-----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, JM7zVof56sLln74ZfoQAcoebETeMK61w7bhmMQ3Svm+FwDG6H8JtuA7NU6durfxo l20LAvuQ+h27vbwV9AoO2A== /in/edgar/work/20000721/0000950149-00-001573/0000950149-00-001573.txt : 20000921 0000950149-00-001573.hdr.sgml : 20000920 ACCESSION NUMBER: 0000950149-00-001573 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20000721 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLO COM CENTRAL INDEX KEY: 0001102283 STANDARD INDUSTRIAL CLASSIFICATION: [4813 ] IRS NUMBER: 943272783 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-42002 FILM NUMBER: 676931 BUSINESS ADDRESS: STREET 1: 2000 SIERRA POINT PARKWAY STREET 2: SUITE 600 CITY: BRISBANE STATE: CA ZIP: 94005 BUSINESS PHONE: 6502922656 S-1 1 s-1.txt FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 2000 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ COLO.COM (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ CALIFORNIA 4813 94-3272783 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
COLO.COM 2000 SIERRA POINT PARKWAY, SUITE 601 BRISBANE, CALIFORNIA 94005 (650) 292-2656 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ CHARLES M. SKIBO CHIEF EXECUTIVE OFFICER COLO.COM 2000 SIERRA POINT PARKWAY, SUITE 601 BRISBANE, CALIFORNIA 94005 (650) 292-2656 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: MARIO M. ROSATI, ESQ. JAMES S. SCOTT, SR., ESQ. MICHAEL S. DORF, ESQ. SHEARMAN & STERLING ALEXANDER D. PHILLIPS, ESQ. 599 LEXINGTON AVENUE JUDY G. HAMEL, ESQ. NEW YORK, NY 10022 MARK A. METCALF, ESQ. (212) 848-4000 WILSON SONSINI GOODRICH & ROSATI PROFESSIONAL CORPORATION 650 PAGE MILL ROAD PALO ALTO, CA 94304 (650) 493-9300
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, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------- Common stock, no par value............................ $230,000,000.00 $60,720.00 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. 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 SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 21, 2000 [COLO.COM LOGO] - -------------------------------------------------------------------------------- Shares Common Stock - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This is the initial public offering of COLO.COM and we are offering shares of our common stock. The initial public offering price of our common stock is expected to be between $ and $ per share. We have made application to list our common stock on The Nasdaq Stock Market's National Market under the symbol "COLC." INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COLO.COM Per Share $ $ $ Total $ $ $
We have granted the underwriters the right to purchase up to additional shares to cover over-allotments. DEUTSCHE BANC ALEX. BROWN ROBERTSON STEPHENS BEAR, STEARNS & CO. INC. UBS WARBURG LLC THE DATE OF THIS PROSPECTUS IS , 2000 - -------------------------------------------------------------------------------- 3 PROSPECTUS SUMMARY The following summary highlights information we present more fully elsewhere in this prospectus. This prospectus 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 factors described under the heading "Risk Factors" and elsewhere in this prospectus. COLO.COM We are rapidly deploying an international platform of colocation facilities, called Neutral Optical Hubs, in which our customers can install equipment, connect to a choice of network providers and connect with our other customers. We believe our Neutral Optical Hubs will be best-in-class facilities that will offer a broad choice of network providers and the most flexible means to access these providers. Our carrier neutral facilities enable our target customers to use any of the network providers available at our facilities to deliver high quality broadband services and applications to their end users. We are not a communications carrier, and because our facilities are carrier neutral, our customers will be able to connect their communications equipment located in our facilities to any of the carriers that are connected to our facilities. As of May 31, 2000, we had signed contracts with 53 customers to locate equipment in one or more Neutral Optical Hubs, including: - Internet-based businesses, such as Campsix, Inc., RateXchange Corporation and ShockWave.com, Inc.; - application service providers, such as Evolve Software, Inc. and Musicbank, Incorporated; - Internet service providers, such as InterNAP Network Services Corporation, Madge Networks, N.V., The Masterlink Group, Inc. and SAVVIS Communications Corporation; - competitive local phone companies, such as Mpower Communications Corp., Telseon Inc. and 2nd Century Communications Inc.; and - other voice and data communications companies, such as MCI WorldCom and NeuMedia Inc. The deregulation of the telecommunications industry and the significant growth in Internet users and bandwidth intensive applications has increased the demand for the existing communications infrastructure. This demand has strained the performance of the infrastructure, leading to problems with latency, data loss and security. These and other problems are impacting the ability of our target customers to effectively use the Internet for new services such as voice-over-Internet protocol and some applications that use streaming and broadcast capabilities. Content distribution companies and advanced switch providers have been able to improve existing bottlenecks and network congestion through technology, but depend on others to provide facilities and interconnect networks. Internet-based businesses, application service providers, Internet service providers, competitive local phone companies and other voice and data communications companies, which are our target customers, are increasingly turning to colocation options as the need to be close to their end users and the cost of building in-house facilities increases. These target customers have traditionally had limited colocation choices in carrier operated facilities, carrier hotels or web-hosting facilities. International Data Corporation predicts that the U.S. market for Internet hosting, which consists of shared server hosting, several categories of dedicated server hosting and related services, will grow from an estimated $3.7 billion in 2000 to $18.9 billion in 2003. Within this market, IDC predicts that the market for colocation services will be one of the 1 4 fastest growing segments, growing from an estimated $710 million in 2000 to $4.2 billion in 2003. We believe that our carrier neutral colocation solution addresses the limitations of the traditional alternatives. Our customers will be able to purchase a variety of colocation, cross connection and technical support services in all facilities across our broad geographic presence. We believe our solution provides the foundation for building networks that enable customers to locate equipment close to end users, thereby enhancing performance and enabling them to provide more competitive service offerings. Our Neutral Optical Hubs will offer a number of compelling advantages to our customers, including: - international platform and rapid time to market; - network and service neutrality; - cost savings; - best-in-class facilities; and - superior customer service. To achieve our goal of becoming the premier, international, single-source supplier for carrier neutral colocation facilities to our targeted customer base, our strategy is to: - be first-to-market with broad geographic presence; - maintain neutrality; - strategically deploy multiple Neutral Optical Hubs in key geographic regions; - enter into strategic and commercial relationships to extend sales reach; - expand our service offerings and enable marketplace exchanges; and - build the COLO.COM brand. We intend to have at least 40 Neutral Optical Hubs generating revenue or ready for carriers and customers to install their equipment by the end of June 2001. As of May 31, 2000, we had signed leases for 46 facilities in the United States and Europe totaling more than 1.1 million square feet, of which 11 facilities in the U.S. were ready for carriers and customers to install their equipment. We believe our Neutral Optical Hubs will become the preferred platform for companies that want to enhance service for their end users, will facilitate business-to-business commerce among our customers and will enable the convergence of Internet and telecommunication services. ------------------------ We were incorporated in California under the name Colomotion, Inc. in April 1997 and changed our name to COLO.COM in July 1999. We reincorporated in Delaware in 2000. Our principal executive office is located at 2000 Sierra Point Parkway, Brisbane, California 94005, and our telephone number is (650) 292-2656. Our corporate website is www.colo.com. The information contained on our website is not incorporated by reference into this prospectus. 2 5 THE OFFERING Common stock offered................ shares Common stock to be outstanding after this offering....................... shares Use of proceeds..................... To fund capital expenditures in the leasing and buildout of colocation facilities in the U.S. and internationally, to provide working capital, including expenses associated with sales and marketing activities, to fund operating losses, for general corporate purposes and potentially to fund acquisitions. Proposed Nasdaq National Market symbol.............................. COLC Common stock to be outstanding after this offering is based on 62,885,699 shares of common stock outstanding as of May 31, 2000. It does not include: - 3,199,400 shares issuable upon exercise of stock options outstanding as of May 31, 2000, with exercise prices ranging from $0.05 to $5.00 per share; and - 7,103,945 shares issuable upon exercise of warrants outstanding as of May 31, 2000, with exercise prices ranging from $0.01 to $10.00 per share. ------------------------ Except as otherwise indicated, all of the information in this prospectus: - reflects the automatic conversion of each outstanding share of preferred stock into one share of common stock upon the closing of this offering; - assumes no exercise of the underwriters' over-allotment option; and - assumes our reincorporation from California into Delaware prior to the closing of this offering. 3 6 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) See Note 2 of Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares used in computing per share and pro forma per share data below.
PERIOD FROM INCEPTION YEAR ENDED THREE MONTHS ENDED (APRIL 2) TO DECEMBER 31, MARCH 31, DECEMBER 31, ----------------- ------------------ 1997 1998 1999 1999 2000 ------------ ------- ------- ------- -------- (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Revenue...................................... $ 31 $ 190 $ 218 $ 55 $ 192 Operating costs and expenses................. 108 1,740 9,596 1,233 11,804 Loss from operations......................... (77) (1,550) (9,378) (1,178) (11,612) Net loss..................................... (78) (1,553) (8,887) (1,176) (11,892) Basic and diluted net loss per share......... $(0.03) $ (0.28) $ (1.86) $ (0.26) $ (1.49) Shares used in computing basic and diluted net loss per share.................................. 2,612 5,554 4,771 4,461 7,985 Pro forma basic and diluted net loss per share (unaudited).......................... $ (0.34) $ (0.13) $ (0.21) Shares used in computing pro forma basic and diluted net loss per share (unaudited)..... 26,460 8,717 57,155
In the "as adjusted" column below, we have given effect to the receipt of the net proceeds from the sale of our common stock in this offering at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
MARCH 31, 2000 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents................................... $381,010 $ Property and equipment, net................................. 49,033 49,033 Restricted cash and cash equivalents(1)..................... 3,765 3,765 Restricted investments(2)................................... 77,729 77,729 Total assets................................................ 525,108 Current portion of notes payable, net of discount(3)........ 478 478 Non-current liabilities, net of discount on long term notes payable(3)................................................ 219,041 219,041 Total stockholders' equity.................................. 279,332
- ------------------------- (1) Reflects funds set aside as collateral for letters of credit issued under building lease agreements. (2) Reflects investments set aside as collateral for the first four interest payments relating to our senior notes. (3) The unamortized portion of the estimated fair value of warrants issued in connection with financing transactions is recorded as a discount to the related note payable. The actual amount payable at maturity on these obligations at March 31, 2000 is $303.4 million. 4 7 RISK FACTORS You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. Investing in our common stock involves a high degree of risk. Risks and uncertainties, in addition to those we describe below, that are not presently known to us or that we believe are immaterial may also impair our business operations. These risks could, if they occur, harm our business and our operating results. In addition, the trading price of our common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment. RISKS RELATED TO OUR BUSINESS AND INDUSTRY WE ARE A NEW COMPANY AND FACE ALL OF THE RISKS OF A START-UP COMPANY IN A NEW AND RAPIDLY EVOLVING MARKET. We will encounter challenges and difficulties frequently experienced by early-stage companies in new and rapidly evolving markets, including - a lack of operating experience; - increasing net losses and negative cash flows; - lack of sufficient customers; - insufficient revenue or cash flow to be self sustaining; - high capital expenditures; - an unproven business model; and - difficulties in managing rapid growth. We can not assure you that we will ever be successful. WE MAY NOT SUCCEED BECAUSE OF OUR LIMITED EXPERIENCE. Because we are a new company, we have limited experience in designing, building and operating Neutral Optical Hubs. As of May 31, 2000, seven of our Neutral Optical Hubs were generating revenue (excluding our first facility located in San Francisco (Mission Street) that we intend to close). Our buildout plan requires that we identify, lease and construct multiple facilities at the same time. We intend to have at least 40 Neutral Optical Hubs generating revenue or ready for carriers and customers to install their equipment in metropolitan areas by the end of June 2001. This business plan is based on our assumption that it will take approximately ten months from the date that we enter into a lease until the date a new Neutral Optical Hub begins generating revenue. Although we have successfully met this time frame for all of our facilities (excluding our first facility located in San Francisco (Mission Street)) which were generating revenue as of May 31, 2000, we have previously experienced and may continue to experience unforeseen delays and expenses in connection with our facility buildout program. In addition, we have not yet demonstrated that we are able to manage the buildout of multiple facilities at the same time. We also may elect to defer construction of a facility until we have the capital available to complete construction. Accordingly, we cannot assure you that we will successfully complete the implementation of our buildout plan within our proposed time frame. In addition, our lack of experience could result in increased operating and capital costs and delays in our expansion strategy. Our lack of operating experience could also result in service interruptions for our customers. In addition, our long-term business strategy calls for us 5 8 to eventually offer higher margin value-added services to our customers. However, we do not currently provide such services, and have no experience in developing, implementing and marketing such services. Accordingly, we can not assure you that we will be successful at providing these additional services, or that they will not result in additional losses. We may not successfully address any or all of the risks posed by our lack of experience, and our failure to do so would seriously harm our business and operating results. WE MUST BUILD OUT NEW FACILITIES VERY RAPIDLY IN ORDER TO EXECUTE OUR BUSINESS PLAN. We must build out new facilities very rapidly in order to execute our business strategy, which is based upon gaining a first-to-market advantage in the new market for neutral colocation facilities. To accomplish this goal, we intend to have at least 40 Neutral Optical Hubs generating revenue or ready for carriers and customers to install their equipment in metropolitan areas by the end of June 2001 and intend to open numerous facilities in subsequent years. Among other things, our aggressive buildout strategy will require us to rapidly: - locate and secure suitable sites for our Neutral Optical Hubs; - acquire and install equipment for each of our facilities, including heat, ventilation and air-conditioning systems, electrical power supply and backup systems, fire detection and suppression systems, equipment monitoring and 24 x 7 security systems; - hire technical personnel for each of our facilities; and - connect a variety of network providers to each of our facilities. We have very limited experience doing this. In addition, our existing and prospective customers expect us to provide broad geographic coverage in the near future. As a result, delays in successfully completing our buildout strategy could impair important relationships, damage our reputation and have a material adverse effect on our results of operations. WE HAVE INCURRED LOSSES SINCE INCEPTION AND WE EXPECT FUTURE LOSSES. We have had very low revenues and have generally experienced increasing quarterly operating losses and negative cash flows since inception. As of March 31, 2000, we had cumulative net losses of $22.4 million and cumulative cash used in operating activities of $14.0 million. We expect that our net losses and negative cash flows will increase significantly for the foreseeable future. We cannot assure you that we will be able to achieve operating income or positive cash flows in the future. If we cannot, we would not be able to meet our working capital requirements or make interest and principal payments on our debt. WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS WHICH WE MAY NOT BE ABLE TO OBTAIN. To complete the implementation of our intended buildout plan within our proposed time frame and to fund our anticipated operating losses, we will need to raise funds through additional private or public equity or debt financings. We currently anticipate that our available cash resources combined with the net proceeds from this offering will be sufficient to meet our anticipated operating losses, interest expense and capital expenditure requirements through at least the completion of our intended 40-facility buildout plan by the end of June 2001. However, we could be incorrect. Our available cash resources and the net proceeds from this offering will not be sufficient to complete all of the facilities for which we may lease sites. However, we are able to control the deployment of our facilities and do not intend to begin construction on a facility unless we have the capital available to complete construction. We will need to raise additional funds to expand beyond 40 facilities and to fund any related operating losses, to develop new or enhance existing services or applications, or to respond to 6 9 competitive pressures. We anticipate that we may incur a substantial amount of additional debt under a credit facility that we may enter into during 2000. Financing may not be available to us at the time we need it, or if it is available, it may only be available on terms that are unfavorable to us. If we cannot raise sufficient additional funds on acceptable terms we may need to delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities, and we may incur additional losses if we need to terminate any leases or abandon or delay the completion of any facilities under construction. Equity financing would dilute the ownership interest of our current stockholders. Debt financing would increase our interest expense. The anticipated timing and amount of our capital requirements is forward-looking and therefore inherently uncertain. It may take longer than we anticipate to build out our Neutral Optical Hubs. We also do not know how long our sales cycle will be, but it is likely to be lengthy. Once a particular facility is generating revenue, we expect that it will take an extended period of time before it will have enough business to provide sufficient revenue to cover its expenses. Growth in the number of our facilities is likely to increase the amount and duration of losses and our financing needs. Our future capital requirements may therefore vary significantly from what we currently project and may be affected by unforeseen delays and expenses and a lengthier than anticipated sales cycle. If we encounter any of these problems or if we have underestimated our working capital, operating losses or capital expenditure requirements, we may require significantly more financing than we currently anticipate. OUR MARKET IS NEW AND WE DO NOT KNOW IF THERE IS SUFFICIENT DEMAND FOR OUR SERVICES. Because the market for neutral colocation facilities is just developing, we do not know whether there will be sufficient demand for our services. Although a number of emerging companies are developing similar businesses, we are not aware of any company that has successfully executed a business plan like ours. We will make large capital expenditures and incur substantial losses before we have much information about the actual level of demand for our services. If there is not as much demand as we expect, our revenues may be insufficient to cover our costs and expenses, and the value of our common stock could be significantly decreased. WE EXPECT COMPETITION TO BE INTENSE. The market for colocation services is expanding. The main barriers to entry are access to capital, the time needed to assemble a management team and build out facilities, and the ability to secure a first-to-market advantage. We have targeted the developing neutral colocation segment of the broader market for colocation services. Although there are a number of companies developing businesses similar to ours, in most metropolitan areas there are currently a limited number of providers of neutral colocation facilities operating. We expect other companies to enter this market segment if there is sufficient demand for neutral colocation services. A substantial portion of the costs and expenses of a neutral colocation facility are fixed. Once a facility is built and staffed, the marginal cost of providing colocation space to a customer is relatively low. Therefore, if there is more than one neutral colocation facility in a metropolitan area, there may be price competition. If there is significant excess capacity in a metropolitan area, this could lead to increased price competition and lower margins. If we are unable to rapidly roll out our Neutral Optical Hubs, we may lose our first-to-market advantage and other companies may be able to attract the same customers that we are targeting. Once a potential customer is located in a competitor's facility, it will be extremely difficult to convince that potential customer to relocate to our Neutral Optical Hubs because 7 10 moving out of an existing facility could result in service interruptions and significant costs to reconfigure network connections. In addition to competing with other neutral colocation providers, we will compete with traditional colocation providers, including local phone companies, long distance phone companies, Internet service providers and web hosting facilities. Most of these competitors have greater resources, more customers, longer operating histories, greater brand recognition and more established relationships than we have. We believe our neutrality provides us with an advantage over these competitors. However, these competitors could offer colocation on neutral terms, and may start doing so in the metropolitan areas where we establish operations. If this occurs, we could face increased price competition. The Telecommunications Act requires incumbent local exchange carriers to provide non-discriminatory colocation to telecommunications carriers that wish to interconnect with the incumbent local exchange carrier's networks or obtain access to incumbent local exchange carrier-provided unbundled network elements. In 1996, the Federal Communications Commission adopted initial rules to implement this provision and, in 1999, adopted additional rules that should significantly lower the cost and increase the attractiveness of incumbent local exchange carrier-provided colocation facilities. Consequently, colocation offered by incumbent local exchange carriers may become more competitive with our service offerings. Telephone and Internet companies with which we compete will be able to provide our target customers with additional benefits, including bundled communication services, and may do so at reduced prices or in a manner that is more attractive to our potential customers than obtaining space in our Neutral Optical Hubs. If these competitors were to provide communication services at reduced prices together with colocation space, it may lower the total price of these services in a fashion that we cannot match. Our competitors include: - carriers, such as AT&T, Level 3 Communications, MCI WorldCom, Qwest Communications International, Inc. and Sprint, which offer colocation as a byproduct of offering access to their networks; - web-hosting facilities offered by Digital Island, Inc. and Exodus Communications, Inc.; - network access points, such as Neutral Nap, PAIX, and Equinix, Inc.; - carrier hotels, such as One Wilshire in Los Angeles, the Westin Building in Seattle and 60 Hudson in New York, which offer physical space for lease, incumbent local exchange carriers; and - other domestic and international companies offering central office-like facilities, such as Switch and Data Facilities Co., CO Space, Inc., InFlow, Inc., Telehouse International Corporation of America and TelePlace in the U.S., CityReach International, DigiPlex S.A., Global Reach, IX Europe, iaxis, InterXion Netherlands BV and Redbus Interhouse in Europe, and iAsiaWorks, Inc. in Asia. Several of our competitors are our customers or our potential customers. WE MUST MANAGE OUR GROWTH AND EXPANSION EFFECTIVELY. We are experiencing, and expect to continue to experience, rapid growth with respect to the buildout of our Neutral Optical Hubs, expansion of our customer base and increasing the number of our employees. This growth has placed, and we expect it will continue to place a significant strain on our financial, management, operational and other systems and resources, 8 11 and we cannot assure you that our systems, resources, procedures and controls will be adequate to support further expansion of our operations. Any failure to manage growth effectively could seriously harm our business and operating results. To succeed, we will need to: - maintain close coordination among our executive, technical, accounting, finance, marketing, sales, real estate, construction and operations organizations; - improve our operating, administrative, financial and accounting procedures and controls; and - implement sophisticated management information systems, including construction management, billing, budget, sales administration and tracking, human resources and customer support systems, and systems that enable us to monitor our operations. We introduced a new management team and replaced substantially all of our accounting and finance staff in 1999. In connection with the audit of our financial statements for the period from our inception (April 2, 1997) to December 31, 1997 and the year ended December 31, 1998, our independent accountants reported on certain material weaknesses in the system of internal accounting and financial controls maintained by our former management, which included deficiencies in the maintenance of supporting documentation and approvals for disbursements, processes for authorizing significant contracts and reconciliation of general ledger accounts, and also reported certain unauthorized stock transactions. During 1999, in addition to hiring new accounting and financial personnel, our new management team implemented a number of internal accounting polices and procedures to strengthen our system of internal controls. We believe that these new policies and procedures have resolved all of the material weaknesses reported in connection with our 1998 audit. We can not assure you that we will not experience any deficiencies in our system of internal controls in the future. For example, despite our strengthened internal control policies and procedures, we discovered an undocumented transaction involving an option for the purchase of 5,000 shares of our common stock in mid-1999. OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A SHORT OPERATING HISTORY. We were founded under prior management in April 1997 and opened our first facility in San Francisco (Mission Street) in January 1998. As of May 31, 2000, this facility was one of eight of our Neutral Optical Hubs generating revenue. Our new management has decided to close this facility because it does not meet our technical best-in-class criteria. Our operating history through December 31, 1999 consists of less than two years of operations of a single facility which has relatively few customers and which is scheduled to be closed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a further description of the costs associated with the closure of this facility. As a result, you have limited financial and operating data about our company upon which to evaluate our business operations and our prospects and the merits of an investment in the common stock in this offering. Furthermore, the business of providing neutral colocation facilities is a new industry. Although a number of emerging companies are developing similar businesses, we are not aware of any company that has successfully executed a business plan like ours. Accordingly, neither we nor you have the benefit of a comparable historical business model in order to analyze our business plan and prospects. 9 12 WE HAVE A NEW MANAGEMENT TEAM, AND WE DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL. Nearly all of our management team joined us in 1999 and 2000. Although our management team has significant business experience, the members of the team have worked together for only a brief period of time. Our ability to effectively execute our business strategy depends in large part on our new management team's ability to operate effectively together. If our executives are unable to do so, our business and results of operations may be materially and adversely affected. Our success also depends in significant part upon the continued services of our key technical, sales and senior management personnel. If we lose one or more of our key employees, we may not be able to find a replacement and our business and operating results could be adversely affected. In particular, our performance depends upon the continued service of Charles M. Skibo, our chairman and chief executive officer. Mr. Skibo joined us in January 1999 and has been instrumental in designing and leading the execution of our business strategy. The loss of Mr. Skibo's services would have a material and adverse effect on our business. Although most of our senior management personnel are in place, we will need to hire additional key personnel in positions related to our strategy of rapid expansion, including mid-level headquarters staff and qualified technical personnel at each of our Neutral Optical Hubs. We estimate that we will need to hire at least 300 additional employees in executive, technical, accounting, finance, marketing, sales, customer service, real estate, construction management and operational positions by the end of 2000. As of May 31, 2000, we had 234 employees, compared to 11 employees at December 31, 1998. Our future success will depend upon our ability to identify, hire, integrate and retain and train these new employees. In addition, due to generally tight labor markets, our industry, in particular, suffers from a lack of available qualified personnel. We may not be successful in attracting, assimilating or retaining qualified personnel. OUR SUBSTANTIAL AMOUNT OF DEBT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER OUR OUTSTANDING INDEBTEDNESS. We have a substantial amount of debt, with an approximate total indebtedness of $303.4 million as of March 31, 2000. In addition, we anticipate that we may incur a substantial amount of additional debt under a credit facility that we may enter into during 2000. This substantial level of debt could have important consequences to you. For example, it could: - make it more difficult for us to satisfy our obligations with respect to our outstanding debt; - increase our vulnerability to general adverse economic and industry conditions or difficulties that our business may experience; - require us to dedicate a substantial portion of our cash flow from operations, if any, to payments on our debt, thereby reducing the availability of funds for working capital, operating losses, capital expenditures and other general corporate requirements; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate or in taking advantage of significant business opportunities that may arise; - place us at a competitive disadvantage compared to our competitors that have less debt or leverage; and 10 13 - limit our ability to engage in certain business activities, including, among other things, our ability to borrow additional funds or make certain investments due to the financial and restrictive covenants in our debt. Any of the above factors could have a material adverse effect on our business, financial condition and results of operations. We and our subsidiaries and any future subsidiaries may incur substantial amounts of additional debt in the future, including an unlimited amount of purchase money debt and up to $200.0 million of debt under credit facilities, which may be secured. The terms of the indenture governing our senior notes limit, but do not prohibit, us or our subsidiaries and any future subsidiaries from doing so. If we or our subsidiaries and any future subsidiaries incur more debt, the related risks described above could intensify, and it could be more difficult for us to satisfy our obligations under our senior notes. See "Capitalization," "Selected Consolidated Financial Data" and "Description of Indebtedness." SERVICE AND OTHER INTERRUPTIONS COULD LEAD TO SIGNIFICANT COSTS AND DISRUPTIONS WHICH COULD REDUCE OUR REVENUE AND HARM OUR BUSINESS REPUTATION AND FINANCIAL RESULTS. Service interruptions are a very serious concern for our prospective customers and a service interruption or breach of security could be very costly to us and very damaging to our reputation. Our facilities and customers' equipment are vulnerable to damage from human error, physical or electronic security breaches, power loss, other facility failures, fire, earthquake, water damage, sabotage, vandalism and similar events. In addition, our customers would be adversely affected by the failure of carriers to provide network access to our facilities as a result of any of these events. Moreover, we are using an internally developed, standard facility design and are installing substantially the same equipment at each of our facilities. Any latent flaws in our design or equipment would affect most or all of our facilities. Although we have designed our facilities to exacting standards, any of these events or other unanticipated problems at one or more of our facilities could interrupt our customers' ability to provide their services from our facilities. This could damage our reputation, make it difficult to attract new customers and cause our existing customers to seek to terminate their contracts with us. DELAYS IN CUSTOMER INSTALLATION COULD REDUCE OUR REVENUE. We face the risk that too many customers may want to enter our facilities at the same time. Our business plan calls for a substantial percentage of available facility space to be occupied within the first year after a facility is operational. However, only a limited number of customers will be physically able to install equipment in a facility at the same time. We also face a number of organizational issues regarding installing multiple customers' equipment in multiple locations at the same time. Thus, we may be unable to accommodate our customers' needs as quickly as they would like. This could result in damage to our reputation and a reduction in the amount of, or delay in receiving, revenue from the affected customers. WE DEPEND ON THIRD PARTIES, INCLUDING NETWORK OWNERS WITH WHOM WE COMPETE, TO PROVIDE NETWORK CONNECTIONS TO OUR NEUTRAL OPTICAL HUBS. We are not a communications carrier, and therefore, we rely on third parties to provide our customers with access to voice, data and Internet networks. We need to secure relationships with third party network providers to offer our customers a choice of cost-effective access to networks from our Neutral Optical Hubs. Our facilities will not be attractive to our customers without these connections. We intend to rely primarily on revenue opportunities from our existing and prospective customers to encourage carriers to incur the expenses required to 11 14 connect from their points of presence to our Neutral Optical Hubs. Carriers will likely evaluate the revenue opportunity of a Neutral Optical Hub based on their estimates of demand. Many of these carriers have their own colocation facilities and may therefore be reluctant to provide network services at our Neutral Optical Hubs. As a result, carriers may elect not to connect their services to our Neutral Optical Hubs. If numerous carriers do not connect to our Neutral Optical Hubs, our business may fail. In order to attract carriers to connect to our facilities, we plan to place circuit orders with approximately three carriers prior to completing construction of each facility. These orders will generally require us to pay an installation fee and a minimum monthly charge for periods anticipated to be approximately one to three years. As of May 31, 2000, we had placed orders with multiple carriers to connect to 24 of our facilities, with aggregate monthly service charges of approximately $550,000. These charges become payable as carriers complete their connections to each facility. We expect that as customers connect to these carriers, these circuits and the related monthly charges will be assigned to these customers and thereby reduce our obligations to the carriers. However, we cannot assure you that we will be successful in assigning these commitments to our customers or that we will not be required to make substantial payments to carriers before we begin generating revenues from our customers. In addition to the 24 facilities with carrier service orders to be charged, 11 of our facilities either had carriers installed or connections on order without monthly service charges. We may also need to provide additional incentives to attract carriers to connect to our facilities. We believe that once the first carriers connect to any given facility, other carriers will be more likely to do so. In the event that we experience delays in installing customers in our facilities, or those customers do not want services from the carriers which we have brought into a facility, we may be required to make substantial payments to these carriers. The construction required to connect multiple carriers to our Neutral Optical Hubs is complex and involves factors outside of our control, including the availability of local building permits, regulatory processes and the availability of the carrier's construction resources and vendor equipment. We have in the past experienced, and may in the future experience, delays in obtaining access. OUR ABILITY TO FILL OUR NEUTRAL OPTICAL HUBS IS LIMITED BY THE AVAILABILITY OF ELECTRICAL POWER. The availability of an adequate supply of electrical power and the infrastructure to deliver that power is critical to our ability to attract new customers and achieve our projected results. We rely on third parties to provide electrical power to our Neutral Optical Hubs, and cannot be sure that these parties will provide adequate electrical power to our Neutral Optical Hubs or that we will have the necessary infrastructure to deliver adequate electrical power to our users. Even if the utility company provides adequate power to the building, we still must rely on the landlord to provide adequate electrical power to our Neutral Optical Hub. If the amount of electrical power delivered to our facilities is inadequate to support our customer requirements or does not occur in a timely manner, our operating results and cash flow may be materially and adversely affected. In addition, the amount of space required to house generators and batteries limits the amount of sellable space that we have in each of our Neutral Optical Hubs and restricts our ability to expand the facilities. Our electrical power specifications are based upon the expected mix of customers and the expected mix of their equipment. Technological change could also increase the power requirements of customer equipment. As a result, a different mix of customers or equipment or different specifications of our customers equipment than what we expect could cause us to run out of available power before a facility is fully filled thus reducing our anticipated revenue stream or requiring us to incur additional costs to increase the amount of available power and potentially reducing the amount of saleable space. 12 15 OUR REVENUES FROM EACH NEUTRAL OPTICAL HUB WILL BE AFFECTED BY A MIX OF CUSTOMERS WITH LARGE AND SMALL DEMANDS FOR SPACE. Customers will have specific requirements for the configuration of their space which we may inaccurately predict. We build our sites anticipating roughly an equal mix of custom fit cage space that is designed to meet the specifications of our customers with demands for larger space and pre-configured cabinet and cage space that is designed for customers with demands for small and medium sized space. If we fail to meet our anticipated customer mix, we may incur significant costs to retrofit our facilities. We expect our large customers to purchase large amounts of cage space and outfit it to meet their own specifications. Our preconfigured cage space is available in 10' x 12', 10' x 10' and 8' x 7' sizes, and our cabinets are designed to fit standard size Internet (19-inch) and telecommunications (23-inch) mounts. We expect that some significant larger customers will drive early revenue and occupancy within each of our facilities and help us attract smaller customers. If we fail to attract enough large customers, we may not be able to increase our revenues quickly enough and may fail to establish ourselves as a credible service provider. We also expect that we will be able to fill our custom cage space much more quickly than our pre-configured cabinet and cage space. On the other hand, if we sell more than the expected amount of our space to large customers, we will have less space available to sell, on a potentially higher margin basis, to smaller customers. As a result, if we are unable to achieve a desirable mix of large and small customers, our financial results may be adversely affected. WE MAY CONTINUE TO HAVE CUSTOMER CONCENTRATION. To date, we have relied upon a very small number of customers for most of our revenue. We expect that we will continue to rely upon a limited number of customers for a high percentage of our revenue on a per-facility basis and may also continue to have customer concentration company-wide. As a result of this concentration of our customer base, a loss of or decrease in business from one or more of our customers in any single facility could have a material and adverse effect on that facility, and a loss of or decrease in business from one or more of our significant customers that have entered into contracts covering multiple facilities could have a material and adverse effect on our business, prospects, financial condition and results of operations. In addition, since customers entering into contracts covering multiple facilities will have a significant impact on our revenue, they may force us into concessions that will reduce our profit margins. WE MAY HAVE DIFFICULTY COLLECTING PAYMENTS FROM SOME OF OUR CUSTOMERS. We anticipate that a number of our customers will be start-up companies. There is a risk that these companies will experience difficulty paying their bills, including money owed to us for our services. Although we believe that the difficulties and service interruptions associated with relocating communications equipment may lead these customers to give greater priority to paying for our services, we might not be able to collect all of the money owed to us by some of these customers. We intend to remove customers that do not pay us in a timely manner. However, we may have difficulty collecting from or removing these customers. WE MUST RESPOND TO EVOLVING INDUSTRY STANDARDS. The demand for our Neutral Optical Hubs will be affected by evolving industry standards and changes in customer demands. Our success will partially depend on our ability to address the increasingly sophisticated and varied needs of our existing and prospective customers. Future advances in technology may not be beneficial to, or compatible with, our business, and we may not be able to incorporate advances on a cost-effective and timely basis. For example, 13 16 although we have taken steps to incorporate wireless communications capabilities into our facilities, the further development of this technology could lead to a reduced need for our other products and services. If customer requirements for electrical power increase and we are unable to meet this demand it will have a material and adverse impact on our business. If evolving industry standards result in substantial changes in the standard size specifications of our customers' equipment, and thereby result in the need for different dimensions of cage or cabinet space, we may need to incur additional costs to retrofit our facilities and our financial results may be adversely impacted. WE MUST LOCATE AND SECURE SUITABLE SITES. We need sites that meet specific infrastructure requirements such as access to multiple communication carriers, a significant supply of electrical power, high ceilings, and the capability for heavy floor loading. In many markets, the supply of facilities with these characteristics is very limited and is in very high demand. In addition, the completion of lease transactions requires timely and successful negotiations with landlords. Our ability to secure leases rapidly can be affected by poor landlord responses. If we are not able to locate and secure suitable sites for our Neutral Optical Hubs in the markets that we intend to enter, we will not be able to complete the implementation of our buildout plan within our proposed time frame, and our business and results of operations may be adversely affected. WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS THAT COULD HARM OUR BUSINESS. A component of our strategy is to expand into international markets, including Europe and Asia-Pacific. International expansion is important to our customers who want a colocation provider with broad geographic coverage. Because our management has limited experience in conducting business outside the U.S. and may not know particular factors that affect our business in foreign countries, we will be subject to greater risks there. In addition, we anticipate that market and regulatory acceptance of the services provided by our Neutral Optical Hubs will be slower outside the U.S. As a result, we could suffer material harm to our business, including increased costs, longer sales cycles and diversion of management's attention, if we experience difficulty in dealing with some of the risks inherent in conducting our business internationally. Some of these risks include: - increased leasing costs and expenses; - difficulty or increased costs of constructing Neutral Optical Hubs; - longer construction times and sales cycles; - difficulty of securing relationships with third party network owners; - business practices and protectionist laws that favor local competition; - changes in regulatory requirements, tariffs and other trade barriers; - challenges in staffing and managing foreign operations, including differences in employment laws and practices; - difficulties associated with enforcing agreements through foreign legal systems; and - fluctuations in currency exchange rates and imposition of currency exchange controls. In addition, in order to develop or expand our international operations, we may acquire complementary businesses or enter into joint ventures or outsourcing agreements with third parties. Thus, we may depend on third parties to be successful in our international operations. 14 17 WE MAY MAKE ACQUISITIONS, WHICH POSE INTEGRATION AND OTHER RISKS. We may seek to acquire other colocation providers or additional colocation facilities from other companies. As a result of these acquisitions, we may: - pay too much; - be required to incur significant expenditures to retrofit the acquired facility to bring it up to our standards; - have difficulty assimilating customers, technology and personnel from acquired businesses; - create goodwill that would reduce our earnings, if any, as it is amortized; and - have to make write-offs of acquired assets. We may also acquire colocation facilities or operators of colocation facilities in foreign countries to expand our international operations. These acquisitions would also pose the risks discussed above under "We face risks associated with international operations that could harm our business." In addition, we might issue common stock to pay for some or all of the purchase price for acquired businesses. That would dilute the ownership interests of our current stockholders. Currently, we have no present understandings, commitments or agreements with respect to any such acquisitions. LEGISLATION AND GOVERNMENT REGULATION COULD ADVERSELY IMPACT OUR BUSINESS PLAN AND OUR OPERATING RESULTS. Changes in the regulatory environment could affect our operating results by increasing competition, decreasing revenue, increasing costs or impairing our ability to offer services. The provision of basic telecommunications services is subject to significant regulation at the federal and state level. The Federal Communications Commission regulates telecommunications carriers that provide interstate and international common carrier services. State public utilities commissions exercise jurisdiction over intrastate basic telecommunications services but do not regulate most enhanced services, which involve more than the pure transmission of customer provided information. Many of our customers, competitors and vendors, especially incumbent local exchange carriers, are subject to federal and state regulations. These regulations change from time to time in ways that are difficult for us to predict. Although we believe the services we provide today are not subject to any regulation by the Federal Communications Commission or the state public utilities commissions, changes in regulation or new legislation may increase the regulation of our current services. In addition, our intended expansion into international markets could subject us to regulatory requirements of foreign jurisdictions. WE MAY BE SUBJECT TO ENVIRONMENTAL RISKS INHERENT IN THE ON-SITE STORAGE OF DIESEL FUEL AND BATTERIES. Our Neutral Optical Hubs contain tanks for the storage of diesel fuel and significant quantities of lead acid batteries to provide back-up power generation and uninterrupted operation of our customers' equipment. We maintain an environmental compliance program that includes the implementation of required technical and operational procedures designed to minimize the potential for leaks and spills, maintenance of records and manufacturer's recommended preventative maintenance. However, we cannot assure you that these systems will at all times remain free from leaks or that the use of these systems will not result in spills. Any leak or spill, depending on such factors as the material involved, quantity and environmental setting, could result in interruptions to our operations and expenditures that could have a material adverse effect on our business, financial condition and results of operations. 15 18 RISKS RELATED TO THIS OFFERING OUR SIGNIFICANT STOCKHOLDERS CAN EXERT CONTROL OVER US, AND MAY NOT MAKE DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL STOCKHOLDERS. After this offering, our officers, directors and principal stockholders (greater than 5% stockholders) will together control approximately % of our outstanding common stock. As a result, these stockholders, if they act together, will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of COLO.COM and might affect the market price of our common stock, even when such a change may be in the best interests of all stockholders. WE HAVE BROAD DISCRETION TO USE THE PROCEEDS OF THIS OFFERING, AND OUR INVESTMENT OF THESE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN. Our management has broad discretion over the use of proceeds from this offering and may spend these proceeds in ways with which our stockholders may not agree. We intend to use the proceeds from this offering to fund capital expenditures in the leasing and buildout of colocation facilities, to provide working capital, including expenses associated with sales and marketing activities, to fund operating losses, for general corporate purposes and potentially to fund acquisitions. Our use of proceeds may not yield a significant return or any return at all. OUR STOCK PRICE MAY FLUCTUATE SUBSTANTIALLY. Prior to this offering, there has been no public market for shares of our common stock. An active public trading market may not develop following completion of this offering or, if developed, may not be sustained. We and the representatives of the underwriters, through negotiations, will determine the initial public offering price of the shares of common stock. This price will not necessarily reflect the market price of the common stock following this offering. The market price for the common stock following this offering will be affected by a number of factors, including the following: - the announcement of new products or services by us or our competitors; - quarterly variations in our or our competitors' results of operations; - failure to achieve operating results projected by securities analysts; - changes in earnings estimates or recommendations by securities analysts; - developments in our industry; and - general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors. These factors and fluctuations, as well as general economic, political and market conditions, may materially adversely affect the market price of our common stock. 16 19 POTENTIAL SALES OF SHARES ELIGIBLE FOR FUTURE SALE AFTER THIS OFFERING COULD CAUSE OUR STOCK PRICE TO DECLINE. If our stockholders sell substantial amounts of our common stock (including shares issued upon the exercise of outstanding options and warrants) in the public market following this offering, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. The shares sold in this offering will be freely tradable immediately upon completion of this offering. In addition, on the 181st day after completion of this offering, approximately shares of our common stock held by existing stockholders will be freely tradable, subject in some instances to the volume and other limitations of Rule 144. Sales of these shares and other shares of common stock held by existing stockholders could cause the market price of our common stock to decline. PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN OUR CONTROL, EVEN IF THIS WOULD BE BENEFICIAL TO STOCKHOLDERS. Provisions of our amended and restated certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include: - a classified board of directors, in which our board is divided into three classes with three year terms with only one class elected at each annual meeting of stockholders, which means that a holder of a majority of our common stock will need two annual meetings of stockholders to gain control of the board; - a provision which prohibits our stockholders from acting by written consent without a meeting; - a provision which permits only the board of directors, the president or the chairman to call special meetings of stockholders; and - a provision which requires advance notice of items of business to be brought before stockholders meetings. These provisions can be amended only with the vote of the holders of 66 2/3% of our outstanding capital stock. AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION. If you purchase shares of our common stock in this offering, you will incur immediate dilution of $ per share in pro forma net tangible book value. If the holders of outstanding options or warrants exercise those options or warrants, you will incur further dilution. See "Dilution." 17 20 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intend," "potential" or "continue." In addition, these forward-looking statements include statements regarding the following: - our business strategy; - our future operations; - our financial position and estimated revenues; - our expected cost and timing of leasing, constructing and equipping each new facility; and - our prospects, plans and objectives of management. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus or to conform these statements to actual results. 18 21 USE OF PROCEEDS We estimate that we will receive net proceeds of approximately $ million from the sale of the shares of common stock in this offering (approximately $ if the underwriters exercise their over-allotment option in full), at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. We expect to use the net proceeds to fund capital expenditures in the leasing and buildout of colocation facilities in the U.S. and internationally, to provide working capital, including expenses associated with sales and marketing activities, to fund operating losses, for general corporate purposes and potentially to fund acquisitions. The amounts that we will actually expend will vary significantly depending on a number of factors, including revenue growth, if any, capital expenditures, the amount of cash generated by our operations, any additional financing that we may obtain and the use of proceeds of any such financing and other factors, many of which are beyond our control. Additionally, if we determine that it would be in our best interests, we may modify the number, selection and timing of entry into various geographic markets that we may enter. Accordingly, we will retain broad discretion in the allocation of the net proceeds of this offering. Although we may use a portion of the net proceeds to pursue acquisitions of businesses complementary to ours or additional colocation facilities from other companies, there are no present understandings, commitments or agreements with respect to any such acquisitions. Pending use of the net proceeds as outlined above, we will invest these funds in short-term, interest bearing, investment-grade securities to the extent permitted by the covenants governing our outstanding senior notes and our existing debt and any statistical asset tests imposed by the Investment Company Act of 1940 and in government securities. DIVIDEND POLICY We have not paid any dividends since our inception and do not intend to pay any dividends on our capital stock in the foreseeable future. We anticipate that we will retain all of our future earnings, if any, for use in our operations and expansion of our business. In addition, the indenture governing our outstanding senior notes significantly limits our ability to pay dividends on our capital stock. TRADEMARKS We own applications for federal registration and claim rights in the service marks COLO.COM(SM), Neutral Optical Hub(SM) and NOH(SM). This prospectus also refers to service marks, trade names and trademarks of other companies. 19 22 CAPITALIZATION The following unaudited table sets forth: - the actual cash, investments and capitalization of COLO.COM at March 31, 2000; and - the as adjusted cash, investments and capitalization after giving effect to this offering assuming an initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses. Please read this table in conjunction with our consolidated financial statements, the notes to those statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included later in this prospectus.
MARCH 31, 2000 --------------------------------- (UNAUDITED) ACTUAL AS ADJUSTED ------------ --------------- (IN THOUSANDS, EXCEPT SHARE DATA) Cash and cash equivalents................................... $381,010 $ ======== Restricted cash and cash equivalents........................ 3,765 3,765 ======== ======== Restricted investments...................................... 77,729 77,729 ======== ======== Current portion of notes payable, net of discount(1)........ 478 478 ======== ======== Long term obligations, net of current portion: Notes payable, net of discount(1)......................... 1,287 1,287 13 7/8% senior notes due 2010, net of discount(1)......... 216,468 216,468 -------- -------- Total long-term debt...................................... 217,755 217,755 Stockholder's equity: Series A preferred stock, no par value; 5,250,000 shares authorized; 4,261,730 shares issued and outstanding (no shares outstanding as adjusted)........................ 2,079 -- Series B preferred stock, no par value; 24,500,000 shares authorized; 24,500,000 shares issued and outstanding (no shares outstanding as adjusted).................... 12,219 -- Series C preferred stock, no par value; 21,000,000 shares authorized; 20,408,164 shares issued and outstanding (no shares outstanding as adjusted)(2)................. 194,056 -- Common stock, no par value; 81,000,000 shares authorized; 13,557,555 shares issued and outstanding (62,727,449 shares outstanding as adjusted)(3)..................... 26,003 Warrants(4)................................................. 88,460 88,460 Deferred compensation....................................... (19,698) (19,698) Notes receivable from stockholders.......................... (1,377) (1,377) Accumulated deficit......................................... (22,410) (22,410) -------- -------- Total stockholders' equity............................. 279,332 -------- -------- Total capitalization................................... $497,087 $ ======== ========
- ------------------------- (1) The unamortized portion of the estimated fair value of warrants issued in connection with financing transactions is recorded as a discount to the related note payable. The actual amount payable on these notes as of March 31, 2000 is $303.4 million. (2) Excludes 601,655 shares of Series C preferred stock issuable upon the exercise of currently exercisable warrants outstanding as of March 31, 2000 with a weighted average per share exercise price of $8.35 and per share exercise prices ranging from $6.44 to 20 23 $10.00. Upon the closing of this offering, these warrants will become exercisable for an equal number of shares of common stock at the same exercise price. In June 2000, we cancelled warrants to purchase 10,000 shares of Series C preferred stock in partial consideration for the issuance of 10,000 shares of common stock. (3) Excludes: - 10,000 shares of common stock that were issued in June 2000 in exchange for a cash payment and the cancellation of warrants to purchase 10,000 shares of Series C preferred stock as described above in (2); - 2,860,550 shares of common stock reserved for issuance upon exercise of outstanding vested and unvested options as of March 31, 2000 with a weighted average per share exercise price of $2.22 and per share exercise prices ranging from $0.05 to $5.00; - 530,000 shares of common stock issuable upon the exercise of currently exercisable warrants outstanding as of March 31, 2000 with a per share exercise price of $0.05; and - 5,991,540 shares of common stock reserved for issuance upon exercise of the warrants sold in our senior notes offering in March 2000, with a per share exercise price of $0.01. These warrants will become exercisable upon the earlier of (a) March 10, 2001 or (b) 180 days following the closing of our initial public offering. (4) Reflects the value assigned to warrants issued in connection with our senior notes offering and other financing transactions. The value assigned to the warrants was calculated using the Black-Scholes pricing model (see Notes 6 and 8 to Consolidated Financial Statements). 21 24 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. The pro forma net tangible book value of COLO.COM at March 31, 2000, was $ million, or $ per share. Pro forma net tangible book value per share represents total tangible assets less total liabilities, divided by the number of outstanding shares of common stock. After giving effect to the sale of the shares of common stock we are offering at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value at March 31, 2000, would have been $ million, or $ per share. This represents an immediate increase in the pro forma as adjusted net tangible book value per share of $ to our existing stockholders and an immediate dilution of $ per share to new investors purchasing common stock in this offering, or approximately % of the assumed offering price of $ per share. The following table illustrates this per share dilution: Assumed public offering price per share................... $ Pro forma net tangible book value per share at March 31, 2000................................................. $ Increase per share attributable to this offering........ -------- Pro forma as adjusted net tangible book value per share after this offering..................................... -------- Dilution per share to new investors....................... $ ========
The following table shows on a pro forma as adjusted basis at March 31, 2000, after giving effect to the sale of the shares of common stock we are offering at an assumed initial public offering price of $ per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses, the total consideration paid to us and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering:
SHARES PURCHASED TOTAL CONSIDERATION --------------------- --------------------- AVERAGE PRICE NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE -------- ---------- -------- ---------- ------------- Existing stockholders............ % $ % $ New investors.................... % % -------- ----- -------- ------ ------- Total.......................... 100.0% $ 100.0% $ ======== ===== ======== ====== =======
The computations in the table above assume no exercise of any stock options or warrants outstanding at May 31, 2000. As of May 31, 2000 there were options outstanding to purchase a total of 3,199,400 shares of common stock at a weighted average exercise price of $2.25 per share, and there were warrants outstanding to purchase a total of 7,103,945 shares of common stock at a weighted average exercise price of $0.71 per share. If any of these options or warrants are exercised, there will be further dilution to new investors purchasing common stock in this offering. In addition, we may issue stock, options or warrants in connection with acquisitions, strategic relationships, investments and attracting, retaining and compensating employees. These issuances may dilute the ownership interests of our stockholders, including new investors purchasing common stock in this offering. 22 25 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the notes to those statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included later in this prospectus. The following selected consolidated financial data for the period from our inception (April 2, 1997) to December 31, 1997 and for the years ended December 31, 1998 and 1999 has been derived from our audited consolidated financial statements included in the back of this prospectus. The statements of operations data for the three months ended March 31, 1999 and 2000 and the balance sheet data as of March 31, 2000 are derived from our unaudited financial statements included in the back of this prospectus. In management's opinion, the unaudited financial statements include all adjustments, consisting of only normal recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations as of this date and for these periods. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the entire year.
