedies, in addition to any others, each of which shall be independent of the other and severally enforceable: (i) The right to have the provisions of Section 6 of this Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that monetary damages will not provide an adequate remedy to the Company; (ii) The right to obtain an injunction to prevent the Employee from taking actions prohibited by this Agreement without the requirement of posting a bond, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that monetary damages will not provide an adequate remedy to the Company; (iii) The right and remedy to require Employee to pay all damages resulting from such breach; and (iv) The right to terminate Employee's employment for "Cause" pursuant to Section 8 hereof. 8. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. Employee's employment shall automatically terminate upon the death or disability of Employee. Disability shall mean an infirmity preventing Employee from performing in any material respect his duties for at least 120 days (whether or not consecutive) during any one-year period. (b) TERMINATION FOR CAUSE. The Company may terminate Employee's employment at any time for "Cause" in accordance with the procedures provided below. Termination by the Company for "Cause" shall be limited to termination upon (i) the material neglect or inattention by Employee of his duties hereunder after a written warning of such material neglect or inattention of his duties, or (ii) the engaging by Employee in conduct that is materially and demonstrably injurious to the Company, monetarily or otherwise, which shall be deemed to include violating any material term of this Agreement. Prior to the Company's exercising its right to terminate Employee's employment for Cause, the Company shall give thirty (30) days prior written notice to Employee of the specific action proposed to be taken and the grounds therefor and a reasonable opportunity for Employee to respond thereto to the Company and to cure such situation. (c) OTHER TERMINATION. The Company shall have the right to terminate Employee's employment at any time without Cause by giving at least thirty (30) days prior written notice to Employee of the Company's election to terminate the Employee's employment. If the Company terminates the Employee's employment at the end of the four year initial term (whether with or without cause) or any time after the four year initial term, Employee shall only be entitled to his salary and benefits through the date of termination and no more. If the Company terminates the Employee's employment without Cause during the initial four year Term or in the event that Employee's employment is terminated due to Disability during the initial four year Term, and the Company receives from the Employee a full release of all claims in a form satisfactory to the Company the Company shall pay Employee an amount equal to three months salary as severance pay based upon the monthly salary then in effect. 9. EFFECT OF TERMINATION. Upon the termination of Employee's employment, the rights of Employee which shall have accrued prior to the date of such termination shall not be affected in any way. Except as provided in Section 8(c) hereof, Employee shall not have any rights which have not previously accrued upon termination of his employment. Section 6 hereof shall survive any termination of Employee's employment. 10. MEDIATION & BINDING ARBITRATION. Except with respect to the provisions of Sections 6 and 7 hereof which shall not be subject to binding arbitration, the Company and Employee agree that all other disputes, controversies or claims that may arise between them (including their agents and employees) including, without limitation, any dispute, controversy or claim as to the interpretation or enforcement of any of the provisions of this Agreement, shall be submitted first to mediation and then to binding arbitration in the city of San Antonio, Texas in accordance with the rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. (a) MEDIATION. If a controversy or claim arises between the parties then that controversy or claim will be mediated within one month of its identification by the parties. (b) BINDING ARBITRATION. In the event that the parties cannot resolve their dispute by mediation within one month, the parties then agree to bring the dispute to binding arbitration within one month of the conclusion of the mediation. 11. COMMUNICATIONS. Any notice, request or other communication required or permitted by this Agreement to be mailed, given or delivered to Employee shall be in writing, addressed to him at his address shown below or at such other address as he shall have furnished from time to time to the Company for the purposes hereof; and any payment to Employee under this Agreement may be made by check delivered to him or mailed to or delivered at such address. Any notice, request or other communication required or permitted by this Agreement to be given to the Company is to be in writing, addressed to the Company at the address of its principal office in San Antonio, Texas, or at such other address as the Company shall have furnished to Employee for the purposes hereof. 12. AMENDMENTS. This Agreement may be amended or modified only by a written instrument executed by the parties hereto. 13. BINDING EFFECT. This Agreement shall be binding upon, and shall inure to the benefit of Employee; the obligations of Employee hereunder are personal and this Agreement may not be assigned by Employee. This Agreement shall be binding upon, and shall inure to the benefit of, the Company and shall also bind and inure to the benefit of any successor of the Company by merger or consolidation or any assignee or transferee of all or substantially all of its properties, but, except to any such successor or assignor of the Company, this Agreement may not be assigned by the Company. 14. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 15. SEVERABILITY. If any provision of this Agreement shall, to any extent, be invalid or unenforceable, the remainder of this Agreement shall not be affected, and each term hereof shall be valid and shall be enforced to the extent permitted by law. 16. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which is to be deemed an original, but all of which, together, constitute one and the same instrument. EXECUTED as of the day and year first above written. RACKSPACE, LTD. By: MACROWEB, LC By: /s/ Morris Miller ------------------------------------ Its: member ----------------------------------- PATRICK CONDON By: /s/ Patrick Condon ------------------------------------ Address: --------------------------------------- 13515 West Ave #236 --------------------------------------- San Antonio, TX 78216 --------------------------------------- Exhibit A 1. Health/medical/dental insurance for Employee. EX-10.9 12 EXHIBIT 10.9 ASSET PURCHASE AND SALE AGREEMENT THIS ASSET PURCHASE AND SALE AGREEMENT (the "Agreement") is entered into this 29th day of December, 1998, by and between Cymitar Technology Group, Inc., a Texas corporation ("Seller"), Richard Yoo ("Yoo"), Dirk Elmendorf ("Elmendorf"), Patrick Condon ("Condon") (Yoo, Elmendorf and Condon are sometimes referred to herein as the "Shareholders") and Rackspace, Ltd. ("Buyer"). WHEREAS, Seller owns and operates a business under the name "Rackspace" which involves the leasing of internet servers, bandwidth, connectivity, and administration of all aspects of servers, as well as other inter-net businesses (collectively, the "Business"); and WHEREAS, Buyer desires to purchase all or substantially all of the assets of the Seller pursuant to the terms of this Agreement. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: 1. SALE AND PURCHASE OF ASSETS. 1.1 SALE AND PURCHASE OF ASSETS. Subject to the terms and conditions set forth in this Agreement, Seller agrees to sell, convey, transfer, assign, grant and deliver to Buyer, and Buyer, in reliance on the representations, warranties and covenants of Seller and the Shareholders, agrees to purchase, acquire and accept from Seller, all of Seller's right, title and interest in and to all of the tangible and intangible assets, including real, personal and mixed property, owned or held by Seller, including but not limited to all assets used or useful in connection with the operation of the Business (collectively, the "Assets") which are described on Exhibit A attached hereto. The Assets shall not include the Excluded Assets, as defined in Section 1.2 below. The Assets shall include but are not limited to: (a) the leasehold interest under the real property lease described on Exhibit A (the "Real Property Lease") a true and correct copy of which have been provided to the Buyer; (b) all equipment and other tangible personal property used or useful in connection with the operation of the Business including, all of which are set forth and described on Exhibit A, and all of Seller's interest in and to all manufacturer's, distributor's or other warranties relating to any of the foregoing; (c) all licenses, permits, franchises, authorizations and other similar rights issued by any federal, state or local governmental authority (collectively, the "Authorizations"); (d) those contracts and other agreements to which Seller is a party and which are listed on Exhibit A (the "Assumed Contracts"), true, correct and complete copies of which have been delivered to Buyer; (e) all patents, trade names, trade marks, service marks, copyrights, computer programs, data, trade secrets, business information, customer lists, supplier lists, marketing plans, intellectual property rights (whether or not reduced to writing or other tangible form) and other intangible property owned or held by Seller and all of the rights associated therewith (including any and all applications, registrations, extensions and renewals relating thereto); (f) all business and other books, papers, files, correspondence and records pertaining to the operation of the Business; and (g) all contract rights, accounts and accounts receivable of Seller. The Assets to be sold hereunder shall be transferred to Buyer at the Closing free and clear of all liens, claims, security interests encumbrances and liabilities of any kind or nature whatsoever ("Encumbrances"). Buyer is not, and shall not be deemed to have assumed any liability or obligation of the Seller, except for those liabilities arising after the Closing under the Assumed Liabilities (as herein defined) as expressly provided for herein. 1.2 EXCLUDED ASSETS. The Assets shall not include the following (the "Excluded Assets"): (a) Any and all cash, bank deposits (other than cash deposits to secure contract obligations which shall be included within the Assets); (b) all contracts of insurance and claims against insurers; (c) all employee benefit plans and assets thereof and all employment contracts; (d) All commitments, contracts and agreements not specifically assumed by Buyer pursuant to Section 1.1 hereof; and (e) All other items listed on Schedule 1.2 hereto. 2. PURCHASE PRICE; METHOD OF PAYMENT 2.1 PURCHASE PRICE. The purchase price for the Assets is the sum of $192,369.00 (the "Purchase Price"). The Purchase Price is equal to the aggregate amount of the liabilities of the Seller listed on Exhibit B. Seller and the Shareholders represent that Exhibit B accurately describes the names of all creditors of the Seller (the "Creditors") and the amounts owed by each of them. Seller and the Shareholders expressly agree to use the proceeds of the Purchase Price to pay all of the Creditors the amounts owed, and further agree to make such payments as soon as possible after the execution of this Agreement, but in no event later than January 10, 1999. All of Seller's Liabilities (including the name of the creditor and the amount owed) are set forth on 2 Exhibit B attached hereto. The Buyer may pay the Seller's creditors directly. Any such payments will be for the account of Seller and shall reduce the Purchase Price accordingly. In the event that any additional liabilities of Seller become known after closing, provided that (i) such liabilities were incurred prior to closing and not afterward, (ii) the aggregate of all liabilities of the Seller do not exceed $200,000.00 (which shall include all liabilities listed on Exhibit B and any other liability of Seller) and (iii) the shareholders of Seller and Seller did not intentionally or recklessly fail to disclose such liabilities, at Buyer's election, Buyer shall pay either Seller or Buyer shall pay such creditors directly. All above notwithstanding, the aggregate amount of all payments to be made by Buyer under this Agreement shall not exceed $200,000.00. 2.2 ASSUMPTION OF LIABILITIES. At the Closing, Buyer shall assume only the liabilities and obligations of Seller to be performed on or after the Closing Date under (i) the Real Property Lease, and (ii) the Assumed Contracts (collectively, the "Assumed Liabilities"), except to the extent that such liabilities arise prior to the Closing. Buyer is not and shall not assume any other liability of the Seller whatsoever. 2.3 NO OTHER LIABILITIES ASSUMED. Except as expressly provided in Section 2.2 hereof, Buyer shall not and does not assume any liability or obligation of Seller, fixed or contingent, disclosed or undisclosed, including without limitation, (i) contractual obligations, (ii) employment or consulting contracts or commitments or obligations to employ any employee of Seller, (iii) obligations for pensions, vacation pay, severance or other employee benefit plans, programs or practices, (iv) obligations or liabilities for Taxes and (v) any other liabilities or claims against Seller of any kind or nature whatsoever, no matter when raised. Except as expressly provided herein, Buyer shall not be required to defend any suit or claim arising out of any act, event or transaction occurring prior to the Closing Date or out of any condition existing prior to the Closing Date, in connection with the ownership or operation of the Business, including without limitation, any successor or transferee liability. 2.4 ALLOCATION OF PURCHASE PRICE. Within sixty days after the execution of this Agreement, Buyer and Seller shall use their best efforts to agree upon an allocation of the Purchase Price amongst the Assets. To the extent Buyer and Seller reach an agreement on the allocation of the Purchase Price, Buyer and Seller shall each file with their respective federal income tax return for the tax year in which the closing occurs, IRS Form 8594 and IRS form 8824, as applicable, containing the information agreed upon by the parties pursuant to the immediately preceding sentence. Buyer agrees to report the purchase of the Assets, and Seller agrees to report the sale of such Assets on all federal, state and local tax returns in a manner consistent with the information agreed upon by the parties pursuant to this section and contained in its respective IRS Form 8594 and IRS Form 8824, as applicable. Notwithstanding any other provision of this Agreement, the provisions of this Section 2.4 shall survive the Closing without limitation. 3. REPRESENTATIONS AND WARRANTIES BY SELLER. Seller and the Shareholders jointly and severally represent and warrant to Buyer as follows: 3.1 BINDING AGREEMENT. This Agreement, and the agreements entered into pursuant to this Agreement (the "Collateral Agreements") constitutes, and upon execution and delivery by Seller will constitute, valid and binding agreements and obligations of Seller enforceable against Seller in accordance with their respective terms, except as the enforceability hereof may be 3 affected by bankruptcy, insolvency or similar laws affecting creditors' rights generally or court applied equitable remedies. There is no agreement, understanding, or option between Seller and any third party that encumbers the Assets or obligates Seller to sell any portion of the Assets. 3.2 FINANCIAL STATEMENTS. Seller represents that all financial statements, financial information, and reports regarding the financial condition of the Seller, provided or to be provided to Purchaser are true and correct in all material respects. 3.3 NO CONFLICT OR BREACH. Except as set forth on Schedule 3.3, the execution and delivery of this Agreement, the fulfillment of and the compliance with the respective terms and provisions of this Agreement, and the consummation of the transactions described in this Agreement, will not and do not (i) conflict with or constitute a violation of (with or without the giving of notice or the lapse of time or both) any law, ordinance, regulation, order, award, judgment, injunction or decree of any legislative body, court, governmental or regulatory authority or arbitrator which is applicable or relates to Seller or any of the Assets or of the Business, or (ii) violate or conflict with, constitute a material default under, result in a material breach, acceleration or termination of any provision of, require the consent of any third party under, or result in the creation of any Encumbrance upon any of the Assets pursuant to, any contract, agreement, commitment, indenture, or other instrument or obligation to which Seller is a party or by which Seller is bound or to which any of the Assets may be subject. 3.4 GOVERNMENTAL AND THIRD PARTY CONSENTS. Neither the execution and delivery of this Agreement by Seller nor the consummation by Seller of the transactions contemplated hereby, nor compliance by Seller with any provisions of this Agreement or the Collateral Agreements will require any filing with, or the obtaining of any permit, authorization, consent or approval of, any governmental or regulatory authority or any third party. 3.5 LITIGATION; COMPLIANCE WITH LAW. Except as set forth in Schedule 3.5, there is no action, suit, investigation, claim, arbitration, proceeding or litigation pending or to the knowledge of the Seller or the Shareholders, threatened against or involving any of the Seller, the Assets, or the Business at law or in equity, or before or by any court, arbitrator or governmental authority. The Business is not operating under or subject to any order, judgment, decree or injunction of any court, arbitrator or governmental authority. Seller has complied in all material respects and are in compliance in all material respects with all laws, ordinances, regulations, awards, orders, judgments, decrees and injunctions applicable to the Assets and to the Business and operations of Seller, including the federal, state and local laws, ordinances, regulations and orders pertaining to employment of labor, zoning and other matters. 3.6 LEASED REAL PROPERTY. (a) LEASED OR LICENSED REAL PROPERTY. The Real Property Lease (complete and accurate copies of which have been provided to the Buyer) is a legal, valid and binding obligation of the parties thereto that is enforceable in accordance with its terms and is in full force and effect. Seller enjoys peaceful and undisturbed possession thereunder and is not in default thereunder and, to the knowledge of Seller and the Shareholders, no circumstances or events have occurred which, with notice or the lapse of time or both, could constitute a default by Seller, or to the knowledge of the Seller or the Shareholders, any other party, under any of the Real Property Lease. 4 (b) COMPLIANCE. The Seller and the Shareholders have not received notice of any facts or circumstances which lead them to believe that the Leased Real Property is not in material compliance with applicable federal, state, and local laws, including zoning, land use, lighting and marking requirements, and building code laws, ordinances and regulations necessary to conduct the operations of the Business as presently conducted. All of the improvements located on the Leased Real Property (the "Improvements") are in good condition and repair. (c) TITLE TO LEASED REAL PROPERTY. Seller has, and at Closing Buyer will receive good and valid leasehold interest in all the Leased Real Property, free and clear of all Encumbrances. 3.7 TITLE TO ASSETS; SUFFICIENCY OF ASSETS. Seller has good and valid title to all of the Assets, free and clear of all Encumbrances. At Closing shall transfer to Buyer good and valid title to all of the Assets free and clear of all Encumbrances. The Assets constitute all of the assets which are material to the conduct of the Business. 3.8 CONDITION OF TANGIBLE ASSETS. All of the tangible personal property included in the Assets to be conveyed to Buyer are in good operating condition and repair, normal wear and tear excepted; and are suitable, adequate and fit for the uses for which they are being used by Seller; and such Assets and the present use thereof are not in violation in any respect of applicable laws or regulations. 3.9 INTELLECTUAL PROPERTY. Seller has provided Buyer with an accurate list of all franchises, licenses, service marks, trademarks, trade names, copyrights, patents and applications therefor, trade secrets, customer lists, supplier lists, business information, computer programs and other intellectual property rights (the "Intellectual Property") owned or licensed for use by or registered in the name of Seller, all of which are valid and in full force and effect and are transferable to Buyer by the sole act and deed of Seller and no consent on the part of any other person is necessary to validate the transfer to Buyer. All Intellectual Property developed by the Seller and all Intellectual Property developed by any shareholder or employee of the Seller which relates to the Business, is owned by the Seller and the Seller is free to transfer and assign such Intellectual Property to the Buyer. To Seller's and Shareholders' knowledge, the activities of the Business or Seller's use of any of the foregoing Intellectual Property has not infringed and Buyer's use of such Intellectual Property will not infringe upon any trademark, trade name, copyright, patent, trade secret or legally protectable right of another. No claim or demand has been made by any third party alleging such infringement by the Seller, nor does the Seller or the Shareholders have any reason to believe that the use of the Intellectual Property might infringe the rights of a third party). 3.10 REPORTS AND RECORDS. All returns, reports and statements relating to the Business currently required to be filed by Seller with any governmental instrumentality have been filed and complied with in all material respects and are true, correct and complete in all material respects, and true, correct and complete copies thereof have been made available for inspection by Buyer. All such reports, returns and statements shall continue to be filed on a current basis until the Closing Date, and will be true, correct, and complete in all material respects. 3.11 LABOR MATTERS. Seller is in material compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages 5 and hours with respect to its employees. No employee of the Seller is represented by any labor union or collective bargaining agreement and there are no collective bargaining or other labor agreements with respect to employees of the Seller. Seller is not engaged in any unfair labor practice with respect to any such employees of the Seller, and no unfair labor practice charge or complaint against Seller with respect to the Business has been filed before the National Labor Relations Board, any state labor relations board or any court or tribunal, and none is threatened. There is no labor strike, dispute, request for representation, slowdown or stoppage pending and none is or has been threatened. 3.12 TAXES. (i) Seller has filed or caused to be filed all returns, declarations of estimated taxes, reports, statements, information statements and the like ("Tax Returns") required to be filed with any taxing authority prior to the date hereof; except those Tax Returns for which requests for extensions have been timely filed, and all such Tax Returns are correct and complete in all material respects. (ii) Seller has paid or caused to be paid all taxes (including, without limitation, income, gross receipts, ad valorem, excise, value-added, sales, use, transfer, franchise, license, stamp, occupation, withholding, employment, payroll, property or environmental tax or premium, together with any interest, penalty, addition to tax or additional amount imposed by any governmental body or authority; collectively, "Taxes") shown to be due and payable on such Tax Returns. (iii) Seller has not executed any waiver or waivers which extend or have the effect of extending any applicable statute of limitations with respect to the assessment or collection of Taxes. (iv) No federal, state, local or foreign audits or other administrative or court proceedings are presently pending with regard to any Tax Returns or Taxes of Seller and Seller has not received notice from any governmental authority of the expected commencement of such proceedings. (v) There are no liens for Taxes on the Assets of Seller other than liens for taxes not yet due and payable. (vi) None of the Assets is subject to a lease. 3.13 UNDISCLOSED LIABILITIES. Seller does not have any liabilities except to the extent disclosed on Exhibit B attached hereto. 3.14 CONTRACTS/ASSIGNMENTS. Each of the Assumed Contracts is a valid and binding obligation of Seller. Seller and Shareholder have no reason to believe that the Assumed Contracts are not binding upon all the parties. None of the parties to any of such Assumed Contract has terminated, canceled, or substantially modified any of such Assumed Contracts and neither Seller nor, to Seller's and Shareholders' knowledge, any other party is in default thereunder. Each of the Assumed Contracts may be freely assigned by Seller to Buyer without the requirement of any consent or approval, except as otherwise noted on Exhibit A. 3.15 EMPLOYEE BENEFITS. Seller has no and has never had any employee benefit plans (as defined in Section (3) of the Employee Retirement Income Security Act of 1974, as 6 amended ("ERISA"), maintained by or contributed to by Seller (all such plans are referred to as the "Plans"), or any employee stock option or stock purchase, bonus, incentive compensation, severance pay and fringe benefit arrangements. During the five-year period ending at the Closing, Seller has not made or been required to make any contributions to any "multiemployer plan" (as defined in Section 3(37) of ERISA). 3.16 TRUE AND CORRECT COPIES. Seller has delivered or made available to Buyer true, correct, and complete copies of all contracts, agreements and documents referred to in this Agreement or related to the Business, together with all modifications thereof and amendments thereto. A true and correct list of all contracts and agreements between Seller and any third party related to the Business, other than the Assumed Contracts, whether written or oral, is contained in Schedule 3.16, all of which shall be terminated by the Seller prior to Closing. 3.17 INSURANCE. All insurance policies maintained by Seller with respect to the Assets and operation of the Business have been provided to the Buyer. 3.18 ADVERSE BUSINESS CHANGES. Since December 23, 1998, there has not been (i) any adverse change in the financial condition, assets, liabilities, business, or results or operations of the Seller other than changes in the ordinary course of business, none of which has been materially adverse, (ii) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the Business, (iii) any amendment or termination of any contract, agreement, plan, lease, or license to which Seller is a party or by which it is bound, otherwise than in the ordinary course of business or as required elsewhere in this Agreement, or (iv) any disposition, mortgage, pledge, or subjection to any lien, claim, charge, option, or encumbrance of any of the Assets. 3.19 DISCLOSURE. Neither this Agreement nor any written instrument, list, exhibit or certificate furnished or to be furnished to Buyer pursuant hereto contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements not misleading. There is no state of facts or circumstances known to Seller or the Shareholders and not disclosed to Buyer which should be disclosed to Buyer in order not to make any of the warranties and representations contained herein not false or misleading or which may have an adverse effect on the Assets. 4. REPRESENTATIONS AND WARRANTIES BY BUYER. Buyer represents, warrants and covenants to Seller as follows: 4.1 ORGANIZATION AND STANDING. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas. Buyer has all requisite corporate power and corporate authority to enter into, execute and deliver this Agreement and the Collateral Agreements, and to perform and comply with all of the terms, covenants and conditions to be performed or complied with by Buyer in this Agreement and the Collateral Agreements, and to consummate the transactions contemplated by this Agreement and the Collateral Agreements. 4.2 AUTHORIZATION. The execution, delivery and performance of this Agreement and of the Collateral Agreements, and the consummation of the transactions contemplated by this Agreement and the Collateral Agreements, have been duly and validly authorized by all necessary corporate action on the part of Buyer. This Agreement constitutes, and upon execution and delivery the Collateral Agreements will constitute, valid and binding agreements and obligations of Buyer, 7 enforceable in accordance with their respective terms, except as the enforceability hereof may be affected by bankruptcy, insolvency or similar laws affecting generally creditors' rights or by court applied equitable remedies. 5. THE CLOSING; CLOSING DATE. 5.1 CLOSING. The Closing hereunder shall be held upon the execution of this Agreement at the offices of Matthews & Branscomb, P.C. located at 106 S. St. Mary's Street, San Antonio, Texas 78205 or such other mutually agreeable time or location. 5.2 DELIVERY BY SELLER. At or before the Closing, Seller shall deliver to Buyer: (a) TRANSFER DOCUMENTS. The following bills of sale, statements, assignments and other instruments of transfer and consents, in form prepared by and satisfactory to Buyer, sufficient to transfer and convey to Buyer, free and clear title (of the quality provided for in this Agreement) to the Assets to the Buyer, and dated as of the Closing Date: (i) One or more bills of sale conveying to the Buyer the tangible personal property; (iii) One or more assignments of the Assumed Contracts and the Leased Real Property; (iv) One or more assignments of the intangible assets; (v) Any and all tax clearance certificates from state and local tax authorities as may be requested by the Buyer; provided that Seller shall be responsible for obtaining all such certificates. (vi) Such other instruments or documents as Buyer may reasonably request to effectuate the transfer to Buyer of the Assets. (vii) Estoppel letters and any other agreement or document requested by the Buyer, evidencing that there is no default under any of the Assumed Contracts or the Real Property Lease to be assigned to Buyer and that such agreements may be assigned to the Buyer. (viii) UCC-3 termination statements and any other document requested by the Buyer which evidences the release and termination of any Encumbrance on the Assets. (B) SHAREHOLDER AND DIRECTOR RESOLUTIONS. A certified copy of the resolution of the board of directors and shareholders of the Seller, authorizing the transactions contemplated by this agreement. 5.3 DELIVERY BY BUYER. At or before the Closing, Buyer shall deliver to Seller: (a) PURCHASE PRICE PAYMENT. The Purchase Price by cashier's check or by wire transfer pursuant to wire instructions that Seller shall deliver to Buyer prior to the Closing. 8 (b) ASSUMPTION AGREEMENTS. One or more assumption agreements in a form satisfactory to the Buyer, pursuant to which Buyer shall assume the obligations of Seller under the Assumed Contracts and the Real Property Lease. 6. SURVIVAL; INDEMNIFICATION. 6.1 SURVIVAL OF REPRESENTATIONS/LIMITATION OF LIABILITY/SECURITY INTEREST. All representations and warranties made by any party to this Agreement shall survive the Closing for a period of eighteen months, except for representations and warranties regarding taxes which shall survive for a period of two years. Notwithstanding anything in this Agreement to the contrary, the Buyer's sole and exclusive remedy in the event of any breach by the Seller or any of the Shareholders of any provision, representation or warranty contained in this Agreement, and Buyer's sole and exclusive recourse for any right to indemnification under Section 6.2 below, shall be to foreclose upon the Units (limited partnership interests in Rackspace, Ltd. owned by the Shareholders) held by the Shareholders (or a portion of such Units), and the Buyer expressly waives the right to pursue the Shareholders directly for monetary damages. For this purpose, the Shareholders grant to the Buyer, a security interest in the Units they own in Rackspace, Ltd. as security for the damages which may result from any breach of the representations and warranties made by the Shareholders under this Agreement and as security for the indemnity obligations set forth in Section 6.2 below. The Buyer shall not exercise any right it may have to foreclose upon any of the Shareholder's Units unless the aggregate amount of financial loss to the Buyer exceeds $25,000.00. The Shareholders agree that to sign a UCC-1 financing statement to perfect the Buyer's lien against their Units, upon request by Buyer. The parties hereby waive any provision of law to the extent that it would limit or restrict the agreements set forth in this Section 6.1. The Buyer shall provide the Shareholders with 15 business days advance written notice of any such foreclose and the Shareholders shall have until the end of such 15 business day period to pay the the claim arising hereunder in cash, in which event no such foreclosure shall occur. The Buyer shall release its security interest on the Shareholders' Units and such Units shall no longer be subject to a claim hereunder, upon the earlier to occur of two years from the date of this Agreement (but only to the extent no unsatisfied claims have been made on or before such date) or upon the Shareholders escrowing $250,000 in cash to satisfy any claims that may arise hereunder under an escrow agreement reasonably acceptable to the Buyer. 6.2 INDEMNIFICATION BY SELLER. Subject to the conditions and provisions of this Section 6.2 and Section 6.4 hereof, Seller agrees to indemnify, defend and hold harmless Buyer from and against any and all demands, claims, complaints, actions or causes of action, suits, proceedings, investigations, arbitrations, assessments, losses, damages, liabilities, costs and expenses, including, but not limited to, interest, penalties and reasonable attorneys' fees and disbursements, asserted against, imposed upon or incurred by Buyer, directly or indirectly, by reason of or resulting from any misrepresentation or breach of the representations and warranties of Seller and the Shareholders contained in or made pursuant to this Agreement. 6.3 INDEMNIFICATION BY BUYER. Subject to the conditions and provisions of this Section 6.3 and the provision of Section 6.4, Buyer hereby agrees to indemnify, defend and hold harmless Seller from and against all demands, claims, complaints, actions or causes of action, suits, proceedings, investigations, arbitrations, assessments, losses, damages, liabilities, costs and expenses, including, but not limited to, interest, penalties and reasonable attorneys' fees and disbursements, asserted against, imposed upon or incurred by Seller, directly or indirectly, by reason of or resulting from (a) any liability or obligation of or claims against Seller (whether absolute, accrued, contingent 9 or otherwise and whether contractual, tax or any other type of liability or obligation or claim) expressly assumed by Buyer pursuant to Section 2.2 hereof; or (b) any misrepresentation or breach of the representations and warranties of Buyer contained in or made pursuant to this Agreement. 6.4 CONDITIONS OF INDEMNIFICATION. The obligations and liabilities of Seller and of Buyer hereunder with respect to their respective indemnities pursuant to this Section 6, resulting from any claim or other assertion of liability by third parties (hereinafter called collectively, "Claims"), shall be subject to the following terms and conditions: (a) The party seeking indemnification (the "Indemnified Party") must give the other party or parties, as the case may be (the "Indemnifying Party"), notice of any such Claim promptly after the Indemnified Party receives notice thereof. (b) The Indemnifying Party shall have the right to undertake, by counsel or other representatives of its own choosing, the defense of such Claim. (c) In the event that the Indemnifying Party shall elect not to undertake such defense, or within a reasonable time after notice of any such Claim from the Indemnified Party shall fail to defend, the Indemnified Party (upon further written notice to the Indemnifying Party) shall have the right to undertake the defense, compromise or settlement of such Claim, by counsel or other representatives of its own choosing, on behalf of and for the account and risk of the Indemnifying Party (subject to the right of the Indemnifying Party to assume defense of such Claim at any time prior to settlement, compromise or final determination thereof). (d) Anything in this Section 6.4 to the contrary notwithstanding, (i) if there is a reasonable probability that a Claim may materially and adversely affect the Indemnified Party other than as a result of money damages or other money payments, the Indemnified Party shall have the right, at its own cost and expense, to participate in the defense, compromise or settlement of the Claim; (ii) the Indemnifying Party shall not, without the Indemnified Party's written consent, settle or compromise any Claim or consent to entry of any judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party of a release from all liability in respect of such Claim, and (iii) in the event that the Indemnifying Party undertakes defense of any Claim, the Indemnified Party, by counsel or other representative of its own choosing and at its sole cost and expense, shall have the right to consult with the Indemnfiying Party and its counsel or other representatives concerning such Claim and the Indemnifying Party and the Indemnified Party and their respective counsel or other representatives shall cooperate with respect to such Claim. 6.5. NOTICES. All notices, demands, requests, or other communications which may be or are required to be given or made by any party to any other party pursuant to this Agreement shall be in writing and shall be delivered by first class, registered, certified or express mail, return receipt requested, postage prepaid, or, hand-delivered, addressed as follows: If to Buyer: 111 Soledad, Suite 1100 San Antonio, Texas 78205 10 If to Seller or the Shareholders: Richard K. Yoo 100 Lorene #102 San Antonio, Tx 78209 With copy to: Fulbright & Jaworski Attn: Daryl Lansdale 300 Convent Street Suite 2200 San Antonio, Texas 78205 or such other address or facsimile number as the respective addressee may indicate by written notice. Each notice, demand, request or communication which shall be given or made in the manner described above shall be deemed sufficiently given or made for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt, or the affidavit of messenger) or at such time as delivery is intentionally refused by the individual named addressee upon presentation. 7. POST CLOSING OBLIGATIONS. 7.1 CHANGE OF NAME. As soon as practicable after the Closing, Seller shall change (and the Shareholders shall cause Seller to make such change) its name to a name which is substantially dissimilar to "Cymitar." Seller agrees never to use the name "Cymitar" or a name similar to Cymitar at anytime in the future. 8. MISCELLANEOUS. 8.1. SPECIFIC PERFORMANCE. Seller acknowledges that the Assets to be sold and delivered by Buyer pursuant to this Agreement are unique and that Buyer has no adequate remedy at law if Seller shall fail to perform any of their obligations hereunder, and Seller therefore confirm and agree that Buyer's right to specific performance is essential to protect the rights and interests of 11 Buyer. Accordingly, in addition to any other remedies which Buyer may have hereunder or at law or in equity or otherwise, Seller hereby agree that Buyer shall have the right to have all obligations, undertakings, agreements and other provisions of this Agreement specifically performed by Seller and that Buyer shall have the right to obtain an order or decree of such specific performance in any of the courts of the United States or of any state or other political subdivision thereof. 8.2. FURTHER ASSURANCES. Each of the parties hereto agrees that it will, at any time, prior to, at or after Closing, take or cause to be taken such further actions, and execute, deliver and file or cause to be executed, delivered and filed such further documents and instruments, and obtain such consents, as may reasonably be necessary or reasonably requested in connection with the consummation of the purchase and sale contemplated by this Agreement or in order to fully effectuate the purposes, terms and conditions of this Agreement. 8.3 BROKERS. Each of Seller and Buyer represents to the other that it has not retained any broker or person in connection with the transactions contemplated by this Agreement. 8.4 SCHEDULES AND EXHIBITS. Any item set forth on or in any Schedule or Exhibit to this Agreement shall be deemed to be incorporated by reference into this Agreement and any information disclosed in any Schedule shall be deemed to have been disclosed pursuant to all other Schedules to this Agreement. 8.5 WAIVER. Except as otherwise provided in this Agreement, no delay or failure on the part of any party hereto in exercising any right, power or privilege under this Agreement or under any other instrument or document given in connection with or pursuant to this Agreement shall impair any such right, power or privilege or be construed as a waiver of any default or any acquiescence therein. No single or partial exercise of any such right, power or privilege shall preclude the further exercise of any such right, power or privilege, or the exercise of any other right, power or privilege. No waiver shall be valid against any party hereto unless made in writing and signed by the party against whom enforcement of such waiver is sought and then only to the extent expressly specified therein. 8.6 REMEDIES CUMULATIVE. Except as specifically provided herein, the remedies provided herein shall be cumulative and shall not preclude the assertion by Seller or by Buyer of any other rights or the seeking of any other remedies against the other, or its successors or assigns. Nothing contained herein shall preclude a party from seeking equitable relief, where appropriate. 8.7 ENTIRE AGREEMENT; AMENDMENT. This Agreement, including the Schedules and Exhibits hereto and other instruments and documents referred to herein or delivered pursuant hereto, contains the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior oral or written agreements, commitments or understandings with respect to such matters. No amendment, modification or discharge of this Agreement shall be valid or binding unless set forth in writing and duly executed by the party against whom enforcement of the amendment, modification or discharge is sought. 8.8 HEADINGS. The headings of the sections and subsections contained in this Agreement are inserted for convenience only and do not form a part or affect the meaning, construction or scope thereof. 12 8.9 SIGNATURE IN COUNTERPARTS. This Agreement may be executed in separate counterparts, none of which need contain the signature of all parties, each of which shall be deemed to be an original, and all of which taken together constitute one and the same instrument. It shall not be necessary in making proof of this Agreement to produce or account for more than the number of counterparts containing the respective signatures of, or on behalf of, all of the parties hereto. 8.10 CONSTRUCTION. This Agreement shall be construed and enforced in accordance with the laws of the State of Texas, excluding the conflicts of law principles thereof. 