PERIOD FROM YEAR ENDED THREE MONTHS ENDED INCEPTION DECEMBER 31, MARCH 31, (APRIL 2) TO ----------------- ------------------ DECEMBER 31, 1997 1998 1999 1999 2000 ----------------- ------- ------- ------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenue...................................... $ 31 $ 190 $ 218 $ 55 $ 192 Operating costs and expenses: Cost of revenue............................ 92 342 762 164 3,521 Selling, general and administrative........ 14 1,388 6,526 409 5,464 Deferred compensation...................... -- -- 1,248 -- 2,258 Depreciation and amortization.............. 2 10 139 50 561 Loss on lease and leasehold improvements... -- -- 921 610 -- ------ ------- ------- ------- -------- Total operating costs and expenses....... 108 1,740 9,596 1,233 11,804 ------ ------- ------- ------- -------- Loss from operations......................... (77) (1,550) (9,378) (1,178) (11,612) Interest income.............................. -- 7 491 2 2,659 Interest expense(1).......................... (1) (10) -- -- (2,939) ------ ------- ------- ------- -------- Net loss..................................... $ (78) $(1,553) $(8,887) $(1,176) $(11,892) ====== ======= ======= ======= ======== Basic and diluted net loss per share......... $(0.03) $ (0.28) $ (1.86) $ (0.26) $ (1.49) ====== ======= ======= ======= ======== Shares used in computing basic and diluted net loss per share......................... 2,612 5,554 4,771 4,461 7,985 ====== ======= ======= ======= ======== Pro forma basic and diluted net loss per share (unaudited)(2)....................... $ (0.34) $ (0.13) $ (0.21) ======= ======= ======== Shares used in computing pro forma basic and diluted net loss per share (unaudited)(2)............................. 26,460 8,717 57,155 ======= ======= ========
23 26
DECEMBER 31, ------------------------- MARCH 31, 1998 1999 2000 ----------- ----------- ----------- (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $138 $198,412 $381,010 Property and equipment, net................................. 495 13,195 49,033 Restricted cash and cash equivalents(3)..................... -- 2,162 3,765 Restricted investments(4)................................... -- -- 77,729 Total assets................................................ 888 215,742 525,108 Current portion of notes payable, net of discount(5)........ -- 1,464 478 Non-current liabilities, net of discount on long term notes payable(5)................................................ -- 1,918 219,041 Total stockholders' equity.................................. 476 202,688 279,332
- ------------------------- (1) Excludes interest of $930,000 in 1999 and $591,000 in the three months ended March 31, 2000, which has been capitalized as a component of construction in progress, in accordance with generally accepted accounting principles. (2) The calculation of pro forma net loss per share assumes the conversion of each outstanding share of preferred stock into one share of common stock as of the original issuance date. (3) Reflects funds set aside as collateral for letters of credit issued under building lease agreements. (4) Reflects investments set aside as collateral for the first four interest payments relating to our senior notes. (5) The unamortized portion of the estimated fair value of warrants issued in connection with financing transactions is recorded as a discount to the related note payable. The actual amount payable on these obligations at March 31, 2000 is $303.4 million. 24 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and the notes to those statements included later in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this prospectus, particularly in "Risk Factors." OVERVIEW We are creating an international platform of colocation facilities, which we refer to as Neutral Optical Hubs, in which our customers can install equipment, connect to a choice of network providers and connect with our other customers to deliver high quality, broadband services and applications to their end users. We offer our customers best-in-class facilities, which provide environmentally and physically secure centers to deploy their equipment, the opportunity to interconnect with outside carriers and with our other customers, and technical assistance and consulting services. Our colocation, cross connection and service products will scale with our customers' needs both within facilities and across our international solution. We are not a communications carrier, and because our facilities are carrier neutral, our customers will be able to connect their communications equipment located in our facilities to any of the carriers that are connected to our facilities. Since our inception in April 1997, our principal activities have included developing our business plan, raising capital, hiring management and other key personnel, developing our site selection criteria and our standard facility design, locating and securing sites, designing and constructing our Neutral Optical Hubs, and sales and marketing activities. We have generally experienced increasing quarterly operating losses and negative cash flows since inception, and we expect that our net losses and negative cash flows will increase significantly for the foreseeable future. As of May 31, 2000, we had entered into leases for 46 sites in the United States and Europe, of which 15 facilities were under construction and 11 facilities were ready for carriers and customers to install their equipment, of which seven facilities were generating revenue (excluding our first facility located in San Francisco (Mission Street) that we intend to close). We intend to have at least 40 Neutral Optical Hubs generating revenue or ready for carriers and customers to install their equipment in metropolitan areas by the end of June 2001. As a result of this buildout strategy, we will significantly increase our cost of revenue and selling, general and administrative expenses. On average, we expect a new domestic facility of 25,000 square feet to cost approximately $10 million to construct and equip. Our business plan assumes that it will take approximately ten months from the date that we enter into a lease until the date a new Neutral Optical Hub begins generating revenue. Although we have successfully met this time frame for all of our facilities (excluding our first facility located in San Francisco (Mission Street)) which were generating revenue as of May 31, 2000, we have previously experienced and may continue to experience unforeseen delays and expenses in connection with our facility buildout program. We also may elect to defer construction of a facility until we have the capital available to complete construction. In addition, we have not yet demonstrated that we are able to manage the buildout of multiple facilities at the same time. We also do not know how long our sales cycle will be, but it is likely to be lengthy. Once a particular facility is generating revenue, we expect that it will take an extended period of time before it will have enough business to 25 28 provide sufficient revenue to cover its expenses. We expect that it will cost more and take longer to construct, equip and begin generating revenue in international locations. In order to attract carriers to connect to our facilities, we plan to place circuit orders with approximately three carriers prior to completing construction of each facility. These orders will generally require us to pay an installation fee and a minimum monthly charge for periods anticipated to be approximately one to three years. As of May 31, 2000, we had placed orders with multiple carriers to connect to 24 of our facilities, with aggregate monthly service charges of approximately $550,000. These charges become payable as carriers complete their connections to each facility. We expect that as customers connect to these carriers, these circuits and the related monthly charges will be assigned to these customers and thereby reduce our obligations to the carriers. However, we cannot assure you that we will be successful in assigning these commitments to our customers or that we will not be required to make substantial payments to carriers before we begin generating revenues from our customers. In addition to the 24 facilities with carrier service orders to be charged, 11 of our facilities either had carriers installed or connections on order without monthly service charges. We may also need to provide additional incentives to attract carriers to connect to our facilities. If we accelerate our expansion plans or develop additional facilities, this will likely increase the amount and duration of losses and our financing needs. In early 1999, our new management team determined that our first facility located in San Francisco (Mission Street) and the adjoining expansion site did not meet our technical criteria and decided to close it. As a result, we recognized a charge of $921,000 in 1999 for the writedown of the leasehold improvements related to this facility, the termination of the lease on the adjacent expansion site and forfeiture of a security deposit and prepaid rent. We have made arrangements with all of the customers at our San Francisco (Mission Street) facility to relocate to our San Francisco (Townsend Street) or Emeryville, California facilities or to another facility of their choice. We accounted for the writedown of leasehold improvements and cancellation of the lease in 1999, but may be required to incur additional expenses in 2000 for costs related to this facility closure and in connection with relocating customers. FACTORS AFFECTING FUTURE OPERATIONS REVENUE. We enter into contracts with our customers that typically have terms between one and ten years with varying renewal periods. Our revenue consists primarily of: - monthly fees for colocation services; - monthly fees for cross connecting our customers to communication carriers and other customers; - fees for technical support services; and - fees for installation services. Our revenue will increase as we open additional Neutral Optical Hubs. Over time, we intend to build upon our present service offerings by providing additional value-added services and eventually enabling customers to buy, sell and exchange services within each facility. Revenue for services other than installation is recognized as services are provided. Advance payments received from customers are deferred and recognized as revenue on a straight-line basis over the period in which service is provided. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101 summarizes the SEC's view in applying generally accepted accounting principles to selected revenue recognition issues. As of January 1, 2000, we began to recognize installation revenue over the life of the customer contract. The cost associated with customer installation 26 29 and other services is expensed as incurred. There is no material impact on prior years' statements. COST OF REVENUE. Cost of revenue has historically consisted primarily of site-related employee salaries and benefits, rental payments on our Neutral Optical Hubs, payments for equipment, connectivity charges and other site-related operating expenses. We expect our cost of revenue to increase both in dollar amounts and as a percentage of revenue for the foreseeable future as a result of our buildout strategy. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses consist primarily of headquarters-related employee salaries and benefits, consulting fees, travel costs, sales commissions, rental payments and other occupancy costs at our headquarters location. We expect our selling, general and administrative expenses to increase both in dollar amounts and as a percentage of revenue for the foreseeable future as we build the infrastructure necessary to support our anticipated growth. However, we expect these expenses to eventually decline as a percentage of our revenue as we roll out additional Neutral Optical Hubs. DEFERRED COMPENSATION. In connection with the grant of certain stock options at various dates in 1999 and 2000, we recorded deferred compensation under stockholders' equity, representing the difference between the estimated fair value for accounting purposes of our stock on the dates of grant and the exercise prices. We are amortizing this deferred compensation amount over the vesting period of the underlying options or upon the lapsing of the restrictions on the applicable shares. We recorded a stock-based compensation expense resulting from the amortization of this deferred compensation amount in 1999 and the first quarter of 2000, and will recognize additional stock-based compensation expense in future periods as we amortize the $19.7 million deferred compensation remaining in stockholders' equity at March 31, 2000. All deferred compensation relates to selling, general and administrative expenses. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense consists of depreciation of capitalized construction costs, leasehold improvements, site equipment, furniture, fixtures and computer and office equipment and amortization of other assets. Capitalized costs include construction, cabling and on-site construction management costs as well as rent, utilities, direct costs and interest accrued during the construction phase. Depreciation of these costs begins once construction is complete and the facility is ready for carriers and customers to install their equipment. INTEREST INCOME. Interest income has been generated primarily from the unspent proceeds of our common and preferred stock offerings, our senior notes and funds received from various financing arrangements. INTEREST EXPENSE. Interest expense includes interest paid in cash as well as the amortization of the value of warrants issued in connection with our debt facilities and the amortization of deferred financing costs incurred in conjunction with our senior notes offering. We amortize the value of these warrants over the commitment period of the credit facility or the period in which the debt is outstanding. In accordance with generally accepted accounting principles, certain interest expense incurred during construction of our facilities is capitalized as a component of construction in progress. INCOME TAXES. We have operated at a net loss since inception and as a result we do not have a provision for income taxes. Deferred tax assets resulting from net operating losses and other temporary differences have been fully reserved. 27 30 RESULTS OF OPERATIONS QUARTERS ENDED MARCH 31, 1999 AND 2000 REVENUE. Our revenue increased 249% from $55,000 in the three months ended March 31, 1999 to $192,000 in the three months ended March 31, 2000. The increase in revenue resulted primarily from one customer at one of our Neutral Optical Hubs. The majority of this revenue is related to monthly fees for colocation services. COST OF REVENUE. Our cost of revenue increased 2,047% from $164,000 in the three months ended March 31, 1999 to $3.5 million in the three months ended March 31, 2000. This increase was primarily the result of increased headcount and site expenses, consisting of rent, utilities and other related costs at our Neutral Optical Hubs as well as a one-time non cash charge of $2.3 million for warrants issued to NEXTLINK. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and administrative expenses increased 1,236% from $409,000 in the three months ended March 31, 1999 to $5.5 million in the three months ended March 31, 2000. The increase was primarily due to an increase in headcount and related costs. We hired additional personnel in anticipation of future growth and increased the number of employees who perform headquarters-based functions. Our headcount increased from 11 at March 31, 1999 to 161 at March 31, 2000. Our occupancy and rental costs increased as a result of the expansion of our corporate office to accommodate our larger headcount. DEFERRED COMPENSATION. Amortization of deferred compensation increased from $0 in the three months ended March 31, 1999 to $2.3 million in the three months ended March 31, 2000. The increase was due to the increase in deferred compensation in connection with the grant of stock options subsequent to March 31, 1999. All deferred compensation relates to selling, general and administrative expenses. DEPRECIATION AND AMORTIZATION. Our depreciation and amortization expenses have increased 1,022% from $50,000 in the three months ended March 31, 1999 to $561,000 in the three months ended March 31, 2000. The increase was the result of the commencement of depreciation at three additional Neutral Optical Hubs in the first quarter of 2000. The increase is also due to additional computer equipment and office furniture at our expanded corporate office. LOSS ON LEASE AND LEASEHOLD IMPROVEMENTS. Our costs associated with the loss on lease and leasehold improvements decreased from $610,000 in the three months ended March 31, 1999 to $0 in the three months ended March 31, 2000. In early 1999, our new management team determined that our first facility located in San Francisco (Mission Street) and the adjacent expansion site did not meet our technical criteria and decided to close it. As a result, we recognized a charge of $610,000 in the three months ended March 31, 1999. INTEREST INCOME. Our interest income increased 132,850% from $2,000 in the three months ended March 31, 1999 to $2.7 million in the three months ended March 31, 2000. This increase was due to interest earnings on the net proceeds of our Series C preferred stock offering in December 1999 and our senior notes offering in March 2000 INTEREST EXPENSE. Our interest expense increased from $0 in the three months ended March 31, 1999 to $2.9 million in the three months ended March 31, 2000. The increase was due to accrued interest on the $300 million of senior notes issued in March 2000 and our other financing vehicles. An additional $591,000 of interest is capitalized and included as construction in progress in the first quarter of 2000. 28 31 YEARS ENDED DECEMBER 31, 1998 AND 1999 REVENUE. Our revenue increased 15% from $190,000 in 1998 to $218,000 in 1999. This increase came from additional customers at our San Francisco (Mission Street) facility as well as increased technical support services provided to customers. COST OF REVENUE. Our cost of revenue increased 123% from $342,000 in 1998 to $762,000 in 1999. This increase was primarily the result of increased headcount at our new Neutral Optical Hubs and variable costs related to the increased headcount. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and administrative expenses increased 370% from $1.4 million in 1998 to $6.5 million in 1999. This increase was primarily the result of increased salaries and related expenses. We hired additional personnel in anticipation of future growth and increased the number of employees who perform headquarters-based functions from nine at December 31, 1998 to 64 at December 31, 1999. Our occupancy and rental costs increased as a result of the expansion of our corporate office to accommodate our larger headcount. Additionally, consulting costs increased as we developed our site selection criteria and standardized facility design, located and secured sites and evaluated our compensation structure. DEFERRED COMPENSATION. Amortization of deferred compensation increased from $0 in 1998 to $1.2 million in 1999. The increase was due to the increase in deferred compensation in connection with the grant of stock options in 1999. All deferred compensation relates to selling, general and administrative expenses. DEPRECIATION AND AMORTIZATION. Our depreciation and amortization expense increased 1,290% from $10,000 in 1998 to $139,000 in 1999. This increase was primarily the result of depreciation on computer and office furniture and equipment at our expanded corporate office and depreciation associated with leasehold improvements at our existing San Francisco (Mission Street) facility. LOSS ON LEASE AND LEASEHOLD IMPROVEMENTS. Our costs associated with the loss on lease and leasehold improvements increased from $0 in 1998 to $921,000 in 1999. In early 1999, our new management team determined that our first facility located in San Francisco (Mission Street) and the adjacent expansion site did not meet our technical criteria and decided to close it. As a result, we recognized a charge of $921,000 in 1999, which consisted of $449,000 in the writedown of the leasehold improvements related to this facility and $472,000 for the termination of the lease on the expansion site and related legal costs, and forfeiture of a security deposit and prepaid rent. INTEREST INCOME. Our interest income increased 6,914% from $7,000 in 1998 to $491,000 in 1999. This change was primarily the result of interest earnings on the unspent proceeds of our Series B preferred stock offering in April 1999 and Series C preferred stock offering in December 1999. INTEREST EXPENSE. Our interest expense decreased from $10,000 in 1998 to $0 in 1999. This change is primarily the result of capitalizing interest costs incurred during the construction of various Neutral Optical Hubs in 1999. FOR THE PERIOD FROM INCEPTION (APRIL 2, 1997) TO DECEMBER 31, 1997 AND FOR THE YEAR ENDED DECEMBER 31, 1998 REVENUE. Our revenue increased 513% from $31,000 in 1997 to $190,000 in 1998. This increase was due to the fact that our first facility opened in January 1998, and we recognized minimal revenue from consulting services prior to the opening of this facility. 29 32 COST OF REVENUE. Our cost of revenue increased 272% from $92,000 in 1997 to $342,000 in 1998. This increase was primarily the result of increased salaries and consulting costs in connection with the increased headcount concurrent with opening our first facility in January 1998. Rent and other costs have also increased as a result of opening of our first facility in January 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and administrative expenses increased 9,814% from $14,000 in 1997 to $1.4 million in 1998. This increase was primarily the result of increased salaries and related expenses, higher marketing costs associated with our initial marketing efforts and consulting expenses incurred to support our growing business. In anticipation of future growth, we increased the number of employees who perform headquarters-based functions from two at December 31, 1997 to nine at December 31, 1998. Our travel and occupancy costs also increased as a result of the increase in personnel. DEPRECIATION AND AMORTIZATION. Our depreciation and amortization expense increased 400% from $2,000 in 1997 to $10,000 in 1998. This increase was primarily the result of the expansion of our corporate office as well as the purchase of computer equipment necessary to support our business, as well as the depreciation of leasehold improvements related to our San Francisco (Mission Street) facility. INTEREST INCOME. Our interest income increased from $0 in 1997 to $7,000 in 1998. This change was primarily the result of interest earnings on the unspent proceeds of our sale of common stock and short-term borrowings during 1998. INTEREST EXPENSE. Our interest expense increased 900% from $1,000 in 1997 to $10,000 in 1998. This change is primarily the result of additional interest expense on short-term borrowings in 1998. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our business primarily from approximately $498.3 million of net proceeds from the sale of our preferred stock to venture capital firms and other individual, institutional and strategic investors and issuance of our senior notes. In 1998 and 1999, we received approximately $2.0 million in net proceeds from the sale of our Series A preferred stock. In April 1999, we received $12.2 million in net proceeds from the sale of our Series B preferred stock. In December 1999, we received $193.6 million in net proceeds from the sale of our Series C preferred stock. In March 2000, we received $290.3 million of net proceeds from the issuance of our senior notes. Our capital expenditures were approximately $71,000 in 1997, $436,000 in 1998, $12.4 million in 1999 and $35.7 million in the three months ended March 31, 2000. These expenditures were incurred primarily to build out our colocation facilities and corporate office. Our capital expenditures will be substantially higher in future periods in connection with the construction of Neutral Optical Hubs in the U.S. and internationally. As of March 31, 2000, we had committed capital expenditures of approximately $52.7 million relating to the build out of our Neutral Optical Hubs. Through June 2001, we plan to make total capital expenditures estimated in excess of $400 million, primarily to build out 40 Neutral Optical Hubs, to expand our headquarters and to install and upgrade our information systems. We will also need to fund our net losses, which we expect will increase substantially. As of March 31, 2000, we are obligated to make minimum base payments on non-cancelable leases for 36 Neutral Optical Hub sites and our corporate office of $9.7 million in the last nine months of 2000, $17.3 million in 2001, $18.2 million in 2002, $18.7 million in 2003, 30 33 $18.4 million in 2004 and $122.5 million in subsequent years. Our lease obligations will increase substantially in future periods as we enter into additional leases. In order to attract carriers to connect to our facilities, we plan to place circuit orders with approximately three carriers prior to completing construction of each facility. These orders will generally require us to pay an installation fee and a minimum monthly charge for periods anticipated to be approximately one to three years. As of May 31, 2000, we had placed orders with multiple carriers to connect to 24 of our facilities, with aggregate monthly service charges of approximately $550,000. These charges become payable as carriers complete their connections to each facility. In addition to the 24 facilities with carrier service orders to be charged, 11 of our facilities either had carriers installed or connections on order without monthly service charges. In the event that we experience delays in installing customers in our facilities, or those customers do not want services from the carriers which we have brought into a facility, we may be required to make substantial payments to these carriers. Net cash used in operating activities was $66,000 in 1997, $1.3 million in 1998, $7.7 million in 1999 and $4.9 million in the three months ended March 31, 2000. Net cash used in operating activities in each of these periods was primarily due to our net losses and increases in deposits, prepaid and other current assets, offset in part by depreciation and increases in accounts payable, accrued expenses, deferred compensation and the loss on lease and leasehold improvements. Net cash used in investing activities was $71,000 in 1997, $436,000 in 1998, $12.0 million in 1999 and $97.5 million in the three months ended March 31, 2000. Net cash used in investing activities in each of these periods was primarily used to fund capital expenditures. In 1999 and the three months ended March 31, 2000, we also set aside funds as collateral for letters of credit issued under building lease agreements. In March 2000, we set aside approximately $77.7 million of funds as collateral for the first four interest payments of the senior notes under the terms of that offering. Net cash provided by financing activities was $172,000 in 1997, $1.8 million in 1998, $218.0 million in 1999 and $285.0 million in the three months ended March 31, 2000. In 1997, this amount consisted primarily of $119,000 in net proceeds from our issuance of notes payable and $53,000 from our sale of common stock. In 1998, this amount included primarily $2.0 million in net proceeds from our issuance of Series A preferred stock, offset in part by $160,000 from our repayment of notes payable and $30,000 from our repurchase of common stock. Net cash provided by financing activities in 1999 consisted primarily of $12.2 million in net proceeds from our Series B preferred stock financing, $193.6 million in net proceeds from our Series C preferred stock financing, $6.1 million in net borrowings under our loan facilities and revolving line of credit and $205,000 from our sale of common stock. Net cash provided by financing activities in the three months ended March 31, 2000 consisted primarily of $290.3 million in net proceeds from our senior notes offering, less preferred stock issuance costs of $5.9 million, which were paid during the three months ended March 31, 2000. We have an equipment and tenant improvement financing agreement with MMC/GATX Partnership and other lenders. This agreement provides financing of up to $17.0 million for construction costs and the purchase of equipment at our Los Angeles and Vienna, Virginia, facilities. Amounts may be borrowed under this agreement through December 31, 2001, subject to certain conditions. The interest rate is set at the applicable U.S. treasury note yield to maturity plus 3.93%. The principal and interest on each advance is payable in 42 equal monthly installments commencing on the first day of the month immediately following the advance date, plus a final payment of 10% of the original advance. This agreement is secured by all tangible and intangible assets relating to the specific facilities funded by the lender. As of March 31, 31 34 2000, we had outstanding borrowings of $1.2 million under this facility, and $15.7 million was available for future borrowing, subject to certain conditions. We have an equipment and tenant improvement financing agreement with Comdisco, Inc. This agreement provides financing of up to $7.0 million for construction costs and the purchase of equipment at our Chicago and Emeryville, California facilities. Amounts may be borrowed under this agreement through August 31, 2000, subject to certain conditions. The credit line bears interest at 8.25%. The principal and interest on each advance is payable in 42 equal monthly installments commencing on the first day of the month immediately following the advance date, plus a final payment of 15% of the original advance. This agreement is secured by all tangible and intangible assets relating to the specific facilities funded by the lender. As of March 31, 2000, we had outstanding borrowings of $2.2 million under this facility, and $4.6 million was available for future borrowing, subject to certain conditions. We currently anticipate that our available cash resources combined with the net proceeds from this offering will be sufficient to meet our anticipated operating losses, interest expense and capital expenditure requirements through at least the completion of our intended 40-facility buildout plan by the end of June 2001. However, we could be incorrect. Our available cash resources and the net proceeds from this offering will not be sufficient to complete all of the facilities for which we may lease sites. However, we are able to control the deployment of our facilities and do not intend to begin construction on a facility unless we have the capital available to complete construction. We will need to raise additional funds to expand beyond 40 facilities and to fund any related operating losses, to develop new or enhance existing services or applications, or to respond to competitive pressures. We anticipate that we may incur a substantial amount of additional debt under a credit facility that we may enter into during 2000. If adequate funds are not available on acceptable terms, our business, results of operations and financial condition could be harmed. See "Risk Factors -- We will need significant additional funds, which we may not be able to obtain." QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We place our investments with high quality issuing institutions in the U.S. and, by policy, limit the amount of risk by investing primarily in demand deposits and government securities. We do not have a significant amount of floating rate debt, and do not believe that an increase or decrease in interest rates would significantly increase or decrease our interest expense on debt obligations. We do not currently have any significant foreign operations and thus are not currently materially exposed to foreign currency fluctuations. RECENT ACCOUNTING PRONOUNCEMENTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which provides guidance on the capitalization of the costs incurred for computer software developed or obtained for internal use. We adopted the new standard in 1999, although the impact on our 1999 financial statements was not significant. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that all start-up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP 98-5 is adopted. Adoption of this statement in fiscal 1999 did not have a material impact on our consolidated financial statements; we have historically expensed all of our startup costs as incurred. 32 35 In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities," which establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Subsequently, in June 1999, the FASB issued SFAS No. 137, "Accounting for Derivatives and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133," which amended SFAS No. 133. We do not currently engage in derivative activity and do not expect the adoption of this standard to have a material effect on our results of operations, financial position or cash flows. 33 36 BUSINESS We are creating an international platform of colocation facilities, which we refer to as Neutral Optical Hubs, in which our customers can install equipment, connect to a choice of network providers and connect with our other customers to deliver high quality broadband services and applications to their end users. We believe our Neutral Optical Hubs will be best-in-class facilities that will offer a broad choice of network providers and the most flexible means to access these providers that allow our target customers to deliver high quality, broadband services and applications to their end users. We are not a communications carrier, and because our facilities are carrier neutral, our customers will be able to connect their communications equipment located in our facilities to any of the carriers that are connected to our facilities. As of May 31, 2000, we had signed contracts with 53 customers to locate equipment in one or more Neutral Optical Hubs. Our customers currently include: - Internet-based businesses, such as Campsix, Inc., RateXchange Corporation and ShockWave.com, Inc.; - Application service providers, such as Evolve Software, Inc. and Musicbank, Incorporated; - Internet service providers, such as InterNAP Network Services Corporation; Madge Networks, N.V., The Masterlink Group, Inc. and SAVVIS Communications Corporation; - Competitive local phone companies, such as Mpower Communications Corp., Telseon Inc. and 2nd Century Communications Inc.; and - Other voice and data communications companies, such as MCI WorldCom and NeuMedia Inc. We intend to have at least 40 Neutral Optical Hubs generating revenue or ready for carriers and customers to install their equipment in metropolitan areas by the end of June 2001, including multiple facilities in certain geographic regions. With this broad footprint and proximity to our customers' end users, we believe our Neutral Optical Hubs will become the preferred platform for companies that want to optimize service for their end users and will facilitate business-to-business commerce among our customers. As of May 31, 2000, we had signed leases for 46 facilities in the United States and Europe totaling more than 1.1 million square feet, of which we had 11 facilities in the U.S. ready for carriers and customers to install their equipment. MARKET OPPORTUNITY The deregulation of the telecommunications industry and the significant growth in Internet users and bandwidth intensive applications has increased the demand for and strained the performance of the existing communications infrastructure. According to International Data Corporation, the number of Internet users worldwide is expected to grow from 160 million at the end of 1998 to 500 million at the end of 2003. This rapid growth has resulted in performance problems across the Internet, including problems with latency, data loss and security. These and other problems are impacting the ability of our target customers to effectively use the Internet for new services such as voice-over-Internet protocol and some applications that use streaming and broadcast capabilities. Content distribution companies and advanced switch providers have been able to improve existing bottlenecks and network congestion through technology, but depend on others to provide facilities and interconnect networks. 34 37 Internet-based businesses, application service providers, Internet service providers, competitive local phone companies and other voice and data communications companies all face challenges to effectively provide high-quality services due to the inadequacies of the present infrastructure. Internet-based businesses and application service providers need reliable, high-performance delivery of their products and services. This need is growing as bandwidth intensive applications increase, end-users become more sophisticated and performance expectations increase. Internet service providers require sophisticated user connections and peering arrangements in order to deliver their services to the broadest array of customers by the most efficient means of transport. Competitive local phone companies need broadly distributed local access to successfully deliver their services and are still dependent on the incumbent local phone companies for access. Other voice and data communications companies need to stay competitive in a market with many emerging providers and technologies. While attempting to keep pace with new technology and deliver quality services, each of these businesses rely on an infrastructure that is not designed for current demands. In order to enhance performance, businesses require a systems architecture and platform that is distributed close to their end users. Our target customers have traditionally had the limited choices of building their own facilities or colocating their equipment in carrier operated facilities, carrier hotels or web-hosting facilities. Building a facility can take a substantial amount of time, capital and expertise that would be better focused on the core business. In an attempt to improve their service performance and focus on their core competencies, many Internet-based businesses, application service providers, Internet service providers, competitive local phone companies and network providers have turned to colocation, which enables them to outsource key components of their operations. The current options available for colocation services all have limitations that restrict our target customers from providing the necessary service offerings that their customers demand. The following are the current colocation alternatives: CARRIERS. Historically, carrier colocation facilities have provided limited support of customers' equipment, limited or no flexibility in carrier choice, and limited availability of space, resulting in dependence on a specific carrier and higher costs. For example, local phone companies' central offices provide interconnection to only their networks and do not provide the scalability essential to our target customers. CARRIER HOTELS. These facilities may offer flexibility in choice of carrier and interconnection among tenants, but typically provide limited support and coordination of network services. In addition, they are typically single site facilities which do not provide our customers a solution for widespread network deployment. WEB-HOSTING FACILITIES. These facilities typically create dependence on the services and the network provided by the facility operator. In addition, these facilities do not typically accommodate customers in the telecommunications industry. In some instances, these operators may require customers to use their services exclusively, which may result in higher prices and limited flexibility in network deployment for our target customers. IDC predicts that the U.S. market for Internet hosting, consisting of shared server hosting, several categories of dedicated server hosting, including the colocation market in which we compete, and related services, will grow from an estimated $3.7 billion in 2000 to $18.9 billion in 2003. Within this market, IDC predicts that the market for colocation services, will be one of the fastest growing segments growing from an estimated $710 million in 2000 to $4.2 billion in 2003. However, all of these estimates include charges for bandwidth, which we do not provide. Although we are not aware of any similar forecast for growth in the overall telecommunications services provider market or in the market for colocation of telecommunications equipment, we expect the growth of these markets to be significant. 35 38 THE COLO.COM SOLUTION We believe that our neutral colocation solution addresses the limitations of the traditional alternatives. We will provide customers with cabinet, pre-configured and custom cage space for their equipment, connections to a choice of carriers and technical services and support in all facilities across our broad geographic presence. Our solution is carrier neutral, cost-effective, flexible and scalable, and our facilities will be widely deployed and staffed with trained Internet and telecommunications technicians. We believe our solution provides the foundation for building networks that enable customers to locate equipment close to end users, thereby enhancing performance and enabling them to provide more competitive service offerings to their end users. Our Neutral Optical Hubs will offer a number of compelling advantages to our customers, including: INTERNATIONAL PLATFORM AND RAPID TIME TO MARKET. We believe that the ability to rapidly deploy equipment close to their end users is a critical success factor for our customers. We intend to have at least 40 Neutral Optical Hubs generating revenue or ready for carriers and customers to install their equipment by the end of June 2001, including multiple locations in certain metropolitan areas. With such a broad footprint and proximity to our customers' end users, we offer to our customers the ability to accelerate the deployment and expansion of their services. By using our Neutral Optical Hubs, we enable our customers to better focus on their core competencies. NETWORK AND SERVICE NEUTRALITY. Our Neutral Optical Hub solution is designed to offer our customers choices in network and service providers to enable them to meet current and future market needs and technology demands. Each Neutral Optical Hub will have multiple carrier and connectivity options to provide a solution that meets each customer's network objectives. We will offer connectivity choice and flexibility from longhaul to local, Internet protocol to wireless and dark fiber to gigabit ethernet. We also offer our customers choice in managed services and network integration, both through our own services and those developed through strategic relationships with third party service providers. COST SAVINGS. Because our facilities are neutral and will have a diverse population of carriers and service providers, we expect that our customers will be able to obtain competitive pricing and benefit from the aggregated purchasing power of colocating with many other high bandwidth users. In addition, we expect that our professional service offerings will help our customers manage their equipment in our facilities and reduce their overhead expenses. BEST-IN-CLASS FACILITIES. We believe that our Neutral Optical Hubs will be superior or equal to other colocation alternatives. We have designed our facilities to offer our customers technologically advanced, redundant systems intended to provide uninterruptible electrical power availability, temperature and humidity control, fire detection and suppression systems and security systems. Our facilities are engineered to conform to a high set of standards that define a rigid and extensive set of performance, quality, environmental and safety requirements. SUPERIOR CUSTOMER SERVICE. Substantially all of our facilities have technicians, who are trained in Internet and telecommunications networks and equipment, available on site 24 hours a day, seven days a week. Our technicians are available to assist our customers in diagnosing and repairing customers' network equipment problems and installing customer equipment. We also may offer customers access to experienced network technicians to help configure and test networks as well as for more technically complex tasks. Each of our Neutral Optical Hubs has an operations control center that monitors all aspects of the facility through a comprehensive facility management system. 36 39 OUR STRATEGY To achieve our goal of becoming the premier, international, single-source supplier of carrier neutral colocation facilities to our targeted customer base, our strategy is to: BE FIRST-TO-MARKET WITH BROAD GEOGRAPHIC PRESENCE. Our strategy is to be first-to-market with a broad geographic presence to provide a Neutral Optical Hub solution to Internet-based businesses, application service providers, Internet service providers, competitive local exchange phone companies and other voice and data communications companies. We intend to quickly build Neutral Optical Hubs in metropolitan areas across North America and eventually Europe and Asia to become the first provider of carrier neutral colocation facilities with a broad domestic and international presence. MAINTAIN NEUTRALITY. We are not a communications carrier. We believe that by operating carrier neutral facilities, we will be able to offer our target customers the opportunity to select among many network providers and to negotiate terms with the providers of their choice. We also believe that by remaining neutral, we will be more likely to attract multiple carriers to connect to our facilities. In addition, we intend to continue to offer our customers choice in managed services and network integration through services developed through strategic relationships with third party service providers. STRATEGICALLY DEPLOY MULTIPLE NEUTRAL OPTICAL HUBS IN KEY GEOGRAPHIC REGIONS. We believe that by deploying multiple Neutral Optical Hubs in one geographic region, we will provide the foundation for networks that enable customers to locate equipment in closer proximity to end users, thereby enhancing performance and enabling them to provide more competitive service offerings. We also believe this strategy will enable us to establish a market presence more quickly and provide benefits from being on different power grids and with better access to local telecom facilities. ENTER INTO STRATEGIC AND COMMERCIAL RELATIONSHIPS TO EXTEND OUR SALES REACH. We intend to enter into strategic and commercial relationships with companies such as communications service providers, who may attract additional customers, and communications equipment companies, who may both locate equipment in our sites and resell our space. We believe that such relationships are valuable because they could accelerate our revenue growth, support our Neutral Optical Hub branding process, decrease our cost of sales, extend our sales reach and contribute to further network provider diversity within our facilities. EXPAND OUR SERVICE OFFERINGS AND ENABLE MARKETPLACE EXCHANGES. Over time, we intend to expand upon our current service offerings by providing additional value-added services, either through internal development, acquisitions or partnerships. These future service offerings may include developing switching capabilities among customers, more efficient distribution of content from peering points to end users, and an expanded scope of technical services for network consulting and support. Some of these additional service offerings may eventually enable our customers to efficiently buy, sell and exchange services with other customers within the same facility, thereby making our Neutral Optical Hubs more attractive as commerce centers for growth and interconnection of voice and data networks. In addition, because our Neutral Optical Hubs will house both Internet and telecommunications network equipment, we may eventually provide our customers with a platform on which Internet and telecommunications customers may connect to each other to provide integrated voice, data and Internet services, facilitating future applications. BUILD THE COLO.COM BRAND. We intend to build recognition of the COLO.COM brand through our best-in-class facility design, direct and indirect channel sales, and an aggressive communications strategy including public relations campaigns, industry trade show participation, channel marketing programs and targeted advertising programs. In particular, we have designed 37 40 our Neutral Optical Hubs to provide a standardized layout, color scheme and overall recognizable look and feel. SERVICE OFFERINGS We offer our customers best-in-class colocation facilities, which provide environmentally and physically secure centers to deploy their equipment, the opportunity to interconnect with outside carriers and with our other customers, and technical assistance and consulting services. The colocation, cross connection and service and support offerings can grow with our customers' needs. Our current offerings and their benefits include:
- ---------------------------------------------------------------------------------------------- OFFERINGS DESCRIPTION CUSTOMER BENEFIT - ---------------------------------------------------------------------------------------------- COLOCATION - Cabinets (designed to - Customer controlled, secure - Security fit standard Internet or equipment areas in multiple telecom size equipment) size offerings - Flexibility of size - Cages (available in preconfigured sizes or custom sizes) - ---------------------------------------------------------------------------------------------- CROSS CONNECTIONS - DS-1 - Connects customers to - Choice of carriers and carriers and other customers negotiated terms - DS-3 - Demuxed DS-3 - Single-mode fiber - Multi-mode fiber - 10/100 ethernet - ---------------------------------------------------------------------------------------------- SERVICE AND SUPPORT - Long-term contracts - 24 x 7 on-site technical - No necessity to hire staff support to support equipment located - Hourly service at our Neutral Optical - Technical support services, Hubs including status reporting, cross connection testing, - Fast response to customers' and smart hands equipment and network problems - Installation of colocation equipment and cross connections - Comprehensive tracking of service requests - Conference facilities - ----------------------------------------------------------------------------------------------
Our pre-packaged service options vary based on the number of hours of technical support requested. In the future, we plan to build upon our present offerings by providing additional value-added services, either directly or through partnerships. These future service offerings may include developing switching capabilities among customers, more efficient distribution of content from peering points to end users, web-enabled remote monitoring of customer equipment, and an expanded scope of technical services for network consulting and support. OPERATIONS CONTROL CENTERS AND FACILITIES MONITORING Each Neutral Optical Hub has an operations control center that monitors all aspects of the facility through a comprehensive facility management system. This system collects data on 38 41 more than 200 variables per location and provides real time monitoring of all aspects of facility health, including customer power utilization, power trend analysis and power-based alarming. We are currently developing a web extension of this architecture to provide a common set of customer-viewable facility metrics, power utilization reports, power trend reports, and to allow both distributed and centralized monitoring of our facilities. We believe that this management flexibility will allow individual Neutral Optical Hubs to be self-supporting, supported from a "sister site," or supported from our corporate headquarters in Brisbane, California. CUSTOMER SERVICE We believe that customer satisfaction is a critical component to growing our business. We have designed a comprehensive customer service program that focuses on the customer deployment process and post-deployment requests through our 24 x 7 customer service center. Customer deployment phase: We assign a dedicated account specialist to each customer/account to ensure that the processing of each customer order and installation is handled expeditiously. Account specialists will be highly versed in their assigned accounts and will be personally responsible to support the customer. Customer post-deployment: Once the installation process is complete, customers can make service requests through our customer service center (1-877-FYI-COLO). Based on the nature of the call, a customer service representative will expedite a service request ticket to one of our 24 x 7 on-site support staff. On-site support services: Our Internet and telecommunications network and equipment trained technicians are available at all times to assist our customers in diagnosing and repairing network equipment problems and installing equipment. We also may offer customers access to experienced network technicians to help configure and test networks as well as for more technically complex tasks. CUSTOMERS Our target customers are Internet-based businesses, application service providers, Internet service providers, competitive local phone companies and other voice and data communications companies. Our customers include: INTERNET BASED BUSINESSES - Campsix, Inc., a business-to-business Internet incubator. - RateXchange Corporation, a centralized, online marketplace that brings buyers and sellers of telecom capacity together. - Shockwave.com, Inc., the provider of Shockwave Player, a Web standard for entertaining, engaging and rich media playback. APPLICATION SERVICE PROVIDERS - Evolve Software, Inc., a provider of solutions that automate the service chain. - Musicbank, Incorporated, a streaming music service for major record labels, music retailers, artists and the general public. 39 42 INTERNET SERVICE PROVIDERS - InterNAP Network Services Corporation, a provider of Internet connectivity services targeted at businesses seeking to maximize the performance of Internet-based applications. - Madge Networks N.V., a networking and Internet services provider, specializing in managed networks, Web and application hosting, enterprise local area networking products and video networking. - The Masterlink Group, Inc., an Internet services company, providing professional website development and design services, website hosting, e-commerce development tools, Internet access, and database integration services. - SAVVIS Communications Corporation, a global internetworking solutions provider offering high-quality, high-speed Internet and networking services to corporate users, web centric companies and local/regional Internet service providers. Together with its parent company, Bridge Information Systems, a provider of financial news and information, SAVVIS provides bundled content, security and managed data networking services. COMPETITIVE LOCAL PHONE COMPANIES - Mpower Communications Corp. (formerly MGC Communications, Inc.), a provider of facilities based integrated communication services including Internet, voice over DSL, local phone service, custom calling features and long distance services to small and medium size businesses. - Telseon Inc. (formerly Cmetric), a provider of gigabit bandwidth fiber-based data services to enterprises, Internet service providers, and network provider partners by exploiting ethernet and fiber optics technology. - 2nd Century Communications Inc., a provider of advanced computing applications integrated with voice and data communications over a unified network to small and medium-sized businesses. NETWORK PROVIDERS - MCI WorldCom, a provider of facilities-based and fully integrated local, long distance, international and Internet services. - NeuMedia Inc., a provider of fiber optic network services. In the three months ended March 31, 2000, our three largest customers were Mpower, IXNet, Inc. and Megawatts, from whom we received approximately 61%, 18% and 5% of our revenue, respectively. In 1999, our three largest customers were IXNet, Megawats and KIVEX, from whom we received approximately 56%, 23% and 11% of our revenue, respectively. In 1998, our three largest customers were MediaOne Group, Inc., Megawats and IXNet from whom we received approximately 34%, 31% and 11% of our revenue, respectively. SALES AND MARKETING DIRECT SALES FORCE. We have a direct sales force to market our Neutral Optical Hub solution to our target customers. We are organizing our sales force along both account-specific and geographic lines. We have five sales regions in the U.S. and intend to establish two additional international sales regions. Each region will have a sales director, sales representatives and 40 43 sales engineers who handle the technical issues that may arise in our sales process. At May 31, 2000, we employed 62 people in our sales and sales engineering divisions, and we intend to continue to grow our sales force rapidly. INDIRECT SALES CHANNELS. We are also building and exploring additional distribution channels, including indirect sales channels for our product offerings by strategically targeting partners that have relationships with prospective customers requiring a colocation solution. For example, we currently have an agreement with Nortel for an option on space in our Neutral Optical Hubs for use by Nortel's customers to place equipment purchased from Nortel. This provides us with an indirect sales channel and allows Nortel to deploy its switches more quickly. Other channel relationships include InterNAP, Band-X, Avcom, Cat Technologies and Extreme Networks. MARKETING. Our marketing efforts are focused on building a world-wide brand through actively communicating a value proposition that establishes COLO.COM as the premier provider of a widely distributed infrastructure where customers can locate their equipment close to end users and partners and quickly and easily deploy applications and services for their customers. We believe that brand recognition is critical in developing market leadership. We intend to build our services into a world class brand through a recognizable standard look and feel of our Neutral Optical Hubs and an aggressive communications strategy including public relation campaigns, trade show participation, channel marketing programs and targeted advertising. STRATEGIC AND COMMERCIAL RELATIONSHIPS We have entered into strategic relationships with NEXTLINK, Nortel, and MasTec and Skanska, each of whom also made equity investments in COLO.COM, and a commercial relationship with InterNAP. NEXTLINK. NEXTLINK has an option to locate its equipment in 20 of our Neutral Optical Hubs and to provide connectivity in the form of both fiber and wireless connections to our customers in these facilities. NEXTLINK also received a warrant to purchase our Series C preferred stock, which became exercisable in the first quarter of 2000 as a result of NEXTLINK initiating the process of connecting its network to ten of our Neutral Optical Hubs. NEXTLINK purchased approximately $5 million of our Series C preferred stock. NORTEL. Nortel has an option on space in our Neutral Optical Hubs for use by its customers who want to buy Nortel equipment and need a place to locate it. This provides us with an indirect sales channel and allows Nortel to deploy its switches more quickly. Nortel purchased approximately $5 million of our Series C preferred stock and we have agreed to acquire $5 million of equipment from Nortel before December 31, 2001. MASTEC AND SKANSKA. MasTec and Skanska have agreed to build 22 of our Neutral Optical Hubs in North America. In addition, MasTec and Skanska each purchased approximately $2.5 million of our Series C preferred stock in December 1999. INTERNAP. We have also entered into a commercial relationship with InterNAP that gives it reseller rights with respect to its space in our San Francisco (Townsend Street) facility for the purpose of selling value-added services to its customers. InterNAP has also designated COLO.COM as a preferred colocation provider. FACILITY BUILDOUT SITE SELECTION AND LEASING. We have engaged two large commercial real estate brokers, Cushman & Wakefield in the U.S. and Canada, and Jones Lang LaSalle in Europe, to identify and evaluate potential targeted sites for our facilities. To ensure consistent quality and uniform 41 44 facilities, we have developed an exacting set of standards for the features of the spaces that we lease and a 60-point site selection checklist. One of our most important criteria is proximity to network facilities. Using these standards, our real estate staff evaluates each potential site, ranks them and then makes its selection. Detailed proposal requirements and our own lease form with sample lease amendments allow us to expedite the leasing process. FACILITY DESIGN. We have designed a comprehensive facility model based on a rigorous set of standardized engineering specifications that will be applied to each facility we build. We design our facilities to provide exacting environmental controls and physical security as well as fully redundant, technologically advanced electrical power, air conditioning and fire suppression systems. We believe that our design specifications will lead to high quality facilities that we can construct rapidly. FACILITY CONSTRUCTION. We have teamed with leading project management and construction firms to build our facilities in accordance with our construction criteria. These firms include MasTec North America, Inc. of Miami, Florida and Sordoni Skanska Construction Company of Parsippany, New Jersey; DPR Construction of Redwood City, California; and Total Site Solutions of Beltsville, Maryland for facilities in the United States and Jones Lang LaSalle for facilities in Europe. Each of these firms has expertise in architecture, engineering, and the permitting process as well as the skills to manage local contractors. CUSTOMER INSTALLATION AND CONNECTIVITY. Once we have completed construction of a Neutral Optical Hub, some time is required for customers and carriers to stage, configure and install their equipment, and for customers to connect to the carriers. Systems testing and further staff training also occurs during this time. At the end of this period, we expect that the facility will begin generating revenue. On average, we expect a new domestic facility of 25,000 square feet to take approximately ten months from entering into a lease to generating revenue and cost approximately $10 million to construct and equip. On average, we expect a new international facility of 50,000 square feet to take approximately twelve months from entering into a lease to generating revenue and cost approximately $25 million to construct and equip. We may elect to defer construction of a facility until we have the capital available to complete construction. COMPETITION The market for colocation services is expanding. The main barriers to entry are access to capital, the time needed to assemble a management team and build out facilities, and the ability to secure a first-to-market advantage. We have targeted the developing neutral colocation segment of the broader market for colocation services. Although there are a number of companies developing businesses similar to ours, in most metropolitan areas there are currently a limited number of providers of neutral colocation facilities operating. We expect other companies to enter this market segment if there is sufficient demand for neutral colocation services. In addition to competing with other neutral colocation providers, we will compete with traditional colocation providers, including local phone companies, long distance phone companies, Internet service providers and web-hosting facilities. Most of these competitors have greater resources, more customers, longer operating histories, greater brand recognition and more established relationships than we have. We believe our neutrality provides us with an advantage over these competitors. However, these competitors could offer colocation on neutral terms, and may start doing so in the metropolitan areas where we establish operations. If this occurs, we could face increased price competition. 42 45 The Telecommunications Act requires incumbent local exchange carriers to provide non-discriminatory colocation to telecommunications carriers that wish to interconnect with the incumbent local exchange carrier's networks or obtain access to incumbent local exchange carrier-provided unbundled network elements. In 1996, the Federal Communications Commission adopted initial rules to implement this provision and, in 1999, adopted additional rules that should significantly lower the cost and increase the attractiveness of incumbent local exchange carrier-provided colocation facilities. Consequently, colocation offered by incumbent local exchange carriers may become more competitive with our service offerings. There are a number of companies offering colocation facilities. Many of these competitors could also be our customers. These companies can be categorized as follows: CARRIER OPERATED FACILITIES. Carrier operated facilities are generally operated by the traditional local exchange carriers, long distance providers and some new local phone companies. For example, carriers such as AT&T, Global Center, Level 3 Communications, MCI WorldCom, Qwest Communications International, and Sprint, as a byproduct of offering access to their networks, offer colocation space. By becoming an occupant of a carrier-operated facility, customers are typically limited to purchasing services from that carrier. As a result, customers may be required to pay high prices and might receive poor service, as colocation is ancillary to the carriers' primary business. WEB-HOSTING FACILITIES. Web-hosting facilities such as Digital Island, Exodus Communications and Globix may require their Internet-based customers to use their services exclusively which may result in higher pricing and limited network deployment flexibility. NETWORK ACCESS POINTS. Other network access facilities, such as Neutral Nap, PAIX, and Equinix, tend to be Internet exchange centric and can face difficulties in bringing the right mix of customers and carrier-diversity into their sites, affecting connectivity and time-to-market. OTHER CENTRAL OFFICE-LIKE FACILITIES. Several other companies are offering central office-like facilities. There are a number of domestic and international companies, including Switch and Data Facilities, CO Space, InFlow, Telehouse and TelePlace in the U.S., City Reach, DigiPlex, Global Reach, IX Europe, iaxis, InterXion and Redbus Interhouse in Europe, and iAsiaWorks in Asia. CARRIER HOTELS. Carrier hotels such as the Westin Building in Seattle, One Wilshire in Los Angeles and 60 Hudson in New York City, are buildings that tend to be operated by real estate companies or individuals that expect to lease physical space to telecommunications companies for colocation purposes. Once a customer is located in a facility, it will be difficult to convince that customer to relocate to another colocation facility, because moving out of an existing facility could result in service interruptions and significant costs to reconfigure network connections. One of the key components of our business strategy is to be first-to-market with broad geographic presence, which we believe will provide us with a competitive advantage over later market entrants. GOVERNMENT REGULATION We believe that, because we do not provide transmission, switching, or multiplexing services or facilities, we are not currently subject to regulation by the Federal Communications Commission or state authorities that regulate telecommunications. Telecommunications regulation frequently changes, however, and, particularly at the state level, the line between regulated and non-regulated activities is not always clear. Accordingly, it is possible that a regulatory authority would seek to regulate some of our existing activities. In addition, some 43 46 new services or products offered by us may be subject to regulation by state public utility commissions, the FCC, or both. FACILITIES Our executive offices are located in approximately 36,000 square feet of office space in Brisbane, California under leases expiring in 2004 and 2005. As of May 31, 2000, we had entered into leases for 46 Neutral Optical Hubs in the following metropolitan areas and specific locations, which cover the approximate gross square footage noted below and expire in the indicated years:
SQUARE FEET LEASE METROPOLITAN AREA LOCATION LEASED EXPIRATION ----------------- -------- ----------- ---------- Austin...................... Austin, TX 15,986 2010 Boston...................... Medford, MA 38,416 2010 Chicago..................... Chicago, IL -- Wells St.* 6,800 2009 Oak Brook, IL* 16,780 2009 Chicago, IL -- Cermak Rd. 33,300 2015 Charlotte................... Charlotte, NC 30,324 2010 Cincinnati.................. Cincinnati, OH 22,840 2010 Cleveland................... Cleveland, OH 27,776 2012 Dallas...................... Dallas, TX* 27,370 2010 Ft. Worth, TX* 19,031 2011 Denver...................... Englewood, CO 27,485 2010 Detroit..................... Detroit, MI 28,342 2010 Jacksonville................ Jacksonville, FL 25,910 2010 Kansas City................. Lee's Summit, MO 25,000 2010 Las Vegas................... Las Vegas, NV* 28,560 2010 Los Angeles................. Los Angeles, CA* 34,710 2009 Irvine, CA 23,709 2010 Louisville.................. Louisville, KY 28,000 2010 Madrid...................... Madrid, Spain 37,700 2015 Memphis..................... Cordova, TN 27,298 2010 Miami....................... Miami, FL 26,216 2010 Milwaukee................... Milwaukee, WI* 5,200 2010 Minneapolis................. Minneapolis, MN 38,367 2012 Munich...................... Munich, Germany 111,000 2010 Norfolk..................... Chesapeake, VA 23,424 2010 New York City............... New York, NY -- Hudson St. 33,286 2015 New York, NY -- Broad St. 32,614 2010 Orlando..................... Orlando, FL 27,992 2010 Phoenix..................... Phoenix, AZ 32,000 2010 Pittsburgh.................. Pittsburgh, PA 26,220 2010 Portland.................... Beaverton, OR 23,101 2010 Portland, OR 23,441 2011 Richmond.................... Richmond, VA 33,471 2010 Salt Lake City.............. West Valley, UT 33,947 2010 San Antonio................. San Antonio, TX 34,898 2010 San Diego................... San Diego, CA 22,068 2010 San Francisco............... Emeryville, CA* 14,657 2009 San Francisco, CA -- Townsend St.* 20,576 2010 Santa Clara, CA 25,000 2015 San Ramon, CA 18,677 2010 Seattle..................... Seattle, WA* 19,138 2010 Bothell, WA 66,568 2015
44 47
SQUARE FEET LEASE METROPOLITAN AREA LOCATION LEASED EXPIRATION ----------------- -------- ----------- ---------- St. Louis................... St. Louis, MO -- Walnut St. 9,358 2010 St. Louis, MO -- Tucker Blvd. 28,024 2010 Washington, DC.............. Vienna, VA* 23,715 2009 Sterling, VA 26,534 2010
- ------------------------- * Generating revenue or ready for carriers and customers to install their equipment as of May 31, 2000. We anticipate that our target center in the United States will be approximately 25,000 square feet, subject to space and power availability, and that approximately 50% of the square footage in each of our facilities will be available for our customers' use. Most of our facilities have ten year lease terms, with options for additional lease periods. We are actively negotiating and seeking leases in many additional locations as part of our planned deployment in the U.S., Canada and Europe. EMPLOYEES As of May 31, 2000, we had 234 full-time employees. None of our employees is represented by a labor union, and we consider employee relations to be good. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. The competition for such personnel is intense, and we cannot assure you that we will be able to identify, attract and retain such personnel in the future. See "Risk Factors -- We have a new management team, and we depend on our ability to attract and retain key personnel." LEGAL PROCEEDINGS We are not currently a party to any material legal proceedings. 45 48 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors and their ages as of May 31, 2000 are as follows:
NAME AGE POSITION ---- --- -------- Charles M. Skibo.................. 61 Chief Executive Officer and Chairman of the Board Wayne A. Olson.................... 55 Senior Vice President, Operations and Administration H.S. Kullar....................... 47 Senior Vice President, Sales and Marketing Stephen I. Robertson.............. 39 Chief Financial Officer Gary J. Sanders................... 53 Chief Information Officer James M. Smith.................... 31 Chief Technology Officer David H. Stanley.................. 53 General Counsel and Secretary Robert E. Lamb, Jr. .............. 32 Vice President, Business Development John F. Mevi III.................. 42 Vice President, Sales James H. Strachan................. 27 Vice President, Product Development and Planning Christopher E. Clouser(2)......... 48 Director Young Soo Ha(1)................... 37 Director John W. Jarve(2).................. 44 Director Richard P. Nespola(1)............. 55 Director Arthur Patterson(2)............... 56 Director Kirby G. Pickle, Jr.(1)........... 43 Director
- ------------------------- (1) Member of Audit Committee. (2) Member of Compensation Committee. CHARLES M. SKIBO has served as our Chairman of the Board and Chief Executive Officer since January 1999. Since February 1996, Mr. Skibo has also served as Chairman and Chief Executive Officer of Allied Telecommunications, a communications company. Since February 1990, Mr. Skibo has served as Chairman and Chief Executive Officer of Strategic Enterprises and Communications, Inc., a venture capital firm. From 1985 to 1987, Mr. Skibo was President and CEO of U.S. Sprint and its predecessor company, U.S. Telecom. Mr. Skibo is also a director of iBasis, Inc., a public international Internet telephony services provider, and a director of New ICO, a privately held satellite based Internet company. WAYNE A. OLSON has served as our Senior Vice President, Operations and Administration since March 1999. From July 1993 to March 1999, Mr. Olson was President and Chief Executive Officer of the St. Andrews Group, Ltd., a consulting firm specializing in human systems and organizational services. H.S. KULLAR has served as our Senior Vice President, Sales and Marketing since June 2000. From September 1999 to June 2000, Mr. Kullar was our Senior Vice President, Marketing. From February 1999 to September 1999, Mr. Kullar was an independent consultant. From April 1998 to February 1999, Mr. Kullar served as Vice President of Product Marketing with Fabrik Communications, a provider of service-based enterprise email solutions. From May 1997 to April 1998, Mr. Kullar was Senior Director of Business Development for ICG/Netcom, an Internet services corporation; Senior Director of Strategic and Product Marketing from October 1996 to May 1997; and Director of Market Programs and Development for Business Services from April 1996 to October 1996. From March 1994 to April 1996, Mr. Kullar served as General Manager of AFAX, a messaging services company. STEPHEN I. ROBERTSON has served as our Chief Financial Officer since March 2000. From July 1998 to March 2000, Mr. Robertson served as Chief Financial Officer of InsWeb 46 49 Corporation, an online insurance marketplace. From November 1997 to July 1998, Mr. Robertson was a Senior Vice President of Lehman Brothers, an investment banking firm. From September 1986 to October 1997, Mr. Robertson held various investment banking positions with Salomon Brothers, Smith Barney, and Alex. Brown. GARY J. SANDERS has served as our Chief Information Officer since September 1999 and served as our Interim Chief Financial Officer from September 1999 to March 2000. From November 1998 to September 1999, Mr. Sanders served in a part-time capacity as Vice President, Finance and Chief Financial Officer at TimeDance, Inc., an Internet-based group scheduling company. From November 1998 to August 1999, Mr. Sanders also served in a part-time capacity as Vice President of Finance and Chief Financial Officer at Optimal Networks, Inc. a software company. Mr. Sanders served as Vice President of Finance and Chief Financial Officer of Tyecin Systems, Inc., a software company, from April 1996 to June 1998, and of Luxcom, Inc., a telecommunications equipment company, from July 1985 to April 1996. Mr. Sanders has also served in executive finance positions with Cynthia Peripherals/Bull Peripherals Corp. and the Federal Reserve Bank of San Francisco. JAMES M. SMITH has served as our Chief Technology Officer since July 1999. From April 1999 to June 1999, he was our Director of Operations. From November 1997 to April 1999, Mr. Smith served as Sales Manager with Verio, an Internet service provider. Prior to joining Verio, Mr. Smith founded ATMnet, an Internet service provider, where he served as Sales Manager from February 1996 to November 1997. From August 1994 to January 1996, Mr. Smith attended Oregon State University. DAVID H. STANLEY has served as our General Counsel and Secretary since October 1999. From October 1997 to September 1999, Mr. Stanley served as General Counsel and Member of Executive Staff for Avant! Corporation, a software company. From July 1988 to October 1997, Mr. Stanley served as Vice President, Legal and Corporate Services, General Counsel and Secretary with Informix Corporation, a software company. ROBERT E. LAMB, JR. co-founded COLO.COM in 1997 and has served as our Vice President, Business Development since February 1999. From November 1998 to February 1999, Mr. Lamb served as our President, and from October 1997 to November 1998, as our Vice President, Marketing. From March 1997 to October 1997, Mr. Lamb served as Senior Account Manager at Neural Applications Corporation, a software company. From July 1995 to March 1997, Mr. Lamb served as Regional Sales Director for Ethos Corporation, a web portal development company. From January 1995 to June 1995, Mr. Lamb was an institutional equities salesperson with Genesis Merchant Group Securities, a brokerage firm. JOHN F. MEVI III has served as our Vice President, Sales since May 1999. From March 1998 to May 1999, Mr. Mevi served as Director of Sales with Sentient Networks, a multi-protocol switch manufacturer. Prior to joining Sentient, Mr. Mevi founded ATMnet, an Internet service provider, where he served as Vice President of Sales and Marketing from November 1995 to November 1997. From September 1994 to December 1995, Mr. Mevi was a Senior Account Executive at Teleport Communications Group, a communications company. JAMES H. STRACHAN has served as our Vice President, Product Development and Planning since March 1999. Mr. Strachan served as our Director of Product Development from December 1998 to March 1999, our Vice President, Sales from June 1998 to November 1998 and our Business Development Manager from February 1998 to June 1998. From September 1996 to February 1998, Mr. Strachan served in various sales positions at MCI Communications, a telecommunications company. From 1992 to 1996, Mr. Strachan attended California State University at San Luis Obispo, California, and received his B.S. in Finance, Real Estate and Marketing. 47 50 CHRISTOPHER E. CLOUSER has served as one of our directors since January 2000. Since May 2000, Mr. Clouser has served as President of CRP Sports and Chief Executive Officer of the Minnesota Twins Baseball Club. From July 1999 to May 2000, Mr. Clouser served as President and Chief Executive Officer and a director of Preview Travel, Inc. From March 1991 to June 1999, Mr. Clouser served as Senior Vice President of Northwest Airlines. Mr. Clouser is also a director of Pepsi Americas, Inc. YOUNG SOO ("PERRY") HA has served as one of our directors since September 1998. From December 1998 to January 1999, Mr. Ha served as our Interim Chief Executive Officer. Since September 1997, Mr. Ha has been a general partner of Athena Technology Ventures, a venture capital firm. From June 1994 to September 1997, he was head of the North American Center of Excellence for the Product Development and Technology Management Practice at Gemini Consulting, a consulting company. JOHN W. JARVE has served as one of our directors since April 1999. Since 1985, Mr. Jarve has been employed by Menlo Ventures, a venture capital firm focused on the software, communications, healthcare and Internet sectors, where he currently serves as a general partner and managing director. Mr. Jarve is also a director of Digital Insight Corporation and iBasis, Inc. RICHARD P. NESPOLA has served as one of our directors since January 2000. Since January 1990, Mr. Nespola has served as President, Chief Executive Officer and a director of The Management Network Group, Inc., a consulting firm. ARTHUR PATTERSON has served as one of our directors since April 1999. Since 1983, Mr. Patterson has been a partner of Accel Partners, a venture capital firm. Mr. Patterson is also a director of Actuate Corporation, Weblink Wireless, Inc., Portal Software, Inc. and Viasoft, Inc. KIRBY G. ("BUDDY") PICKLE, JR. has served as one of our directors since January 2000. Since February 1997, Mr. Pickle has served as President and Chief Operating Officer of Teligent, Inc., a telecommunications company. From 1991 to January 1997, Mr. Pickle served as Executive Vice President of MFS Communications Co., a telecommunications company. BOARD OF DIRECTORS Our bylaws authorize a range of from four to seven directors, currently set at seven. Either our board or our stockholders have the power to amend this provision of our bylaws to set the exact number of directors within this range. We currently have seven directors and no vacancies. Upon completion of this offering, our board of directors will be divided into three classes, each with staggered three-year terms. As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Our class I directors, whose terms will expire at the 2001 annual meeting of stockholders, are and . Our class II directors, whose terms will expire at the 2002 annual meeting of stockholders, are and . Our class III directors, whose terms will expire at the 2003 annual meeting of stockholders, are , and . BOARD COMMITTEES Our board of directors currently has an audit committee and a compensation committee. The audit committee consists of Mr. Nespola, Mr. Ha and Mr. Pickle. The audit committee has a written charter and selects our independent auditors, reviews the scope of audit and other 48 51 services by our independent auditors, reviews the accounting principles and auditing practices and procedures to be used for our financial statements and reviews the results of our accounting audits. The compensation committee consists of Mr. Clouser, Mr. Patterson and Mr. Jarve. The compensation committee makes recommendations to the board of directors regarding our stock plans and the compensation of officers. DIRECTOR COMPENSATION Our non-employee directors are reimbursed for expenses incurred in connection with attending board and committee meetings but are not compensated for their services as board or committee members. Pursuant to the terms of our stock plan, our board has the discretion to grant options to current and new non-employee directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the compensation committee is currently, or has been at any time since our formation, one of our officers or employees. No interlocking relationships exist between our board of directors, compensation committee or officers and the board of directors, compensation committee or officers of any other company, nor has an interlocking relationship existed in the past. 49 52 EXECUTIVE COMPENSATION The following table sets forth a summary of the compensation earned during 1999 by the two individuals who served as our Chief Executive Officers during 1999 and our four other most highly compensated executive officers, whom we collectively refer to as our named executive officers, for services rendered in all capacities to COLO.COM. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ------------------------------- ------------------------- OTHER SECURITIES ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION OPTIONS COMPENSATION ---------------------------- -------- ------- ------------ ---------- ------------ Charles Skibo(1)...................... $206,250 $75,000 -- 4,210,000 -- Chairman of the Board and Chief Executive Officer Young Soo Ha(2)....................... -- -- -- -- -- Wayne Olson(3)........................ 118,750 50,000 -- 551,143 $18,350(5) Senior Vice President, Operations and Administration Robert Lamb, Jr. ..................... 117,500 40,000 -- 40,000 6,346(6) Vice President, Business Development James Strachan........................ 107,500 45,000 -- 100,000 6,827(6) Vice President, Product Development and Planning Richard Palomba(4).................... 144,250 -- -- 50,000 -- Vice President, Real Estate Acquisition and Development
- ------------------------- (1) Mr. Skibo began his employment with us on January 25, 1999. (2) Mr. Ha served as our Interim Chief Executive Officer from December 1998 to January 1999, for which he received no compensation. (3) Mr. Olson began his employment with us on March 15, 1999. (4) Mr. Palomba was compensated pursuant to a consulting agreement with Corporate Planning & Property Consulting, Inc., of which Mr. Palomba is a principal. In March 2000, Mr. Palomba became a part-time consultant and no longer serves as a vice president. (5) Consists of relocation expenses. (6) Consists of payments for accrued but unused vacation time. 50 53 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information relating to stock options granted during 1999 to our named executive officers:
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS EXERCISE PRICE APPRECIATION FOR UNDERLYING GRANTED TO OR BASE OPTION TERM(3) OPTIONS GRANTED EMPLOYEES IN PRICE PER EXPIRATION ----------------------- NAME (#)(1) FISCAL YEAR SHARE DATE(2) 5% 10% ---- --------------- ------------ --------- ---------- ---------- ----------- Charles 1,270,000 13.05% $0.05 1/28/2009 $39,935 $101,203 Skibo(4)........ 2,940,000 30.20 0.05 4/12/2009 92,448 234,280 Young Soo Ha...... -- -- -- -- -- -- Wayne Olson....... 551,143 5.67 0.05 6/08/2009 17,331 43,919 Robert Lamb, 40,000 0.41 0.05 6/08/2009 1,258 3,187 Jr. ............ James Strachan.... 40,000 0.41 0.05 6/08/2009 1,258 3,187 60,000 0.62 0.50 11/24/2009 18,867 47,812 Richard Palomba... 50,000 0.51 0.05 6/08/2009 1,572 3,984
- ------------------------- (1) These options are incentive stock options that were granted at fair market value and vest over a 4-year period so long as the optionee is employed by us, except for the options granted to Mr. Skibo which vest over a 3-year period. (2) Each of the options has a ten-year term, subject to earlier termination in the event of the optionee's earlier cessation of service with us. (3) The assumed 5% and 10% rates of stock price appreciation are provided in accordance with rules of the Securities and Exchange Commission and do not represent our estimate or projection of the future price of our common stock. Actual gains, if any, on stock option exercises are dependent on the future performance of the common stock, overall market conditions and the option holder's continued employment through the vesting period. Unless the market price of the common stock appreciates over the option term, no value will be realized from the option grants made to the Named Executive Officers. (4) Under the terms of Mr. Skibo's employment agreement, all of the shares subject to this option will accelerate and become fully vested in the event that either Mr. Skibo's employment with the Company is terminated without cause or there is a material breach by the Company of his employment agreement. See "-- Employment Arrangements." 51 54 AGGREGATE OPTION EXERCISES IN 1999 AND FISCAL YEAR-END OPTION VALUES The following table sets forth information for our named executive officers in 1999 relating to option exercises in 1999 and the number and value of securities underlying exercisable and unexercisable options held at December 31, 1999. All options were granted under our 1998 Incentive Stock Option Plan. These options are immediately exercisable in full at the date of grant, but shares purchased on exercise of unvested options are subject to a repurchase right in our favor that entitles us to repurchase unvested shares at their original exercise price upon termination of the employee's services with us. Except as indicated in the footnotes below, the repurchase rights generally lapse on these shares as to 25% of the shares on the first anniversary of the grant date, and the balance ratably per month over the next three years.
NUMBER SECURITIES UNDERLYING VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT ACQUIRED VALUE DECEMBER 31, 1999 DECEMBER 31, 1999(2) ON EXERCISE REALIZED --------------------------- --------------------------- NAME (#) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ---------- ----------- ------------- ----------- ------------- Charles Skibo(3)... 4,210,000 $8,209,500 -- -- -- -- Young Soo Ha....... -- -- -- -- -- -- Wayne Olson........ 551,143 1,074,729 -- -- -- -- Robert Lamb, Jr. ............. 40,000 78,000 -- -- -- -- James Strachan..... 190,000 370,500 60,000 -- $90,000 -- Richard Palomba.... 50,000 97,500 -- -- -- --
- ------------------------- (1) Based on the fair market value of our common stock at an assumed price of $2.00 per share, less the exercise price payable for such shares. (2) Based on the fair market value of our common stock at December 31, 1999 estimated by our board of directors to be $2.00 per share less the exercise price payable for such shares. (3) Our right of repurchase lapses over a three-year period with respect to 60% of the underlying shares at the first anniversary of the grant date, 20% on the second anniversary and 20% on the third anniversary of the grant date except in the event of termination without cause, our right of repurchase lapses immediately. COMPENSATION PLANS 1998 INCENTIVE STOCK OPTION PLAN Our 1998 Incentive Stock Option Plan was adopted by our board of directors in January 1998 and approved by our stockholders in February 1998. The maximum number of shares that may be issued under the 1998 Incentive Stock Option Plan is 14,047,839 shares of our common stock. As of May 31, 2000, options to purchase 3,199,400 shares of our common stock were outstanding under this plan. Our board of directors has decided that no further options will be granted under the 1998 Incentive Stock Option Plan. However, the provisions of this plan will still govern outstanding options. The 1998 Incentive Stock Option Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, referred to as the Code, to our employees, and for the grant of nonstatutory stock options and stock purchase rights to our employees, directors and consultants. In the event of our merger with or into another corporation or a sale of substantially all of our assets, the successor corporation will assume or substitute each option or stock purchase right. If the outstanding options or stock purchase rights are not assumed or substituted, the administrator will provide notice to the optionee that he or she has the right to exercise the option or stock purchase right as to all of the shares subject to the option or stock purchase right, including shares which would not otherwise be exercisable, for a period of 15 52 55 days from the date of the notice. The option or stock purchase right will terminate upon the expiration of the 15-day period. 2000 STOCK PLAN Our board of directors adopted the 2000 Stock Plan in 2000 and the stockholders initially approved this plan in 2000. Our 2000 Stock Plan provides for the grant of incentive stock options, within the meaning of Section 422 Code, to our employees, and for the grant of nonstatutory stock options and stock purchase rights to our employees, directors and consultants. Number of Shares of Common Stock Available under the 2000 Stock Plan. As of , 2000, a total of shares of our common stock were reserved for issuance pursuant to the 2000 Stock Plan, of which options to acquire shares were issued and outstanding as of that date. Our 2000 Stock Plan provides for annual increases in the number of shares available for issuance under our 2000 Stock Plan on the first day of each fiscal year, beginning with our fiscal year 2001, equal to the lesser of % of the outstanding shares of common stock on the first day of our fiscal year, shares or a lesser amount as our board may determine. Administration of the 2000 Stock Plan. Our board of directors or a committee of our board administers the 2000 Stock Plan. In the case of options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the committee will consist of two or more "outside directors" within the meaning of Section 162(m) of the Code. The administrator has the power to determine the terms of the options or stock purchase rights granted, including the exercise price, the number of shares subject to each option or stock purchase right, the exercisability of the options and the form of consideration payable upon exercise. Options. The administrator determines the exercise price of options granted under the 2000 Stock Plan, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code and all incentive stock options, the exercise price must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option generally may not exceed ten years, and the administrator determines the term of all other options. No optionee may be granted an option to purchase more than shares in any fiscal year. In connection with his or her initial service, an optionee may be granted an additional option to purchase up to shares. After termination of one of our employees, directors or consultants, he or she may exercise his or her option for the period of time stated in the option agreement. Generally, if termination is due to death or disability, the option will remain exercisable for 12 months. In all other cases, the option will generally remain exercisable for 3 months. However, an option may never be exercised later than the expiration of its term. Stock Purchase Rights. The administrator determines the exercise price of stock purchase rights granted under our 2000 Stock Plan. Unless the administrator determines otherwise, the restricted stock purchase agreement will grant us a repurchase option that we may exercise upon the voluntary or involuntary termination of the purchaser's service with us for any reason (including death or disability). The purchase price for shares we repurchase will generally be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to us. The administrator determines the rate at which our repurchase option will lapse. 53 56 Transferability of Options and Stock Purchase Rights. Our 2000 Stock Plan generally does not allow for the transfer of options or stock purchase rights, and only the optionee may exercise an option and stock purchase right during his or her lifetime. Automatic Option Grants to Non-Employee Directors. Our 2000 Stock Plan also provides for the automatic grant of shares of common stock to a director who first becomes a non-employee director (except those directors who become non-employee directors by ceasing to be employee directors) on or after the date of this offering. This option will vest as to % of the shares subject to the option on each anniversary of the date of grant. Each non- employee director will automatically be granted an option to purchase shares each year following the date of our annual stockholder's meeting (except after the first such annual meeting if it is held within 6 months of the date of this offering) if on such date, he or she will have served on our board of directors for at least the previous 6 months. This option will vest as to % of the shares subject to the option on each anniversary of the date of grant. All options automatically granted to non-employee directors will have a term of 10 years, and the exercise price will be 100% of the fair market value per share of common stock on the date of grant. Adjustments upon Merger or Asset Sale. Our 2000 Stock Plan provides that in the event of our merger with or into another corporation or a sale of substantial all of our assets, the successor corporation will assume or substitute an equivalent option or right for each outstanding option or stock purchase right. If following the assumption or substitution of an option automatically granted to one of our outside directors any such outside director is terminated other than by his or her voluntary resignation, then he or she will have the right to exercise the option as to all of the shares subject to the option, including shares which would not otherwise be exercisable. If there is no assumption or substitution of outstanding options or stock purchase rights, the administrator will provide notice to the optionee that he or she has the right to exercise the option or stock purchase right as to all of the shares subject to the option or stock purchase right, including shares which would not otherwise be exercisable, for a period of 15 days from the date of the notice. The option or stock purchase right will terminate upon the expiration of the 15-day period. Amendment and Termination of our 2000 Stock Plan. Our 2000 Stock Plan will automatically terminate in 2010, unless we terminate it sooner. In addition, our board of directors has the authority to amend, suspend or terminate the 2000 Stock Plan provided it does not adversely affect any option previously granted under it. 2000 EMPLOYEE STOCK PURCHASE PLAN. Concurrently with this offering, we intend to establish an Employee Stock Purchase Plan. Number of Shares of Common Stock Available under the Purchase Plan. A total of shares of our common stock will be made available for sale. In addition, our Employee Stock Purchase Plan provides for annual increases in the number of shares available for issuance under the Employee Stock Purchase Plan on the first day of each fiscal year, beginning with our fiscal year 2001, equal to the lesser of % of the outstanding shares of our common stock on the first day of the fiscal year, shares or such other amount as may be determined by our board of directors. Administration of the Purchase Plan. Our board of directors or a committee of our board administers the Purchase Plan. Our board of directors or its committee has full and exclusive authority to interpret the terms of the Employee Stock Purchase Plan and determine eligibility. 54 57 Eligibility to Participate. All of our employees are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, an employee may not be granted an option to purchase stock if such employee: - immediately after grant owns stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock, or - whose rights to purchase stock under all of our employee stock purchase plans accrues at a rate that exceeds $25,000 worth of stock for each calendar year. Offering Periods and Contributions. Our Employee Stock Purchase Plan is intended to qualify under Section 423 of the Code and contains consecutive, overlapping 24-month offering periods. Each offering period includes four 6-month purchase periods. The offering periods generally start on the first trading day on or after and of each year, except for the first such offering period which will commence on the first trading day on or after the effective date of this offering and will end on the last trading day on or before . Our Employee Stock Purchase Plan permits participants to purchase common stock through payroll deductions of up to % of their eligible compensation which includes a participant's base salary, wages, overtime pay, commissions, bonuses and other compensation remuneration paid directly to the employee. A participant may purchase a maximum of shares during a 6-month period. Purchase of Shares. Amounts deducted and accumulated by the participant are used to purchase shares of our common stock at the end of each six-month purchase period. The price is 85% of the lower of the fair market value of our common stock at the beginning of an offering period or after a purchase period's end. If the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, participants will be withdrawn from the current offering period following their purchase of shares on the purchase date and will be automatically re-enrolled in a new offering period. Participants may end their participation at any time during an offering period and will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with us. Transferability of Rights. A participant may not transfer rights granted under the Employee Stock Purchase Plan other than by will, the laws of descent and distribution or as otherwise provided under the Purchase Plan. Adjustments upon Merger or Asset Sale. In the event of our merger with or into another corporation or a sale of all or substantially all of our assets, a successor corporation may assume or substitute each outstanding option. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened, and a new exercise date will be set. Amendment and Termination of the Purchase Plan. Our Employee Stock Purchase Plan will terminate in 2010. However, our board of directors has the authority to amend or terminate our Purchase Plan, except that, subject to certain exceptions described in the Purchase Plan, no such action may adversely affect any outstanding rights to purchase stock under our Purchase Plan. 401(k) PLAN In 1999, our board of directors adopted a Retirement Savings and Investment Plan covering our full-time employees located in the U.S. This plan is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, so that contributions to 55 58 this plan by employees, and the investment earnings thereon, are not taxable to employees until withdrawn. Pursuant to this plan, employees may elect to reduce their current compensation by up to the lesser of 15% of their annual compensation or the statutorily prescribed annual limit, and to have the amount of such reduction contributed to this plan. We do not currently make additional matching contributions on behalf of plan participants. EMPLOYMENT ARRANGEMENTS Charles M. Skibo. Mr. Skibo entered into an employment agreement with us on January 25, 1999. This agreement is for an initial term of three years, terminating on January 24, 2002, and renewable for one-year periods. Under the agreement, we agreed to pay Mr. Skibo an annual salary of $225,000 for his first year of employment, $250,000 for his second year of employment, and $300,000 for his third year of employment. Upon completion of an initial public offering during the term of agreement, Mr. Skibo's annual salary will immediately increase to $360,000. Mr. Skibo is also eligible to receive target bonuses of up to $75,000 in the first year of employment, 60% of his base salary in the second year of employment and 85% of his base salary in the third year of employment. In connection with his employment, Mr. Skibo was granted options to purchase 4,210,000 shares of our common stock. These options were exercised for shares of restricted stock which vest over a three year period, with 60% of the shares vesting at the end of one year of employment, 20% vesting at the end of two years of employment, and 20% vesting at the end of three years of employment. If Mr. Skibo is terminated without cause, he will be entitled to receive continued payment of his base salary for the remainder of the term of the agreement and the vesting of his restricted stock shall accelerate and become fully vested. Wayne A. Olson. Mr. Olson began working as our Senior Vice President, Operations and Administration in March 1999. Under the terms of Mr. Olson's offer letter, if we terminate Mr. Olson's employment without cause, Mr. Olson will continue to receive his salary for twelve months following the termination date. Stephen I. Robertson. Mr. Robertson began working as our Chief Financial Officer in March 2000. Under the terms of Mr. Robertson's offer letter, Mr. Robertson was granted an option to purchase 560,000 shares of our common stock to vest over four years. If we complete a secondary funding event after our initial public offering prior to the end of Mr. Robertson's first year of employment, 70,000 of the shares will vest at the close of that transaction. If we terminate Mr. Robertson's employment without cause, Mr. Robertson will continue to receive his salary and his options will continue to vest for twelve months following the termination date. In the event that we experience a change in control and Mr. Robertson is terminated without cause or is constructively terminated, his option will continue to vest for two years after the termination date. INDEMNIFICATION AND LIMITATION OF LIABILITY Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for the following: - any breach of their duty of loyalty to the corporation or its stockholders; - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; 56 59 - unlawful payments of dividends or unlawful stock repurchases or redemptions; or - any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation and bylaws provide that we shall indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. We have entered into agreements to indemnify our directors, executive officers and controller, in addition to indemnification provided for in our bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in our rights, arising out of such person's services as a director or executive officer to us, any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. 57 60 RELATED PARTY TRANSACTIONS PREFERRED STOCK FINANCINGS From June 1998 through April 1999, we issued to various investors a total of 4,261,730 shares of Series A preferred stock at a purchase price of $0.50 per share. In April 1999, we issued to various investors a total of 24,500,000 shares of Series B preferred stock at a purchase price of $0.50 per share. In December 1999, we issued to various investors a total of 20,408,164 shares of Series C Preferred stock at a purchase price of $9.80 per share. Investors in, and beneficial owners of, our preferred stock include, among others, the following directors and holders of more than 5% of our outstanding stock:
PREFERRED STOCK ------------------------------------ PREFERRED STOCKHOLDER SERIES A SERIES B SERIES C --------------------- --------- ---------- --------- HOLDERS OF MORE THAN 5%: Accel Partners Entities...................... -- 10,000,000 816,327 Athena Venture Fund, L.P. ................... 2,500,000 2,500,000 510,204 InvestCorp International Inc. ............... -- -- 3,571,428 Menlo Ventures Entities...................... -- 10,000,000 1,836,735 Meritech Capital Partners Entities........... -- -- 4,081,633 DIRECTORS: Young Soo Ha(1).............................. 2,500,000 2,500,000 510,204 John Jarve(2)................................ -- 10,000,000 1,836,735 Arthur Patterson(3).......................... -- 10,000,000 816,327
- ------------------------- (1) Consists of shares held by Athena Venture Fund, L.P. Mr. Ha is a general partner of Athena Venture Fund, L.P. and disclaims beneficial ownership of these shares except to the extent of his proportionate partnership interest therein. (2) Consists of shares held by Menlo Ventures entities. Mr. Jarve is a general partner of the Menlo Ventures entities and disclaims beneficial ownership of these shares except to the extent of his proportionate partnership interest therein. (3) Consists of shares held by Accel Partners entities. Mr. Patterson is a general partner of the Accel Partners entities and disclaims beneficial ownership of these shares except to the extent of his proportionate partnership interest therein. Holders of our preferred stock are entitled to registration rights with respect to the shares of common stock issuable upon conversion of the preferred stock. See "Description of Capital Stock -- Registration Rights." LOANS TO OFFICERS We have implemented a program under which our directors, executive officers and a number of other key employees are permitted to exercise their outstanding options as to both vested and unvested shares, with unvested shares being subject to a right of repurchase at cost in favor of COLO.COM in the event of termination of employment prior to vesting of the shares. Under this program, the participants paid the exercise price for their outstanding options pursuant to full recourse promissory notes. The notes bear interest at a rate of approximately 6.2% per annum and are due and payable on the earlier of termination of the participant's 58 61 employment with us, or on various dates beginning in November 2003. The principal balance as of March 31, 2000 of each note payable by a director or executive officer is set forth below:
NOTE DIRECTOR OR EXECUTIVE OFFICER AMOUNT ----------------------------- ---------- H.S. Kullar................................................. $ 200,000 David H. Stanley............................................ 200,000 Charles M. Skibo............................................ 84,200 James M. Smith.............................................. 82,000 Wayne A. Olson.............................................. 27,557 John F. Mevi III............................................ 20,000 Robert E. Lamb, Jr. ........................................ 10,000 James H. Strachan........................................... 8,500
The aggregate principal balance as of March 31, 2000 of notes payable by all directors, officers and employees was approximately $1.4 million. CONSULTING AGREEMENT In March 1999, we entered into a consulting agreement with Corporate Planning & Property Consulting, Inc. Mr. Palomba is a Principal of Corporate Planning & Property Consulting, Inc. Under this agreement, Mr. Palomba served as our Vice President, Real Estate Acquisition and Development. In March 2000, Mr. Palomba became a part-time consultant and no longer serves as a vice president. OTHER TRANSACTIONS In December 1998, we repurchased 600,000 shares of common stock for a total of $60,000 from our former Chief Executive Officer, Peter Berns, in connection with his resignation from employment with us. Mario M. Rosati, one of our directors from June 1998 to April 1999, is also a member of Wilson Sonsini Goodrich & Rosati, Professional Corporation, which has served as our outside corporate counsel since January 1998. Mr. Rosati holds 12,000 shares of common stock and WS Investment Company 98B holds 108,000 shares. WS Investment Company 98B is a holding company of Wilson Sonsini Goodrich & Rosati. The spouse of Robert E. Lamb, Jr., our Vice President, Business Development, is the owner of Visual Resources, Inc. Through May 31, 2000, we had purchased approximately $72,000 of business materials and printing supplies from Visual Resources. We believe that all transactions between us and our officers, directors, principal stockholders and other affiliates have been, and it is our intention that they will be, on terms no less favorable to us than could be obtained from unaffiliated third parties. 59 62 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock (on an as-converted basis), as of May 31, 2000, by the following individuals or groups: - each person, or group of affiliated persons, whom we know beneficially owns more than 5% of our outstanding stock; - each of our named executive officers; - each of our directors; and - all of our directors and executive officers as a group. Unless otherwise indicated, the address for each stockholder on this table is c/o COLO.COM, 2000 Sierra Point Parkway, Suite 601, Brisbane, California 94005-1819. Except as otherwise noted, and subject to applicable community property laws, to the best of our knowledge, the persons named in this table have sole voting and investing power for all of the shares of common stock held by them. This table lists percentage ownership based on 62,885,699 shares of common stock outstanding (assuming the conversion of all preferred stock) as of May 31, 2000. Options to purchase shares of our common stock that are exercisable within 60 days of May 31, 2000 are deemed to be beneficially owned by the persons holding these options for the purpose of computing percentage ownership of that person, but are not treated as outstanding for the purpose of computing any other person's ownership percentage. Shares underlying options that are deemed beneficially owned are included in the number of shares listed in the column labeled "Number." In addition, a portion of the shares held by all of our executive officers listed below are subject to repurchase by us at the original purchase prices under the terms of restricted stock purchase agreements. Under these agreements, these officers exercised unvested options and gave us a right to repurchase these shares, which lapses over time.
SHARES BENEFICIALLY OWNED --------------------------------------------- PERCENT BEFORE PERCENT AFTER BENEFICIAL OWNER NUMBER OFFERING OFFERING ---------------- ---------- -------------- ------------- 5% STOCKHOLDERS: Accel Partners Entities(1)................... 10,816,327 17.2% % 428 University Ave Palo Alto, CA 94301 Athena Venture Fund, L.P..................... 5,510,204 8.8 310 University Ave., Suite 202 Palo Alto, CA 94301 InvestCorp International Inc.(2)............. 3,571,428 5.7 280 Park Avenue, 37th Floor New York, NY 10017 Menlo Ventures Entities(3)................... 11,836,735 18.8 3000 Sand Hill Road Building 4, Suite 100 Menlo Park, CA 94025 Meritech Capital Partners Entities(4)........ 4,081,633 6.5 90 Middlefield Road, Suite 201 Menlo Park, CA 94025
60 63
SHARES BENEFICIALLY OWNED --------------------------------------------- PERCENT BEFORE PERCENT AFTER BENEFICIAL OWNER NUMBER OFFERING OFFERING ---------------- ---------- -------------- ------------- EXECUTIVE OFFICERS AND DIRECTORS: Charles M. Skibo(5).......................... 4,210,000 6.7% Wayne A. Olson............................... 551,143 * Robert E. Lamb, Jr. ......................... 1,366,550 2.2 Richard J. Palomba(6)........................ 210,000 * James H. Strachan(7)......................... 270,000 * Christopher E. Clouser(8).................... 150,000 * Young S. Ha(9)............................... 5,643,141 9.0 John W. Jarve(10)............................ 11,836,735 18.8 Richard P. Nespola(11)....................... 150,000 * Arthur Patterson(12)......................... 10,816,327 17.2 Kirby G. Pickle, Jr.(13)..................... 150,000 * All directors and executive officers as a group (16 persons)(14).......................... 37,307,896 58.3%
- ------------------------- * Less than 1% of the outstanding shares of common stock. (1) Includes 8,804,490 shares held by Accel VI L.P., 1,124,898 shares held by Accel Internet Fund II L.P., 140,612 shares held by Accel Keiretsu VI L.P. and 746,327 shares held by Accel Investors '98 L.P. (2) All of these shares are held by Colo.com Equity Limited, a holding company of InvestCorp International Inc. (3) Includes 10,380,352 shares held by Menlo Ventures VII, L.P., 435,975 shares held by Menlo Entrepreneurs Fund VII, L.P., 971,817 shares held by Menlo Ventures VIII, L.P., 38,484 shares held by Menlo Entrepreneurs Fund VIII, L.P., and 10,107 shares held by MMEF VIII, L.P. (4) Includes 4,016,327 shares held by Meritech Capital Partners, L.P. and 65,306 shares held by Meritech Capital Affiliates, L.P. (5) All of these shares are held by the Skibo Family Limited Partnership, of which Mr. Skibo is a general partner. (6) Includes 40,000 shares held by Mr. Palomba's daughter, Gina K. Palomba UGMA, and 120,000 shares held jointly by Mr. Palomba and Beverly Palomba. (7) Includes 60,000 shares that are subject to unvested options which are immediately exercisable into restricted stock. (8) Includes 150,000 shares that are subject to unvested options which are immediately exercisable into restricted stock. (9) Includes 5,510,204 shares held by Athena Venture Fund, L.P. Mr. Ha, one of our directors, is a general partner of this entity and disclaims beneficial ownership of these shares, except to the extent of his proportionate partnership interest therein. Also includes 132,937 shares held by the Ha Family Trust of 1997. (10) Includes 10,380,352 shares held by Menlo Ventures VII, L.P., 435,975 shares held by Menlo Entrepreneurs Fund VII, L.P., 971,817 shares held by Menlo Ventures VIII, L.P., 38,484 shares held by Menlo Entrepreneurs Fund VIII, L.P., and 10,107 shares held by MMEF VIII, L.P. Mr. Jarve, one of our directors, is a managing director of MV Management VII, LLC, the general partner of Menlo Ventures VII, L.P. and Menlo Entrepreneurs Fund VII, L.P., and MV Management VIII, LLC, the general partner of Menlo Ventures VIII, L.P., Menlo Entrepreneurs Fund VIII, L.P. and MMEF VIII, L.P. and disclaims 61 64 beneficial ownership of these shares, except to the extent of his proportionate partnership interest therein. (11) Includes 150,000 shares that are subject to unvested options which are immediately exercisable into restricted stock. (12) Includes 8,804,490 shares held by Accel VI L.P., 1,124,898 shares held by Accel Internet Fund II L.P., 746,327 shares held by Accel Investors '98 L.P. and 140,612 shares held by Accel Keiretsu VI L.P. Mr. Patterson, one of our directors, is a general partner of each of these entities and disclaims beneficial ownership of these shares, except to the extent of his proportionate partnership interest therein. (13) Includes 150,000 shares that are subject to unvested options which are immediately exercisable into restricted stock. (14) Includes 1,070,000 shares that are subject to unvested options which are immediately exercisable into restricted stock. 62 65 DESCRIPTION OF CAPITAL STOCK GENERAL Our certificate of incorporation that becomes effective upon the closing of this offering authorizes the issuance of 200,000,000 shares of common stock, $0.001 par value, and authorizes the issuance of 10,000,000 shares of undesignated preferred stock, no par value. From time to time, our board of directors may establish the rights and preferences of the preferred stock. As of May 31, 2000, 62,885,699 shares of common stock were issued and outstanding and held by approximately 165 stockholders, and options to purchase 3,199,400 shares of common stock were issued and outstanding and held by 250 optionholders. COMMON STOCK Each holder of common stock is entitled to one vote for each share held on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably the dividends, if any, that are declared from time to time by the board of directors out of funds legally available for that purpose. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of COLO.COM, the holders of common stock are entitled to share in our assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable. The rights, preferences and privileges of the 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 in the future. PREFERRED STOCK The board of directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until the board of directors determines the specific rights of the holders of this preferred stock. However, the effects might include, among other things: - restricting dividends on the common stock; - diluting the voting power of the common stock; - impairing the liquidation rights of the common stock; or - delaying or preventing a change in control of COLO.COM without further action by the stockholders. Upon the closing of this offering, no shares of preferred stock will be outstanding, and we have no present plans to issue any shares of preferred stock. WARRANTS As of May 31, 2000, we had outstanding warrants to purchase an aggregate of 520,750 shares of common stock at an exercise price of $0.05 per share. These warrants are currently exercisable in full and will expire upon the earlier of the closing of our initial public 63 66 offering or 2002. We also had outstanding warrants to purchase 217,679 shares of common stock at an exercise price of $6.44 per share, 73,976 shares of common stock at an exercise price of $7.57 per share and 300,000 shares of common stock at an exercise price of $10.00 per share. These warrants to purchase 217,679 shares of common stock and 73,976 shares of common stock are currently exercisable and will expire in 2009. The warrants to purchase 300,000 shares of common stock are currently exercisable and will expire in 2004. In connection with the issuance of the senior notes in March 2000, we issued warrants to purchase an aggregate of 5,991,540 shares of our common stock with an exercise price of $0.01 per share. These warrants become exercisable 180 days after our initial public offering and automatically expire on March 15, 2010. REGISTRATION RIGHTS After this offering, holders of 49,169,894 shares of common stock (collectively, "registrable shares") may, under limited circumstances and subject to specified conditions and limitations, require us to use our best efforts to register the registrable shares. We must use our best efforts to register registrable shares: - if we receive written notice from holders of 50% or more of the registrable shares requesting that we effect a registration with respect to not less than 40% of the registrable shares then held by the holders requesting registration (or a lesser percentage where the reasonably anticipated price to the public of the sale of the registrable shares will exceed $10,000,000); provided, however, that we are not obligated to effect such registration prior to December 31, 2000 or during the 180 day period following the effective date of this offering. - if we decide to register our own securities (except in connection with an initial public offering and, in any offer involving an underwriting, the underwriters may limit the amount of registrable shares to 20% of the total amount of shares included in such offering;) or - if (1) we receive written notice from any holder or holders of registrable shares requesting that we effect a registration on Form S-3 (a shortened form of registration statement) with respect to shares of the registrable shares and (2) we are then eligible to use Form S-3 (which at the earliest will occur twelve calendar months after the closing of this offering). These registration rights terminate with respect to each registrable share upon the first to occur of when the holder can transfer his or her registrable shares pursuant to Rule 144 or five years after the closing of this offering. The holders of the warrants issued in connection with the senior notes are entitled to piggyback registration rights for the common stock issuable upon exercise of the warrants. We are obligated to register, within 180 days following the consummation of this offering, the shares issuable upon exercise of the warrants issued in connection with the senior notes. We are further obligated to keep such registration effective until the earlier of such time as all warrants have been exercised or two years after the effective date of the registration statement. 64 67 ANTITAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CHARTER AND BYLAWS Provisions of Delaware law and our certificate of incorporation and bylaws could make the following more difficult: - the acquisition of COLO.COM by means of a tender offer; - the acquisition of COLO.COM by means of a proxy contest or otherwise; or - the removal of our incumbent officers and directors. These provisions, summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of COLO.COM to negotiate first with our board. We believe that the benefits of increased protection of its potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure COLO.COM outweigh the disadvantages of discouraging these proposals because negotiation of any proposals of this type could result in an improvement of their terms. Election and Removal of Directors. Our board of directors is divided into three classes. The directors in each class will serve for a three-year term, with our stockholders electing one class each year. See "Management -- Board of Directors." This system of electing and removing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of COLO.COM, because it generally makes it more difficult for stockholders to replace a majority of the directors. Stockholder Meetings. Under our bylaws, only the board of directors, the chairman of the board or the president may call special meetings of stockholders. Requirements for Advance Notification of Stockholder Nominations and Proposals. Our bylaws establish advance notice procedures for stockholder proposals and for the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board. Delaware Antitakeover Law. COLO.COM is subject to Section 203 of the Delaware General Corporation Law, an antitakeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder, unless the business combination or the transaction in which the person became an interested stockholder is approved in the manner specified in Section 203. Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an interested stockholder is a person who, together with affiliates and associates, owns or within three years prior to the determination of interested stockholder status did own 15% or more of a corporation's voting stock. The existence of this provision may have an antitakeover effect by discouraging takeover attempts not approved in advance by the board of directors, that might result in a premium over the market price for the shares of common stock held by stockholders. Elimination of Stockholder Action by Written Consent. Our certificate of incorporation eliminates the right of stockholders to act by written consent without a meeting. No Cumulative Voting. Our certificate of incorporation and bylaws do not provide for cumulative voting in the election of directors. Undesignated Preferred Stock. The authorization of undesignated preferred stock makes it possible for the board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of COLO.COM. 65 68 These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of COLO.COM. Amendment of Charter Provisions. The amendment of any of the above provisions would require approval by holders of at least 66 2/3% of the outstanding common stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is . LISTING We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "COLC." 66 69 DESCRIPTION OF INDEBTEDNESS THE 13 7/8% SENIOR NOTES In March 2000, we issued an aggregate of $300.0 million of 13 7/8% senior notes pursuant to an indenture between us, as issuer, and State Street Bank and Trust Company of California, N.A., as trustee. The senior notes are unsecured obligations and mature on March 15, 2010. Interest on the senior notes accrues at the rate of 13 7/8% per annum, payable semi-annually on March 15 and September 15 of each year, commencing on September 15, 2000. The senior notes will be redeemable at our option, in whole or in part, on or after March 15, 2005 at the redemption prices set forth in the senior notes indenture. In addition, at anytime prior to March 15, 2003, we may redeem up to 35% of the principal amount of the senior notes with the net proceeds of one or more sales of certain types of our stock at a redemption price of 113.875%, plus accrued and unpaid interest, if any, to the redemption date; provided that at least 65% of the aggregate principal amount of the senior notes originally issued remain outstanding and notice of such redemption is mailed within 60 days of each such sale of stock. Upon a change of control (as defined in the senior notes indenture), we would be required to purchase the senior notes at a purchase option equal to 101% of the principal amount, plus accrued and unpaid interest, if any. The debt evidenced by the senior notes ranks equally in right of payment with all our existing and future unsubordinated unsecured debt, and senior in right of payment to all existing and future subordinated debt. The senior notes indenture restricts, among other things, our ability to incur additional debt and the use of proceeds of such additional debt, pay dividends or make certain other restricted payments, incur certain liens to secure debt or engage in merger transactions. There are significant "carve-outs" and exceptions to these covenants. COMDISCO LOAN FACILITY In October 1999, we entered into a $7.0 million loan facility with Comdisco, Inc. Under this facility, which we can draw down through August 31, 2000, Comdisco provides financing for construction costs and equipment for our facilities in Chicago, Illinois and Emeryville, California. This agreement is secured by all tangible and intangible assets relating to the specific facilities funded by the lender. Individual loans bear interest at a rate of 8.25% per annum and will be repaid in 42 equal monthly installments plus a final payment equal to 15% of the original advance. As of March 31, 2000, we had outstanding borrowings of $2.2 million under this facility. In connection with this facility, we issued to Comdisco a warrant to purchase 73,976 shares of our Series C preferred stock at an exercise price of $7.57 per share. The facility restricts our ability to merge or consolidate with another entity. It also restricts our ability to pay dividends or purchase stock. MMC/GATX LOAN FACILITY In November 1999, we entered into a $17.0 million loan facility with MMC/GATX Partnership and other lenders. Under this facility, which we can draw down through December 31, 2001, MMC provides financing for construction costs and equipment for our facilities in Los Angeles, California and Vienna, Virginia. This agreement is secured by all tangible and intangible assets relating to the specific facilities funded by the lender. Individual 67 70 loans bear interest at a rate equal to the sum of the applicable U.S. Treasury note yield to maturity plus 3.93% per annum and will be repaid in 42 equal monthly installments plus a final payment equal to 10% of the original advance. As of March 31, 2000, we had outstanding borrowings of $1.2 million under this facility. In connection with this facility, we issued to MMC and others warrants to purchase 217,679 shares of our Series C preferred stock at an exercise price of $6.44 per share. The facility restricts our ability to merge or consolidate with another entity. It also restricts our ability to pay dividends or purchase stock. 68 71 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock, and we cannot assure you that a significant public market for the common stock will develop or be sustained after this offering. Future sales of substantial amounts of common stock, including shares issued upon exercise of outstanding options and warrants, in the public market following this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sale of our equity securities. As described below, no shares currently outstanding will be available for sale immediately after this offering because of contractual resale restrictions contained in agreements between us and our stockholders. Upon completion of this offering, we will have outstanding shares of common stock based upon shares outstanding as of May 31, 2000, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options prior to completion of this offering. Of these shares, the shares sold in this offering will be freely tradable without restriction under the Securities Act, except for any shares purchased by our "affiliates" as defined in Rule 144 under the Securities Act. Of the remaining shares of common stock, shares held by existing stockholders are subject to lock-up agreements with the underwriters and/or us providing that the stockholder will not offer to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights to, any shares of common stock or any securities that are convertible into common stock, owned as of the date of this prospectus or subsequently acquired, for a period of 180 days after the date of this prospectus without prior written consent. As a result of these lock-up agreements, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701 under the Securities Act, none of these shares will be resellable until 181 days after the date of this prospectus. Deutsche Bank Securities Inc. may, in its sole discretion and at any time without notice, release all or any portion of the shares subject to lock-up agreements. Beginning 181 days after the date of this prospectus, approximately shares will be eligible for sale in the public market. All of these shares will be subject to volume limitations under Rule 144, except shares eligible for sale under Rule 144(k) and shares eligible for sale under Rule 701. In some cases, these shares are subject to repurchase rights of COLO.COM. In general, under Rule 144, as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares for at least one year, including the holding period of any prior owner except an affiliate, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or - the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about COLO.COM. Under Rule 144(k), a person who is not deemed to have been an affiliate of COLO.COM 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 any prior owner except an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701, as currently in effect, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirement, of 69 72 Rule 144. Any employee, officer or director of or consultant to COLO.COM who purchased shares pursuant to a written compensatory plan or contact may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell their Rule 701 shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their Rule 701 shares. However, all Rule 701 shares are subject to lock-up agreements and will only become eligible for sale at the earlier of the expiration of the 180-day lock-up agreements or the receipt of the written consent of Deutsche Bank Securities Inc. more than 90 days after the date of this prospectus. After this offering, we intend to file a registration statement on Form S-8 registering shares of common stock subject to outstanding options or reserved for future issuance under our employee benefit plans. As of May 31, 2000, options to purchase a total of 3,199,400 shares were outstanding and 1,749,483 shares were reserved for future issuance under our stock plans. Common stock issued upon exercise of outstanding vested options or issued pursuant to our employee stock purchase plan, other than common stock issued to our affiliates, will be available for immediate resale in the open market following expiration of the 180-day lock-up agreements. Also beginning six months after the date of this offering, holders of 49,169,894 restricted shares will be entitled to registration rights on these shares for sale in the public market. See "Description of Capital Stock -- Registration Rights." Registration of these shares under the Securities Act would result in their becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. 70 73 UNDERWRITING Subject to the terms and conditions of the underwriting agreement, the underwriters named below, through their representatives Deutsche Bank Securities Inc., FleetBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc. and UBS Warburg LLC, have severally agreed to purchase from us the following respective number of shares of common stock at a public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus:
NUMBER OF UNDERWRITER SHARES ----------- --------- Deutsche Bank Securities Inc. .............................. FleetBoston Robertson Stephens Inc. ........................ Bear, Stearns & Co. Inc. ................................... UBS Warburg LLC............................................. -------- Total Underwriters ( )................................ ========
The underwriting agreement provides that the obligations of the several underwriters to purchase the shares of common stock offered hereby are subject to certain conditions precedent and that the underwriters will purchase all shares of common stock offered hereby, other than those covered by the over-allotment option described below, if any of these shares are purchased. The underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover of this prospectus and to dealers at a price that represents a concession not in excess of $ per share under the public offering price. The underwriters may allow, and these dealers may re-allow, a concession of not more than $ per share to other dealers. After the initial public offering, representatives of the underwriters may change the offering price and other selling terms. We have granted to the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to additional shares of common stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. The underwriters may exercise this option only to cover over- allotments made in connection with the sale of common stock offered hereby. To the extent that the underwriters exercise this option, each of the underwriters will become obligated, subject to conditions, to purchase approximately the same percentage of additional shares of common stock as the number of shares of common stock to be purchased by it in the above table bears to the total number of shares of common stock offered hereby. We will be obligated, pursuant to the option, to sell these additional shares of common stock to the underwriters to the extent the option is exercised. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered. The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is % of the initial public offering price. We have agreed to pay the underwriters the following fees, assuming either no exercise or full exercise by the underwriters of the underwriters' over- allotment option:
TOTAL FEE ------------------------------------------------ WITHOUT EXERCISE OF WITH FULL EXERCISE FEE PER SHARE OVER-ALLOTMENT OPTION OF OVER-ALLOTMENT OPTION ------------- --------------------- ------------------------ Fee paid by COLO.COM........ $ $ $
71 74 In addition, we estimate that our share of the total expenses of this offering, excluding the above described underwriting discounts and commissions, will be approximately $ . We have agreed to indemnify the underwriters against some specified types of liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect of any of these liabilities. Each of our officers and directors, and substantially all of our stockholders and holders of options and warrants to purchase our stock, have agreed not to offer, sell, contract to sell or otherwise dispose of, or enter into any transaction that is designed to, or could be expected to, result in the disposition of any shares of our common stock or other securities convertible into or exchangeable or exercisable for shares of our common stock or derivatives of our common stock owned by these persons prior to this offering or common stock issuable upon exercise of options or warrants held by these persons for a period of 180 days after the effective date of the registration statement of which this prospectus is a part without the prior written consent of Deutsche Bank Securities Inc. This consent may be given at any time without public notice. We have entered into a similar agreement with the representatives of the underwriters, except that we may grant options and sell shares pursuant to our 1998 Incentive Stock Option Plan and our 2000 Employee Stock Purchase Plan without such consent. The representatives of the underwriters have advised us that the underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. "Covered" short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from the issuer in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. "Naked" short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering. The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. Purchases to cover a short position and stabilizing transactions may have the effect of preventing or retarding a decline in the market price of our common stock, and together with the imposition of the penalty bid may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. 72 75 At our request, the underwriters have reserved for sale, at the initial public offering price, up to shares for our vendors, employees, family members of employees, customers and other third parties. The number of shares of our commons stock available for sale to the general public will be reduced to the extent these reserved shares are purchased. Any reserved shares that are not purchased by these persons will be offered by the underwriters to the general public on the same basis as the other shares in this offering. The underwriters have provided, and are expected to continue to provide, investment banking and other services to us and our affiliates. In connection with our senior notes offering, which occurred in March 2000, three of the underwriters received discounts and commissions in their role as initial purchasers. Deutsche Bank Securities Inc. received approximately $675,000, Bear, Stearns & Co. Inc. received approximately $1.8 million and UBS Warburg LLC received approximately $700,000. In connection with our Series C preferred stock financing, which occurred in December 1999, two of the underwriters received commissions and fees for their services as placement agents. Deutsche Bank Securities, Inc. received approximately $4.4 million and UBS Warburg LLC received approximately $1.3 million. In addition, BT Investment Partners, Inc., an affiliate of Deutsche Bank Securities Inc., purchased 102,041 shares of Series C preferred stock for an aggregate purchase price of $1.0 million and UBS Capital II LLC, an affiliate of UBS Warburg LLC, purchased 2,021,816 shares of Series C preferred stock for an aggregate price of $19.8 million. PRICING OF THIS OFFERING Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for our common stock has been determined by negotiation among us and the representatives of the underwriters. Among the primary factors considered in determining the public offering price were: - prevailing market conditions; - our results of operations in recent periods; - the present stage of our development; - the market capitalization and stage of development of other companies that we and the representatives of the underwriters believe to be comparable to our business; and - estimates of our business potential. LEGAL MATTERS Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California will pass upon the validity of the common stock sold in this offering for COLO.COM. Shearman & Sterling, New York, New York and Menlo Park, California is acting as counsel for the underwriters in connection with selected legal matters relating to the shares of common stock offered by this prospectus. As of the date of this prospectus, an investment partnership composed of current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati and certain members of and persons associated with Wilson Sonsini Goodrich & Rosati, beneficially owned an aggregate of 123,132 shares of our common stock. 73 76 EXPERTS The consolidated financial statements of COLO.COM and subsidiaries as of December 31, 1998 and 1999 and for the period from inception (April 2, 1997) to December 31, 1997 and for the years ended December 31, 1998 and 1999 included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. AVAILABLE INFORMATION We have filed with the Securities and Exchange Commission a Registration Statement on Form S-1. This prospectus, which forms a part of the Registration Statement, does not contain all the information included in the Registration Statement. Certain information is omitted and you should refer to the Registration Statement and its exhibits. With respect to references made in this prospectus to any contract or other document of COLO.COM, such references are not necessarily complete and you should refer to the exhibits attached to the Registration Statement for copies of the actual contract or document. You may review a copy of the Registration Statement, including exhibits and schedule filed therewith, at the Securities and Exchange Commission's public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Securities and Exchange Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such materials from the Public References Section of the Securities and Exchange Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Securities and Exchange Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as COLO.COM, that file electronically with the Securities and Exchange Commission. 74 77 COLO.COM AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations....................... F-4 Consolidated Statements of Changes in Stockholders' Equity (Deficit)................................................. F-5 Consolidated Statements of Cash Flows....................... F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 78 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of COLO.COM: We have audited the accompanying consolidated balance sheets of COLO.COM (a California corporation) and Subsidiary as of December 31, 1998 and 1999, and the related statements of operations, changes in stockholders' equity (deficit), and cash flows for the period from inception (April 2, 1997) to December 31, 1997, and for the years ended December 31, 1998 and 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of COLO.COM and Subsidiary as of December 31, 1998 and 1999, and the results of their operations and their cash flows for the period from inception (April 2, 1997) to December 31, 1997, and for the years ended December 31, 1998 and 1999, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP San Francisco, California, January 24, 2000 F-2 79 COLO.COM AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1999, AND MARCH 31, 2000 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, MARCH 31, 2000 ------------------- -------------------------- 1998 1999 ACTUAL PRO FORMA ------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 138 $198,412 $381,010 Accounts receivable, net of allowance for doubtful accounts of $5, $25, and $135 (unaudited) at December 31, 1998 and 1999, and March 31, 2000, respectively..... 42 28 521 Prepaids and other current assets......................... 177 704 2,182 ------- -------- -------- Total current assets.................................... 357 199,144 383,713 PROPERTY AND EQUIPMENT, net................................. 495 13,195 49,033 RESTRICTED CASH AND CASH EQUIVALENTS........................ -- 2,162 3,765 RESTRICTED INVESTMENTS...................................... -- -- 77,729 DEPOSITS AND OTHER NONCURRENT ASSETS........................ 36 1,241 10,868 ------- -------- -------- Total assets............................................ $ 888 $215,742 $525,108 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 263 $ 8,911 $ 21,434 Accrued liabilities....................................... 149 761 4,823 Current portion of notes payable, net of discount......... -- 1,464 478 ------- -------- -------- Total current liabilities............................... 412 11,136 26,735 ------- -------- -------- NONCURRENT LIABILITIES: Long-term notes payable, net of discount.................. -- 1,876 217,755 Other noncurrent liabilities.............................. -- 42 1,286 ------- -------- -------- Total noncurrent liabilities............................ -- 1,918 219,041 ------- -------- -------- Total liabilities....................................... 412 13,054 245,776 ------- -------- -------- COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY: Series A preferred stock, no par value: Authorized shares -- 5,250,000 Issued and outstanding shares -- 4,255,730 at December 31, 1998, and 4,261,730 at both December 31, 1999, and March 31, 2000 and 0 at March 31, 2000 (pro forma)............ 2,078 2,079 2,079 -- Series B preferred stock, no par value: Authorized shares -- 24,500,000 Issued and outstanding shares -- 0 at December 31, 1998, and 24,500,000 at both December 31, 1999, and March 31, 2000 and 0 at March 31, 2000 (pro forma)................ -- 12,219 12,219 -- Series C preferred stock, no par value: Authorized shares -- 21,000,000 Issued and outstanding shares -- 0 at December 31, 1998 and 20,408,164 at both December 31, 1999, and March 31, 2000 and 0 at March 31, 2000 (pro forma)................ -- 194,056 194,056 -- Common stock, no par value: Authorized shares -- 81,000,000 Issued and outstanding shares -- 4,233,888, 13,321,793, 13,557,555 (unaudited) and 62,727,449 (unaudited) at December 31, 1998 and 1999, March 31, 2000, and March 31, 2000 (pro forma) respectively....................... 37 12,826 26,003 234,357 Warrants.................................................. -- 2,434 88,460 88,460 Deferred compensation..................................... -- (9,306) (19,698) (19,698) Notes receivable from stockholders........................ (8) (1,102) (1,377) (1,377) Accumulated deficit....................................... (1,631) (10,518) (22,410) (22,410) ------- -------- -------- -------- Total stockholders' equity.............................. 476 202,688 279,332 $279,332 ------- -------- -------- ======== Total liabilities and stockholders' equity.............. $ 888 $215,742 $525,108 ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 80 COLO.COM AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIOD FROM INCEPTION (APRIL 2, 1997) TO DECEMBER 31, 1997, FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999, AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS YEARS ENDED ENDED PERIOD FROM INCEPTION DECEMBER 31, MARCH 31, (APRIL 2, 1997) TO ----------------- ------------------ DECEMBER 31, 1997 1998 1999 1999 2000 --------------------- ------- ------- ------- -------- (UNAUDITED) REVENUE......................................... $ 31 $ 190 $ 218 $ 55 $ 192 ------ ------- ------- ------- -------- OPERATING COSTS AND EXPENSES: Cost of revenue............................... 92 342 762 164 3,521 Selling, general, and administrative.......... 14 1,388 6,526 409 5,464 Deferred compensation......................... -- -- 1,248 -- 2,258 Depreciation and amortization................. 2 10 139 50 561 Loss on lease and leasehold improvements...... -- -- 921 610 -- ------ ------- ------- ------- -------- Total operating costs and expenses.......... 108 1,740 9,596 1,233 11,804 ------ ------- ------- ------- -------- Loss from operations........................ (77) (1,550) (9,378) (1,178) (11,612) INTEREST INCOME................................. -- 7 491 2 2,659 INTEREST EXPENSE................................ (1) (10) -- -- (2,939) ------ ------- ------- ------- -------- Net loss........................................ $ (78) $(1,553) $(8,887) $(1,176) $(11,892) ====== ======= ======= ======= ======== PER SHARE INFORMATION: Net loss per common share: basic and diluted..................................... $(0.03) $ (0.28) $ (1.86) $ (0.26) $ (1.49) ====== ======= ======= ======= ======== Common shares used in computing per share amounts: basic and diluted.................... 2,612 5,554 4,771 4,461 7,985 ====== ======= ======= ======= ======== Proforma: Net loss per common share basic and diluted (unaudited)................................. $ (0.34) $ (0.13) $ (0.21) ======= ======= ======== Common shares used in computing per share amounts basic and diluted (unaudited)....... 26,460 8,717 57,155 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 81 COLO.COM AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM INCEPTION (APRIL 2, 1997) TO DECEMBER 31, 1997, FOR THE YEARS ENDED DECEMBER 31, 1998, AND 1999, AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK SERIES A SERIES B SERIES C COMMON STOCK ------------------ -------------------- --------------------- -------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS --------- ------ ---------- ------- ---------- -------- ---------- ------- -------- BALANCE, APRIL 2, 1997..... -- $ -- -- $ -- -- $ -- -- $ -- $ -- Issuance of common stock for cash and services... -- -- -- -- -- -- 5,050,000 53 -- Net loss for period....... -- -- -- -- -- -- -- -- -- --------- ------ ---------- ------- ---------- -------- ---------- ------- ------- BALANCE, DECEMBER 31, 1997...................... -- -- -- -- -- -- 5,050,000 53 -- Issuance of Series A preferred stock for cash and services, net of issuance costs.......... 4,255,730 2,078 -- -- -- -- -- -- -- Issuance of common stock in exchange for stockholder notes and cash.................... -- -- -- -- -- -- 3,755,000 188 -- Repurchase of common stock................... -- -- -- -- -- -- (4,571,112) (204) -- Net loss for year......... -- -- -- -- -- -- -- -- -- --------- ------ ---------- ------- ---------- -------- ---------- ------- ------- BALANCE, DECEMBER 31, 1998...................... 4,255,730 2,078 -- -- -- -- 4,233,888 37 -- Issuance of Series A preferred stock for cash, net of issuance costs................... 6,000 1 -- -- -- -- -- -- -- Issuance of Series B preferred stock for cash, net of issuance costs................... -- -- 24,500,000 12,219 -- -- -- -- -- Issuance of Series C preferred stock for cash and debt repayment, net of issuance costs....... -- -- -- -- 20,408,164 194,056 -- -- -- Issuance of common stock for cash and services... -- -- -- -- -- -- 284,366 999 -- Value assigned to issued warrants................ -- -- -- -- -- -- -- -- 2,434 Exercise of employee stock options for stockholder notes and cash.......... -- -- -- -- -- -- 9,785,368 1,285 -- NOTES RECEIVABLE ACCUMU- DEFERRED FROM LATED EQUITY COMPENSATION STOCKHOLDERS DEFICIT (DEFICIT) ------------ ------------ -------- --------- BALANCE, APRIL 2, 1997..... $ -- $ -- $ -- $ -- Issuance of common stock for cash and services... -- -- -- 53 Net loss for period....... -- -- (78) (78) -------- ------ -------- -------- BALANCE, DECEMBER 31, 1997...................... -- -- (78) (25) Issuance of Series A preferred stock for cash and services, net of issuance costs.......... -- -- -- 2,078 Issuance of common stock in exchange for stockholder notes and cash.................... -- (182) -- 6 Repurchase of common stock................... -- 174 -- (30) Net loss for year......... -- -- (1,553) (1,553) -------- ------ -------- -------- BALANCE, DECEMBER 31, 1998...................... -- (8) (1,631) 476 Issuance of Series A preferred stock for cash, net of issuance costs................... -- -- -- 1 Issuance of Series B preferred stock for cash, net of issuance costs................... -- -- -- 12,219 Issuance of Series C preferred stock for cash and debt repayment, net of issuance costs....... -- -- -- 194,056 Issuance of common stock for cash and services... -- -- -- 999 Value assigned to issued warrants................ -- -- -- 2,434 Exercise of employee stock options for stockholder notes and cash.......... -- (1,143) -- 142