8.11 MEDIATION AND ARBITRATION. The parties agree that all disputes, controversies or claims that may arise between them which relate to this Agreement, including, without limitation, any dispute, controversy or claim as to the interpretation or enforcement of any of the provisions of this Agreement, shall be submitted first to mediation and then to binding arbitration in the city of San Antonio, Texas in accordance with the rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. (1) MEDIATION. If a controversy or claim arises between the parties then that controversy or claim will be mediated within one month of its identification by the parties. (2) BINDING ARBITRATION. In the event that the parties cannot resolve their dispute by mediation within one month, the parties then agree to bring the dispute to binding arbitration within one month of the conclusion of the mediation. IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement, or has caused this Agreement to be duly executed and delivered in its name on its behalf, all as of the day and year first above written. BUYER: RACKSPACE, LTD. BY: Macroweb, LC, its General Partner By: /s/ Morris Miller ------------------------------- Title: member ---------------------------- SELLER: CYMITAR TECHNOLOGY GROUP, INC. By: /s/ Richard Yoo ------------------------------------- Its: President ------------------------------------- 13 SHAREHOLDERS: /s/ RICHARD YOO -------------------------------------- RICHARD YOO /s/ DIRK ELMENDORF -------------------------------------- DIRK ELMENDORF /s/ PATRICK CONDON -------------------------------------- PATRICK CONDON 14 EX-10.10 13 EXHIBIT 10.10 Transfer Agreement This Agreement is made this 29th made of December, 1998, by and between Rackspace, Ltd. (the "Partnership") and Richard Yoo ("Yoo"), Dirk Elmendorf ("Elmendorf") and Pat Condon ("Condon"). In consideration for the substantial benefits to be received by Yoo, Elmendorf and Condon incident to the creation of the Partnership, and to ensure that the Partnership receives all intellectual property relating to the business conducted by Cymitar Technology Group, Inc. ("Cymitar"), the parties agree as follows: Yoo, Condon and Elmendorf hereby transfer and assign to the Partnership any and all tradesecrets, rights, inventions, trade marks, copyrights and any other intellectual property rights whatsoever they may own or have an interest in which relates to the business conducted by Cymitar at any time previous to the date of this Agreement or which relate to the Concept as such term is defined in the Agreement of Limited Partnership of Rackspace, Ltd., except for the tradesecrets, rights, inventions, trade marks, copyrights and other intellectual property rights being transferred to Elmendorf pursuant to the agreement attached hereto as Exhibit A. /s/ Richard Yoo /s/ Pat Condon - --------------------- ---------------------- Richard Yoo Pat Condon /s/ Dirk Elmendorf Rackspace, Ltd. - --------------------- Dirk Elmendorf By: Macroweb, LC By: /s/ Morris Miller -------------------- Its: member -------------------- EX-10.11 14 EXHIBIT 10.11 AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. This Agreement of Limited Partnership (hereinafter referred to as the "Agreement") is entered into the 29th day of December, 1998, between Macroweb, LC, a Texas limited liability company (the "General Partner"), Trout, Ltd, a Texas limited partnership ("Trout"), Richard Yoo ("Yoo"), Patrick Condon ("Condon") and Dirk Elmendorf ("Elmendorf) (Trout, Yoo, Condon and Elmendorf are sometimes referred to herein as the "Limited Partners"). The General Partner and the Limited Partners are sometimes hereinafter collectively referred to as the "Partners." W I T N E S S E T H: WHEREAS, the parties hereto desire to form the Partnership in order to more conveniently conduct all business for which a partnership may be formed: Now, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1. DEFINED TERMS The capitalized terms used in this Agreement, unless the context otherwise requires, shall have the meanings specified in this Article 1. ACT. Texas Revised Limited Partnership Act, as set forth at Article 6132a-1 in Vernon's Annotated Texas Civil Statutes, as it may be amended from time to time. ADDITIONAL LIMITED PARTNERS. The Limited Partners who are admitted to the Partnership by the General Partner after the date of this Agreement on terms negotiated by the General Partner consistent with the General Partner's fiduciary duty to the Partnership, who shall become a party to this Agreement upon their execution of a counterpart to this Agreement, all in accordance with the terms and conditions of this Agreement. AFFILIATE. Means, with respect to any Person, any corporation, limited liability company, partnership, individual, trust or association controlled by, controlling or under common control with such Person, with the concept of control in this context meaning the ownership of at least 10% of the 1 voting securities or partnership, equity or other beneficial interest of the controlled entity. AGREEMENT. This Agreement of Limited Partnership of Rackspace, Ltd. as originally executed and as subsequently amended from time to time. APPROVAL OF THE CLASS A LIMITED PARTNERS. Means and includes the approval of Yoo (to the extent he is employed by the Partnership), or, the approval by Elmendorf and Condon (to the extent that both are employed by the Partnership), or, if only one of Elmendorf, Condon and Yoo are employed by the Partnership, the approval of the one who is employed by the Partnership. To the extent that none of the foregoing are employed by the Partnership, the approval of either Yoo, Condon or Elmendorf, so long as such persons own in aggregate at least 15% of the Ownership Percentage Interest in the Partnership. Otherwise, the Approval of the Class A Limited Partners shall be deemed to be obtained regardless of any action or inaction of Yoo, Condon or Elmendorf. CAPITAL ACCOUNT. The Capital Account of a Partner determined from the inception of the Partnership strictly in accordance with the rules set forth in Treas. Reg. Section 1.704-1(b)(2)(iv) or any successor provisions. Subject to the previous sentence, Capital Account means (a) the amount of all Capital Contributions of such Partner to the Partnership (valuing all capital contributions at fair market value determined by the General Partner), increased by (b) the amount of net income and gain allocated to the Partner, decreased by (c) the amount of losses allocated to the Partner, and further decreased by (d) the amount of cash distributed and the net fair market value of all property distributed by the Partnership to the Partner. CAPITAL CONTRIBUTION. The amount of money and the net fair market value of any property (other than money) contributed to the Partnership by any Partner. CASH AVAILABLE FOR DISTRIBUTION. All cash received by the Partnership from all sources (including capital contributions and borrowings), less cash expended or reserved, in the discretion of the General Partner, (i) for liabilities (contingent or otherwise), federal, state and local taxes, expenses, capital expenditures, and obligations of the Partnership or obligations secured by the assets of the Partnership, or (ii) for any other reason deemed beneficial by the General Partner for the Partnership or the Partners but not necessarily for any assignees of the Partners. CERTIFICATE OF LIMITED PARTNERSHIP. The certificate of limited partnership, as amended or restated, filed with the Secretary of State of the State of Texas forming the Partnership as a Texas limited partnership. CLASS A LIMITED PARTNERS. Collectively, Yoo, Elmendorf and Condon and their successors and assigns. CLASS B LIMITED PARTNER. Trout, its successors and assigns. 2 CONCEPT. The offering of full web-server hosting services through the leasing of internet servers, bandwidth, connectivity and administration of all aspects of servers; and all copyrights, patents, inventions, trade secrets, trademarks, service marks, trade logos, trade names, trade dress and other intellectual property rights that relate thereto. CODE. The Internal Revenue Code of 1986, as amended from time to time. FAMILY MEMBER. A spouse, sibling, parent, child or grandchild of a Person, including adopted children, and relations in law. GENERAL PARTNER. Macroweb, LC, a Texas limited liability company ("Macroweb"), or any Person subsequently admitted to the Partnership as a General Partner pursuant to the terms of Section 3.3 of this Agreement. GENERAL PARTNER INTEREST. The interest in the Partnership owned by the General Partner representing the rights and interests of the General Partner under this Agreement. INITIAL CAPITAL CONTRIBUTION. The Capital Contribution made by Trout in the amount of $200,000.00. LIMITED PARTNERS INTEREST. The interest in the Partnership owned by the Limited Partners representing the rights and interests of the Limited Partners under this Agreement. LIMITED PARTNERS. Trout, Yoo, Condon and Elmendorf, any other person admitted to the Partnership by the General Partner as a Limited Partner in accordance with this Agreement, and the successors and assigns of any of the foregoing. LOSS RECAPTURE ALLOCATIONS. The allocation of Partnership net income and gain to any Limited Partners in an amount equal to the cumulated amount of any Specially Allocated Losses. MAJORITY IN INTEREST OF THE LIMITED PARTNERS. Limited Partners who own, at the time of determination, more than fifty percent (50%) of the Ownership Percentage Interests owned by all Limited Partners. MILLER. Morris A. Miller OWNERSHIP PERCENTAGE INTEREST. The Ownership Percentage Interests of the Partners as described in Section 5.1 of this Agreement. PARTNERS. All of the General and Limited Partners of the Partnership. 3 PARTNERSHIP. The limited partnership formed under the Act, known as "Rackspace Ltd". PERSON. Any natural person, limited liability company, general or limited partnership, corporation, joint venture, trust or association. REGULAR ALLOCATION. The allocation of Partnership net income and gain, after the Loss Recapture Allocation, made to all the Partners in accordance with their Ownership Percentage Interests. REGULAR DISTRIBUTIONS. The distributions made to all the Partners out of Cash Available for Distribution, in accordance with the Capital Accounts, but after Tax Distributions. REGULAR LOSS ALLOCATION. The allocation of Partnership losses among the Partners in accordance with their Ownership Percentage Interests in the Partnership until the Capital Accounts of Yoo, Condon and Elmendorf (and their assignees) are reduced to zero. RELATED PARTY. Shall mean as to any Partner, (i) any Affiliate of such Partner, (ii) any employee, officer, director, shareholder, member, manager or partner of such Partner or of any Affiliate of such Partner, (iii) any Family Member of any Person that is a Related Party of such Partner, and (iv) all agents (whether or not disclosed) acting on behalf of or by the direction of any of the foregoing, and shall mean, as to Weston and Miller, (I) any Affiliate of Weston or Miller, (II) any Family Member of Weston or Miller or any Family Member of any Person that is a Related Party of Weston or Miller, and (III) all agents (whether or not disclosed) acting on behalf of or by the direction of any of the foregoing. SECURITIES ACT. The Securities Act of 1933, as amended. SPECIALLY ALLOCATED LOSSES. Allocations of Partnership losses to Trout in the event the Capital Accounts of all other Limited Partners are zero. SUBSTITUTE LIMITED PARTNERS. Those Limited Partners admitted pursuant to the provisions of Section 8.6 of the Agreement. TAX DISTRIBUTIONS. The distributions made to the Partners to pay the federal tax liabilities of the Partners. WESTON. Graham M. Weston. UNIT. A unit of ownership in the Partnership initially representing a .01% Ownership Percentage Interest and the rights and interests of a Partner under this Agreement. 4 ARTICLE 2 THE LIMITED PARTNERSHIP SECTION 2.1 NAME. The business of the Partnership shall be conducted under the name "Rackspace, Ltd." or any other name deemed advisable by the General Partner. SECTION 2.2 PRINCIPAL OFFICE. The principal office of the Partnership and the address of the General Partner shall be 111 Soledad, Ste, 1100, San Antonio, Texas 78205; provided, however, that the General Partner may, by notice to the Limited Partners, change the address of the principal office. The Partnership may maintain such other offices at such other places as the General Partner deems advisable. SECTION 2.3 PURPOSE AND POWER OF THE PARTNERSHIP. The Partnership has the power and authority to conduct any lawful business. The Partnership is organized for the following purposes: a. To purchase all of the assets of Cymitar Technology Group, Inc. ("Cymitar"); b. To further develop the Concept; c. To continue to support the Cymitar customer contracts that are assigned to the Partnership; and d. To enter into, make and perform all contracts and other undertakings, and engage in all activities and transactions, as may be necessary or advisable to carry out any of the foregoing purposes. SECTION 2.4 TERM. The Partnership commenced upon the filing of the Certificate of Limited Partnership with the Secretary of State of the State of Texas and shall continue in existence until the close of Partnership business on DECEMBER 31, 2050, or until the earlier termination of the Partnership in accordance with the provisions of this Agreement. SECTION 2.5 TAX STATUS. Neither the General Partner nor any other Partner shall file an election for the Partnership to be treated as other than a Partnership for federal income tax purposes; provided that this prohibition shall not in any manner affect, limit or reduce the General Partner's rights and authorities under Sections 13 and 14 below. Each of the Partners hereby recognizes that this Partnership will be subject to the provisions of Sub-Chapter K of Chapter 1 of Subtitle A of the Code. The Partners agree that the Partnership shall not be required to file any election under Section 754 of the Code. SECTION 2.6 REGISTERED OFFICE AND AGENT. The post office address of the registered office of the Partnership is 111 Soledad, Ste. 1100 San Antonio, Texas 78205, and 5 the name of the registered agent of the Partnership at such address is Morris A. Miller. SECTION 2.7 FISCAL YEAR. The fiscal year of the Partnership shall be the calendar year ending December 31. ARTICLE 3. MANAGEMENT OF PARTNERSHIP SECTION 3.1 AUTHORITY OF GENERAL PARTNER. Subject to the limitations imposed in this Agreement, the General Partner shall have full and complete power and authority, in the name and on behalf of the Partnership, to manage, control, administer and operate its business and affairs, and to do or cause to be done any and all acts, to incur and pay out of the funds of the Partnership any and all fees, costs and expenses, and to execute, deliver, file and record any and all instruments and documents of every character deemed by the General Partner to be appropriate. Except as otherwise set forth herein, the scope of such power and authority shall encompass all matters in any way connected with, incidental to, or necessary for the business and affairs of the Partnership. Without in any way limiting the generality of the foregoing, the General Partner shall have the following specific powers: a. To borrow on behalf of the Partnership; b. To employ such agents, employees, consultants, brokers, accountants and other persons necessary or appropriate to carry out the Partnership's business and to cause the Partnership to pay fees, expenses, salaries, wages and other compensation to such persons; c. To procure and maintain general liability insurance and insurance on the properties and assets of the Partnership; d. To negotiate the terms of and execute such notes, evidences of indebtedness, deeds of trust, contracts, documents and instruments relating to Partnership business as may, in the opinion of the General Partner, be appropriate, necessary or advisable; e. To incur and pay out of the funds of the Partnership, any and all fees, costs and expenses deemed by the General Partner to be appropriate, necessary or advisable in the operation of the business of the Partnership; f. To cause the Partnership to purchase or lease, land, supplies, equipment and other materials and assets; g. Consistent with the General Partner's fiduciary duty to the Partnership, to hold title, or designate others to hold title, to properties of the Partnership; h. To mortgage, pledge or sell any properties or assets of the Partnership; 6 i. To receive, issue receipts for and otherwise dispose of and deal in all checks, deeds, monies, and other personal property which arise out of or are related to the Partnership's business; j. To open, maintain and close bank accounts and draw checks or other orders for the payment of money for the management and operation of the Partnership; k. To make any and all expenditures that it reasonably deems necessary or appropriate in connection with the management of the operation of the Partnership, including reimbursing the General Partner as provided in Section 3.11 hereof; l. To manage and supervise the maintenance and operation of all assets that are owned by the Partnership; m. To pay, extend, renew, modify, adjust, submit to arbitration, prosecute, defend or compromise, upon such terms as the General Partner may determine and upon such evidence as it may deem sufficient, any obligation, suit, liability, cause of action or claim, either in favor of or against the Partnership; n. To loan funds to the Partnership, provided that the interest charged to the Partnership shall not exceed the lesser of (i) the General Partner's actual interest cost, or (ii) the rate that would be charged the Partnership by unrelated lenders on comparable loans; o. To declare bankruptcy on behalf of the Partnership or assign property of the Partnership in trust for creditors of the Partnership; p. To take any action authorized by any Section of this Agreement; and q. To take all necessary and reasonable actions to fulfill its duties hereunder. SECTION 3.2 SPECIFIC LIMITATIONS ON GENERAL PARTNER. Notwithstanding any other provision of this Agreement or the Act to the contrary, without the Approval of the Class A Limited Partners to the specific act in question, the General Partner shall have no right, power or authority to undertake, authorize or permit any of the following acts or decisions except in accordance with the limitations or conditions set forth below as to each specific act: a. To allow the Partnership to enter into any transaction of any nature whatsoever, (including but not limited to, issuing interests under Sections 9.1 and 9.3 or paying compensation for services), whether directly or indirectly, with any General Partner, Trout, Miller or Weston or a Related Party of any General Partner, Trout, Miller or Weston, unless, prior to entering into such transaction, a fairness opinion is obtained from (i) an independent third party mutually agreed upon by the Class A Limited Partners and the General Partner, or (ii) a big 6 accounting firm which is not utilized by the General Partner, 7 Weston or Miller or any affiliate of the General Partner, Weston or Miller, which concludes that the proposed transaction would be fair to the Partnership; provided however, this limitation shall not apply to non-recurring single transactions which are less than $5,000.00; provided that no more than $10,000.00 of such transactions occur in any calendar year; b. To allow the Partnership to enter into any additional capital raising or other financing transaction (other than a public offering pursuant to Article 15 below) until such time as $1,050,000 has been advanced to the Partnership pursuant to Section 4.5; c. To sell the Partnership (whether by merger, statutory exchange, consolidation, recapitalization, sale of all or substantially all of its assets), unless all of the holders of Units or other Partnership Interests will receive the same form and amount of consideration per Unit or other Partnership Interests, or if any holders are given an option as to the form and amount of consideration to be received, all holders will be given the same option; d. To admit any Person as a General Partner of the Partnership; e. To possess Partnership property or assign its right in Partnership property, other than for a Partnership purpose; f. To admit any Additional Limited Partner to the Partnership, except in accordance with Article 9 of this Agreement; g. To allow the Partnership to incur indebtedness to Trout, any General Partner, Weston or Miller or a Related Party of any General Partner, Trout, Weston or Miller, except for the $1,050,00.00 loan described in Section 4.5 below and any indebtedness that (a) bears interest at the lessor of (i) the lender's actual interest cost, (ii) the rate that would be charged the Partnership by unrelated lenders on comparable loans, and (iii) the prime rate charged by Frost National Bank, N.A. plus 5%, and (b) has an amortization term of not less than five years (without regard to the maturity date of the loan); and h. To amend (i) the Promissory Note and Security Agreement each of even date herewith and each between the Partnership and Exeter Financial, LC, or (ii) the Credit Agreement of even date herewith among the Partnership, Exeter Financial, LC, Miller and Weston. SECTION 3.3 REPLACEMENT OF GENERAL PARTNER. a. Replacement. The General Partner may not be replaced except in the event of such General Partner's dissolution, resignation or bankruptcy or in the event (a) the General Partner, in violation of this Agreement, makes a disposition of its Units or Interests in the Partnership, (b) Trout makes a disposition of its Units or interests in the Partnership in violation of this Agreement, (c) Weston or Miller makes a disposition of their partnership, 8 membership or other ownership interests in the General Partner or Trout in violation of the Support Agreement ("Support Agreement ) dated of even date herewith among the Class A Limited Partners, the Partnership, Miller and Weston. In the event that the General Partner may be replaced pursuant to (a), (b) or (c),the Class A Limited Partners may remove the General Partner and select a new General Partner. However, before the General Partner is replaced pursuant to (a), (b) or (c) above, the General Partner shall have thirty (30) days from receipt of notice from the Class A Limited Partners (and the Class A Limited Partners shall be required to provide such notice prior to removing the General Partner) to reverse the transaction giving rise to the right to remove the General Partner, and if the transaction is reversed, the General Partner may not be replaced. b. Dissolution, Resignation or Bankruptcy. In the event of the dissolution, resignation or bankruptcy of the General Partner where the Partnership is continued pursuant to Section 11.1(d) hereof, a successor General Partner shall be admitted to the Partnership upon the approval of a Majority in Interest of the Limited Partners; provided however, in the event that 100% of the membership or other ownership interest of the new General Partner will not be owned by Miller and Weston (or their successors and assigns who have taken such interests in accordance with this agreement), or Miller and Weston (or their successors and assigns who have taken such interests in accordance with this agreement) otherwise fail to control the new General Partner, the new General Partner shall be selected and Approval of the Class A Limited Partners. Each successor General Partner shall have equal responsibility for the management and operation of the Partnership to that of the General Partner and shall succeed to the rights and obligations of the original General Partner as set forth in Section 3.1. Any Partner who ceases to be a General Partner for any reason shall immediately and without further action of any party lose all rights and privileges incident to such office, and the General Partner Interest of such former General Partner shall immediately be converted to a Limited Partner Interest. SECTION 3.4 OBLIGATIONS OF THE GENERAL PARTNER. The General Partner shall manage the affairs of the Partnership in accordance with the Act and all other legal requirements and contractual obligations applicable to the Partnership, including the General Partner's duty to act in good faith and in the best interests of the Partnership. The General Partner shall devote such part of its time to the Partnership as may be required to perform and execute its responsibilities hereunder. The General Partner shall cause Miller and Weston to provide the Partnership with time and attention when called to do so by the Partnership to assist the Partnership to succeed in its business endeavors (and by separate agreement Miller and Weston have agreed to provide such time and attention to the Partnership). For so long as Yoo is employed by the Partnership, the General Partner shall discuss with Yoo important decisions related to the Partnership. For so long as any of the Class A Limited Partners are employed by the Partnership and thereafter so long as they in aggregate own at least 15% of the Ownership Percentage Interest in the Partnership, one of them shall be elected to serve on the General Partner's board of directors. Furthermore, for so long as the Class A Limited Partners are employed by the Partnership, they shall hold the following Partnership titles and shall have such duties and authority as prescribed by the General Partner from time to time: Yoo - President/CEO, Condon - Chief Operating Officer, Elmendorf - Chief Technology 9 Evangelist. In addition, on or before April 1, 1998, the General Partner shall cause the Partnership to pay Yoo, Condon and Elmendorf a sufficient amount (net of taxes) to enable them to pay any federal income taxes accruing to them as shareholders of Cymitar, as a result of the Partnership's purchase of Cymitar's assets. The General Partner agrees to cause the Partnership to pay all rent and other costs and expenses associated with the lease agreement pertaining to the leasehold at 9828 Lorene Lane, San Antonio, Texas 78216, the Partnership agrees to indemnify Yoo from and against any liability associated with such lease. SECTION 3.5 LIABILITIES OF GENERAL PARTNER. In carrying out its duties hereunder, the General Partner shall not be liable to the Partnership or to any other Partner for any actions taken in good faith and reasonably believed to be in the best interests of the Partnership, or for errors in judgment, but shall only be liable for willful misconduct, gross negligence, or breach of its fiduciary obligations under this Agreement. SECTION 3.6 REPORTS. The General Partner shall maintain all of the financial records of the Partnership, in accordance with such generally accepted method as the General Partner deems most appropriate, and otherwise in accordance with generally accepted accounting principles consistently applied. Each of the Partners agree to furnish to the General Partner all cost, expense or other financial information which is necessary to keep such records. Within 120 days of the close of the Partnership's fiscal year, which shall correspond with the calendar year, the General Partner will give each Partner a financial statement for the preceding twelve (12) months, prepared at the expense of the Partnership by a firm of certified public accountants selected by the General Partner, which need not be audited. The General Partner will use its best efforts to give each Partner the information necessary for tax reporting purposes within ninety (90) days of the close of the fiscal year. SECTION 3.7 TAX RETURNS. The Partners intend for the Partnership to be treated as a partnership for tax purposes. The General Partner shall cause to be prepared, at the cost and expense of the Partnership, all federal, state and local income and other tax returns and statements, if any, which must be filed on behalf of the Partnership with any taxing authority. The General Partner shall timely file the returns on behalf of the Partnership. SECTION 3.8 TAX MATTERS PARTNER. The General Partner shall be the "tax matters partner" of the Partnership, within the meaning of Section 6231(a)(7) of the Code and any regulations issued thereunder, unless the Code, or the regulations issued thereunder, require another person to be the tax matters partner. Said tax matters partner is authorized and required to represent the Partnership (at the Partnership's expense) in connection with all examinations of the Partnership's affairs by tax authorities, including resulting administrative and judicial proceedings, and shall have the following duties and obligations: a. The tax matters partner shall have a continuing obligation to provide the Internal Revenue Service with sufficient information so that proper notice can be mailed to all Partners as provided in Section 6223 of the Code, and the Partners shall furnish the tax matters partner with such information (including information specified in Section 6230(e) of the Code) as the tax matters partner may reasonably request for such purpose. 10 b. The tax matters partner shall keep each Partner informed of all administrative and/or judicial proceedings for the adjustment of the partnership items (as defined in Section 6231(a)(3) of the Code and regulations promulgated thereunder) at the partnership level. Without limiting the generality of the foregoing sentence, within fifteen (15) days of receiving any written or oral notice of the time and place of a meeting or other proceeding from the Internal Revenue Service regarding a partnership proceeding (and in any event, within a reasonable time prior to such meeting or proceeding), the tax matters partner shall furnish a copy of such written communication or notice, or inform the Partners in writing of the substance of any such oral communication. This obligation of the tax matters partner to inform the Partners shall not extend to routine and minor events. c. If any administrative proceeding contemplated under Section 6223 of the Code has begun, the Partners shall, upon request by the tax matters partner, notify the tax matters partner of their treatment of any Partnership item on their federal income tax return which is or may be inconsistent with the treatment of that item on the Partnership's return. d. Any Partner that enters into a settlement agreement with the Secretary of the Treasury with respect to the partnership items shall notify the other Partners of such settlement agreement and its terms within thirty (30) days after the date of such settlement. e. If the tax matters partner elects not to file suit concerning an administrative adjustment or request for administrative adjustment and another Partner elects to file such a suit, such other Partner shall notify all Partners of such intention and the forum or forums in which such suit shall be filed shall be agreed to by all of the Partners. f. The tax matters partner shall have the authority to extend the statute of limitations, file a request for administrative adjustment, file suit concerning any tax refund or deficiency relating to any Partnership administrative adjustment or enter into any settlement agreement relating to any Partnership item of income, gain, loss, deduction or credit for any taxable year of the Partnership. g. Each Partner shall be entitled to participate in all administrative proceedings with the Internal Revenue Service, as provided by Code Section 6224(a). h. The obligations imposed on the tax matters partner and participation rights afforded the Partners by this Agreement and Sections 6221 through 6233 of the Code may not be restricted or limited in any fashion by the tax matters partner or any Partner or Partners without the written consent of all of the Partners. Each Partner agrees to cooperate with the tax matters partner and to do or refrain from doing any or all things reasonably required by said Partner to conduct such proceedings. In the event that said Partner, while acting as the "tax matters partner," ceases to be the General Partner for any reason, the remaining Partners shall immediately elect a substitute tax matters partner who shall be the "tax matters partner" of the Partnership. 11 SECTION 3.9 BANK ACCOUNTS. The General Partner shall establish one or more bank accounts in the name of the Partnership into which all funds of the Partnership shall be deposited. No other funds shall be deposited or commingled in these accounts. Partnership funds may be withdrawn from the accounts upon the signature of the General Partner, or its designee, for the purpose of paying the debts of the Partnership, reimbursing the General Partner for expenses incurred pursuant to Section 3.11, distributing Cash Available for Distribution to the Partners, or any other purpose authorized under this Agreement. SECTION 3.10 BOOKS AND RECORDS. The General Partner, on behalf of the Partnership, shall keep and maintain at the principal office of the Partnership the following records: a. List of Partners. A current list that states the name and mailing address of each Partner, the Ownership Percentage Interest in the Partnership owned by each Partner; the number of Units owned by Limited Partner b. Tax Returns. Copies of the Partnership's federal, state, and local information or income tax returns for each of the Partnership's six most recent tax years. c. Agreement. A copy of this Agreement and the Certificate of Limited Partnership; copies of any restatements of this Agreement; and executed copies of any powers of attorney under which this Agreement, the Certificate of Limited Partnership, and all amendments or restatements thereto have been executed. d. Books. Correct and complete books and records of account of the Partnership. Each of the Partners agree to furnish the General Partner all documents regarding costs and expenses and other financial information which are necessary to maintain such records. Any Partner (or their duly authorized representatives), on written request to the General Partner, stating the purpose, may examine and copy, at any reasonable time, for any proper purpose, and at the Partner's expense, these records and other information kept by the General Partner on behalf of the Partnership. However, under no circumstances shall the Partnership or the General Partner have the obligation to provide information regarding the Partnership to any Limited Partner, except to the extent that such information is requested for a proper purpose and the General Partner determines that the disclosure of such information will not harm the Partnership. The above notwithstanding, if a Class A Limited Partner is no longer employed by the Partnership, then he (and any transferee or assignee of such Class A Limited Partner) shall lose his rights to review the books of the Partnership, to receive any reports from the Partnership and any other right of a Limited Partner other than the right to receive the distributions and allocations from the Partnership at such times as those distributions and allocations may be made by the Partnership. However, at the Class A Limited Partner's sole cost and expense, at the request of such Class A Limited Partner, the Partnership shall have the books and records of the Partnership audited to determine whether or not the Partnership has properly made distributions and allocations to such Class A Limited Partner. If the audit 12 determines that such distributions and allocations have been improperly made, and such discrepancy is at least a 5% difference between the proper allocation or distribution, and the allocation or distribution made by the General Partner, then the Partnership shall pay the cost of the audit. SECTION 3.11 REIMBURSEMENT OF GENERAL PARTNER. The General Partner is entitled to be reimbursed for reasonable out-of-pocket costs and expenses incurred by the General Partner on behalf of the Partnership; provided that if any costs and expenses are incurred to reimburse any Related Party of the General Partner, Miller, Weston or Trout, the transaction giving rise to such reimbursement shall have been made on terms no less favorable to the Partnership than could be reasonably expected to be obtained from a third party. Without the approval of the Class A Limited Partners, the General Partner will not be reimbursed for any of its overhead costs and expenses. ARTICLE 4. RIGHTS, PROHIBITIONS, AND LIABILITIES OF LIMITED PARTNERS SECTION 4.1 RIGHTS OF LIMITED PARTNERS. The Limited Partners shall be entitled to the rights provided by the Act, as the same may be lawfully modified by the terms of this Agreement. SECTION 4.2 PROHIBITIONS WITH RESPECT TO LIMITED PARTNERS. The Limited Partners shall not have the right to: a. Participate in the control of the business affairs of the Partnership except as expressly provided herein; transact any business on behalf of or in the name of the Partnership; or have any power or authority to bind or obligate the Partnership; b. Have their original investments, if any, repaid (i) until the Partnership is dissolved, all Partnership liabilities have been paid or funds have been set aside therefor, and compliance with the provisions for dissolution hereunder cause such repayment, or (ii) unless the terms of the Act, as the same may be lawfully modified by the terms of this Agreement, are complied with and the same require such repayment, except that distributions authorized by Section 7.2 hereof shall be made from time to time and may in some cases represent a return of a Limited Partners' original investment; or c. Sell or assign any of such Limited Partner's interest in the Partnership, except as expressly provided herein. SECTION 4.3 LIABILITIES OF LIMITED PARTNERS. A Limited Partner shall not be personally liable for any amounts other than the amounts subscribed by such Limited Partner to the capital of the Partnership, and shall not be liable for any debts, obligations or losses of the Partnership or of the General Partner. 13 SECTION 4.4 DEFICIT CAPITAL ACCOUNTS. The Limited Partners shall not be obligated to restore the amount of any deficit balance in their respective Capital Accounts, as such term is hereinafter defined, upon the liquidation of their interest in the Partnership or upon the liquidation of the Partnership itself. SECTION 4.5 LOANS TO THE PARTNERSHIP. Trout agrees to cause the Partnership to be lent up to $1,050,000.00, $550,000.00 of which is non-discretionary as further described below and $500,000.00 of which shall be to fund positive circumstances; provided that Trout, in its sole discretion determines that such $500,000.00 is needed by the Partnership and that such loan can be prudently made by the lender. Such loan or loans will bear interest at the annual rate of 8% interest compounded annually. No payments of principle or interest will be due for the first three years from the date funds are first advanced. Beginning in the fourth year monthly payments of principal and interest will be due and payable based upon an amortization of the principle and accrued interest (as of the end of the third year) over the following five years. Such loan or loans will be fully secured by the assets of the Partnership. The loan or loans may be prepaid at anytime by the Partnership without penalty. Upon the execution of this Agreement, not less than $150,000.00 will be advanced to the Partnership by Exeter Financial, LC pursuant to this Section 4.5. Within six months of the execution of this Agreement, Trout will cause Exeter Financial LC to advance an additional advance of $400,000.00 to the Partnership. These two initial advances shall not be subject to Trout's discretion. Any guaranty by Trout of the Partnership's debts and obligations shall be treated as an advance under this paragraph, provided that no interest shall be paid to Trout in respect of the guaranteed amount unless Trout is forced to pay on the guaranty. SECTION 4.6 LIFE INSURANCE. The Partnership will purchase a key-man policy in the amount of $1,250,000 for Yoo. The policy shall be structured to require, that upon the death of Yoo, Trout is paid $200,000 of the proceeds, the Partnership's lender (as referenced in Section 4.5) receives the remaining proceeds up to the amount owing under its loan to the Partnership (and such amount will fully discharge such loan as well as any obligation of Trout to cause additional funds to be loaned to the Partnership pursuant to Section 4.5 above), and any remainder is paid to the Partnership. SECTION 4.7 LOCATION FOR SERVERS. Trout agrees to use its reasonable best efforts to secure a location for the Partnership's data center and offices at favorable rent. ARTICLE 5. OWNERSHIP PERCENTAGE INTERESTS AND CAPITAL CONTRIBUTIONS SECTION 5.1 PARTNER'S OWNERSHIP PERCENTAGE INTERESTS. a. Upon the creation of the Partnership, the Ownership Percentage Interest of the General Partner shall be .1 percent (.1%), represented by 1,000 Units. 14 b. Upon the creation of the Partnership, the Ownership Percentage Interest of Trout will be 50.90% represented by 509,000 Units. c. Upon the creation of the Partnership, the Ownership Percentage Interest of Yoo, Condon and Elmendorf shall be Yoo - 37% represented by 370,000 Units, Condon - 8% represented by 80,000 Units, Elmendorf - 4% represented by 40,000 Units. d. One Million Units will be issued incident to the creation of the Partnership. However, a total of Ten Million Units may be issued by the General Partner to Additional Limited Partners in accordance with the terms of this Agreement. In the event Additional Limited Partners are admitted to the Partnership in accordance with the terms of this Agreement, the Ownership Percentage Interests of each Partner shall be adjusted pro rata, and the Ownership Percentage Interests of such Additional Limited Partner(s) shall be established by the General Partner, as provided herein. The General Partner's rights hereunder are not intended to reduce the General Partner's fiduciary duty to the Limited Partners. SECTION 5.2 CAPITAL CONTRIBUTIONS. a. The General Partner is not required to make any contribution of capital to the Partnership except as otherwise provided in this Agreement. b. Trout is required to make an initial capital contribution in the amount of $200,000 upon the execution of this Agreement. No other Partner is required to make any capital contribution to the Partnership, except to the extent required by the General Partner for Additional Limited Partners. SECTION 5.3 ADDITIONAL CAPITAL. The Partners shall not be obligated to contribute additional capital to the Partnership beyond their initial Capital Contributions (to the extent required) nor shall the Partners be obligated to guarantee any debt or obligation of the Partnership, except as otherwise set forth in this Agreement. SECTION 5.4 ESTABLISHMENT OF CAPITAL ACCOUNTS. An individual Capital Account shall be established for each Partner, which account shall be credited with the amounts of each Partner's Capital Contributions to the Partnership from time to time. A Partner shall not be entitled to interest on his or its Capital Contribution, or to withdraw any part of his or its Capital Account, or to receive any distribution from the Partnership, except as specifically provided herein. 