F-5 82 COLO.COM AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) FOR THE PERIOD FROM INCEPTION (APRIL 2, 1997) TO DECEMBER 31, 1997, FOR THE YEARS ENDED DECEMBER 31, 1998, AND 1999, AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK SERIES A SERIES B SERIES C COMMON STOCK ------------------ -------------------- --------------------- -------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS --------- ------ ---------- ------- ---------- -------- ---------- ------- -------- Recognition of deferred compensation............ -- -- -- -- -- -- -- 10,554 -- Deferred compensation..... -- -- -- -- -- -- -- -- -- Repurchase of common stock................... -- -- -- -- -- -- (981,829) (49) -- Net loss for year......... -- -- -- -- -- -- -- -- -- --------- ------ ---------- ------- ---------- -------- ---------- ------- ------- BALANCE, DECEMBER 31, 1999...................... 4,261,730 2,079 24,500,000 12,219 20,408,164 194,056 13,321,793 12,826 2,434 Value assigned to issued warrants (unaudited).... -- -- -- -- -- -- -- -- 86,176 Warrants exercised (unaudited)............. -- -- -- -- -- -- 90,345 200 (150) Exercise of employee stock options for stockholder notes and cash (unaudited)............. -- -- -- -- -- -- 210,000 330 -- Payment of stockholder note.................... -- -- -- -- -- -- -- -- -- Recognition of deferred compensation (unaudited)............. -- -- -- -- -- -- -- 12,650 -- Deferred compensation (unaudited)............. -- -- -- -- -- -- -- -- -- Repurchase of common stock (unaudited)............. -- -- -- -- -- -- (64,583) (3) -- Net loss for period (unaudited)............. -- -- -- -- -- -- -- -- -- --------- ------ ---------- ------- ---------- -------- ---------- ------- ------- BALANCE, MARCH 31, 2000 (unaudited)............... 4,261,730 $2,079 24,500,000 $12,219 20,408,164 $194,056 13,557,555 $26,003 $88,460 ========= ====== ========== ======= ========== ======== ========== ======= ======= NOTES RECEIVABLE ACCUMU- DEFERRED FROM LATED EQUITY COMPENSATION STOCKHOLDERS DEFICIT (DEFICIT) ------------ ------------ -------- --------- Recognition of deferred compensation............ (10,554) -- -- -- Deferred compensation..... 1,248 -- -- 1,248 Repurchase of common stock................... -- 49 -- -- Net loss for year......... -- (8,887) (8,887) -------- ------- -------- -------- BALANCE, DECEMBER 31, 1999...................... (9,306) (1,102) (10,518) 202,688 Value assigned to issued warrants (unaudited).... -- -- -- 86,176 Warrants exercised (unaudited)............. -- -- -- 50 Exercise of employee stock options for stockholder notes and cash (unaudited)............. -- (328) -- 2 Payment of stockholder note.................... -- 53 -- 53 Recognition of deferred compensation (unaudited)............. (12,650) -- -- -- Deferred compensation (unaudited)............. 2,258 -- -- 2,258 Repurchase of common stock (unaudited)............. -- -- -- (3) Net loss for period (unaudited)............. -- -- (11,892) (11,892) -------- ------- -------- -------- BALANCE, MARCH 31, 2000 (unaudited)............... $(19,698) $(1,377) $(22,410) $279,332 ======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 83 COLO.COM AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM INCEPTION (APRIL 2, 1997) TO DECEMBER 31, 1997, FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999, AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED) (IN THOUSANDS)
PERIOD FROM THREE MONTHS INCEPTION YEAR ENDED ENDED (APRIL 2, 1997) TO DECEMBER 31, MARCH 31, DECEMBER 31, ------------------ ------------------ 1997 1998 1999 1999 2000 ------------------ ------- -------- ------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................ $(78) $(1,553) $ (8,887) $(1,176) $(11,892) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......................... 2 10 139 50 561 Amortization of warrants.............................. -- -- -- -- 338 Loss on disposal of fixed assets...................... -- -- 465 465 -- Deferred compensation................................. -- 1,248 -- 2,258 Cost of revenues relating to warrants................. -- -- -- -- 2,294 Series A preferred stock exchanged for services....... -- 116 -- -- -- Changes in operating assets and liabilities: Accounts receivable, net............................ (9) (33) 14 3 (494) Prepaids and other current assets................... -- (177) (527) 178 (1,478) Deposits and other noncurrent assets................ -- (36) (955) 32 (209) Accounts payable.................................... 7 256 110 (155) 886 Other noncurrent liabilities........................ -- -- 42 -- 1,170 Accrued liabilities................................. 12 137 612 118 1,634 ---- ------- -------- ------- -------- Net cash used in operating activities............. (66) (1,280) (7,739) (485) (4,932) ---- ------- -------- ------- -------- CASH FLOWS USED IN INVESTING ACTIVITIES: Additions to property and equipment, net................ (71) (436) (12,430) (73) (35,734) Increase in accounts payable related to construction activities............................................ -- -- 2,598 -- 17,577 Restricted investments.................................. -- -- -- -- (77,729) Increase in restricted cash and cash equivalents........ -- -- (2,162) -- (1,603) ---- ------- -------- ------- -------- Net cash used in investing activities............. (71) (436) (11,994) (73) (97,489) ---- ------- -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable................. 119 41 9,729 497 290,508 Interest payable........................................ -- -- -- -- 2,502 Repayments of notes payable............................. -- (160) (3,643) -- (2,153) Proceeds from sale of common stock...................... 53 6 205 17 -- Payment of stockholder note............................. -- -- -- -- 53 Warrants and options exercised.......................... -- -- -- -- 52 Proceeds from issuance of Series A preferred stock, net................................................... -- 1,962 1 1 -- Proceeds from issuance of Series B preferred stock, net................................................... -- -- 12,219 -- -- Proceeds from issuance of Series C preferred stock, net................................................... -- -- 199,496 -- -- Preferred stock issuance costs paid..................... -- -- -- -- (5,940) Repurchase of common stock.............................. -- (30) -- -- (3) ---- ------- -------- ------- -------- Net cash provided by financing activities......... 172 1,819 218,007 515 285,019 ---- ------- -------- ------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 35 103 198,274 (43) 182,598 CASH AND CASH EQUIVALENTS: Beginning of period..................................... -- 35 138 138 198,412 ---- ------- -------- ------- -------- End of period........................................... $ 35 $ 138 $198,412 $ 95 $381,010 ==== ======= ======== ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest................ $ 1 $ 10 $ 63 $ -- $ 106 Notes issued for purchase of common stock............... -- 182 1,143 -- 328 Repurchase of common stock in exchange for stockholder notes................................................. -- 174 49 -- -- Stock issued for assets and services.................... -- -- 936 -- -- Value assigned to warrants.............................. -- -- 2,434 -- 86,176 Warrants exercised...................................... -- -- -- -- 150 Deferred compensation................................... -- -- 10,554 -- 12,650 Issuance of Series C preferred stock in lieu of debt repayment............................................. -- -- 500 -- -- Amortization of debt discount included in capitalized interest.............................................. -- -- 874 -- 591 Accrued preferred stock issuance costs.................. -- -- 5,940 -- --
The accompanying notes are an integral part of these consolidated financial statements. F-7 84 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) 1. NATURE OF BUSINESS: COLO.COM, formerly Colomotion, Inc., was incorporated on April 2, 1997, in the state of California. As of March 31, 2000, COLO.COM had two wholly owned subsidiaries. COLO.COM Limited, was incorporated in the United Kingdom on November 12, 1999. COLO.COM GmbH was incorporated in Germany on February 9, 2000. The Company, which includes COLO.COM, COLO.COM Limited and COLO.COM GmbH, is a rapidly growing provider of colocation facilities in which communications services companies can house their equipment and connect to network providers. The Company's target customers are Internet-based businesses, application service providers, Internet service providers, competitive local phone companies and other voice and data communications companies. The facilities, known as Neutral Optical Hubs, will offer target customers a capital-efficient means to rapidly deploy their networks and applications. As of December 31, 1999, the Company operated one such Neutral Optical Hub in which revenue was generated. As of March 31, 2000, the Company had four Neutral Optical Hubs in which revenue was generated. The Company intends to make its facilities available in many domestic and international locations. The facilities are planned to provide flexible access to multiple communications carriers, allowing customers the opportunity to select a network provider. The facilities will also have technologically advanced systems designed to provide uninterrupted electric power availability, temperature and humidity control, physical security and environmental safety, and on-site services provided by a staff of telecommunication and Internet-trained technicians. The Company is a start-up company in a new and rapidly evolving market. Its success, in part, depends on its ability to generate additional financing, grow its customer base, and manage its relations with the companies that provide connectivity to its Neutral Optical Hubs. The Company's success also depends on its ability to effectively manage growth, develop Neutral Optical Hubs worldwide, penetrate additional international markets, and profitably charge for its services. Additional risks include actual and potential competition from larger, existing service providers and carriers as well as new market entrants, changes in technology, evolving industry standards, development of an effective strategy to secure market acceptance for the Company's services, and retention of qualified personnel. The Company incurred a loss of $8,887,000 and $11,892,000 (unaudited) for the year ended December 31, 1999, and for the three months ended March 31, 2000, respectively, and had an accumulated deficit at March 31, 2000, of $22,410,000 (unaudited). The Company expects to make significant capital expenditures and to continue to incur significant losses in the foreseeable future. Management believes that the Company will be successful in obtaining adequate sources of cash to fund its anticipated operating losses, capital expenditures, and interest expense through the end of 2000 and to follow through with plans for growth and expansion. There can be no assurance that management will be successful in carrying out its plans. If the risks listed above cannot be managed in a timely manner, the Company's operations may be adversely affected. 2. SIGNIFICANT ACCOUNTING POLICIES: INTERIM FINANCIAL STATEMENTS The interim consolidated financial statements as of March 31, 2000, and for the three months ended March 31, 1999 and 2000, are unaudited, and certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. In the opinion of management, all adjustments (consisting only of F-8 85 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) normal recurring adjustments) necessary to fairly present the financial position, results of operations and cash flows with respect to the interim financial statements have been included. The results of operations for the interim periods are not indicative of the results for the entire fiscal year. UNAUDITED PROFORMA PRESENTATION The unaudited pro forma balance sheet and statement of stockholders' equity (deficit) as of March 31, 2000 reflects the automatic conversion of all outstanding shares of convertible preferred stock into 49,169,894 shares of common stock which will occur upon the closing of the Company's proposed initial public offering. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of COLO.COM and its subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial statements to conform to the current reporting. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. REVENUE RECOGNITION Through December 31, 1999, all revenue has been generated from the Company's first facility in San Francisco (Mission Street). In the first three months of 2000, revenue has been generated from four of the Company's Neutral Optical Hubs. The Company enters into contracts with its customers for services and use of cabinet and cage space at the Company's Neutral Optical Hubs. These contracts typically have terms between one and ten years, with varying renewal periods. The Company's revenue consists primarily of monthly payments for use of cabinet and cage space in the Company's Neutral Optical Hubs, payments for customer connections to communications carriers, and payments for installation and technical support services. Generally, the Company bills the customer at the beginning of the month for the subsequent month's rent. Any advance collections are deferred and recognized on a straight-line basis over the period in which service is provided. Revenue for services other than installation is recognized as the services are provided. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101 summarizes the SEC's view in applying generally accepted accounting principles to selected revenue recognition issues. As of January 1, 2000, the Company began to recognize installation revenue over the life of a customer F-9 86 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) contract. The cost associated with customer installation and other services is expensed as incurred. There is no material impact on prior years' statements. SIGNIFICANT CUSTOMERS The Company earned approximately 34 percent, 31 percent and 11 percent of its revenue from sales made to its three largest customers during the year ended December 31, 1998. The Company earned approximately 56 percent, 23 percent and 11 percent of its revenue from sales made to its three largest customers during the year ended December 31, 1999. The Company earned approximately 28 percent, 19 percent and 18 percent of its revenues compared to 61 percent, 18 percent and 5 percent of its revenues for sales made to its three largest customers during the three months ended March 31, 1999 and 2000, respectively (unaudited). DEFERRED RENT The Company has certain leases that contain fixed escalations of the minimum annual lease payments during the original term of the lease. The Company recognizes occupancy expense on a straight-line basis, recording the difference between the rental amount charged to expense and the amount payable under the lease as a deferred rent liability. Amounts are included in other noncurrent liabilities. CONCENTRATION OF CREDIT RISK Financial instruments that may potentially subject the Company to concentration of credit risk consist principally of cash, short term securities and accounts receivable. All cash is with financial institutions with strong credit ratings, which minimizes the risk of loss due to nonpayment. The Company has not experienced any losses due to credit impairment related to its financial instruments. The collection of accounts receivable is subject to the credit worthiness of the Company's customers. The Company has experienced minimal losses due to the write-off of uncollectible accounts. INCOME TAXES Upon incorporation, the Company's common stockholders elected to be taxed under the subchapter S corporation provisions of the Internal Revenue Code, whereby stockholders are personally liable for federal income taxes on their proportionate share of the Company's net income or loss. Effective June 26, 1998, with the issuance of Series A preferred stock, the Company became ineligible for S corporation status. As of June 26, 1998, the Company had an accumulated deficit of $567,000 incurred while an S corporation. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying the applicable statutory tax rate to the differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. F-10 87 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) SEGMENT REPORTING The Company has adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes annual and interim reporting standards for operating segments of a company. The statement requires disclosures of selected segment-related financial information about products, major customers, and geographic areas. The Company has one reportable segment because it is not organized by multiple segments for purposes of making operating decisions or assessing performance. The Company evaluates performance, makes operating decisions, and allocates resources based on financial data consistent with the presentation in the accompanying consolidated financial statements. As of December 31, 1998 and 1999 and March 31, 2000 (unaudited), substantially all operations and assets were based in the United States. CASH EQUIVALENTS For purposes of reporting cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. RESTRICTED CASH AND CASH EQUIVALENTS Restricted cash and cash equivalents represent funds set aside as collateral for letters of credit issued under building lease agreements. The balance consists of certificates of deposits with terms of 90 days or less. RESTRICTED INVESTMENTS Under the covenants of the offering of the senior notes, the Company is required to pledge securities equal to the amount of the first four interest payments. These securities, which consist of United States Treasury bills with maturities near the date of each interest payment, are held by a Trustee. It is the Company's intent to hold these investments until maturity. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated using the straight-line method over estimated useful lives, or related lease terms, if shorter, as follows:
CLASSIFICATIONS ESTIMATED USEFUL LIVES --------------- ---------------------- Computer and office furniture and equipment............................ 3 - 5 years Site equipment, furniture and fixtures............................. 5 years Leasehold improvements................. The lesser of estimated useful lives or term of lease
LONG-LIVED ASSETS The Company's policy is to record long-lived assets at cost, amortizing their costs over the expected useful life of the related assets. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," assets are F-11 88 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. CONSTRUCTION IN PROGRESS Construction in progress includes direct expenditures for the construction of Neutral Optical Hubs and is stated at cost. Capitalized construction costs include costs incurred under the construction contract, cabling, on-site construction management and rent, utilities, direct costs and interest during the construction phase. Once a Neutral Optical Hub has been constructed and is available for its intended use, capitalized costs are depreciated at an appropriate rate based on Company policy. Interest incurred during construction is capitalized in accordance with SFAS No. 34, "Capitalization of Interest Costs." Total interest capitalized to construction in progress during the year ended December 31, 1999, and the three months ended March 31, 1999 and 2000, was $930,000, $0 and $591,000 (unaudited), respectively. DEFERRED FINANCING COSTS During March 2000, the Company completed an offering of senior notes that raised approximately $290 million (unaudited), net of issuance costs. As of December 31, 1999, and March 31, 2000, costs of $144,000 and $9,680,000 (unaudited), respectively, have been incurred in connection with this offering. These costs are included in other noncurrent assets in the accompanying consolidated balance sheets. These costs are being amortized on a straight-line basis over the life of the notes beginning in March 2000. NET INCOME (LOSS) PER COMMON SHARE The Company computes net income (loss) per common share in accordance with SFAS No. 128, "Earnings Per Share," and SEC Staff Accounting Bulletin No. 98 (SAB No. 98). Under the provisions of SFAS No. 128 and SAB No. 98, basic net income (loss) per common share (Basic EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding excluding shares subject to repurchase. Diluted net income (loss) per common share (Diluted EPS) is computed by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents then outstanding. Diluted EPS for all periods presented does not include the impact of stock options, shares subject to repurchase, preferred stock, and warrants, as the effect of their inclusion would be antidilutive. PRO FORMA NET LOSS PER SHARE (UNAUDITED) The calculation of pro forma net loss per share assumes that all series of convertible shares have been converted into common stock as of the original issuance date. COST OF REVENUE Cost of revenue consists primarily of site-related employee salaries and benefits, rental payments on the Company's Neutral Optical Hubs, payments for equipment, connectivity charges, utilities, and other direct operating expenses. F-12 89 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) DEFERRED COMPENSATION AND STOCK EXCHANGED FOR SERVICES The Company has elected to follow Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of employee stock options is less than the fair market value of the underlying stock on the date of grant, compensation expense is recorded for the difference between fair market value and the exercise price. Expense associated with stock-based compensation is being amortized over the vesting period of the individual award consistent with the method described in Financial Accounting Standards Board (FASB) Interpretation No. 28. No stock compensation expense was recorded in 1998. The Company has recorded compensation expense of $1,248,000 and $2,258,000 (unaudited) for the year ended December 31, 1999, and for the three months ended March 31, 2000, respectively. All deferred compensation relate to selling, general and administrative expense. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The value of warrants, options or stock exchanged for services is expensed over the period benefited. To calculate the expense, the Company uses either the market value of the equity instrument or the value of the services, whichever is more objectively determinable. RECENTLY ISSUED ACCOUNTING STANDARDS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1), which provides guidance on the capitalization of the costs incurred for computer software developed or obtained for internal use. The Company adopted the new standard in 1999, although the impact on the 1999 financial statements was not significant. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-5 requires that all start-up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP 98-5 is adopted. Adoption of this statement in fiscal 1999 did not have an impact on the consolidated financial statements; all start-up costs have historically been expensed as incurred. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities," which establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Subsequently, in June 1999, the FASB issued SFAS No. 137, "Accounting for Derivatives and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133," which amended SFAS No. 133. The Company does not currently have any derivatives or hedges and does not expect the adoption of this standard to have a material effect on the Company's results of operations, financial position or cash flows. F-13 90 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) 3. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following at December 31, 1998 and 1999, and March 31, 2000 (in thousands):
DECEMBER 31, --------------- MARCH 31, 1998 1999 2000 ---- ------- ----------- (UNAUDITED) Computer and office furniture and equipment............ $ 15 $ 1,487 $ 3,159 Site equipment, furniture, and fixtures................ 24 24 4,275 Leasehold improvements................................. 163 146 6,476 Construction in progress............................... 305 11,635 35,676 ---- ------- ------- 507 13,292 49,586 Less: Accumulated depreciation......................... (12) (97) (553) ---- ------- ------- $495 $13,195 $49,033 ==== ======= =======
Depreciation and amortization expense for the period from inception (April 2, 1997) to December 31, 1997, for the years ended December 31, 1998 and 1999, and for the three months ended March 31, 1999 and 2000, was $2,000, $10,000, $139,000, $50,000 (unaudited) and $561,000 (unaudited), respectively. During 1997, the Company implemented SFAS No. 121, which requires an entity to assess the recoverability of the carrying amount of an asset if certain events or changes in circumstances occur. During 1999, management determined that the Company would relocate its San Francisco facility to a new site. Consequently, the Company determined that the leasehold improvements related to the current site were impaired and recognized a charge for impairment loss of $449,000, which is included in loss on lease and leasehold improvements in the accompanying consolidated statements of operations. ACQUISITION OF LEASE AND LEASEHOLD IMPROVEMENTS In September 1999, the Company entered into an agreement to acquire a colocation facility lease in Chicago and the related equipment and leasehold improvements, which were under construction. The facility was under construction and not yet producing revenue. A two-year noncompete agreement with the seller was also obtained. Further, the Company agreed to utilize an affiliate of the seller to construct five additional Neutral Optical Hubs and to pay the seller a fee for future customer referrals. The purchase price was $500,000 plus 100,000 shares of the Company's common stock, with 50,000 issued in September 1999 and 50,000 to be issued in increments in 2000 based upon the seller achieving certain milestones. If the milestones are not achieved by the seller, any unissued shares will be issued by the Company on September 1, 2000, for no additional consideration. A value of $250,000 was assigned to the common stock issued in September 1999 and the 50,000 shares that will ultimately be issued in 2000. The Company has assigned a value of $500,000 to the leasehold improvements in process and a $250,000 value to the noncompete covenant and other rights obtained under the agreement. The $500,000 and $250,000 are included in property and equipment, net, and deposits and other noncurrent assets, respectively, in the accompanying consolidated balance sheet. F-14 91 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) 4. ACCRUED LIABILITIES: Accrued liabilities consist of the following at December 31, 1998 and 1999, and March 31, 2000 (in thousands):
DECEMBER 31 ------------ MARCH 31, 1998 1999 2000 ---- ---- ----------- (UNAUDITED) Payroll and payroll related expenses...................... $ 20 $622 $ 820 Operating expenses and other.............................. 129 139 1,575 Interest payable.......................................... -- -- 2,428 ---- ---- ------ $149 $761 $4,823 ==== ==== ======
5. INCOME TAXES: The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company's primary temporary differences relate to items expensed for financial reporting purposes but not currently deductible for income tax purposes consisting primarily of accrued vacation, capitalized interest, stock-based compensation expense, deferred rent, and other reserves. As of December 31, 1999, the Company had a tax net operating loss (NOL) carryforward of approximately $8,157,000 for both federal and California state income tax purposes. The federal NOL begins to expire in 2018, and the California NOL begins to expire in 2005. A significant change in ownership of the Company may limit the Company's ability to use these NOL carryforwards. SFAS No. 109 requires that the tax benefit of such net operating loss be recorded as an asset. At December 31, 1999, the Company had gross deferred tax assets of approximately $3,432,000 related to the NOL, tax credits, and miscellaneous temporary differences. The Company has recorded a full valuation allowance of $3,432,000 at December 31, 1999, due to uncertainties surrounding the realizability of the deferred tax asset. 6. NOTES PAYABLE: In March 2000, the Company issued $300,000,000 of Senior Notes and 300,000 warrants to purchase 5,991,540 shares of the Company's Common Stock (the Senior Notes) at $.01 per share. The Senior Notes mature on March 15, 2010 and bear interest at 13 7/8% per annum. Interest on the Senior Notes will be payable semiannually on March 15 and September 15 of each year. Approximately $9,680,000 of costs were incurred in connection with this offering. These deferred financing costs are included in other non current assets in the accompanying consolidated balance sheets and are being amortized on a straight-line basis over the life of the notes beginning in March 2000. The Senior Notes indenture restricts, among other things, the Company's ability to incur additional debt and the use of proceeds of such additional debt, pay dividends or make certain other restricted payments, incur certain liens to secure debt or engage in certain merger transactions. In the event of a change of control as defined in the indenture agreement, each note-holder will have the right to require that the Company repurchase the notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest. The covenants of the Senior Notes require the Company F-15 92 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) to pledge investments equal to the first four interest payments due by the Company. These securities are included in restricted investments in the accompanying consolidated balance sheets. The warrants are exercisable any time on or after the earliest to occur of (a) 180 days after the closing date of the Company's initial public offering or (b) the first anniversary of the warrant issuance date. A value of $83,881,560 was assigned to these warrants. In October 1999, the Company entered into a loan agreement (the Comdisco Loan Agreement) with Comdisco, Inc. (Comdisco). The Comdisco Loan Agreement provides financing for up to $7 million for construction costs and equipment at the Company's Chicago, Illinois, and Emeryville, California, sites. The commitment for this financing terminates on August 31, 2000. Individual notes bear interest at a rate of 8.25 percent per annum and are repayable in 42 monthly installments plus a final payment of 15 percent of the original advance. The Comdisco Loan Agreement includes a prepayment option available after 12 months with a premium equal to 1 percent of the unpaid principal plus the present value of the final payment. Comdisco's security interest includes all tangible and intangible assets relating to the specific facilities funded by the lender. The agreement contains restrictive covenants including limitations on future acquisitions or the payment of dividends or stock purchases. As part of the Comdisco Loan Agreement, the Company granted Comdisco warrants to purchase 73,976 shares of the Company's Series C preferred stock at an exercise price of $7.57 per share. The warrants are exercisable from the date of grant and expire 10 years after this date. A value of $548,000 was assigned to these warrants. In November 1999, the Company borrowed $2.4 million under the Comdisco Loan Agreement. As of December 31, 1999, and March 31, 2000, $2.3 million and $2.2 million (unaudited), respectively, was outstanding. Comdisco is also a holder of Series C preferred stock. In November 1999, the Company entered into a loan agreement (the MMC Loan Agreement) with MMC/GATX Partnership (MMC) and other lenders (Others). The MMC Loan Agreement provides financing of up to $17 million for eligible construction costs and equipment at the Company's Los Angeles, California, and Vienna, Virginia, sites. The commitment for this financing terminates on December 31, 2001. Individual notes bear interest at a per annum rate equal to the sum of the applicable U.S. Treasury note yield to maturity plus 3.93 percent. These notes are repayable in 42 equal monthly installments plus a final payment of 10 percent of the original advance. MMC's security interest includes substantially all tangible and intangible assets relating to the specific facilities funded by the lenders. The MMC Loan Agreement includes a prepayment option declining from 10 percent to 2 percent of the unpaid principal over the loan period plus the present value of the final payment. The agreement contains restrictive covenants including limitations on future acquisitions or the payment of dividends or stock purchases. As part of the MMC Loan Agreement, the Company granted MMC and Others warrants to purchase 227,679 shares of the Company's Series C preferred stock at an exercise price of $6.44 per share. The warrants are exercisable from the date of grant and expire 10 years after this date. A value of $1.7 million was assigned to these warrants. In December 1999, the Company borrowed $1.3 million under the MMC Loan Agreement. As of December 31, 1999, and March 31, 2000, $1.3 million and $1.2 million (unaudited), respectively, was outstanding. In November 1999, the Company entered into a one-year Revolving Line of Credit Agreement (Revolver) with a bank. The Revolver provides credit of up to $2 million, including amounts outstanding under letters of credit. Advances bear interest at a rate equal to the prime rate plus 1.25 percent per annum. The borrowings are secured by substantially all personal property of the Company, including accounts receivable, deposit accounts, inventory, and intellectual property other than assets pledged to the Company's other lenders. The agreement contains restrictive covenants F-16 93 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) including limitations on future acquisitions or the payment of dividends or stock purchases. Additionally, the agreement contains covenants requiring certain minimum quarterly consolidated revenue amounts. As part of the Revolver, the Company entered into a stock purchase agreement giving the bank the right to purchase 24,845 shares of the Company's common stock at a price of $2.00 per share. A value of $150,000 was assigned to these stock purchase rights. In December 1999, the Company borrowed $2 million under the Revolver. In March 2000, the Revolver was paid in full and cancelled (unaudited). The value assigned to the above warrants or options was calculated using the Black-Scholes pricing model with the following assumptions: a risk-free weighted average interest rate of 6.0 percent, expected dividend yield of 0 percent, the expected lives of four to seven years from the date of the grant, and an expected volatility of 70 percent. This amount is accounted for as a discount on the related note and is being amortized as interest expense ratably over either the life of the commitment period of the credit facility or the life of the Senior Notes (10 to 120 months). In December 1999, the Company entered into a loan agreement (the Lighthouse Loan Agreement) with Lighthouse Capital Partners (Lighthouse). The Lighthouse Loan Agreement provides bridge financing of up to $6 million. Notes issued bear interest at a rate of 10 percent per annum and mature on January 31, 2000. The agreement contains covenants including limitations on future investments or loan agreements. As part of the Lighthouse Loan Agreement, the Company entered into a stock purchase agreement whereby Lighthouse purchased 91,429 shares of the Company's common stock at a price of $0.50 per share. In December 1999, the Company borrowed $4 million under the Lighthouse Loan Agreement. This note was repaid on December 30, 1999, with cash of $3.5 million and the issuance of 51,020 shares of Series C preferred stock at a value $9.80 per share. The differences between the fair value of the common stock used for accounting purposes and the purchase price of $0.50 was $686,000 and was accounted for as a discount on the related note and was fully amortized in 1999 upon the repayment of the note. Lighthouse is also a holder of Series C preferred stock. The unamortized portion of the value assigned to warrants issued in connection with the above notes payable agreements is recorded as a discount to the related note payable. F-17 94 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) As of December 31, 1999 and March 31, 2000 (unaudited), the payments due on long-term debt for the next five years and thereafter were as follows (in thousands):
DECEMBER 31, MARCH 31, YEAR ENDING 1999 2000 ----------- ------------ ---------- 2000................................................ $ 2,829 $ 676 2001................................................ 996 996 2002................................................ 1,103 1,103 2003................................................ 658 658 Thereafter.......................................... -- 300,000 ------- -------- Total notes payable............................... 5,586 303,433 Less: Discount related to warrants, net of amortization...................................... (2,246) (85,200) ------- -------- Total notes payable, net of discount.............. 3,340 218,233 Less: Current portion of notes payable, net of discount.......................................... (1,464) (478) ------- -------- Long term notes payable, net of discount.......... $ 1,876 $217,755 ======= ========
7. COMMITMENTS AND CONTINGENCIES: FACILITY OPERATING LEASES The Company is committed under long-term operating leases for various facilities expiring at various dates through 2014 with varying renewal options and escalating rent clauses. The Company generally pays for real estate taxes, insurance, and specified maintenance costs under real property leases. The minimum rental commitments under these lease agreements as of December 31, 1999, are as follows:
LEASED YEAR ENDING DECEMBER 31, FACILITIES ------------------------ -------------- (IN THOUSANDS) 2000........................................................ $ 6,686 2001........................................................ 7,420 2002........................................................ 7,570 2003........................................................ 7,703 2004........................................................ 7,476 Thereafter.................................................. 47,990 ------- $84,845 =======
Rent expense, net of amounts capitalized to construction in progress, for the period from inception (April 2, 1997) to December 31, 1997, and for the years ended December 31, 1998 and 1999 (excluding the expansion site abandoned in 1999), and for the three months ended March 31, 1999 and 2000, was approximately $26,000, $121,000, $338,000, $14,000 (unaudited) and $388,000 (unaudited), respectively. These amounts are included in operating expenses in the accompanying statements of operations. F-18 95 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) PURCHASE COMMITMENTS The Company has entered into certain capital expenditure commitments associated with construction of future facilities and equipment purchases. As of December 31, 1999, and March 31, 2000, purchase commitments were $42 million and $53 million (unaudited), respectively, excluding the commitments described in Note 8. CARRIER COMMITMENTS To attract carriers to connect to our facilities, the Company plans to place circuit orders with up to three carriers prior to completing construction of a facility. These orders generally require the Company to pay an installation fee and a minimum monthly charge for periods anticipated to be approximately one to three years. As of March 31, 2000, the Company had placed orders with multiple carriers to connect to six facilities. As of March 31, 2000, the Company had the following commitments associated with these contracts:
MARCH 31, 2000 -------------- (UNAUDITED) 2000........................................................ $ 910 2001........................................................ 1,468 2002........................................................ 1,407 2003........................................................ 610 ------ $4,395 ======
The table above excludes amounts payable under month to month carrier commitments. As customers connect to carriers, it is anticipated that the related monthly charges will be assigned to the customers, thereby reducing the Company's obligation. ABANDONED LEASES In 1998, the Company leased its original San Francisco facility and an adjacent expansion site under operating leases with original expiration dates in 1999 and 2007, respectively. In the first quarter of 1999, management determined that the original facility and the expansion site adjacent to the San Francisco facility would not be used, and thus it was anticipated that the lease would be terminated. On October 5, 1999, the Company entered into an agreement to terminate its expansion site lease whereby the Company paid the owner approximately $286,000 and forfeited its security deposit. Additionally, the Company wrote off rent that was prepaid through August and paid certain legal costs associated with terminating the lease. For the year ended December 31, 1999, the Company has recorded a $472,000 provision for loss associated with terminating the lease. This provision is included in loss on lease and leasehold improvements in the accompanying consolidated statements of operations. F-19 96 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) 8. TRANSACTIONS WITH PREFERRED STOCK INVESTORS: AGREEMENT WITH NEXTLINK In December 1999, the Company entered into a Definitive Agreement and Warrant (the NEXTLINK Agreement) with NEXTLINK Communications, Inc. (NEXTLINK). Among other items, the NEXTLINK Agreement specifies a minimum number of facilities the Company must open by December 31, 2001, and provides for the connection of NEXTLINK's network at up to 20 of the Company's Neutral Optical Hubs within two years. As part of the NEXTLINK Agreement, the Company granted NEXTLINK a warrant to purchase up to 300,000 shares of the Company's Series C preferred stock at an exercise price of $10.00 per share. The warrants are issued in increments of 30,000 for up to 10 facilities. The warrants become exercisable when specific performance measures in the first quarter of 2000 are achieved and expire five years from the warrant issuance. As of December 31, 1999, measurement dates had not yet occurred, and no warrants had been earned. In the first quarter of 2000, NEXTLINK met the performance measures of initiating connections into 10 facilities and earned the warrants to purchase 300,000 shares of the Company's Series C Preferred stock. The value associated with these warrants of $2,294,000 was included in cost of revenues in the three months ended March 31, 2000 (unaudited). This agreement also provides NEXTLINK with available space provisions at the Company's Neutral Optical Hubs and grants NEXTLINK certain rental rights. The terms of the agreement are for five years and provide NEXTLINK with two five-year renewal options. The value assigned to the above warrants was calculated using the Black-Scholes pricing model with the following assumptions: risk free interest rate of 6.6 percent, no expected dividend yield, expected life of four years from the grant date, and expected volatility of 70 percent. AGREEMENT WITH MASTEC AND SKANSKA In December 1999, the Company entered into a Project Management and Construction Services Agreement (the Construction Agreement) with Mastec North America, Inc. (Mastec) and Sordoni Skanska Construction Company (Skanska). The Construction Agreement provides for the construction of 22 Neutral Optical Hubs and the related project management at specified prices. Skanska will perform the construction work, and Mastec will provide project management services. Management estimates the Company's obligation under this agreement to be approximately $120 million, depending on the building specifications. Mastec and Skanska are holders of Series C preferred stock. AGREEMENT WITH NORTEL In December 1999, the Company entered into a Strategic Alliance Agreement with Nortel Networks, Inc. (Nortel). The agreement requires the Company to purchase Nortel equipment in an amount of no less than $5 million before December 31, 2001, and gives Nortel the right of first refusal on a percentage of space in future Neutral Optical Hubs. Contemporaneous with the execution of the Strategic Alliance Agreement, Nortel purchased Series C preferred stock. F-20 97 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) 9. STOCKHOLDERS' EQUITY: The Company's amended and restated articles of incorporation allow for the issuance of 81,000,000 shares of common stock, 5,250,000 shares of Series A preferred stock (Series A Stock), 24,500,000 shares of Series B preferred stock (Series B Stock), and 21,000,000 shares of Series C preferred stock (Series C Stock). COMMON STOCK The holders of common stock are entitled to one vote per share. Subject to preferences on outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends as may be declared by the Board of Directors. In the event of a liquidation, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock. Certain holders of common stock have entered into repurchase agreements allowing the Company the exclusive option to repurchase the unreleased shares as defined in the stock purchase agreement in the event of termination of the stockholder's employment with the Company. The repurchase option extends for 90 days after termination and grants the right to the Company to repurchase the shares at the original purchase price per share. The number of shares subject to repurchase is reduced over a four-year vesting period. The Company has the right to repurchase 88,889, 35,556 and 22,224 (unaudited) unreleased shares as of December 31, 1998 and 1999, and March 31, 2000, respectively, at the stock issuance price if the holders' service with the Company terminates. For the year ended December 31, 1999, the Company issued 9,785,368 shares of common stock as a result of the exercise of stock options and repurchased 981,829 shares (see Note 11). The Company has the right to repurchase 7,551,976 unvested shares as of December 31, 1999, at the stock issuance price if the holders' service with the Company terminates PREFERRED STOCK Significant rights and preferences attaching to the Series A Stock are as follows: DIVIDENDS -- The holders of Series A Stock are entitled, when and if declared by the Board of Directors, to receive noncumulative dividends out of the remaining assets of the Company after payment of liabilities, payable in preference and priority to any dividend to common stockholders, at the rate of $0.04 per share per annum. To date, no dividends have been declared by the Board of Directors. PREFERENCE IN LIQUIDATION -- In the event of any liquidation, dissolution, or winding up of the Company, the holders of Series A Stock are entitled to receive, prior and in preference to any distribution of any assets or surplus funds to the holders of common stock, an amount equal to $0.50 per share plus a further amount equal to any dividends declared but unpaid on such shares. VOTING RIGHTS -- The holders of Series A Stock are entitled to the number of votes equal to the number of shares of common stock into which each share of preferred stock is convertible on the record date for the vote. F-21 98 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) CONVERSION -- Each share of Series A Stock is convertible, at the option of the holder, into the number of fully paid and nonassessable shares of common stock on a one-for-one basis, subject to certain adjustments. All preferred stock will convert upon the closing of a public offering of the Company's common stock in which the public offering price equals or exceeds $15.00 per share and the aggregate proceeds raised equal or exceed $40 million. During 1998, the Company issued 231,000 shares of Series A Stock to individuals at no cost in exchange for services. The value of $116,000 was assigned to the stock and has been expensed as selling, general, and administrative expenses in the accompanying statements of operations. SERIES B PREFERRED STOCK In April 1999, the Company issued 24,500,000 shares of Series B Stock at $0.50 per share. The sale of Series B Stock raised $12,219,000, net of issuance costs. The Series B Stock has essentially the same rights and preferences as the Series A Stock. SERIES C PREFERRED STOCK In December 1999, the Company issued 20,408,164 shares of Series C Stock at $9.80 per share. The sale of Series C Stock raised $194,056,000, net of issuance costs. The Series C Stock has essentially the same rights and preferences as the Series A Stock, except that (1) dividends are payable at a rate of $0.784 per share per annum and (2) in the event of any liquidation, dissolution, or winding up of the Company, the holders of Series C Stock are entitled to receive, prior and in preference to any distribution of assets or surplus funds to the holders of Series A Stock, Series B Stock or common stock an amount equal to $9.80 per share plus a further amount equal to any dividends declared but unpaid on such shares. NOTES RECEIVABLE FROM STOCKHOLDERS The Company has implemented a program under which directors, officers, and a number of key employees are permitted to exercise their outstanding options as to both the vested and unvested shares. The Company has the right to repurchase any unvested shares at the original option price in the event of termination of employment prior to vesting of all shares. Under this program, the participants paid the exercise price for their outstanding options through a full-recourse promissory note. These notes bear interest at a rate of 6.2 percent per annum and are due and payable on the earlier of termination of employment or on various dates beginning in November 2003. As of December 31, 1998 and 1999, and March 31, 2000 (unaudited), there were one stockholder, fifteen stockholders and seventeen stockholders, respectively, with loans outstanding. Stockholder loans are classified as a contra account within stockholders' equity. 10. WARRANTS TO PURCHASE STOCK: In conjunction with the issuance of Series A Stock in March 1998, the Company issued warrants to purchase 545,500 shares of the Company's common stock at an exercise price of $0.05 per share to certain individuals involved in identifying Series A Stock investors. The purchase rights under the warrants expire in March 2002 unless terminated earlier in accordance with the stock warrant purchase agreement. F-22 99 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) See Notes 6 and 8 for a description of Series C Stock and common stock warrants issued to various lenders and a related party, respectively. Warrants outstanding have the following contractual lives (in years):
MARCH 31, 2000 DECEMBER 31, 1999 (UNAUDITED) ----------------------------------------- ------------------------------ NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE EXERCISE WARRANTS REMAINING WARRANTS REMAINING PRICE OUTSTANDING CONTRACTUAL LIFE OUTSTANDING CONTRACTUAL LIFE -------- ----------- ---------------- ----------- ---------------- Common stock................. $ 0.01 -- -- 5,991,540 10.0 Common stock................. 0.05 545,500 3.2 530,000 3.0 Common stock................. 2.00 24,845 * -- -- Series C Stock............... 7.57 73,976 9.8 73,976 9.5 Series C Stock............... 6.44 227,679 9.8 227,679 9.6 Series C Stock............... 10.00 300,000 5.0 300,000 4.7 --------- --------- Total...................... 1,172,000 7,123,195 ========= =========
- ------------------------- * This warrant had no stated expiration date and was exercised during the three months ended March 31, 2000. All of the warrants outstanding at December 31, 1999, are exercisable except the 300,000 Series C Stock warrants related to NEXTLINK (see Note 8). A holder of any of the warrants described above will not be entitled to any rights as a stockholder of the Company, including, without limitation, the right to vote the underlying shares of preferred stock until the holder has exercised the warrants. All of the warrants outstanding at March 31, 2000 are exercisable except the 5,991,541 common stock warrants related to the Senior Notes (unaudited). 11. STOCK OPTION PLAN: The Company's 1998 Stock Option Plan (the Plan) provides for the grant of incentive stock options and nonstatutory stock options to employees, directors, and consultants of the Company. The Plan also allows for the issuance of stock purchase rights and an option exchange program. As of December 31, 1999 and March 31, 2000 (unaudited), there were no stock purchase rights outstanding and no activity in the option exchange program. Stock options granted under the Plan generally vest over a four-year period, with 25 percent vesting after one year of the grant date and an additional one forty-eighth of the total number of shares becoming exercisable on each monthly anniversary thereafter. Options expire ten years after the grant date. The terms of the Plan allow certain individuals to exercise their options prior to full vesting. In the event that an individual's service to the Company terminates before his/her options become fully vested, the Company has the right to repurchase the unvested shares at the original option price. The maximum aggregate number of shares authorized for options under the Plan was 3,490,000 at December 31, 1998 and 14,047,839 at both December 31, 1999 and March 31, 2000 (unaudited). The Company accounts for stock options granted to employees and directors under APB Opinion No. 25. For the year ended December 31, 1998, no compensation expense was recognized. Stock-based compensation expense of $1,248,000, $0 (unaudited) and $2,258,000 (unaudited) was recognized for the year ended December 31, 1999, and for the three months ended March 31, 1999 and 2000, respectively. F-23 100 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) Options issued to consultants were valued using the Black-Scholes option pricing model consistent with SFAS No. 123. Expense is being recognized over the vesting period of the options. Had compensation cost for the stock options issued to employees and directors been determined consistently with SFAS No. 123, the Company's net loss and basic and diluted loss per share would have been changed to the following pro forma amounts:
YEARS ENDED THREE MONTHS ENDED PERIOD FROM INCEPTION DECEMBER 31, MARCH 31, (APRIL 2, 1997) TO ------------------ --------------------- DECEMBER 31, 1997 1998 1999 1999 2000 --------------------- ------- ------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Net loss: As reported............. $ (78) $(1,553) $(8,887) $(1,176) $(11,892) Pro forma............... (78) (1,554) (9,040) (1,182) (12,343) Basic and diluted net loss per common share: As reported............. $(0.03) $ (0.28) $ (1.86) (0.26) $ (1.49) Pro forma............... (0.03) (0.28) (1.89) (0.26) (1.55)
A summary of the status of the Company's stock option plan is as follows:
WEIGHTED RANGE OF AVERAGE EXERCISE EXERCISE OPTIONS PRICES PRICE ---------- ------------- -------- Outstanding at December 31, 1997............. -- $ -- $ -- Granted.................................... 2,472,500 0.03 - 0.055 0.05 Exercised.................................. -- -- -- Canceled................................... -- -- -- ---------- ------------- ----- Outstanding at December 31, 1998............. 2,472,500 0.03 - 0.055 0.05 Granted.................................... 9,735,072 0.05 - 2.00 0.21 Exercised.................................. (9,785,368) 0.03 - 1.00 0.13 Canceled................................... (963,854) 0.05 - 0.50 0.06 ---------- ------------- ----- Outstanding at December 31, 1999............. 1,458,350 0.05 - 2.00 0.54 Granted (unaudited)........................ 1,629,500 2.00 - 5.00 3.63 Exercised (unaudited)...................... (210,000) 0.05 - 2.00 1.57 Canceled (unaudited)....................... (17,300) 0.05 - 2.00 1.00 ---------- ------------- ----- Outstanding at March 31, 2000 (unaudited).... 2,860,550 $0.05 - 2.00 $2.22 ========== ============= =====
The weighted average fair value of options granted as of December 31, 1998 and 1999, and March 31, 2000, is $0.007, $1.190 and $8.42 (unaudited), respectively. Of the options outstanding at December 31, 1998 and 1999, and March 31, 2000, 850,000, 250,000 and 250,000 (unaudited), respectively, are vested. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998, F-24 101 COLO.COM AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED) 1999 and 2000: risk-free weighted-average interest rates of between 4.5 and 6.5 percent, expected dividend yield of 0 percent, expected life of between three and four years from the grant date, and expected volatility of 0 percent in 1998 and 70 percent in 1999 and 2000. Included in the options exercised above for the year ended December 31, 1999, was 981,829 of unvested options where the Company repurchased the stock upon the individuals' leaving the Company. The options outstanding have the following contractual lives:
DECEMBER 31, 1998 DECEMBER 31, 1999 MARCH 31, 2000 - ------------------------------------ ------------------------------------ --------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER OF REMAINING NUMBER OF REMAINING NUMBER OF REMAINING OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE CONTRACTUAL OUTSTANDING PRICE LIFE OUTSTANDING PRICE LIFE OUTSTANDING PRICE LIFE - ----------- -------- ----------- ----------- -------- ----------- ----------- ----------- ----------- (UNAUDITED) 150,000... 0.030 9.07 -- 0.030 N/A -- 0.030 -- 1,472,500.. 0.050 9.76 479,000 0.050 9.58 440,000 0.050 9.33 850,000... 0.055 9.79 250,000 0.055 8.71 250,000 0.055 8.48 - --........ 0.500 N/A 478,050 0.500 9.81 456,750 0.500 9.58 - --........ 2.000 N/A 251,300 2.000 9.96 827,600 2.000 9.80 - --........ 5.000 N/A -- 5.000 886,200 5.000 9.85 --------- --------- --------- 2,472,500.. 1,458,350 2,860,550 ========= ========= =========
12. 401(K) RETIREMENT PLAN: The Company established a 401(k) retirement plan in May 1999 for which all full-time employees are eligible after one month of employment. Pursuant to this plan, employees may elect to reduce their current compensation by up to the lesser of 15% of their annual compensation or the statutorily prescribed annual limit, and to have the amount of such reduction contributed to the plan. Company contributions to the plan are at the discretion of the Board of Directors, begin to vest upon completion of one year of employment, and become fully vested after five years of employment. As of both December 31, 1999 and March 31, 2000 (unaudited) the Company has not declared or paid any contributions to the plan. 13. SUBSEQUENT EVENTS: Subsequent to March 31, 2000, the Company has formed three new subsidiaries, COLOCOM Iberia, S.A. in Spain, COLO.COM Limited in Canada, COLO.COM B.V. in the Netherlands and COLO.COM, Inc. in Delaware. Each of these subsidiaries are wholly owned by the Company. In April 2000, the Company authorized 1,724,439 shares of Series D preferred stock. No shares have been issued. F-25 102 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 1 Risk Factors.......................... 5 Forward-Looking Statements............ 18 Use of Proceeds....................... 19 Dividend Policy....................... 19 Trademarks............................ 19 Capitalization........................ 20 Dilution.............................. 22 Selected Consolidated Financial Data................................ 23 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 25 Business.............................. 34 Management............................ 46 Related Party Transactions............ 58 Principal Stockholders................ 60 Description of Capital Stock.......... 63 Description of Indebtedness........... 67 Shares Eligible for Future Sale....... 69 Underwriting.......................... 71 Legal Matters......................... 73 Experts............................... 74 Available Information................. 74 Index to Consolidated Financial Statements.......................... F-1
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE IN THESE SECURITIES, 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. [COLO.COM LOGO] SHARES COMMON STOCK DEUTSCHE BANC ALEX. BROWN ROBERTSON STEPHENS BEAR, STEARNS & CO., INC. UBS WARBURG LLC PROSPECTUS , 2000 103 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all fees and expenses payable by COLO.COM in connection with the registration of the common stock hereunder. All of the amounts shown are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee.
AMOUNT TO BE PAID ---------- SEC Registration Fee........................................ $ 60,720 NASD Filing Fee............................................. 23,500 Nasdaq National Market Listing Fee.......................... 95,000 Printing and Engraving Expenses............................. 200,000 Legal Fees and Expenses..................................... 400,000 Accounting Fees and Expenses................................ 250,000 Transfer Agent and Registrar Fees and Expenses.............. 25,000 Blue Sky fees and expenses.................................. 10,000 Miscellaneous Expenses...................................... 185,780 ---------- Total..................................................... $1,250,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Prior to the closing of this offering, COLO.COM intends to reincorporate from California into Delaware. Section 145 of the Delaware General Corporation Law allows for the indemnification of officers, directors and any corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act. Our certificate of incorporation and our bylaws provide for indemnification of our directors, officers, employees and other agents to the extent and under the circumstances permitted by the Delaware General Corporation Law. We have also entered into agreements with our directors and executive officers that require COLO.COM, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors and executive officers to the fullest extent permitted by Delaware law. We have also purchased directors and officers liability insurance, which provides coverage against certain liabilities including liabilities under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (a) Within the last three years we have issued and sold the following unregistered securities: (1) Since our inception through May 31, 2000, we have issued and sold an aggregate of 24,768,434 shares of common stock at purchase prices ranging from $0.001 to $2.00 per share. (2) Since our inception through May 31, 2000, we have granted options to purchase 14,353,322 shares of common stock to employees, directors and consultants under our 1998 incentive stock option plan at exercise prices ranging from $0.03 to $5.00 per share. Of the 14,353,322 shares granted, 3,199,400 remain outstanding, 10,145,368 shares of common stock have been purchased pursuant to exercises of stock options and II-1 104 2,054,966 shares have been canceled and returned to the 1998 incentive stock option plan. (3) From June 1998 to April 1999, we sold 4,261,730 shares of Series A preferred stock at a price of $0.50 per share to approximately 47 investors. (4) In March 1999, we issued warrants to purchase an aggregate of 545,500 shares of common stock at an exercise price of $0.05 per share. (5) In October 1999, we issued a warrant to purchase 73,976 shares of Series C preferred stock at an exercise price of $7.57 per share. (6) In November 1999, we issued a warrant to purchase 24,845 shares of common stock at $2.00 per share and warrants to purchase 227,679 shares of Series C preferred stock at an exercise price of $6.44 per share. In June 2000, we cancelled warrants to purchase 10,000 shares of Series C preferred stock as partial consideration for the issuance of 10,000 shares of common stock. (7) In April 1999, we sold an aggregate of 24,500,000 shares of Series B preferred stock at a price of $0.50 per share to approximately 9 investors. (8) In December 1999, we sold an aggregate of 20,408,164 shares of Series C preferred stock at a price of $9.80 per share to approximately 70 investors and a warrant to purchase 300,000 shares of Series C preferred stock at an exercise price of $10.00 per share. (9) In March 2000, we issued 300,000 units consisting of $300,000,000 of 13 7/8% Senior Notes due 2010 and 300,000 warrants to purchase an aggregate of 5,991,540 shares of common stock at an exercise price of $0.01 per share. The sales and issuances of securities in the transactions described above were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act, Regulation D promulgated thereunder or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving any public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in such transactions. All recipients had adequate access, through their relationship with COLO.COM, to information about us. (b) There were no underwritten offerings employed in connection with any of the transactions set forth in Item 15(a). ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 1.1* Form of Underwriting Agreement 3.1(a)(1) Amended and Restated Articles of Incorporation, as currently in effect 3.1(b)* Certificate of Incorporation to be filed upon completion of the offering 3.2(a)(1) Bylaws of COLO.COM as currently in effect 3.2(b)* Bylaws of COLO.COM as in effect upon completion of the offering 4.1* Specimen Common Stock Certificate 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
II-2 105
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.1(1) Amended and Restated Investors Rights Agreement dated December 17, 1999 10.2 1998 Incentive Stock Option Plan and forms of agreements thereunder 10.3* 2000 Stock Plan 10.4* 2000 Employee Stock Purchase Plan 10.5* Form of Director and Executive Officer Indemnification Agreement 10.6(1) Senior Notes Indenture by COLO.COM as Issuer and State Street Bank and Trust Company, N.A. as Trustee, dated March 10, 2000 10.7 Warrants Registration Rights Agreement between COLO.COM and State Street Bank and Trust Company, N.A. (as warrant agent), dated March 10, 2000 10.8(1) Registration Rights Agreement dated March 10, 2000 between COLO.COM and Goldman Sachs & Co., Bear Stearns & Co. Inc., Chase Securities Inc., Deutsche Bank Securities Inc., Warburg Dillon Read LLC and Jeffries & Company Inc. 10.9(1) Office Lease by and between COLO.COM and Hitachi America, LTD, dated December 1999 10.10(1) Office Building Net Lease by and between COLO.COM and BEP- Emeryville, LP, dated July 16, 1999 10.11 Office Lease by and between COLO.COM and Hitachi America, Ltd. dated May 18, 1999. 10.12(1) Strategic Alliance Agreement by and between COLO.COM and Nortel Networks Inc., dated December 23, 1999 10.13(1) Definitive Agreement by and between COLO.COM and NextLINK Communications, Inc., dated December 23, 1999 10.14(1) Employment Agreement by and between COLO.COM and Charles Skibo, with Addendum, dated January 25, 1999 10.15(1) Loan and Security Agreement by and between COLO.COM and Comdisco, Inc., dated October 22, 1999 10.16(1) Loan and Security Agreement by and among COLO.COM and Silicon Valley Bank, Venture Lending and Leasing II, Inc., Transamerica Business Credit Corporation and Lighthouse Capital Partners, dated November 9, 1999 10.17(1) Retail Lease between Telehub, Inc. and Mauswerks, Inc., dated November 7, 1996 and related assignment by Mauswerks, Inc. to COLO.COM dated July 8, 1997 10.18* Warrant Agreement to Purchase Shares of Series C Preferred Stock of COLO.COM issued to NEXTLINK Communications, Inc. dated December 27, 1999. 10.19 Employment Offer Letter to Wayne A. Olson dated March 11, 1999. 10.20* Employment Offer Letter to Stephen I. Robertson dated February 18th, 2000. 10.21 Form of Warrant to Purchase Shares of Common Stock 10.22 Form of Warrant to Purchase Series C Preferred Stock 10.23 Warrant Agreement to Purchase Shares of the Series C Preferred Stock of COLO.COM issued to Comdisco, Inc. dated October 22, 1999 10.24* Warrant Agreement between COLO.COM and State Street Bank and Trust Company, N.A. dated March 10, 2000 21.1 List of Subsidiaries 23.1 Consent of Arthur Andersen LLP, Independent Auditors
II-3 106
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 23.2* Consent of Counsel (included in exhibit 5.1) 24.1 Power of Attorney (included on page II-5)
- ------------------------- * To be filed by amendment (1) Incorporated by reference from exhibits to COLO.COM's registration statement on Form S-4 (No. 333-38906). (b) FINANCIAL STATEMENT SCHEDULES All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS Insofar as indemnification by COLO.COM for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of COLO.COM, 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 COLO.COM of expenses incurred or paid by a director, officer or controlling person of COLO.COM in the successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, 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 whether such indemnification by COLO.COM is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. We hereby undertake that: (a) We will provide to the underwriters at the closing as 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. (b) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by COLO.COM pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (c) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 107 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, COLO.COM has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Brisbane, State of California, on the 21st day of July, 2000. COLO.COM By: /s/ CHARLES M. SKIBO --------------------------------------- Charles M. Skibo Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles M. Skibo and Stephen I. Robertson and each of them, his attorneys-in-fact, each with the 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 in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every Act and thing 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 such attorneys-in-fact and agents or any of them, 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 on Form S-1 has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ CHARLES M. SKIBO Chief Executive Officer and July 21, 2000 - --------------------------------------------- Chairman of the Board Charles M. Skibo (Principal Executive Officer) /s/ STEPHEN I. ROBERTSON Chief Financial Officer (Principal July 21, 2000 - --------------------------------------------- Financial and Accounting Officer) Stephen I. Robertson /s/ CHRISTOPHER E. CLOUSER Director July 21, 2000 - --------------------------------------------- Christopher E. Clouser /s/ YOUNG SOO HA Director July 21, 2000 - --------------------------------------------- Young Soo Ha
II-5 108
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN W. JARVE Director July 21, 2000 - --------------------------------------------- John W. Jarve /s/ RICHARD P. NESPOLA Director July 21, 2000 - --------------------------------------------- Richard P. Nespola /s/ ARTHUR PATTERSON Director July 21, 2000 - --------------------------------------------- Arthur Patterson /s/ KIRBY G. PICKLE, JR. Director July 21, 2000 - --------------------------------------------- Kirby G. Pickle, Jr.
II-6 109 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 1.1* Form of Underwriting Agreement 3.1(a)(1) Amended and Restated Articles of Incorporation, as currently in effect 3.1(b)* Certificate of Incorporation to be filed upon completion of the offering 3.2(a)(1) Bylaws of COLO.COM as currently in effect 3.2(b)* Bylaws of COLO.COM as in effect upon completion of the offering 4.1* Specimen Common Stock Certificate 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 10.1(1) Amended and Restated Investors Rights Agreement dated December 17, 1999 10.2 1998 Incentive Stock Option Plan and forms of agreements thereunder 10.3* 2000 Stock Plan 10.4* 2000 Employee Stock Purchase Plan 10.5* Form of Director and Executive Officer Indemnification Agreement 10.6(1) Senior Notes Indenture by COLO.COM as Issuer and State Street Bank and Trust Company, N.A. as Trustee, dated March 10, 2000 10.7 Warrants Registration Rights Agreement between COLO.COM and State Street Bank and Trust Company, N.A. (as warrant agent), dated March 10, 2000 10.8(1) Registration Rights Agreement dated March 10, 2000 between COLO.COM and Goldman Sachs & Co., Bear Stearns & Co. Inc., Chase Securities Inc., Deutsche Bank Securities Inc., Warburg Dillon Read LLC and Jeffries & Company Inc. 10.9(1) Office Lease by and between COLO.COM and Hitachi America, LTD, dated December 1999 10.10(1) Office Building Net Lease by and between COLO.COM and BEP- Emeryville, LP, dated July 16, 1999 10.11 Office Lease by and between COLO.COM and Hitachi America, Ltd. dated May 18, 1999. 10.12(1) Strategic Alliance Agreement by and between COLO.COM and Nortel Networks Inc., dated December 23, 1999 10.13(1) Definitive Agreement by and between COLO.COM and NextLINK Communications, Inc., dated December 23, 1999 10.14(1) Employment Agreement by and between COLO.COM and Charles Skibo, with Addendum, dated January 25, 1999 10.15(1) Loan and Security Agreement by and between COLO.COM and Comdisco, Inc., dated October 22, 1999 10.16(1) Loan and Security Agreement by and among COLO.COM and Silicon Valley Bank, Venture Lending and Leasing II, Inc., Transamerica Business Credit Corporation and Lighthouse Capital Partners, dated November 9, 1999
110
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.17(1) Retail Lease between Telehub, Inc. and Mauswerks, Inc., dated November 7, 1996 and related assignment by Mauswerks, Inc. to COLO.COM dated July 8, 1997 10.18* Warrant Agreement to Purchase Shares of Series C Preferred Stock of COLO.COM issued to NEXTLINK Communications, Inc. dated December 27, 1999. 10.19 Employment Offer Letter to Wayne A. Olson dated March 11, 1999. 10.20* Employment Offer Letter to Stephen I. Robertson dated February 18, 2000. 10.21 Form of Warrant to Purchase Shares of Common Stock 10.22 Form of Warrant to Purchase Series C Preferred Stock 10.23 Warrant Agreement to Purchase Shares of the Series C Preferred Stock of COLO.COM issued to Comdisco, Inc. dated October 22, 1999 10.24* Warrant Agreement between COLO.COM and State Street Bank and Trust Company of California, N.A. dated March 10, 2000 21.1 List of Subsidiaries 23.1 Consent of Arthur Andersen LLP, Independent Auditors 23.2* Consent of Counsel (included in exhibit 5.1) 24.1 Power of Attorney (included on page II-5)
- ------------------------- * To be filed by amendment (1) Incorporated by reference from exhibits to COLO.COM's registration statement on Form S-4 (No. 333-38906). EX-10.2 2 ex10-2.txt 1998 INCENTIVE STOCK OPTION PLAN 1 EXHIBIT 10.2 COLO.COM 1998 INCENTIVE STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 hereof. (f) "Common Stock" means the Common Stock of the Company. (g) "Company" means COLO.COM, a California corporation. (h) "Consultant" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity. (i) "Director" means a member of the Board of Directors of the Company. (j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If re-employment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive -1- 2 Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (o) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (p) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (q) "Option" means a stock option granted pursuant to the Plan. (r) "Option Agreement" means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (s) "Option Exchange Program" means a program whereby outstanding Options are exchanged for Options with a lower exercise price. (t) "Optioned Stock" means the Common Stock subject to an Option or a Stock Purchase Right. (u) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. -2- 3 (v) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (w) "Plan" means this 1998 Incentive Stock Option Plan. (x) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below. (y) "Section 16(b)" means Section 16(b) of the Securities Exchange Act of 1934, as amended. (z) "Service Provider" means an Employee, Director or Consultant. (aa) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 below. (bb) "Stock Purchase Right" means a right to purchase Common Stock pursuant to Section 11 below. (cc) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be subject to option and sold under the Plan is 10,467,396 Shares. The Shares may be authorized but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of either an Option or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Administrator. The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may from time to time be granted hereunder; -3- 4 (iii) to determine the number of Shares to be covered by each such award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(e) instead of Common Stock; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option has declined since the date the Option was granted; (viii) to initiate an Option Exchange Program; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and (xi) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan. (c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees. 5. Eligibility. (a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. (b) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. -4- 5 For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (c) Neither the Plan nor any Option or Stock Purchase Right shall confer upon any Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate such relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan. 7. Term of Option. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 8. Option Exercise Price and Consideration. (a) The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option (A) granted to a Service Provider who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Service Provider, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. -5- 6 (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Except in the case of Options granted to Officers, Directors and Consultants, Options shall become exercisable at a rate of no less than 20% per year over five (5) years from the date the Options are granted. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least thirty (30) days) to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option -6- 7 within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent that the Option is vested on the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to the entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. Non-Transferability of Options and Stock Purchase Rights. The Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer. The terms of the offer shall comply in all respects with Section 260.140.42 of Title 10 of the California Code of Regulations. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or -7- 8 disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine. Except with respect to Shares purchased by Officers, Directors and Consultants, the repurchase option shall in no case lapse at a rate of less than 20% per year over five (5) years from the date of purchase. (c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a shareholder and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan. 12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option or Stock Purchase Right until fifteen (15) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option or Stock Purchase Right would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock -8- 9 Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 13. Time of Granting Options and Stock Purchase Rights. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Service Provider to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Board shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 15. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. -9- 10 (b) Investment Representations. As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. Reservation of Shares. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws. 19. Information to Optionees and Purchasers. The Company shall provide to each Optionee and to each individual who acquires Shares pursuant to the Plan, not less frequently than annually during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and, in the case of an individual who acquires Shares pursuant to the Plan, during the period such individual owns such Shares, copies of annual financial statements. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information. -10- 11 COLO.COM 1998 INCENTIVE STOCK OPTION PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT Optionee Name and Address - ------------------------------- - ------------------------------- The undersigned Optionee has been granted an Option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Date of Grant: (Grant Date) Vesting Commencement Date: (Vest Commence Date) Exercise Price per Share: ($Ex. Price/Share) Total Number of Shares Granted: (Total Shares) Total Exercise Price: ($0.00) Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: (Expiration Date) Vesting Schedule: This Option shall be exercisable, in whole or in part, according to the following vesting schedule: [Twenty-five percent (25%) of the total number of Shares subject to the Option shall vest on the date twelve months following the Vesting Commencement Date and an additional 1/48 of the total number of Shares subject to the Option shall vest on each monthly anniversary date thereafter, subject to Optionee's continued status as a Service Provider on such dates.] Termination Period: This Option shall be exercisable for three months after Optionee ceases to be a Service Provider. Upon Optionee's death or Disability, this Option may be exercised for one year after Optionee ceases to be a Service Provider. In no event may Optionee exercise this Option after the Term/Expiration Date as provided above. -1- 12 II. AGREEMENT 1. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant (the "Optionee"), an option (the "Option") to purchase the number of Shares set forth in the Notice of Grant, at the exercise price per Share set forth in the Notice of Grant (the "Exercise Price"), and subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. (a) Right to Exercise. This Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and with the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the "Exercise Notice") which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise complies with Applicable laws. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 3. Optionee's Representations. In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, the Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B. 4. Lock-Up Period. Optionee hereby agrees that, if so requested by the Company or any representative of the underwriters (the "Managing Underwriter") in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the "Market Standoff Period") following the effective date of a registration statement of the Company filed under the Securities Act. Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. -2- 13 5. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash or check; (b) consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or (c) surrender of other Shares which, (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 6. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any Applicable Law. 7. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 8. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 9. Tax Consequences. Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercise of ISO. If this Option qualifies as an ISO, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. (b) Exercise of Nonstatutory Stock Option. There may be a regular federal income tax liability upon the exercise of a Nonstatutory Stock Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (c) Disposition of Shares. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax -3- 14 purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and of at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes. If Shares purchased under an ISO are disposed of within one year after exercise or two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (1) the Fair Market Value of the Shares on the date of exercise, or (2) the sale price of the Shares. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (d) Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (1) the date two years after the Date of Grant, or (2) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee. 10. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws but not the choice of law rules of California. 11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. -4- 15 Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: COLO.COM By: - ------------------------------- --------------------------- Signature Signature - ------------------------------- --------------------------- Print Name Title RESIDENCE ADDRESS: - ------------------------------- - ------------------------------- -5- 16 EXHIBIT A 1998 INCENTIVE STOCK OPTION PLAN EXERCISE NOTICE COLO.COM 2000 Sierra Point Parkway Suite 601 Brisbane, CA 94005-1819 Attention: Chief Financial Officer 1. Exercise of Option. Effective as of today, ___________, 20__, the undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase _________ shares of the Common Stock (the "Shares") of COLO.COM (the "Company") under and pursuant to the 1998 Incentive Sock Option Plan (the "Plan") and the Stock Option Agreement dated ________, 20 (the "Option Agreement"). 2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price of the Shares, as set forth in the Option Agreement. 3. Representations of Optionee. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until the issuance of the Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares shall be issued to the Optionee as soon as practicable after the Option is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date of issuance except as provided in Section 12 of the Plan. 5. Company's Right of First Refusal. Before any Shares held by Optionee or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). (a) Notice of Proposed Transfer. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). (b) Exercise of Right of First Refusal. At any time within thirty (30) days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase 17 all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below. (c) Purchase Price. The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. (d) Payment. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. (e) Holder's Right to Transfer. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the date of the Notice, that any such sale or other transfer is effected in accordance with any applicable securities laws and that the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. (f) Exception for Certain Family Transfers. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Optionee's lifetime or on the Optionee's death by will or intestacy to the Optionee's immediate family or a trust for the benefit of the Optionee's immediate family shall be exempt from the provisions of this Section. "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section. (g) Termination of Right of First Refusal. The Right of First Refusal shall terminate as to any Shares upon the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended. 6. Tax Consultation. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 7. Restrictive Legends and Stop-Transfer Orders. -2- 18 (a) Legends. Optionee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES. (b) Stop-Transfer Notices. Optionee agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. (c) Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 8. Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns. 9. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or by the Company forthwith to the Administrator which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Administrator shall be final and binding on all parties. 10. Governing Law; Severability. This Agreement is governed by the internal substantive laws but not the choice of law rules, of California. -3- 19 11. Entire Agreement. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan, the Option Agreement and the Investment Representation Statement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. Submitted by: Accepted by: OPTIONEE: COLO.COM By: - ------------------------------- --------------------------- Signature Signature - ------------------------------- --------------------------- Print Name Title RESIDENCE ADDRESS: ADDRESS: - ------------------------------- --------------------------- - ------------------------------- --------------------------- --------------------------- Date Received -4- 20 EXHIBIT B INVESTMENT REPRESENTATION STATEMENT OPTIONEE: COMPANY: COLO.COM SECURITY: COMMON STOCK AMOUNT: DATE: In connection with the purchase of the above-listed Securities, the undersigned Optionee represents to the Company the following: (a) Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Optionee is acquiring these Securities for investment for Optionee's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). (b) Optionee acknowledges and understands that the Securities constitute "restricted securities" under the Securities Act and 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 Optionee's investment intent as expressed herein. In this connection, Optionee understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Optionee'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. Optionee further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the Securities. Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company, a legend prohibiting their transfer without the consent of the Commissioner of Corporations of the State of California and any other legend required under applicable state securities laws. (c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the -1- 21 Optionee, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale 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); and, in the case of an affiliate, (2) the availability of certain public information about the Company, (3) the amount of Securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable. In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than one year after the later of the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than two years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above. (d) Optionee further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Optionee understands that no assurances can be given that any such other registration exemption will be available in such event. Signature of Optionee: ------------------------------- Date: , ------------------------ ---- -2- 22 EXHIBIT C-1 COLO.COM 1998 INCENTIVE STOCK OPTION PLAN RESTRICTED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made between (the "Purchaser") and COLO.com (the "Company") as of ______________, 19__. RECITALS A. Pursuant to the exercise of the stock option granted to Purchaser under the Company's 1998 Incentive Stock Option Plan (the "Plan") and pursuant to the Stock Option Agreement (the "Option Agreement") dated ______________, 19__ by and between the Company and Purchaser with respect to such grant, which Plan and Option Agreement are hereby incorporated by reference, Purchaser has elected to purchase __________ shares of Common Stock of the Company (the "Shares"), __________ of which Shares remain unvested as of the date hereof in accordance with the vesting schedule set forth in the Option Agreement. B. As required by the Option Agreement, as a condition to Purchaser's election to exercise the option, Purchaser must execute this Restricted Stock Purchase Agreement, which sets forth the rights and obligations of the parties with respect to Shares acquired upon exercise of the Option. 1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase an aggregate of __________ shares of the Company's Common Stock (the "Shares"), at the price of $__________ per share for an aggregate purchase price of $__________. 2. Payment or Purchase Price. The Purchase price for the Shares may be paid by delivery to the Company at the time this Agreement of (i) a check or, (ii) a check and an executed promissory note in form satisfactory to the Company and (iii) an executed security agreement under which the promissory note is secured by the Shares, in form satisfactory to the Company. 23 3. Repurchase Option. (a) If Purchaser's status as a Service Provider is terminated for any reason, including for cause, death, and disability, the Company shall have the right and option to purchase from Purchaser, or Purchaser's personal representative, as the case may be, all of the Purchaser's Shares as of the date of such termination at the price paid by the Purchaser for such Shares (the "Repurchase Option"). (b) Upon the occurrence of a termination, the Company may exercise its Repurchase Option by delivering personally or by registered mail, to Purchaser (or his transferee or legal representative, as the case may be), within ninety (90) days of the termination, a notice in writing indicating the Company's intention to exercise the Repurchase Option and setting forth a date for closing not later than thirty (30) days from the mailing of such notice. The closing shall take place at the Company's office. At the closing, the holder of the certificates for the Shares being transferred shall deliver the stock certificate or certificates evidencing the Shares, and the Company shall deliver the purchase price therefor. (c) At its option, the Company may elect to make payment for the Shares to a bank selected by the Company. The Company shall avail itself of this option by a notice in writing to Purchaser stating the name and address of the bank, date of closing, and waiving the closing at the Company's office. (d) If the Company does not elect to exercise the Repurchase Option conferred above by giving the requisite notice within ninety (90) days following the termination, the Repurchase Option shall terminate. (e) The Repurchase Option shall terminate in accordance with the Exercise and Vesting Schedule in Purchaser's Option Agreement such that the Repurchase Option shall not apply on a given date to any vested Shares on such date. 4. Transferability of the Shares; Escrow. (a) Purchaser hereby authorizes and directs the secretary of the Company, or such other person designated by the Company, to transfer the Shares as to which the Repurchase Option has been exercised from Purchaser to the Company. (b) To insure the availability for delivery of Purchaser's Shares upon repurchase by the Company pursuant to the Repurchase Option under Section 3, Purchaser hereby appoints the secretary, or any other person designated by the Company as escrow agent, as its attorney-in-fact to sell, assign and transfer unto the Company, such Shares, if any, repurchased by the Company pursuant to the Repurchase Option and shall, upon execution of this Agreement, deliver and deposit with the secretary of the Company, or such other person designated by the Company, the share - 2 - 24 certificates representing the Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit C-2. The Shares and stock assignment shall be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of the Company and Purchaser attached as Exhibit C-3 hereto, until the Company exercises its purchase right as provided in Section 3, until such Shares are vested, or until such time as this Agreement no longer is in effect. As a further condition to the Company's obligations under this Agreement, the spouse of the Purchaser, if any, shall execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit C-4. Upon vesting of all of the Shares, the escrow agent shall promptly deliver to the Purchaser the certificate or certificates representing such Shares in the escrow agent's possession belonging to the Purchaser, and the escrow agent shall be discharged of all further obligations hereunder; provided, however, that the escrow agent shall nevertheless retain such certificate or certificates as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. (c) The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Shares in escrow and while acting in good faith and in the exercise of its judgment. (d) Transfer or sale of the Shares is subject to restrictions on transfer imposed by any applicable state and federal securities laws. Any transferee shall hold such Shares subject to all the provisions hereof and the Exercise Notice executed by the Purchaser with respect to any Shares purchased by Purchaser and shall acknowledge the same by signing a copy of this Agreement. 5. Ownership, Voting Rights, Duties. This Agreement shall not affect in any way the ownership, voting rights or other rights or duties of Purchaser, except as specifically provided herein. 6. Legends. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legend (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 7. Adjustment for Stock Split. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 8. Notices. Notices required hereunder shall be given in person or by registered mail to the address of Purchaser shown on the records of the Company, and to the Company at their respective principal executive offices. - 3 - 25 9. Survival of Terms. This Agreement shall apply to and bind Purchaser and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors. 10. Section 83(b) Election. Purchaser hereby acknowledges that he or she has been informed that, with respect to the exercise of an Option for unvested Shares, an election may be filed by the Purchaser with the Internal Revenue Service, within 30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase. In the case of a Nonstatutory Stock Option, this will result in a recognition of taxable income to the Purchaser on the date of exercise, measured by the excess, if any, of the fair market value of the Shares, at the time the Option is exercised over the purchase price for the Shares. Absent such an election, taxable income will be measured and recognized by Purchaser at the time or times on which the Company's Repurchase Option lapses. In the case of an Incentive Stock Option, such an election will result in a recognition of income to the Purchaser for alternative minimum tax purposes on the date of exercise, measured by the excess, if any, of the fair market value of the Shares, at the time the option is exercised, over the purchase price for the Shares. Absent such an election, alternative minimum taxable income will be measured and recognized by Purchaser at the time or times on which the Company's Repurchase Option lapses. Purchaser is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) of the Code. A form of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference. PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER'S BEHALF. PURCHASER FURTHER ACKNOWLEDGES THAT PURCHASER HAS RECEIVED A FORM OF ELECTION UNDER SECTION 83(b) AND A FORM OF COVER LETTER TO ACCOMPANY SUCH ELECTION AS EXHIBITS TO THIS AGREEMENT. 11. Representations. Purchaser has reviewed with his own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Purchaser understands that he (and not the Company) shall be responsible for his own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. 12. Governing Law. This Agreement shall be governed by the internal substantive laws, but not the choice of law rules, of California. - 4 - 26 Purchaser represents that he has read this Agreement and is familiar with its terms and provisions. Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Agreement. IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth above. "COMPANY" COLO.COM ------------------------------------ By ------------------------------------ Title "PURCHASER" ------------------------------------ Signature ------------------------------------ Printed Name ------------------------------------ Soc. Sec. No. Address: ------------------------------------ ------------------------------------ - 5 - 27 EXHIBIT C-2 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, __________________________, hereby sell, assign and transfer unto COLO.com (__________) shares of the Common Stock of COLO.com standing in my name of the books of said corporation represented by Certificate No. ________ herewith and do hereby irrevocably constitute and appoint to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Purchase Agreement of COLO.com and the undersigned dated ______________, 19__. Date: _______________ Signature: _________________________ INSTRUCTIONS TO PURCHASER: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise its "repurchase option," as set forth in the Agreement, without requiring additional signatures on the part of the Purchaser. 28 EXHIBIT C-3 JOINT ESCROW INSTRUCTIONS __________________, 19__ COLO.com Attn: Stock Plan Administration 2000 Sierra Point Parkway, Suite 601 Brisbane, CA 94005 Dear Secretary: As Escrow Agent for both COLO.com (the "Company"), and the undersigned purchaser of Common Stock of the Company (the "Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement ("Agreement") between the Company and the undersigned, in accordance with the following instructions: 1. In the event the Company and/or any assignee of the Company (referred to collectively for convenience herein as the "Company") exercises the Company's repurchase option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company or its assignee, against the simultaneous delivery to you of the purchase price (by cash, a check, or some combination thereof) for the number of shares of stock being purchased pursuant to the exercise of the Company's repurchase option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as Purchaser's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. 29 Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a stockholder of the Company while the stock is held by you. 4. Upon written request of the Purchaser, but no more than once per calendar year, unless the Company's repurchase option has been exercised, you will deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Company's repurchase option. Within 120 days after cessation of Purchaser's continuous employment by or services to the Company, or any parent or subsidiary of the Company, you will deliver to Purchaser a certificate or certificates representing the aggregate number of shares held or issued pursuant to the Agreement and not purchased by the Company or its assignees pursuant to exercise of the Company's repurchase option. 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of the same to Purchaser and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the Statute of Limitations with respect to these Joint Escrow Instructions or any documents deposited with you. - 2 - 30 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: COLO.com 2000 Sierra Point Parkway Suite 601 Brisbane, CA 94005 Attention: Stock Plan Administration PURCHASER: ----------------------------------- ----------------------------------- ----------------------------------- - 3 - 31 ESCROW AGENT: COLO.com 2000 Sierra Point Parkway Suite 601 Brisbane, CA 94005 Attention: Secretary 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. 18. These Joint Escrow Instructions shall be governed by the internal substantive laws, but not the choice of law rules, of California. COLO.COM ------------------------------------ By ------------------------------------ Title PURCHASER ------------------------------------ Signature ------------------------------------ Typed or Printed Name ESCROW AGENT ------------------------------------ Secretary - 4 - 32 EXHIBIT C-4 CONSENT OF SPOUSE I, ____________________, spouse of ___________________, have read and approve the foregoing Restricted Stock Purchase Agreement. In consideration of granting of the right to my spouse to purchase shares of COLO.com, as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: _______________, 199__ - ----------------------------------- Signature 33 EXHIBIT C-5 ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b) of the Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income or alternative minimum taxable income, as the case may be, for the current taxable year the amount of any compensation taxable to taxpayer in connection with taxpayer's receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME: TAXPAYER:________________________SPOUSE:_______________________ ADDRESS:________________________________________________________________ IDENTIFICATION NO.: TAXPAYER:____________SPOUSE:_______________________ TAXABLE YEAR: 1999 2. The property with respect to which the election is made is described as follows: shares (the "Shares") of the Common Stock of COLO.com (the "Company"). 3. The date on which the property was transferred is:____________, 19 ____. 4. The property is subject to the following restrictions: The Shares may not be transferred and are subject to forfeiture under the terms of an agreement between the taxpayer and the Company. These restrictions lapse upon the satisfaction of certain conditions contained in such agreement. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $_______________. 6. The amount (if any) paid for such property is: $_______________. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. Dated: ___________________, 19__ __________________________________________ Taxpayer The undersigned spouse of taxpayer joins in this election. Dated: ___________________, 19__ ______________________________________ Spouse of Taxpayer EX-10.7 3 ex10-7.txt WARRANTS REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.7 Execution Copy WARRANTS REGISTRATION RIGHTS AGREEMENT WARRANTS REGISTRATION RIGHTS AGREEMENT, dated as of March 10, 2000 (this "Agreement"), between COLO.COM, a California corporation (the "Company"), and STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as warrant agent (the "Warrant Agent"). Pursuant to the terms of a Purchase Agreement, dated the date hereof (the "Purchase Agreement"), among the Company, Goldman Sachs & Co., Bear, Stearns & Co., Chase Securities Inc., Deutsche Bank Securities Inc., Warburg Dillon Read LLC and Jefferies and Company, Inc. (the "Purchasers"), the Company has agreed to issue and sell to the Purchasers an aggregate of 300,000 Warrants (each, a "Warrant"), each Warrant initially entitling the holder thereof to purchase 19.9718 Common Shares (as defined below) of the Company at a per share exercise price equal to $0.01, as part of the issuance of 300,000 Units (the "Units"), each consisting of one 13 7/8% Senior Note due 2010 of the Company with a principal amount of $1,000 (each, a "Note" and collectively, the "Notes") to be issued pursuant to the provisions of a Indenture to be dated as of the Closing Date (the "Indenture") between the Company, as issuer, and State Street Bank and Trust Company of California, N.A., as trustee, and one Warrant. The Note and the Warrant included in each Unit will become separately transferable at the close of business upon the earliest to occur of (i) the date that is one year after the Closing Date (as defined below), (ii) 180 days after the closing date of the Company's initial public offering, (iii) the commencement of an exchange offer with respect to the Notes undertaken pursuant to the Registration Rights Agreement (as defined below), (iv) the effectiveness of a shelf registration statement with respect to resales of the Notes, (v) the commencement of an offer to purchase the Notes upon a change of control and (vi) such date as determined by Goldman, Sachs & Co. in its sole discretion. In consideration of the foregoing and of the mutual agreements contained herein and in the Purchase Agreement, the Company and the Warrant Agents hereby agree as follows: 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Auditors" means, at any time, the independent auditors of the Company at such time. "Board" means the board of directors of the Company from time to time. "Closing Date" means the date of issuance of the Units. 2 2 "Comfort Letter" has the meaning specified in Section 3 hereof. "Commission" means the United States Securities and Exchange Commission. "Common Shares" means the shares of common stock, $0.01 par value per share, of the Company and any other capital stock of the Company into which such Common Shares may be converted or reclassified or that may be issued in respect of, in exchange for or in substitution of such Common Shares by reason of any stock splits, stock dividends, distributions, mergers, consolidations or other like events. "Company" has the meaning specified in the preamble to this Agreement. "Company Shares" has the meaning specified in Section 2(b) hereof. "Cutback Notice" has the meaning specified in Section 2(a) hereof. "Effectiveness Period" has the meaning specified in Section 3 hereof. "Exchange Act" has the meaning specified in Section 4 hereof. "Existing Registration Rights Agreement" means any registration rights or similar agreement described in the Final Offering Memorandum under the caption "Description of Capital Stock--Registration Rights", as it may be amended, waived, supplemented, modified, restated, renewed or extended from time to time, including any amendment, waiver supplement, modification, restatement, renewal or extension entered into after the date hereof to include any shares issuable after the date hereof in such agreement. "Existing Registration Rights Agreement Shares" has the meaning specified in Section 2(b) hereof. "Expiration Date" means the tenth anniversary of the Closing Date. "Holders" means the record holders of the Warrants and the holders of Common Shares (or other securities) received upon exercise thereof. "Includible Secondary Shares" has the meaning specified in Section 2(c) hereof. "Includible Shares" has the meaning specified in Section 2(b) hereof. "Indemnified Person" has the meaning specified in Section 7(a) hereof. "Indenture" has the meaning specified in the recitals to this Agreement. 3 3 "managing underwriter" has the meaning specified in Section 2 hereof. "Notes" has the meaning specified in the recitals to this Agreement. "Opinion" has the meaning specified in Section 3 hereof. "Other Shares" has the meaning specified in Section 2(b) hereof. "Person" means an individual, general partnership, limited partnership, corporation, trust, joint stock company, association, joint venture or any other entity or organization, whether or not legal entities, including, without limitation, a government or political subdivision or an agency or instrumentality thereof. "Piggy-back Registration Rights" has the meaning specified in Section 2(a) hereof. "Purchasers" has the meaning specified in the recitals to this Agreement. "Purchase Agreement" has the meaning specified in the recitals to this Agreement. "Registration Rights Agreement" means the Registration Statement dated as of the Closing Date between the Company and Goldman, Sachs & Co. for itself and on behalf of the purchasers set forth in Schedule I of the Purchase Agreement. "Registration Statement" has the meaning specified in Section 2(a) hereof. "Resale Shelf" has the meaning specified in Section 3 hereof. "Securities Act" means the United States Securities Act of 1933, as amended. "Units" has the meaning specified in the recitals to this Agreement. "Warrant" has the meaning specified in the recitals to this Agreement. "Warrant Agent" has the meaning specified in the preamble to this Agreement. "Warrant Agreement" means the Warrant Agreement dated as of the Closing Date between the Company and State Street Bank and Trust Company of California, N.A., relating to the Warrants. "Warrant Shares" means the Common Shares (or other securities) issued or purchasable upon exercise of the Warrants. 4 4 "Warrant Shelf Registration Statement" has the meaning specified in Section 3 hereof. 2. Piggy-Back Registration Rights. (a) If, prior to the date that is ten days prior to the expiration of the Warrants, the Company proposes to file a Registration Statement with the Commission respecting an offering of any Common Shares (or other securities) purchasable upon exercise of the Warrants (other than (x) an offering that could be registered solely on Form S-4, S-8, or F-4 or any successor form thereto, (y) securities offered or issued pursuant to any employment or benefit plan or arrangement to any employee, director, partner, trustee or consultant or advisor of or to the Company or any subsidiary of the Company, and (z) the initial public offering of Common Shares (or other securities) purchasable upon exercise of the Warrants if no shareholder of the Company participates therein as a selling shareholder), the Company shall give prompt written notice to all the Holders of Warrants or Warrant Shares at least 30 days prior to the initial filing of the registration statement relating to such offering (the "Registration Statement"). Each such Holder shall have the right, within 20 days after delivery of such notice, to request in writing that the Company include all or a portion of such of the Warrant Shares in such Registration Statement ("Piggy-back Registration Rights"). The Company shall include in the public offering all of the Warrant Shares that a Holder has requested be included, unless the underwriter for the public offering or the underwriter managing the public offering (in either case, the "managing underwriter") delivers a notice (a "Cutback Notice") pursuant to Section 2(b) or 2(c) hereof. The managing underwriter may deliver one or more Cutback Notices at any time prior to the execution of the underwriting agreement for the public offering. (b) If a proposed public offering includes both securities to be offered for the account of the Company ("Company Shares") and shares to be sold by shareholders, the provisions of this Section 2(b) shall be applicable if the managing underwriter delivers a Cutback Notice stating that, in its opinion, the number of Common Shares that selling shareholders propose to sell therein (other than shareholders proposing to sell shares pursuant to the registration rights granted under the Existing Registration Rights Agreement (the "Existing Registration Rights Agreement Shares")), whether or not such selling shareholders have the right to include shares therein (the "Other Shares"), plus the number of Warrant Shares that the Holders have requested to be sold therein, plus the number of Existing Registration Rights Agreement Shares that the holders thereof have requested to be sold therein, plus the Company Shares, exceeds the maximum number of shares specified by the managing underwriter in such Cutback Notice that may be distributed without materially and adversely affecting the price, timing or distribution of the Company Shares. Such maximum number of shares that may be so sold, excluding the Company Shares, are referred to as the "Includible Shares." 5 5 If the managing underwriter delivers such Cutback Notice, the Company shall be entitled to include all of the Company Shares in the public offering and each requesting party (or beneficiary) exercising its registration rights (or privileges) under the Existing Registration Rights Agreement, shall be entitled to include in the public offering up to its pro rata portion of the Includible Shares and in priority to the inclusion of any Warrant Shares and any Other Shares that are proposed to be sold in such public offering, and each requesting Holder shall be entitled to include in the public offering up to its pro rata portion of the Includible Shares and in priority to the inclusion of any Other Shares that are proposed to be sold in such public offering. No shareholder that proposes to sell Other Shares in the proposed initial public offering, other than as specified above, may sell any such shares therein unless all Warrant Shares requested by the Holders to be sold therein are so included. (c) If a proposed public offering is entirely a secondary offering, the provisions of this Section 2(c) shall be applicable if the managing underwriter delivers a Cutback Notice stating that, in its opinion, the aggregate number of Warrant Shares and Other Shares proposed to be sold therein exceeds the maximum number of shares (the "Includible Secondary Shares") specified by the managing underwriter in such Cutback Notice that may be distributed without materially and adversely affecting the price, timing or distribution of the Common Shares being distributed. (i) If the managing underwriter delivers such Cutback Notice, in the case of a demand registration pursuant to the Existing Registration Rights Agreement, first each party entitled to be included in such demand registration pursuant to the Existing Registration Rights Agreement shall be entitled to include all of its Includible Secondary Shares, and second each requesting Holder shall be entitled to include up to its pro rata portion of the remaining Includible Secondary Shares and in priority to the inclusion of any Other Shares, other than as specified above, that are proposed to be sold in such public offering; and (ii) If the managing underwriter delivers such Cutback Notice in the case of any other demand registration, first each party exercising such demand registration rights shall be entitled to include all of its Includible Secondary Shares, then each party entitled to be included in such demand registration pursuant to the Existing Registration Rights Agreement, and then each requesting Holder, shall be entitled to include up to its pro rata portion of the remaining Includible Secondary Shares and in priority to the inclusion of any Other Shares, other than as specified above, that are proposed to be sold in such public offering. No shareholder that proposes to sell Other Shares in the proposed public offering, other than as specified above, may sell any such shares therein unless all Warrant Shares requested by the Holders to be sold therein are so included. 6 6 (d) The underwriting agreement for such public offering shall provide that each requesting Holder shall have the right to sell its Warrant Shares to the underwriters and that the underwriters shall purchase the Warrant Shares at the price paid by the underwriters for the Common Shares sold by the Company and/or selling shareholders, as the case may be. 3. Shelf Registration. (a) If only the Company sells Common Shares in an initial public offering or all of the Warrant Shares (or other securities) purchasable upon exercise of the Warrants have not been sold in one or more public offerings, the Company shall use its best efforts to cause to be filed pursuant to Rule 415 under the Securities Act a shelf registration statement on the appropriate form (the "Warrant Shelf Registration Statement") covering the resale of the Warrant Shares (or other securities) by the Holders and shall use its best efforts to cause the Warrant Shelf Registration Statement to become effective under the Securities Act upon the earliest to occur (i) 180 days after the closing date of the initial public offering of the Company and (ii) one year after the Closing Date (subject to an extension (not to exceed 90 days) if the Company is subject to a "lockup" or "blackout" period imposed pursuant to or in connection with any underwriting or purchase agreement relating to an underwritten Rule 144A or registered public offering of Common Shares or securities convertible into or exchangeable for Common Shares). The Company shall use reasonable efforts to keep the Warrant Shelf Registration Statement continuously effective, subject to Section 4 hereof, until the earlier of such time as all of the Warrants Shares have been resold and two years after the Closing Date (the "Effectiveness Period"). Prior to filing the Warrant Shelf Registration Statement or any amendment thereto, the Company shall provide a copy thereof to Goldman, Sachs & Co. and its counsel and afford them a reasonable time to comment thereon. (b) If the Warrant Shelf Registration Statement shall register the resale of the Warrant Shares (a "Resale Shelf") as provided in Section 3(a) above, the Company agrees to: (i) make available for inspection by a representative of the Holders, the managing underwriter participating in any disposition pursuant to such Resale Shelf and one firm of attorneys designated by the Holders (upon execution of customary confidentiality agreements reasonably satisfactory to the Company and its counsel), at reasonable times and in a reasonable manner, financial and other records, documents and properties of the Company that are pertinent to the conduct of due diligence customary for an underwritten offering, and cause the officers, directors and employees of the Company to supply all information reasonably requested by any such representative, underwriter or attorney in connection with a Resale Shelf as shall be necessary to enable such persons to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act of 1933, as amended from time to time; (ii) use its reasonable best efforts to cause all Warrant Shares sold under a Resale Shelf to be listed on any securities exchange or any automated quotation system 7 7 on which similar securities issued by the Company are then listed, to the extent such Warrant Shares satisfy applicable listing requirements; (iii) provide a reasonable number of copies of the prospectus included in such Resale Shelf to Holders that are selling Warrant Shares pursuant to such Resale Shelf; (iv) if any disposition pursuant to such Resale Shelf is an underwritten offering, use its reasonable best efforts to cause to be provided to the managing underwriter upon the effectiveness of such Resale Shelf, a customary "10b-5" opinion of independent counsel (an "Opinion") and a customary "cold comfort" letter of independent auditors (a "Comfort Letter"); (v) if any disposition pursuant to such Resale Shelf is an underwritten offering, use its reasonable best efforts to cause to be provided to the managing underwriter an Opinion and Comfort Letter with respect to each document, including any amendments thereto, that is incorporated by reference in such Resale Shelf; and (vi) notify the Warrant Agent and any managing underwriter in writing, for distribution to the Holders, (A) when the Resale Shelf has become effective and when any post-effective amendment thereto has been filed and becomes effective, (B) of any request by the Commission or any state securities authority for amendments and supplements to the Resale Shelf or of any material request by the Commission or any state securities authority for additional information after the Resale Shelf has become effective, (C) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of the Resale Shelf or the initiation of any proceedings for that purpose, (D) if, between the effective date of the Resale Shelf and the closing of any sale of Warrant Shares covered thereby, the representations and warranties of the Company contained in any underwriting agreement, securities sales agreement or other similar agreement, including this Agreement, relating to disclosure cease to be true and correct in all material respects or if the Company receives any notification with respect to the suspension of the qualification of the Warrant Shares for sale in any jurisdiction or the initiation of any proceeding for such purpose, (E) of the happening of any event during the period the Resale Shelf is effective such that such Resale Shelf or the related prospectus contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make statements therein not misleading (in the case of a prospectus, in light of circumstances under which they were made) and (F) of any determination by the Company that a post-effective amendment to a Registration Statement would be appropriate. The Holders hereby agree to suspend, and to cause any managing underwriter to suspend, use of the prospectus contained in a Resale Shelf upon receipt of such notice under clause (C), (E) or (F) above until, in the case of clause (C), such stop order is removed or rescinded or, in the case of 8 8 clauses (E) and (F), the Company has amended or supplemented such prospectus to correct such misstatement or omission or otherwise. (c) Each beneficial owner of Warrant Shares sold pursuant to a Resale Shelf, by accepting its beneficial ownership of a Warrant or the Warrant Shares, hereby (i) agrees to provide the Company with information with respect to it that the Company reasonably requests in connection with any Resale Shelf. 4. Suspension. Notwithstanding the foregoing, during any consecutive 365-day period while the Warrants are exercisable, the Company shall have the ability to suspend the filing, effectiveness or use of such Warrant Shelf Registration Statement for up to two 30-consecutive-day periods (except during the 30 days immediately prior to the expiration of the Warrants) if: (a) an event or circumstance occurs and is continuing as a result of which the registration statement, any related prospectus or any document incorporated therein by reference, as then amended or supplemented or proposed to be filed, would, in the good faith determination of the Board, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and (b) (i) the Board determines in good faith that the disclosure of such an event at such time would have a material adverse effect on the business, operations or prospects of the Company or (ii) the disclosure otherwise relates to a material business transaction which has not yet been publicly disclosed; provided that the Effectiveness Period shall be extended by the number of days in any such suspension period. The Company shall provide notice of such determination to the Holders at their addresses appearing in the register of Warrants maintained by the Warrant Agent. 5. Blue Sky. The Company shall use its reasonable best efforts to register or qualify the Warrant Shares proposed to be sold or issued pursuant to the Registration Statement or the Warrant Shelf Registration Statement under all applicable securities or "blue sky" laws of all jurisdictions in the United States in which any Holder of Warrants may or may be deemed to purchase Warrant Shares upon the exercise of Warrants or resale of the Warrant Shares, as the case may be, and shall use its reasonable best efforts to maintain such registration or qualification through the earlier of (A) the date upon all Warrant Shares have been resold under the Warrant Shelf Registration Statement and (B) the Expiration Date; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a broker or a dealer in securities 9 9 in any jurisdiction where it would not otherwise be required to qualify but for this Section 5, (ii) file any general consent to service of process or (iii) subject itself to taxation in any jurisdiction if it is not otherwise so subject. 6. Accuracy of Disclosure. The Company (and its successors) represents and warrants to each Holder (and each beneficial owner of a Warrant or Warrant Share) and agrees for the benefit of each Holder (and each beneficial owner of a Warrant or Warrant Share) that, except during any period in which the availability of the Warrant Shelf Registration Statement has been suspended, (i) the Warrant Shelf Registration Statement and the documents incorporated by reference therein will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading; and (ii) the prospectus delivered pursuant to which such Holder sells its Warrant Shares and the documents incorporated by reference therein will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that representations, warranties and agreements set forth in this Section 6 do not apply to statements or omissions in the Warrant Shelf Registration Statement or any such prospectus based upon information relating to any Holder furnished to the Company (or its successors) in writing by such Holder expressly for use therein. 7. Indemnity. (a) The Company hereby agrees to indemnify each beneficial owner of a Warrant and each person, if any, who controls any beneficial owner of a Warrant within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or is under common control with, or is controlled by, any beneficial owner of a Warrant (whether or not it is, at the time the indemnity provided for in this Section 7 is sought, such a beneficial owner), from and against all losses, damages or liabilities which such beneficial owner or any such controlling or affiliated person ("Indemnified Person") suffers as a result of any breach, on the date of the resale of any Warrant Share by such Indemnified Person pursuant to the Warrant Shelf Registration Statement, of the representations, warranties or agreements contained in Section 6. In addition, the foregoing indemnity with respect to any preliminary Prospectus shall not inure to the benefit of any Indemnified Person to the extent that any such losses, claims, damages or liabilities result from the fact that such Indemnified Person sold securities to a person to whom there was not sent or given by or on behalf of such Indemnified Person (if required by law so to have been delivered) a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) at or prior to the written confirmation of the sale of the Warrant Shares to such person, and if the losses, claims, damages or liabilities result from an untrue statement or alleged untrue statement or an omission or alleged omission contained in such preliminary Prospectus that was corrected in the Prospectus (as so amended or supplemented), unless such failure is the result of noncompliance by the Company with its obligations to deliver copies of the Prospectus to the Indemnified Person, nor shall this indemnity 10 10 agreement inure to the benefit of any Indemnified Person from whom the person asserting any such losses, claims, damages or liabilities purchased the Warrant Shares concerned to the extent that at the time of such purchase such Indemnified Person had received written notice from the Company that the use of such Prospectus, amendment, supplement or preliminary Prospectus was suspended as provided in Section 3(b)(vi) or Section 4. In addition, the Company shall not be liable in any such case to the extent that any such loss, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary Prospectus or Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any such Indemnified Person expressly for use therein. (b) Promptly after receipt by an Indemnified Person under this Section 7 of notice of the commencement of any action (including any governmental action), such Indemnified Person will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an Indemnified Person shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the Indemnifying Person would be inappropriate due to actual or potential conflict of interests between such Indemnified Person and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the Indemnified Person under this Section 7, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any Indemnified Person otherwise than under this Section 7. 8. Expenses. All expenses incident to the Company's performance of or compliance with its obligations under this Agreement will be borne by the Company, regardless of whether a Registration Statement or Warrant Shelf Registration Statement becomes effective, including without limitation (i) all Commission or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all reasonable fees and expenses incurred in connection with compliance with state securities or "blue sky" laws, (iii) all reasonable expenses of any persons incurred by or on behalf of the Company in preparing or assisting in preparing, word processing, printing and distributing any registration statement, any prospectus, any amendments or supplements thereto and other documents relating to the performance of and compliance with this Agreement, (iv) the reasonable fees (including legal fees and expenses) and disbursements of the Warrant Agent, (v) the reasonable fees and disbursements of counsel for the Company and 11 11 (vi) the fees and disbursements, if any, of the Auditors, but excluding (x) the reasonable fees and disbursements of counsel retained by the participating Holders and (y) the Holders' share of underwriting discounts and commissions. 9. "Market Stand Off" Agreement. Each Holder hereby agrees that during the 180 day period following the effective date of an initial public offering of Common Shares (or other securities purchasable upon exercise of the Warrants), it shall not, to the extent requested by the Company or the managing underwriter, sell or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any Common Shares of the Company held by it at any time during such period except Common Shares included in such registration; provided, however, that all directors of the Company party to or beneficiaries of, from time to time, the Existing Registration Rights Agreement and, if required by the managing underwriter, the Management Investors, Beneficial Investors and others party thereto, or beneficiaries thereof, from time to time, enter into or are bound by similar agreements. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Warrant Shares until the end of such period. 10. Miscellaneous. (a) No Inconsistent Agreements. The Company represents and the Warrant Agent represents to the best of its knowledge to the other that it has not entered into, and agrees that on or after the date of this Agreement it will not enter into, any agreement which is inconsistent with the rights granted to the Holders of Warrants or Warrant Shares in this Agreement or otherwise conflicts with the provisions hereof. The Company represents that the rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's other issued and outstanding securities under any agreements (after giving effect to any waiver, consent, amendment, resolution or other instrument in full force and effect on the date hereof). (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company and the Warrant Agent have obtained the written consent of Holders of at least a majority of the outstanding Warrants affected by such amendment, modification, supplement, waiver or consent; provided that any amendment, modification or supplement to this Agreement which, in the good faith opinion of the Board of Directors of the Company (and evidenced by a resolution of such board), does not adversely affect any Holder, shall not be subject to such requirement for written consent. 12 12 (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 10(c); (ii) if to the Company, initially at the Company's address set forth in the Indenture and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 10(c); and (iii) if to the Warrant Agent, initially at the Warrant Agent's address set forth in the Warrant Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 10(c). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Warrants in violation of the terms of the Purchase Agreement or the Warrant Agreement. If any transferee of any Holder shall acquire Warrants, in any manner, whether by operation of law or otherwise, such Warrants shall be held subject to all of the terms of this Agreement and the Warrant Agreement, and by taking and holding such Warrants such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement or the Warrant Agreement and such person shall be entitled to receive the benefits hereof. (e) Purchases and Sales of Warrants. The Company shall not, and shall use its best efforts to cause its affiliates (as defined in Rule 405 under the Securities Act) not to, purchase and then resell or otherwise transfer (other than to the Company or any subsidiary thereof) any Warrants other than Warrants acquired and cancelled. (f) Third Party Beneficiary. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company and the Warrant Agents, and each Holder shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 13 13 (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. This Agreement shall be governed by the laws of the State of New York. The Warrant Agent, the Company and the Holders agree to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or related to this Agreement or the Warrants. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 14 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. COLO.COM By /s/ CHARLES M. SKIBO ---------------------------------- Name: Charles M. Skibo Title: President and Chief Financial Officer STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as Warrant Agent By /s/ SCOTT C. EMMONS ---------------------------------- Name: Scott C. Emmons Title: Vice President 15 Execution Copy WARRANTS REGISTRATION RIGHTS AGREEMENT between COLO.COM and STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as Warrant Agent Dated as of March 10, 2000 EX-10.11 4 ex10-11.txt OFFICE LEASE BY/BETWEEN COLO.COM AND HITACHI 1 EXHIBIT 10.11 OFFICE LEASE BY AND BETWEEN HITACHI AMERICA, LTD., AS LANDLORD, AND COLOMOTION, INC., AS TENANT 2 TABLE OF CONTENTS