15 ARTICLE 6. ALLOCATIONS OF INCOME, GAIN AND LOSS SECTION 6.1 ALLOCATION OF PARTNERSHIP NET INCOME AND GAIN. All Partnership net income and gain for each tax year of the Partnership will be allocated as follows: FIRST: LOSS RECAPTURE ALLOCATION. To the Limited Partners in an amount equal to the cumulated amount of any Specially Allocated Losses. SECOND: REGULAR ALLOCATION. The remainder, to all the Partners in accordance with their Ownership Percentage Interests in the Partnership. SECTION 6.2 ALLOCATION OF PARTNERSHIP LOSSES. All Partnership losses shall be allocated among the Partners in accordance with their Ownership Percentage Interests in the Partnership until the Capital Accounts of all Limited Partners other than Trout, are reduced to zero (the "Regular Loss Allocation"). To the extent that the Capital Account balances of all the Limited Partners other than Trout are zero, any additional losses (the "Specially Allocated Losses") will be allocated to Trout (and its assigns). SECTION 6.3 SPECIAL TAX ALLOCATIONS. Notwithstanding anything to the contrary in this Agreement, the Partnership shall make the following tax allocations if so required by the Code or Regulations: SECTION 704(C) PROVISIONS. Upon the sale of the Partnership property contributed by a Partner (or any property received in exchange for such property), the resulting gain or loss shall be allocated to that Partner and/or to any transferee of any interest in the Partnership from such Partner for income tax purposes as provided in Section 704(c) of the Code and applicable Regulations. QUALIFIED INCOME OFFSET. Any Partner who unexpectedly receives an adjustment, allocation, or distribution described in subparagraphs (4), (5) or (6) of Treas. Reg. Section 1.704-1(b)(2)(ii)(d), which adjustment, allocation or distribution creates or increases a deficit balance in that Partner's Capital Account, shall be allocated items of book income and gain in an amount and manner sufficient to eliminate the deficit balance in that Partner's Capital Account so created or increased as quickly as possible in accordance with Treas. Reg. Section 1.704-1(b) (2)(ii)(d) and its requirements for a "qualified income offset." MINIMUM GAIN CHARGEBACK. If Regulations relating to Section 704(b) of the Code require a Minimum Gain Chargeback to cause the allocations under Section 3.1 of this Agreement to have substantial economic effect, the tax 16 allocations described in Section 3.1 shall be adjusted to accommodate the necessary Minimum Gain Chargeback. ARTICLE 7. DISTRIBUTIONS SECTION 7.1 GENERAL. The General Partner shall cause the Partnership to distribute cash for Tax Distributions to the Partners on an annual basis. However, to the extent the Partnership incurs losses, no Tax Distributions will be made until the cumulated net income and gain of the Partnership exceeds the cumulated amount of such losses. Otherwise, the Partnership will only distribute cash to the extent that the General Partner determines that such cash is not needed for Partnership operations and expansion, working capital and contingencies ("Cash Available for Distribution"). SECTION 7.2 DISTRIBUTION OF CASH AVAILABLE FOR DISTRIBUTION. To the extent that Tax Distributions or distributions of Cash Available for Distribution are made by the Partnership, such distributions shall be made as follows: FIRST: TAX DISTRIBUTIONS. Tax Distributions shall be made to the Partners in an amount equal to the amount of any federal income tax estimated by the General Partner to be incurred by the Partners (such estimate to be made on the assumption that all of the Partners will be taxed at the highest marginal tax rate applicable to individuals, which is currently 39.59%) on their allocable share of any net income or gain from the Partnership which is recognized for federal income tax purposes during the prior year and not otherwise distributed to the Partners. However, to the extent the Partnership incurs losses, no Tax Distributions will be made until the cumulated net income and gain of the Partnership exceeds the cumulated amount of such losses. Tax Distributions shall be made not later than February 28th of each year. SECOND: REGULAR DISTRIBUTIONS. Regular Distributions of the remaining Cash Available for Distribution shall be made to all the Partners in accordance with their Capital Accounts. ARTICLE 8. DISPOSITION OF UNITS SECTION 8.1 REPURCHASE OF CLASS A LIMITED PARTNERS' UNITS BY PARTNERSHIP. As set forth below and subject to the limitations set forth herein, the Partnership will have the right to purchase all or a portion (as described in more detail below) of Condon and 17 Elmendorf's Units (and they shall have the obligation to sell such Units) in the event that either of them are no longer employed by the Partnership, whether as a result of death, resignation, termination for cause, termination without cause, disability or otherwise; provided that the triggering event (end of employment) occurs prior to the end of the four year employment term (as set forth in the employment agreement between each of Condon and Elmendorf and the Partnership (the "Employment Agreements")). Notwithstanding the foregoing, the Partnership will not have the right to purchase Elmendorf's and Condon's Units under this Section 8.1 if the termination of their employment occurs on or after January 1, 2003. To the extent that: (i) the right to purchase arises prior to January 1, 2001 and arises out of the resignation or termination for "cause" (as defined in the Employment Agreements), the purchase price for Condon or Elmendorf's Units will be the book value of the Units, (ii) the right to purchase arises at any time and arises out of the termination of employment without "cause" (as defined in the Employment Agreements) the purchase price will be the greater of the fair market value (with no minority ownership or control discount applied) for the Units being sold (determined by an independent appraiser, who is either (a) selected by the mutual agreement of the Partner whose Units are being repurchased and the Partnership, (b) a "big six" accounting firm selected by the Partnership (provided such accounting firm is not utilized by the Partnership, the General Partner, Weston or Miller or any Related Party of the foregoing), or, (c) a third party independent appraiser designated by a "big six" accounting firm selected by the Partnership (provided such accounting firm is not utilized by the Partnership, the General Partner, Weston or Miller or any Related Party of the foregoing)), or the amount of the respective annual salaries of Elmendorf or Condon, as to Units sold by each of them, respectively, (iii) the right to purchase arises under any other event, the purchase price will be the fair market value for the Units being sold (with no minority ownership or control discount applied), as determined by an independent appraiser selected in accordance with the provision set forth above. Payment for the Units shall be 20% in cash and the remainder paid pursuant to a promissory note bearing interest at the rate of 8%, fully amortized over four years. However, in the event that the purchase arises out of the termination without "cause", 30% will be paid in cash and the balance will be paid over three years on the other terms described in the preceding sentence. The Partnership's right to purchase all of Condon's and Elmendorf's Units in the event that their employment ends prior to January 1, 2003 is limited by the following: (A) If (i) Condon or Elmendorf, as the case may be, provides the Partnership with 45 days prior written notice of his election to resign and such resignation takes place on or after January 1, 2001, or (ii) prior to January 1, 2001, Condon or Elmendorf dies, becomes disabled, or is terminated by the Partnership without cause, Elmendorf or Condon, as the case may be, may elect to retain up to fifty percent (50%)of his Units, (B) To the extent that the termination of employment occurs after January 1, 2001, Condon or Elmendorf, as the case may be, may elect to retain that percentage of his Units which is determined by dividing the number of months that Condon or Elmendorf, as the case may be, is employed by the Partnership from January 1,1999, by 48. The Partnership shall have the exact same rights with respect to Yoo and Yoo shall have the exact same obligations as set forth above, except that if prior to January 1, 2002, Yoo is terminated for "cause" (as defined in the Employment Agreement between the Partnership and Yoo) or Yoo resigns prior to January 1, 2002 (or Yoo otherwise resigns at anytime without giving 45 days prior written notice), the Partnership will have the right to purchase 18 all of his Units at book value, and if Yoo is terminated without "cause" (as defined in the Employment Agreement), the purchase price for his Units will be the greater of the fair market value (as determined by an independent appraiser selected in the method described above and with no minority ownership or control discount applied) of his Units being sold or an amount equal to 1.5 multiplied by Yoo's annual salary in effect immediately prior to then end of his employment. With respect to Condon and Elmendorf, the Partnership, to the extent it desires to exercise its right to purchase their Units, must purchase all of the Units which are subject to the right of purchase. With respect to Yoo, the Partnership, to the extent that it desires to exercise its right to purchase his Units, may purchase less than all of the Units which are subject to the right of purchase. However, the Partnership may not elect to leave Yoo with a de minimis number of Units. The book value and fair market value of Units subject to sale to the Partnership, shall be determined as of the end of the last fiscal quarter of the Partnership immediately prior to the end of employment, provided that the appraiser shall be entitled to take into consideration any events occurring after the last fiscal quarter which may have a material effect on the fair market value of the Units, including the departure of any key employee. The above notwithstanding, in the event of a merger or other business combination, sale of all or substantially all of the Partnership's assets or in the event that the Partnership (or a successor entity created for the purpose of making a public offering) completes a public offering underwritten by a nationally recognized underwriter and raises more than $10,000,000.00 for the Partnership (or the successor entity), all the rights of the Partnership to repurchase the Yoo's Elmendorf's and Condon's Units shall automatically terminate. In order to clarify the rights of the Partnership described in this Section 8.1, Exhibit B is attached hereto to outline the rights and obligations of the parties. SECTION 8.2 PROHIBITED DISPOSITIONS. Elmendorf, Yoo and Condon (collectively, the "Class A Partners") shall not make any sale, transfer, pledge, assignment or other disposition of any of their Units which may be purchased by the Partnership pursuant to the Partnership's rights under Section 8.1 above. Therefore, as to each Class A Limited Partner, for so long as the Partnership has the right to acquire any of such Class A Partners' Units in the event that he is no longer employed by the Partnership, no disposition of those Units which may be acquired by the Partnership may be made by such Class A Partner. In any circumstances where the prior two sentences do not restrict the transfer of the Units owned by the Class A Partners, no Limited Partner (including any assignee of a Limited Partner) other than Trout may propose to make any sale, transfer, pledge, assignment or other disposition of all or any part of their Units or other Limited Partnership interests (such interests referred to as the "Units Offered for Sale") except in exchange for cash or a combination of cash and promissory notes. Prior to making such disposition, the Class A Limited Partner (the "Selling Partner") shall first offer his or her Units Offered for Sale to Trout under the same terms and conditions as the proposed sale (the "Terms of Sale"). Such offer shall be in writing and delivered to Trout, along with the name of the proposed purchaser of the Units Offered for Sale. The Selling Partner shall provide to Trout all information regarding the proposed sale and the proposed purchaser, as may be reasonably requested by Trout. Trout shall have four business (4) days from the receipt of such written offer to (i) elect in writing to purchase all of such Units Offered for Sale, and (ii) make available to the Selling Partner at the offices of the General Partner, an amount equal to ten 19 (10%) percent of the purchase price of the Units Offered for Sale as a non-refundable deposit. Payment for the Units Offered for Sale shall be made in accordance with the Terms of Sale. If Trout does not elect to purchase all the Units Offered for Sale, the Selling Partner shall be free to sell all, but not less than all of such Units Offered for Sale for a period of sixty (60) days after the expiration of the Trout's option, provided that any such sale must be made under the same terms and conditions as the Terms of Sale and to the proposed purchaser named in the Terms of Sale. The Selling Partner shall provide all information relating to the transferee of the Units Offered for Sale which is reasonably requested by the General Partner. Trout and Macroweb may not propose to make any sale, transfer (which shall include a merger, statutory exchange, consolidation of either Trout or Macroweb), pledge, assignment or other disposition of all or any part of their Units or other interests in the Partnership (such interests desired to be sold, transferred, pledged or assigned are referred to as the "Controlling Units offered for Sale") except by sale of cash or a combination of cash and promissory notes. Prior to making such disposition, Trout or Macroweb, as the case may be, shall first offer the Controlling Units Offered for Sale to the Class A Limited Partners, in proportion to their Ownership Interests in the Partnership under the same terms and conditions as the proposed sale (the "Terms of Sale"). Trout and/or Macroweb shall provide to the Class A Limited Partners all available information regarding the proposed sale and the proposed purchaser, as may be reasonably requested by the Class A Limited Partners. The Class A Limited Partners shall have four (4) business days from the receipt of such written offer to (i) elect in writing to purchase all of the Controlling Units Offered for Sale (in proportion to their Ownership Interests in the Partnership, or in whatever other proportion they may otherwise agree), and (ii) make available to Trout and Macroweb at the offices of the General Partner, an amount equal to ten (10%) percent of the purchase price of the Controlling Units Offered for Sale as a non-refundable deposit; provided that, in lieu of such deposit, the Class A Limited Partners may pledge (under a pledge agreement acceptable to Trout or Macroweb, as the case may be) their Units as security for their obligation to pay an amount equal to 10% of the purchase price of the Controlling Units Offered for Sale as a non-refundable deposit. Payment for the Controlling Units Offered for Sale shall be made in accordance with the Terms of Sale. In addition, to the extent that the Terms of Sale require a note or notes, the Class A Limited Partners, to the extent they desire to purchase all of the Controlling Units Offered for Sale, shall be required to demonstrate that they have at least the same credit worthiness as the proposed purchaser. If the Class A Limited Partners do not elect to purchase all of the Controlling Units Offered for Sale or cannot demonstrate the same credit worthiness as the proposed purchaser under Terms of Sale which include a note or notes, Trout and/or Macroweb, as the case may be, shall be free to sell all the Controlling Units Offered for Sale for a period of sixty (60) days after the expiration of the Class A Limited Partners' option, provided that any such sale must be made under the same terms and conditions as the Terms of Sale. Trout shall provide all information relating to the transferee of the Controlling Units Offered for Sale which is reasonably requested by the General Partner. Except as specifically allowed under this Agreement, no Limited Partner may sell, assign, transfer, mortgage, encumber, hypothecate, pledge or otherwise dispose of all or any part of such Limited Partner's interests in the Partnership and any attempt to take such action and any purported separate sale, transfer, assignment, mortgage, encumbrance, hypothecation, pledge, or other disposition by any Limited Partner shall be void. In the event of any sale, transfer, 20 assignment or other disposition which is not made in accordance with this Agreement, and without herein recognizing such as being permitted or valid, the Limited Partner making the same shall remain and continue to be liable for the performance of all of its obligations hereunder and the Partnership shall continue to make any distributions, if any, to said Limited Partner. All subsequent owners of any Units, or other Limited Partnership interests hereunder shall hold same subject to all the terms and provisions hereof. To the extent that the provisions of this Section 8.2 and the other provisions of this Agreement are followed incident to any sale of Units, the transferee of such Units shall become a Substitute Limited Partner of the Partnership with the written consent of the General Partner, which consent shall not be withheld or delayed. With respect to any transfer of all of the Units and interests in the Partnership held by Macroweb, the transferee shall become the substitute General Partner of the Partnership, provided that the provisions of this Section 8.2 and all other provisions of this Agreement are followed incident to the sale of such Units and interests. SECTION 8.3 TRANSFERS TO A FAMILY MEMBER. Any Limited Partner shall be permitted to transfer his or her Units or other Limited Partnership interests to a Family Member or a trust established for the benefit of a Family Member ("Trust") without subjecting such Units to the right of first refusal contained in Section 8.2 above, provided that written notice of such transfer is provided to the General Partner at least thirty (30) days prior to the transfer. However, no such Family Member or Trust shall become a Substitute Limited Partner without the express written consent of the General Partner and the Approval of the Class A Limited Partners, which consent may be arbitrarily withheld. It is expressly agreed that Trout may transfer its Units to Miller, Weston or any of their Family Members or a trust established for the benefit of a Family Member. SECTION 8.4 TRANSFER OF UNITS. Each Partner affirms that he/she/it has purchased and now holds his, her or its Units for his, her or its own account, solely for investment and not with any intention of distributing, dividing, or reselling the same. In addition to other restrictions on transfer contained in this Agreement, the Units and any other Limited Partnership interests may be assigned, pledged, or subjected to a security interest (collectively referred to as "disposition") only if: a. Such disposition is consistent with such affirmation; b. The transferee of such disposition is not a competitor of the Partnership; c. Except with respect to a transfer to a Family Member or a trust established for the benefit of a Family Member, such Partner has first offered to sell the Units or other Limited Partnership interests in accordance with Section 8.2 above; and d. The following conditions to such disposition have been met, unless such conditions have been waived in writing by the General Partner in its sole discretion which discretion, may be arbitrarily exercised: 21 (i) the transferee has delivered an instrument reasonably satisfactory to the General Partner which accepts and adopts the terms and provisions of this Agreement, including the assumption of all obligations of the transferor to the Partnership and an agreement to be subject to all transfer restrictions applicable to his/her or its transferor; (ii) the transferor has delivered to the General Partner an opinion of counsel, who is reasonably satisfactory to the General Partner, in form and substance satisfactory to counsel designated by the General Partner to the effect that the tax status of the Partnership will not be adversely affected by the transfer; (iii) the transferor has delivered to the General Partner an opinion of counsel, who is reasonably satisfactory to the General Partner, in form and substance satisfactory to counsel designated by the General Partner to the effect that neither the assignment nor any offering in connection therewith violates any provision of any federal or state securities or comparable law; (iv) the General Partner has determined that the transfer would not cause a termination of the Partnership within the meaning of Section 708(b) of the Code; and (v) the transferor pays for all expenses incurred by the Partnership in connection with such disposition. It is further expressly provided herein that the Partners shall not make any transfer, assignment, lease, or gift of any interest in the Partnership to a "tax exempt entity" as that term is defined in the Code which would cause such tax exempt entity to become directly or indirectly a Partner in the Partnership. Any such transfer to such a tax exempt entity shall be void. SECTION 8.5 PARALLEL EXIT. No Partner (including any transferee or assignee)or any Family Member or trust established for the benefit of a Family Member which has received Units from a Partner (a "Transferee"), may sell any of their Units without first offering to all of the Limited Partners (including any Additional Limited Partners), the right to participate in such transfer, on a pro rata basis, on the same terms and conditions as the proposed sale by the Partner or Transferee seeking to transfer Units. Before making any sale the Partner or any Transferee shall provide each of the other Limited Partners and any Additional Limited Partners with written notice of the date and terms of the proposed sale and each of the other Limited Partners and the Additional Limited Partners shall each have the right to sell his or her Units or other Limited Partnership interests pursuant to such sale in an amount equal to the Units subject to purchase, multiplied by a fraction, the numerator of which shall be the Ownership Percentage Interests held by such Limited Partner or Additional Limited Partner, as the case may be, and the denominator of which is the total amount of the Ownership Percentage Interests held by all the Partners electing to participate in such sale. Any Limited 22 Partner or Additional Limited Partner who elects to participate in such sale, shall be required to irrevocably make its election within four business days of receipt of written notice from the Limited Partner or Transferee. Notwithstanding the foregoing, any purchase of less than all of the Units elected to be sold as provided above, shall be made from all parties participating in the sale, pro rata, based on the number of Units to be sold by each. The provisions of this Section 8.5 will not apply to any involuntary sale of Units, such as a sale under the terms of a pledge or security agreement, nor does this provision apply to any transfer to a Family Member of a Limited Partner or a trust established for the benefit of a Family Member of a Limited Partner. SECTION 8.6 STATUS OF TRANSFEREE. The transfer by a Limited Partner of his/her or its Units, or other Limited Partnership interests shall not constitute the person acquiring such Units, or other Limited Partnership interests, to become a Substitute Limited Partner, except with the express written consent of the General Partner. Such consent may not be withheld if all of the requirements for transfer which are set forth herein have been met. No such substitution shall become effective until such transferee and all of the Partners, (either individually or through their agent or attorney in fact, including the General Partner as such attorney-in-fact) execute all amendments, certificates and other documents and perform all acts relating to such substitution which the General Partner deems appropriate to comply with applicable requirements of law so as to preserve the limited liability status of the Partnership upon the completion of such substitution under the laws of the jurisdictions in which the Partnership is doing business. Without in any way limiting the power of attorney contained in Article 12, each Partner agrees upon request of the General Partner to execute such amendments, certificates or other documents and perform such acts. SECTION 8.7 EFFECTIVE TIME OF TRANSFER. A purported transfer of a Unit(s), or any other Limited Partnership interest shall be valid as to the Partnership and the General Partner on the first day of the month following the month in which the foregoing conditions have been met (whereupon the General Partner shall cause the name of the transferee to be registered as the holder of such Unit or Units upon the records maintained for that purpose as provided in Section 3.12). SECTION 8.8 SUBDIVIDED UNITS PROHIBITED. Without the written consent of the General Partner, which may be arbitrarily withheld, Limited Partners shall not be permitted to sell, transfer, assign, convey, give, donate or bequeath a fractional part of a Unit, or other fractional part of a Limited Partnership interest, except to the extent such fractional part was issued as such upon the formation of the Partnership. SECTION 8.9 TRANSFER TO BELL AND GRUBBS. Notwithstanding anything herein to the contrary, Yoo is specifically authorized to transfer and assign 5000 Units to Brian Bell and 5000 Units to Edwin Grubbs, and Yoo agrees to make such assignment as soon as practicable after the execution of this Agreement. The General Partner specifically consents to such alignment and such assignment shall not be subject to the rights of first refusal contained in Section 8.2; however, the parties shall be required to comply with the requirements of Section 8.3. Brian Bell and Edwin Grubbs shall be assignees only and shall not become Substitute 23 Limited Partners. ARTICLE 9. ADDITIONAL LIMITED PARTNERS SECTION 9.1 ADMISSION OF NEW PARTNERS. In order to raise additional capital for the Partnership, the General Partner is authorized to admit Additional Limited Partners and to sell additional Units and other Limited Partnership interests in the Partnership, under such terms and conditions as may be negotiated by the General Partner in an arms-length transaction consistent with the General Partner's fiduciary duty to the Partnership. However, unless and until at least $1,050,000 has been loaned to the Partnership pursuant to Trout's obligations under Section 4.5 above (i) neither Trout, Macroweb, Miller, Weston or any of their Related Parties may be sold additional Units and other Limited Partnership interests in the Partnership, and (ii) no sale of the Partnership's Units will be made without the Approval of the Class A Limited Partners. Incident to admitting Additional Limited Partners and notwithstanding anything in this Agreement to the contrary, the terms of this Agreement may be amended by the General Partner without the consent of the Limited Partners in order to provide for the rights and duties of such Additional Limited Partners. In the event Additional Limited Partners are admitted to the Partnership by the General Partner, the Ownership Percentage Interests of each existing Partner shall be adjusted on a pro rata basis and the Ownership Percentage Interests of such Additional Limited Partner shall be established by the General Partner. SECTION 9.2 PREEMPTIVE RIGHTS. To the extent that the General Partner proposes to sell additional Units or other Limited Partnership interests or securities exercisable for or convertible into such Units or other Limited Partnership Interests as permitted in Section 9.1 above for cash, the General Partner shall first offer such Limited Partnership interests to all the Partners and each Partner shall be entitled to purchase an amount of such Limited Partnership interests in proportion to the Ownership Percentage Interest of each Partner. Upon receipt of the offer, to the extent that any of the Limited Partners desire to accept the offer they must, within four business days of receipt of the offer, (i) notify the General Partner in writing of acceptance, and (ii) deposit 10% of the purchase price with the Partnership. SECTION 9.3 INTERESTS GRANTED TO KEY PERSONNEL. In order to attract qualified personnel or to reward personnel (collectively, "Key Personnel') for their efforts, the General Partner has the right to grant Units and Limited Partnership interests and options to acquire Units and Limited Partnership interests to such persons in exchange for their future services. The grant of such Limited Partnership interests shall not be subject to the preemptive rights provided for in Section 9.2 above. Incident to granting any such Limited Partnership interests and notwithstanding anything in this Agreement to the contrary, the terms of this Agreement may be amended by the General Partner without the consent of the Limited Partners in order to provide for the rights and duties of such additional Limited Partners. In the event such Additional Limited Partners are admitted to the Partnership by the General Partner, the Ownership Percentage Interests of each existing Partner shall be adjusted on a pro rata basis 24 and the Ownership Percentage Interests of such Additional Limited Partners shall be established by the General Partner. The above notwithstanding, unless the Approval of the Class A Limited Partners is obtained, the General Partner shall not, in any calendar year of the Partnership, grant to Key Personnel Units, Limited Partnership interests or options to acquire the same, to the extent that the aggregate amount of such Units, Limited Partnership interests and options to acquire the same, constitute more than 10% of the outstanding Units of the Partnership at the beginning of such calendar year. ARTICLE 10. TERMINATION, DEATH, BANKRUPTCY SECTION 10.1 TERMINATION OF AGREEMENT. Upon dissolution of the Partnership and termination of this Agreement, the General Partner or the liquidator, as the case may be, shall promptly liquidate the affairs of the Partnership by discharging all debts and liabilities of the Partnership and by distributing all remaining assets in cash or in kind, or partly in cash and partly in kind, in accordance with Sections 11.2 and 11.3 hereof. SECTION 10.2 NO RECOURSE. Upon liquidation and termination of the Partnership, each Limited Partner shall look solely to the assets of the Partnership for the return of his investment, and such Limited Partner shall have no recourse or further right or claim in connection therewith against the General Partner or any other Limited Partner. In winding up the affairs of the Partnership and distributing its assets, the General Partner or liquidator, as the case may be, shall set up a reserve to meet any contingent or unforeseen liabilities or obligations and deposit funds for such purpose, together with funds held by the Partnership for distribution to Partners which remain unclaimed after a reasonable period of time, with an escrow agent for the purpose of disbursing such reserves and funds. The General Partner or liquidator, as the case may be, shall have sole discretion in establishing and maintaining such reserves and the amount thereof. The escrow agent is authorized and directed at the expiration of such period as the liquidator shall deem advisable, to distribute the balance thereafter remaining in the manner provided in Article 11. SECTION 10.3 DEATH, INCAPACITY OR BANKRUPTCY. The death, legal incapacity or bankruptcy of a Limited Partner (or, in the case of a Limited Partner that is a partnership, joint venture, association, corporation or trust, in its insolvency, dissolution or bankruptcy) shall not dissolve nor terminate the Partnership. In such event, the personal representative, guardian or other successor in interest of such Limited Partner shall have the rights of a Limited Partner for the sole purpose of settling the estate of such Limited Partner and may sell or transfer the Unit(s) of such Limited Partner only pursuant to the provisions of Article 8. 25 ARTICLE 11. DISSOLUTION AND WINDING UP SECTION 11.1 DISSOLUTION. The Partnership shall be dissolved only upon the happening of any of the following events: a. The expiration of the term of the Partnership set forth in Section 2.5 hereof; b. Any disposition by the Partnership of all or substantially all of its assets; c. The General Partner elects to dissolve (provided such election takes place after January 1, 2001); or d. The withdrawal, termination (by the filing of articles of dissolution of the General Partnership if it is a limited liability company) or bankruptcy of the General Partner, unless the Partnership is continued pursuant to the written consent of the Limited Partners owning at least 15% of the Ownership Percentage Interests of all the Partners. Upon dissolution, the General Partner or liquidator, as the case may be, shall proceed with reasonable promptness to liquidate the business of the Partnership. The Partners shall share in the profits and losses of the business during the period of liquidation pursuant to the provisions of Article 6. SECTION 11.2 DISTRIBUTION UPON LIQUIDATION. Upon dissolution and termination of the Partnership, any proceeds of liquidation shall be applied in the following order of priority and according to the following procedures: a. To pay debts and liabilities of the Partnership (including loans or advances by the Partners) not otherwise adequately provided for by reserves held by the Partnership, and the expenses of liquidation; b. To set up reasonable reserves for any remaining contingent or unforeseen liabilities of the Partnership not otherwise provided for, to be maintained in a regular trust fund account for a reasonable period of time and if any excess funds thereafter remain, then to be distributed pursuant to this Section 11.2; c. After giving effect to all contributions and all prior distributions, and after all Net Income, Net Loss and other items have been allocated in accordance with Article 6, to the Partners in accordance with and to the extent of their respective positive Capital Accounts; and 26 d. Liquidating distributions shall then be made to and among the Partners based upon their distribution rights provided for in Section 7.2. PURSUANT TO SECTION 4.4 HEREOF, IF ANY PARTNER HAS A DEFICIT BALANCE IN THE PARTNER'S CAPITAL ACCOUNT FOLLOWING LIQUIDATION OF THE PARTNER'S INTEREST AS DETERMINED AFTER TAKING INTO ACCOUNT ALL CAPITAL ACCOUNT ADJUSTMENTS FOR THE PARTNERSHIP'S TAXABLE YEAR IN WHICH SUCH LIQUIDATION OCCURS, SAID PARTNER SHALL NOT BE OBLIGATED TO RESTORE THE AMOUNT OF SUCH DEFICIT BALANCE TO THE PARTNERSHIP. It is the express intention of the Partners to override the holding of PARK CITIES CORPORATION V. BYRD, 534 S.W.2d 668 (Tex. 1976), as contemplated herein, and to satisfy the economic effect requirements of Subchapter K of the Code by the use of the qualified income offset provided in Section 6.3 hereof. SECTION 11.3 LIQUIDATION. The General Partner shall act as liquidator, except in the event of the withdrawal, dissolution or bankruptcy of the General Partner, in which case a Majority in Interest of the Limited Partners shall appoint one or more liquidators. A reasonable time shall be allowed for the orderly liquidation of the assets of the Partnership and the discharge of liabilities to creditors so as to enable the liquidator to minimize the normal losses attendant upon the liquidation. Each of the Partners shall be furnished with a statement which shall set forth the assets and liabilities of the Partnership as of the date of complete liquidation. SECTION 11.4 GAINS OR LOSSES IN PROCESS OF LIQUIDATION. Any property distributed in kind in liquidation shall be treated as though the property were sold at its fair market value and the cash proceeds were distributed. The difference between the value of the property distributed in kind and its book value shall be treated as a gain or loss on sale of the property and shall be credited to or charged against the interest of the Partners in the proportions set forth in Article 6. In the event there is Partnership property which has not been sold and the undivided interests distributed to the respective Partners, such property will be distributed subject to such liens, encumbrances, restrictions, contracts, obligations, commitments or undertakings as existed with respect to such property at the time acquired by the Partnership or were subsequently created or entered into by the Partnership, and otherwise not released or terminated. ARTICLE 12. POWER OF ATTORNEY SECTION 12.1 APPOINTMENT OF GENERAL PARTNER. By execution hereof, the Limited Partners, irrevocably constitutes and appoints the General Partner as each such Limited Partner's true and lawful attorney-in-fact and agent with full power and authority to act in his, her or its name and place in executing, filing and recording (i) any documents or statements required to change the registered office and/or registered agent of the Partnership, (ii) this Agreement and the Certificate of Limited Partnership, (iii) any amendments or restatements 27 to the Certificate of Limited Partnership required to reflect the admission of a new General Partner, the withdrawal of a General Partner, a change in name of the Partnership or other proper amendments made in accordance with Article 13, (iv) a certificate of cancellation upon the completion of the winding up of the Partnership, (v) any documents or certificates required by law to merge the Partnership with another limited partnership or other entity as permitted by this Agreement, (vi) any documents or certificates required to be filed as a result of the admission of additional or substitute General Partners or Limited Partners, (vii) any amendments to this Agreement incident to admitting new Limited Partners in accordance with Article 9 of this Agreement, and (viii) any amendments to this Agreement which do not affect the rights and obligations of the Partners but are made to correct a mistake or an omission to this Agreement. Each Limited Partner further authorizes such attorney-in-fact to take any further action which such attorney-in-fact shall consider necessary or advisable in connection with any of the foregoing, hereby giving such attorney-in-fact full power and authority to do and perform each and every act or thing whatsoever requisite or advisable to be done in and about the foregoing as fully and to the same extent as each such Limited Partner might or could do if personally present, hereby ratifying and confirming all that such attorney-in-act shall lawfully do or cause to be done by virtue hereof; provided, that in no event may the attorney-in-fact utilize this power of attorney to cast any vote or consent of the undersigned other than as to matters with respect to which the attorney-in-fact is specifically authorized so to act hereunder or which the undersigned has consented to in writing. Each Limited Partner has and does hereby agree to execute any and all additional forms, documents or instruments as may be reasonably necessary or required by each Limited Partner to evidence this power of attorney. This power of attorney is coupled with an interest, is irrevocable, survives the death, incompetency, termination or dissolution of any Limited Partner, and is binding on any assignee of all or part of a Partnership interest hereunder. Each Limited Partner agrees to be bound by any representation made by the attorney-in-fact acting in good faith pursuant to such power of attorney, and hereby waives any and all defenses which may be available to protest, negate or disaffirm the actions of the attorney-in-fact taken in good faith under such power of attorney. ARTICLE 13. AMENDMENTS SECTION 13.1 AUTHORITY TO AMEND. Except as otherwise expressly provided for herein, this Agreement may be amended with the consent of the General Partner and the Approval of the Class A Limited Partners. SECTION 13.2 NOTICE OF AMENDMENTS. A copy of any amendment to be approved by the Limited Partners shall be mailed in advance to such Limited Partners. 28 ARTICLE 14. MERGER OF PARTNERSHIP Pursuant to the Act, and with the prior written consent the General Partner the Partnership may adopt a plan of merger and may merge with one or more domestic or foreign limited partnerships, corporations, general partnerships, limited liability companies, associations or other legal entity organized pursuant to the laws of the state of Texas or any other state to the extent of such laws or the constituent documents of such entity would permit such entity to enter into a merger with the Partnership. The approval of the Class A Limited Partners shall be required to approve such merger unless all of the holders of Units will receive the same form and amount of consideration per Unit, or if any holders are given an option as to the form and amount of consideration to be received, all holders are given the same option. ARTICLE 15. PUBLIC OFFERING Notwithstanding anything herein to the contrary, the General Partner is authorized, without the consent of the Limited Partners, to cause the Partnership to merge with a new corporation or to contribute all of the Partnership's assets and liabilities to a new corporation, incident to a public offering of the stock of such successor entity, provided that the offering raises at least $10,000,000. In such event, the Partnership will be terminated and each Partner will receive, incident to such merger or transfer, shares of stock in the successor entity, in proportion to each Partner's respective positive Capital Account balance adjusted by treating the Partnership as having liquidated and gains and losses allocated in accordance with Section 11.4 hereof. ARTICLE 16. PROTECTION OF PARTNERSHIP INFORMATION/BUSINESS OPPORTUNITIES All Partners, and their respective officers, directors, members, managers and employees (including Miller and Weston) acknowledge and agree that the Partnership has and will continue to develop proprietary information which is essential for the success of the Partnership. Such information, includes but is not limited to marketing plans, strategies, financial data, customer lists, supplier lists, source code, business ideas (collectively, the "Confidential Information'), whether oral or embodied in documents (including writings, drawings, graphs, charts, photographs, phonorecords, video recordings, and other data compilations from which information can be obtained) or tangible things. The Partners agree to keep the Confidential Information secret at all times, and not to disclose such information to any third party without the consent of the General Partner. The Partners and their 29 respective officers, directors, members, managers and employees (including Miller and Weston) all agree, and shall be prohibited from using the Confidential Information for any purpose other than the purpose of the Partnership. All of the Partners, for so long as they own Units or Limited Partnership interests (whether directly or indirectly), agree to promptly bring to the attention of the General Partner and the Partnership, any business opportunity which become known to them which relates to the business of the Partnership. The above notwithstanding, the parties acknowledge that Weston and Miller shall have no duty to bring any business opportunity to the Partnership unless the business opportunity relates to Partnership's core business activity at the time, which is currently, commercially developing the Concept. Pursuant to a separate agreement between the Partnership, Weston and Miller, Weston and Miller have agreed that they will not compete with the core business activities of the Partnership for so long as they control the General Partner and for a period of one year after they lose control of the General Partner. MISCELLANEOUS SECTION 16.1 LIABILITY OF GENERAL PARTNER. The General Partner, its officers, directors, representatives, employees and agents shall not be liable to the Partnership or to the Limited Partners for losses sustained or liabilities incurred as a result of any error in judgment or mistake of law or fact (including simple negligence) or for any act done or omitted to be done in good faith in conducting the Partnership business, unless such error, mistake, act or omission was performed or omitted fraudulently or in bad faith or constituted gross negligence or self-dealing. SECTION 16.2 INDEMNIFICATION OF THE GENERAL PARTNER. THE PARTNERSHIP SHALL INDEMNIFY THE GENERAL PARTNER, ITS OFFICERS, DIRECTORS, REPRESENTATIVES, EMPLOYEES AND AGENTS (collectively referred to as the "GENERAL PARTNER" for this Section 17.2 only), AGAINST EXPENSES (INCLUDING COURT COSTS AND ATTORNEY'S FEES), LOSSES AND JUDGEMENTS INCURRED BY THE GENERAL PARTNER IN CONNECTION WITH ANY THREATENED, PENDING OR COMPLETED ACTION, SUIT OR PROCEEDING, WHETHER CIVIL, CRIMINAL, ADMINISTRATIVE, ARBITRABLE OR INVESTIGATIVE, ANY APPEAL IN SUCH AN ACTION, SUIT OR PROCEEDING, IN WHICH THE GENERAL PARTNER IS NAMED DEFENDANT OR RESPONDENT BECAUSE IT IS OR WAS THE GENERAL PARTNER OF THE PARTNERSHIP, IS OR WAS SERVING AT THE REQUEST OF THE PARTNERSHIP, OR OTHERWISE ACTING AS THE GENERAL PARTNER OF THE PARTNERSHIP, TO THE MAXIMUM EXTENT PERMITTED UNDER THE ACT OR OTHERWISE BY TEXAS LAW, BUT ONLY TO THE EXTENT THAT THE SAME WERE NOT CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE GENERAL PARTNER. 30 SECTION 16.3 INDEMNIFICATION OF THE CLASS A LIMITED PARTNERS. THE PARTNERSHIP SHALL INDEMNIFY YOO, ELMENDORF AND CONDON AGAINST EXPENSES (INCLUDING COURT COSTS AND ATTORNEY'S FEES), LOSSES AND JUDGEMENTS INCURRED BY THEM IN CONNECTION WITH ANY THREATENED, PENDING OR COMPLETED ACTION, SUIT OR PROCEEDING, WHETHER CIVIL, CRIMINAL, ADMINISTRATIVE, ARBITRABLE OR INVESTIGATIVE, ANY APPEAL IN SUCH AN ACTION, SUIT OR PROCEEDING, IN WHICH THEY ARE NAMED DEFENDANT OR RESPONDENT BECAUSE IT IS OR WAS EMPLOYED BY THE PARTNERSHIP, TO THE MAXIMUM EXTENT PERMITTED UNDER THE ACT OR OTHERWISE BY TEXAS LAW, BUT ONLY TO THE EXTENT THAT THE SAME WERE NOT CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF YOO, ELMENDORF OR CONDON, AS THE CASE MAY BE. SECTION 16.4 CONSTRUCTION. The indemnification provided by this Article shall be subject to all valid and applicable laws, including, without limitation, Article 11 of the Act, and, in the event this Article or any of the provisions hereof or the indemnification contemplated hereby are found to be inconsistent with or contrary to any such valid laws, the latter shall be deemed to control and this Article shall be regarded as modified accordingly, and, as so modified, to continue in full force and effect. SECTION 16.5 PARTNERSHIP PROPERTY. The legal title to the real or personal property or interest therein now or hereafter acquired by the Partnership shall be owned, held or operated in the name of the Partnership, and no Partner, individually, shall have any ownership of such property. SECTION 16.6 NOTICES. Any notice, payment, demand or communication required or permitted to be given by the provisions of this Agreement shall be deemed to have been sufficiently given or served for all purposes if delivered personally to the party or to an officer of the party to whom the same is directed, or if sent by Registered or Certified Mail, postage and charges prepaid, to the address of a Partner as shown on Exhibit "A" of this Agreement, or to such other address as shall be furnished in writing by any party to another. Any such notice shall be deemed to be transmitted as of the date so delivered, if delivered personally, or two business days after the date on which the same was deposited with adequate postage in a regularly maintained receptacle for the deposit of United States mail, addressed and sent as aforesaid. All notices hereunder shall be effective on transmittal, except where actual receipt is required by an express provision hereof. Each Partner agrees to promptly provide his current address and telephone number to the General Partner in the event the last address and telephone number previously provided to the General Partner becomes inaccurate. SECTION 16.7 SECTION HEADINGS. Section and other headings contained in this Agreement are for reference purposes only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof. 31 SECTION 16.8 SEVERABILITY. Every provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Agreement. SECTION 16.9 MEETINGS. In connection with any vote of the Limited Partners required hereunder, the General Partner or any Limited Partner may call meetings of the Partners which shall be held in San Antonio, Bexar County, Texas. The call shall state the nature of the business to be transacted. Partners may vote at such meeting in person, by proxy or by written consent to the actions taken at the meeting. All Partners shall exercise best efforts in attempting to be present at any meeting called as so provided. SECTION 16.10 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which shall constitute one agreement, and the signatures of any party to any counterpart shall be deemed to be a signature to, and may be appended to, any other counterpart. SECTION 16.11 PARTIES IN INTEREST. Each and all of the covenants, terms, provisions and agreements herein contained shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, assigns, successors and legal representatives. SECTION 16.12 GENDER. All words herein in the male gender shall be deemed to include words in the female gender wherever the context shall so require, and all words in the neuter gender shall be deemed to include words in male and female gender wherever the context shall so require. SECTION 16.13 TIME. Time is of the essence of this Agreement. SECTION 16.14 CONTRACTS WITH RELATED PARTIES; COMPETITION. Subject to such additional requirements as may be stated in this Agreement, nothing in this Agreement shall be construed to prevent any Partner from dealing with the Partnership and receiving payment for services, materials furnished or professional services given or for money loaned to the Partnership, provided such compensation shall be fair, reasonable and competitive and so long as the terms of such agreement or transaction are no less favorable to the Partnership than what the Partnership could obtain from an unrelated third party. SECTION 16.15 WAIVER OF PARTITION. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES, DURING THE TERM OF THE PARTNERSHIP, ANY RIGHT TO MAINTAIN ANY ACTION FOR PARTITION WITH RESPECT TO THE PROPERTY OF THE PARTNERSHIP. NO PARTNER SHALL HAVE AN OWNERSHIP INTEREST IN SPECIFIC PROPERTY. SECTION 16.16 ARBITRATION. Except as specifically provided in this Agreement or as provided in any employment agreement or other written agreement between the parties hereto, or between the Partnership and any of the parties hereto which expressly 32 provide that such is not subject to binding arbitration, the parties agree that all disputes, controversies or claims that may arise between them (including their agents and employees) including, without limitation, any dispute, controversy or claim as to the interpretation or enforcement of any of the provisions of this Agreement, shall be submitted first to mediation and then to binding arbitration in the city of San Antonio, Texas in accordance with the rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. a. MEDIATION. If a controversy or claim arises between the parties then that controversy or claim will be mediated within one month of its identification by the parties. b. BINDING ARBITRATION. In the event that the parties cannot resolve their dispute by mediation within one month, the parties then agree to bring the dispute to binding arbitration within one month of the conclusion of the mediation. REMAINDER OF PAGE LEFT BLANK INTENTIONALLY. 33 c. EFFECTIVE DATE. This Agreement shall be dated and shall be effective as of the date when this Agreement shall have been signed by all respective parties and the Certificate of Limited Partnership filed with the Secretary of State of Texas. IN WITNESS WHEREOF, the General Partner and the Limited Partners have executed this Agreement as of the date first above written. GENERAL PARTNER: Macroweb, LC By:/s/ Morris A. Miller, Member ------------------------------------ Morris A. Miller, Member By:/s/ Graham M. Weston ------------------------------------ Graham M. Weston, Member LIMITED PARTNERS: /s/ Richard Yoo --------------------------------------- Richard Yoo /s/ Dirk Elmendorf --------------------------------------- Dirk Elmendorf /s/ Patrick Condon --------------------------------------- Patrick Condon Trout, Ltd. By: Knightsbridge, L.C., General Partner By: /s/ Morris Miller ------------------- Its: member ------------------- 34 EXHIBIT A NAMES AND ADDRESSES OF PARTNERS Macroweb, LC 111 Soledad Suite 1100 San Antonio, Texas 78205 Trout, Ltd: 111 Soledad Suite 1100 San Antonio, Texas 78205 Dirk Elmendorf 12221 Blanco Rd. #2303 San Antonio, Texas 78216 Patrick R. Condon 13515 West Ave. #236 San Antonio, Tx 78216 Richard K. Yoo 100 Lorene #102 San Antonio, Tx 78209 Any notice to Dirk Elmendorf, Patrick Condon or Richard Yoo shall also be sent to: Fulbright & Jaworski Attn: Daryl Lansdale 300 Convent Street Suite 2200 San Antonio, Tx 78205 35 FIRST AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. This First Amendment to Agreement of Limited Partnership of (hereinafter referred to as the "Agreement") is made effective the 29th day of September, 1999 (the "Effective Date"), Rackspace, Ltd. (the "Partnership"), Macroweb, LC, a Texas limited liability company (the "General Partner" or "Macroweb"), Trout, Ltd, a Texas limited partnership ("Trout"), Richard Yoo ("Yoo"), Patrick Condon ("Condon") and Dirk Elmendorf ("Elmendorf) (Macroweb, Trout, Yoo, Condon and Elmendorf are sometimes referred to herein as the "Partners"). This Agreement amends the Agreement of Limited Partnership between the parties hereto dated December 29, 1999 (the "Partnership Agreement"). WHEREAS, Exeter Financial, LC ("Exeter") advanced $1,050,000.00 to the Partnership pursuant to the Credit Agreement dated December 29, 1999; and WHEREAS, Trout caused Exeter to commit to advance the Partnership an additional $500,000 over the next six months, as needed by the Partnership (the "Second Financial Commitment") of which $225,000.00 has been advanced to the Partnership as of the date of this Agreement, which commitment is set forth in the agreement entitled "Second Financial Commitment" of even date herewith; WHEREAS, as of the Effective Date of this Amendment, the Partnership owes Exeter $1,308,139.73 (principal and interest)(the "Outstanding Balance"); and WHEREAS, incident to obtaining the Second Financial Commitment, the Partnership and the Partners have agreed to convert $1,050,000.00 of the outstanding principal balance and $32,531.51 of accrued but unpaid interest (the "Converted Debt") to equity in the Partnership; and WHEREAS, Trout has acquired the right to receive the Converted Debt from Exeter and therefore the $1,082,531.51 of contributed capital resulting from the conversion will be credited to Trout's capital account and Trout's Ownership Percentage Interest will be increased pursuant to the provisions set forth below. NOW, THEREFORE, FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN MADE, THE PARTIES AGREE AS FOLLOWS: 1. DEBT CONVERSION. Trout represents and warrants that it owns the Converted Debt pursuant to an agreement between Trout and Exeter whereby Trout purchased the converted Debt from Exeter and as represented by Exeter under the Second Financial Commitment. Trout hereby contributes the Converted Debt to the Partnership and as a result, (i) Trout's capital account is increased by $1,082,531.51 and (ii) Trout receives an additional 190,476.19 Units in the Partnership. 2. RESULT OF DEBT CONVERSION. The Partners and the Partnership agree that as a result of the Debt Conversion, the Partners (and assignees), the number of Units owned by them and their respective Ownership Percentage Interests are as follows:
Partner Units Ownership Percentage Interest ------- ----- ----------------------------- Macroweb 1,000 Units .084% Trout 699,476.19 Units 58.756% Yoo 360,000 Units 30.24% Condon 80,000 Units 6.72% Elmendorf 40,000 Units 3.36% Grubbs (assignee only) 5,000 Units .42% Bell (assignee only) 5,000 Units .42% Total Units Outstanding 1,090,476.19 Units 100.00%
3. Capital Contribution of Trout. Under the Partnership Agreement, Trout agreed to initially contribute $200,000.00 to the Partnership, but mistakenly contributed $192,369 rather than $200,000.00. The Partnership and Trout agree that, as of the date hereof, Trout owes the Partnership $8,090.95 ($7,631.00 principal and $495.95 interest)(the "Amount Owed"). Trout agrees to pay the Amount Owed to the Partnership within 30 days of the date hereof. Executed by the Partners and the Partnership this 11 day of November, 1999, but made effective on the date first stated above. RACKSPACE, LTD. By: Macroweb, LC Its: General Partner /s/ Graham M. Weston ---------------------------- Graham M. Weston, Member /s/ Morris A. Miller, member ---------------------------- Morris A. Miller, Member Macroweb, LC /s/ Morris A. Miller, member ---------------------------- Morris A. Miller, Member /s/ Graham M. Weston ---------------------------- Graham M. Weston, Member LIMITED PARTNERS: /s/ Richard Yoo 11/11/99 --------------------------------- Richard Yoo /s/ Dirk Elmendorf 11/11/99 --------------------------------- Dirk Elmendorf /s/ Patrick Condon 11/11/99 --------------------------------- Patrick Condon Trout, Ltd. By: Knightsbridge, L.C., General Partner By: /s/ Morris Miller ------------------- Its: manager ------------------ SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. This Second Amendment to Agreement of Limited Partnership of Rackspace, Ltd. (hereinafter referred to as the "Second Amendment") is made effective the 30th day of November, 1999 (the "Effective Date"), by and among Rackspace, Ltd. (the "Partnership"), Macroweb, LC, a Texas limited liability company (the "General Partner" or "Macroweb"), Trout, Ltd., a Texas limited partnership ("Trout'), Richard Yoo ("Yoo"), Patrick Condon ("Condon") and Dirk Elmendorf ("Elmendorf'), (Macroweb, Trout, Yoo, Condon and Elmendorf are sometimes referred to herein as the "Existing Partners"), and Isom Capital Partners I, L.P. ("Isom"), First Inning Investors, L.P. ("First Inning"), The Hamilton Companies LLC, a Colorado limited liability company ("Hamilton"), Weston Investment Interests, LLC, a Nevada limited liability company ("Weston Entity"), and MiniPat & Company, Ltd., a Texas limited partnership ("MiniPat"). This Second Amendment amends the Agreement of Limited Partnership dated December 29, 1999 between the Existing Partners (hereinafter referred to as the "Agreement" or "Partnership Agreement"). Except as amended by this Second Amendment and by the First Amendment to Agreement of Limited Partnership of Rackspace, Ltd., the terms of the Partnership Agreement shall continue in full force and effect. Capitalized terms used herein shall, unless otherwise specified, have the meanings assigned to them in the Partnership Agreement. WHEREAS, Trout, the Class B Limited Partner, desires to purchase additional Units in the Partnership; WHEREAS, Isom, First Inning, Hamilton, Weston Entity, and MiniPat desire to purchase Units in the Partnership and to become Limited Partners in the Partnership pursuant to the terms hereof.; WHEREAS, the Partnership and the Existing Partners desire to have Trout, MiniPat, Isom, First Inning, Hamilton and Weston Entity make the investments in the Partnership as set forth herein and to have such persons become Limited Partners of the Partnership. NOW, THEREFORE, FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN MADE, THE PARTIES AGREE AS FOLLOWS: 1. ADMISSION OF NEW PARTNERS. Upon the execution of this Second Amendment by all the parties hereto, Isom, First Inning, Hamilton, Weston Entity, and MiniPat shall become Additional Limited Partners of the Partnership as "Class C Limited Partners," having the rights and interests set forth in this Second Amendment. For the purposes of the Partnership Agreement, the SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 1 Class C Limited Partners are included in the definition of "Partner" and "Limited Partner." The Units issued to MiniPat pursuant to this Second Amendment shall not be subject to the repurchase and sale provisions of Section 8.1 hereof, even though MiniPat is owned or controlled by Condon. 2. INCREASE IN NUMBER OF UNITS. Section 5.2 of the Partnership Agreement permits the General Partner to issue up to Ten Million Units to Additional Limited Partners. The parties agree to increase the number of Units which may be issued under Sections 5.2 and 9.1 of the Partnership Agreement by the General Partner to One Hundred Million Units. In addition, the number of Units outstanding as of the date of this Second Amendment (1,190,476.19) shall be split on a 10 for 1 basis such that number of Units outstanding shall be increased by a multiple often to 11,904,761.9 (prior to the issuance of the additional Units contemplated herein) and the number of Units (and options to acquire Units) which may be issued or granted by the General Partner to Key Personnel under Section 9.3 is increased by a multiple of ten. The term "Unit" in the Partnership Agreement shall be amended to read: "Unit. A unit of ownership in the Partnership initially represents a .00001% Ownership Percentage Interest and the rights and interests of a Partner under this Agreement, subject to adjustment upon the issuance of additional Units; provided that all Units at any time outstanding shall represent the same fractional parts of the Ownership Percentage Interests of the Limited Partners. 3. CONTRIBUTION OF CAPITAL. a. Upon the execution of this Second Amendment, Isom, First Inning, Trout and Condon shall contribute the amounts set forth below to the Partnership (the "New Contributions to Capital"): Isom: $2,560,000.00 First Inning: $1,300,000.00 Hamilton: $ 500,000.00 Weston Entity: $ 750,000.00 Trout: $ 500,000.00 Condon: $ 200,000.00 Total Contribution: $5,810,000.00
The $500,000.00 contributed by Trout consists of conversion of existing debt of the Partnership in that amount (including principal and interest) (the "Existing Debt"). All other contributions are made in cash, except for the Weston Entity contribution which is being made in the form of a short-term promissory note. The Existing Debt constitutes advances made by Exeter Financial, LC to the Partnership. By separate agreement, Trout has acquired from Exeter Financial, LC the right to be repaid the Existing Debt. Contemporaneously with the execution of this Second Amendment, Trout and Exeter Financial, LC have delivered a certificate evidencing that no sums are owed to either of them by the Partnership for advances made by either of Trout or Exeter SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 2 Financial, LC. The $500,000.00 contribution by Trout satisfies and discharges the obligation of Exeter to advance $500,000.00 to advance such sum to the Partnership pursuant to the Second Financial Commitment dated September 29, 1999. b. Contemporaneously with the $1,300,000.00 contribution made by First Inning, the Partnership shall enter into the agreement ("Option Agreement") attached hereto as EXHIBIT A entitled "Option for Investment" with First Inning's general partner, Trango Capital L.L.C. ("Trango"), pursuant to which Trango has the right, but not the obligation to contribute $800,000.00 to the Partnership and receive Units as a Class C Limited Partner. The purchase price per Unit acquired by Trango will be $2.10 per Unit subject to adjustment as provided in the Option Agreement. The parties expressly agree that upon the Closing (as defined in the) Option Agreement, Trango shall acquire additional Units in accordance with the Option Agreement. At such time, the General Partner, at its option, shall have the right to revalue the Partnership property in accordance with Treasury Regulation 1.704-1(b)(2)(iv)(f). c. At any time on or prior to January 17, 2000 (the "Expiration Date"), Hamilton shall have the option, but not the obligation, to contribute an additional $500,000.00 to the Partnership and receive additional Units as a Class C Limited Partner. The purchase price per Unit pursuant to this option shall be $2.10 per Unit. The issuance of these Units shall not be subject to the preemptive rights in Section 9.2 of the Partnership Agreement. The option shall be exercisable by Hamilton delivering to the General Partner written notice of such exercise at any time before the Expiration Date. If this option shall be exercised subsequent to any recapitalization, merger, consolidation, combination or exchange of Units, reorganization or liquidation of the Partnership occurring after the date hereof, as a result of which securities of any class shall be issued in respect of outstanding Units, Hamilton shall receive, for the aggregate price paid upon such exercise, the aggregate number and class of securities which Hamilton would have received if this option had been exercised immediately prior to such recapitalization, merger, consolidation, combination or exchange of Units, reorganization or liquidation. This option shall not be transferable or assignable by Hamilton, except upon the prior written consent of the General Partner which consent may be withheld in the General Partner's sole discretion. 4. ADJUSTMENT TO CAPITAL ACCOUNTS. The parties to this Second Amendment have made a determination that the fair market value of the assets of the Partnership, immediately prior to the contributions required by this Second Amendment, is $25,000,000.00 (the "Current Valuation"). However, the parties further agree that the value of the assets is extremely speculative and may in fact be substantially more or substantially less than $25,000,000.00. The number of Units received by Isom, First Inning, Trout, Hamilton, Weston Entity, and MiniPat are based upon the parties' mutual determination that the value of the Partnership's assets immediately prior to closing of the sale of such additional Units is $25,000,000.00. The Capital Accounts of each of the Existing Partners shall be adjusted in accordance with Treasury Regulation 1.704-1(b)(2)(iv)(f) to reflect the Current Valuation as follows: SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 3
Pre-Offering Post-Offering Adjusted Adjusted Partner Capital Account Capital Account ------- --------------- --------------- CLASS A ------- Yoo $ 7,487,999.97 $ 7,487,999.97 Condon 1,663,999.99 1,663,999.99 Elmendorf 832,000.00 832,000.00 Grubbs* 104,000.00 104,000.00 Bell* 104,000.00 104,000.00 CLASS B ------- Macroweb $ 20,800.00 $ 20,800.00 Trout 14,787,200.04 15,287,200.04 CLASS C ------- First Inning --- $ 1,300,000.00 Isom --- 2,560,000.00 Hamilton 500,000.00 Weston Entity --- 750,000.00 MiniPat --- 200,000.00 TOTAL $25,000,000.00 $30,810,000.00 --------------- ---------------
*ASSIGNEE ONLY The parties agree that hereafter the Partners' Capital Accounts shall be adjusted, and the Partners' distributive shares of income, gain, loss and deduction of the Partnership, determined for purposes of computing their book Capital Accounts, shall be determined in accordance with, Treasury Regulations Sections 1.704-1(b) (including without limitation Sections 1.704-1(b)(2)(iv)(f) and (g)) and 1.704-2. 5. OWNERSHIP PERCENTAGES AND UNITS. As a result of the contributions of capital set forth in paragraph 3 above, the Ownership Percentage Interests and number of Units held by each Partner is as follows: SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 4
Ownership Percentage Partner Units Interests ------- ----- --------- CLASS A ------- Yoo 3,600,000.00 24.537% Condon 800,000.00 5.453% Elmendorf 400,000.00 2.726% Grubbs (assignee of Class A) 50,000.00 .341% Bell (assignee of Class A) 50,000.00 .341% CLASS B ------- Macroweb 10,000.00 .068% Trout* 7,232,856.20 49.299% CLASS C ------- First Inning 619,047.61 4.219% Isom 1,219,047.62 8.309% Hamilton** 238,095.24 1.623% Weston Entity 357,142.86 2.434% MiniPat 95,238.10 .649% TOTAL UNITS OUTSTANDING 14,671,428.58 ----------------------- -------------
*AS A CONSEQUENCE OF THE NEW CONTRIBUTIONS TO CAPITAL, TROUT HAS BEEN ISSUED AN ADDITIONAL 238,095 UNITS TO BE HELD AS A CLASS B LIMITED PARTNER. **THIS DOES NOT INCLUDE 238,095.24 UNITS TO BE ISSUED HAMILTON SHOULD IT EXERCISE ITS OPTION TO PURCHASE $500,000.00 OF ADDITIONAL UNITS AT $2.10 PER UNIT PRIOR TO THE EXPIRATION DATE. 6. ALLOCATIONS. Article 6 of the Partnership Agreement is amended and restated in its entirety to read as follows: ARTICLE 6. ALLOCATIONS OF INCOME AND LOSS SECTION 6.1 ALLOCATIONS OF PARTNERSHIP INCOME AND LOSS FOR PERIODS PRIOR TO THE SECOND AMENDMENT. Partnership net income or net loss and items of Partnership income, gain, loss and deduction allocable in accordance with Section 6.6 to taxable years or periods ending on or before the date of the Second Amendment shall be allocated among the Existing Partners (defined in the Second Amendment) in accordance with the Partnership Agreement as in effect prior to the Second Amendment. For this purpose, items of Partnership income, gain, loss and deduction arising from the transactions contemplated by the Second SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 5 Amendment (including, without limitation, any cancellation of indebtedness income of the Partnership resulting from Trout's acquisition of the right to be repaid the Existing Debt (as defined in the Second Amendment) and the contribution of such right to the Partnership pursuant to Section 3 of the Second Amendment) shall be deemed to have been realized and recognized by the Partnership on or before the date of the Second Amendment and shall be allocated solely to the Existing Partners. SECTION 6.2 ALLOCATIONS OF PARTNERSHIP NET INCOME FOR PERIODS AFTER THE SECOND AMENDMENT. Partnership net income (determined for purposes of maintaining the Partners' Capital Accounts and after any allocations for such taxable year or period pursuant to Section 6.4) allocable to taxable years or periods beginning after the date of the Second Amendment shall be allocated to the Partners as follows: (a) First, to the General Partner until the cumulative allocations of net income made to the General Partner pursuant to this Section 6.2(a) equal the cumulative allocations of net loss previously made to the General Partner pursuant to the proviso clause of Section 6.3(b); (b) Second, to the Limited Partners in proportion to and to the extent of the excess, if any, of (i) the cumulative allocations of net loss previously made to them pursuant to Section 6.3(b), over (ii) the cumulative allocations of net income previously made to them pursuant to this Section 6.2(b); and (c) Third, to the Partners in proportion to their Ownership Percentage Interests. SECTION 6.3 ALLOCATIONS OF PARTNERSHIP NET LOSS FOR PERIODS AFTER THE SECOND AMENDMENT. Partnership net loss (as determined for purposes of maintaining the Partners' Capital Accounts and after any allocations for such taxable year or period pursuant to Section 6.4) allocable to taxable years or periods beginning after the date of the Second Amendment shall be allocated to the Partners as follows: (a) First, to the Partners in proportion to and to the extent of the excess, if any, of (i) the cumulative allocations of net income previously made to them pursuant to Section 6.2(c), over (ii) the cumulative allocations of net loss previously made to them pursuant to this Section 6.3(a); and (b) Second, to the Partners in accordance with their Ownership Percentage Interests; PROVIDED THAT to the extent any such loss allocation would cause or increase a deficit balance in any Limited Partner's Capital Account (after adjustment for any applicable increases described in the penultimate sentences of Treasury regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and after any applicable decreases described in Treasury regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 6 (hereinafter, a Partner's "Adjusted Capital Account"), the amount thereof shall instead be allocated to Limited Partners with positive Adjusted Capital Accounts, if any, in proportion to and to the extent of their positive Adjusted Capital Accounts, and the balance, if any, shall be allocated to the General Partner. SECTION 6.4 SPECIAL ALLOCATIONS OF ITEMS OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION FOR PERIODS AFTER THE SECOND AMENDMENT. Before giving effect to allocations of net income or net loss for a taxable year or period pursuant to Sections 6.2 and 6.3, the following items of Partnership income, gain, loss and deduction (determined for purposes of maintaining the Partners' Capital Accounts) shall be specially allocated to the Partners, as follows and in the following order of priority: (a) If there is a net decrease in "partnership minimum gain" (as defined in Treasury regulations Section 1.704-2(d)), items of income and gain (determined in accordance with Treasury regulations Section 1.704-2(f)(6))) shall, to the extent required by the Treasury regulations, be specially allocated to the Partners in an amount equal to each Partner's share of the net decrease in partnership minimum gain (determined in accordance with Treasury regulations Section 1.704-2(g)). This Section 6.4(a) shall be applied consistently with, and subject to the exceptions contained in, the minimum gain chargeback requirements of Treasury regulations Section 1.704-2(f). (b) If there is a net decrease in "partner nonrecourse debt minimum gain" (as defined in Treasury regulations Section 1.704-2(i)(2)), items of income and gain (determined in accordance with the provisions of Treasury regulations Section 1.704-2(i)(4)) shall, to the extent required by the Treasury regulations, be specially allocated to the Partners in an amount equal to each Partner's share of the net decrease in partner nonrecourse debt minimum gain (determined in accordance with the provisions of Treasury regulations Section 1.704-2(i)(5)). This Section 6.4(b) shall be applied consistently with, and subject to the exceptions contained in, the partner nonrecourse debt minimum gain chargeback requirements of Treasury regulations Section 1.704-2(i)(4). (c) if a Partner unexpectedly receives any adjustment, allocation or distribution described in Treasury regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6) that causes or increases a deficit balance in the Partner's Adjusted Capital Account, items of income and gain shall be specially allocated to the Partner in an amount and manner sufficient to eliminate, to the extent required by the Treasury regulations, such deficit balance in the Partner's Adjusted Capital Account as quickly as possible, provided that an allocation pursuant to this Section 6.4(c) shall be made only to the extent that the Partner has a deficit balance in its Adjusted Capital Account after all other allocations provided for in this Article IV have been tentatively made as if this Section 6.4(c) were not in this Agreement. This Section 6.4(c) shall be interpreted SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 7 consistently with the "qualified income offset" provisions of Treasury regulations Section 1.704-1(b)(2)(ii)(d). (d) If any Partner has a deficit balance in its Capital Account at the end of any taxable year or period that is in excess of the sum of any amount the Partner is obligated to restore pursuant to this Agreement and any amount the Partner is treated as obligated to restore pursuant to the penultimate sentences of Treasury regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), items of income and gain in the amount of such excess shall be specially allocated to the Partner as quickly as possible, provided that an allocation pursuant to this Section 6.4(d) shall be made only to the extent of any such excess determined after all other allocations provided for in this Article IV have been tentatively made as if Section 6.4(c) and this Section 6.4(d) were not in this Agreement. (e) "Nonrecourse deductions" (as defined in Treasury regulations Section 1.704-2(c)) shall be specially allocated to, and "excess nonrecourse liabilities" (as defined in Treasury regulations Section 1.752-3(a)(3)) shall be shared among, the Partners in proportion to their Ownership Percentage Interests. (f) "Partner nonrecourse deductions" (as defined in Treasury regulations Section 1.704-2(i)(2)) shall be specially allocated to the Partners who bear the economic risk of loss for the liability to which those deductions are attributable, determined in accordance with the principles of Treasury regulations Section 1.704-2(i)(l). (g) To the extent an adjustment to the adjusted tax basis of any Partnership asset under Code Sections 734(b) or 743(b) is required to be taken into account in determining Capital Accounts under Treasury regulations Section 1.704-1(b)(2)(iv)(m), the amount of the Capital Account adjustment shall be treated as an item of income (if positive) or loss (if negative) and shall be specially allocated to the Partners consistent with the manner in which their Capital Accounts are required to be adjusted by such Treasury Regulation. (h) To minimize any distortions in the manner that the Partners would have shared Partnership distributions if the special allocations required by Sections 6.4(a) through (g) had not been part of this Agreement, the General Partner shall specially allocate to the Partners offsetting items of income, gains, loss or deduction so that the net amounts allocated to each Partner pursuant to Section 6.2, Section 6.3 and this Section 6.4 will, to the extent reasonably possible, equal the net amounts that would have been allocated to each Partner pursuant to Sections 6.2 and 6.3 had Sections 6.4(a)-(g) not been part of this Agreement. In exercising its authority hereunder, the General Partner may consider any expected future allocations pursuant to Sections 6.4(a) and 6.4(b) that are likely to offset other allocations made pursuant to Sections 6.4(a) through 6.4(g). SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 8 SECTION 6.5 ALLOCATIONS FOR FEDERAL INCOME TAX PURPOSES. (a) Except as provided in Section 6.5(b), for each taxable year or period of the Partnership, items of taxable income, gain, loss and deduction of the Partnership, determined solely for federal income tax purposes, shall be allocated to the Partners in the same manner as each correlative item of income, gain, loss, and deduction is allocated to the Partners pursuant to Sections 6.1 through 6.4. (b) In accordance with Section 704(c) of the Code and the Treasury regulations thereunder, solely for federal income tax purposes, items of taxable income, gain, loss and deduction with respect to any Partnership asset other than money that has been contributed to the Partnership or revalued on the books of the Partnership shall be allocated among the Partners in a manner that takes into account the difference, at the time of contribution or revaluation, between the adjusted tax basis of the asset and the amount by which it is carried on the books of the Partnership for purposes of maintaining the Partner's Capital Accounts. Such allocations shall be made utilizing the "Remedial Method" described in Treasury regulations Section 1.704-3(d). Allocations pursuant to this Section 6.5 are solely for federal income tax purposes and shall not affect the Partners' Capital Accounts. SECTION 6.6. VARYING INTERESTS. To reflect the varying interests of the Partners during any taxable year, net income or net loss and items of income, gain, loss and deduction of the Partnership shall be determined on a daily, monthly or other basis using any convention or method permitted under Code Section 706 and the Treasury regulations thereunder, provided that gain or loss arising from dispositions of Partnership assets shall be allocated to the Partners on the date of the disposition. Notwithstanding the foregoing, for the Partnership's 1999 taxable year such items shall be allocated as follows: a. The Partnership's books shall be closed as of June 30, 1999, and net income or net loss and items of income, gain, loss and deduction of the Partnership for the period ending on June 30, 1999 shall be allocated to the persons who were Partners on June 30, 1999. b. Proration of Tax items For Second Half of 1999. Net income or net loss and items of income, gain, loss and deduction of the Partnership for the period beginning on July 1, 1999 and ending on December 31, 1999 shall, except as otherwise provided in Section 6.1, be allocated to the persons who were Partners during such period by assigning an equal portion of each such item to each day in such period and allocating the amount assigned to each day among the persons who were Partners on such day in accordance with the provisions of this Agreement in effect on such day. SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 9 7. CERTAIN DEFINED TERMS. The defined terms: Loss Recapture Allocation, Regular Allocation, Regular Loss Allocation and Specially Allocated Losses contained in Article I of the Partnership Agreement are deleted. 8. DISTRIBUTIONS. Section 7.2 of the Partnership Agreement is amended and restated in its entirety as follows: SECTION 7.2 DISTRIBUTIONS OF CASH AVAILABLE FOR DISTRIBUTION. To the extent that Tax Distributions or distributions of Cash Available for Distribution are made by the Partnership, such distributions shall be made as follows: FIRST: TAX DISTRIBUTIONS. Tax Distributions shall be made to the Partners in an amount equal to the amount of any federal income tax estimated by the General Partner to be incurred by the Partners (such estimate to be made on the assumption that all of the Partners will be taxed at the highest marginal federal income tax rate applicable to individuals, which is currently 39.59%) on their allocable share of any net income or net gain from the Partnership which is recognized for federal income tax purposes during the prior year and not otherwise distributed to the Partners. However, to the extent that a Partner has been allocated losses, no Tax Distributions will be made to the Partner until the cumulative net income and gain of the Partnership allocated to the Partner exceeds the cumulative amount of losses allocated to the Partner. Tax Distributions shall be made not later than February 28th of each year. To the extent the Partnership makes Tax Distributions, subsequent distributions that would have been made pursuant to Sections 7.2 Second and 11.2(c) shall first be made among the Partners in a manner that, to the extent possible, will cause the cumulative distributions pursuant to Article 7 and Section 11.2(c) to each Partner to be equal to the amount that would have been distributed to each Partner had Section 7.2 First not been part of this Agreement; and notwithstanding Sections 4.4 and 11.2(c) to the contrary, the amount of any such excess distributions to a Partner remaining upon liquidation of the Partnership or the Partner's interest in the Partnership shall be immediately repaid to the Partnership by the Partner for distribution to the other Partners. SECOND: REGULAR DISTRIBUTIONS. Regular Distributions of the remaining Cash Available for Distribution shall be made to all the Partners in accordance with their Ownership Percentage Interests. 9. RIGHTS AND OBLIGATIONS OF CLASS C PARTNERS. The Class C Limited Partners shall have all of the rights and all of the obligations which apply to Limited Partners. In addition, the following terms shall apply: SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 10 a. SECTION 3.2. Section 3.2 of the Partnership Agreement restricts the General Partner from taking certain actions without the approval of the Class A Limited Partners (the "Restricted Acts"). Section 3.2 is hereby amended to require the General Partner to obtain the "Approval of the Class C Limited Partners" before taking the Restricted Act in question, in addition to the approval of the Class A Limited Partners. For the purposes of this Second Amendment, the "Approval of the Class C Limited Partners" shall mean the approval of 65% of Limited Partners Interest held by the Class C Limited Partners. A Class C Limited Partner's approval or consent shall be pursuant to a vote or written consent as provided in Section 16.9. b. SECTION 3.3 Section 3.3 addresses when the General Partner may be removed or replaced. The parties agree that in the event the General Partner may be removed and replaced under Section 3.3(a), such removal and replacement shall require the Approval of the Class A Limited Partners and the Class C 3 Limited Partners, but at all times subject to the rights contained in Section 3.3 of the General Partner to reverse the transaction giving rise to the removal. Provided, however, at any time the General Partner may be removed upon the approval of 60% of the Limited Partners Interests. In the event of the dissolution, bankruptcy or resignation of the General Partner under Section 3.3(b), where a successor General Partner is appointed which is not owned 100% by Graham M. Weston ("Weston") and Morris A. Miller ("Miller"), the new General Partner will be selected by and with the Approval of the Class A Limited Partners and the Class C Limited Partners. c. SECTION 8.2 (RESTRICTIONS ON TRANSFER). Section 8.2 of the Partnership Agreement is amended to read in its entirety as follows: SECTION 8.2 PROHIBITED DISPOSITIONS. a. CLASS A PARTNER RESTRICTION. The Class A Limited Partners shall not make any sale, transfer, pledge, assignment or other disposition of any of their Units which may be purchased by the Partnership pursuant to the Partnership's rights under Section 8.1 above. Therefore, as to each Class A Limited Partner, for so long as the Partnership has the right to acquire any of such Class A Partners' Units in the event that he is no longer employed by the Partnership, no disposition of those Units which may be acquired by the Partnership under Section 8.1 may be made by such Class A Partner. b. TRANSFERS PROHIBITED. Except as specifically allowed under this Agreement, no Limited Partner may sell, assign, transfer, mortgage, encumber, hypothecate, pledge or otherwise dispose of all or any part of such Limited Partner's interests in the Partnership and any attempt to take such action and any purported separate sale, transfer, assignment, mortgage, encumbrance, SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 11 hypothecation, pledge, or other disposition by any Limited Partner shall be void. In the event of any sale, transfer, assignment or other disposition which is not made in accordance with this Agreement, and without herein recognizing such as being permitted or valid, the Limited Partner making the same shall remain and continue to be liable for the performance of all of its obligations hereunder and the Partnership shall continue to make any distributions, if any, to said Limited Partner. All subsequent owners of any Units, or other Limited Partnership interests hereunder shall hold same subject to all the terms and provisions hereof. To the extent that the provisions of this Section 8.2 and the other provisions of this Agreement are followed incident to any sale of Units, the transferee of such Units shall become a Substitute Limited Partner of the Partnership with the written consent of the General Partner, which consent shall not be withheld or delayed. With respect to any transfer of all of the Units and interests in the Partnership held by Macroweb, the transferee shall become the substitute General Partner of the Partnership, provided that the provisions of this Section 8.2 and all other provisions of this Agreement are followed incident to the sale of such Units and interests. c. RIGHT OF FIRST REFUSAL. Subject to transfers of Units of the Class A Limited Partner in accordance with Section 8.1 above, no Limited Partner (including any assignee of a Limited Partner) may propose to make any sale, transfer, pledge, assignment or other disposition of all or any part of their Units or other Limited Partnership interests (such interests referred to as the "Units Offered for Sale") except in exchange for cash or a combination of cash and promissory notes. Prior to making such disposition, the Limited Partner desiring to make such sale (the "Selling Partner") shall first offer his or her Units Offered for Sale to each of the other Limited Partners under the same terms and conditions as the proposed sale (the "Terms of Sale"). Such offer shall be in writing (the "Offer Notice") and delivered to the other Partners, along with the name of the proposed purchaser of the Units Offered for Sale. The Selling Partner shall provide to the other Partners all information regarding the proposed sale and the proposed purchaser, as may be reasonably requested by the other Partners. For a period of 15 Business Days after the date of the Offer Notice is given, a Partner may accept the Selling Partner's offer with respect to the portion of the Units Offered for Sale that corresponds to the ratio of the accepting Partner's Limited Partners interest to the Limited Partners Interest of all the other Partners (other than the Selling Partner) by giving written notice SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 12 of such acceptance to the Selling Partner and the General Partner. Beginning with the expiration of 15 Business Days after the date the Offer Notice is given and ending on the 20th Business Day after the date the Offer Notice was given, the Partnership or the General Partner may, in the sole discretion of the General Partner, accept the Seller's offer with respect to all of the remaining portion of the Units Offered for Sale by giving written notice of such acceptance to the Seller and the other Partners. Unless the other Partners and the Partnership (in the aggregate) accept the Seller's offer with respect to all of the Units Offered for Sale, the Selling Partner's offer shall be deemed rejected in its entirety. Upon an election to purchase all of such Units Offered for Sale as provided above, the purchasing Partners (and the Partnership as the case may be) shall make available to the Selling Partner at the offices of the General Partner, an amount equal to ten (10%) percent of the purchase price of the Units Offered for Sale as a non-refundable deposit. In addition, to the extent that the Terms of Sale require a note or notes, the accepting Limited Partners shall be required to demonstrate that they have at least the same credit worthiness as the proposed purchaser. Payment for the Units Offered for Sale shall be made in accordance with the Terms of Sale. If the Partners and the Partnership do not elect to purchase all the Units Offered for Sale, the Selling Partner shall be free to sell all, but not less than all of such Units Offered for Sale for a period of sixty (60) days after the expiration of the option of the other Partners, provided that any such sale must be made under the same terms and conditions and to the same purchaser as described in the Terms of Sale. The Selling Partner shall provide all information relating to the transferee of the Units Offered for Sale which is reasonably requested by the General Partner. d. SECTION 8.3 (TRANSFERS TO A FAMILY MEMBER). Section 8.3 of the Partnership Agreement is amended to read in its entirety as follows: Any Limited Partner shall be permitted to transfer his or her Units or other Limited Partner Interests to (i) a Family Member or a trust established for the benefit of a Family Member ("Trust"), (ii) Affiliates of the Limited Partner, (iii) to the General Partner, (iv) to the Partnership, (v) to Persons to whom the interest is transferred by reason by the Limited Partner's death or involuntarily by operation of law, or (vi) pursuant to a transfer in accordance with the provisions of Section 8.2. However, no such transferee shall become a Substitute Limited Partner except in accordance with Section 8.6 of the Partnership Agreement. It is expressly agreed that SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 13 Trout may transfer its Units to Miller, Weston or any of their Family Members or a trust established for the benefit of a Family Member. In addition, the definition of "Affiliate" shall be amended to read in its entirety: "AFFILIATE" means a Person who directly or indirectly controls, is controlled by, or is under common control with, the Person referred to. For this purpose, "control" means the ability to direct or cause the direction of the management or affairs of a Person, whether through the ownership of voting securities, by contract or otherwise. e. SECTION 13.1 (AMENDMENTS TO PARTNERSHIP AGREEMENT). In such instances when Section 13.1 of the Partnership Agreement requires the Approval of the Class A Limited Partners, the General Partner shall be required to obtain both the Approval of the Class A Limited Partners and the Approval of the Class C Limited Partners. In addition Section 13.1 is further amended to add a second sentence to read in its entirety: "The consent of each Limited Partner must be obtained for any amendment which would materially affect the Limited Partner's rights to distributions (other than by virtue of additional Capital Contributions by other Partners), its obligations for Capital Contributions, adversely affect its limited liability as a Limited Partner, modify the provisions of this SECTION 13.1, or lower the threshold required by the Partnership Agreement or the Act for obtaining the vote, consent or approval of the Limited Partners with respect to any action or undertaking." f. ARTICLE 14 (MERGER OF PARTNERSHIP). The last sentence of Article 14 Merger of Partnership is deleted and the following shall be added in its place: "The Approval of the Class A Limited Partners and the Approval of the Class C Limited Partners shall be required to approve such merger, unless all of the holders of Units will be given the same or substantially the same rights as they have pursuant to this Second Amendment (including, without limitation, preferences, rights of first refusal, options, conversion rights, preemptive rights, voting rights, or registration rights). Provided, however, no Approval of the Class A Limited Partners nor Class C Limited Partners shall be required for a transaction to convert the Partnership to a corporation (whether by virtue of merger, conversion or other transaction) which is consummated solely for the purpose of changing the form of entity used to conduct business of the Partnership, so long as the Limited Partners have the same or substantially the same rights, obligations and interests in the new entity as they enjoyed as Partners of the Partnership, including, without limitation, preferences, rights of first refusal, options, conversion rights, preemptive rights, voting rights and registration rights, but excluding any rights to limit the General Partner as provided in Section 3.2 of the Partnership Agreement. In the event any transaction pursuant to this Article 14 results in the termination of the Partnership, each Partner will receive, incident to such merger or other transaction, shares of stock in the successor entity, in proportion to each Partner's then current respective positive Capital Account balance, as adjusted by treating the Partnership as having liquidated and gains and losses allocated in accordance with Section 11.4 hereof." SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 14 g. ARTICLE 15 (PUBLIC OFFERING). Article 15 is amended to read in its entirety: "Notwithstanding anything herein to the contrary, the Partners agree that incident to an initial public offering of the securities of the Partnership or any successor entity, which raises at least $10,000,000.00, the following rights contained in this Agreement shall be terminated: (i) preemptive rights, (ii) parallel exit rights, (iii) rights of first refusal, and (iv) transfer restrictions (other than as required by applicable securities laws)." h. REPRESENTATION ON BOARD OF DIRECTORS. If the Partnership converts to a corporation, limited liability company or other entity (whether by virtue of corporate reorganization, merger, conversion or otherwise)(herein referred to as the "Successor Entity"): (i) the Class C Limited Partners, for so long as the Class C Limited Partners hold at least 10% of the equity interests (capital stock, membership interests or otherwise) of the Successor Entity, they shall have the right to designate one director or manager of such entity; (ii) Hamilton, for so long as Hamilton holds at least 2.5% of the equity interests (capital stock, membership interests or otherwise) of the Successor Entity (either directly or indirectly through their limited partner interest in Isom), it shall have the right to designate one director or manager of such entity; and (iii) Trout, for so long as Trout holds at least 20% of the equity interest (capital stock, member interest or otherwise) of the Successor Entity, it shall have the right to designate up to five (5) directors or managers of such entity. Provided, however, should Hamilton not exercise its option to purchase $500,000.00 in additional Units prior to the Expiration Date, as provided in Section 3.c. of this Second Amendment, then its right to designate a director or manager shall be subject to termination in the discretion of the Partnership or the Successor Entity. Provided, further, should Trout elect to waive its right to designate any directors (so that it has no right to designate any director or manager) in connection with a sale of securities of the Partnership or Successor Entity which raises $10,000,000.00 or more, then the Class C Limited Partners and Hamilton will agree to waive their designation right as well. There shall be not more than 7 directors or managers of the Successor Entity, except upon the consent of the Class C Limited Partners and Hamilton (so long as Hamilton has a designation right). The designation of the director or manager by the Class C Limited Partners shall be determined by a vote of 65% of the Class C Limited Partners other than Hamilton for so long as Hamilton has a right to designate a director or manager, and thereafter upon the Approval of the Class C Limited Partners (including Hamilton). 