Page No. ---- SECTION 1. TERMS AND DEFINITIONS......................................... 1 SECTION 2. PROPERTY LEASED............................................... 3 A. Premises...................................................... 3 B. Common Areas.................................................. 3 C. Minor Variations In Area...................................... 3 SECTION 3. COMMENCEMENT OF TERM AND POSSESSION OF PREMISES............... 3 A. Lease Commencement Date....................................... 3 B. Completion of Tenant Improvements and Possession of Premises.. 4 C. Extension of Lease Commencement Date.......................... 4 D. Acceptance and Suitability.................................... 4 E. Tenant's Termination Right.................................... 5 SECTION 4. RENT.......................................................... 5 A. Monthly Rental................................................ 5 B. Rent and Additional Rent...................................... 5 SECTION 5. COMMON AREAS.................................................. 5 A. Definitions................................................... 5 B. Control of Common Areas....................................... 5 SECTION 6. SECURITY DEPOSIT.............................................. 6 SECTION 7. TENANT'S TAXES................................................ 6 SECTION 8. USE OF PREMISES............................................... 7 A. Permitted Uses................................................ 7 B. Compliance with Laws.......................................... 7 C. Hazardous Materials........................................... 8 D. Landlord's Rules and Regulations.............................. 10 E. Traffic and Energy Management; Recycling...................... 10 SECTION 9. SERVICE AND UTILITIES......................................... 11 A. Standard Building Services.................................... 11 B. After-Hours Charges........................................... 11 C. Limitation on Landlord's Obligations.......................... 11 D. Excess Service................................................ 11 E. Security Services............................................. 12 SECTION 10. MAINTENANCE AND REPAIRS....................................... 12 A. Landlord's Obligations........................................ 12 B. Tenant's Obligations.......................................... 12
i 3 C. Landlord's Right to Make Repairs.............................. 13 D. Condition of Premises Upon Surrender.......................... 13 SECTION 11. ENTRY BY LANDLORD............................................. 13 SECTION 12. ALTERATIONS, ADDITIONS AND TRADE FIXTURES..................... 14 SECTION 13. MECHANIC'S LIENS.............................................. 15 SECTION 14. INSURANCE..................................................... 15 A. Tenant........................................................ 15 B. Landlord...................................................... 16 C. Waiver of Subrogation......................................... 16 SECTION 15. INDEMNITY..................................................... 16 A. Indemnification by Tenant..................................... 16 B. Limitation on Landlord's Liability............................ 17 C. No Landlord Liability for Force Majeure Events................ 17 D. Indemnification by Landlord................................... 17 SECTION 16. ASSIGNMENT AND SUBLETTING BY TENANT........................... 18 A. Consent Required.............................................. 18 B. Tenant's Request for Consent.................................. 18 C. Landlord's Election........................................... 18 D. Landlord's Factors............................................ 18 E. Granting of Consent........................................... 19 F. Assignment and Sublease Profit................................ 19 G. Tenant Remains Liable......................................... 20 H. Assignee Becomes Liable....................................... 20 I. Bankruptcy.................................................... 20 J. Landlord's Fees............................................... 20 K. Certain Rights Personal to Tenant............................. 20 L. Sublease Rents................................................ 21 SECTION 17. TRANSFER OF LANDLORD'S INTEREST............................... 21 SECTION 18. DAMAGE AND DESTRUCTION........................................ 21 A. Minor Insured Damage.......................................... 21 B. Major or Uninsured Damage..................................... 21 C. Abatement of Rent............................................. 22 D. Waiver........................................................ 22 SECTION 19. CONDEMNATION.................................................. 22 A. Total or Partial Taking....................................... 22 B. Award......................................................... 22 C. Abatement in Rent............................................. 23 D. Temporary Taking.............................................. 23 E. Transfer of Landlord's Interest to Condemnor.................. 23
ii 4 SECTION 20. DEFAULT....................................................... 23 A. Tenant's Default.............................................. 23 B. Remedies...................................................... 24 C. Relief From Forfeiture........................................ 26 SECTION 21. LATE PAYMENTS/INTEREST AND LATE CHARGES....................... 26 A. [Intentionally Omitted]....................................... 26 B. Interest...................................................... 26 C. Late Charges.................................................. 27 D. No Waiver..................................................... 27 SECTION 22. [INTENTIONALLY OMITTED]....................................... 27 SECTION 23. HOLDING OVER.................................................. 27 SECTION 24. ATTORNEYS' FEES............................................... 28 SECTION 25. MORTGAGE PROTECTION/SUBORDINATION............................. 28 A. Subordination................................................. 28 B. Attornment.................................................... 28 C. Amendment..................................................... 29 SECTION 26. ESTOPPEL CERTIFICATION/FINANCIAL STATEMENTS................... 29 A. Estoppel Certificate.......................................... 29 B. Furnishing of Financial Statements............................ 29 SECTION 27. PARKING....................................................... 29 A. Landlord's Obligations........................................ 29 B. Tenant's Rights and Obligations............................... 30 C. Control of Parking Area....................................... 30 SECTION 28. SIGNS; NAME OF BUILDING....................................... 31 A. Signs......................................................... 31 B. Building Identification....................................... 31 SECTION 29. QUIET ENJOYMENT............................................... 31 SECTION 30. ADDITIONAL FACILITIES AVAILABLE TO TENANT..................... 32 A. Conference Rooms.............................................. 32 B. Fitness Center................................................ 32 C. Fees.......................................................... 33 SECTION 31. NOTICES....................................................... 33 SECTION 32. NOTICE AND CURE TO LANDLORD AND MORTGAGEE..................... 33 SECTION 33. GENERAL....................................................... 33 A. Paragraph Headings............................................ 33 B. Incorporation of Prior Agreements; Amendments................. 33
iii 5 C. Waiver........................................................ 34 D. Short Form or Memorandum of Lease............................. 34 E. Time of Essence............................................... 34 F. Examination of Lease.......................................... 34 G. Severability.................................................. 34 H. Surrender of Lease Not Merger................................. 34 I. Authority..................................................... 34 J. Governing Law................................................. 35 K. Force Majeure................................................. 35 L. Use of Language............................................... 35 M. Successors.................................................... 35 N. No Reduction of Rental........................................ 35 O. No Partnership................................................ 35 P. Exhibits...................................................... 35 Q. Indemnities................................................... 35 R. Nondisclosure of Lease Terms.................................. 36 S. No Light, Air or View Easement................................ 36 T. Brokers....................................................... 36 U. Counterparts.................................................. 36
EXHIBIT A FLOOR PLAN OF THE PREMISES EXHIBIT B CONSTRUCTION WORK LETTER EXHIBIT C RULES AND REGULATIONS EXHIBIT D AMENDMENT OF LEASE COMMENCEMENT DATE 6 OFFICE LEASE THIS LEASE is entered into by and between Landlord and Tenant effective as of this 18th day of May, 1999. SECTION 1. TERMS AND DEFINITIONS The following terms as used herein shall have the meanings as set forth below: A. "Landlord" means HITACHI AMERICA, LTD., a New York corporation, and its successors and assigns. B. "Tenant" means COLOMOTION, INC., a California corporation. C. "Building" means the building in which the Premises are located, which Building has approximately 266,606 square feet of Rentable Area and is located at 2000 Sierra Point Parkway, in the City of Brisbane, California. D. "Project" means the Building, the Premises, the Common Areas and the legal parcel on which the Building is located. E. "Premises" means the following: from the Lease Commencement Date until 12/31/1999, the space labeled as "Phase 1" on Exhibit A, Page 2 of 2 attached hereto and incorporated herein by this reference; from 01/01/2000 until 06/30/2000, the spaces labeled as "Phase 1" and "Phase 2" thereon; and from and after 07/01/2000, the spaces labeled as "Phase 1," "Phase 2" and "Phase 3" thereon. The Premises from time to time covered by this Lease shall be referred to as Suite 601. F. "Term" means the approximately sixty (60) month period commencing on the Lease Commencement Date and expiring on the Expiration Date. G. "Lease Commencement Date" means the earlier to occur of (1) July 1, 1999 and (2) the date Tenant commences operation of its business from the Premises; provided, however, that if the Lease Commencement Date stated in this subsection is amended pursuant to Section 3(C) below, Landlord and Tenant shall execute and attach hereto as a new Exhibit D an Amendment of Lease Commencement Date in the form of Exhibit D hereto, which shall specify such amended Lease Commencement Date and, if applicable, an amended Expiration Date. H. "Expiration Date" means June 30, 2004 unless amended as provided in an Amendment of Lease Commencement Date executed as provided above. 1 7 I. "Monthly Rental" means the following:
Period Monthly Rental ------ -------------- Lease Commencement Date - 12/31/1999 $18,720.00 01/01/2000 - 06/30/2000 $37,440.00 07/01/2000 - 06/30/2001 $59,019.84 07/01/2001 - 06/30/2002 $61,387.92 07/01/2002 - 06/30/2003 $63,938.16 01/01/2003 - 06/30/2004 $66,488.40
J. "Rentable Area" means: (1) As to each floor of the Building on which the entire space rentable to tenants is or will be leased to one tenant (hereinafter referred to as a "Single Tenant Floor"), Rentable Area shall be the entire area bounded by the inside surface of the four exterior glass walls (or in the inside surface of the permanent exterior wall(s) where there is no glass) on such floor, including all areas used for elevator lobbies, corridors, special stairways, or elevators, restrooms, mechanical rooms, electrical rooms and telephone closets without deduction for columns and other structural portions of the Building or vertical penetrations that are included for the special use of the tenant of such floor together with a portion of the covered or enclosed common facilities which constitute a part of the Building and which are maintained by Landlord for the common benefit of all tenants of the Building which bears the same proportion to the total area of such common facilities as the Rentable Area of each Single Tenant Floor bears to the Rentable Area of the Building (excluding such common facilities), but excluding the area contained within the exterior walls of the Building stairs, fire towers, vertical ducts, elevator shafts, flues, vents, stacks and pipe shafts. (2) As to each floor of the Building on which space is or will be leased to more than one tenant, Rentable Area attributable to each such lease shall be the total of (a) the entire area included within the premises covered by such lease, being the area bounded by the inside surface of any exterior glass walls (or the inside surface of the permanent exterior wall(s) where there is no glass) of the Building bounding such premises, the exterior of all walls separating such premises from any public corridors or other public areas on such floor, and the centerline of all walls separating such premises from other areas leased or to be leased to other tenants on such floor, (b) that portion outside the Premises but within space intended for use or occupancy as premises by another tenant utilized by Tenant for wiring, ducts, vents or other requirements of Tenant's operations in the Premises, (c) that portion of the covered or enclosed common facilities which constitute a part of the Building and which are maintained by Landlord for the common benefit of all tenants of the Building which bears the same proportion to the total area of such common facilities as the Rentable Area of such Premises bears to the Rentable Area of the Building (excluding such common facilities), and (d) a pro rata portion of any area of the Building devoted to common features such as elevator lobbies, corridors, restrooms, mechanical rooms, electrical rooms and telephone closets, but excluding any area contained within the exterior walls of the 2 8 Building for stairs, fire towers, vertical ducts, elevator shafts, flues, vents, stacks and pipe shafts. K. "Security Deposit" means $132,976.80. L. "Permitted Use" means commercial office use. M. "Brokers" means Cornish & Carey Commercial and Cushman & Wakefield. N. "Landlord's Address for Notice" means 2000 Sierra Point Parkway, MS 550, Brisbane, California 94005, Attention: Facilities Manager. O. "Tenant's Address for Notice" means the address of the Premises. P. "Parking Spaces" means 3.3 unreserved parking spaces per 1000 square feet of Rentable Area in the Premises in the area of the Project designated by Landlord for vehicle parking. Q. "Fitness Center Memberships" means eighteen (18) memberships in the fitness center located on the first floor of the Building ("Fitness Center"). SECTION 2. PROPERTY LEASED A. Premises. Upon and subject to the terms, covenants and conditions hereinafter set forth, Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises; reserving to Landlord, however, (1) the use of the exterior walls, roof, return air plenum and the area under the Premises floor and (2) the rights to make structural (building) modifications and the right to install, maintain, use, repair and replace pipes, ducts, conduits, and wires to serve or serving other tenant premises in the Building through the Premises in locations which will not materially interfere with Tenant's use thereof. Tenant shall not enter upon or use in any manner or for any purpose any space on the sixth floor of the Building other than the area from time to time expressly included within the Premises in accordance with the provisions of Section 1(E), except with the prior written approval of Landlord, which Landlord may give or withhold in its sole and absolute discretion. For any calendar month during any portion of which Tenant may use or occupy any space not included within the Premises, Tenant shall pay to Landlord a rental equal to the area used or occupied by Tenant multiplied by the per square foot rental amount then in effect for the Premises, or such other amount as Landlord and Tenant may mutually agree in writing. B. Common Areas. Subject to the terms, covenants and conditions of this Lease, Tenant shall have the right, for the benefit of Tenant and its employees and invitees, to the non-exclusive use of all of the Common Areas as hereinafter defined. C. Minor Variations In Area. The Rentable Area of the Premises contained in Section 1(E) is agreed to be the Rentable Area of the Premises regardless of minor variations resulting from construction of the Building and/or tenant improvements. SECTION 3. COMMENCEMENT OF TERM AND POSSESSION OF PREMISES A. Lease Commencement Date. The Term of the Lease shall commence on the Lease Commencement Date (as extended only pursuant to Section 3(C) below, if applicable), and shall continue, subject to earlier termination as provided herein, until the Expiration Date (as extended only pursuant to Section 3(C) below). 3 9 B. Completion of Tenant Improvements and Possession of Premises. Upon execution of this Lease by the parties, Tenant shall have the right to enter the Premises solely for purposes of performing and completing all tenant improvements described as "Tenant's Work" in Exhibit B hereto, and Tenant shall open the Premises for business, on or before the Lease Commencement Date. Tenant's occupancy of the Premises prior to the Lease Commencement Date shall be subject to all of the terms and conditions of this Lease; provided, however, Tenant's obligation to pay Monthly Rental shall not commence until the Lease Commencement Date. All tenant improvements constructed in the Premises, whether by Landlord or by (or on behalf of) Tenant and whether at Landlord's or Tenant's expense, shall become part of the Premises and shall be and remain the property of Landlord unless Landlord specifically agrees otherwise in writing. C. Extension of Lease Commencement Date. If the Premises are not ready for occupancy by Tenant on the original Lease Commencement Date specified in Section 1(G) due to one or more delays caused by Landlord or caused by matters beyond the control of Landlord, this Lease and the obligations of Landlord and Tenant hereunder shall nevertheless continue in full force and effect. However, in such event Landlord and Tenant shall agree on an amendment of the original Lease Commencement Date to reflect such delay or delays and shall, in each instance, within thirty (30) days after the amended Lease Commencement Date, execute and attach hereto an amendment in the form of that attached as Exhibit D hereto stating such amended Lease Commencement Date and, if applicable, an amended Expiration Date and no rental shall be payable by Tenant hereunder until the amended Lease Commencement Date. The delay in commencement of the Term and in the accrual of rent described in the foregoing sentence shall constitute full settlement of all claims that Tenant might otherwise have by reason of the Premises not being ready for occupancy on the original Lease Commencement Date specified in Section 1(G) above. If the Premises are not ready for occupancy by Tenant on the Lease Commencement Date due to one or more delays caused by Tenant, or anyone acting under or for Tenant, Landlord shall have no liability for such delay and the Lease Commencement Date shall nevertheless begin as of the Lease Commencement Date stated in Section 1(G) (as extended only because of Landlord's delay pursuant to this Section 3(C), if applicable). D. Acceptance and Suitability. Tenant hereby agrees to accept the Premises in its "AS IS" condition. Tenant agrees that by taking possession of the Premises it will conclusively be deemed to have inspected the Premises and found the Premises in satisfactory condition. Tenant acknowledges that neither Landlord, nor any agent, employee or servant of Landlord, has made any representation with respect to the Premises, the Building, or the Project or with respect to the suitability of them for the conduct of Tenant's business, nor has Landlord agreed to undertake any modifications, alterations, or improvements of the Premises or Building, except as specifically provided in this Lease. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, LANDLORD HEREBY DISCLAIMS, AND TENANT WAIVES THE BENEFIT OF, ANY AND ALL IMPLIED WARRANTIES, INCLUDING IMPLIED WARRANTIES OF HABITABILITY, FITNESS OR SUITABILITY FOR PURPOSE, OR THAT THE BUILDING OR THE IMPROVEMENTS IN THE PREMISES HAVE BEEN CONSTRUCTED IN A GOOD AND WORKMANLIKE MANNER. 4 10 E. Tenant's Termination Right. Tenant shall have a right to terminate this Lease effective as of June 30, 2002, upon notice given and payment made as specified below; provided, however, that the termination of this Lease pursuant to any such notice and payment shall not be effective if Tenant is in default under this Lease at the time of giving notice of termination or, at Landlord's option, upon the effective date of termination. Tenant shall exercise such option by giving written notice to Landlord not later than September 30, 2001, time being of the essence with regard to the giving of such notice, and by paying to Landlord, at the time such notice is given, a termination payment of $245,551.68. Tenant's notice shall be effective to terminate this Lease only provided and on condition that it is accompanied by payment to Landlord of such termination payment. If Tenant effectively exercises its right to terminate this Lease herein provided, Tenant shall continue to pay all of the rents herein and perform all of its obligations hereunder through June 30, 2002, upon which date the Term of this Lease shall end in the same manner as if the same were the Expiration Date originally specified on this Lease. SECTION 4. RENT A. Monthly Rental. Commencing on the Lease Commencement Date, Tenant shall pay to Landlord during the Term the amount set forth in Section 1(I) in monthly installments (the "Monthly Rental"), which sum shall be payable by Tenant on or before the first day of each month, in advance, without further notice, at the address specified for Landlord in Section 1(N), or such other place as Landlord shall designate, without any prior demand therefor and without any abatement, demand, counterclaim, deduction or setoff whatsoever. If the Lease Commencement Date should occur on a day other than the first day of a calendar month, or the Expiration Date should occur on a day other than the last day of a calendar month, then the rental for such fractional month shall be prorated on a daily basis upon a thirty (30) day calendar month. B. Rent and Additional Rent. As used in this Lease, the term "rent" shall mean Monthly Rental and additional rent, and the term "additional rent" shall mean all other amounts payable by Tenant to Landlord pursuant to this Lease other than Monthly Rental. All Monthly Rental and additional rent shall be paid without any abatement, demand, deduction, setoff or counterclaim whatsoever in lawful money of the United States which shall be legal tender at the time of payment. Where no other time is stated herein for payment, payment of any amount payable from Tenant to Landlord hereunder shall be due and made, within ten (10) days after Tenant's receipt of Landlord's invoice or statement therefor. Tenant expressly acknowledges that Tenant's covenant to pay rent under this Lease is separate and independent from Landlord's covenant to provide services and other amenities hereunder. SECTION 5. COMMON AREAS A. Definitions. "Common Areas" means all areas, space, equipment and special services provided by Landlord for the common or joint use and benefit of Landlord, the tenants and other occupants of the Building, and their respective employees, agents, servants, suppliers, customers and other invitees, including, by way of illustration, but not limitation, retaining walls, fences, landscaped areas, parks, curbs, sidewalks, private roads, the cafeteria on the first floor of the Building, common restrooms, stairways, elevators, lobbies, common hallways, patios, service quarters, parking areas and all common areas and other areas within the exterior of the Building and in the Project. B. Control of Common Areas. Landlord shall maintain the Common Areas, including lobbies, stairs, elevators, corridors, restrooms, windows, mechanical, plumbing and electrical equipment, and the structure itself in reasonably good order and condition except for damage occasioned by the act 5 11 of Tenant, its employees, agents, contractors or invitees, which damage shall be repaired by Landlord at Tenant's expense. Landlord shall have the sole and exclusive control of the Common Areas, as well as the right to make changes to the Common Areas. Notwithstanding the preceding sentence, Landlord is not responsible for any harm or damage to any of Tenant's officers, agents, employees, servants, suppliers, customers or other invitees as a result of their use of the Common Areas. Landlord's rights to make changes shall include, but not be limited to, the right to (a) restrain the use of the Common Areas by unauthorized persons, (b) utilize from time to time any portion of the Common Areas for promotional and related matters, (c) temporarily close any portion of the Common Areas for repairs, improvements or alterations, (d) change the shape and size of the Common Areas or change the location of improvements within the Common Areas, including, without limitation, parking areas, roadways and curb cuts, and (e) prohibit access to or use of Common Areas that are designated for the storage of supplies or operation of equipment necessary to operate the Project or Building. Landlord may determine the nature, size and extent of the Common Areas as well as make changes to the Common Areas from time to time which, in its opinion, are deemed desirable. Noise, dust, dirt or vibration or other incidents to new construction of improvements on lands adjacent or proximate to the Building, whether or not owned by Landlord, shall in no way affect this Lease or impose any liability on Landlord. SECTION 6. SECURITY DEPOSIT Upon execution of this Lease, Tenant shall deposit with Landlord the Security Deposit defined in Section 1(K) above, which shall be held by Landlord as security for the performance by Tenant of all terms, covenants and conditions of this Lease. It is expressly understood and agreed that such Security Deposit is not an advance rental deposit or a measure of Landlord's damages in case of Tenant's default. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of rent or the obligation to repair and maintain the Premises or to perform any other term, covenant or condition contained herein, Landlord may (but shall not be required to), without prejudice to any other remedy provided herein or provided by law and without notice to Tenant, use the Security Deposit, or any portion of it, to cure the default or to compensate Landlord for all damages sustained by Landlord resulting from Tenant's default. Tenant shall immediately on demand pay to Landlord a sum equivalent to the portion of the Security Deposit so expended or applied by Landlord as provided in this Section so as to maintain the Security Deposit in the sum initially deposited with Landlord. Although the Security Deposit shall be deemed the property of Landlord, if Tenant is not in default at the expiration or termination of this Lease, Landlord shall return the Security Deposit (or applicable portion thereof) to Tenant. Landlord shall not be required to keep the Security Deposit separate from its general funds and Landlord, not Tenant, shall be entitled to all interest, if any, accruing on any such Security Deposit. Upon any sale or transfer of its interest in the Building, Landlord shall transfer the Security Deposit to its successor in interest and thereupon, Landlord shall be released from any liability or obligation with respect thereto. SECTION 7. TENANT'S TAXES Tenant shall be liable for any tax (now or hereafter imposed by any governmental entity) applicable to or measured by or on the rents or any other charges payable by Tenant under this Lease, including (but not limited to) any gross income tax, gross receipts tax or excise tax with respect to the receipt of such rent or other charges or the possession, leasing or operating, use or occupancy of the Premises, but not including any net income, franchise, capital stock, estate or inheritance taxes. If any such tax is required to be paid to the governmental taxing entity directly by Landlord, then Landlord shall pay the amount due and, upon demand, shall be fully reimbursed by Tenant for such payment. 6 12 Tenant shall also be liable for all taxes levied against the leasehold held by Tenant or against any personal property, leasehold improvements, additions, alterations and fixtures placed by or for Tenant in, on or about the Premises, Building and Project or constructed by Landlord for Tenant in the Premises; and if any such taxes are levied against Landlord or Landlord's property, or if the assessed value of such property is increased (whether by special assessment or otherwise) by the inclusion therein of value placed on such leasehold, personal property, leasehold improvements, additions, alterations and fixtures, and Landlord pays any such taxes (which Landlord shall have the right to do regardless of the validity thereof), Tenant, upon demand, shall fully reimburse Landlord for the taxes so paid by Landlord or for the proportion of such taxes resulting from such increase in any assessment. SECTION 8. USE OF PREMISES A. Permitted Uses. Tenant shall use the Premises solely for the Permitted Use specified in Section 1(L) above, and for no other use, and under the name specified in Section 1(B) above. Tenant shall, at its own cost and expense, obtain any and all licenses and permits necessary for any such use. Tenant shall not do or permit anything to be done in or about the Premises, Common Areas, Building or Project which will in any way obstruct or interfere with the rights of Landlord or other tenants or occupants of the Building or injure or annoy them or use or allow the Premises to be used for any unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises and Common Areas or permit any odors to emanate from the Premises and intrude upon the Common Areas or the premises of Landlord or other tenants. Tenant shall not commit or suffer to be committed any waste in or upon the Premises, Common Areas, Building or Project. Tenant shall not do or permit anything to be done in or about the Premises, Common Areas, Building or Project which may render the insurance thereon void or increase the insurance risk thereon. If an increase in any fire and extended coverage insurance premiums paid by Landlord for the Building and Project is caused by Tenant's use and occupancy of the Premises, then Tenant shall pay as additional rental the amount of such increase to Landlord. B. Compliance with Laws. Tenant shall not use the Premises, Building, Project or Common Areas in any way (or permit or suffer anything to be done in or about the same) which will conflict with any law, statute, ordinance or governmental rule or regulation or any covenant, condition or restriction (whether or not of public record) affecting the Premises, Project or Building, now in force or which may hereafter be enacted or promulgated including, but not limited to, the provisions of any city or county zoning codes regulating the use thereof. Tenant shall, at its sole cost and expense, promptly comply with (i) all laws, statutes, ordinances and governmental rules and regulations, now in force or which may hereafter be in force, applicable to Tenant or its use of or business operations in the Premises including structural, utility system and life safety system changes necessitated by Tenant's acts, use of the Premises or by improvements made by or for Tenant, (ii) all requirements, and other covenants, conditions and restrictions, now in force or which may hereafter be in force, which affect the Premises, and (iii) all requirements, now in force or which may hereafter be in force, of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises, Building or Project. The judgment of any court of competent jurisdiction or the admission by Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, statute, ordinance, governmental rule or regulation or any requirement, covenant, condition or restriction shall be conclusive of the fact as between Landlord and Tenant. Tenant agrees to fully indemnify Landlord against any liability, claims or damages arising as a result of a breach of the provisions of this Section 8(B) by Tenant, and against all costs, expenses, fines or other charges arising therefrom, including, without limitation, reasonable attorneys' fees and related costs incurred by Landlord in connection therewith, which indemnity shall survive the expiration or earlier termination of this Lease. Without limiting the generality 7 13 of the foregoing, it is expressly understood and agreed that Tenant is accepting the Premises "AS IS," in its present state and condition, without any representations or warranties from Landlord of any kind whatsoever, either express or implied, with respect to the Premises or the Building, including without limitation the compliance of the Premises or the Building with The Americans With Disabilities Act and the rules and regulations promulgated thereunder, as amended from time to time (the "ADA"). Tenant shall be responsible for insuring that the Premises and Tenant's use thereof and operations therein fully and completely comply with the ADA. If Tenant's use of the Premises or operations therein cause Landlord to incur any obligation under the ADA, as reasonably determined by Landlord, then Tenant shall reimburse Landlord for Landlord's costs and expenses in connection therewith. If Tenant's initial use of the Premises is not a "place of public accommodation" within the meaning of the ADA, then Tenant may not thereafter change the use of the Premises to cause the Premises to become a "place of public accommodation." In the event that Tenant desires or is required hereby to make Alterations (as defined below) to the Premises in order to satisfy its obligations under the ADA, then all such Alterations shall be subject to any requirements in this Lease with respect to Alterations of the Premises, and shall be performed at Tenant's sole cost and expense. C. Hazardous Materials. (1) Tenant covenants and agrees that it shall not cause or permit any Hazardous Materials (as defined below) to be brought upon, kept, or used in or about the Premises, Building or Project by Tenant, its agents, employees, contractors or invitees. The foregoing covenant shall not extend to substances typically found or used in general office applications so long as (a) such substances and any equipment which generates such substances are maintained only in such quantities as are reasonably necessary for Tenant's operations in the Premises, (b) such substances are used strictly in accordance with the manufacturers' instructions therefor, (c) such substances are not disposed of in or about the Project in a manner which would constitute a release or discharge thereof, and (d) all such substances and any equipment which generates such substances are removed from the Project by Tenant upon the expiration or earlier termination of this Lease. Any use, storage, generation, disposal, release or discharge by Tenant of Hazardous Materials in or about the Project as is permitted pursuant to this Section shall be carried out in compliance with all applicable federal, state and local laws, ordinances, rules and regulations, including without limitation any labeling standards established by state regulations. Moreover, no hazardous waste resulting from any operations by Tenant shall be stored or maintained by Tenant in or about the Project for more than ninety (90) days prior to removal by Tenant. Tenant shall, annually within thirty (30) days after Tenant's receipt of Landlord's written request therefor, provide to Landlord a written list identifying any Hazardous Materials then maintained by Tenant in the Project, the use of each such Hazardous Material and the approximate quantity of each such Hazardous Material so maintained by Tenant, together with written certification by Tenant stating, in substance, that neither Tenant nor any person for whom Tenant is responsible has released or discharged any Hazardous Materials in or about the Project. (2) In the event that Tenant proposes to conduct any use or to operate any equipment which will or may utilize or generate a Hazardous Material other than as specified in Section 8(C)(1) above, Tenant shall first in writing submit such use or equipment to Landlord for approval. No approval by Landlord shall relieve Tenant of any obligation of Tenant pursuant to this Section 8(C), including the removal, clean-up and indemnification obligations imposed upon Tenant by this Section 8(C). Tenant shall, within five (5) days after receipt thereof, furnish to Landlord copies of all notices or other communications 8 14 received by Tenant with respect to any actual or alleged release or discharge of any Hazardous Material in or about the Premises or the Project and shall, whether or not Tenant receives any such notice or communication, notify Landlord in writing of any discharge or release of Hazardous Material by Tenant or anyone for whom Tenant is responsible in or about the Premises or the Project. In the event that Tenant is required to maintain any Hazardous Materials license or permit in connection with any use conducted by Tenant or any equipment operated by Tenant in the Premises, copies of each such license or permit, each renewal or revocation thereof and any communication relating to suspension, renewal or revocation thereof shall be furnished to Landlord within five (5) days after receipt thereof by Tenant. Compliance by Tenant with the two immediately preceding sentences shall not relieve Tenant of any other obligation of Tenant pursuant to this Section 8(C). (3) Upon any violation of the foregoing covenants, Tenant shall be obligated, at Tenant's sole cost, to clean-up and remove from the Project all Hazardous Materials introduced into the Project by Tenant or any person or entity for whom Tenant is responsible. Such clean-up and removal shall include all testing and investigation required by any governmental authorities having jurisdiction and preparation and implementation of any remedial action plan required by any governmental authorities having jurisdiction. All such clean-up and removal activities of Tenant shall, in each instance, be conducted to the satisfaction of Landlord and all governmental authorities having jurisdiction. Landlord's right of entry pursuant to Section 11 below shall include the right to enter and inspect the Premises for violations of Tenant's covenants in this Section 8(C). (4) Tenant shall indemnify, defend and hold harmless Landlord, and its successors, assigns, partners, officers, employees, agents, lenders and attorneys from and against any and all claims, liabilities, losses, actions, costs and expenses (including attorneys' fees and costs of defense) incurred by such indemnified persons, or any of them, as the result of (a) the introduction into or about the Project by Tenant or anyone for whom Tenant is responsible of any Hazardous Materials, (b) the usage, storage, maintenance, generation, disposition or disposal by Tenant or anyone for whom Tenant is responsible of Hazardous Materials in or about the Project, (c) the discharge or release in or about the Project by Tenant or anyone for whom Tenant is responsible of any Hazardous Materials, (d) any injury to or death of persons or damage to or destruction of property resulting from the use, introduction, maintenance, storage, generation, disposal, disposition, release or discharge by Tenant or anyone for whom Tenant is responsible of Hazardous Materials in or about the Project, and (e) any failure of Tenant or anyone for whom Tenant is responsible to observe the foregoing covenants of this Section 8(C). (5) Upon any violation of the foregoing covenants, Landlord shall be entitled to exercise all remedies available to a landlord against a defaulting tenant, including but not limited to those set forth in Section 20. Without limiting the generality of the foregoing, Tenant expressly agrees that upon any such violation Landlord may, at its option, (a) immediately terminate this Lease or (b) continue this Lease in effect until compliance by Tenant with its clean-up and removal covenant notwithstanding any earlier expiration date of the term of this Lease. No action by Landlord hereunder shall impair the obligations of Tenant pursuant to this Section 8(C). (6) As used in this Section 8(C), "Hazardous Materials" is used in its broadest sense and shall include any petroleum based products, pesticides, paints and solvents, polychlorinated biphenyl, lead, cyanide, DDT, acids, ammonium compounds and other chemical products 9 15 and any substance on material defined or designated as hazardous or toxic, or other similar term, by any federal, state or local environmental statute, regulation, or ordinance affecting the Premises, Building or Project presently in effect or that may be promulgated in the future, as such statutes, regulations and ordinances may be amended from time to time, including but not limited to the statutes listed below: Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et seq. Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. Section 9601 et seq. Clean Air Act, 42 U.S.C. Sections 7401-7626. Water Pollution Control Act (Clean Water Act of 1977), 33 U.S.C. Section 1251 et seq. Insecticide, Fungicide, and Rodenticide Act (Pesticide Act of 1987), 7 U.S.C. Section 135 et seq. Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq. Safe Drinking Water Act, 42 U.S.C. Section 300(f) et seq. National Environmental Policy Act (NEPA) 42 U.S.C. Section 4321 et seq. Refuse Act of 1899, 33 U.S.C. Section 407 et seq. California Health and Safety Code Section 25316 et seq. California Code of Federal Regulations, Title 8 Section 5194 California Code of Federal Regulations, Title 22 Section 12601 (7) By its signature to this Lease, Tenant confirms that it has conducted its own examination of the Premises and the Project with respect to Hazardous Materials and accepts the same "AS IS" and with no Hazardous Materials present thereon. (8) Tenant acknowledges that incorporation of any material containing asbestos into the Premises is absolutely prohibited. Tenant agrees, represents and warrants that it shall not incorporate or permit or suffer to be incorporated, knowingly or unknowingly, any material containing asbestos into the Premises. D. Landlord's Rules and Regulations. Tenant shall, and Tenant agrees to cause its agents, servants, employees, invitees and licensees to, observe and comply fully and faithfully with the rules and regulations attached hereto as Exhibit C or such rules and regulations which may hereafter be adopted by Landlord (the "Rules") for the care, protection, cleanliness, and operation of the Premises, Building and Project, and any modifications or additions to the Rules adopted by Landlord, provided that, Landlord shall give written notice thereof to Tenant. Landlord shall not be responsible to Tenant for the failure of any other party to observe or comply with any of the Rules. E. Traffic and Energy Management; Recycling. Tenant agrees to cooperate and use its best efforts to participate in governmentally mandated or voluntary traffic management and recycling programs generally applicable to businesses located in the area in which the Project is situated or to the Project and, initially, shall encourage and support van and car pooling by employees and shall encourage and support staggered and flexible working hours for employees to the fullest extent permitted by the requirements of Tenant's business. Landlord shall offer, for the benefit of Tenant and other occupants of the Building and their respective employees only, the non-exclusive use of a shuttle service from the Project to a Caltrain station and a BART station at times designated by Landlord. Landlord shall have the option to discontinue such shuttle service at any time. Neither this Section 8(E) nor any other provision in this Lease, however, is intended to or shall create any rights or benefits in any other person, firm, company, governmental entity or the public. Landlord and Tenant agree to cooperate and use their best efforts to comply with any and all guidelines or 10 16 controls imposed upon either Landlord or Tenant by federal or state governmental organizations or by any energy conservation association to which Landlord is a party concerning energy management. Landlord will provide recycling containers for Tenant's use at the Premises. Tenant agrees to use its best efforts to encourage its employees to recycle all recyclable material. Any costs, fees, fines or other levies assessed against Landlord as the result of failure of Tenant to comply with this Section 8(E) shall be reimbursed by Tenant to Landlord as additional rent. SECTION 9. SERVICE AND UTILITIES A. Standard Building Services. So long as Tenant is not in default hereunder (including any default of a type described in clauses (4) - (6) of Section 20(A) below), Landlord agrees to make available to the Premises, during the Building's normal business hours of 8:00 a.m. to 6:00 p.m. Monday through Friday (holidays excepted), which hours are subject to change from time to time as reasonably determined by Landlord, such heat and air conditioning (hereafter "HVAC"), water and electricity, as may be required in Landlord's judgment for the comfortable use and occupation of the Premises for general office purposes and at a level which is usual and customary in similar office buildings in the area where the Building is located, all of which shall be subject to the Rules of the Building as well as any governmental requirements or standards relating to, among other things, energy conservation. B. After-Hours Charges. During non-business hours Landlord shall keep the public areas of the Building and Project lighted and shall provide elevator service with at least (1) elevator, but shall not be obligated to furnish HVAC to the Premises. If Tenant requires HVAC during non-business hours, Tenant shall give Landlord at least twenty-four (24) hours prior notice of such requirement or shall follow such other procedure for activating the building energy management system as Landlord may advise Tenant, and Tenant shall pay Landlord for such extra service at Landlord's standard rates. Such rates are subject to increase from time to time based on increase in Landlord's costs associated with providing such extra services. All payments required for such charges shall be deemed to be additional rent and Landlord shall have the same remedies for a default in payment thereof as for a default in payment of rent. If the Building is designed for individual tenant operation of the HVAC, Tenant agrees to pay the cost of operating the HVAC at any time other than the schedule of hours for providing the same set forth above, which cost may include the operation of the HVAC for space located outside the Premises when such space is serviced concurrently with the operation of the HVAC for the benefit of the Premises. C. Limitation on Landlord's Obligations. Landlord shall not be in breach of its obligations under this Section 9 unless Landlord fails to make any repairs or perform maintenance which it is obligated to perform hereunder and such failure persists for an unreasonable time after written notice of a need for such repairs or maintenance is given to Landlord by Tenant. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of Landlord's failure to furnish or the interruption or termination of any of the foregoing when such failure, interruption or termination is caused by accidents, breakage, repairs, strikes, brownouts, blackouts, lockouts or other labor disturbances or labor disputes of any character, or by any other cause, similar or dissimilar, beyond the actual or reasonable control of Landlord, nor shall such failure, interruption or termination under such circumstances be construed as a constructive or actual eviction of Tenant. Landlord shall not be liable under any circumstances for loss or injury to property or business, however occurring, through or in connection with or incidental to Landlord's failure to furnish or the interruption or termination of any of said service or utilities. D. Excess Service. Tenant shall not, without the written consent of Landlord, use any apparatus or device in the Premises, including, without limitation, electronic data processing machines, punch card machines or machines using in excess of one hundred twenty (120) volts or which consumes 11 17 more electricity than is usually furnished for the Permitted Use of the Premises, as determined by Landlord. Tenant shall not consume water or electric current in excess of that usually furnished or supplied for the use of the Premises (as determined by Landlord), without first procuring the written consent of Landlord, which Landlord may refuse. The excess cost (including any penalties for excess usage) for such water and electric current shall be established by an estimate made by a utility company or independent engineer hired by Landlord at Tenant's expense and Tenant shall pay such excess costs each month with Monthly Rental. All costs and expenses of modifying existing equipment, cables, lines, etc. or installing additional equipment, cables, lines, etc. to accommodate such excess usage or use by Tenant of such apparatus or device shall be borne by Tenant. E. Security Services. Certain security measures (both by electronic equipment and personnel) may be provided by Landlord in connection with the Building and Common Areas. However, Tenant hereby acknowledges that such security is intended to be only for the benefit of the Landlord in protecting its property from fire, theft, vandalism and similar perils and while certain incidental benefits may accrue to Tenant therefrom, such security is not for the purpose of protecting either the property of Tenant or the safety of its officers, employees, servants or invitees. By providing such security, Landlord assumes no obligation to Tenant and shall have no liability arising therefrom and Tenant hereby releases Landlord from all liability relating thereto. If, as a result of Tenant's occupancy of the Premises, Landlord in its sole discretion determines that it is necessary to provide security or implement additional security measures or devices in or about the Building or the Common Areas, Tenant shall be required to pay, as additional rent, the cost or increased cost, as the case may be, of such security. SECTION 10. MAINTENANCE AND REPAIRS A. Landlord's Obligations. Except for special or non-standard systems and equipment installed for Tenant's exclusive use, Landlord shall keep in good condition and repair, at Landlord's initial cost and expense, HVAC systems which service the Premises as well as other premises within the Building, the foundations, exterior walls, structural condition of interior bearing walls and roof of the Premises, interior walls, interior surfaces of exterior walls, ceilings, windows, doors, cabinets, draperies, electrical and lighting facilities within the Premises, window coverings, carpeting and other floor coverings, plate glass and skylights located within the Premises and the Building, as well as the parking lots, walkways, driveways, landscaping, fences, signs, and utility installations of the Project. Janitorial services to the Premises shall be provided in accordance with specifications established by Landlord, which specifications are subject to change from time to time in the reasonable discretion of Landlord. Landlord shall also provide elevator service, restroom supplies and window washing with reasonable frequency. Landlord shall not be required to make any repairs that are the obligation of any other tenant or occupant within the Building or Project or repairs for damage caused by any negligent or intentional act or omission of Tenant or any person claiming through or under Tenant or any of Tenant's employees, suppliers, shippers, customers or invitees, in which event Tenant shall repair such damage at its sole cost and expense. Tenant hereby waives and releases its right to make repairs at Landlord's expense under any law, statute, ordinance, rule or regulation now or hereafter in effect in any jurisdiction in which the Project is located. B. Tenant's Obligations. Tenant shall, at its sole cost and expense, make all repairs and replacements as and when Landlord deems reasonably necessary to preserve in good working order and condition any special or supplementary HVAC systems located within the Premises and installed for the exclusive use of the Premises, Tenant's cabling and telephone lines and all other non-standard utility facilities and systems exclusively serving the Premises, and all of Tenant's 12 18 trade fixtures located within the Premises; provided, however, at Tenant's written request, Landlord will maintain such non-standard improvements at Tenant's expense, at a cost or charge equal to the costs incurred in such maintenance plus an additional overhead charge of fifteen percent (15%). Tenant shall not commit or permit any waste in or about the Premises, the Building or the Project. Tenant shall reimburse Landlord on demand for all repairs to the Premises, Building and Project which are required, in the reasonable opinion of Landlord, as a result of any misuse, neglect, negligent or intentional act or omission committed or permitted by Tenant or by any subtenant, agent, employee, supplier, shipper, customer, invitee or servant of Tenant. C. Landlord's Right to Make Repairs. In the event that Tenant fails to maintain the Premises in good and sanitary order, condition and repair as required by this Lease, then, following written notification to Tenant (except in the case of an emergency, in which case no prior notification shall be required), Landlord shall have the right, but not the obligation, to enter the Premises and to do such acts and expend such funds at the expense of Tenant as are required to place the Premises in good, safe and sanitary order, condition and repair. Any amount so expended by Landlord plus an overhead charge of fifteen percent (15%) of the expended amount shall be paid by Tenant promptly upon demand as additional rent. D. Condition of Premises Upon Surrender. Except as otherwise provided in this Lease, Tenant shall, upon the expiration or earlier termination of the Term, surrender the Premises to Landlord in the same condition as on the date Tenant took possession, reasonable wear and tear excepted. All appurtenances, fixtures, improvements, additions and other property attached to or installed in the Premises whether by Landlord or by or on behalf of Tenant, and whether at Landlord's expense or Tenant's expense, shall be and remain the property of Landlord unless Landlord specifically agrees otherwise in writing. Any furnishings and personal property of Tenant located in the Premises, whether the property of Tenant or leased by Tenant (including the fixtures, improvements and other items agreed, in writing, by Landlord to belong to the Tenant as provided in the preceding sentence and, unless Landlord elects to require Tenant to leave the same in the Premises, which Landlord shall have the right to do, all data, telephone or other cabling or wiring installed by or on behalf of Tenant in the Premises, including the plenum area above the ceiling of the Premises), shall be and remain the property of Tenant and shall be removed by Tenant at Tenant's sole cost and expense at the expiration of the Term. Tenant shall promptly repair any damage to the Premises or the Building resulting from such removal. Any of Tenant's property not removed from the Premises upon the expiration of the Term shall, at Landlord's option, either become the property of Landlord or may be removed by Landlord and Tenant shall pay to Landlord the cost of such removal within ten (10) days after delivery of a bill therefor or Landlord, at its option, may deduct such amount from the Security Deposit. Any damage to the Premises, including any structural damage, resulting from Tenant's use or from the removal of Tenant's fixtures, furnishings and equipment, shall be repaired by Tenant at Tenant's expense. SECTION 11. ENTRY BY LANDLORD. Landlord reserves and shall at any and all times have the right to enter the Premises at reasonable times during normal business hours and at any time in case of an emergency to inspect the same to determine whether Tenant is complying with its obligations hereunder; to supply janitorial service and any other service to be provided by Landlord hereunder; and, upon reasonable notice to Tenant, may exhibit the Premises to prospective purchasers, mortgagees or prospective tenants; to post notices of nonresponsibility; and to alter, improve or repair the Premises and any portion of the Building and Project, without abatement of rent, and may for that purpose erect scaffolding and other necessary structures that are reasonably required by the character of the work to be performed by Landlord, provided that the business of Tenant 13 19 shall not be interfered with unreasonably. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open such doors in the event of an emergency. Any entry to the Premises or portions thereof obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises, or any portion thereof. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business and any loss of occupancy or quiet enjoyment of the Premises by reason of Landlord's exercise of its right of entry in accordance with this Section 11, and Tenant shall not be entitled to an abatement or reduction of rent in connection therewith. SECTION 12. ALTERATIONS, ADDITIONS AND TRADE FIXTURES Except to the extent provided for in Exhibit B hereto, Tenant shall not make any alterations, additions or improvements to the Premises, or any part thereof, whether structural or nonstructural (hereafter "Alterations"), without Landlord's prior written consent. If Tenant does not use Landlord's architect or contractor to design or perform Alterations, Tenant shall pay to Landlord, as additional rent, a management fee equal to ten percent (10%) of the cost of the Alterations plus any professional fees or other costs and expenses incurred by Landlord in reviewing such plans and specifications or inspecting progress of any such work. In order to obtain Landlord's preliminary consent, which preliminary consent may be given or denied in Landlord's sole discretion, Tenant shall submit such information as Landlord may require, including without limitation plans and specifications for the Alterations. After Landlord gives preliminary consent, in order to obtain Landlord's final consent, which consent may not be unreasonably withheld, Tenant shall then submit (a) permits, licenses, bonds, and the construction contract, all in conformance with the plans and specifications preliminarily approved by Landlord; (b) evidence of insurance coverage in such types and amounts and from such insurers as Landlord deems satisfactory; and (c) such other information as Landlord deems reasonably necessary. The construction contract shall, at a minimum, require the general contractor and all subcontractors to obey the rules and regulations of the Building and Project. All Alterations shall be done in good workmanlike manner by qualified and licensed contractors or mechanics, as approved by Landlord. Except for Alterations to the Premises, Tenant shall have no right whatsoever to make any alterations or modifications to any portion of the Building or its appurtenant facilities nor shall any Alterations affect the structure of the Building or its exterior appearance. All Alterations made by or for Tenant (other than Tenant's moveable trade fixtures), shall, unless Landlord expressly requires or agrees otherwise in writing, immediately become the property of Landlord, without compensation to Tenant, but Landlord has no obligation to repair, maintain or insure those Alterations. Carpeting, shelving and cabinetry are considered improvements of the Premises and not movable trade fixtures, regardless of how or where affixed. No Alterations will be removed by Tenant from the Premises either during or at the expiration or earlier termination of the Term, and they shall be surrendered as a part of the Premises unless Landlord has required that Tenant remove them. At Landlord's discretion, Alterations are subject to removal by Tenant and at Tenant's sole cost and expense. Upon any such removal, Tenant shall repair any damage caused to the Premises thereby, and shall return the Premises to the condition they were in prior to installation of such Alterations so removed. Tenant shall indemnify, defend and keep Landlord free and harmless from and against all liability, loss, damage, cost, attorneys' fees and any other expense incurred on account of claims by any person performing work or furnishing materials or supplies for Tenant or any person claiming under Tenant. Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Landlord against any liability for mechanic's liens and to insure completion of the work. Landlord shall have the right at all times to post on the Premises any notices permitted or required by law, or that Landlord shall deem proper, for the protection of Landlord, the Premises, the Building and the Project, and any other party having an interest 14 20 therein, from mechanics' and materialmen's liens, and Tenant shall give to Landlord written notice of the commencement of any construction in or on the Premises at least thirty (30) days prior thereto. Prior to the commencement of any such construction, Landlord shall be furnished certificates of insurance, naming Landlord as an additional insured, evidencing that each contractor performing work has insurance acceptable to Landlord, including but not limited to general liability insurance of not less that Two Million Dollars ($2,000,000.00) and worker's compensation insurance in the statutorily required amount. SECTION 13. MECHANIC'S LIENS Tenant shall keep the Premises, the Building and the Project free from any liens arising out of any work performed, material furnished or obligation incurred by or for Tenant or any person or entity claiming through or under Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of any such lien, cause the same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause such lien to be released by such means as Landlord deemed proper, including payment of the claim giving rise to such lien. All such sums paid and all expenses incurred by Landlord in connection therewith shall be due and payable to Landlord by Tenant on demand. SECTION 14. INSURANCE A. Tenant. During the Term hereof, Tenant shall keep in full force and effect the following insurance and shall provide appropriate insurance certificates to Landlord prior to the Lease Commencement Date and annually thereafter before the expiration of each policy: (1) Commercial general liability insurance for the benefit of Tenant and Landlord as an additional insured, with a limit of not less than Two Million Dollars ($2,000,000.00) combined single limit per occurrence, against claims for personal injury liability including, without limitation, bodily injury, death or property damage liability and covering (a) the business(es) operated by Tenant and by any subtenant of Tenant on the Premises, (b) operations of independent contractors engaged by Tenant for services or construction on or about the Premises, and (c) contractual liability; (2) All risk property insurance, insuring the personal property, furniture, furnishings and fixtures belonging to Tenant located on the Premises for not less than one hundred percent (100%) of the actual replacement value thereof; (3) Workers' compensation in the amount required by law; and (4) Business interruption or loss of income insurance in amounts satisfactory to Landlord, with a rental interruption rider assuring Landlord that the rent due hereunder will be paid for a period of not less than twelve (12) months or the remaining term of this Lease, whichever is shorter, if the Premises are destroyed or rendered inaccessible by a risk insured against by a policy of all risk insurance. Each insurance policy obtained by Tenant pursuant to this Lease shall contain a clause that the insurer will provide Landlord with at least thirty (30) days' prior written notice of any material change, non-renewal or cancellation of the policy, shall be in a form satisfactory to Landlord and shall be taken out with an insurance company authorized to do business in the State in which the Project is located and rated not less than Best's Financial Class X and Best's Policy Holder Rating Project is located and rated not less than Best's Financial Class X and Best's Policy Holder Rating "A". In addition, any insurance policy obtained by Tenant shall be written as a primary policy, and shall not be contributing with or in excess of any coverage which Landlord may carry. The 15 21 liability limits of the above described insurance policies shall in no manner limit the liability of Tenant under the terms of Section 15 below. Not more frequently than every two (2) years, if, in the reasonable opinion of Landlord, the amount of liability insurance specified in this Section 14 is not adequate, the above-described limits of coverage shall be adjusted by Landlord, by written notification to Tenant, in order to maintain the level of insurance protection at least equal to the protection afforded on the date the Term commences. If Tenant fails to maintain and secure the insurance coverage required under this Section 14, then Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to procure and maintain such insurance, the cost of which shall be due and payable to Landlord by Tenant on demand. If, on account of the failure of Tenant to comply with the provisions of this Section, Landlord is deemed a co-insurer by its insurance carrier, then any loss or damage which Landlord shall sustain by reason thereof shall be borne by Tenant and shall be immediately paid by Tenant as additional rent upon receipt of a bill therefor and evidence of such loss. B. Landlord. During the Term hereof, Landlord shall keep in full force and effect the following insurance: (1) All risk property insurance (including flood and earthquake) insuring the Building and Landlord's improvements in an amount not less than the full replacement cost thereof; and (2) Such other insurance as Landlord deems necessary in its sole and absolute discretion. All insurance policies shall be issued in the names of Landlord and Landlord's lender, if any, and any other party reasonably designated by Landlord as an additional insured, as their interests appear. The insurance policies shall provide that any proceeds shall be made payable to Landlord, or to the holders of mortgages or deeds of trust encumbering Landlord's interest in the Premises, Building, and Project, or to any other party reasonably designated by Landlord as an additional insured, as their interests shall appear. C. Waiver of Subrogation. Landlord and Tenant each hereby waives any and all rights of recovery against the other, and against any other tenant or occupant of the Building and against the officers, employees, agents, representatives, customers and business visitors of such other party and of each such other tenant or occupant of the Building, for loss of or damage to such waiving party or its property or the property of others under its control, arising from any cause insured against under any policy of property insurance required to be carried by such waiving party pursuant to the provisions of this Lease (or any other policy of property insurance carried by such waiving party in lieu thereof) at the time of such loss or damage. The foregoing waiver shall be effective whether or not a waiving party actually obtains and maintains such insurance which such waiving party is required to obtain and maintain pursuant to this Lease (or any substitute therefor). Landlord and Tenant shall, upon obtaining the policies of insurance which they are required to maintain hereunder, give notice (if required) to their respective insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. SECTION 15. INDEMNITY A. Indemnification by Tenant. Tenant agrees to indemnify, defend and hold Landlord and its officers, directors, partners, agents and employees (collectively, "Indemnitees") entirely harmless from and against all liabilities, loss, demands, actions, expenses or claims, including reasonable attorneys' 16 22 fees and court costs, for injury to or death of any person or for damages to any property or for violation of law arising out of or in any manner connected with (i) the use, occupancy or enjoyment of the Premises, Building or Project by Tenant or Tenant's agents, employees, invitees or contractors (the "Tenant's Agents") or any work, activity or other things allowed or suffered by Tenant or Tenant's Agents to be done in or about the Premises, Building or Project, (ii) any breach or default in the performance of any obligation of Tenant under this Lease, and (iii) any act or failure to act, whether negligent or otherwise tortious, by Tenant or Tenant's Agents in or about the Premises, Building or Project; provided, however, that Tenant shall not be required to indemnify Landlord in respect of any loss or damage arising by reason of the gross negligence or willful misconduct of Landlord. B. Limitation on Landlord's Liability; Release of Directors, Officers and Partners of Landlord. Tenant agrees that, in the event Tenant shall have any claim against Landlord under this Lease arising out of the subject matter of this Lease, Tenant's sole recourse shall be against the Landlord's interest in the Building, for the satisfaction of any claim, judgment or decree requiring the payment of money by Landlord as a result of a breach hereof or otherwise in connection with this Lease, and no other property or assets of Landlord, its officers, directors, employees, successors or assigns, shall be subject to the levy, execution or other enforcement procedure for the satisfaction of any such claim, judgment, injunction or decree. MOREOVER, TENANT AGREES THAT LANDLORD SHALL IN NO EVENT AND UNDER NO CIRCUMSTANCES BE RESPONSIBLE FOR ANY CONSEQUENTIAL, SPECIAL, INCIDENTAL OR PUNITIVE DAMAGES INCURRED OR SUSTAINED BY TENANT, OR ITS EMPLOYEES, AGENTS, CONTRACTORS OR INVITEES AS A RESULT OF OR IN ANY WAY CONNECTED TO TENANT'S OCCUPANCY OF THE PREMISES. None of the Indemnitees shall be liable to Tenant for, and, as such assumption and waiver do not violate public policy, Tenant assumes shall risk of, and waives any and all right to assert claims against, or obtain any damages from, the Indemnitees with respect to, loss, injury, or damages which may be sustained by the person, goods, wares, merchandise or property of Tenant, Tenant's Agents, or any other person in or about the Premises from any cause whatsoever, whether such damage or injury results from conditions arising within the Premises or from other sources and whether known, unknown, foreseen, unforeseen, patent or latent. Tenant understands and acknowledges the significance and consequence of such specific assumption of risk and waiver. C. No Landlord Liability for Force Majeure Events. Landlord shall not be liable or responsible to Tenant for any loss or damage to any property or person occasioned by theft, fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order, requisition, or order of governmental body or authority, or for any damage or inconvenience that may arise through repair or alteration of any part of the Project, the Building or the Premises, or a failure to make any such repairs, except as expressly provided in this Lease. D. Indemnification by Landlord. Landlord shall indemnify, defend, protect and save Tenant harmless from all losses, costs, damages, claims and liability whatsoever on account of any damage or liability of any kind or for any injury to or death of persons arising in the Common Areas if caused by or resulting from any negligent or willful act or omission of Landlord or its employees or agents; provided, however, that Landlord's obligation to indemnify and hold harmless Tenant pursuant to the foregoing provisions is made for the purpose of providing any benefit from time to time available to Tenant under policies of insurance carried by Landlord, and further provided that the foregoing provisions shall in no event require Landlord to provide any defense to Tenant or pay any sum to or on behalf of Tenant in addition to that which may be provided and paid pursuant to such policies of insurance as may be carried by Landlord from time to time. 17 23 SECTION 16. ASSIGNMENT AND SUBLETTING BY TENANT A. Consent Required. Tenant shall not, directly or indirectly, voluntarily or by operation of law, sell, assign, encumber, pledge or otherwise transfer or hypothecate all or any part of the Premises or Tenant's leasehold estate hereunder (collectively, "Assignment"), or permit the Premises to be occupied by anyone other than Tenant or sublet the Premises ("Sublease") or any portion thereof without Landlord's prior written consent being had and obtained in each instance, subject to the terms and conditions contained in this Section. In no event will Landlord's consent be unreasonably withheld. Any sale or other transfer, including transfer by consolidation, merger or reorganization, of twenty-five percent (25%) or more of the voting stock of Tenant, if Tenant is a corporation, or any sale or other transfer of twenty-five percent (25%) or more of the partnership interest in Tenant, if Tenant is a partnership, shall be an Assignment for purposes of this Section. As used in this subsection, the term "Tenant" shall also mean any entity that has guaranteed Tenant's obligation under this Lease, and the prohibition hereof shall be applicable to any sales or transfers of stock or partnership interest of said guarantor. B. Tenant's Request for Consent. If Tenant desires at any time to enter into an Assignment of this Lease or a Sublease of the Premises or any portion thereof, Tenant shall request, in writing, at least sixty (60) days prior to the effective date of the Assignment or Sublease, Landlord's consent to the Assignment or Sublease, and shall provide Landlord with the following information: (1) The name of the proposed assignee, subtenant or occupant; (2) The nature of the proposed assignee's, subtenant's or occupant's business to be carried on in the Premises; (3) The terms and provisions of the proposed Assignment or Sublease and a copy of such documents; and (4) Such financial information concerning the proposed assignee, subtenant or occupant which Landlord shall have requested following its receipt of Tenant's request for consent. C. Landlord's Election. At any time within fifteen (15) business days after Landlord's receipt of the notice specified above, Landlord may by written notice to Tenant elect to (1) consent to the proposed Assignment or Sublease, (2) refuse to consent to the proposed Assignment or Sublease, or (3) terminate this Lease in full with respect to an Assignment or terminate in part with respect to a Sublease. Any such termination of this Lease shall be conditioned on Landlord successfully entering into a new lease covering the Premises or a portion thereof with the intended assignee or subtenant on such terms as Landlord and such person may agree, or entering into a new lease covering the Premises or a portion thereof with any other person. In such event, Tenant shall not be entitled to any portion of the profit, if any, which Landlord may realize on account of such termination and reletting. Landlord's exercise of its aforesaid option shall not be construed to impose any liability upon Landlord with respect to any real estate brokerage commission(s) or any other proposed subletting or assignment. D. Landlord's Factors. Landlord and Tenant agree (by way of example and without limitation) that Landlord shall be entitled to take into account any fact or factor which Landlord reasonably deems relevant to its decision to consent or not consent to an Assignment or Sublease, including but not necessarily limited to the following, all of which Tenant hereby agrees are reasonable factors for Landlord's consideration: 18 24 (1) The financial strength of the proposed assignee or subtenant (which shall be at least equal to that of Tenant as of the date of execution of this Lease), including the adequacy of its working capital to pay all expenses anticipated in connection with any remodeling of the Premises. (2) The quality and nature of the business and/or services to be conducted in or from the Premises by the proposed assignee or subtenant and in any other locations which it has. (3) Violation of exclusive use rights previously granted by Landlord to other tenants of the Building. (4) The quality of the appearance of the Premises resulting from any remodeling or renovation to be conducted by the proposed assignee or subtenant, and the compatibility of such quality with that of other premises in the Building. (5) Whether the business in the Premises is, and whether the business to be operated by the proposed assignee or subtenant will be, a "destination business" (i.e., a business which draws patrons to the Building specifically to obtain services from such business). (6) Whether the proposed tenant is a direct competitor of Landlord. (7) Whether there then exists any default by Tenant pursuant to this Lease or any non-payment or non-performance by Tenant under this Lease which, with the passage of time and/or the giving of notice, would constitute a default under this Lease. Moreover, Landlord shall be entitled to be reasonably satisfied that each and every covenant, condition or obligation imposed upon Tenant by this Lease and each and every right, remedy or benefit afforded Landlord by this Lease is not impaired or diminished by such Assignment or Sublease. In no event shall there be any substantial change in the use of the Premises in connection with any Assignment or Sublease except as expressly approved in writing by Landlord in advance. Landlord and Tenant acknowledge that the express standards and provisions set forth in this Lease dealing with Assignment and Sublease, including those set forth in Section 16(E) through 16(H) have been freely negotiated and are reasonable at the date hereof taking into account Tenant's proposed use of the Premises and the nature and quality of the Building and Project. No withholding of consent by Landlord for any reason deemed sufficient by Landlord shall give rise to any claim by Tenant or any proposed assignee or subtenant or entitle Tenant to terminate this Lease or to any abatement of rent. Approval of any Assignment of Tenant's interest shall, whether or not expressly so stated, be conditioned upon such assignee assuming in writing all obligations of Tenant hereunder by a written instrument satisfactory to Landlord. E. Granting of Consent. If Landlord consents to the Sublease or Assignment within said thirty (30) day period, Tenant may enter into such Assignment or Sublease of the Premises or portion thereof, but only upon the terms and conditions set forth in the notice furnished by Tenant to Landlord pursuant to Section 16(B) above. F. Assignment and Sublease Profit. In connection with any Assignment or Sublease, as a condition to Landlord's consent, seventy-five percent (75%) of any sums or other economic consideration received by Tenant directly or indirectly in connection with any assignment or sublease hereunder (except to the extent of assignment or sublease commissions paid by Tenant to a licensed broker at prevailing rates for comparable space) from assignee or sublessee and leasehold improvement costs whether described as rental or otherwise which exceed, in the aggregate, the total sums which 19 25 Tenant is obligated to pay Landlord hereunder (prorated to reflect obligations allocable to that portion of the Premises assigned or sublet) shall be payable to Landlord as additional rent under this Lease. Within fifteen (15) days after written request therefor by Landlord, Tenant shall at any time and from time to time at Landlord's request certify to Landlord the amount of all such sums or other economic consideration received and all such commissions and improvement costs incurred, or expected to be received or incurred. G. Tenant Remains Liable. No consent by Landlord to any Assignment or Sublease by Tenant shall relieve Tenant of any obligation to be performed by Tenant under this Lease, whether arising before or after the Assignment or Sublease. The consent by Landlord to any Assignment or Sublease shall not relieve Tenant of the obligation to obtain Landlord's express written consent to any other Assignment or Sublease. Any Assignment or Sublease that is not in compliance with this Section 16 shall be void and, at the option of Landlord, shall constitute a material default by Tenant under this Lease. The acceptance of rent by Landlord or payment to Landlord of any other monetary obligation by a proposed assignee or sublessee shall not constitute the consent by Landlord to such Assignment or Sublease. Tenant shall promptly provide to Landlord a copy of the fully executed Sublease or Assignment. H. Assignee Becomes Liable. Each assignee, sublessee or other transferee, other than Landlord, shall assume, as provided in this Section 16(H), all obligations of Tenant under this Lease and shall be and remain liable jointly and severally with Tenant for the payment of Monthly Rental and all other monetary obligations hereunder, and for the performance of all the terms, covenants, conditions and agreements herein contained on Tenant's part to be performed for the Term; provided, however, that the assignee, sublessee, or other transferee shall be liable to Landlord for rent only in the amount set forth in the Assignment or Sublease. No Assignment shall be binding on Landlord unless the assignee or Tenant shall deliver to Landlord a counterpart of the Assignment and an instrument in recordable form that contains a covenant of assumption by the assignee satisfactory in substance and form to Landlord, consistent with the requirements of this Section 16(H) but the failure or refusal of the assignee to execute such instrument of assumption shall not release or discharge the assignee from its liability as set forth above. I. Bankruptcy. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq., (the "Bankruptcy Code"), any and all monies or other consideration payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and be promptly paid or delivered to Landlord. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code, shall be deemed, without further act or deed, to have assumed all of the obligations arising under this Lease on and after the date of such Assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. J. Landlord's Fees. Tenant shall pay Landlord's expenses and attorneys' fees incurred in processing an Assignment or Sublease, but in no event less than Five Hundred Dollars ($500.00) for each such proposed transfer to cover the legal review and processing expenses of Landlord, whether or not Landlord shall grant its consent to such proposed transfers. K. Certain Rights Personal to Tenant. All options to extend, renew or expand, if any, contained in this Lease are personal to Tenant. Consent by Landlord to any Assignment or Sublease shall not 20 26 include consent to the assignment or transfer of any such rights with respect to the Premises or any special privileges or extra services granted to Tenant by this Lease, or any addendum or amendment hereto or letter of agreement. All such options, rights, privileges and extra services shall terminate upon the effective date of such Assignment or Sublease unless Landlord specifically grants in writing such options, rights, privileges and extra services to such assignee or subtenant. Similarly, any allowance, abatement or monetary concession provided to Tenant as an inducement to execute this Lease is personal to Tenant and shall be amortized (on a straight line basis) over the term of this Lease. Upon the effective date of any Assignment or Sublease, the then unamortized portion thereof shall be paid by Tenant to Landlord in cash on or before the effective date of such Assignment or Sublease. L. Sublease Rents. Tenant immediately and irrevocably assigns to Landlord, as security for Tenant's obligations under this Lease, all rent from any subletting of all or part of the Premises, and appoints Landlord, as assignee and as attorney-in-fact for Tenant for purposes hereof. Landlord, or a receiver for Tenant appointed on Landlord's application, may collect such rents and apply same toward Tenant's obligations under this Lease; except that, until the occurrence of an act of default by Tenant, Tenant shall have the right and license to collect such rents. SECTION 17. TRANSFER OF LANDLORD'S INTEREST In the event Landlord shall sell or otherwise convey its title to the Building, then, after the effective date of such sale or conveyance, Landlord shall have no further liability under this Lease to Tenant except as to matters of liability which have accrued and are unsatisfied as of the date of sale or conveyance, and Tenant shall seek performance solely from Landlord's purchaser or successor in title. In connection with such sale or transfer, Landlord may assign its interest under this Lease without further notice to or consent by Tenant. In such event, Tenant agrees to be bound to any successor Landlord. SECTION 18. DAMAGE AND DESTRUCTION A. Minor Insured Damage. In the event the Premises or the Building, or any portion thereof, is damaged or destroyed by any casualty that is covered by the insurance maintained by Landlord pursuant to Section 14 above, then Landlord shall rebuild, repair and restore the damaged portion thereof, provided that (1) the amount of insurance proceeds available to Landlord equals or exceeds the cost of such rebuilding, restoration and repair, (2) such rebuilding, restoration and repair can be completed within one hundred eighty (180) days after the work commences in the opinion of a registered architect or engineer appointed by Landlord, (3) the damage or destruction has occurred more than twelve (12) months before the expiration of the Term, and (4) such rebuilding, restoration or repair is then permitted, under applicable governmental laws, rules and regulations, to be done in such a manner as to return the damaged portion thereof to substantially its condition immediately prior to the damage or destruction, including, without limitation, substantially the same Rentable Area on each of the damaged floors. To the extent that insurance proceeds must be paid to a mortgagee or beneficiary under, or must be applied to reduce any indebtedness secured by, a mortgage or deed of trust encumbering the Premises, Building or Project, such proceeds, for the purposes of this Section 18(A), shall be deemed not available to Landlord unless such mortgagee or beneficiary permits Landlord to use such proceeds for the rebuilding, restoration and repair of the damaged portion thereof. Notwithstanding the foregoing, Landlord shall have no obligation to repair any damage to, or to replace any of, Tenant's personal property, furnishings, trade fixtures, equipment or other such property or effects of Tenant. B. Major or Uninsured Damages. In the event the Premises or the Building, or any portion thereof, is damaged or destroyed by any casualty to the extent that Landlord is not obligated, under Section 18(a) above, to rebuild, repair or restore the damaged portion thereof, then Landlord shall, within 26 27 sixty (60) days after such damage or destruction, notify Tenant of its election, at its option, to either (1) rebuild, restore and repair the damaged portions thereof, in which case Landlord's notice shall specify the time period within which Landlord estimates such repairs or restoration can be completed; or (2) terminate this Lease effective as of the date the damage or destruction occurred. If Landlord does not give Tenant written notice within sixty (60) days after the damage or destruction occurs of its election to rebuild or restore and repair the damaged portions thereof, Landlord shall be deemed to have elected to terminate this Lease. C. Abatement of Rent. There shall be an abatement of rent by reason of damage to or destruction of the Premises or the Building, or any portion thereof, to the extent that Landlord receives insurance proceeds for loss of rental income attributable to the Premises, commencing on the date that the damage to or destruction of the Premises or Building has occurred. Such abatement shall be determined by reference to the area of the Premises rendered untenantable, except that if so much of the Premises shall be untenantable that it is not commercially practicable for Tenant to use any portion thereof, rent shall entirely abate during restoration of the casualty. D. Waiver. Tenant shall have no claim against Landlord for any damage suffered by Tenant by reason of any such damage, destruction, repair or restoration. Tenant waives the provisions of California Civil Code Sections 1932(2) and 1933(4) and any present or future laws or case decisions to the same effect. Upon completion of such repair or restoration, Tenant shall promptly refixture the Premises substantially to the condition they were in prior to the casualty and shall reopen for business if closed by the casualty. SECTION 19. CONDEMNATION A. Total or Partial Taking. If all or substantially all of the Premises is condemned or taken in any manner for public or quasi-public use, including but not limited to, a conveyance or assignment in lieu of the condemnation or taking, this Lease shall automatically terminate as of the earlier of the date on which actual physical possession is taken by the condemnor or the date of dispossession of Tenant as a result of such condemnation or other taking. If less than all or substantially all of the Premises is so condemned or taken, this Lease shall automatically terminate only as to the portion of the Premises so taken as of the earlier of the date on which actual physical possession is taken by the condemnor or the date of dispossession of Tenant as a result of such condemnation or taking. If a portion of the Building not including the Premises is condemned or otherwise taken so as to require, in the opinion of Landlord, a substantial alteration or reconstruction of the remaining portions thereof, this Lease may be terminated by Landlord, as of the date on which actual physical possession is taken by the condemnor or dispossession of Tenant as a result of such condemnation or taking, by written notice to Tenant delivered within sixty (60) days following notice to Landlord of the date on which such physical possession is taken or dispossession will occur. B. Award. Landlord shall be entitled to the entire award in any condemnation proceeding or other proceeding for taking for public or quasi-public use, including, without limitation, any award made for the value of the leasehold estate created by this Lease. No award for any partial or total taking shall be apportioned, and Tenant hereby assigns to Landlord any award that may be made in such condemnation or other taking, together with any and all rights of Tenant now or hereafter arising in or to the same or any part thereof. Although all damages in the event of any condemnation are to belong to Landlord whether such damages are awarded as compensation for diminution in value of the leasehold or to the fee of the Premises, Tenant shall have the right to claim and recover from the condemnor, but not from Landlord, such compensation as may be separately awarded or recoverable by Tenant in Tenant's own right on account of damages to Tenant's business by reason of the condemnation and for or on account of any cost or loss to which Tenant might be put in 22 28 removing Tenant's merchandise, furniture and other personal property, fixtures, and equipment, for the interruption of or damage of Tenant's business or for Tenant's relocation expenses. C. Abatement in Rent. In the event of a partial condemnation or other taking that does not result in a termination of this Lease as to the entire Premises pursuant to this Section 19, the rent and all other charges shall abate in proportion to the portion of the Premises taken by such condemnation or other taking. If this Lease is terminated, in whole or in part, pursuant to any of the provisions of this Section 19, all rentals and other charges payable by Tenant to Landlord hereunder and attributable to the Premises taken shall be paid up to the date upon which actual physical possession shall be taken by the condemnor. Landlord shall be entitled to retain all of the Security Deposit until such time as this Lease is terminated as to all of the Premises. D. Temporary Taking. If all or any portion of the Premises is condemned or otherwise taken for public or quasi-public use for a limited period of time, this Lease shall remain in full force and effect and Tenant shall continue to perform all terms, conditions and covenants of this Lease; provided, however, the rent and all other charges payable by Tenant to Landlord hereunder shall abate during such limited period in proportion to the portion of the Premises that is rendered untenantable and unusable as a result of such condemnation or other taking. Landlord shall be entitled to receive the entire award made in connection with any such temporary condemnation or other taking. Tenant shall have the right to claim and recover form the condemnor, but not from Landlord, such compensation as may be separately awarded or recoverable by Tenant in Tenant's own right on account of damages to Tenant's business by reason of the condemnation and for or on account of any cost or loss to which Tenant might be put in removing Tenant's merchandise, furniture and other personal property, fixtures and equipment or for the interruption of or damage to Tenant's business. E. Transfer of Landlord's Interest to Condemnor. Landlord may, without any obligation to Tenant, agree to sell and/or convey to the condemnor the Premises, the Building, the Project or any portion thereof, sought by the condemnor, free from this Lease and the rights to Tenant hereunder, without first requiring that any action or proceeding be instituted or, if instituted, pursued to a judgment. SECTION 20. DEFAULT A. Tenant's Default. The failure by Tenant to perform any one or more of the following obligations shall constitute a default hereunder by Tenant: (1) If Tenant abandons all or a substantial portion of the Premises; (2) If Tenant fails to pay any rent or other charges required to be paid by Tenant under this Lease and such failure continues for five (5) days after such payment is due and payable; provided, however, that the obligation of Tenant to pay a late charge or interest pursuant to this Lease below shall commence as of the due date of the rent or such other monetary obligation and not on the expiration of such five (5) day grace period; (3) If Tenant involuntarily transfers Tenant's interest in this Lease or voluntarily transfers (attempted or actual) its interest in this Lease, without Landlord's prior written consent; (4) If Tenant files a voluntary petition for relief or if a petition against Tenant in a proceeding under the Federal Bankruptcy Laws or other insolvency laws is filed and not withdrawn or dismissed within forty-five (45) days thereafter, or if under the provisions of any law providing for reorganization or winding up of corporations, any court of competent 23 29 jurisdiction assumes jurisdiction, custody or control of Tenant or any substantial part of the Premises or any of Tenant's personal property located at the Premises and such jurisdiction, custody or control remains in force unrelinquished, unstayed or unterminated for a period of forty-five (45) days; (5) If in any proceeding or action in which Tenant is a party, a trustee, receiver, agent or custodian is appointed to take charge of the Premises or any of Tenant's personal property located at the Premises (or has the authority to do so) for the purpose of enforcing a lien against the Premises or Tenant's personal property; (6) If Tenant shall make any general assignment for the benefit of creditors or convene a meeting of its creditors or any class thereof for the purpose of effecting a moratorium upon or composition of its debts, or any class thereof; (7) If Tenant fails to discharge any lien placed upon the Premises, the Building or the Project by Tenant or any person claiming under, by or through Tenant within ten (10) days of the imposition of such lien; (8) If Tenant fails to promptly and fully perform any other covenant, condition or agreement contained in this Lease (other than subparagraphs (1) through (7) above) and such failure continues for ten (10) days after written notice thereof from Landlord to Tenant, or if such failure cannot be completely cured within such ten (10) day period, then if Tenant fails to commence such cure within such ten (10) day period and thereafter proceed to completely cure such failure within thirty (30) days after such written notice; or (9) If Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or other person or entity is involved in any of the acts or events described in subparagraphs (1) through (8) above. B. Remedies. Any notice given by Landlord pursuant to Section 20(A) above may be the notice required or permitted pursuant to Section 1161 et seq. of the California Code of Civil Procedure or successor statutes, and the provisions of this Lease shall not require the giving of a notice in addition to such statutory notice to terminate this Lease and Tenant's right to possession of the Premises. The periods specified in Section 20(A) within which Tenant is permitted to cure any default following notice from Landlord shall run concurrently with any cure period provided by applicable laws. Upon the occurrence of a default by Tenant that is not cured by Tenant within any applicable grace period specified above, Landlord shall have the following rights and remedies in addition to all other rights and remedies available to Landlord at law or in equity, which shall be cumulative and non-exclusive: (1) Without further notice or demand of any kind to Tenant or any other person, the right to declare this Lease and the term of this Lease terminated; re-enter the Premises and the improvements located thereon, with or without process of law; to eject all parties in possession thereof therefrom; repossess and enjoy the Premises together with all said improvements; and to recover from Tenant all of the following: (a) The worth at the time of award of the unpaid rent which had been earned at the time of termination; plus (b) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the 24 30 amount of such rental loss that Tenant proves could have been reasonably avoided; plus (c) The worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of rental loss that Tenant proves could be reasonably avoided; plus. (d) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any attorneys' fees, broker's commissions or finder's fees (not only in connection with the reletting of the Premises, but also that portion of any leasing commission paid by Landlord in connection with this Lease which is applicable to that portion of the Term which is unexpired as of the date on which this Lease is terminated); the then unamortized cost of any tenant improvements constructed for or on behalf of Tenant by or at the expense of Landlord or of any moving allowance or other concession made available to Tenant and/or paid by Landlord pursuant to this Lease; any costs for repairs, clean-up, refurbishing, removal (including the repair of any damage caused by such removal) and storage (or disposal) of Tenant's personal property, equipment, fixtures, and anything else that Tenant is required (under this Lease) to remove but does not remove; any costs for alterations, additions and renovations; and any other costs and expenses, including reasonable attorneys' fees and costs, incurred by Landlord in regaining possession of and reletting (or attempting to relet) the Premises. (2) The right to continue this Lease in effect and to enforce all of Landlord's rights and remedies under this Lease, including the right to recover rent and any other additional monetary charges as they become due, for as long as Landlord does not terminate Tenant's right to possession. Acts of maintenance or preservation, efforts to relet the Premises, the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease or Landlord's withholding of consent to an Assignment or Subletting pursuant to the terms and conditions of Section 16 above shall not constitute a termination of Tenant's right to possession. (3) The foregoing provisions of clause (2) shall apply even though Tenant has breached the Lease and abandoned the Premises, in which case Landlord shall have the right to re-enter the Premises with or without process of law to eject therefrom all parties in possession thereof, and, without terminating this Lease, at any time and from time to time, but without obligation to do so, to relet the Premises and the improvements located therein or any part or parts of any thereof for the account of Tenant, or otherwise, on such conditions as Landlord in its discretion may deem proper, with the right to make alterations and repairs to the Premises in connection therewith, and to receive and collect the rents therefor, and apply the same (a) first to the payment of such costs and expenses as Landlord may have paid, assumed or incurred: (I) in recovering possession of the Premises and said improvements, including attorney's fees, and costs; (II) on expenses for placing the Premises and said improvements in good order and condition, for decorating and preparing the Premises for reletting; (III) for making any alterations, repairs, changes or additions to the Premises that may be necessary or convenient; and (IV) for all other costs and expenses, including leasing and subleasing commissions, and charges paid, assumed or incurred by Landlord in or upon reletting the Premises and said improvements, or in fulfillment of the covenants of Tenant under this Lease; (b) then to the payment of 25 31 Monthly Rental and other monetary obligations due and unpaid hereunder; and (c) any balance shall be held by Landlord and applied in payment of future amounts as the same may become due and payable hereunder. Any such reletting may be for the remainder of the term of this Lease or for a longer or shorter period. Landlord may execute any lease or sublease made pursuant to the terms of this clause (3) either in its own name or in the name of Tenant as its agent, as Landlord may see fit. The tenant(s) or subtenant(s) thereunder shall be under no obligation whatsoever with regard to the application by Landlord of any rent collected by Landlord from such tenant or subtenant to any and all sums due and owing or which may become due and owing under the provisions of this Lease, nor shall Tenant have any right or authority whatever to collect any rent whatever from such tenant(s) or subtenant(s). If Tenant has been credited with any rent received by such reletting and such rent shall not be promptly paid to Landlord by the tenant(s) or subtenant(s), or if such rentals received from reletting during any month are less than those to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. For all purposes set forth in this clause (3), Landlord is hereby irrevocably appointed as agent for Tenant. No taking of possession of the Premises by Landlord shall be construed as Landlord's acceptance of a surrender of the Premises by Tenant or an election on Landlord's part to terminate this Lease unless written notice of such intention is given to Tenant. Notwithstanding any such subletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. Election by Landlord to proceed pursuant to this clause (3) shall be made upon written notice to Tenant and shall be deemed an election of the remedy described in California Civil Code Section 1951.4 (providing that a lessor of real property may continue a lease in effect after a lessee's breach or abandonment and recover rent as it becomes due, if the lessee has the right to sublet or assign, subject only to reasonable limitations). If Landlord elects to pursue such remedy, unless Landlord relets the Premises, Tenant shall have the right to sublet the Premises and to assign its interest in this Lease, subject to all of the standards and conditions set forth in Section 16. Landlord may elect to terminate the prosecution of such remedy at any time by written notice to Tenant, and the right of Tenant to sublet or assign shall terminate upon receipt by Tenant of such notice. (4) The right to have a receiver appointed for Tenant, upon application by Landlord, to take possession of the Premises and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord pursuant to this subsection. C. Relief From Forfeiture. Tenant hereby waives all rights under California Code of Civil Procedure Section 1179 and California Civil Code Section 3275 providing for relief from forfeiture, and any other right now or hereafter existing to redeem the Premises or reinstate this Lease after termination pursuant to this Section 20 or by order or judgment of any court or by any legal process. SECTION 21. LATE PAYMENTS/INTEREST AND LATE CHARGES A. [Intentionally Omitted]. B. Interest. Any amount due from Tenant to Landlord which is not paid when due shall bear interest at the rate of one percent (1%) per month or, if less, the maximum rate permitted by law from the date such payment is due until paid, except that amounts spent by Landlord on behalf of Tenant shall bear interest at such rate from the date of disbursement by Landlord which Tenant agrees is 26 32 to compensate Landlord for Tenant's use of Landlord's money after it is due. Payment of such interest shall not excuse or cure any default by Tenant pursuant to this Lease. Such rate shall remain in effect after the occurrence of any breach or default hereunder by Tenant to and until payment of the entire amount due. C. Late Charges. TENANT HEREBY ACKNOWLEDGES THAT IN ADDITION TO LOST INTEREST, THE LATE PAYMENT BY TENANT TO LANDLORD OR RENT OR ANY OTHER SUMS DUE HEREUNDER WILL CAUSE LANDLORD TO INCUR OTHER COSTS NOT CONTEMPLATED IN THIS LEASE, THE EXACT AMOUNT OF WHICH WILL BE EXTREMELY DIFFICULT AND IMPRACTICABLE TO ASCERTAIN. SUCH OTHER COSTS INCLUDE, BUT ARE NOT LIMITED TO, PROCESSING, ADMINISTRATIVE AND ACCOUNTING COSTS, AND LATE CHARGES WHICH MAY BE IMPOSED UPON LANDLORD BY THE TERMS OF ANY ENCUMBRANCE COVERING THE PREMISES. ACCORDINGLY, IF ANY INSTALLMENT OF RENT OR ANY ADDITIONAL RENT OR OTHER SUM DUE FROM TENANT SHALL NOT BE RECEIVED BY LANDLORD WHEN SUCH AMOUNT SHALL BE DUE (WITHOUT REGARD TO ANY GRACE PERIOD GRANTED IN THIS LEASE), TENANT SHALL PAY TO LANDLORD AS ADDITIONAL RENT HEREUNDER A LATE CHARGE EQUAL TO THE LESSER OF FIVE PERCENT (5%) OF SUCH OVERDUE AMOUNT OR $1,500.00. THE PARTIES HEREBY AGREE THAT (i) SUCH LATE CHARGE REPRESENTS A FAIR AND REASONABLE ESTIMATE OF THE COSTS LANDLORD WILL INCUR IN PROCESSING SUCH DELINQUENT PAYMENT BY TENANT, (ii) SUCH LATE CHARGE SHALL BE PAID TO LANDLORD AS LIQUIDATED DAMAGES FOR EACH DELINQUENT PAYMENT, AND (iii) THE PAYMENT OF THE LATE CHARGE IS TO COMPENSATE LANDLORD FOR THE ADDITIONAL ADMINISTRATIVE EXPENSE INCURRED BY LANDLORD IN HANDLING AND PROCESSING DELINQUENT PAYMENTS. [SIGNATURE ILLEGIBLE] [ILLEGIBLE] ------------------------- ----------------- Landlord's Initials Tenant's Initials D. No Waiver. Neither assessment nor acceptance of partial payments, interest or late charges by Landlord shall constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of its other rights and remedies under this Lease. Nothing contained in this Section shall be deemed to condone, authorize, sanction or grant to Tenant an option for the late payment of rent, additional rent or other sums due hereunder, and Tenant shall be deemed in default with regard to any such payments should the same not be made by the date on which they are due. SECTION 22. [INTENTIONALLY OMITTED]. SECTION 23. HOLDING OVER Any holding over by Tenant in the possession of the Premises, or any portion thereof, after the expiration or earlier termination of the Term, with the prior written consent of Landlord, shall be construed to be a tenancy from month to month at one hundred fifty percent (150%) of the Monthly Rental herein specified for the last month in the Term (prorated on a monthly basis) unless Landlord shall specify a lesser amount for rent in its sole discretion, and shall otherwise be on the terms and conditions herein specified as far as applicable. Any holding over without Landlord's consent shall constitute a default by Tenant and shall entitle Landlord to pursue all remedies provided in this Lease and Tenant shall be liable for any and all direct or consequential damages or losses of Landlord resulting from Tenant's holding over without Landlord's consent. 27 33 SECTION 24. ATTORNEYS' FEES Tenant shall pay to Landlord all amounts for costs and expenses, including, but not limited to, reasonable attorneys' fees and amounts paid to any collection agency, incurred by Landlord in connection with any breach or default by Tenant under this Lease or incurred in order to enforce or interpret the terms or provisions of this Lease. Tenant shall also pay to Landlord all such amounts, including attorneys' fees, incurred by Landlord in responding to any request by Tenant (a) to amend or modify this Lease or (b) to prepare any statement or document in connection with this Lease, including without limitation estoppel certificates or subordination agreements or the like. Such amounts shall be payable upon demand. In addition, if any action shall be instituted by either Landlord or Tenant for the enforcement or interpretation of any of its rights or remedies in or under this Lease, the prevailing party shall be entitled to recover from the losing party all costs incurred by the prevailing party in said action and any appeal therefrom, including reasonable attorneys' fees and court costs to be fixed by the court therein. In the event Landlord is made a party to any litigation between Tenant and any third party, then Tenant shall pay all costs and attorneys' fees incurred by or imposed upon Landlord in connection with such litigation; provided, however, if Landlord is ultimately held to be liable, then Landlord shall reimburse Tenant for the cost of any attorneys' fees paid by Tenant on behalf of Landlord. SECTION 25. MORTGAGE PROTECTION/SUBORDINATION A. Subordination. The rights of Tenant under this Lease are and shall be, at the option of Landlord, either subordinate or superior to any mortgage or deed of trust (including a consolidated mortgage or deed of trust) constituting a lien on the Premises, Building or Project, or Landlord's interest therein or any part thereof, whether such mortgage or deed of trust has heretofore been, or may hereafter be, placed upon the Premises by Landlord, and to any ground or master lease if Landlord's title to the Premises or any part thereof is or shall become a leasehold interest. To further assure the foregoing subordination or superiority, Tenant shall, upon Landlord's request, together with the request of any mortgagee under a mortgage or beneficiary under a deed of trust or ground or master lessor, execute any instrument (including without limitation an amendment to this Lease that does not materially and adversely affect Tenant's rights or materially increase Tenant's obligations under this Lease) or instruments intended to subordinate this Lease, or at the option of Landlord, to make it superior to any mortgage, deed of trust, or ground or master lease. Notwithstanding any such subordination, Tenant's right to occupy the Premises pursuant to this Lease shall remain in effect for the full Term as long as Tenant is not in default hereunder. B. Attornment. Notwithstanding Section 25(A) above, Tenant agrees (1) to attorn to any mortgagee of a mortgage or beneficiary of a deed of trust encumbering the Premises and to any party acquiring title to the Premises by judicial foreclosure, trustee's sale, or deed in lieu of foreclosure, and to any ground or master lessor, as the successor to Landlord hereunder, (2) to execute any attornment agreement reasonably requested by a mortgagee, beneficiary, ground or master lessor, or party so acquiring title to the Premises, and (3) that this Lease, subject to the rights under any outstanding non-disturbance agreement, at the option of such mortgagee, beneficiary, or ground or master lessor, or other party, shall remain in force notwithstanding any such judicial foreclosure, trustee's sale, deed in lieu of foreclosure, or merger of titles. Notwithstanding the foregoing, neither a mortgagee of a mortgage or beneficiary of a deed of trust encumbering the Premises, any party acquiring title to the Premises by judicial foreclosure, trustee sale, or deed in lieu of foreclosure, or any ground lessor or master lessor, as the successor to Landlord hereunder, shall be liable or responsible for any breach of a covenant contained in this Lease that occurred before such party acquired its interest in the Premises or for any continuing breach thereof until after the successor Landlord has received the notice and right to cure as provided herein, and no such party shall be liable or responsible for any security deposits held by Landlord hereunder 28 34 which have not been transferred or actually received by such party, and such party shall not be bound by any payment of rent or additional rent for more than two (2) months in advance. C. Amendment. If any lending institution with which Landlord has negotiated or may negotiate for financing for the Building or Project requires any changes to this Lease, Tenant shall promptly execute and deliver an amendment to this Lease prepared by Landlord and embodying such changes, so long as such changes do not materially and adversely affect Tenant's rights or materially increase Tenant's obligations hereunder. In the event that Tenant shall fail to execute and deliver such amendment within twenty (20) days after receipt thereof by Tenant, such failure shall constitute a default hereunder by Tenant and shall entitle Landlord to all remedies available to a landlord against a defaulting tenant pursuant to a written lease, including but not limited to those remedies set forth in Section 20. SECTION 26. ESTOPPEL CERTIFICATE/FINANCIAL STATEMENTS A. Estoppel Certificate. Tenant, at any time and from time to time upon not less than ten (10) days' prior written notice from Landlord, agrees to execute and deliver to Landlord a statement in the form provided by Landlord (1) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the rent and other charges are paid in advance, if any; (2) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if they are claimed evidencing the status of this Lease; (3) acknowledging the amount of the Security Deposit held by Landlord; and (4) containing such other information regarding this Lease or Tenant as Landlord reasonably requests. Tenant's failure to deliver an estoppel certificate within such time shall be conclusive upon Tenant that (i) this Lease is in full force and effect without modification except as may be represented by Landlord, (ii) to Tenant's knowledge there are no uncured defaults in Landlord's performance, (iii) no rent has been paid in advance except as set forth in this Lease, and (iv) such other information regarding this Lease and Tenant set forth therein by Landlord is true and complete. B. Furnishing of Financial Statements. Landlord has reviewed the financial statements, if any, requested of Tenant and has relied upon the truth and accuracy thereof with Tenant's knowledge and representations of the truth and accuracy of such statements and that said statements accurately and fairly depict the financial condition of Tenant. Said financial statements are an inducing factor and consideration for the entering into of this Lease by Landlord with this particular Tenant. At each of the times provided below, Tenant shall furnish Landlord with Tenant's most recent audited financial statements, including a balance sheet and income statement, or a document in which Tenant states that its books are not independently audited accompanied by Tenant's most recent unaudited financial statements, including a balance sheet and income statement, signed by Tenant's chief financial officer. Such information shall be provided at Landlord's request by Tenant on each and all of the following dates (or if Landlord's request is not made at least ten (10) days before such date, within ten (10) days of Landlord's request): July 1, 2000; January 1, 2001; July 1, 2001; July 1, 2002; and July 1, 2003. SECTION 27. PARKING A. Landlord's Obligations. Landlord agrees to maintain or cause to be maintained an automobile parking area and to maintain and operate, or cause to be maintained and operated, said automobile parking area during the Term of this Lease for the benefit and non-exclusive use by Tenant and the customers, service suppliers, other invitees and employees of Tenant. Whenever the words "automobile parking area" or "parking area" are used in this Lease, it is intended that the same 29 35 shall include, whether in a surface parking area or a parking structure, the automobile parking stalls, driveways, loading docks, truck areas, service drives, entrances and exits and sidewalks, landscaped areas, pedestrian passageways in conjunction therewith and other areas designated for parking. Landlord shall keep said automobile parking are in a neat, clean and orderly condition, lighted and landscaped, and shall repair any damage to the facilities thereof. Nothing contained herein shall be deemed to impose liability upon Landlord for personal injury or theft, for damage to any motor vehicle, or for loss of property from within any motor vehicle, which is suffered by Tenant or any of its employees, customers, service suppliers or other invitees in connection with their use of said automobile parking area. Landlord shall also have the right to establish such reasonable rules and regulations as may be deemed desirable, at Landlord's sole discretion, for the proper and efficient operation and maintenance of said automobile parking area. Such rules and regulations may include, without limitation, (i) restrictions on the hours during which the automobile parking area shall be open for use and (ii) the establishment on a non-discriminatory basis of charges for parking therein (on either a reserved or unreserved basis, at Landlord's sole discretion) by tenants of the Building as well as by their employees, customers and service suppliers. B. Tenant's Rights and Obligations. Tenant shall be entitled to use the number of vehicle parking spaces allocated to Tenant in Section 1(P) without paying any additional rent therefor. Tenant and its employees shall park their vehicles only in those portions of the Common Areas or other locations designated and provided for that purpose by Landlord. Tenant's parking shall not be reserved and shall be limited to vehicles no longer than standard size automobiles or pickup or sport utility vehicles. Tenant shall not cause large trucks or other large vehicles to be parked within the Project or on the adjacent public streets except in accordance with the Rules. Vehicles shall be parked only in striped parking spaces and not in driveways or other locations not specifically designated for parking. Handicapped spaces shall only be used by those legally permitted to use them. Tenant shall not use or permit the use of loading areas, any spaces which have been specifically assigned by Landlord to employees of Landlord or other tenants or for such other uses as visitor parking or which have been designated by governmental entities as being restricted to certain uses. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities. The parking area shall not be used to provide car wash, oil changes, detailing, automotive repair or other services unless otherwise approved or furnished by Landlord. Tenant shall furnish Landlord with its and its employees' license plate numbers within fifteen (15) days after taking possession of the Premises, and Tenant shall thereafter notify Landlord of any changes within five (5) days after such change occurs. If Tenant or its employees fail to park their cars in designated parking areas, then Landlord may charge Tenant Fifteen Dollars ($15.00) per day for each day or partial day that any such car is parked in any area other than those designated. Overnight and weekend parking shall not be permitted unless Tenant has provided Landlord with advance written notice thereof. If Tenant permits or allows any of the prohibited activities described herein, Landlord shall have the right, without notice, in addition to any other rights it may have, to remove or tow away the vehicle. If Landlord shall tow any vehicles of Tenant or its employees, suppliers, shippers, customers, or invitees, Tenant shall pay to Landlord the costs and expenses incurred by Landlord in connection therewith, within ten (10) days after Landlord sends Tenant an invoice therefor. C. Control of Parking Area. Landlord shall at all times during the Term hereof have the sole and exclusive control of the automobile parking area, and may at any time during the Term hereof exclude and restrain any person from use or occupancy thereof; excepting, however, Tenant and employees, customers, service suppliers and other invitees of Tenant and of other tenants in the Building who make use of said area in accordance with any rules and regulations established by 30 36 Landlord from time to time with respect thereto. The rights of Tenant and its employees, customers, service suppliers and invitees referred to in this Section 27 shall at all times be subject to (i) the rights of Landlord and other tenants in the Building and their customers, employees, licensees, invitees, successors and assigns to use the same in common with Tenant and its employees, customers, service suppliers and invitees, (ii) the availability of parking spaces in said automobile parking area, and (iii) Landlord's right to assign reserved parking spaces and to change the location of any assigned reserved parking spaces in such instances as shall be determined at Landlord's sole discretion. Notwithstanding Landlord's exclusive control and obligations to provide a parking area, Landlord is not responsible or liable for any damage to any automobiles or persons in the parking area. SECTION 28. SIGNS; NAME OF BUILDING A. Signs. Landlord shall enter Tenant's name in the Building directory located in the main lobby of the Building and in the elevator lobby of the floor on which the Premises is located. Tenant shall not have the right to place, construct, or maintain on or about the Premises, Building or Project, or in any interior portions of the Premises that may be visible from the exterior of the Building or Common Areas, any signs, names, insignia, trademark, advertising placard, descriptive material or any other similar item ("Sign") without Landlord's prior written consent, which consent may be withheld in Landlord's sole discretion; provided, however, any Signs are further subject to approval of any applicable governmental authority and/or compliance with applicable governmental requirements and covenants, conditions and restrictions applicable to the Building or the Project. In the event Landlord consents to Tenant placing a Sign on or about the Premises, Building or Project, any such Sign shall be subject to Landlord's approval of the color, size, style and location of such Sign, and shall conform to any current or future Sign criteria established by Landlord for the Building or Project. If Landlord enacts a Sign criteria or revises an existing Sign criteria, after Tenant has erected a Sign to which Landlord has granted its consent, if Landlord so elects, Tenant agrees, at Landlord's expense, subject to Landlord's prior approval of the cost thereof, to make the necessary changes to its Sign in order to conform the Sign to Landlord's Sign criteria, as enacted or revised, provided that such changes shall be limited to the color, size, style and location of Tenant's Sign and that Tenant shall not be required to change the content of its Sign. In the event Landlord consents to Tenant's placement of a Sign on the Building, Tenant shall, at its sole cost, remove such Sign from the Building at the end of the Term, restore the Building to the same condition as before the installation of the Sign, ordinary wear and tear excepted and remove any discoloration of the Building caused by the presence of such sign. B. Building Identification. Landlord reserves the right at any time it deems necessary or appropriate to (1) place Signs at any location on the Building and Project as it deems necessary and (2) change the name, address or designation of the Building and Project. SECTION 29. QUIET ENJOYMENT Upon payment by Tenant of the rents herein provided, and upon the observance and performance of all the covenants, terms and conditions on Tenant's part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term without hindrance or interruption by Landlord or any other person or persons lawfully or equitably claiming by, through or under Landlord, subject, nevertheless, to the terms and conditions of this Lease, and any mortgage and/or deed of trust to which this Lease is subordinate. 