10. DISSOLUTION (SECTION 11.1.c.). Section 11.1.c. of the Partnership Agreement is amended in its entirety to read: c. The General Partner, upon approval of a Majority in Interest of the Limited Partners, elects to dissolve (provided such election takes place after January 1, 2001). SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 15 11. MEETING & VOTING OF LIMITED PARTNERS. Section 16.9 of the Partnership Agreement is amended to read in its entirety as follows: SECTION 16.9. MEETINGS & VOTING BY LIMITED PARTNERS. a. MEETINGS. Within a reasonable time after each fiscal year and at such other times as the General Partner, in its sole discretion, shall determine, the General Partner shall call a meeting of the Partners for the purpose of discussing the affairs of the Partnership and acting on any matter permitted or required by this Agreement or the Act to be acted on by the Limited Partners. The General Partner shall give not less than ten days prior written notice of the meeting, specifying the time and location of the meeting and the matters to be discussed or acted upon. Meetings may be held at any time during normal business hours and at any place within San Antonio, Texas as the General Partner may select. Partners may waive notice of or attendance at the meeting and may vote in Person, by proxy, by delivering a signed written consent specifying its vote for or against a matter to the General Partner at or prior to the meeting, or by telephone or other electronic communication device. Attendance at a meeting shall constitute waiver of notice of the meeting. The General Partner or its designee shall chair the meeting and may conduct the meeting under such rules as it may reasonably select. b. VOTING BY LIMITED PARTNERS. Unless by vote pursuant to a meeting called in accordance with SECTION 16.9.a, a Limited Partner's approval or consent shall be conveyed in writing to the General Partner not later than 15 Business Days after the date the approval or consent was requested by the General Partner. A failure to respond in any such time period shall constitute a consent or approval which is consistent with the General Partner's recommendation with respect to the proposal. If the General Partner receives the necessary vote, approval or consent of the Limited Partners to any action, the General Partner shall be authorized and empowered to implement such action without further authorization by the Limited Partners. The Limited Partners shall have the right to consent, approve or vote with respect to a matter only as specifically reserved for their consent, approval or vote pursuant to this Agreement or any nonvariable provision of the Act. Unless otherwise required by this Agreement or any nonvariable provision of the Act, the vote, consent or approval of the Limited Partners on any matter required or permitted to be submitted to their vote, consent or SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 16 approval shall be had only by a Majority in Interest of the Limited Partners. c. TIME PERIODS FOR CONSENTS. Notwithstanding anything in the Agreement to the contrary, the Class C Limited Partners shall not have less than 15 Business Days to make any election or give any consent, whether in connection with the election to exercise preemptive rights, parallel exit rights or otherwise. In the case of exercise of preemptive rights under Section 9.2 of the Agreement, the 15 Business Days time period shall commence to run upon the Limited Partners' receipt from the General Partner of a description (containing all material terms) of the proposed offering giving rise to the preemptive rights. The term "Business Day" as used in this Agreement shall mean Monday through Friday, except any of those days in any week in which the national banks of the U.S.A. are closed for business. 12. TAX PROVISIONS. Incident to a sale of Units in compliance with the terms of the Partnership Agreement, upon request of the transferring Partner, the General Partner shall, to the extent permitted by law, make the appropriate election to adjust the basis of Partnership properties pursuant to Code Sections 754, 755, 734(b) and 743(b), or comparable provisions of state or local law, in connection with transfers of interests and Partnership distributions; PROVIDED, HOWEVER, that the General Partner, as a condition to making any such election, may require any Partner or transferee requesting such election to pay or make adequate provisions for payment of the reasonable costs and expenses incurred by the Partnership in making and as a consequence of making such election. 13. REGISTRATION RIGHTS. The Class C Limited Partners and Trout shall be granted demand and piggy-back registration rights for the Units acquired pursuant to this Second Amendment, as more particularly set forth in that certain Registration Rights Agreement by and among the Partnership, the Class C Limited Partners and Trout entered into contemporaneously with this Second Amendment. 14. PARTIES BOUND. The Class C Limited Partners agree, that by executing this Second Amendment, they are bound to the terms contained herein as well as the terms contained in the Partnership Agreement as if they had become direct signatories to the Partnership Agreement. 15. RELATED PARTIES. The parties to the Second Amendment acknowledge that the Weston Entity may meet the definition of a Related Party of Weston under the terms of the Partnership Agreement. To the extent that the Weston Entity does meet the definition of a Related Party of Weston, with the respect to the issuance of Units to the Weston Entity pursuant to the terms of this Second Amendment, the parties agree to waive the requirements of Section 3.2(a) of the Partnership Agreement. SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 17 16. KEY MAN LIFE INSURANCE. For a period of two (2) years, the Partnership shall maintain Key Man Life Insurance on the life of Graham M. Weston in an amount of not less than $4,000,000.00. 17. OPTIONS TO KEY PERSONNEL. a. Section 9.3 to of the Partnership Agreement permits the General Partner to issue Units and options to acquire Units to Key Personnel. The Partners desire to cap the number of Units, Limited Partnership Interests, or options to acquire the same at 10% of the outstanding Units. Therefore, the last sentence of Section 9.3 is hereby amended to read in its entirety: "The above notwithstanding, except upon the Approval of the Class A Limited Partners and the Approval of the Class C Limited Partners (including the affirmative approval of Isom), the General Partner shall not grant to any Key Personnel, any Units, Limited Partnership Interests, or options to acquire the same, to the extent that the aggregate amount of all such interests granted to Key Personnel would (if fully exercised) constitute more than 10% of the then outstanding number of Units or Limited Partners Interests of the Partnership." All the options contemplated to be granted to the Certain Key Employees (as defined below) and First Inning pursuant to this Second Amendment and the Option Agreement shall be counted towards the 10% cap on such interests. b. Currently, Richard Yoo ("Yoo"), Pat Condon ("Condon") and Dirk Elmendorf ("Elmendorf") are subject to employment agreements with the Partnership and are paid annualized salaries of $3,000.00 per month, with the right to receive an annual bonus of $15,000.00 to the extent that the Partnership has repaid all principal owing to Exeter Financial, LC. If the bonus were paid and spread throughout the year, the monthly salary of Yoo, Condon and Elmendorf would be $4,250.00. Miller and Weston are employees at will and are not currently being paid a salary, but may be paid an annual salary not in excess of $100,000 in 2000, $110,000 in 2001 and $121,000 in 2002. The parties agree that the General Partner may issue options to Yoo, Condon, Elmendorf, Miller and Weston (collectively "Certain Key Personnel") to acquire Units, in lieu of their salary, in accordance with the following general terms, SUBJECT TO execution of definitive option agreements: (i) Yoo, Condon and Elmendorf may elect at the beginning of each calendar quarter, during 2000, to forgo some or all of their monthly salary and earn the right to receive options to acquire Units. Each of Yoo, Condon and Elmendorf, to the extent that any of them elect not to continue their salary at $3,000 per month for the next twelve months and not receive a bonus (or elect to receive such amount less than $4,250 per month) he will earn options to acquire such number of Units determined by dividing the difference between $12,750 (3 months salary and imputed bonus amount) and the actual cash salary and bonus paid to them in the applicable quarter of 2000, by the Fair Market Unit Value. The "Fair Market Unit Value" shall mean $2.10 through December 31, 2000, and thereafter shall be determined on each calendar quarter to be the lesser of: (i) 120 times the gross revenues of the Partnership for the month immediately preceding the month of determination and then divided by the number of Units outstanding; or (ii) the highest sales price of any Units sold by the Partnership, if any, during any of the four months immediately preceding determination. SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 18 (ii) Weston and Miller may elect at the beginning of each calendar quarter (or for the entire year at their election), during 2000, 2001 and 2002 to forgo some or all of their monthly salary and earn the right to receive options to acquire Units. Miller and Weston, to the extent that they elect not to receive any salary (or to the extent that elect to receive part cash, then the difference between the cash compensation received and the applicable compensation level for that year) they will receive options to acquire such number of Units determined by dividing the difference between the amount of their monthly salary earned for such quarter and the amount of the cash salary, if any, actually paid to them in the applicable quarter, by the Fair Market Unit Value. (iii) The foregoing options to Certain Key Personnel shall be earned and calculated on a quarterly basis throughout the year and granted at the end of each year. The exercise price of the options shall be $.01 per Unit (payable in cash or netted out of the number of Units granted). The options shall be subject to forfeiture by each of the Certain Key Personnel if their employment with the Partnership (or any successor entity) is terminated voluntarily or involuntarily, for cause, or without cause, prior to June 30, 2001, unless employment is terminated due to death, disability, or in connection with the sale of substantially all the ownership interests or assets of the Partnership (whether by sale, merger or other transaction) to a third party. In the event of such forfeiture, the terminated employee shall be entitled to receive the salary he would have received during the time of employment but for his election to earn the options. c. The option agreements for the Certain Key Personnel (including amendments, as necessary, to the employment agreements of Yoo, Condon and Elmendorf) shall contain the terms as outlined in Section 17(b)(i), (ii) and (iii) above, be in a form acceptable to the General Partner and shall contain anti-dilutions provisions, forfeiture provisions upon termination of employment or competition with the Partnership, and other provisions which are customary and reasonable. 18. ASSIGNMENT OF CERTAIN RIGHTS. Notwithstanding anything in the Partnership Agreement or this Second Amendment to the contrary, a Limited Partner which has executed this Second Amendment may assign any right of first refusal, preemptive right or other right to acquire Units to any (i) current limited partner, partner, shareholder or member of such Limited Partner, or an Affiliate of such Person, or an entity controlled by such Persons or their Affiliates, or (ii) another Person upon the prior consent of the General Partner in the General Partner's sole discretion (a "Current Affiliate") and provide the General Partner written notice of such assignment within five (5) Business Days. Upon any such assignment, the Current Affiliate shall be subject to the rights, obligations, and restrictions provided in the Partnership Agreement (as amended) with respect to exercising any such rights and becoming a Limited Partner or Substitute Limited Partner. 19. REPRESENTATION. The parties to this Second Amendment acknowledge that the law firm of Matthews and Branscomb, P.C. has assisted in the preparation of this document on behalf of and as counsel for Trout, Ltd. and the General Partner, and further acknowledge that the Partnership will pay the fees and expenses associated with such services. SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 19 20. MULTIPLE COUNTERPARTS. This Second Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. REMAINDER OF PAGE LEFT INTENTIONALLY BLANK SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. 20 Executed as of the date first written above. RACKSPACE, LTD. By: Macroweb, LC Its: General Partner /s/ Graham M. Weston ---------------------------- Graham M. Weston, Member /s/ Morris A. Miller, Member ---------------------------- Morris A. Miller, Member GENERAL PARTNER: Macroweb, LC /s/ Morris A. Miller, Member ---------------------------- Morris A. Miller, Member /s/ Graham M. Weston ---------------------------- Graham M. Weston, Member LIMITED PARTNERS: /s/ Richard Yoo ---------------------------- Richard Yoo /s/ Dirk Elmendorf ---------------------------- Dirk Elmendorf /s/ Patrick Condon ---------------------------- Patrick Condon Trout, Ltd. By: Knightsbridge, L.C.,General Partner By: /s/ Morris Miller, Member ------------------------- Its: Member ------------------------- SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. Isom Capital Partners I, L.P. By: BESK Funding, Inc., General Partner By: /s/ S. James Bishkin ------------------------------- S. James Bishkin President First Inning Investors, L.P. By: Trango Capital L.L.C., General Partner By: /s/ Quincy J. Lee ------------------------------- Quincy J. Lee, Manager The Hamilton Companies LLC By: /s/ Frederic C. Hamilton ------------------------------- Title: President --------------------------- Weston Investment Interests, LLC By: /s/ Graham M. Weston ------------------------------ Title: Manager --------------------------- MiniPat & Company, Ltd. By: /s/ Patrick Condon ----------------------------- Title: President -------------------------- SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. Isom Capital Partners I, L.P. By: BESK Funding, Inc., General Partner By: /s/ S. James Bishkin -------------------------- S. James Bishkin President First Inning Investors, L.P. By: Trango Capital L.L.C., General Partner By: /s/ Quincy J. Lee ------------------------------- Quincy J. Lee, Manager The Hamilton Companies LLC By: /s/ Frederic C. Hamilton ------------------------------ Title: President & Man. --------------------------- Weston Investment Interests, LLC By: /s/ Graham Weston ----------------------------- Title: Manager -------------------------- MiniPat & Company, Ltd. By: /s/ Patrick Condon ---------------------------- Title: Manager ------------------------- SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. THIRD AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. This Third Amendment to Agreement of Limited Partnership of Rackspace, Ltd. (hereinafter referred to as the "Third Amendment") is made this 22nd day of February, 2000, by and among Rackspace, Ltd. (the "Partnership"), Macroweb, LC, a Texas limited liability company (the "General Partner" or "Macroweb"), Trout, Ltd., a Texas limited partnership ("Trout"), Richard Yoo ("Yoo"), Patrick Condon ("Condon") and Dirk Elmendorf ("Elmendorf"), Isom Capital Partners I, L.P. ("Isom"), First Inning Investors, L.P. ("First Inning"), The Hamilton Companies LLC, a Colorado limited liability company ("Hamilton"), Weston Investment Interest, L.L.C., a Nevada limited liability company ("Weston Entity"), MiniPat & Company, Ltd., a Texas limited partnership ("MiniPat")(Macroweb, Trout, Yoo, Condon, Elmendorf, Isom, First Inning, Hamilton, Weston Entity and MiniPat are sometimes referred to herein as the "Existing Partners") and 2M Technology Ventures, L.P. (the "New Partner" or "2M"). This Third Amendment amends the Agreement of Limited Partnership dated December 29, 1998, as amended on September 29, 1999 (the "First Amendment") and again on November 30, 1999 (the "Second Amendment," and collectively, hereinafter referred to as the "Agreement" or "Partnership Agreement"). Except as amended by this Third Amendment, the Second Amendment and the First Amendment to Agreement of Limited Partnership of Rackspace, Ltd., the terms of the Partnership Agreement shall continue in full force and effect. Capitalized terms used herein shall, unless otherwise specified, have the meanings assigned to them in the Partnership Agreement. WHEREAS, Hamilton has exercised its right to contribute an additional $500,000.00 to the Partnership and thereby receive an additional 238,095.24 Units to be held as a Class C Limited Partner; and WHEREAS, 2M desires to contribute $250,000.00 to the Partnership, to become a Class C Limited Partner and to receive 119,047.62 Units in accordance with the terms of this Agreement. WHEREAS, the Partnership and the Existing Partners desire to have 2M make an investment in the Partnership as set forth herein and to have it become a Limited Partner of the Partnership. NOW, THEREFORE, FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN MADE, THE PARTIES AGREE AS FOLLOWS: 1. ADMISSION OF NEW PARTNER. Upon the execution of this Third Amendment by all the parties hereto, effective January 21, 2000 2M shall become an Additional Limited Partner of the Partnership as a "Class C Limited Partner," having the rights and interests of a Class C Limited Partner as set forth in the Second Amendment except as otherwise provided herein. 2. CONTRIBUTION OF CAPITAL. a. Upon the execution of this Third Amendment, 2M shall contribute $250,000.00 to the Partnership (the "New Contribution to Capital") and effective January 21st, 2000 shall be deemed to have received 119,047.62 Units as a Class C Limited Partner. b. On January 21st, 2000 Hamilton contributed an additional $500,000.00 to the Partnership and received 238,095.24 additional Units as a Class C Limited Partner. 3. CAPITAL ACCOUNTS. The parties to this Third Amendment have made a determination that the fair market value of the assets of the Partnership, immediately prior to the contributions by Hamilton and 2M described in 2 above, was $30,810,000.00 (the "Valuation"). However, the parties further agree that the value of the assets is extremely speculative and may in fact be substantially more or substantially less than $30,810,000.00. The number of Units received by Hamilton and 2M are based upon the parties' mutual determination that the value of the Partnership's assets immediately prior to closing of the sale of such additional Units is $30,810,000.00. The parties agree as of and immediately prior to January 21, 2000, the Partners' Capital Accounts shall be adjusted to reflect the Valuation and the Partners' distributive shares of tax items shall be determined all in accordance with Treasury Regulation 1.704-1(b)(2)(iv)(f) and (g). The parties further agree that immediately prior to any subsequent contribution to the Partnership or distribution from the Partnership, Capital Accounts shall be adjusted in accordance with the provisions of Code Section 704(b) and the Regulations, including Treasury Regulation 1.704-1(b)(2)(iv)(f) and (g). 4. OWNERSHIP PERCENTAGES AND UNITS. As a result of the contributions of capital set forth in paragraph 3 above, the Ownership Percentage Interests and number of Units held by each Partner is as follows:
Ownership Percentage Partner Units Interests ------- ----- --------- CLASS A Yoo 3,600,000.00 23.95437% Condon 800,000.00 5.32319% Elmendorf 400,000.00 2.66159% Grubbs (assignee of Class A) 50,000.00 .33269% Bell (assignee of Class A) 50,000.00 .33269% CLASS B 2 Macroweb 10,000.00 .06653% Trout 7,232,856.20 48.12737% CLASS C First Inning 619,047.61 4.11913% Isom 1,219,047.62 8.11153% Hamilton 476,190.48 3.16856% Weston Entity 357,142.86 2.37642% MiniPat 95,238.10 .63371% 2M 119,047.62 .79214% TOTAL UNITS OUTSTANDING 15,028,570.49
5. WAIVER OF PRE-EMPTIVE RIGHTS. The parties to this Agreement hereby waive any pre-emptive rights that they may have to acquire Units issued by the Partnership, but only with respect to the Units issued by the Partnership which are set forth in 4 above (and Units issued under Options in effect prior to the date hereof) and not with respect to any Units issued by the Partnership after the date of this Agreement. 6. RIGHT TO APPOINT DIRECTORS. Notwithstanding Section 9(h) of the Second Amendment to the Agreement of Limited Partnership of Rackspace, Ltd. to the contrary, 2M shall not have the right to participate with the other Class C Limited Partners in designating one director or manager of the Successor Entity under the terms set forth in such Section 9(h), nor for the purposes of Section 9(h) shall 2M's equity interest in the Partnership be included in determining whether the Class C Limited Partners hold 10% of the equity interests of the Successor Entity. 7. PARTIES BOUND/ADDITIONAL AGREEMENTS. The parties hereto agree that Hamilton and 2M, by executing this Third Amendment, are bound to and have the benefit of the terms contained herein as well as the terms contained in the First Amendment, the Second Amendment and the Partnership Agreement as if they had become direct signatories to such agreements. 8. REPRESENTATION. The parties to this Third Amendment acknowledge that the law firm of Matthews and Branscomb, P.C. has assisted in the preparation of this document on behalf of and as counsel for Trout, Ltd. and the General Partner, and further acknowledge that the Partnership will pay the fees and expenses associated with such services. 9. MULTIPLE COUNTERPARTS. This Third Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. REMAINDER OF PAGE LEFT INTENTIONALLY BLANK 3 Executed as of the date first written above. RACKSPACE, LTD. By: Macroweb, LC Its: General Partner /s/ Graham M. Weston --------------------------------- Graham M. Weston, Member /s/ Morris A. Miller --------------------------------- Morris A. Miller, Member GENERAL PARTNER: Macroweb, LC /s/ Morris A. Miller --------------------------------- Morris A. Miller, Member /s/ Graham M. Weston --------------------------------- Graham M. Weston, Member LIMITED PARTNERS: /s/ Richard Yoo --------------------------------- Richard Yoo /s/ Dirk Elmendorf --------------------------------- Dirk Elmendorf /s/ Patrick Condon --------------------------------- Patrick Condon Trout, Ltd. By: Knightsbridge, L.C.,General Partner By: /s/ Graham M. Weston --------------------------------- Its: --------------------------------- 4 Isom Capital Partners I, L.P. By: BESK Funding, Inc., General Partner By: /s/ S. James Bishkin -------------------------- S. James Bishkin President First Inning Investors, L.P. By: Trango Capital L.L.C., General Partner By: /s/ Quincy J. Lee ----------------------- Quincy J. Lee, Manager The Hamilton Companies LLC By: /s/ Frederic C. Hamilton ----------------------------- Title: President -------------------------- Weston Investment Interest, L.L.C. By: /s/ Graham Weston ----------------------------- Title: Member -------------------------- MiniPat & Company, Ltd. By: /s/ Patrick Condon ---------------------------- Title: President ------------------------- 2M Technology Ventures, L.P. By: 2M Technology Group, L.L.C. Its: General Partner By: /s/ Steven Leeke ------------------------- 5 FOURTH AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. This Fourth Amendment to Agreement of Limited Partnership of Rackspace, Ltd. (hereinafter referred to as the ("Fourth Amendment") is made effective the 27 day of March, 2000 (the "Effective Date"), by and among Rackspace, Ltd. (the "Partnership"), Macroweb, LC, a Texas limited liability company (the "General Partner" or "Macroweb"), Trout, Ltd., a Texas limited partnership ("Trout"), Richard Yoo ("Yoo"), Patrick Condon ("Condon"), Dirk Elmendorf ("Elmendorf"), Isom Capital Partners I, L.P. ("Isom"), First Inning Investors, L.P. ("First Inning"), The Hamilton Companies LLC, a Colorado limited liability company ("Hamilton"), Beaulieu River Capital LC (formerly, Weston Investment Interest, L.L.C.), a Nevada limited liability company ("Beaulieu"), MiniPat & Company, Ltd., a Texas limited partnership ("MiniPat"), 2M Technology Ventures, L.P. ("2M") (Macroweb, Trout, Yoo, Condon, Elmendorf, Isom, First Inning, Hamilton, Weston Entity, MiniPat and 2M are sometimes referred to herein as the "Existing Partners"), Norwest Venture Partners VII, L.P. ("Norwest"), Red Hat, Inc. ("Red Hat") and Tailwind Capital Partners 2000, L.P. ("Thomas Weisel"). This Fourth Amendment amends the Agreement of Limited Partnership dated December 29, 1998, as amended on September 29, 1999 (the "First Amendment"), on November 30, 1999 (the "Second Amendment") and again on February 22, 2000 (the "Third Amendment") (collectively, hereinafter referred to as the "Agreement" or the "Partnership Agreement"). Except as amended by this Fourth Amendment, the Third Amendment, the Second Amendment and the First Amendment to Agreement of Limited Partnership of Rackspace, Ltd., the terms of the Partnership Agreement shall continue in full force and effect. Capitalized terms used herein shall, unless otherwise specified, have the meanings assigned to them in the Partnership Agreement. WHEREAS, Norwest desires to contribute $5,750,000, to become a Class C Limited Partner and to receive Units in accordance with the terms of this Agreement. WHEREAS, Red Hat desires to contribute $2,000,000, to become a Class C Limited Partner and to receive Units in accordance with the terms of this Agreement. WHEREAS, Thomas Weisel desires to contribute $300,000, to become a Class C Limited Partner and to receive Units in accordance with the terms of this Agreement. WHEREAS, the Partnership and the Existing Partners desire to have Norwest, Red Hat and Thomas Weisel invest in the Partnership as set forth herein and to have them become Limited Partners of the Partnership. NOW, THEREFORE, FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN MADE, THE PARTIES AGREE AS FOLLOWS: 1. ADMISSION OF NEW PARTNERS. Upon the execution of this Fourth Amendment by all the parties hereto, effective the date set forth above, Norwest, Red Hat and Thomas Weisel shall become Additional Limited Partners of the Partnership as "Class C Limited Partners", having the rights and interests of Class C Limited Partners as set forth in the Second Amendment except as otherwise provided herein. For the purposes hereof, references to the "Partners" or the "Limited Partners" shall include Norwest, Red Hat and Thomas Weisel. 2. CONTRIBUTION OF CAPITAL/WARRANTS. Upon the execution of this Fourth Amendment, (i) Norwest shall contribute $5,750,000 to the Partnership and shall receive 1,015,901 Class C Units to be held as a Class C Limited Partner, (ii) Red Hat shall contribute $2,000,000 to the Partnership and shall receive 353,356.89 Class C Units to be held as a Class C Limited Partner, and Thomas Weisel shall contribute $300,000 to the Partnership and shall receive 53,003.53 Class C Units to be held as a Class C Limited Partner (collectively, the "New Contributions to Capital). In addition, Norwest shall receive a warrant (the "Norwest Warrant") to purchase an amount of Class C Units (which have the same rights and obligations as the Units initially purchased by Norwest), determined by dividing $3,000,000 by the greater of the $18.24 or the mid-point in the filing range (the "Mid-point") set forth in the preliminary prospectus (commonly referred to as the "red herring") which is first circulated by the Company. After the Mid-point is established, the warrant may be exercised at anytime before one year after the date of issuance, unless the Mid-point is not established within four months of the date hereof, in which case it may be exercised after four months from the date of issuance. A copy of the warrant is attached as Exhibit A. 3. CAPITAL ACCOUNTS. The parties to this Fourth Amendment have made a determination that the fair market value of the assets of the Partnership, immediately prior to the contributions by Norwest, Red Hat and Thomas Weisel described in 2 above, was $85,000,000.00 (the "Valuation"). However, the parties further agree that the value of the assets is extremely speculative and may in fact be substantially more or substantially less than $85,000,000. The number of Units received by Norwest, Red Hat and Thomas Weisel is based upon the parties' mutual determination that the value of the Partnership's assets immediately prior to the Effective Date, was $85,000,000. The parties agree as of and immediately prior to the Effective Date, the Partners' Capital Accounts shall be adjusted to reflect the Valuation and the Partners' distributive shares of tax items shall be determined all in accordance with Treasury Regulation 1.704-1(b)(2)(iv)(f) and (g). The parties further agree that immediately prior to any subsequent contribution to the Partnership or distribution from the Partnership, Capital Accounts shall be adjusted in accordance with the provisions of Code Section 704(b) and the Regulations, including Treasury Regulation 1.704-1(b)(2)(iv)(f) and (g). The Capital Accounts of all of the Partners as of the Effective Date are as set forth on Exhibit "B" attached hereto. 2 4. OWNERSHIP PERCENTAGES AND UNITS. As a result of the contributions of capital set forth in paragraph 2 above, the Ownership Percentage Interests and number of Units held by each Partner is as follows:
Ownership Percentage Partner Units Interests ------- ----- --------- CLASS A Yoo 3,600,000 21.88339% Condon 800,000 4.86298% Elmendorf 400,000 2.43149% Grubbs (assignee of Class A) 50,000 .30394% Bell (assignee of Class A) 50,000 .30394% CLASS B Macroweb 10,000 .06079% Trout 7,232,856.20 43.96651% CLASS C First Inning 619,047.61 3.76302% Isom 1,219,047.62 7.41025% Hamilton 476,190.48 2.89463% Beaulieu 357,142.86 2.17097% MiniPat 95,238.10 .57893% 2M 119,047.62 .72366% Norwest 1,015,901 6.17538% Red Hat 353,356.89 2.14796% Thomas Weisel 53,003.53 .32219% TOTAL UNITS OUTSTANDING 16,450,831.91
5. NEW INVESTORS. It is expressly agreed that the General Partner may cause the Partnership to issue up to 530,035.34 Class C Units (the "Additional Units") to one or more additional persons or entities (the "New Investors") and to admit them as Class C Limited Partners, provided that the aggregate purchase price per Unit is not less than $5.66 per Unit. In addition, the General Partner may cause the Partnership to issue a warrant to the New Investors with the same terms as contained in the Norwest Warrant, including terms as to amount of Units subject to purchase, price, and the time period in which it may be exercised. It is the intention of the parties hereto that such New Investors shall have the benefits and obligations of the Class C Limited Partners, except to the extent limited by paragraph 7 below, and that they may become signatories to this Agreement without any further consent or agreement of the parties to this agreement. To the extent that such New Investors become parties to this agreement, the schedule set forth in paragraph 4 above shall be appropriately 3 adjusted and the capital accounts of all the Partners will be "booked-up" in accordance with paragraph 3 above at the time of the investment to reflect the valuation of the Partnership at that time. To the extent that the New Investors are admitted to the Partnership, for the purposes hereof, references to the "Partners" or the "Limited Partners" shall include the New Investors. 6. WAIVER OF PRE-EMPTIVE RIGHTS. The parties to this Agreement hereby waive any pre-emptive rights that they may have to acquire Units issued by the Partnership, but only with respect to the Units issued by the Partnership which are set forth in 4 above, Units issued upon options in effect prior to the date hereof, or Units issued to New Investors under paragraph 5 above, and not with respect to any Units issued by the Partnership after the date of this Agreement. In addition, with respect to the Units purchased by Norwest, Red Hat, Thomas Weisel and the New Investors, if any, the parties hereto waive any rights of first refusal which may exist with respect to the resale of those Units by any of them. 7. RIGHT TO APPOINT DIRECTORS. Notwithstanding Section 9(h) of the Second Amendment to the Agreement of Limited Partnership of Rackspace, Ltd. to the contrary, Norwest, Red Hat, Thomas Weisel and the New Investors, if any, shall not have the right to participate with the other Class C Limited Partners in designating one director or manager of the Successor Entity under the terms set forth in such Section 9(h), nor for the purposes of Section 9(h) shall Norwest's, Red Hat's, Thomas Weisel's or the New Investors equity interest in the Partnership be included in determining whether the Class C Limited Partners hold 10% of the equity interests of the Successor Entity. 8. PARTIES BOUND/ADDITIONAL AGREEMENTS. The parties hereto agree that Norwest, Red Hat, Thomas Weisel and the New Investors, if any, by executing this Fourth Amendment, are bound to and have the benefit of the terms contained herein as well as the terms contained in the First Amendment, the Second Amendment, the Third Amendment and the Partnership Agreement as if they had become direct signatories to such agreements. 9. REPRESENTATION. The parties to this Fourth Amendment acknowledge that the law firm of Matthews and Branscomb, P.C. has assisted in the preparation of this document on behalf of and as counsel for Trout, Ltd. and the General Partner, and further acknowledge that the Partnership will pay the fees and expenses associated with such services. 10. MULTIPLE COUNTERPARTS. This Fourth Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] 4 Executed as of the date first written above. RACKSPACE, LTD. By: Macroweb, LC Its: General Partner /s/ Graham M. Weston ------------------------------------- Graham M. Weston, Member /s/ Morris A. Miller ------------------------------------- Morris A. Miller, Member GENERAL PARTNER: Macroweb, LC /s/ Morris A. Miller ------------------------------------- Morris A. Miller, Member /s/ Graham M. Weston ------------------------------------- Graham M. Weston, Member LIMITED PARTNERS: /s/ Richard Yoo ------------------------------------------- Richard Yoo /s/ Dirk Elmendorf ------------------------------------------- Dirk Elmendorf /s/ Patrick Condon ------------------------------------------- Patrick Condon Trout, Ltd. By: Knightsbridge, L.C.,General Partner By: /s/ Morris Miller ---------------------------------- Its: Member --------------------------------- 5 Isom Capital Partners I, L.P. By: BESK Funding, Inc., General Partner By: /s/ S. James Bishkin ---------------------------------- S. James Bishkin President First Inning Investors, L.P. By: Trango Capital L.L.C., General Partner By: /s/ Quincy J. Lee ---------------------------------- Quincy J. Lee, Manager The Hamilton Companies LLC By: /s/ Frederic C Hamilton --------------------------------------- Beaulieu River Capital LC (formerly, Weston Investment Interest, L.L.C.) By: /s/ Graham Weston --------------------------------------- MiniPat & Company, Ltd. By: /s/ Patrick Condon --------------------------------------- 6 2M Technology Ventures, L.P. By: 2M Technology Group, L.L.C. Its: General Partner By: /s/ Steven [ILLEGIBLE] ---------------------------------- Red Hat, Inc. By: /s/ Walter McCormick --------------------------------------- Norwest Venture Partners VII, L.P. By: /s/ George Still, Jr. --------------------------------------- General Partner Tailwind Capital Partners 2000, L.P. By: Thomas Weisel Capital Partners LLC, general partner By: /s/ David A. Baylor ---------------------------------- David A. Baylor, General Counsel NEW INVESTORS: 7 FOURTH AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF RACKSPACE, LTD. Separate Signature Page for New Investors With respect to the 466,431 Class C Units purchased by Sequoia Capital Franchise Fund for $2,640,000. Sequoia Capital Franchise Fund By: /s/ illegible --------------------------- With respect to the 63,604 Class C Units purchased by Sequoia Capital Franchise Partners for $360,000. Sequoia Capital Franchise Partners By: /s/ illegible --------------------------- 8
EX-10.12 15 EXHIBIT 10.12 Exhibit 10.12 WARRANT This Agreement (herein the "AGREEMENT") is entered into effective the 30th day of November, 1999 (herein the "EFFECTIVE DATE"), by and between RACKSPACE, LTD. (herein "RACKSPACE"), a Texas limited partnership whose sole general partner is Macroweb, LC, a Texas limited liability company, and TRANGO CAPITAL, L.L.C., a Texas limited liability company (herein "TRANGO"). WHEREAS, Rackspace is in the business of offering web-server hosting services through the leasing of internet servers, bandwidth, connectivity and administration of all aspects of servers; and WHEREAS, Trango is the sole general partner of First Inning Investors, L.P., a Texas limited partnership (herein "FIRST INNING"); and WHEREAS, contemporaneous with the execution of this Agreement, First Inning is investing One Million Three Hundred Thousand and No/100 Dollars ($1,300,000.00) in Rackspace (herein the "FIRST INVESTMENT"), which investment is being made, in part, in consideration for the agreement of Rackspace to provide to Trango a warrant to make a substantial additional investment in Rackspace, all as provided herein; NOW, THEREFORE, in consideration of the premises herein set out, and Ten Dollars and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Rackspace and First Inning agree as follows: 1. OPTION TO INVEST. Trango will have the option (but not the obligation) to acquire all (but not less than all) of the Option Interest (as hereinafter defined) in consideration for the payment to Rackspace of the Purchase Price (as hereinafter defined) (herein the "OPTION TO INVEST"). If Trango exercises such Option to Invest, it shall acquire the Option Interest through a new limited partnership to be formed, of which Trango will be sole general partner, which will be pursuant to a limited partnership agreement on substantially the same terms as the Agreement of Limited Partnership of First Inning, with the limited partners being one or more of the Limited Partners of First Inning and/or Melvin Lachman, the specific limited partners and the percentage of ownership of each shall be determined by Trango, in its sole and absolute discretion (herein "FIRST INNING II"). WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 1 OF 7 PAGES 2. EXERCISE OF OPTION. The Option to Invest may be exercised by Trango providing to Rackspace written notice of the exercise by Trango of such option (herein the "NOTICE OF EXERCISE") at any time from the Effective Date hereof through 5 p.m., CST, on December 31, 2001 (herein the "OPTION PERIOD"). 3. PURCHASE PRICE. The Purchase Price for the Option Interest is Eight Hundred Thousand and No/100 Dollars ($800,000.00), to be paid by First Inning II to Rackspace at the Closing (as hereinafter defined). 4. OPTION INTEREST. 4.1 For purposes of this Agreement: (a) The interest acquired by First Inning for the First Investment, as subsequently altered by virtue of any merger, exchange or dilution for other investment in Rackspace (or its successor-in-interest), if any, is herein referred to as the "INITIAL INVESTMENT"; (b) The OPTION INTEREST, as that term is used in this Agreement, shall be an interest equal to 61.5385% (that is, $800,000 DIVIDED BY $1,300,000) of the then Initial Investment (that is, of the same quality and character of investment in the same entity [e.g., undivided limited partnership interest, or shares in corporation, or membership interests in a limited liability company] but only 61.5385% of the equity interest represented by the First Investment at the time of exercise of the Option). 4.2 In consideration for the payment of the Purchase Price by First Inning II as herein provided, at the Closing, Rackspace will transfer and assign the Option Interest to First Inning II, free and clear of any liens or encumbrances. 4.3 The Option Interest will have all of the rights and privileges generally available to other Limited Partners of Rackspace. 5. CLOSING. The Closing shall occur at the offices of Rackspace within ten (10) business after the Notice of Exercise is delivered by Trango to Rackspace. WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 2 OF 7 PAGES 6. SALE OR MERGER. 6.1 In the event that, during the Option Period while Trango has not yet exercised the Option to Invest, all or substantially all of the ownership/equity interests (i.e., undivided limited partnership, or shares in a corporation, or membership interests in a limited liability company, as the case may be) in Rackspace, or all or substantially all of the assets of Rackspace, are to be sold, then Rackspace will provide to Trango not less than fifteen (15) business days prior written notice of such sale and the terms and provisions of such sale (herein the "NOTICE OF INTENT TO SELL"), and Trango will be entitled to exercise the Option to Invest prior to consummation of such sale, and the Option Interest acquired by First Inning II will participate fully and ratably (that is, with all other ownership/equity interests) in such sale; provided, however, if Trango fails to exercise the Option to Invest within such 15 business days and consummate the purchase of the Option Interest within such 15 days, then the Option to Invest will lapse and be of no further force and effect. 6.2 In the event that during the Option Period while Trango has not yet exercised the Option to Invest, Rackspace contemplates a merger or exchange which will result in the then owners of the ownership/equity in Rackspace receiving ownership/equity in any other entity, then Rackspace will provide to Trango not less than fifteen (15) business days prior written notice of such merger or exchange and the terms and provisions of such merger or exchange (therein the "NOTICE OF INTENT TO SELL"), and Trango will be entitled to exercise the Option to Invest prior to consummation of such merger or exchange, and the Purchase Price paid by First Inning II will be taken into consideration in valuation of the assets of Rackspace in determining the valuation to be used in such merger or exchange, and the Option Interest acquired by First Inning II will participate fully and ratably (that is, with all other ownership/equity interests) in such sale or exchange; provided, however, if Trango fails to exercise the Option to Invest within such fifteen (15) business days, the Option to Invest will NOT lapse prior to the end of the Option Period and the Option Interest will be in the proportionate interest (i.e., 61.5385%) of the interest received and thereafter held in exchange for the Initial Investment. 7. ACCESS TO BOOKS AND RECORDS. From the Effective Date hereof until the expiration of the Option Period: (a) Trango (though its designated representative or agent) will be provided access from time to time to the books and records of Rackspace during normal business hours, and upon not less than 48 hours prior written notice, for the purpose of determining the financial condition of and value of interests in Rackspace; and (b) Rackspace will provide to Trango copies of all unaudited and/or audited operating statements and financial statements (monthly, quarterly and/or annually) as Rackspace shall prepare or have prepared for the benefit of its management, lender(s) or partners. WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 3 OF 7 PAGES 8. REPRESENTATIONS AND WARRANTIES OF RACKSPACE. 8.1 Rackspace does hereby make the following representations and warranties to Trango, and will again at the Closing make the following representations and warranties to Trango: 8.1.1 Rackspace is a limited partnership, duly formed and validly existing and in good standing under the laws of the State of Texas. 8.1.2 Rackspace has all of the requisite authority to execute, deliver and carry out the terms and provisions of this Agreement and other documents to be executed and delivered by and pursuant to this Agreement. 8.1.3 Rackspace is not in default under any agreement to which it is a party (including, without limitation, its partnership agreement), the effect of which will materially adversely affect performance by Rackspace of its obligations pursuant to and contemplated by the terms of this Agreement, or its operations or the value of its assets or the value of partnership interests therein. 8.1.4 There are no actions, suits or proceedings pending, or to the current actual knowledge of Rackspace, without duty of independent inquiry, threatened against or affecting Rackspace or its General Partner, before any court or any governmental, administrative, regulatory, adjudicatory or arbitrational body or agency of any kind which will materially adversely affect the performance of Rackspace of its obligations pursuant to and as contemplated by the terms and provisions of this Agreement or the operations of Rackspace, or the value of partnership interests therein. 8.1.5 Neither this Agreement nor any document, financial statement, or financial information furnished by Rackspace to Trango, at the time furnished, contains, or will contain, any untrue statement of material fact or omits the stated fact material thereto or to this Agreement. 8.1.6 Rackspace has good and marketable title to all of its assets and interests in assets, whether real, personal, mixed, tangible, or intangible, which constitute all of the assets and interests in assets that are used in the business of Rackspace, and all those assets are free and clear of restrictions on or conditions to transfer or assignment, and free and clear of mortgages, liens and pledges, charges, encumbrances, claims, conditions or restrictions, except for (i) those disclosed in financial statements of Rackspace which have been previously delivered to Trango, (ii) any lien for current taxes not yet due and payable, and (iii) possible minor matters that, in the aggregate, are not substantial in amount and do not materially detract from or interfere with the WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 4 OF 7 PAGES present or intended use of any of these assets or materially impair the business operations of Rackspace. The above notwithstanding, with respect to the intellectual property rights held by Rackspace, no warranty is made other than, Rackspace is not aware of any facts which indicate that Rackspace's use of such intellectual property infringes the rights of any third party. 8.1.7 Rackspace has not relied upon any representations or warranties, written or oral, express or implied, by Trango or its agents, and neither Trango or its agents have made any representations, written, oral, express or implied, to Rackspace, as to the past, current or future value of the Option Interest. 9. REPRESENTATIONS AND WARRANTIES OF TRANGO. 9.1 Trango does hereby make the following representations and warranties to Rackspace, and will again at the Closing make the following representations and warranties to Rackspace: 9.1.1 Trango is a limited liability company duly formed and validly existing and in good standing under the laws of the State of Texas. 9.1.2 Trango has all of the requisite authority to execute, deliver and carry out the terms and provisions of this Agreement and other documents to be executed and delivered by and pursuant to this Agreement. 9.1.3 Trango is fully satisfied that it has received such access to the books and records of Rackspace as it requires, as well as such other information pertaining to Rackspace, and its operations of current and potential competitors, as it deems necessary or appropriate, in evaluating the acquisition of the offered interests other than access to the financial information as provided for herein. 9.1.4 Trango has not relied upon any representations or warranties, written or oral, express or implied, by Rackspace or its agents, and neither Rackspace nor its agents, have made any representations, written or oral, express or implied, to Trango, as to the present, current or future value of the Option Interest. 9.1.5 All representations of First Inning and its limited partners as contained in the subscription agreement of even date herewith between First Inning and Rackspace are true and correct in all material respects. WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 5 OF 7 PAGES 10. MISCELLANEOUS. 10.1 There are no brokers in this transaction, and no commissions will be due and owing upon the consummation of the transactions contemplated in this Agreement. 10.2 The parties hereto agree that they will execute and deliver or cause to be executed and delivered, such additional agreements and instruments that shall be reasonably required and necessary to carry into effect the purpose of this Agreement. 10.3 All notices or other communications with the parties hereto shall be required or permitted to give hereunder shall be deemed given, when delivered or if and when mailed by certified mail, return receipt requested, postage prepaid, addressed to the party to whom given at the address set forth below, or such other addresses which may be designated by written notice served on the other party, or by hand delivery, to the address below, or by telecopy to the telecopy number provided below: RACKSPACE: Rackspace, Ltd. 111 Soledad, Suite 1100 San Antonio, Texas 78205 Attention: Mr. Graham M. Weston Telecopy: (210) 892-4329 FIRST INNING: Trango Capital, L.L.C. 970 Isom Road San Antonio, Texas 78216 Attention: Mr. Quincy J. Lee Telecopy: (210) 804-4394 10.4 Captions and arrangements used in this Agreement are for convenience only, and shall not affect the interpretation of this Agreement. 10.5 This Agreement has been made and entered into and is performable in Bexar County, Texas, and shall be construed under the laws of the State of Texas, and venue shall be in Bexar County, Texas. 10.6 Any provision of this Agreement held by a Court of competent jurisdiction to be invalid or enforceable shall not impair or invalidate the remainder of the Agreement, and the effect thereof shall be confined to the provision held to be invalid or enforceable. 10.7 This written Agreement constitutes the entire and complete agreement between the parties hereto, and it is expressly understood that there are no verbal understandings or agreements which may change the terms, covenants, conditions herein set forth, and that no modification of this Agreement and no waiver of any terms and conditions herein shall be effective unless made in writing and duly executed by all of the parties hereto. WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 6 OF 7 PAGES 10.8 The terms, conditions and obligations of this Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective heirs, legal representatives, predecessors, successors and assigns. 10.9 This Agreement may be executed in multiple counterparts, each of which shall be an original, but all of which shall constitute one document. It shall not be necessary that all parties hereto be signatory to the same counterpart. 10.10 Each party shall pay all costs and expenses incurred or to be incurred by it in negotiating and preparing this Agreement and in closing and carrying the transactions contemplated by this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date hereinabove set out. RACKSPACE: RACKSPACE, LTD., a Texas limited partnership By: MACROWEB, LC, a Texas limited liability company, Sole General Partner By: /s/ Graham Weston ------------------------------------ Its: manager ----------------------------------- FIRST INNING: TRANGO CAPITAL, L.L.C., a Texas limited liability company By: /s/ Quincy J. Lee ----------------------------------------- Quincy J. Lee, Manager WARRANT FOR INVESTMENT IN RACKSPACE, LTD. PAGE 7 OF 7 PAGES EX-10.13 16 EXHIBIT 10.13 Exhibit 10.13 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into effective as of the 30th day of November, 1999, by and among Rackspace, Ltd., a Texas limited partnership (the "Company"), and the securities holders of the Company set forth on EXHIBIT A attached hereto (such persons being referred to herein as the "Investors" and individually as an "Investor"). WITNESSETH: WHEREAS, each investor is acquiring Units of Limited Partners Interest ("Units") in the Company in accordance with the Second Amendment to Agreement of Limited Partnership of the Company, dated effective November 30, 1999 (the "Second Amendment"); and WHEREAS, one of the Investors, First Inning Investors, L.P. ("First Inning"), has the right to acquire additional Units pursuant to an Option Agreement ("Option Agreement") to be entered into in accordance with the Second Amendment; and WHEREAS, another investor, The Hamilton Companies LLC ("Hamilton"), has the right to acquire additional Units pursuant to an option ("Hamilton Option") granted in the Second Amendment: and WHEREAS the execution of this Agreement by the Investors is a condition to the closing of the transactions contemplated by the Second Amendment; and WHEREAS the Company has agreed to provide the Investors with certain registration rights with respect to the Registrable Securities. NOW THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration, the parties hereto hereby agree as follows: Section 1. CERTAIN DEFINITIONS. As used in this Agreement, the following definitions shall apply: "AFFILIATE" means a Person who directly or indirectly controls, is controlled by, or is under common control with, the Person referred to. For this purpose, "control" means the ability to direct or cause the direction of the management or affairs of a Person, whether through the ownership of voting securities, by contract or otherwise. "COMMISSION" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any similar successor federal statute, and the rules and regulations thereunder, all as the same shall be in effect from time to time. "FAMILY AFFILIATE" means, with respect to any Investor, (i) a natural Person who is a spouse, lineal descendent or spouse of a lineal descendent, or any trust or family trust of which the investor or any of such Persons is the trustee or a beneficiary (ii) a corporation, partnership, limited partnership, limited liability company or other business entity if and for so long as the Investor holds, directly or indirectly, equity securities or interests in such entity having the right to elect a majority of the members of the board of directors or other governing body or to otherwise manage the affairs of the entity. "HOLDER" means any holder of outstanding Registrable Securities; provided, however, that for all purposes under this Agreement, the holder of any Registrable Securities shall be deemed to be the Holder of the Registrable Securities into which such Registrable Securities are then convertible. "PERSON" means any natural Person, any unincorporated organization or association, and any partnership limited liability company, corporation, estate, trust, nominee, custodian or other individual or entity. The terms "REGISTER", REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act (and any post-effective amendments thereto filed or required to be filed), and the declaration or ordering of the effectiveness of such registration statement. "REGISTRABLE SECURITIES" means: (i) the Units held by the Investors issued pursuant to the Second Amendment, including any additional Units acquired by the Investors by exercise of any preemptive rights or rights of first refusal, (ii) the Units, if any, issued to First Inning pursuant to the Option Agreement, (iii) the Units, if any, issued to Hamilton pursuant to the Hamilton Option, and (iv) any securities of the Company issued or issuable, directly or indirectly, in respect of by way of exchange for such Units held by the Investors, together with any other securities which are issued with respect thereto by way of any stock split, stock dividend, recapitalization, reorganization, or similar event; PROVIDED, HOWEVER, that Registrable Securities shall not include any Registrable Securities which have previously been registered or sold to the public or which are eligible for sale to the public under paragraph (k) of Rule 144 as defined below. "REGISTRATION DATE" means the effective date of the first registration statement filed by the Company for an offering of its securities to the general public, or the date on which the Company first becomes subject to the registration requirements of Section 12(b) or Section 12(h) of the Securities Exchange Act, whichever first occurs. -2- "REGISTRATION EXPENSES" means all expenses incurred by the Company in complying with registration obligations hereunder, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company and the reasonable fees and disbursements of not more than one counsel chosen by the Holders who are the holders of a majority of Registrable Securities being registered, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). Registration Expenses shall not include fees of counsel for the Holders other than of one counsel as set forth above or Selling Expenses as defined below. "REQUISITE HOLDERS" means Holders of not less than 50% of the Registrable Securities; except in the case of a Demand Registration for the first registered offering of the Company's securities it means holders of not less than 40% of the then outstanding equity securities of the Company. "RESTRICTED SECURITIES" means the securities of the Company required to bear the legend set forth in Section 2 hereof. "RULE 144" means Rule 144 promulgated under the Securities Act, or any similar successor rule, as the same shall be in effect from time to time. "RULE 145" means Rule 145 promulgated under the Securities Act, or any similar successor rule, as the same shall be in effect from time to time. "RULE 415" means Rule 415 promulgated under the Securities Act, or any similar successor rule, as the same shall be in effect from time to time. "SELLING EXPENSES" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the sale of Registrable Securities. "SECURITIES ACT" means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, as shall be in effect at the time. "SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules, regulations and interpretations promulgated thereunder. Section 2. DEMAND REGISTRATION. (a) REQUEST FOR REGISTRATION. If, at any time after the first to occur of (i) 180 days following the Registration Date or (ii) the third anniversary of this Agreement, the Company shall receive from the Requisite Holders a written request that the Company effect the registration under the Securities Act of the resale of Registrable Securities held by such Requisite Holders (a "Demand Registration"), then The Company shall: -3- (i) promptly give written notice of the proposed registration to all other Holders; and (ii) use its best efforts to effect, as soon as practicable, the registration under the Securities Act (including, without limitation, by means of a shelf registration pursuant to Rule 415 under the Securities Act if so requested and if the Company is then eligible to use such a registration) of the Registrable Securities which the Company has been so requested to register, together with all or such portion of the Registrable Securities of any Holders joining in such request as are specified in a written request received by the Company within 20 days after the Company mails such written notice in accordance with the registration procedures set forth in Section 7 hereof; PROVIDED, HOWEVER, that the Company shall not be obligated to take any action to effect any such registration under the Securities Act: (A) after the Company has effected one such registration pursuant to this Section 2 which have been declared or ordered effective and pursuant to which securities have been sold; or (B) if such request is for a shelf registration pursuant to Rule 415 of the Securities Act and is in connection with the first registration statement filed by the Company. Subject to the foregoing clauses (A) and (B) the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, and in any event within 120 days, after receipt of the request or requests of the Requisite Holders; PROVIDED, HOWEVER, that if the Company shall furnish to such Holder a certificate signed by the president of the Company stating that in the good faith judgment of the board of directors of the Company, it would be seriously detrimental to the Company or its shareholders for such registration statement to be filed on or before the date filing would be required and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a reasonable period not to exceed 90 days. The Company's right to delay such registration as set forth in the previous sentence may only be exercised one time during any twelve month period. (b) PRIORITY ON UNDERWRITTEN DEMAND REGISTRATIONS. If the Requisite Holders so elect, the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an underwritten offering. In such event, if the managing underwriter or underwriters of the Demand Registration advise the Company and the Requisite Holders in writing that the total amount of Registrable Securities requested to be included in such offering would exceed the maximum amount of securities which can be marketed at a price reasonably related to the current fair market value of such securities without adversely affecting such offering (the "Underwriters Maximum Number"), the Company will be required to include in such registration to the extent of the Underwriters Maximum Number: FIRST, the Registrable Securities requested to be included in such registration by the Holders thereof, allocated PRO RATA among such Holders on the basis of the -4- number of Registrable Securities requested to be included therein by each such Holder; and SECOND, any equity securities requested to be included in such registration by the Company and any other holders of such securities, allocated as determined by the Company subject to any agreements between the Company and any such holders. (c) SELECTION OF UNDERWRITERS. The managing underwriter or underwriters to be used in connection with such registration shall be selected by the Requisite Holders holding a majority of the Registrable Securities being registered. The Company shall have the right to approve the selection of any such underwriters, which approval shall not be unreasonably withheld. (d) UNDERWRITING AGREEMENTS. The Company shall (together with all Holders selling Registrable Securities) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by a majority in interest of the Requisite Holders, and each Holder selling Registrable Securities shall participate in such underwriting. (e) WITHDRAWAL FROM UNDERWRITING. If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Requisite Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration, and such Registrable Securities shall not be transferred in a public distribution prior to 90 days after the effective date of such registration, or such other shorter period of time as the underwriters may require. If by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion and manner used in determining the underwriter limitation in this Section 2. (f) INCLUSION AS A DEMAND REGISTRATION. For purposes of this Section 2, a registration will not count as a Demand Registration until it has become effective; PROVIDED, HOWEVER, if the Requisite Holders withdraw their Registrable Securities (whether before or after the effectiveness of such registration), such demand will count as a Demand Registration for purposes of this Section 2 unless the Requisite Holders pay all of the Registration Expenses associated with such attempted registration. (g) RIGHTS OF OTHER SECURITIES HOLDERS JOINING DEMAND. In order for the Requisite Holders to make a Demand Registration that would result in the First public offering of the securities of the Company, it will be necessary to have other equity securities holders of the Company (as selected in the discretion of the Investors) join the Investors in making such demand. In such event, the holders of Company securities joining the Investors in that Demand Registration shall be entitled to participate in that particular registration on the same basis as the Investors. -5- Section 3. PIGGYBACK REGISTRATION. (a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. Whenever the Company proposes to register the sale of any of its equity securities under the Securities Act other than on Form S-4 or Form S-8 promulgated under the Securities Act or any similar form then in effect, the Company shall give written notice thereof to each Holder as soon as practicable (but in any event at least 30 days before such filing), offering such Holder the opportunity to register on such registration statement such number of Registrable Securities as such Holder may request in writing, subject to the provisions of section 3(b), not later than 20 days after the date of the giving of such notice (a "Piggyback Registration"). Upon receipt by the Company of any such request, the Company shall use reasonable efforts to, or in the case of an underwritten offering, to cause the managing underwriter or underwriters to, include such Registrable Securities in such registration statement (or in a separate registration statement concurrently filed) and to cause such registration statement to become effective with respect to such Registrable Securities in accordance with the registration procedures set forth in Section 7 hereof. If the Company's registration is to be effected pursuant to an underwritten offering, Registrable Securities registered pursuant to this Section 3 shall be distributed in accordance with such offering. Notwithstanding the foregoing, if at any time after giving written notice of its intention to register its equity securities and before the effectiveness of the registration statement filed in connection with such registration, the Company determines for any reason either not to effect such registration or to delay such registration, the Company may, at its election, by delivery of written notice to each Holder (A) in the case of a determination not to effect registration, relieve itself of its obligation to register the Registrable Securities in connection with such registration or (B) in the case of a determination to delay registration, delay the registration of such Registrable Securities for the same period as the delay in the registration of such other equity securities. Each Holder requesting inclusion in a registration pursuant to this Section 3 may, at any time before the effective date of the registration statement relating to such registration, revoke such request by delivering written notice of such revocation to the Company (which notice shall be effective only upon receipt by the Company); PROVIDED, HOWEVER, that if the Company, in consultation with its financial and legal advisors, determines that such revocation would materially delay the registration or otherwise require a recirculation of the prospectus contained in the registration statement, then such holder shall have no right to so revoke its request. (b) PRIORITY IN PIGGYBACK REGISTRATION. Notwithstanding the foregoing, with respect to any primary registration that is underwritten and with respect to which the managing underwriter or underwriters advise the Company of an Underwriters Maximum Number, then the Company will so notify all Holders requesting inclusion in such registration and will be required to include in such registration, to the extent of the Underwriters Maximum Number: FIRST, any equity securities that the Company proposes to sell for its own account (up to the Underwriters Maximum Number); SECOND, the Registrable Securities requested by Holders to be included in such registration allocated PRO RATA with any other holders of equity securities having piggyback registration rights on the basis of the number of securities requested to be included therein by each such holder; and THIRD, to the extent that the Underwriters Maximum Number has not been filled by the application of the preceding clauses, any further equity securities that the Company proposes to sell for its own account and/or -6- any equity securities requested to be included in such registration by other holders of such securities, allocated as determined by the Company subject to agreements between the Company and any such holders. (c) SELECTION OF UNDERWRITERS. If any Piggyback Registration is in the form of an underwritten offering, the managing underwriter or underwriters and any additional investment bankers and managers to be used in connection with such registration shall be selected by the Company (subject to any separate agreement with the holders on behalf of which a secondary underwritten offering is being made). The selection of such underwriters shall also be subject to the approval by the Holders participating in such underwritten offering holding a majority of the Registrable Securities being registered, which approval shall not be unreasonably withheld. (d) UNDERWRITING AGREEMENTS. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company, and each Holder selling Registrable Securities shall participate in such underwriting. (e) WITHDRAWAL FROM UNDERWRITING. If any Holder or other holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to 180 days after the effective date of the registration statement relating thereto, or such other shorter period of time as the underwriters may require. (f) RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. Section 4. MARKET STANDOFF. If the Company at any time shall register the offer and sale of shares of Common Stock to the public under the Securities Act (including any registration pursuant to Sections 2 or 3), the Holders shall not sell publicly, make any short sale of, grant any option for the purchase of, or otherwise dispose publicly of, any Registrable Securities (other than those shares of Common Stock included in such registration pursuant to Sections 2 or 3) without the prior written consent of the Company for a period designated by the Company in writing to the Holders, which period shall begin not more than 10 days prior to the effectiveness of the registration statement pursuant to which such public offering shall be made and shall not last more than 180 days after the effective date of such registration statement. The Company shall obtain the agreement of any person permitted to sell shares of stock in a registration to be bound by and to comply with this Section 4 as if such person was a Holder hereunder. Section 5. EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with the one Demand Registration and the Piggyback Registrations shall be borne by the Company. All -7- Selling Expenses relating to securities so registered as well as all Registration Expenses relating to Demand Registrations and Piggyback Registrations not required to be borne by the Company shall be borne by the holders of such securities pro rata on the basis of the number of shares of securities so registered on their behalf. Section 6. REGISTRATION PROCEDURES. If and whenever the Company is required by the provisions of Section 2 or 3 hereof to use its best efforts to effect promptly the registration of Registrable Securities, the Company shall: (a) Prepare and file with the Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become and remain effective as provided herein; (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and current and to comply with the provisions of the Securities Act with respect to the sale of or other disposition of all Registrable Securities covered by such registration statement, including such amendments and supplements as may be necessary to reflect the intended method of disposition of the prospective seller or sellers of such Registrable Securities, but for no longer than one hundred eighty (180) days subsequent to the effective date of such registration in the case of a registration statement on Form S-1 (or any similar form of registration statement required to set forth substantially identical information) and for no longer than one hundred twenty (120) days in the case of a registration statement on Form S-3; PROVIDED, HOWEVER, that (i) such period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company; and (ii) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, provided that Rule 415 permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment that (I) includes any prospectus required by Section 10(a)(3) of the Securities Act or (II) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (I) and (II) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; (c) Furnish to each prospective seller of Registrable Securities such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities of such seller; -8- (d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing; (e) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange or approved for quotation on any inter-dealer quotation system on which similar securities issued by the Company are then listed or quoted; (f) Provide a transfer agent and registrar for all Registrable Securities registered pursuant to such registration statement and a CUSIP number of all such Registrable Securities, in each case not later than the effective date of such registration; (g) Use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any Holder may reasonably request and do any and all other acts and things which may be reasonably necessary or advisable to enable any Holder to consummate the disposition in such jurisdictions of the Registrable Securities owned by such Holder; PROVIDED, HOWEVER, that the Company will not be required to qualify generally to do business, subject itself to general taxation or consent to general service of process in any jurisdiction where it would not otherwise be required to do so but for this paragraph (g); (h) Use its best efforts to cause such Registrable Securities to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable each Holder holding such Registrable Securities to consummate the disposition of such Registrable Securities; (i) Subject to the execution of confidentiality agreements in form and substance satisfactory to the Company, make available upon reasonable notice and during normal business hours, for inspection by each Holder holding such Registrable Securities, any underwiter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any Holder or underwriter (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Company as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Inspector in connection with such registration statement; -9- (j) Use its best efforts to obtain from its independent certified public accountants "cold comfort" letters in customary form and at customary times and covering matters of the type customarily covered by cold comfort letters; (k) Use its best efforts to obtain from its counsel an opinion or opinions in customary form; (l) Issue to any underwriter to which any Holder holding such Registrable Securities may sell shares in such offering certificates evidencing such Registrable Securities; (m) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; (n) In connection with any underwritten offering pursuant to a registration statement filed pursuant to Section 2 hereof, enter into an underwriting agreement reasonably necessary to effect the offer and sale of Common Stock, provided such underwriting agreement contains customary underwriting provisions and provided further that if the underwriter so requests the underwriting agreement will contain customary contribution provision; and (o) Use its best efforts to take all other steps necessary to effect the registration of such Registrable Securities contemplated hereby. Section 7. INDEMNIFICATION. In the event any of the Registrable Securities are included in a registration statement under this Section: (a) The Company will indemnify each Holder, each of such Holder's officers and directors and partners (and each partner's officers, directors and partners) and such Holder's separate legal counsel and independent accountants, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained, on the effective date thereof, in any registration statement, any prospectus contained therein, or any amendment or supplement there to, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in the light of the circumstances under which they were made) not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers, directors and partners (and each partner's -10- officers, directors and partners) and such Holders' separate legal counsel and independent accountants and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder or underwriter and stated to be specifically for use therein. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and its legal counsel and independent accountants, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained, on the effective date thereof in any such registration statement, any prospectus contained therein, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in the light of the circumstances under which they were made) not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement or prospectus in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the obligations of any such Holder hereunder shall be limited to an amount equal to the proceeds to each such Holder of Registrable Securities sold as contemplated herein. (c) Each party entitled to indemnification under this Section (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 8 to the extent such failure is not prejudicial. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any -11- judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) If the indemnification provided for in this Section 8 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to herein, then the Indemnifying Party, in lieu of indemnifying the Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party with respect to such loss, liability, claim, damage or expense in the proportion that is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and the Indemnified Party shall he determined by reference to, among other things, whether the untrue or alleged untrue statement of material fact or the omission (or alleged omission) to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party, and the parties, relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Section 8. INFORMATION BY HOLDER. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section. Section 9. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company shall use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, beginning 90 days after (i) the Registration Date, or (ii) the Company issues an offering circular meeting the requirements of Regulation A under the Securities Act; (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act (at any time after it has become subject to such reporting requirements); and (c) Furnish to any Holder promptly upon request a written statement as to its compliance with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Securities Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report -12- of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. Section 10. ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register securities granted under this Agreement may be assigned to a transferee or assignee in connection with the transfer or assignment of shares of Registrable Securities (i) to a Family Affiliate of the Holder, (ii) to Affiliates of the Holder, (iii) to the Company, (iv) to Persons to whom the Registrable Securities are transferred by reason of the Holder's death or involuntarily by operation of law, (v) pursuant to a transfer approved by the Company in its sole and absolute discretion, or (vi) to Persons to whom the Registrable Securities are transferred in accordance with the transfer restriction provisions, if any, in the limited partnership agreement, regulations, bylaws or other documents or agreements of Holder; provided, however, that the Company is given written notice thereof. Section 11. SUBSEQUENT PURCHASERS. Without the affirmative vote of the Holders of at least 66-2/3% of the Registrable Securities, the Company shall not grant to any purchaser of the Company's securities any demand registration rights, or any piggyback registration rights that, with respect to underwriters cutbacks, would be inconsistent or in conflict with the provisions hereof. Moreover, for so long as the holders of the Registrable Securities are entitled to exercise the registration rights described herein, they shall receive the benefit of any and all registration rights granted by the Company to any other person who is as of the date of this Agreement securities holder in the Company (or any affiliate of such existing securities holder) which are more favorable than the registration rights granted to the Investors herein. Section 12. TERM. This Agreement and all rights granted to the investors hereunder shall expire on the seventh anniversary of the date on which the first registration statement by the Company for an offering of its securities to the general public is declared effective by the Commission. Section 13. MISCELLANEOUS. (a) NOTICES. Any notice or other communications required or permitted hereunder shall be deemed to be sufficient if contained in a written instrument delivered in person or by nationally-recognized overnight courier or duly sent by First Class certified mail, postage prepaid, or by telecopy addressed to such party at the address or telecopy number set forth below or such other address or telecopy number as may hereafter be designated in writing by the addressee to the addressor listing all parties: -13- If to the Company: Rackspace, Ltd. 112 E. Pecan Street, Suite 600 San Antonio, Texas 78205 Telephone: (210) 892-4000 Facsimile: (210) 892-4329 Attn: Morris A. Miller If to the Investors: Those addresses set forth next to each Investor's name, as set forth in EXHIBIT A (b) ENTIRE AGREEMENT; AMENDMENTS. This Agreement represents the entire agreement of the parties hereto, and supersedes any other agreements among the parties with respect to the subject matter hereof the terms and provisions of this Agreement may not be modified or amended, or any of the provisions hereof waived, except pursuant to the written consent of the Company and holders of a majority of the Registrable Securities. (c) ASSIGNMENT. This Agreement may not be assigned by any party without the prior written consent of the other parties, except by a Holder in accordance with Section 10 above. Any assignment which contravenes this Section shall be void AB INITIO. (d) COUNTERPARTS. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. (e) HEADINGS; INTERPRETATIONS. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. Whenever the context requires, references in this Agreement to the singular number shall include the plural and, likewise, the plural number shall include the singular, and words denoting gender shall include the masculine, feminine and neuter. (f) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas without regard to the principles of conflicts of law thereof. (g) SEPARABILITY. In case any one or more of the provisions contained in this Agreement or any application thereof shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and other applications thereof shall not in any way be affected or impaired thereby. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -14- IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be executed the day and date above written. RACKSPACE, LTD. By: Macroweb, LC By: /s/ Graham M. Weston ----------------------------- Graham M. Weston, Member By: /s/ Morris A. Miller ----------------------------- Morris A. Miller, Member INVESTORS: MACROWEB, LC By: /s/ Graham M. Weston ------------------------------ Graham M. Weston, Member By: /s/ Morris A. Miller ------------------------------ Morris A. Miller, Member ISOM CAPITAL PARTNERS I, LTD. By: BESK Funding Inc., General Partner By: /s/ S. James Bishkin ------------------------------ S. James Bishkin, President FIRST INNING INVESTORS, L.P. By: Trango Capital L.L.C., General Partner By: /s/ Quincy J. Lee ------------------------------ Quincy J. Lee, Manager -15- MINIPAT & COMPANY, LTD. By: /s/ Patrick Condon ---------------------------------- Title: President ------------------------------- THE HAMILTON COMPANIES, LLC By: /s/ Frederic Hamilton ---------------------------------- Title: President ------------------------------- WESTON INVESTMENT INTERESTS, LLC By: /s/ Graham M. Weston ---------------------------------- Title: member ------------------------------- -16- MINIPAT & COMPANY, LTD. By: /s/ Patrick Condon ---------------------------------- THE HAMILTON COMPANIES, LLC By: /s/ Fredric C. Hamilton ---------------------------------- Title: President and Manager ------------------------------- WESTON INVESTMENT INTERESTS, LLC By: /s/ Graham Weston ---------------------------------- Title: Member ------------------------------- -16- EXHIBIT A INVESTORS 1. Macroweb LC 111 Soledad, Suite 1100 San Antonio, TX 78205 Attn.: Graham Weston 2. Isom Capital Partners I, Ltd. c/o BESK Funding, Inc., its General Partner 970 Isom Road San Antonio, TX 78216 Attn.: S. James Bishkin, President 3. First Inning Investors, L.P. c/o Trango Capital L.L.C., its General Partner 970 Isom Road San Antonio, TX 78216 Attn.: Quincy J. Lee 4. MiniPat & Company, Ltd. 13515 West Avenue, No. 236 San Antonio, TX 78216 Attn.: Patrick Condon 5. The Hamilton Companies LLC 1560 Broadway, Suite 2200 Denver, CO 80202 Attn.: Lisa Ireland 6. Weston Investment Interests, LLC 111 Soledad, Suite 1100 San Antonio, TX 78205 Attn.: Graham Weston AMENDMENT TO REGISTRATION RIGHTS AGREEMENT This Amendment to Registration Rights Agreement is made this 22nd day of February, 2000, by and among Rackspace, Ltd., a Texas limited partnership, Macroweb, LC, Trout, Ltd., Isom Capital Partners I, Ltd., First Inning Investors, L.P., MiniPat & Company, Ltd., The Hamilton Companies LLC, Weston Investment Interest, L.L.C., and 2M Technology Ventures, L.P. The parties hereby amend the Registration Rights Agreement dated November 30, 1999 to include as an "Investor", Hamilton that has acquired an additional 238,095.24 Class C Units, and 2M Technology Ventures, L.P. that has acquired 119,047.62 Class C Units. In addition, as specified by the Second Amendment to the Agreement of Limited Partnership of Rackspace, Ltd., the parties acknowledge that Trout, Ltd. is also included as an Investor rather than Macroweb, LC. RACKSPACE, LTD. By: Macroweb, LC, general partner By: /s/ Graham M. Weston -------------------------------- By: /s/ Morris A. Miller -------------------------------- Member Macroweb, LC /s/ Morris A. Miller -------------------------------------------- Morris A. Miller, Member /s/ Graham M. Weston -------------------------------------------- Graham M. Weston, Member Trout, Ltd. By: Knightsbridge, L.C.,General Partner By: /s/ Graham Weston -------------------------------- Its: Member ------------------------------- CLASS C LIMITED PARTNERS Isom Capital Partners I, L.P. By: BESK Funding, Inc., General Partner By: /s/ S. James Bishkin -------------------------------- S. James Bishkin President First Inning Investors, L.P. By: Trango Capital L.L.C., General Partner By: /s/ Quincy J. Lee -------------------------------- Quincy J. Lee, Manager The Hamilton Companies LLC By: /s/ Frederic Hamilton ----------------------------------------- Weston Investment Interest, L.L.C. By: /s/ Graham Weston ----------------------------------------- Title: Member -------------------------------------- MiniPat & Company, Ltd. By: /s/ Patrick Condon ----------------------------------------- Title: President -------------------------------------- 2M Technology Ventures, L.P. By: 2M Technology Group, L.L.C. Its: General Partner By: /s/ Steven D. Leeke ------------------------------ EX-10.14 17 EXHIBIT 10.14 Exhibit 10.14 PROMISSORY NOTE $750,000.00 San Antonio, Texas November 30, 1999 FOR VALUE RECEIVED, the undersigned BEAULIEU RIVER CAPITAL LC, (FORMERLY WESTON INVESTMENT INTERESTS, L.L.C.), a Nevada limited liability company (herein called "MAKER", whether one or more), hereby promises to pay to the order of RACKSPACE, LTD. a Texas limited partnership (herein together with all subsequent holders hereof called "HOLDER") at its main office in San Antonio, Bexar County, Texas, or at such other address as the Holder hereof may from time to time designate in writing to Maker, the principal sum of $750,000.00, or so much thereof as may be advanced, together with interest on the principal balance from time to time remaining unpaid from the date of advance until paid at the rate hereinafter provided. This Note is made in substitution of that certain Note dated November 30, 1999 between Weston Investement Interest, L.L.C. as Maker and Rackspace, Ltd. As Holder which provided for a Maturity Date of January 5, 2000. I. MATURITY DATE: As used herein, the "MATURITY DATE" for this Note shall be February 18, 2000. II. INTEREST RATE: Prior to the Maturity Date, interest on the principal balance advanced and outstanding shall accrue at the rate of eight percent (8.00%) per annum. Interest on this Note shall be calculated on a daily rate equal to 1/365th of the annual percentage rate herein provided. III. PAYMENT OF PRINCIPAL AND INTEREST: This Note shall be due and payable as follows, to-wit: Principal and interest shall be due and payable in full on the Maturity Date. IV. PREPAYMENT: Maker may prepay the principal of this Note in whole or in part at any time or times without penalty. V. SUCCESSORS AND ASSIGNS: The terms and conditions hereof shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. (SIGNATURES ON NEXT PAGE) IN WITNESS WHEREOF Maker has duly executed this Note as of the day and year first above written. MAKER: BEAULIEU RIVER CAPITAL LC /s/ Graham M. Weston ------------------------------- By: Graham M. Weston, Member PAGE EX-10.15 18 EXHIBIT 10.15 Exhibit 10.15 SECOND FINANCIAL COMMITMENT This Second Financial Commitment is made effective the 29th day of September, 1999 (the "Effective Date"), by Exeter Financial, LC, a Texas limited liability company ("Lender"), for the benefit of Rackspace, Ltd., a Texas limited partnership (the "Partnership"). Lender advanced $1,050,000 (the "Initial Loan") to the Partnership pursuant to the commitment made under Credit Agreement dated December 29, 1998 between Lender and the Partnership (the "First Financial Commitment"). Contemporaneously with the execution of this Agreement, Lender acknowledges to the Partnership that it will transfer and assign notes and instruments representing $ 1,050,000.00 principal and $32,531.51 of accrued interest of the Initial Loan to Trout, Ltd. (the "Assigned Debt"). In consideration for the Partnership's agreement herein and separate consideration made to its lender by Trout, Ltd. ("Trout") Lender has advanced and agrees to commit to advance additional funds to the Partnership in order to benefit both the Partnership and Trout, both of which share common owners with Lender. Now Therefore, for and in consideration of the mutual promises herein made, the parties agree and represent as follows: 1. ASSIGNMENT OF CONVERTED DEBT AND AGREEMENT TO CONVERT DEBT TO EQUITY. Lender represents and warrants that it has, contemporaneously with the execution of this Agreement, assigned the notes and other instruments representing the Assigned Debt to Trout. The Partnership represents and warrants that simultaneously with the execution of this Agreement, it will accept the Assigned Debt as a capital contribution by Trout under the terms of the First Amendment to Agreement of Limited Partnership of Rackspace, Ltd., of even date herewith. 2. FINANCIAL COMMITMENT. Lender agrees to advance the Partnership and upon the Partnerships request, in one or more advances on or before March 31, 2000, of up to $500,000.00, which amount includes $225,000.00 which has already been advanced by Lender so that an additional $275,000.00 is to be advanced after the date hereof. The amounts advanced shall be evidenced by promissory notes, each of which shall bear interest at a rate of 8% per annum (compounded annually and added to principal), and shall be secured by all of the assets of the Company. The note(s) shall not require any payments to be made at any time prior to January 1, 2002. From and after January 1, 2002, equal monthly payments of principal and interest shall be due on the first day of each month in an amount necessary to amortize the outstanding principal balance over the five year term of the note. The note shall mature on January 1, 2007. [remainder of page left intentionally blank] EXETER FINANCIAL, LC RACKSPACE, LTD. By:/s/ Morris Miller By: MACROWEB, LC, its general partner ----------------- its: member By:/s/ Morris Miller ---------------- ----------------- Its: member ---------------- EX-10.16 19 EXHIBIT 10.16 RACKSPACE, LTD. 1999 UNIT OPTION PLAN 1. PURPOSE. This 1999 Unit Option Plan (the "Plan") is intended to provide incentives to the employees of Rackspace, Ltd. or any successor to Rackspace, Ltd. (the "Company"), its general partner, any future parent, and any present or future subsidiaries of the Company (collectively, "Related Entities"), by providing them with opportunities to purchase Class D Units in the Company or any successor security of such Class D Units as the result of the operation of paragraph 6 hereof (the "Units") pursuant to options granted hereunder (the "Options"). The holders of Class D Units will have the rights of an "assignee" of a Limited Partnership Interest and thus they will not have any voting rights under the Agreement of Limited Partnership of Rackspace, Ltd. (the "Partnership Agreement"), nor will they be will they have any right which may only be exercised by Limited Partners, however, they will be subject to all terms, conditions and restrictions contained in the Partnership Agreement. Anything in this Plan to the contrary notwithstanding, Options shall not be granted or awarded hereunder to any administrator or administrators if such grant, award or purchase would cause such administrator or administrators not to satisfy the "disinterested person" requirements of Rule 16b-3, or any successor or amended rule ("Rule 16b-3"), promulgated by the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended (the "1934 Act"). Nothing in this Plan shall confer upon an Optionee any right to continue in service for any period or duration or interfere with or otherwise restrict in any way the rights of the Company or any Related Entity, which rights are hereby expressly reserved, to terminate such person's employment at any time and for any reason, with or without cause. Recipients of Options are hereafter referred to individually as an "Optionee" and collectively as "Optionees." 2. ADMINISTRATION OF THE PLAN. The Plan shall be administered (i) to the extent required by Rule 16b-3, by an administrator or administrators in compliance with Rule 16b-3, and (ii) in all other cases, by such administrator or administrators as the general partner of the Company or the board of directors of any successor of the Company (the "Board") may designate or by the Board (collectively, the "Administrators"). Subject to the terms of the Plan, the applicable Administrator shall have the authority to (i) determine the employees of the Company and Related Entities to whom Options may be granted; (ii) determine the option price of Units subject to each Option; (iv) determine the time or times when each Option shall become exercisable and the duration of the exercise period; (v) interpret the Plan and prescribe and rescind rules and regulations relating to it. With respect to persons subject to Section 16 of the 1934 Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of the Plan or action by the applicable Administrator fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the applicable Administrator. The interpretation and construction by the applicable Administrator of any provisions of the Plan or of any Option granted under it shall be final unless otherwise determined by the Board. Administrators or the Board may from time to time adopt such rules and regulations for carrying out the Plan as they may deem best. No member of the Board, any Administrator nor the Company shall be liable for any action or determination made under the terms hereof with respect to the Plan or any Option granted under it. 3. UNITS. The Units subject to the Options shall be authorized but unissued Units. The aggregate number of Units which may initially be issued pursuant to the Plan is six hundred thousand (600,000). The number of Units authorized for the grant of Options under the Plan shall be subject to adjustment as provided in paragraph 6. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the un-purchased Units subject to such Options shall again be available for grants of Units under the Plan to the extent permitted by Rule 16b-3. 4. TERMS OF OPTIONS. A. MINIMUM OPTION PRICE. The price per Unit specified in the agreement relating to each Option granted under the Plan shall not be less than the fair market value per Unit on the date of such grant. If, at the time an Option is granted under the Plan, the Units are publicly traded, "fair market value" shall be determined as of the last business day for which the prices or quotes discussed in this sentence are available prior to the date such Option is granted and shall mean (i) the last reported sales price of a Unit on the principal national securities exchange on which the Units are traded, if the Units are then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Units on the NASDAQ National Market List, if the Units are not then traded on a national securities exchange; or (iii) the closing bid price (or the average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Units are not reported on the NASDAQ National Market List. However, if the Units are not publicly traded at the time an Option is granted under the Plan, "fair market value" shall be deemed to be the greater of (a) the last purchase price of any Unit sold by the Company in an arm's length negotiated transaction within 120 days previous to the date that an Option is granted under the Plan, (b) the annualized revenue of the Company using the revenues for the month preceding the date of grant of an option (12 times the revenue for such previous month) times ten (10) and divided by the number of Units of the Company then outstanding, or (c) $50,000,000 divided by the number of Units of the Company then outstanding. Provided, however, in the event the Administrator shall in good faith determine that the above methods of determining the fair market value of Units are unfair to either the Optionee or the Company, the fair market value of the Units shall be as determined by the Administrator after taking into consideration all 2 factors which it deems appropriate, including, without limitation, the price determined in any applicable public trading market, or any recent sale and offer prices of units of interest in the Company in private transactions negotiated at arm's length. B. DURATION OF OPTIONS. Each Option shall expire on the date specified by the applicable Administrator, but not more than ten (10) years from the date of grant. C. VESTING AND EXERCISE OF OPTIONS. Options shall vest as follows: one third (1/3) of the aggregate Units under the Option on or after the first anniversary of the date of its grant and an additional one third (1/3) of such Units on each of the next following two anniversary dates of its grant. The above notwithstanding, the Administrator shall have the right to increase or decrease the vesting schedule specified above, and to the extent it does so, such vesting schedule shall be specified in the Option. Options which may be exercised according to the above vesting schedule ("Vested Options") may be exercised at anytime after six (6) years from the date of grant, provided however, that such Vested Options may be exercised earlier than six (6) years from the date of grant upon or after the first to occur of (i) the effectiveness of the Company's initial public offering ("IPO"), or (ii) on or after a "Significant Transaction." "Significant Transaction" means the sale of all or substantially all of the assets of the Company, or a merger, business combination or a change in control through the issuance or transfer of equity in the Company, wherein the equity owners of the Company (whether partners, stockholders, members or otherwise) immediately prior to the merger, combination or change in control, do not own or control (directly or indirectly) at least 10% of the equity interest in the Company or the successor company, as the case may be. As to outstanding Vested Options, the Administrator may permit the exercise of such options notwithstanding the failure to meet the IPO and Significant Transaction requirements. The Company makes no representation that an IPO or Significant Transaction will occur and shall have no obligation to seek to cause such events to occur. D. DATE OF GRANT AND EMPLOYEES ELIGIBLE FOR OPTIONS. Options granted under this Plan shall be granted only to employees of the Company or a Related Entity who have been so employed continuously as a full-time employee for at least six (6) months. The above notwithstanding, with respect to persons employed by the Company during 1999, the Administrator shall have the right to deviate from this requirement (whether by an increase or decrease in the number of months a person must be employed) without amending this Plan. Options shall be granted on either December 31 or June 30 of each year, provided that the Administrator may grant Options on dates other than on December 31 and June 30 if extenuating circumstances exist, as determined by the Administrator. E. LIMITATION OF UNITS UNDER OPTION TO A SINGLE OPTIONEE. No Optionee shall be granted Options with aggregate 3 exercise prices for all Units covered by such Options in excess of ten percent (10%) of the annual base salary (exclusive of bonus and commission) of the Optionee at the time of grant. The Administration may deviate from this limit to the extent the circumstance requires. F. OPTION TERMINATES WITH EMPLOYMENT. Upon the termination of the Optionee's full time employment with the Company or a Related Entity, Options held by the Optionee shall terminate except to the extent such Options are Vested Options on the date of any such termination. All Vested Options which may be exercised under the provisions of 4(C) above at the time of termination of employment must be exercised, if at all, within 60 days following any such termination of employment. If not exercised during such sixty (60) day period, such Vested Options shall terminate. All Vested Options which are not exercisable at the time of termination of employment shall terminate on the 120th day following the date of termination of employment, whether or not they become exercisable under the provisions of 4(C) above during such 120 day period. G. CAPITAL ACCOUNT UPON EXERCISE OF OPTION. Units issued upon the exercise of an Option shall be issued with a capital account in the Company (provided the Company upon such exercise is a partnership or other entity for which capital accounts are maintained in respect of units of ownership) which shall bear the same ratio to the total capital accounts in the Company as the number of such Units issued upon such exercise bear to the aggregate units of ownership in the Company then outstanding. H. FORFEITURE FOR COMPETITION. If, at any time while the Optionee remains an employee of the Company or after the Optionee's termination of employment while any Option remains outstanding, the Optionee provides services to a competitor of the Company or a Related Entity, whether as an employee, officer, director, independent contractor, consultant, agent or otherwise (engaging in "Competition"), then the Optionee's rights under any Options outstanding shall terminate and be forfeited, subject only to a determination by the Administrator to the contrary. 5. WRITTEN AGREEMENTS. Options shall be evidenced by instruments (which need not be identical) in such forms as the applicable Administrator may from time to time approve. Such instruments shall conform to such terms, conditions and provisions as are applicable hereunder and may contain such other terms and conditions and provisions as the applicable Administrator deems advisable which are not inconsistent with the Plan, including restrictions applicable to Units issuable upon exercise of Options. The applicable Administrator may from time to time confer authority and responsibility on one or more of its own members and/or one or more officers of the Company or any general partner of the Company to execute and deliver such instruments. The proper officers of the Company or any general partner of the Company are authorized and 4 directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments. 6. ADJUSTMENTS. Upon the happening of any of the following described events, an Optionee's rights with respect to Options granted to him hereunder, shall be adjusted as hereinafter provided, unless otherwise specifically provided, in addition or to the contrary, in the written agreement between the recipient and the Company relating to such Option. A. CERTAIN CORPORATE EVENTS. In the event Units shall be subdivided or combined into a greater or smaller number of units of participation in the Company or if, upon a merger, consolidation, reorganization, split-up, liquidation, combination, recapitalization, the distribution of units of ownership interest, stock or other participation rights as a distribution upon or with respect to Units or the like of the Company, the Units shall be exchanged for other securities of the Company or of another entity, each grantee of an Option shall be entitled, subject to the conditions herein stated, to purchase upon exercise of the Option (or have used for measurement purposes) such number of such units of participation or amount of other securities of the Company or such other entity as were exchangeable for the number of Units which such grantee would have been entitled to purchase (or have used for measurement purposes) except for such action, and appropriate adjustments shall be made in the purchase price per Unit to reflect such subdivision, combination or exchange. In the event any of the foregoing events should occur and the entity the securities of which would be issuable under an Option as the result of the operation of this subparagraph C of this paragraph 6 is not bound and chooses not to be bound under the provisions of this Plan or any Option, and the Company is not a reporting company under the Securities and Exchange Act of 1934, the Administrators shall determine the rights of the Optionee under the Option, which may include termination of the Option. If the surviving entity does not agree to recognize the Options and (i) the transaction meets the definition of a Significant Transaction, or (ii) the Company is otherwise a reporting company under the Securities and Exchange Act of 1934, holders of Vested Options are required to exercise their Options, if at all, within sixty (60) days after the Significant Transaction or other event involving this subparagraph A and any exercise during such 60 days shall be deemed to have occurred on the date previous to such Significant Transaction or other event. B. NEW SECURITIES. If any person or entity owning Units obtained by exercise of an Option receives new or additional or different interests or securities ("New Securities") in connection with a transaction described in subparagraph A above or a distribution described in subparagraph A above as a result of owning such Units, such New Securities shall be subject to all of the conditions and restrictions applicable to the Units with respect to which such New Securities were issued. 5 C. CASH DISTRIBUTIONS. No adjustments in a Unit shall be made for distributions paid in cash or in property other than interests in the Company, unless specified to the contrary by the applicable Administrator in the instrument evidencing such Unit. D. FRACTIONAL UNITS. No fractional Units shall actually be issued under an Option. Any fractional Units which, but for this subparagraph D, would have been issued to a grantee pursuant to an Option shall be deemed to be a whole Unit. E. ADJUSTMENTS. Upon the happening of any of the foregoing events described in subparagraphs A or B above, the class and aggregate number of Units set forth in paragraph 3 hereof that are subject to Options which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect the events described in such subparagraphs. The Board shall determine the specific adjustments to be made under this paragraph 6 and its determination shall be conclusive. 7. MEANS OF EXERCISING OPTIONS AND DENIAL OF RIGHTS AS UNIT HOLDER. An Option(or any part or installment thereof) shall be exercised as specified in the written instrument granting such Option, which instrument may specify any legal method of exercise. The holder of an Option exercisable for Units shall not have the rights of a holder of Units with respect to the Units covered by his Option until the date of issuance of a certificate to him representing such Units. Except as expressly provided above in paragraph 6 with respect to changes in capitalization and distributions in interests, no adjustment shall be made for distributions or similar rights for which the record date is before the date such Unit certificate is issued. 8. TRANSFERABILITY OF OPTIONS. Except as otherwise provided in the Plan, no Option granted under the Plan shall be transferrable by an Optionee other than by will or the laws of descent and distribution. Any Option purported to be transferred to the spouse or former spouse of an Optionee pursuant to any court order or decree or settlement agreement issued or entered into incident to any divorce action shall terminate, whether or not any such court order or decree or settlement agreement purports to merely recognize or document a community interest of such spouse or former spouse. 9. TERMINATION; AMENDMENT. The Board may terminate or amend the Plan in any respect at any time. 10. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of an Option, the Company, in accordance with Section 3402(a) of the Internal Revenue Code, may require the Optionee, purchaser, or holder or exerciser of an Option to pay additional withholding taxes in respect of the amount that is considered compensation includable in such person's gross income. In addition, each Optionee, no later than the date as of which the value of a grant or of any Unit or other amount received thereunder first becomes includable in the gross 6 income for the Optionee for Federal income tax purposes, shall pay to the Company, or make arrangements satisfactory to the Administrator regarding payment of any Federal, state, or local taxes of any kind required by law to be withheld with respect to such income. The Administrator may permit payment of taxes to be made through tender of cash or securities, the withholding of securities or cash to be received or any other arrangement satisfactory to the Administrator. The Company, to the extent permitted by law, shall have the right to deduct any such taxes from any payment of any kind otherwise due to the Optionee. 11. COMPANY'S RIGHT OF FIRST REFUSAL AND OTHER RESTRICTIONS ON TRANSFER OF UNITS. (A) RIGHT OF FIRST REFUSAL AND RESTRICTION ON TRANSFER. No transfer of Units, other than a "Permitted Transfer" as defined in 11(D) below, may be made within twenty-four (24)months of the date the Unit holder first become a full-time employee of the Company. After such 24 month period, in the event that the Optionee proposes to sell, pledge or otherwise transfer to a third party any Units acquired under an Option, or any interest in such Units, the Company shall have a Right of First Refusal with respect to all (and not less than all) of such Units. If the Optionee desires to transfer Units acquired under an Option, the Optionee shall give a written notice (the "Transfer Notice") to the Company describing fully the proposed transfer, including the number of Units proposed to be transferred, the proposed transfer price, the name and address of the proposed transferee (the "Transferee") and proof satisfactory to the Company that the proposed sale or transfer will not violate any applicable federal or state securities laws. The Transfer Notice shall be signed both by the Optionee and by the proposed Transferee and must constitute a binding commitment of both parties to the transfer of the Units. The Company shall have the right to purchase all, and not less than all, of the Units on the terms of the proposal described in the Transfer Notice (subject, however, to any change in such terms permitted under Subsection(B) below) by delivery of a notice of exercise of the Right of First Refusal within 30 days after the date when the Transfer Notice was received by the Company. The Company's rights under this Subsection(A) shall be freely assignable, in whole or in part. (B) TRANSFER OF UNITS. If the Company fails to exercise its Right of First Refusal within 30 days after the date when it received the Transfer Notice, the Optionee may, not later than 90 days following receipt of the Transfer Notice by the Company, conclude a transfer of the Units subject to the Transfer Notice on the terms and conditions described in the Transfer Notice, provided that any such sale is made in compliance with applicable federal and state securities laws and not in violation of any other contractual restrictions to which the Optionee is bound, including any restriction 7 against transfer contained in the Partnership Agreement. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance with the procedure described in Subsection (A) above. If the Company exercises its Right of First Refusal, the parties shall consummate the sale of the Units on the terms set forth in the Transfer Notice within 60 days after the date when the Company received the Transfer Notice (or within such longer period as may have been specified in the Transfer Notice); provided, however, that in the event the Transfer Notice provided that payment for the Units was to be made in a form other than cash or cash equivalents paid at the time of transfer, the Company shall have the option of paying for the Units with cash or cash equivalents equal to the present value of the consideration described in the Transfer Notice. (C) TERMINATION OF RIGHT OF FIRST REFUSAL. Any other provision of this Paragraph 11 notwithstanding, in the event that the Units are readily tradable on an established securities market when the Optionee desires to transfer Units, the Company shall have no Right of First Refusal, and the Optionee shall have no obligation to comply with the procedures prescribed by Subsections (A) and (B) above, provided that such transfer takes place not less than 24 months from the date the Optionee first became a full-time employee of the Company. (D) PERMITTED TRANSFERS. This Paragraph 11 shall not apply to (i) a transfer by beneficiary designation, will or intestate succession or (ii) a transfer to the Optionee's spouse, children or to a trust established by the Optionee for the benefit of the Optionee or the Optionee's spouse, children or grandchildren, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Plan or the Option, including but not limited to the Right of First Refusal and the restriction against transfer for a period of 24 months from the date the Optionee first became a full-time employee of the Company. If the Optionee transfers any Units acquired under this Plan and the Option, either under this Subsection (D) or after the Company has failed to exercise the Right of First Refusal, then this Paragraph 11 shall apply to the Transferee to the same extent as to the Optionee. (E) TERMINATION OF RIGHTS AS UNITHOLDER. If the Company makes available, at the time and place and in the amount and form provided in this Option, the consideration for the Units to be purchased in accordance with this Paragraph 11, then after such time the person from whom such Units are to be purchased shall no longer have any rights as a holder of such Units (other than the right to receive payment of such consideration in accordance with this Option). Such Units shall be deemed to have been purchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Option. 8 (F) SECURITIES LAW RESTRICTIONS. Regardless of whether the offering and sale of Units under the Plan have been registered under the Securities Act of 1933 or have been registered or qualified under the securities laws of any state, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of such Units (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act of 1933, the securities laws of any state or any other law. (G) MARKET STAND-OFF. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, including the Company's initial public offering, the Optionee shall not directly or indirectly sell, make any short sale of, loan, hypothecate, pledge, offer, grant or sell any option or other contract for the purchase of, purchase any option or other contract for the sale of, or otherwise dispose of or transfer, or agree to engage in any of the foregoing transactions with respect to, any Units acquired under this Option without the prior written consent of the Company or its underwriters. Such restriction (the "Market Stand-Off") shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Units acquired under this Agreement until the end of the applicable stand-off period. 12. COMPANY'S RIGHT TO PURCHASE UNITS. (A) COMPANY'S RIGHT TO PURCHASE UNITS IN EVENT OF TERMINATION OF EMPLOYMENT OR IN THE EVENT OF COMPETITION. The Company shall have the right to purchase any Units acquired by an Optionee under Options granted under this Plan in the event that the Optionee is (i) terminated for "cause", (ii) after being continuously employed by the Company for less than 24 months, resigns or is terminated without "cause", (iii) becomes disabled or dies after being continuously employed by the Company for less than 24 months, or (iv) in the event that the Optionee engages in Competition (as defined in 4(H) above) during his/her employment or anytime thereafter. The purchase price for the Units shall be the exercise price paid by the Optionee plus an amount necessary to provide an annualized 10% rate of return from the date the Option was exercised. However, in the event that the Optionee's employment is terminated without "cause," Optionee dies or becomes disabled, and at such time the Company is a reporting company under Securities and Exchange Act of 1934, the Company shall have a right to purchase any Units acquired by the Optionee under Options granted under this Plan for a purchase price equal to the fair market value of the Units determined on the date of termination in accordance with Section 4(A) above (Minimum Option Price). For the purposes hereof, termination for "cause" shall mean 9 termination of employment by the Company made on the basis of the conduct (whether acts or omissions) or performance of the Optionee. The Administrator shall have the sole right to make the determination of whether or not the termination is for "cause." (B) EXERCISE OF RIGHT OF PURCHASE. If the Company desires to exercise its right to purchase such Units, it shall within 120 days after the date employment is ended (i) deliver a notice of exercise to the last known address of the Optionee, and (ii) make available at the offices of the Company, a check in the amount of the purchase price for the Units. (C) TERMINATION OF RIGHTS AS UNITHOLDER. If the Company makes available, at the time and place and in the amount and form provided the consideration for the Units to be purchased in accordance with this Paragraph 12, then after such time the person from whom such Units are to be purchased shall no longer have any rights as a holder of such Units (other than the right to receive payment of such consideration in accordance with this Option). Such Units shall be deemed to have been purchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Option. 13. GOVERNING LAW; CONSTRUCTION. The validity and construction of the Plan and the instruments evidencing Options shall be governed by the laws of the State of Texas. In construing this Plan, the singular shall include the plural and the masculine gender shall include the feminine and neuter, unless the context otherwise requires. 14. NO LIMITATIONS ON COMPANY'S RIGHT TO GRANT OPTIONS. Nothing in this Plan is intended to limit the right of the Company to issue options to purchase Units or any other security with terms inconsistent with or in addition to the terms described above. 15. PROVISION FOR PAYMENT. To the extent that the exercise of an Option relates back to a Significant Transaction, the Company shall make adequate provision to ensure that the Optionee receives the securities, cash or other item of value, which it would have received had he/she become a Unit holder on the date of the Significant Transaction. 16. PARTNERSHIP GOVERNING INSTRUMENT. This Plan is and shall remain subject to the terms of the Agreement of Limited Partnership of Rackspace, Ltd. as the same may be amended from time to time. As a condition to issuing any Units under any Option granted under this Plan, the Administrator shall require the Optionee to become a signatory to the Agreement of Limited Partnership of Rackspace, Ltd., as the same may be amended from time to time. However, the Optionee shall have the rights of an assignee only and shall not have the rights of a Limited Partner. Furthermore, as Class D Unit holders, 10 they will not have any voting rights, pre-emptive rights, rights to review the books and records of the Company, rights to receive reports from the Company or any other right of a Limited Partner other than the right to receive the distributions and allocations from the Company at such times as those distributions and allocations may be made. 11 EX-10.17 20 EXHIBIT 10.17 Exhibit 10.17 FORM OF NON-STATUTORY UNIT OPTION AGREEMENT THIS OPTION AGREEMENT is made as of the 15th day of February, 2000, by and between Rackspace, Ltd., a Texas Limited Partnership, with its principal place of business in San Antonio, Bexar County, Texas (hereinafter called the "Company"), and __________ (Employee), an employee of the Company (hereinafter called the "Employee"). WHEREAS, the Company desires to afford the Employee an opportunity to purchase Class D Limited Partnership Units (hereinafter called the "Units"). NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and Employee's employment by the Company, the parties hereto agree as follows: 1. THE PLAN. This Option Agreement is subject to and shall be governed by the terms and provisions of the Rackspace Ltd. 1999 Unit Option Plan (the "Plan"). Capitalized terms used in the Option Agreement, which are used in the Plan, shall have the same meanings established in the Plan. A copy of the Plan has been provided to the Employee herewith and the receipt and review of which is hereby acknowledged by the Employee. 2. GRANT OF OPTION. The Company hereby grants to the Employee the right and option (hereinafter called the "Option" or "Options") to purchase all or any part of an aggregate of __________) Units on the terms and conditions hereinafter set forth (subject to adjustment as provided in the Plan). The date of grant is _________________. 3. PURCHASE PRICE. The purchase price of the Units covered by the Option shall be $_____ per Unit (subject to adjustment as provided in the Plan). 4. VESTING AND EXERCISE. Until this Option is terminated, the Employee shall have the right to purchase all or a portion of the Units subject to this Option at such times, and from time to time, as is hereinafter set out. There is no obligation on the Employee to purchase any of the Units subject to the Option. The Option shall vest (and to the extent vested become "Vested Options") as follows: one third (1/3) of the aggregate Units under the Option on the first anniversary of the date of grant and an additional one third (1/3) of such Units on each of the next following two anniversaries of the date of grant. To the extent vested, Options may be exercised at any time after the sixth anniversary date from the date of grant, provided that such Vested Options may be exercised earlier than six (6) years from the date of grant upon or after the first to occur of (i) the effectiveness of the Company's initial public offering ("IPO"), or (ii) on or after a "Significant Transaction." "Significant Transaction" means the sale of all or substantially all of the assets of the Company to an unaffiliated third party, or 1 a merger, business combination or a change in control through the issuance or transfer of equity in the Company, wherein the equity owners of the Company (whether partners, stockholders, members or otherwise) of the Company immediately prior to the merger, combination or change in control, do not own or control (directly or indirectly) at least 10% of the equity interest in the Company or the successor company, as the case may be. The Company makes no representation that an IPO or Significant Transaction will occur and shall have no obligation to seek to cause such events to occur. 5. OPTION TERMINATES WITH EMPLOYMENT AND COMPETITION. Upon the termination of full time employment with the Company, the Options held by the Employee terminate except to the extent the Options are Vested Options on the date of any such termination. Vested Options which are exercisable under the terms of paragraph 4 above upon termination of employment must be exercised, if at all, within 60 days following termination. If not exercised during such sixty (60) day period, the Options shall terminate. Vested Options which are not exercisable under the terms of paragraph 4 shall terminate on the 120th day following the termination of employment, whether or not they become exercisable under the provisions of paragraph 4 during such 120 day period. Pursuant to Section 4H of the Plan, this Option terminates in the event that the Employee engages in competition against the Company. 6. EXPIRATION. This Option expires on (a) the seventh anniversary date from the date of grant, (b) the date this Option terminates under the terms of Sections 5 of this Option Agreement, or (c) the date the Option terminates under Section 6A of the Plan, or as otherwise provided under the Plan. 7. MANNER OF EXERCISE OF OPTION. The Employee may exercise this Option by giving written notice to the Company specifying the number of full Units to be purchased and accompanied by payment of the full price thereof. No exercise of the Option shall be complete and no Units shall be delivered to the Employee prior to the time that the full purchase price for such Units has been paid. The purchase price shall be paid in cash or by such other method as the Administrator may approve and the Administrator shall have the right, as a condition of issuance of the Units, to require the Employee to execute documentation in a form satisfactory to the Administrator and the Company to ensure that Employee will comply with the terms and provisions of the Plan, this Option and the Agreement of Limited Partnership (or other governing documents) of the Company. During the lifetime of the Employee, the Option may not be exercised by any person (including the spouse of the Employee) other than by the Employee. Upon the death of the Employee, the Option may be exercised by the personal representative, legatees or heirs of the Employee as to options exercisable upon such death until the termination of the Option. 2 8. NONTRANSFERABILITY OF OPTION. This Option is not transferable except by will or by the laws of descent and distribution. Any Option purported to be transferred to the spouse or former spouse of Employee pursuant to any court order or decree or settlement agreement issued or entered into incident to any divorce action shall terminate, whether or not any such court order or decree or settlement agreement purports to merely recognize or document a community interest of such spouse or former spouse. This Option may not be assigned, transferred, pledged or hypothecated in any manner and shall not be subject to any form of execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition of this Option contrary to the provisions of this Option Agreement, or the levy of any execution, attachment or similar process upon the Option, shall be null and void and of no effect. 9. UNIT-HOLDER RIGHTS. The Employee shall not have any of the rights of a Unit-holder merely because of his ownership of the Option granted by this Option Agreement. Furthermore, as a Class D Unit holder, upon exercise, the Option holder shall only have the rights of an "assignee" of a limited partner of the Company and shall not be a limited partner. 10. EMPLOYMENT STATUS. The grant of this Option shall not impose upon the Company, or any parent or subsidiary corporation, any obligation whatsoever to retain the Employee in employment status. This Option is personal to the Employee and may be exercised by him as provided in the Plan only if he is continuously retained by the Company, or by any parent or subsidiary corporation. 11. REQUIREMENTS OF LAW. If any law or regulation of the Securities and Exchange Commission (the "Commission") or any other federal or state commission or agency having jurisdiction requires the Company or the Employee to take any action with respect to the Units acquired by the exercise of this Option, then the date upon which the Company shall deliver the Units shall be postponed until full compliance has been made with all such legal or regulatory requirements. Further, at or before the time of the delivery of the Units, the Employee shall, if requested by the Company, deliver to the Company his written statement that he intends to hold the Units so acquired by him on exercise of this Option for investment and not with a view to resale or other distribution thereof to the public. Further, in the event the Company shall determine that, in compliance with the Securities Act of 1933, as amended, or any other applicable federal or state statute or regulation, it is necessary to register any of the Units with respect to which an exercise of this Option has been made, or to qualify any such Units for exemption from any of such requirements, the Company shall take such action at its own expense, or at the Company's discretion, treat the exercise of the Option as unenforceable. In any case, not until registration has been completed shall the Units be delivered to the Employee. 3 12. RESTRICTION ON SALE OR OTHER TRANSFER OF UNITS. An Employee may not sell, assign or otherwise transfer any of the Units purchased pursuant to the exercise of the Option granted hereunder in any manner that is not permitted by the Plan or the Agreement of Limited Partnership (or other governing corporate documents of the Company), or violates the Securities Act of 1933, as amended, or the rules and regulations of the Commission issued thereunder, or any other federal or state laws, rules and regulations applicable to the sale or transfer of securities. 13. RESTRICTION ON TRANSFER, RIGHT OF FIRST REFUSAL AND MARKET STAND-OFF. The Units purchased under this Option are subject to certain Restriction on Transfer, Rights of First Refusal and Market Stand-Off obligations included in the Plan. 14. LEGENDS. All certificates evidencing Units purchased under this Agreement shall bear the following legend: THE SECURITIES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF SUCH SECURITIES (OR THE PREDECESSOR IN INTEREST TO SUCH SECURITIES). SUCH AGREEMENT CONTAINS RESTRICTIONS ON TRANSFER AND GRANTS TO THE COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SUCH SECURITIES AND CERTAIN MARKET STAND-OFF OBLIGATIONS. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE. THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 15. GOVERNING LAW; CONSTRUCTION. The validity and construction of this Option Agreement shall be governed by the laws of the State of Texas. In construing this Option Agreement, the singular shall include the plural and the masculine gender shall include the feminine and neuter, unless the context otherwise requires. 4 IN WITNESS WHEREOF, the Company has caused this Non-Statutory Units Option Agreement to be executed by an authorized officer, and the Employee has hereunto set his hand, all as of the day and year first above written. RACKSPACE, LTD., a Texas Limited Partnership By: MACROWEB, LC, General Partner By: ------------------------------- Its:------------------------------- EMPLOYEE: ----------------------------------- Field (Name) 5 EX-10.20 21 EXHIBIT 10.20 PROMISSORY NOTE $150,000.00 San Antonio, Texas December 29, 1998 FOR VALUE RECEIVED, the undersigned Rackspace, Ltd. (herein called "Maker", whether one or more), hereby promises to pay to the order of Exeter Financial, LC (herein together with all subsequent holders' hereof called "Holder") by check into Holder's designated account at Frost Bank, N.A., San Antonio, Bexar County Texas, or at such other bank account in Bexar County, Texas as the Holder hereof may from time to time designate in writing to Maker, the principal sum of $150,000.00, together with interest on the principal balance from time to time remaining unpaid at the rate hereinafter provided. I. MATURITY DATE: As used herein, the "MATURITY DATE" for this Note shall be the first to occur of acceleration in accordance with the terms of this Note, or January 1, 2007. II. INTEREST RATE: Prior to the Maturity Date, interest on the principal balance advanced and outstanding shall accrue at the rate of eight percent (8%) per annum. Prior to the Maturity Date, accrued but unpaid interest shall compound annually and therefore shall be added to the principal balance of this Note at the end of each twelve month period. Interest on this Note shall be calculated on a daily rate equal to 1/365th (or 1/366th in leap years) of the annual percentage rate herein provided. III. PAYMENT OF PRINCIPAL AND INTEREST: This Note shall be due and payable as follows, to-wit: Principal and interest shall be due and payable in equal monthly installments of $3,831.36, commencing on January 1, 2002 and continuing regularly and monthly thereafter on the first day of each succeeding calendar month, until the Maturity Date, when all accrued and unpaid interest and all unpaid principal shall be due and payable in full. Absent a default by Maker, no payments are scheduled under this Note prior to January 1, 2002. Each installment will be applied first to payment of accrued interest on the unpaid principal, and the remainder will be applied to reduction of unpaid principal. IN ANY EVENT, ALL UNPAID PRINCIPAL AND ALL ACCRUED AND UNPAID INTEREST SHALL BE DUE AND PAYABLE IN FULL ON THE MATURITY DATE, WHETHER SUCH MATURITY OCCURS BY ACCELERATION OR OTHERWISE. All payments called for hereunder shall (a) be paid in lawful money of the United States of America in federal or other immediately collectible funds, which, at the time of payment is legal tender for the payment of public and private debts; (b) be payable not later than 1:00 p.m. San Antonio Time on the date such payments are due; and (c) be made to the Holder by wire transfer or direct deposit to the bank account stated above, or at such other bank account in Bexar County, 1 Texas as the Holder may from time to time designate in writing to Maker. IV. SECURITY: This Note is secured by a Security Agreement and Financing Statement (the "SECURITY AGREEMENT") of even date herewith. The Security Agreement covers and constitutes a valid lien upon and against all of Maker's assets, whether now existing or hereafter acquired. The Security Agreement and all other documents or instruments securing the Note are collectively referred to herein as the "SECURITY DOCUMENTS". V. LIMITATION ON INTEREST: This Note and all documents securing the same have been executed under and shall be construed and enforced in accordance with the laws of the State of Texas from time to time in effect, except to the extent United States federal law permits Holder to contract for, charge or receive a greater amount of interest. It is expressly stipulated and agreed to be the intent of Maker and Holder to at all times comply strictly with the applicable usury laws now or hereafter governing consideration received under the Note, Security Documents or any other agreements between the parties with respect to the Property. If the applicable law is ever revised, repealed or judicially interpreted so as to render usurious any consideration called for, contracted for, charged, taken, reserved or received with respect to the Note, the Security Documents, or any other agreement between the parties, or if any prepayment by Maker, or Holder's exercise of the options herein contained to accelerate the maturity of this Note, results in Maker having paid any interest in excess of that permitted by applicable law, then notwithstanding anything to the contrary in this Note, the Security Documents or any other agreement, it is Maker's and Holder's express intent and agreement that all excess amounts theretofore collected by Holder be credited on the principal balance of this Note or any other principal indebtedness of Maker to Holder (or, if this Note and all other such indebtedness have been paid in full, refunded to Maker) and the provisions of this Note, the Security Documents and any other agreements shall immediately be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new documents, so as to comply with the then applicable law, but so as to permit the recovery of the greatest amount otherwise called for hereunder and thereunder. The right to accelerate the maturity of this Note does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and Holder does not intend to collect any unearned interest in the event of acceleration. All consideration paid to the Holder hereof in consideration for the loan evidenced by this Note that constitutes interest under applicable law shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full term of such indebtedness (including the period of any renewal or extension hereof) so that the rate of interest on account of such indebtedness does not exceed the usury ceiling from time to time in effect and applicable to the loan evidenced by this Note for so long as the debt is outstanding. The term "applicable law" and similar terms used herein refer to the law in effect on the date of the first disbursement under this Note; provided that if the law is subsequently revised to permit more interest to be charged on the loan evidenced by this Note, then Holder and Maker agree that to the extent permitted by law, such revised law shall be the "applicable law" as used herein. The provisions of this paragraph shall control all agreements between the Maker and the Holder hereof. 2 Maker represents and warrants to Holder and to all other owners or holders of this Note, that: (i) the loan evidenced hereby is for business, commercial, investment or other similar purposes, and not primarily for personal, family, household or agricultural use, as such terms are used in applicable provisions of Title 4 of the Texas Finance Code, and (ii) the credit transaction evidenced by this Note is specifically exempted under Regulation Z issued by the Board of Governors of the Federal Reserve System in Title 1 (Consumer Credit Cost Disclosure) of the Consumer Credit Protection Act and that no disclosures are required to be given under such regulation and federal laws in connection with this credit transaction. In no event shall the provisions of Chapter 346 of the Texas Finance Code (regarding certain revolving credit accounts) apply to the loan evidenced by this Note. VI. PREPAYMENT: Maker may prepay the principal of this Note in whole or in part at any time or times without penalty. Any prepayment shall be applied first toward accrued and unpaid interest, and then to the principal installments last maturing upon this Note, that is, in the inverse order of maturity and without reducing the amount or time of payment of the remaining obligatory installments. Amounts prepaid may not be reborrowed. VII. DEFAULT: It is hereby agreed that: (i) If default shall be made in the payment of any part of the principal or interest on this Note when due, or in the payment of any other sums due under the Security Agreement or any of the other Security Documents when due, and if such delinquent payment shall not be received by Holder within five (5) business days following written notice thereof by or on behalf of Holder to Maker; provided, however, that after such time as Holder has provided two (2) such notices and opportunity to cure to Maker during any twelve month period, then upon Maker's subsequent default in payment, Holder shall be entitled to exercise its remedies hereunder and under the Security Documents without further notice or opportunity to cure; and provided further, that the failure to pay all indebtedness that is due upon the maturity of this Note, whether matured by acceleration or otherwise, shall be an event of default immediately, without any notice, grace or opportunity to cure; or (ii) If default shall be made in the performance or observance of any of the covenants and agreements contained in this Note, the Security Agreements or any of the other Security Documents, other than a covenant to pay money, and such default shall continue for thirty (30) days following written notice thereof by or on behalf of Holder to Maker; or (iii) Upon the occurrence of any other event whereby, according to the tents of this Note, the Security Agreement or any other Security Document, the required time of payment of this Note may be accelerated; 3 then an "EVENT OF DEFAULT" shall have occurred under this Note and in such event, without further notice or demand, the entire unpaid principal balance of and accrued and unpaid interest on this Note, shall, at the option of the Holder hereof, become immediately due and payable, and Holder may foreclose all liens securing payment hereof, pursue any and all other rights, remedies and recourses available to Holder, or pursue any combination of the foregoing, all remedies hereunder and under the Security Documents being cumulative. Failure by the Holder to exercise any option upon one Event of Default shall not constitute a waiver thereof or a waiver of the right to exercise such option in the event of a subsequent Event of Default. The acceptance by Holder of any payment hereunder that is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing options at that lime or at any subsequent time, or nullify any prior exercise of any such option without the express written consent of the Holder. If, after an Event of Default, this Note is placed in the hands of an attorney for collection, or if collected through judicial proceedings, Maker shall pay, in addition to the sums referred to above, all costs incurred by Holder in collection of the unpaid amounts due hereunder, including a reasonable sum as collection or attorneys' fees, whether or not any judicial action is instituted to enforce this Note. VIII. LATE CHARGE AND DEFAULT INTEREST: If Holder has not received the full amount of any installment due hereunder, or any payment due hereunder (excluding the balance due on the Maturity Date), on or before the date that such amount or payment is due, Maker shall pay, in addition to the amount due, a late charge (the "LATE CHARGE") equal to five percent (5.0%) of each dollar of principal, interest or other amount not paid when due, for the purpose of defraying the expense incident to handling such delinquent payments, whether or not the Note is accelerated for such delinquency. The Late Charge shall be due and payable immediately whether or not demand is made for payment of same. It is further agreed that during the existence of any Event of Default under this Note (but immediately ceasing upon the timely cure of any such Event of Default prior to the acceleration of this Note), the Security Agreement or any other Security Documents, the entire unpaid balance of principal hereunder shall, at the option of Holder, bear interest (the "DEFAULT INTEREST") at a rate equal to the lesser of (i) eighteen percent (18.0%) per annum, or (ii) the highest nonusurious rate permitted by applicable law; provided, however, in the event a Late Charge has been charged or received by Holder with respect to any delinquent installment, the amount of Default Interest shall be reduced by the amount of the Late Charge charged or received as necessary to comply with any applicable law regarding usury. Default Interest shall be due and payable upon demand, and if no demand, then on the first (1st) day of each and every month after such default. During any time when the Default Interest is in effect, Holder may, at its sole option, collect interest at a rate that is less than the rate for Default Interest, however, any such forbearance by Holder, or any demand by Holder for less than the full amount of Default Interest, shall not constitute a waiver of Holder's right to demand payment in full of the total Default Interest both with respect to the period of forbearance or any later period, and shall not constitute or imply any consent to a reduction in the rate of the Default Interest. The rights of Holder under this Article VIII shall in any event be subject to the limitations set forth in Article V. 4 IX. WAIVERS: Maker understands that under Texas law Maker has, unless waived, the right to notice of Holder's intent to accelerate the principal balance of this Note, the right to notice of the actual acceleration of the principal balance of this Note, and the right to presentment of this Note by Holder's demand for payment. Maker also understands that Maker can waive these rights. BY MAKER'S SIGNATURE ON THIS NOTE, EACH MAKER and all sureties, endorsers, guarantors and any other party now or hereafter liable for the payment of this Note in whole or in part, hereby severally (i) WAIVE demand (except as otherwise specifically set forth in this Note), presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices, filing of suit and diligence in collecting this Note or enforcing any of the security for this Note, (ii) agree to any subordination or release of any of such security or the release of any party primarily or secondarily liable hereon, (iii) agree that the Holder hereof shall not be required first to institute suit or exhaust its remedies hereon against the Maker, or any one of them, or others liable or to become liable hereon, or to enforce its rights against them or any security herefor, and (iv) consent to any extension or postponement of time of payment of this Note and to any other indulgence with respect hereto without notice thereof to any of them and without affecting their liability hereunder. X. NOTICES: All notices hereunder shall be given at the following addresses: If to Maker: 111 Soledad, Suite 1100, San Antonio, Texas 78205-3692; if to Holder: 111 Soledad, Suite 1100, San Antonio, Texas 78205-3692. Any party may change its address for notice purposes upon giving thirty (30) days prior notice thereof in accordance with this paragraph. All notices given hereunder shall be in writing and shall be considered properly given if mailed by first-class United States Mail, postage prepaid, registered or certified with return receipt requested, or by delivering same to the intended addressee, or by prepaid telegram. Any notice mailed as above provided shall be deemed to be effective and received upon its deposit in the custody of the U.S. Postal Service; all other notices shall be effective upon actual receipt. XI. ACCELERATION UPON DISPOSITION: As more fully detailed in the Security Agreement, Maker expressly acknowledges, covenants and agrees (i) that, except in the ordinary course of business and as may otherwise be provided in the Security Agreement, there may be no sale, lease, assignment, transfer, conveyance, mortgage, pledge, hypothecation, or any other disposition of all or any portion of, or interest in, the property securing this Note, without the prior written consent of Holder, (ii) that, except as may be provided otherwise in the Security Agreement, Holder may arbitrarily withhold such prior written consent in its sole discretion, and (iii) that in the event any such disposition occurs without Holder's prior written consent, then Holder shall, except as provided in the Security Agreement, have the option of accelerating the maturity hereof and declaring the then unpaid principal balance and accrued interest immediately due and payable. 5 XII. JOINT AND SEVERAL LIABILITY: If this Note is executed by more than one party, each such party shall be jointly and severally liable for the obligations of Maker under this Note. XIII. SUCCESSORS AND ASSIGNS: The terms and conditions hereof shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. XIV. VENUE: MAKER AGREES THAT BEXAR COUNTY, TEXAS SHALL BE THE PROPER VENUE FOR ANY JUDICIAL PROCEEDINGS BROUGHT IN CONNECTION WITH THIS NOTE. HOLDER ACKNOWLEDGES AND AGREES THAT THE LIMITED PARTNERS OF THE MAKER SHALL NOT BE LIABLE FOR THE OBLIGATIONS OF MAKER UNDER THIS NOTE AND THAT HOLDER WILL NOT SEEK PAYMENT OF ANY AMOUNTS HEREUNDER FROM SUCH LIMITED PARTNERS. IN WITNESS WHEREOF Maker has duly executed this Note as of the day and year first above written. MAKER: RACKSPACE, LTD. BY: MACROWEB, LC. its general partner By: /s/ Morris Miller ----------------------------- HOLDER: EXETER FINANCIAL, LC By: /s/ S. West ----------------------------- Its: Manager ----------------------------- EX-10.21 22 EXHIBIT 10.21 AGREEMENT OF EXISTING PARTNERS OF RACKSPACE, LTD. TO FACILITATE PUBLIC OFFERING This Agreement is made this 27 day of March, 2000, by and between Rackspace, Ltd. ("Rackspace" or the "Company" or the "Partnership") and all of its present partners (which include Red Hat, Thomas Weisel and Norwest, as defined below), all of whom are signatories to this Agreement (the "Partners"). Rackspace.com, Inc., a newly formed, Delaware corporation, is also made a party to this Agreement ("New Rackspace"). In addition, Brian Bell and Edwin Grubbs are made parties to this agreement with respect to the partnership interests held by them as assignees. NEW INVESTORS TO BE INCLUDED Under the terms of the Fourth Amendment to Agreement of Limited Partnership of Rackspace, Ltd., it is expressly contemplated that the General Partner may cause Rackspace to issue up to 530,035.34 Class C Units (the "Additional Units") to one or more additional persons or entities (the "New Investors"), provided that the aggregate purchase price per Unit is not less than $5.66 per Unit. The General Partner may also issue to the New Investors a warrant to purchase an amount of Class C Units determined by dividing $3,000,000 by the greater of the $18.24 or the mid-point in the filing range (the "Mid-point") set forth in the preliminary prospectus (commonly referred to as the "red herring") which is first circulated by the Company. It is the intention and agreement of the parties hereto that such New Investors shall have the benefits and obligations of the Holders as set forth herein, and that they may become signatories to this Agreement without any further consent or agreement of the parties to this agreement. CERTAIN REFERENCES The Agreement of Limited Partnership of Rackspace, Ltd. and the four existing amendments thereto, are sometimes collectively referred to herein as the "Partnership Agreement." The Registration Rights Agreement dated November 30, 1999, as amended on February 22, 2000 is referred to as the "Rights Agreement." The Support Agreement dated December 29, 1998, as amended on November 30, 1999 and again on February 22, 2000 is referred to as the "Support Agreement." For the purposes of this agreement, Richard Yoo is referred to as "Yoo," Pat Condon is referred to as "Condon," Dirk Elmendorf is referred to as "Elmendorf," Trout, Ltd. is referred to as "Trout," Macroweb, LC is referred to as the "General Partner," First Inning Investors, L.P., is referred to as "First Inning," Isom Capital Partners I, L.P. is referred to as "Isom," The Hamilton Companies LLC is referred to as "Hamilton," Beaulieu River Capital LC is referred to as "Beaulieu," MiniPat & Company, Ltd. is referred to as "MiniPat," 2M Technology Ventures, L.P., is referred to as "2M," Trango Capital, L.L.C. is referred to as "Trango,"Red Hat, Inc. is referred to as "Red Hat," Norwest Venture Partners VII, L.P. is referred to as "Norwest," Tailwind Capital Partners 2000, L.P. is referred to as "Thomas Weisel," Graham M. Weston is referred to as "Weston," Morris A. Miller is referred to as 1 "Miller," Brian Bell is referred to as "Bell" and Edwin Grubbs is referred to herein as "Grubbs." The Partners, Bell, Grubbs and the New Investors are sometimes collectively referred to herein as the "Holders." PURPOSE OF AGREEMENT This Agreement is made by and amongst Rackspace, New Rackspace, the Holders and the New Investors, if any, to satisfy certain requirements and follow certain recommendations of the Underwriters (defined below) and to facilitate the registration and sale of the stock of New Rackspace in a public offering registered under the Securities Act of 1993 (inclusive of the sale of such stock, the "IPO") underwritten by Deutsche Bank, Securities, Inc., Bear, Stearns & Co. Inc. and Thomas Weisel Partners LLC and certain other underwriters (the "Underwriters"). The IPO will benefit the Holders as they will become shareholders of New Rackspace pursuant to the terms of this Agreement. This Agreement is entered into contemporaneously with the execution of the Fourth Amendment of the Partnership Agreement, whereby Red Hat, Thomas Weisel and Norwest become Class C Limited Partners of the Partnership. ACTIONS TO BE TAKEN UNDER THIS AGREEMENT END OF OPTION RIGHTS. The Underwriters have requested that Weston, Miller, Condon, Elmendorf and Yoo end their rights under Section 17 of the Second Amendment to the Partnership Agreement to forego salary and receive options to acquire additional interests in the Company (and New Rackspace, its successor). If these rights are not terminated, these individuals will have the right to acquire a substantial amount of New Rackspace's stock at prices substantially below market value which will likely result in large earnings charges against New Rackspace. Weston, Miller, Condon, Elmendorf and Yoo have agreed to waive these rights. REGISTRATION RIGHTS. Certain of the Partners have demand and piggyback registration rights under the terms of the Rights Agreement. Red Hat, Norwest, Thomas Weisel and the New Investors do not have such registration rights, whether demand rights or piggyback rights. The parties desire to amend the existing Rights Agreement to include Red Hat, Norwest, Thomas Weisel and the New Investors as Investors under the Registration Rights Agreement. CONVERSION TO CORPORATION. The General Partner has broad powers to cause the Company to convert to a corporation, including for the purpose of facilitating an IPO. In order to facilitate the description of the succession of Rackspace to New Rackspace, the underwriters have suggested that the Holders transfer all of their interests in the Partnership (the "Units") to New Rackspace, in exchange for common stock in New Rackspace (the "Common Stock"). The Partners have agreed to make this exchange 2 pursuant to the terms of this Agreement and agree to allow this exchange, whether or not the IPO occurs. AMENDMENT OF SUPPORT AGREEMENT. The parties desire to amend the Support Agreement to include as Class C Limited Partners, Red Hat, Norwest, Thomas Weisel and the New Investors. NOW, THEREFORE, FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN MADE, THE PARTIES AGREE AS FOLLOWS: OPTIONS TERMINATION OF OPTION RIGHTS. Provided that the IPO is completed by July 31, 2000, effective April 30, 2000, Miller, Weston, Yoo, Elmendorf and Condon will have no further right to forgo salary and receive options to acquire Units in the Company (or stock in New Rackspace) under Section 17 of the Second Amendment to the Partnership Agreement. Miller, Weston, Elmendorf and Condon each made an election on January 1, 2000 to receive options in lieu of salary. Yoo hereby waives his right to receive options under Section 17 in lieu of salary for the four-month period ending April 30, 2000. Commencing January 1, 2000 and ending April 30, 2000, Miller, Weston, Elmendorf and Condon will continue to forgo salary and receive options to acquire Units in accordance with the terms of Section 17 of the Second Amendment to the Partnership Agreement. SUPPORT AGREEMENT AMENDMENT TO SUPPORT AGREEMENT. The Support Agreement, as amended, is further amended to include, for the purpose of Paragraph 1, Norwest, Red Hat, Thomas Weisel and the New Investors, as "Class C Limited Partners." REGISTRATION RIGHTS 1. CORRECTION TO REGISTRATION RIGHTS AGREEMENT. The Rights Agreement does not include Trango as an "Investor." The Rights Agreement is hereby amended to include Trango as an Investor, as if it had initially executed the Rights Agreement. 2. LOCK-UP AGREEMENT. The Underwriters have required that each of the Holders agree not to sell their stock in New Rackspace for a period of 180 days following the IPO and the parties to the Rights Agreement are required to execute the same under the obligations set forth in the Rights Agreement. Therefore, each of the Holders agree to enter into the Lock-up Agreement attached as Exhibit A and deliver the same to the offices of the Company upon the execution of this Agreement. 3 3. PIGGYBACK AND DEMAND REGISTRATION RIGHTS- RED HAT, THOMAS WEISEL, NEW INVESTORS, NORWEST. The parties agree that Red Hat, Norwest, New Investors and Thomas Weisel shall have piggyback and demand registration rights in accordance with the provisions of Section 2 and Section 3 of the Rights Agreement with respect to the Units held by them (and Common Stock acquired incident to the Exchange), shall be considered Holders of Registrable Securities with respect to all the Units (and Common Stock acquired incident to the Exchange) held by them for purposes of the Rights Agreement and each shall have all the benefits and obligations of an Investor under the Rights Agreement, the same as if they were direct signatories to the Rights Agreement. Upon the Exchange (as defined below), the parties agree that without further act of the parties, New Rackspace will be substituted in place of the Company for all purposes of the Rights Agreement. EXCHANGE OF INTERESTS EXCHANGE OF INTERESTS. To accomplish various business purposes, the General Partner of the Partnership has the ability to cause the Partnership to convert to a corporation. The Partnership Agreement specifically contemplates that the Company, through a successor entity, will have an IPO and the General Partner is given broad powers to change the form of the Company from a limited partnership to a corporation by merger or contribution of assets and liabilities, in order to effect an IPO. In addition, if the Company does not have an IPO, the General Partner has determined that it may nevertheless be beneficial to convert to a corporation. At the request of the Underwriters, the General Partner desires that, rather than a merger or contribution of assets and liabilities, the Holders exchange their Units for Common Stock, and that this exchange occur with the possibility that the New Rackspace may not complete the IPO. The exchange will take place on a one Unit for one share of Common Stock basis, except for Yoo, Elmendorf, Condon, Bell, Grubbs and Macroweb, each of whom will receive slightly less than one share of Common Stock per Unit exchanged, and except for Trout, which will receive slightly more than one share of Common Stock per Unit exchanged. Each of the Holders agree that at such time that the General Partner contributes all of its Units to New Rackspace, the Units of such Holder and of all of the Holders, without any further act of the Holders, shall be transferred to New Rackspace in exchange for Common Stock in proportion to the Holders' positive Capital Account balances, adjusted by treating the Partnership as having liquidated and its property sold at fair market value, and gains and losses allocated in accordance with Section 11.4 of the Partnership Agreement, which proportions are set forth below (the "Exchange"). The Common Stock received from New Rackspace will have an appropriate legend indicating that it is subject to the restrictions contained in the Partnership Agreement (which restriction shall be removed after the IPO, if it occurs), and that it is restricted stock and may not be sold without an opinion of counsel to the satisfaction of New Rackspace that such sale will not be in violation of the provisions of the Securities Act of 1933. The 4 Holders agree that no fractional shares of Common Stock will be issued, and as a result fractional Units shall be rounded to the nearest whole number as set forth below:
Partner Units Exchanged Common Stock to be ------- --------------- received upon Exchange ---------------------- Yoo 3,600,000 3,565,714 Condon 800,000 792,380 Elmendorf 400,000 396,190 Grubbs 50,000 49,523 Bell 50,000 49,523 Macroweb 10,000 9,904 Trout 7,232,856.2 7,279,619 First Inning 619,047.61 619,048 Isom 1,219,047.62 1,219,048 Hamilton 476,190.48 476,190 Beaulieu 357,142.86 357,143 MiniPat 95,238.10 95,238 2M 119,047.61 119,048 Red Hat 353,356.89 353,357 Norwest 1,015,901 1,015,901 Thomas Weisel 53,003.53 53,003 --------- ------ Total 16,450,831.94* 16,450,829*
*Subject to adjustment for Units held by the New Investors which will be exchanged on a one Unit for one share of Common Stock basis and subject to further adjustment for the exchange of any Units issued pursuant to the Warrant in favor of Trango Capital, LLC (380,952.38 Units), or any other option holder, all of which will be exchanged on the basis of one share of Common Stock for each Unit exchanged. DIRECTORS/RIGHTS OF PARTNERS/PROXIES 1. DIRECTORS OF NEW RACKSPACE. The Class C Units Holders, The Hamilton Companies, LLC and Trout have the right to appoint directors of New Rackspace under the terms of the Second Amendment to the Partnership Agreement (the "Voting Agreement"). However, these rights end when and if Trout, Ltd. waives its right to appoint five of the seven directors. Miller and Weston are currently the sole directors of New Rackspace. In order to timely 5 appoint five additional members to New Rackspace's board of directors, each of the Holders hereby grant to the General Partner, their irrevocable proxy to vote all of the shares of Common Stock in New Rackspace received by them as a result of the Exchange, to elect and name up to five additional members to the board of directors of New Rackspace. This proxy will expire on the earlier to occur of July 31, 2000, the date immediately prior to the IPO, or the date seven directors are named to New Rackspace's board of directors. The General Partner agrees to consult with each of the Partners prior to naming any of the directors. Effective the date immediately prior to the IPO, the Voting Agreement will terminate. The General Partner agrees that it will not exercise the proxies granted under this paragraph in order to appoint persons who are related to Morris A. Miller or Graham M. Weston. 2. CONVERSION TO CORPORATION PRIOR TO IPO. It is likely that the General Partner will determine that it is necessary to convert to a corporation at a time when it is not certain whether or not the Company will effect the IPO. The Holders agree that all pre-emptive rights, rights of first refusal, share transfer restrictions, re-purchase rights, voting agreements, parallel exit rights and all other rights contained in the Partnership Agreement, and the Support Agreement that do not exist as a consequence of the application of the general corporate provisions of Delaware corporation law (collectively, the "Rights and Obligations"), shall be binding on and inure to the benefit of all New Rackspace's shareholders and on New Rackspace, the same as such Rights and Obligations are presently binding on the Partners and the Company; provided that all of such Rights and Obligations shall terminate immediately prior to the IPO. The parties also agree that the Support Agreement shall terminate immediately prior to the IPO. If, however, the IPO does not take place by July 31, 2000, New Rackspace agrees to prepare the documentation necessary to ensure that all such Rights and Obligations are binding on New Rackspace, the Holders and all other shareholders of New Rackspace (such documents are referred to as the "Documents"), with New Rackspace having the discretion, to the extent reasonably exercised, to modify such Rights and Obligations to the extent necessary to accommodate the differences between a limited partnership and a corporation. The Holders agree to execute Documents upon receipt so long as the Documents substantially conform to the Rights and Obligations set forth in the Partnership Agreement. 3. STOCK PLAN. In order for New Rackspace to adopt a qualified incentive stock option plan, the shareholders of New Rackspace must adopt the plan. The General Partner has selected a highly flexible plan based upon the recommendations of its SEC counsel. In order to approve the plan prior to the IPO, the Holders each give the General Partner, their irrevocable proxy to approve the plan recommended by the Company's counsel. Therefore, each of the Holders give the General Partner their irrevocable proxy with respect to the Common Stock received by them incident to the Exchange, to exercise the voting rights of such stock to approve any incentive stock option plan 6 (including qualified and non-qualified stock options), employee stock purchase plan, director option and compensation plan, and any other plan which is designed to enable New Rackspace to compensate, reward and/or incentivize its employees, agents, consultants and directors. This proxy will end on the earlier to occur of July 31, 2000 or the IPO. 4. INDEMNITY OF GENERAL PARTNER. Upon the Exchange, Macroweb shall no longer be the general partner of Rackspace, Ltd., but rather Rackspace Management, LC shall be the new general partner. The Company acknowledges and agrees that the indemnity obligations contained in the Partnership Agreement shall continue to be enforceable by Macroweb and its members, officers and agents, against the Company and against New Rackspace, with respect to acts and omissions occurring while Macroweb was the general partner of the Company. MISCELLANEOUS 1. REPRESENTATION The parties to this Agreement acknowledge that the law firm of Matthews and Branscomb, P.C. has assisted in the preparation of this document on behalf of and as counsel for Trout, Ltd. and the General Partner only, and further acknowledge that the Partnership will pay the fees and expenses associated with such services. 2. MULTIPLE COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. Executed as of the date first written above. RACKSPACE, LTD. By: Macroweb, LC Its: General Partner /s/ Graham M. Weston ----------------------------------- Graham M. Weston, Member /s/ Morris A. Miller ----------------------------------- Morris A. Miller, Member GENERAL PARTNER: Macroweb, LC 7 /s/ Morris A. Miller --------------------------------------------- Morris A. Miller, Member /s/ Graham M. Weston --------------------------------------------- Graham M. Weston, Member LIMITED PARTNERS: /s/ Richard Yoo -------------------------------------------------- Richard Yoo /s/ Dirk Elmendorf -------------------------------------------------- Dirk Elmendorf /s/ Patrick Condon -------------------------------------------------- Patrick Condon Trout, Ltd. By: Knightsbridge, L.C., General Partner By: /s/ Morris A. Miller ------------------------------------- Isom Capital Partners I, L.P. By: BESK Funding, Inc., General Partner By: /s/ S. James Bishkin ------------------------------------- S. James Bishkin, President First Inning Investors, L.P. By: Trango Capital L.L.C., General Partner By: /s/ Quincy J. Lee ------------------------------------- Quincy J. Lee, Manager The Hamilton Companies LLC By: /s/ Frederick Hamilton ------------------------------------- 8 Beaulieu River Capital LC (formerly, Weston Investment Interest, L.L.C.) By: /s/ Graham Weston ------------------------------------------ Title: Member --------------------------------------- MiniPat & Company, Ltd. By: /s/ Patrick Condon ------------------------------------------ 2M Technology Ventures, L.P. By: 2M Technology Group, L.L.C. Its: General Partner By: /s/ Steven Leeke ------------------------------------------ Red Hat, Inc. By: /s/ Walter McCormick ------------------------------------------ Norwest Venture Partners VII, L.P. By: /s/ George Still, Jr. ------------------------------------------ General Partner /s/ Brian Bell --------------------------------------------- Brian Bell /s/ Edwin Grubbs --------------------------------------------- Edwin Grubbs 9 Tailwind Capital Partners 2000, L.P. By: Thomas Weisel Capital Partners LLC, general partner By: /s/ David A. Baylor --------------------------- David A. Baylor, General Counsel NEW INVESTORS: 10 AGREEMENT OF EXISTING PARTNERS OF RACKSPACE, LTD. TO FACILITATE PUBLIC OFFERING Separate Signature Page for New Investors With respect to the 466,431 Class C Units purchased by Sequoia Capital Franchise Fund for $2,640,000. Sequoia Capital Franchise Fund By: /s/ illegible -------------------------- With respect to the 63,604 Class C Units purchased by Sequoia Capital Franchise Partners for $360,000. Sequoia Capital Franchise Partners By: /s/ illegible -------------------------- RACKSPACE, LTD. By: Macroweb, LC, general partner By: /s/ Graham Weston -------------------------- Its: Member -------------------------- 11
EX-10.22 23 EXHIBIT 10.22 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO RACKSPACE, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THIS WARRANT. RACKSPACE, LTD. WARRANT TO PURCHASE SHARES OF COMMON STOCK March 27, 2000 ("Date of Grant") THIS CERTIFIES THAT, for value received, and subject to the provisions and upon the terms and conditions hereinafter set forth, Norwest Venture Partners (the "Holder") is entitled to subscribe for and purchase, at an exercise price per unit or share (as set forth in Section 1(a) and as adjusted herein, the "Warrant Price"), up to that number of Class C Units (having the rights of a Class C Limited Partner), or shares of fully paid and nonassessable Common Stock (the "Shares") of RACKSPACE, LTD., a Texas limited partnership or its successor corporation ("Rackspace"), as determined by dividing $3,000,000 by the Warrant Price (the "Warrant Coverage"). 1. WARRANT PRICE; TERM (a) WARRANT PRICE. The Warrant Price shall be the greater of (i) $18.24 [a number determined by dividing $300,000,000 by 16,450,831.94, the number of currently outstanding units of Rackspace], or (ii) the price which is at the mid-point of the filing range of Rackspace's Form S-1 filed under the Securities Act of 1933, which is circulated as its preliminary prospectus (the "Mid-point price"). (b) TERM. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time one (1) year from the Date of Grant; provided that it may not be exercised prior to the time the Mid-point price is determined unless the Mid-point price is not determined within four months of the Date of Grant, in which case the Warrant may be exercised after such four month period whether or not the Mid-point price has been determined. If the Mid-point price has not been determined, the Warrant Price shall be $18.24. 2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT. Subject to Section 1 hereof, the purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, by the surrender of this Warrant (with the notice of exercise form attached hereto as EXHIBIT A duly executed) at the principal office of Rackspace and by the payment to Rackspace, by wire transfer according to wire transfer instructions provided by Rackspace, of an amount equal to the then applicable Warrant Price multiplied by the number of Shares then being purchased. The entity or entities in whose name(s) any certificate(s) representing Shares shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes -1- as the record holder(s) of, the units or shares represented thereby (and such units or shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the units or shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty days after such exercise and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty day period. 3. STOCK FULLY PAID. All Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms and conditions herein, be fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. 4. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) RECLASSIFICATION OR MERGER. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger of Rackspace with or into another corporation (other than a merger with another corporation in which Rackspace is the acquiring and the surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of Rackspace, or such successor or purchasing corporation, as the case may be, or its parent corporation, shall duly execute and deliver to the holder of this Warrant a new Warrant (in form and substance reasonably satisfactory to the holder of this Warrant), so that the holder of this Warrant shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the Shares theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or merger by a holder of the number of Shares then purchasable under this Warrant. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this subparagraph (a) shall similarly apply to successive reclassifications, changes, mergers, consolidations, transfers, amendments and waivers. (b) SUBDIVISION OR COMBINATION OF SHARES. If Rackspace at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its outstanding Shares, the Warrant Price shall be proportionately decreased in the case of a subdivision or increased in the case of a combination, effective at the close of business on the date the subdivision or combination becomes effective. (c) STOCK DIVIDENDS AND OTHER DISTRIBUTIONS/CAPITAL ACCOUNT UPON EXERCISE OF OPTION. In case Rackspace shall make or issue, or shall fix a record date for the determination of eligible holders entitled to receive, a dividend or other distribution with respect to the Shares (or any shares of stock or other securities at the time issuable upon exercise of the Warrant) payable in (a) securities of Rackspace or (b) assets (excluding cash dividends paid or payable solely out of retained earnings), then, in each such case, the holder of this Warrant on exercise hereof at any time after the consummation, effective date or record date of such dividend or other distribution, shall receive, in addition to the Shares (or such other stock or securities) issuable on such exercise prior to such date, and without the payment of additional consideration therefor, the securities or such other assets of Rackspace to which such Holder would have been entitled upon such date if such Holder had exercised this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period giving effect to all adjustments called for by this Section 4. Units issued upon exercise of the Warrant shall be issued with a capital account (provided that Rackspace upon such exercise is a partnership or other entity for which capital accounts are maintained in respect of units of ownership) which shall bear the same ratio to the total capital accounts in Rackspace as the number of such Units issued upon exercise bear to the aggregate units of ownership in the Company then outstanding. (d) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in the Warrant Price, the number of Shares purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter. (e) CONVERSION OF SHARES. In the event that all of the authorized and outstanding Shares are redeemed or converted or reclassified into other securities or property pursuant to Rackspace's charter documents or otherwise, or the Shares otherwise cease to exist, then, in such case, the Holder of this Warrant, upon exercise hereof at any time after the date on which the Shares are so redeemed or converted, reclassified or cease to exist (the "Termination Date"), shall receive, in lieu of the number of Shares that would have been issuable upon such exercise immediately prior to the Termination Date, the securities or property that would have been received if this Warrant had been exercised in full and the Shares received thereupon had been simultaneously converted immediately prior to the Termination Date, all subject to further adjustment as provided in this Warrant. Additionally, the Warrant Price shall be immediately adjusted to equal the quotient obtained by dividing (x) the aggregate Warrant Price of the maximum number of Shares for which this Warrant was exercisable immediately prior to the Termination Date by (y) the number of Shares for which this Warrant is exercisable immediately after the Termination Date, all subject to further adjustment as provided herein. 5. NOTICE OF ADJUSTMENTS. Whenever the Warrant Price or the number of Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, Rackspace shall make a certificate signed by its chief executive officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Shares purchasable hereunder after giving effect to such adjustment, which shall be mailed (by first class mail, postage prepaid) to the holder of this Warrant. 6. FRACTIONAL SHARES. No fractional Shares will be issued in connection with any exercise hereunder, but in lieu of such fractional Shares Rackspace shall make a cash payment therefor based on the fair market value of the Shares on the date of exercise as reasonably determined in good faith by Rackspace's Board of Directors. 7. COMPLIANCE WITH SECURITIES ACT: DISPOSITION OF WARRANT OR SHARES. (a) COMPLIANCE WITH SECURITIES ACT. The holder of this Warrant, by acceptance hereof, agrees that this Warrant, and the Shares to be issued upon exercise hereof are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant, or any Shares to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended (the "Act"). If at the time of any transfer or exercise of this Warrant or any of the Shares, such securities have not been registered under the Act and are not eligible for sale without registration under Rule 144 of the Act, Rackspace may require as a condition of allowing such transfer or exercise, that the holder of such securities furnish to Rackspace such information as is reasonably necessary to establish that such transfer and exercise may be made without registration under the Act. This Warrant and all Shares issued upon exercise of this Warrant (unless registered under the Act) shall be stamped or imprinted with a legend in substantially the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO RACKSPACE, THAT SUCH REGISTRATIONS ARE NOT REQUIRED OR (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES. IN ADDITION, NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY." (b) DISPOSITION OF WARRANT OR SHARES. Subject to the provisions of this Section 7, this Warrant may be assigned or transferred in whole or in part by the holder hereof. With respect to any proposed offer, sale or other disposition of this Warrant or any Shares acquired pursuant to the exercise of this Warrant prior to registration of such Warrant or shares, the holder hereof and each subsequent holder of this Warrant agrees to seek and obtain the written permission of Rackspace prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, if reasonably requested by Rackspace, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state law then in effect) of this Warrant or such Shares and indicating whether or not under the Act certificates for this Warrant or such Shares to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with such law. Upon receiving such written notice and reasonably satisfactory opinion, if so requested, Rackspace, as promptly as practicable, shall notify such holder whether or not such holder may sell or otherwise dispose of this Warrant or such Shares, all in accordance with the terms of the notice delivered to Rackspace. Any offer, sale or other disposition of this Warrant (or any Shares acquired pursuant to the exercise of this Warrant) without the prior written consent of Rackspace pursuant to this Section 7(b) shall be null and void and of no effect. 8. RIGHTS AS STOCKHOLDERS; INFORMATION. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Shares or any other securities of Rackspace which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a partner or stockholder of Rackspace or any right to vote for the election of directors or upon any matter submitted to stockholders or partners at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. 9. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 10. NOTICES. Any notice, request, communication or other document required or permitted to be given or delivered to the holder hereof or Rackspace shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of Rackspace or to Rackspace at the address indicated therefor on the signature page of this Warrant. 11. BINDING EFFECT ON SUCCESSORS. Until the issuance of any new warrant required to be issued under Section 4(a), this Warrant shall be binding upon any corporation that issues securities in exchange for securities of the class issuable upon exercise of this Warrant in connection with any merger, consolidation or acquisition of all or substantially all of Rackspace's assets, and all of the obligations of Rackspace relating to the Shares issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant and all of the covenants and agreements of Rackspace shall inure to the benefit of the successors and assigns of the holder hereof. Rackspace will, at the time of the exercise of this Warrant, in whole or in part, upon request of the holder hereof but at Rackspace's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights (including, without limitation, any right to registration of the shares) to which the holder hereof shall continue to be entitled after such exercise or conversion in accordance with this Warrant; provided, that the failure of the holder hereof to make any such request shall not affect the continuing obligation of Rackspace to the holder hereof in respect of such rights. 12. LOST WARRANTS OR STOCK CERTIFICATES. Rackspace covenants to the holder hereof that, upon receipt of evidence reasonably satisfactory to Rackspace of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to Rackspace, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, Rackspace will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 13. DESCRIPTIVE HEADINGS. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 14. GOVERNING LAW. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the internal laws of the State of Texas without regard to its conflicts of laws principles. 15. SURVIVAL. All agreements of Rackspace and the holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative. 16. REMEDIES. In case any one or more of the covenants and agreements contained in this Warrant shall have been breached, the holders hereof (in the case of a breach by Rackspace), or Rackspace (in the case of a breach by a holder), may proceed to protect and enforce their or its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Warrant. 17. ACCEPTANCE. Receipt of this Warrant by the holder hereof shall constitute acceptance of and agreement to the foregoing terms and conditions. 18. NO IMPAIRMENT OF RIGHTS. Rackspace will not, by amendment of its charter documents through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. Without limiting the generality of the foregoing, Rackspace (a) will not increase the par value of any shares of stock issuable upon the exercise of this Warrant above the amount payable therefor upon such exercise, and (b) will take all such action as may be necessary or appropriate in order that Rackspace may validly and legally issue fully paid and non-assessable Shares upon exercise of this Warrant. 19. SEVERABILITY. If any term, provision, covenant, or restriction of this Warrant is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Warrant shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 20. NOTICES OF RECORD DATE. In case: (a) Rackspace shall take a record of the holders of its securities, for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities or to receive any other right; or (b) of any consolidation or merger of Rackspace with or into another corporation, any capital reorganization of Rackspace, any reclassification of the capital stock of Rackspace, or any conveyance of all or substantially all of the assets of Rackspace to another corporation in which holders of Rackspace's stock are to receive stock, securities or property of another corporation; or (c) of any voluntary dissolution, liquidation or winding-up of Rackspace; or (d) of any redemption or conversion of all outstanding securities. Then, and in each such case, Rackspace will mail or cause to be mailed to the holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation, winding-up, redemption or conversion is to take place, and the time, if any is to be fixed, as of which the holders of record of Rackspace's shares or units (or such stock or securities as at the time are receivable upon the exercise of this Warrant) shall be entitled to exchange their shares or units (or such other stock or securities), for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be delivered at least seven (7) days prior to the date therein specified. RACKSPACE, LTD. By: Macroweb, LC, its general partner By: /s/ Graham Weston ------------------------------------- Graham Weston, CEO ACKNOWLEDGED AND AGREED: /s/ George Still, Jr. - --------------------------------- Signature Norwest Venture Partners - --------------------------------- Name of Holder EXHIBIT A NOTICE OF EXERCISE To: RACKSPACE, LTD. 1. The undersigned hereby elects to purchase _________________ units or shares of ________________ of RACKSPACE, LTD. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: ----------------------------- (Name) ----------------------------- ----------------------------- (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. In support thereof, the undersigned has executed an Investment Representation Statement attached hereto as Schedule 1. ----------------------------------------- Signature ----------------------------------------- Date Schedule 1 - ---------- INVESTMENT REPRESENTATION STATEMENT Purchaser: -------------------------------- Rackspace: RACKSPACE, LTD. ("Rackspace") Security: -------------------------------- Amount: -------------------------------- Date: -------------------------------- In connection with the purchase of the above-listed securities (the "Securities"), the undersigned (the "Purchaser") represents to Rackspace as follows: (a) The Purchaser is aware of Rackspace's business affairs and financial condition, and has acquired sufficient information about Rackspace to reach an informed and knowledgeable decision to acquire the Securities. The Purchaser is purchasing the Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Act"). (b) The Purchaser understands that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in the view of the Securities and Exchange Commission ("SEC"), the statutory basis for such exemption may be unavailable if the Purchaser's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) The Purchaser further understands that the Securities must be held indefinitely unless subsequently registered under the Act or unless an exemption from registration is otherwise available. Moreover, the Purchaser understands that Rackspace is under no obligation to register the Securities except as set forth in the Warrant under which the Securities are being acquired. In addition, the Purchaser understands that the certificate evidencing the Securities will be imprinted with the legend referred to in the Warrant under which the Securities are being purchased. (d) The Purchaser is aware of the provisions of Rule 144 and 144A, promulgated under the Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: The availability of certain public information about Rackspace, the resale occurring not less than one year after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (e) The Purchaser further understands that at the time it wishes to sell the Securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, Rackspace may not be satisfying the current public information requirements of Rule 144 and 144A, and that, in such event, the Purchaser may be precluded from selling the Securities under Rule 144 and 144A even if the one-year minimum holding period had been satisfied. (f) The Purchaser further understands that in the event all of the requirements of Rule 144 and 144A are not satisfied, registration under the Act, compliance with Regulation A, or some other registrati