31 37 SECTION 30. ADDITIONAL FACILITIES AVAILABLE TO TENANT A. Conference Rooms. Tenant shall have the right to reserve the use of (1) the Bay Conference Room located on the second floor of the Building without paying any additional rent therefor, (2) the Pacific Conference Room located on the second floor of the Building free of charge once each calendar quarter and at other times at a fee of $100.00 per day or partial day (plus a set-up fee based on Landlord's standard hourly rates to be determined from time to time) and (3) any other conference room located on the second floor of the Building at Landlord's standard hourly rates to be determined from time to time. Tenant shall pay Landlord for any audio/visual, video conferencing or other equipment available in any such conference room a fee to be determined by Landlord from time to time; provided however, Tenant acknowledges that Landlord does not guarantee that any such equipment will be available or in working order at any time. Landlord shall notify Tenant of any discretionary fees described above at such time as Tenant requests use of any such conference room or equipment. Such use of the conference rooms on the second floor of the Building shall be on a non-exclusive basis during normal business hours (as designated by Landlord from time to time) and shall in all other respects be subject to the same obligations set forth in this Lease regarding Tenant's use of the Common Areas. If Tenant desires to reserve a conference room, Tenant shall notify Landlord on Landlord's standard reservation form or in another manner acceptable to Landlord at least ten (10) business days before the desired date of use. Landlord shall notify Tenant within five (5) business days after receipt of Tenant's request whether the requested conference room is available for Tenant's use in accordance with the rules of Landlord from time to time in effect, which may include rules to ensure that Tenant's use of conference facilities is not disproportionate to the Rental Area of the Premises. If not, Tenant may request the use of another conference room, however, Tenant agrees that Landlord shall have no obligation to respond to such request within less than five (5) business days after receipt of Tenant's request. Tenant hereby waives any claims it may have against Landlord due to the unavailability of a conference room at any time, regardless whether Landlord has notified Tenant that a particular conference room is available for Tenant's use, except for claims due to Landlord's willful misconduct. Landlord shall not be required to make conference facilities available to Tenant if Landlord elects, in its discretion, to cease to maintain and operate shared conference facilities in the Building. B. Fitness Center. Tenant shall be entitled to use the number of Fitness Center Memberships allocated to Tenant in Section 1(Q) without paying any additional rent therefor. Such use of the Fitness Center at the Building shall be on a non-exclusive basis during the standard hours of operation of the Fitness Center (as designated by Landlord from time to time) and shall in all other respects be subject to the same obligations set forth in this Lease regarding Tenant's use of the Common Areas. Tenant shall have the right to purchase additional Fitness Center Memberships at $50 per Membership per month. Such amounts shall be payable to Landlord as additional rent and shall be subject to increase on written notice from Landlord. Memberships may only be used by employees of Tenant and not spouses or friends of Tenant's employees or customers, consultants, vendors or agents of Tenant. Tenant shall assign Memberships to specific employees and shall arrange for the security badges of such employees to allow them access to the Fitness Center. Tenant shall notify Landlord of the names of such employees at such time or times as Tenant allocates Memberships to its employees. Tenant shall ensure that the assigned employees do not allow other individuals to use the assigned Memberships. Memberships shall be granted by Landlord only to Tenant; Landlord shall not have any obligation to grant Memberships directly to employees of Tenant. Prior to using the Fitness Center for the first time, each employee of Tenant shall sign a written waiver on Landlord's standard form releasing Landlord from all liability for personal injury or theft or for loss of property from within the Fitness Center. Nothing contained herein shall be deemed to impose, and Tenant hereby waives on behalf of itself and all users of the Fitness Center Memberships (authorized or unauthorized, paid or unpaid), liability against 32 38 Landlord for personal injury or theft or for loss of property from within the Fitness Center, which is suffered by Tenant or any of its employees or other parties. Tenant further agrees to indemnify, defend and hold Landlord and its officers, directors, partners, agents and employees (collectively, "Indemnitees") entirely harmless from and against all liabilities, losses, demands, actions, expenses or claims, including reasonable attorneys' fees and court costs, for injury to or death of any person or for damages to any property or for violation of law arising out of or in any manner connected with the use, occupancy or enjoyment of the Fitness Center by Tenant or and users of the Fitness Center Memberships (authorized or unauthorized, paid or unpaid). Landlord shall not be required to make the Fitness Center available as provided above if Landlord elects, in its discretion, to discontinue operation of the Fitness Center. C. Fees. All amounts payable to Landlord pursuant to this Section 30 shall be deemed additional rent. All fees described herein shall be payable by Tenant regardless whether Tenant or its employees use the conference room(s) that have been reserved or the paid Fitness Center Memberships, as applicable. SECTION 31. NOTICES Any notice, demand, approval, consent, bill, statement or other communication ("Notice") required or desired to be given under this Lease shall be in writing, shall be directed to Tenant at Tenant's Address for Notice or to Landlord at Landlord's Address for Notice and shall be personally served or given by pre-paid certified U.S. Mail or "overnight" delivery service. In the case of personal delivery, any Notice shall be deemed to have been given when delivered; in the case of service by certified mail, any Notice shall be deemed delivered of the date of receipt, refusal or non-delivery indicated on the return receipt; and in the case of overnight delivery service, any Notice shall be deemed given when delivered as evidenced by a receipt. If more than one Tenant is named under this Lease, service of any Notice upon any one of said Tenants shall be deemed as service upon all of such Tenants. The parties hereto and their respective heirs, successors, legal representatives, and assigns may from time to time change their respective addresses for Notice by giving at least fifteen (15) days' written notice to the other party, delivered in compliance with this Section. SECTION 32. NOTICE AND CURE TO LANDLORD AND MORTGAGEE On any act or omission by Landlord which might give, or which Tenant claims or intends to claim gives, Tenant the right to damages from Landlord or the right to terminate this Lease by reason of a constructive or actual eviction from all or part of the Premises, or otherwise, Tenant shall not sue for damages or attempt to terminate this Lease until it has given written notice of the act or omission to Landlord and to the holder(s) of the indebtedness or other obligations secured by any mortgage or deed of trust affecting the Premises as identified by Landlord, and a reasonable period of time for remedying the act or omission has elapsed following the giving of the notice, during which time Landlord and the lienholder(s), or either of them, their agents or employees, may enter upon the Premises and do therein whatever is necessary to remedy the act or omission. During the period after the giving of notice and during the remedying of the act or omission, the Monthly Rental payable by Tenant shall not be abated and apportioned except to the extent that the Premises are untenantable. SECTION 33. GENERAL A. Paragraph Headings. The paragraph headings used in this Lease are for the purposes of convenience only. They shall not be construed to limit or to extend the meaning of any part of this Lease. B. Incorporation of Prior Agreements; Amendments. This Lease contains all agreements of Landlord 33 39 and Tenant with respect to any matter mentioned, or dealt with, herein. No prior agreement or understanding pertaining to any such matters shall be binding upon Landlord. Any amendments to or modifications of this Lease shall be in writing, signed by the parties hereto, and neither Landlord nor Tenant shall be liable for any oral or implied agreements. LANDLORD HAS NOT MADE, AND TENANT MAY NOT RELY ON, ANY REPRESENTATIONS OR WARRANTIES, EXPRESSED OR IMPLIED, WITH REGARD TO THE PROJECT, THE BUILDING, THE PREMISES OR OTHERWISE OR THE SUITABILITY THEREOF FOR TENANT'S BUSINESS, EXCEPT AS EXPRESSLY STATED IN THIS LEASE. IN PARTICULAR, LANDLORD HAS NOT AUTHORIZED ANY AGENT OR BROKER TO MAKE A REPRESENTATION OR WARRANTY INCONSISTENT WITH THE TERMS OF THIS LEASE AND TENANT MAY NOT RELY ON ANY SUCH INCONSISTENT REPRESENTATION OR WARRANTY. C. Waiver. Any waiver by Landlord of any breach of any term, covenant, or condition contained in this Lease shall not be deemed to be a waiver of such term, covenant, or condition or of any subsequent breach of the same or of any other term, covenant, or condition contained in this Lease. Landlord's consent to, or approval of any act shall not be deemed to render unnecessary the obtaining of Landlord's consent to, or approval of, any subsequent act by Tenant. The acceptance of rent or other sums payable hereunder by Landlord shall not be a waiver of any preceding breach by Tenant of any provision hereof, other than failure of Tenant to pay the particular rent or other sum so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent, or sum equivalent to rent. D. Short Form or Memorandum of Lease. Tenant agrees, at the request of Landlord, to execute, deliver, and acknowledge a short form or memorandum of this Lease satisfactory to counsel for Landlord, and Landlord may, in its sole discretion, record such short form or memorandum in the county where the Premises are located. Tenant shall not record this Lease, or a short form or memorandum of this Lease, without Landlord's prior written consent. E. Time of Essence. Time is of the essence in the performance of each provision of this Lease. F. Examination of Lease. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution by and delivery to both Landlord and Tenant. G. Severability. If any term or provision of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. H. Surrender of Lease Not Merger. Neither the voluntary or other surrender of this Lease by Tenant nor the mutual cancellation thereof shall cause a merger of the titles of Landlord and Tenant, but such surrender or cancellation shall, at the option of Landlord, either terminate all or any existing subleases or operate as an assignment to Landlord of any such subleases. The delivery of keys to the Premises to Landlord or its agent shall not, of itself, constitute a surrender and termination of this Lease. I. Authority. If Tenant is a corporation, each individual executing this Lease on behalf of Tenant represents and warrants (1) the he or she is duly authorized to execute and deliver this Lease on behalf of Tenant in accordance with a duly adopted resolution of the Board of Directors of Tenant in accordance with the By-laws of Tenant and (2) that this Lease is binding upon and enforceable 34 40 by Landlord against Tenant in accordance with its terms. If Tenant is a corporation, Tenant shall, concurrently with delivery of an executed Lease to Landlord, deliver to Landlord a certified copy of a resolution of its Board of Directors authorizing or ratifying the execution of this Lease. If Tenant is a partnership, joint venture, or other unincorporated association, each individual executing this Lease on behalf of Tenant warrants that this Lease is binding on Tenant and that each and both of the persons signing on behalf of Tenant were authorized to do so. J. Governing Law. This Lease and the rights and obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the local laws of the State in which the Building is located. K. Force Majeure. If the performance by Landlord of any provision of this Lease is delayed or prevented by any act of God, strike, lockout, shortage of material or labor, restriction by any governmental authority, civil riot, flood, and any other cause not within the control of Landlord, then the period for Landlord's performance of the provision shall be automatically extended for the same time Landlord is so delayed or hindered. L. Use of Language. Words of gender used in this Lease include any other gender, and words in the singular include the plural, unless the context otherwise requires. M. Successors. The terms, conditions and covenants contained in the Lease inure to the benefit of and are binding on, the parties hereto and their respective successors in interest, assigns and legal representatives, except as otherwise herein expressly provided. All rights, privileges, immunities and duties of Landlord under this Lease, including without limitation, notices required or permitted to be delivered by Landlord to Tenant hereunder, may, at Landlord's option, be exercised or performed by Landlord's agent or attorney. N. No Reduction of Rental. Except as otherwise expressly and unequivocally provided in this Lease, Tenant shall not for any reason withhold or reduce the amounts payable by Tenant under this Lease, it being understood that the obligations of Landlord hereunder are independent of Tenant's obligations. If Landlord is required by governmental authority to reduce energy consumption or impose a parking or similar charge with respect to the Premises, Building or Project, to restrict the hours of operation of, limit access to, or reduce parking spaces available at the Building, or take other limiting actions, then Tenant is not entitled to abatement or reduction of rent or to terminate this Lease. O. No Partnership. Notwithstanding anything else to the contrary, Landlord is not, and under no circumstances shall be considered to be, a partner of Tenant, or engaged in a joint venture with Tenant. P. Exhibits. All exhibits attached hereto are made a part hereof and are incorporated herein by this reference. A complete list of said exhibits is set forth in the Table of Contents. Q. Indemnities. The obligations of the indemnifying party under each and every indemnification and hold harmless provision contained in this Lease shall survive the expiration or earlier termination of this Lease to and until the last to occur of (1) the last date permitted by law for the bringing of any claim or action with respect to which indemnification may be claimed by the indemnified party against the indemnifying party under such provision or (2) the date on which any claim or action for which indemnification may be claimed under such provision is fully and finally resolved and, if applicable, any compromise thereof or judgment or award thereon is paid in full by the indemnifying party and the indemnified party is reimbursed by the indemnifying party for any amounts paid by the indemnified party in compromise thereof or upon a judgment or award thereon. 35 41 and in defense of such action or claim, including reasonable attorneys' fees incurred. Payment shall not be a condition precedent to recovery upon any indemnification provision contained herein. R. Nondisclosure of Lease Terms. Landlord and Tenant agree that the terms of this Lease are confidential and constitute proprietary information of the parties hereto. Disclosure of the terms hereof could adversely affect the ability of Landlord to negotiate with other tenants of the Building. Each of the parties hereto agrees that such party, and its respective partners, officers, directors, employees, agents, brokers and attorneys, shall not disclose the terms and conditions of this Lease to any other person without the prior written consent of the other party hereto except pursuant to an order of a court of competent jurisdiction. Provided, however, that Landlord may disclose the terms hereof to any prospective purchaser of the Building or any lender now or hereafter having a lien on Landlord's interest in the Building or the Project, or any portion thereof, and either party may disclose the terms thereof to its respective independent accountants who review its respective financial statements or prepare its respective tax returns, to any prospective transferee of all or any portions of their respective interests hereunder (including a prospective sublessee or assignee of Tenant), to its respective real estate brokers, to any lender or prospective lender to such party, to any governmental entity, agency or person to whom disclosure is required by applicable law, regulation or duty of diligent inquiry and in connection with any action brought to enforce the terms of this Lease, on account of the breach hereof or to seek a judicial determination of the rights and obligations of the parties hereunder. S. No Light, Air or View Easement. Any diminution or shutting of light, air or view by any structure which may be erected on lands adjacent to the Building shall in no way affect this Lease or impose any liability on Landlord. T. Brokers. Tenant warrants and represents that it has not dealt with any real estate broker or agent in connection with this Lease or its negotiation except the Brokers identified in Section 1(M). Tenant shall indemnify and hold Landlord harmless from any cost, expense or liability (including costs of suit and reasonable attorneys' fees) for any compensation, commission or fees claimed by any other real estate broker or agent in connection with this Lease or its negotiation by reason of any act of Tenant. U. Counterparts. This Lease may be executed in several duplicate counterparts, each of which shall be deemed an original of this Lease for all purposes. 36 42 IN WITNESS WHEREOF, the parties have executed this Lease, consisting of the foregoing provisions, any typed addenda appended hereto and all Exhibits appended hereto, on the dates indicated below, the later of which shall be deemed the date of execution of this Lease. "TENANT" "LANDLORD" COLOMOTION, INC., HITACHI AMERICA, LTD., a California corporation a New York corporation By: By: /s/ TOMOHARU SHIMAYAMA --------------------------- --------------------------- Name: Name: TOMOHARU SHIMAYAMA ------------------------- ------------------------- Title: Title: President ------------------------ ------------------------ Dated: May 18, 1999 ------- By: /s/ RICHARD J. PALOMBA --------------------------- Name: RICHARD J. PALOMBA ------------------------- Title: VP Real Estate ------------------------ Dated: May 17, 1999 ------- 43 [FLOOR PLAN] 44 [FLOOR PLAN] Exhibit A 45 EXHIBIT B CONSTRUCTION OF THE PREMISES ARTICLE 1 PLANS AND SPECIFICATIONS SECTION 1.1 TENANT'S WORK. Any and all work required for Tenant's occupancy of the Premises ("Tenant's Work"), including but not limited to construction and restoration of private offices, the procurement and installation of furniture, fixtures, equipment, artwork and interior signage shall be performed by Tenant or its subcontractors strictly in accordance with the Approved Design Drawings (defined above). Tenant's Work shall be at Tenant's sole cost and expense and shall comply in all respects with all applicable laws, statutes, ordinances, building codes and regulations. SECTION 1.2 TENANT'S PLANS. Tenant shall prepare and submit to Landlord plans and specifications prepared at Tenant's expense and stamped as required by an architect, registered licensed professional and/or engineer licensed in California. Such plans and specifications shall be submitted in two (2) phases as provided below. The Premises shall be delivered to Tenant subject to all existing field conditions, and Tenant shall, in connection with the preparation of such plans and specifications, cause its architect to inspect the Premises to determine its existing conditions. If Tenant elects to use an architect other than the architect recommended by Landlord, then Tenant shall pay to Landlord, as additional rent, an architectural services fee equal to ten percent (10%) of the fees paid by Tenant to its architect in connection with Tenant's Work. For purposes hereof, Landlord recommends that Tenant engage RMW Architects for any architectural services performed on behalf of Tenant in connection with Tenant's Work. SECTION 1.3 PRELIMINARY DESIGN DRAWINGS. Upon execution of the Lease, Tenant shall submit to Landlord one (1) reproducible and three (3) prints of preliminary drawings showing the intended design character and finishing of the Premises (the "Preliminary Design Drawings"). SECTION 1.4 CONSTRUCTION DRAWINGS AND SPECIFICATIONS. Within ten (10) days after receipt of accepted Preliminary Design Drawings, Tenant shall submit to Landlord for review and acceptance one (1) reproducible and four (4) prints of the construction drawings and specifications for Tenant's Work (the "Construction Drawings and Specifications"). On or before this day, Tenant shall submit to appropriate governmental agencies applications for all permits and approvals required in connection with Tenant's Work. SECTION 1.5 PLAN ACCEPTANCE AND PROCEDURES. a. The Preliminary Design Drawings and Construction Drawings and Specifications shall be subject to Landlord's review and written acceptance, which Landlord may give or withhold in its sole discretion. Landlord shall review any such drawings and shall, by giving notice to Tenant, either accept or reject the same within fifteen (15) days of receipt from Tenant, specifying the reasons for any rejection. Within ten (10) days after rejection by Landlord of any Preliminary Design Drawings or Construction Drawings and Specifications, Tenant shall revise the same in accordance with Landlord's objections thereto and resubmit the same to Landlord for review and written acceptance, as provided above. The Preliminary Design Drawings and the Construction Drawings and Specifications as accepted by Landlord are referred to herein as the "Approved Design Drawings." b. In the event Tenant shall submit to Landlord for review and acceptance any subsequent changes, modifications or alterations to the Approved Design Drawings accepted a herein provided, Landlord shall have the right to be reimbursed by Tenant for any additional charges, expenses or 1 46 costs related to such changes, modifications or alterations. No such changes, modifications or alterations to the Approved Design Drawings shall be made without the written acceptance of Landlord, which Landlord may give or withhold in its sole discretion. c. Tenant hereby releases Landlord from any and all claims whatsoever for damages for any scheduling disruption or for any other event which causes a delay in the date on which the Premises are available for the commencement of Tenant's Work therein or the date upon which such work is completed. d. Tenant shall perform or cause Tenant's contractor to perform all Tenant's Work in a manner so as to avoid any labor dispute which causes or is likely to cause stoppage or impairment of work or delivery service or any other services in the Building. In the event there shall be any such stoppage or impairment as the result of any such labor dispute or potential labor dispute, Tenant shall immediately undertake such actions as may be necessary to eliminate such dispute or potential dispute, including, but not limited to, (i) removing all disputants from the job site until such time as the labor dispute no longer exists, (ii) seeking an injunction in the event of a breach of contract between Tenant and Tenant's contractor, and (iii) filing appropriate unfair labor practice charges in the event of a union jurisdictional dispute. ARTICLE 2 PROCEDURES FOR CONSTRUCTION SECTION 2.1 COMMENCEMENT OF CONSTRUCTION. Tenant shall commence and diligently prosecute construction of Tenant's Work in the Premises in sufficient time to complete its work by the Lease Commencement Date. The failure of Tenant to comply with the procedures and schedules set forth in this Exhibit B, to prepare Approved Design Drawings, to commence or complete Tenant's Work prior to the Lease Commencement Date, or to fulfill or cause to be fulfilled all of the conditions to opening specified in Section 2.5 of this Exhibit B shall not delay or postpone the Lease Commencement Date, which shall be as provided for in the Lease. SECTION 2.2 GENERAL REQUIREMENTS. a. Tenant shall submit to Landlord, at least five (5) days prior to the commencement of any of Tenant's Work, the following information: 1. The name and address of the general contractor Tenant intends to engage in the construction of the Premises. 2. The date on which Tenant's Work will commence, together with the estimated date of completion of Tenant's Work and fixturizing work. 3. Evidence of Tenant's compliance with the insurance requirements set forth in Section 2.7 of this Exhibit B. 4. Itemized statement of estimated construction costs, including architectural, engineering and contractor's fees. 5. Tenant's contractors' performance and/or labor and material bonds, if so required by Landlord, and/or any other bond to be furnished by Tenant as may be required by Landlord to insure the faithful performance of Tenant's Work in accordance with the Approved Design Drawings. 2 47 b. All contractors engaged by Tenant shall be bondable, licensed contractors, possessing good labor relations, capable of performing quality workmanship approved in advance by Landlord. If Tenant elects to use a contractor other than the contractor recommended by Landlord, then Tenant shall pay to Landlord, as additional rent, a construction services fee equal to ten percent (10%) of the hard costs of Tenant's Work. For purposes hereof, Landlord recommends that Tenant engage Webcor Builders as its general contractor for construction of Tenant's Work. c. Construction shall comply in all respects with applicable laws, statutes, ordinances, building codes and regulations. All required building and other permits in connection with the construction and completion of the Premises shall be obtained and paid for by Tenant. d. Tenant shall cause its contractor to provide warranties of not less than one (1) year against defects in workmanship, materials and equipment. e. Tenant's Work shall be subject to the inspection and approval of Landlord and its supervisory personnel. f. Tenant's contractor shall present to Landlord and maintain at the job site at all times one (1) full set of Construction Drawings and Specifications which have been accepted by Landlord endorsed with the approval stamp and permit number of the Building Department, local Fire Marshall and all other governmental agencies having jurisdiction over the construction and occupancy of the Premises. Landlord and its authorized representatives shall have the right to inspect such Construction Drawings and Specifications at any time. g. Tenant or its contractors shall arrange for necessary utility, hoisting and elevator service with Landlord and shall reimburse Landlord for any special costs incurred by Landlord as a result of Tenant's or Tenant's contractor's utility usage, hoisting arrangements or elevator usage. Tenant and its contractors shall be permitted to use the Building freight elevator (and are expressly prohibited from using the Building's passenger elevators) in performing Tenant's Work provided that such usage does not unreasonably burden Landlord or other tenants of the Building. h. Tenant shall be responsible for and shall obtain and record a Notice of Completion promptly following completion of Tenant's Work, and shall promptly forward a copy of same to Landlord. i. At Landlord's request, all work done by Tenant or its contractors shall be done with union labor recognized by the local building trades council in accordance with applicable union labor agreements. SECTION 2.3. LANDLORD'S RIGHT TO PERFORM WORK. Landlord shall have the right to perform, on behalf of and for the account of Tenant, subject to reimbursement of the cost thereof by Tenant, all or such portion of Tenant's Work, which Landlord determines in its sole discretion should be performed immediately and on an emergency basis for the best interest of the Building, including without limitation, work which pertains to structural components, mechanical, sprinkler and general utility systems, roofing and removal of unduly accumulated construction material and debris. SECTION 2.4. TEMPORARY FACILITIES DURING CONSTRUCTION. Tenant shall provide and pay for the removal of debris, as necessary and required in connection with the construction of the Premises. Storage of Tenant's contractors' construction materials, tools, equipment and debris shall be confined to the Premises and any other areas which may be designated for such purposes by Landlord. Landlord shall not be responsible for any loss or damage to Tenant's and/or Tenant's contractors' equipment. 3 48 SECTION 2.5 CONDITION OF PREMISES. a. Tenant shall not open for business within the Premises until all of the following have been completed: i. The satisfactory completion by Tenant of all of Tenant's Work to be performed by Tenant pursuant to this Exhibit B, in accordance with the Approved Design Drawings. ii. The issuance of a Certificate of Occupancy by the Building Department of the City where the Building is located. iii. The request by Tenant's contractor, when the Premises are substantially complete, of a punch list prepared by Landlord enumerating deficiencies in Tenant's Work. b. Tenant shall cause the following to be performed or completed promptly after opening for business within the Premises, but in no event later than the deadlines set forth below: i. Submission to Landlord of Unconditional Waivers and Releases of Lien Upon Final Payment, within thirty (30) days of completion of construction of the Premises. Such waivers and releases shall be submitted from all persons performing labor and/or supplying materials in connection with Tenant's Work showing that all of said persons have been compensated in full. ii. Submission by Tenant to Landlord of a detailed breakdown of Tenant's final and total construction hard and soft costs within ten (10) days of completion of construction of the Premises. iii. Full payment by Tenant within ten (10) days of billing of all sums due Landlord pursuant to this Exhibit B. iv. Correction of any deficiencies set forth in Landlord's punch list within ten (10) days of completion of construction of the Premises. SECTION 2.6 PAYMENTS BY TENANT. Tenant shall pay Landlord all sums due Landlord for items of work performed or expenses incurred by Landlord on behalf of Tenant within ten (10) days after Landlord sends Tenant a statement therefor, including without limitation any extra expense incurred by Landlord by reason of faulty work done by Tenant or its contractors, by reason of damage to existing work caused by Tenant or its contractors, or by reason of inadequate cleanup by Tenant or its contractors. SECTION 2.7 INSURANCE. a. Tenant shall, at its sole cost and expense, secure and maintain, or cause its contractors to secure and maintain during the period of construction and fixturizing work within the Premises, in addition to the insurance required pursuant to Section 14 of this Lease, all of the insurance policies required and in the amounts of coverage set forth below. Tenant shall not permit its contractors to commence any work until all required insurance has been obtained and certificates of such insurance have been delivered to Landlord. b. Tenant's General Contractor's and SubContractors' Required Minimum Coverage and Limits of Liability. 4 49 1. Worker's Compensation, as required by State Law, and including Employer's Liability Insurance with a limit of not less than $500,000.00, and any insurance required by the Employee Benefit Acts or other statutes applicable in the jurisdiction where the work is to be performed as will protect the contractor and sub-contractors from any and all liability under the aforementioned acts. 2. Comprehensive General Liability or Commercial General Liability Insurance (including Contractor's Protective Liability) in an amount not less than $2,000,000.00 for any one occurrence whether involving bodily injury liability (or death resulting therefrom) or property damage liability or a combination thereof with an aggregate limit of $2,000,000.00. Such insurance shall provide for explosion, collapse and underground coverage. Such insurance shall insure Landlord, Tenant and Tenant's general contractor against any and all claims for bodily injury, including death resulting therefrom and damage to or destruction of property of any kind whatsoever and to whomsoever belonging and arising from operations under the contract or contracts for Tenant's Work, whether such operations are performed by Tenant's general contractor, subcontractors, or any of their subcontractors, or by anyone directly or indirectly employed by any of them. 3. Comprehensive Automobile Liability Insurance, including the ownership, maintenance, and operation of any automotive equipment, owned, hired and non-owned, in an amount not less than $2,000,000.00 for any one occurrence whether involving bodily injury liability (or death resulting therefrom) or property damage liability or a combination thereof. Such insurance shall insure Landlord, Tenant and Tenant's General Contractor and/or Subcontractors against any and all claims for bodily injury, including death resulting therefrom and damage to the property of others caused by accident and arising from operations under the contract or contracts for Tenant's Work, whether such operations are performed by the General Contractor, Subcontractors, or by anyone directly or indirectly employed by any of them. c. Tenant's Protective Liability Insurance: Tenant shall provide Owner's Protective Liability Insurance to insure Landlord and Tenant against any and all liability to third parties for damage because of bodily injury (or death resulting therefrom) and property damage of others or a combination thereof which may arise from work in connection with the Premises, and any other liability for damages which Tenant's general contractor and/or subcontractors are required to insure against under any provisions herein. Said insurance shall be provided in an amount not less than $2,000,000.00 for any one occurrence whether involving bodily injury liability (or death resulting therefrom) or property damage liability or a combination thereof. d. Tenant's Builder's Risk Insurance - Completed Value Builder's Risk Material Damage Insurance Coverage: Tenant shall provide an "All Physical Loss" Builder's Risk insurance policy on the work to be performed for Tenant in the Premises as it relates to the building within which the Premises are located. The policy shall include as insureds Tenant, its contractor and sub-contractors, and Landlord, as their interests may appear. The amount of the insurance to be provided shall be one hundred percent (100%) of the replacement cost. e. All insurance policies required under this Exhibit B other than Worker's Compensation Insurance shall include Landlord as an additional insured. The Worker's Compensation Insurance required under this Exhibit B shall contain an endorsement waiving all rights of subrogation against such 5 50 persons and entities. Tenant shall deliver to Landlord policies of insurance or certificates thereof, and the policies of insurance required pursuant to this Exhibit B shall in all other respects be kept and maintained, in accordance with the provisions of Section 14 of this Lease relating to insurance maintained by Tenant thereunder. Tenant and Landlord shall each have, in respect of the insurance carried pursuant to this Exhibit B, the rights, remedies and obligations set forth in Section 14 of this Lease. SECTION 2.8 SUBMISSIONS FOLLOWING COMPLETION. Tenant shall submit the following to Landlord within thirty (30) days following the completion of Tenant's Work: a. A complete set of record drawing sepia prints initialed as such by Tenant's architect and/or general contractor of the accepted Construction Drawings and Specifications, together with drawings showing any changes made during the course of construction, which drawings and specifications may be relied on by Landlord as delineating Tenant's Work as actually constructed. b. Completed operating, maintenance, and spare parts manuals for all mechanical, electrical and similar equipment installed as part of Tenant's Work. SECTION 2.9 REMOVAL OF TENANT'S WORK. All Tenant's Work shall immediately become the property of Landlord and at the end of the term of the Lease, shall remain on the Premises without compensation to Tenant unless Landlord elects by notice to Tenant to have Tenant remove any Tenant's Work, in which event Tenant shall be responsible for the cost of restoring the Premises to their condition prior to the installment of such Alterations. ARTICLE 3 LANDLORD'S WORK SECTION 3.1 ENTRANCE DOORS. At Landlord's sole cost and expense, Landlord will construct double entry glass doors connecting the Premises with the elevator lobby. Until such work is completed by Landlord, the Premises shall be secured by the existing smoke doors at the entrance to the Premises. SECTION 3.2 OTHER WORK. Landlord will also, at Landlord's sole cost and expense, do the following work: professionally clean the carpets; patch and paint walls; install new building standard carpet in the area labeled as the "VCT" on Exhibit A; and remove one wall adjacent to such area as shown on Exhibit A. 6 51 EXHIBIT C RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF THE LEASE The following Rules and Regulations (the "Rules") shall be in effect at the Building. Landlord reserves the right to adopt reasonable modifications and additions hereto. In the case of any conflict between these Rules and the Lease, the Lease shall be controlling. Landlord shall have the right to waive one or more Rules for the benefit of a particular tenant in Landlord's reasonable discretion. 1. Except with the prior written consent of Landlord, no tenant shall conduct any retail sales in or from the Premises, or any business other than that specifically provided for in the Lease. There shall be no solicitation by Tenant of other tenants or occupants of the Building. 2. Landlord reserves the right to prohibit personal goods and services vendors from access to the Building except upon such reasonable terms and conditions, including but not limited to a provision for insurance coverage, as are related to the safety, care and cleanliness of the Building, the preservation of good order thereon, and the relief of any financial or other burden on Landlord occasioned by the presence of such vendors or the sale by them of personal goods or services to a tenant or its employees. If reasonably necessary for the accomplishment of these purposes, Landlord may exclude a particular vendor entirely or limit the number of vendors who may be present at any one time in the Building. The term "personal goods or services vendors" means persons who periodically enter the Building of which the Premises are a part for the purpose of selling goods or services to a tenant, other than goods or services which are used by a tenant only for the purpose of conducting its business on the Premises. "Personal goods or services" include, but are not limited to, drinking water and other beverages, food, barbering services, and shoeshinning services. 3. The sidewalks, halls, passages, elevators and stairways shall not be obstructed by any tenant or used by it for any purpose other than for ingress to and egress from their respective Premises. The halls, passages, entrances, elevators, stairways, balconies, janitorial closets, and roof are not for the use of the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom Tenant normally deals only for the purpose of conducting its business on the Premises (such as clients, customers, office suppliers and equipment vendors, and the like) unless such persons are engaged in illegal activities. No tenant or agent or employee of any tenant shall go upon the roof of the Building without the written consent of Landlord. 4. The sashes, sash doors, windows, glass lights, and any lights or skylights that reflect or admit light into the halls or other places of the Building shall not be covered or obstructed. The toilet rooms, water and water and wash closets and other water apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be known therein, and the expense of any breakage, stoppage or damage, resulting from the violation of this rule shall be borne by the tenant who, or whose clerks, agents, employees, or visitors, shall have caused it. 1 52 5. No sign, advertisement or notice visible from the exterior of the Premises or Building shall be inscribed, painted or affixed by Tenant on any part of the Building or the Premises without the prior written consent of Landlord. If Landlord shall have given such consent at any time, whether before or after the execution of this Lease, such consent shall in no way operate as a waiver or release of any of the provisions hereof or of this Lease, and shall be deemed to relate only to the particular sign, advertisement or notice so consented to by Landlord and shall not be construed as dispensing with the necessity of obtaining the specific written consent of Landlord with respect to each and every such sign, advertisement or notice other than the particular sign, advertisement or notice, as the case may be, so construed to by Landlord. 6. In order to maintain the outward professional appearance of the Building, all window coverings to be installed at the Premises shall be subject to Landlord's prior reasonable approval. If Landlord, by a notice in writing to Tenant, shall object to any curtain, blind, shade or screen attached to, or hung in, or used in connection with, any window or door of the Premises, such use of such curtain, blind, shade or screen shall be forthwith discontinued by Tenant. No awnings shall be permitted on any part of the Premises. 7. Tenant shall not do or permit anything to be done in the Premises, or bring or keep anything therein, which shall in any way increase the rate of fire insurance on the Building, or on the property kept therein, or obstruct or interfere with the rights of other tenants, or in any way injure or annoy them; or conflict with the regulations of the Fire Department or the fire laws, or with any insurance policy upon the Building, or any part thereof, or with any rules and ordinances established by the Board of Health or other governmental authority. Tenant shall not bring into, or permit or suffer in, the Building or the Project, any weapons or firearms of any kind. 8. No safes or other objects larger or heavier than the freight elevators of the Building are limited to carry shall be brought into or installed in the Premises. Landlord shall have the power to prescribe the weight, method of installation and position of such safes or other objects. The moving of safes shall occur only between such hours as may be designated by, and only upon previous notice to, the manager of the Building, and the persons employed to move safes in or out of the Building must be acceptable to Landlord. No freight, furniture or bulky matter of any description shall be received into the Building or carried into the elevators except during hours and in a manner approved by Landlord. 9. Landlord shall clean the Premises as provided in the Lease, and except with the written consent of Landlord, no person or persons other than those approved by Landlord will be permitted to enter the Building for such purpose, but Tenant shall not cause unnecessary labor by reason of Tenant's carelessness and indifference in the preservation of good order and cleanliness. 10. No tenant shall sweep or throw or permit to be swept or thrown from the Premises any dirt or other substance into any of the corridors or halls or elevators, or out of the doors or windows or stairways of the Building, and Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in an manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any animals, firearms or birds be kept in or about the Building. The Building is a non-smoking building. Smoking or carrying lighted cigars or cigarettes in the Building and the elevators of the Building is prohibited. Smoking is permitted within the Project only in areas designated by Landlord. 11. Except for the use of microwave ovens and coffee makers for Tenant's personal use, no cooking shall be done or permitted by Tenant on the Premises, nor shall the Building be used for lodging. 2 53 12. Tenant shall not use or keep in the Building any kerosene, gasoline, or inflammable fluid or any other illuminating material, or use any method of heating other than that supplied by Landlord. 13. If Tenant desires telephone or telegraph connections, Landlord will direct electricians as to where and how the wires are to be introduced. No boring or cutting for wires or other otherwise shall be made without directions from Landlord. 14. Each tenant, upon the termination of its tenancy, shall deliver to Landlord all the keys of offices, rooms and toilet rooms, and security access card/keys which shall have been furnished such tenant or which such tenant shall have had made, and in the event of loss of any keys so furnished, shall pay Landlord therefor. 15. No Tenant shall lay linoleum or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except by a paste, or other material which may easily be removed with water, the use of cement or other similar adhesive materials being expressly prohibited. The method of affixing any such linoleum or other similar floor covering to the floor, as well as the method of affixing carpets or rugs to the Premises shall be subject to reasonable approval by Landlord. The expense of repairing any damage resulting from a violation of this rule shall be borne by Tenant. 16. No furniture, packages or merchandise will be received in the Building or carried up or down in the elevators, except between such Building hours and in such elevators as shall be designated by Landlord. 17. On Saturdays, Sundays and legal holidays, and on other days between the hours of 6:00 p.m. and 8:00 a.m. access to the Building or to the halls, corridors, elevators or stairways in the Building, or to the Premises, may be refused unless the person seeking access is known to the building watchman, if any, in charge and has a pass or is properly identified. Landlord shall in no case be liable for damages for the admission to or exclusion from the Building of any person whom Landlord has the right to exclude under Rule 3 above. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right but shall not be obligated to prevent access to the Building during the continuance of the same by closing the doors or otherwise, for the safety of Landlord and the tenants and protection of property in the Building. 18. Tenant shall see that the windows and doors of the Premises are closed and securely locked before leaving the Building and Tenant shall exercise extraordinary care and caution that all water faucets or water apparatus are entirely shut off before Tenant or Tenant's employees leave the Building, and that all electricity, gas or air shall likewise be carefully shut off, so as to prevent waste or damage, and for any default or carelessness Tenant shall make good all injuries sustained by other tenants or occupants of the Building or Landlord. 19. Tenant shall not alter any lock or install a new or additional lock or any bolt on any door of the Premises without prior written consent of Landlord. If Landlord shall give its consent, Tenant shall in each case furnish Landlord with a key for any such lock. Landlord shall have the right to impose a charge for each key issued and for rekeying any lock or bolt on any door of the Premises. 20. Tenant shall not install equipment, such as but not limited to electronic tabulating or computer equipment, requiring electrical or air conditioning service in excess of those to be provided by Landlord under the Lease. 3 54 21. No bicycle, or shopping cart, or other vehicle or any animal (other than dogs assisting visually-impaired individuals) shall be brought into the Premises or the halls, corridors, elevators or any part of the Building by Tenant. 22. Landlord shall have the right to prohibit the use of the name of the Building or Project or any other publicity by Tenant which in Landlord's opinion tends to impair the reputation of the Building or Project or their desirability for other tenants, and upon written notice from Landlord, Tenant will refrain from or discontinue such publicity. 23. Tenant shall not install any radio or television antenna, satellite dish, loud speaker or any other device on the exterior walls or the roof of the Building, without the prior written consent of Landlord. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building, the Project or elsewhere. 24. Alcohol may not be consumed in the Premises, the Building or the Project at any time. 25. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 4 55 EXHIBIT D AMENDMENT OF LEASE COMMENCEMENT DATE In connection with that certain Office Lease dated _________ between HITACHI AMERICA, LTD., as Landlord, and ________________, as Tenant concerning the Premises located at ___________________, Landlord and Tenant hereby agree as follows: 1. The Lease Commencement Date stated in Section 1(G) of the Office Lease is amended to be ________________, 1999, and the Expiration Date stated in Section 1(H) is amended to be ___________, 200_. 2. Landlord has satisfactorily complied with all requirements and conditions precedent to the commencement of the Term as specified in the Office Lease. 3. The Premises covered by the Office Lease and the tenant improvements therein have been fully completed as required, are in good condition, are ready for occupancy and have been accepted by Tenant. 4. Tenant has or shall commence paying Monthly Rental pursuant to the Office Lease on _____________, 1999. Dated effective this __day of __________, 1999. "TENANT" "LANDLORD" HITACHI AMERICA, LTD., - -------------------------, a New York corporation a ------------------------- By: By: ----------------------- ------------------------- Name: Name: --------------------- ----------------------- Title: Title: -------------------- ---------------------- Dated: Dated: -------------------- ---------------------- By: ----------------------- Name: --------------------- Title: -------------------- Dated: -------------------- 56 FIRST AMENDMENT TO OFFICE LEASE THE FIRST AMENDMENT TO OFFICE LEASE (this "Amendment"), made as of the 31st day of August, 1999, by and between HITACHI AMERICA, LTD., a New York corporation ("Landlord") and COLO.COM, INC., a California corporation formerly known as Colomotion, Inc. ("Tenant"). WHEREAS, Landlord and Tenant entered into that certain Office Lease (the "Lease") captioned "OFFICE LEASE," dated as of May 18, 1999, providing for, among other matters, the lease of certain space by Landlord to Tenant known as Suite 601 in that certain building located at 2000 Sierra Point Parkway, Brisbane, CA (the "Premises"); and WHEREAS, Landlord and Tenant desire to expand the size of the Premises sooner than contemplated by the existing Lease. NOW, THEREFORE, in consideration of the Premises and the respective undertakings of the parties hereinafter set forth, it is hereby agreed that the Lease shall be amended as follows: 1. Defined Terms. Capitalized terms used herein and not defined herein shall have the meaning for the same set forth in the Lease. 2. Expansion of Premises. Effective as of September 1, 1999, the Premises shall be expanded to include the entire sixth (6th) floor of the Building. All references in the Lease to "Premises" shall be deemed to be references to the entire sixth (6th) floor. Landlord and Tenant hereby agree that, as of September 1, 1999, the balance of the sixth (6th) floor not included in the original premises shall be deemed a part of the Premises for all purposes under the Lease, including without limitation Tenant's acceptance of such additional space in its "AS IS" condition as of September 1, 1999. To accomplish this agreement, effective as of September 1, 1999. To accomplish this agreement, effective as of September 1, 1999, Sections 1(E) and 1(I) of the Lease shall be deemed deleted in their entirety and replaced by the following: E. "Premises" means suite(s) 601 covering the entire sixth (6th) floor of the Building and consisting of approximately eighteen thousand two hundred sixteen (18,216) square feet of Rentable Area, as more particularly shown on page 2 of Exhibit A attached hereto and incorporated herein by this reference. I. "Monthly Rental" means the following:
Period Monthly Rental ------ -------------- Lease Commencement Date - 08/31/99 $18,720.00 09/01/1999 - 06/30/2000 $27,577,96 07/01/2000 - 06/30/2001 $59,019.84 07/01/2001 - 06/30/2002 $61,387.92 07/01/2002 - 06/30/2003 $63,938.16 07/01/2003 - 06/30/2004 $66,488.40
57 3. New Space Plan for Premises. Page 2 of Exhibit A attached to the Lease is hereby deleted in its entirety and replaced by Schedule 1 attached to this Amendment. 4. Lease in Effect. This Amendment (including the expansion of the Premises) shall be effective on September 1, 1999. Except as amended by this Amendment, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. HITACHI AMERICA, LTD. COLO.COM, INC. By: /s/ TOMOHARU SHIMAYAMA By: /s/ RICHARD J. PALOMBA Name: TOMOHARU SHIMAYAMA Name: RICHARD J. PALOMBA Its: President Its: VP Real Estate 2 58 SCHEDULE 1 [FLOOR PLAN] EXHIBIT A Page 2 of 2 EX-10.19 5 ex10-19.txt EMPLOYMENT OFFER LETTER TO WAYNE A. OLSON 1 EXHIBIT 10.19 [COLOMOTION LOGO] Wayne A. Olson March 11, 1999 740 River Dr. #21G St. Paul, MN 55116 Dear Charles: I am pleased to accept your offer to join Colomotion as Senior Vice President Operations and Administration reporting to you. I understand the compensation will be a salary of $150,000 with a target bonus payment of $45,000. In addition I will receive an option to purchase 1.25% of the available stock of Colomotion at the price of $.05 per share, subject to approval by the Board of Directors, and governed by the 1997 Colomotion stock option plan. The calculation of 1.25% of equity in Colomotion will be based on the total of authorized stock following the completion of the current round of equity financing (series B) underway. Colomotion will provide me with the standard menu of employee benefits such as, life insurance, health insurance, 401(k), vacation, etc. To facilitate my relocation to the San Francisco Bay area, I will receive a one time payment of $15,000 plus living expenses for 90 days, subject to repayment to the company if I elect to leave the company prior to March 11, 2000. Colomotion will reimburse me for up to 12 round trips to Omaha, NE, during my first year of employment. If Colomotion terminates my employment without cause I will receive a payment of one year's salary, unless the company becomes financially impaired. At such point all employees would then be treated equally. I will commence employment with Colomotion effective Monday March 15, 1999. As we discussed, I will require occasional time to transition from my existing business commitments during the initial stages of my employment at Colomotion. Thank you for extending me this opportunity. You will not be disappointed. Sincerely, Acknowledged and Accepted: /s/ WAYNE A. OLSON /s/ CHARLES M. SKIBO Wayne A. Olson Charles M. Skibo Executive Officer EX-10.21 6 ex10-21.txt FORM OF WARRANT TO PURCHASE SHARES OF COMMON STOCK 1 EXHIBIT 10.21 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE TRANSFER IS IN ACCORDANCE WITH RULE 144 OR SIMILAR RULE OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. NO. 1 STOCK PURCHASE WARRANT To Purchase Shares of Common Stock of COLOMOTION, INC. For value received, Colomotion, Inc., a California corporation (the "Company"), hereby grants to __________________ (the "Holder"), and its assigns, the right to purchase from the Company up to __________________________________ shares of the Company's Common Stock at $0.05 per share (the "Exercise Price"). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided in Section 9 hereof. 1. Title of Warrant. Prior to the expiration hereof and subject to compliance with applicable laws, this Warrant and all rights hereunder are transferable, in whole or in part, at the principal office or agency of the Company, by the registered Holder hereof in person or by duly authorized attorney, upon surrender of this Warrant and the Assignment Form attached hereto properly endorsed. 2. Exercise of Warrant. Unless earlier terminated under Section 9, the purchase rights represented by this Warrant are exercisable by the Holder, in whole or in part, at any time before the close of business on March 18, 2002 by the surrender of this Warrant and the Notice of Exercise attached hereto duly executed at the principal office of the Company in San Francisco, California (or such other office or agency of the Company as it may designate in writing to the Holder at the address of the Holder appearing on the books of the Company), and upon payment of the Exercise Price of the shares thereby purchased (by cash, check, or cancellation of indebtedness of the Company to the Holder, if any); whereupon the Holder shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. The Company agrees that upon due exercise of this Warrant by the Holder, the shares so purchased shall be and be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant is exercised. 3. Issuance of Shares. Certificates for shares purchased hereunder or issued upon conversion hereof shall be delivered to the Holder within a reasonable period of time after the date on which this Warrant is exercised. The Company covenants that all shares of Common Stock which may be issued upon the exercise of this Warrant will be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 2 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon the exercise of this Warrant, an amount equal to such fraction multiplied by the current Exercise Price at which each share may be purchased hereunder shall be paid in cash to the Holder. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided however that in the event certificates for shares of Common Stock are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and provided further that upon any transfer involved in the issuance or delivery of any certificates for shares of Common Stock, the Company may require reimbursement for any transfer tax. 6. No Rights as Stockholder. This Warrant does not entitle the Holder to any voting rights or other rights as a stockholder of the Company prior to the exercise hereof. 7. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 8. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday. 9. Early Termination and Adjustment. (a) Early Termination. (i) On Merger. If at any time the Company proposes to merge with or into any other corporation, effect a reorganization, or sell or convey all or substantially all of its assets to any other entity in a transaction in which the stockholders of the Company immediately before the transaction own immediately after the transaction less than a majority of the outstanding voting securities of the surviving entity (or its parent), then the Company shall give the Holder of this Warrant fifteen (15) days notice of the proposed effective date of the transaction and, if the Warrant has not been exercised by the effective date of the transaction, it shall terminate. (ii) On Initial Public Offering. If at any time the Company proposes to undertake a firm commitment underwritten initial public offering, then the Company shall give the 3 Holder of this Warrant fifteen (15) days notice of the proposed effective date of the transaction and, if the Warrant has not been exercised by the effective date of the transaction, it shall terminate. (b) Reclassification, etc. If the Company at any time shall, by subdivision, combination or reclassification of securities or otherwise, change any of the securities to which purchase rights under this Warrant exist into the same or a different number of securities of any class or classes, the shares for which this Warrant is exercisable shall thereafter be convertible into the kind and number of shares of stock or other securities or property of the Company to which the Holder would have been entitled if immediately prior to such change the Holder had acquired the shares for which this Warrant is exercisable. If shares of the Company's Common Stock are subdivided or combined into a greater or smaller number of shares, the Exercise Price under this Warrant shall be proportionately reduced in case of subdivision of shares or proportionately increased in the case of combination of shares in both cases by the ratio which the total number of shares of Common Stock to be outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event. (c) Cash Distributions. No adjustment on account of cash dividends or interest on the Company's Common Stock or other securities purchasable hereunder will be made to the Exercise Price under this Warrant. 10. Restrictions on Transferability of Securities. (a) Restrictions on Transferability. This Warrant and the shares of Common Stock issuable upon exercise of this Warrant (collectively the "Securities") shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Section 10, which conditions are intended to ensure compliance with the provisions of the Securities Act of 1933, as amended (the "Securities Act"). Each holder of any of the Securities will cause any proposed purchaser, assignee, transferee, or pledgee of the Securities held by such holder to agree: (i) to take and hold such Securities subject to the provisions and upon the conditions specified in this Section 10 and (ii) to provide the representations in Section 11. (b) Restrictive Legend. Each certificate representing the Securities and any other securities issued in respect of the Securities upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 10(c) below) be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE TRANSFER IS IN ACCORDANCE WITH RULE 144 OR SIMILAR RULE OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. 4 Each holder of Securities and each subsequent transferee consents to the Company making a notation on its records and giving instructions to any transfer agent of the Securities in order to implement the restrictions on transfer established in this Section 10. (c) Notice of Proposed Transfers. Each holder of a certificate representing the Securities, by acceptance thereof, agrees to comply in all respects with the provisions of this Section 10(c). Prior to any proposed sale, assignment, transfer or pledge of any Securities (other than a transfer not involving a change in beneficial ownership, or a transfer in compliance with Rule 144, so long as the Company is furnished with satisfactory evidence of compliance with such Rule), unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and shall be accompanied, at such holder's expense, by either (i) an opinion of counsel (who shall, and whose opinion shall be, addressed to the Company and reasonably satisfactory to the Company) to the effect that the proposed transfer of the Securities may be effected without registration under the Securities Act or (ii) a "no action" letter from the Securities and Exchange Commission (the "Commission") to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Securities shall be entitled to transfer such Securities in accordance with the terms of the notice delivered by such holder to the Company. Each certificate evidencing the Securities transferred as above provided shall bear, except if such transfer is made pursuant to Rule 144, the appropriate restrictive legend set forth in Section 10(b) above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for such holder and in the opinion of counsel for the Company such legend is not required in order to establish compliance with any provision of the Securities Act. (d) Removal of Restrictions on Transfer of Securities. Any legend referred to in Section 10(b) hereof stamped on a certificate evidencing the Securities and the stock transfer instructions and record notations with respect to the Securities shall be removed and the Company shall issue a certificate without such legend to the holder of the Securities if the Securities are registered under the Securities Act, or if such holder provides the Company with an opinion of counsel (which may be counsel for the Company) reasonably satisfactory to the Company to the effect that a public sale or transfer of such security may be made without registration under the Securities Act or such holder provides the Company with reasonable assurances, which may, at the option of the Company, include an opinion of counsel (which may be counsel for the Company) reasonably satisfactory to the Company, that such security can be sold pursuant to paragraph (k) of Rule 144 (or any successor provision) under the Securities Act. 11. Investment Representations of the Holder. With respect to the acquisition of any of the Securities, the Holder hereby represents and warrants to the Company as follows: (a) Experience. The Holder has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity 5 to protect its own interests. (b) Investment. The Holder is acquiring the Securities for investment for its own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. The Holder understands that the Securities have not been, and will not be, registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Holder's representations as expressed herein. (c) Rule 144. The Holder acknowledges that the Securities must be held indefinitely unless subsequently registered under the Securities Act, or unless an exemption from such registration is available. The Holder understands that the Company is not under any obligation to register any of the Securities. The Holder is aware of the provisions of Rule 144 promulgated under the Securities Act that permit limited resale of securities purchased in a private placement subject to satisfaction of certain conditions. (d) No Public Market. The Holder understands that no public market now exists for any of the securities issued by the Company and that the Company has made no assurances that a public market will ever exist for the Securities. (e) Market Stand-off. The Holder agrees, in connection with the Company's initial underwritten public offering of the Company's securities, (1) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any of the securities issuable upon exercise of this Warrant (other than those shares included in the registration, if any) without the prior written consent of the Company and the underwriters managing such initial underwritten public offering of the Company's securities for one hundred eighty (180) days from the effective date of such registration and (2) further agrees to execute any agreement reflecting (1) above as may be requested by the underwriters at the time of the initial public offering, and (3) further agrees that the Company may impose stop transfer instructions with its transfer agent in order to enforce the agreements in (1) and (2) above. (f) Access to Data. The Holder has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management and has also had an opportunity to ask questions of the Company's officers, which questions were answered to its satisfaction. 12. Miscellaneous. (a) Issue Date. The provisions of this Warrant shall be construed and shall be given effect in all respect as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the Company. This Warrant shall constitute a contract under the laws of the State of California and for all purposes shall be construed in accordance with and governed by the laws of said state, without regard to the choice of law or conflict of law provisions thereof. (b) Modification and Waiver. This Warrant and any provisions hereof may be 6 changed, waived, discharged or terminated only by an instrument in writing signed by the parties hereto. (c) Notices. All notices, reports and other communications required or permitted hereunder shall be in writing and may be delivered in person, overnight delivery service or U.S. mail, in which event it may be mailed by first-class, certified or registered, postage prepaid, addressed to the addresses set forth at the end of this Warrant. Each such notice, report or other communication shall for all purposes under this Warrant be treated as effective or having been given when delivered if delivered personally or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid. IN WITNESS WHEREOF, Colomotion, Inc. has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: March 18, 1999. COLOMOTION, INC. By:__________________________________ Charles M. Skibo, Chief Executive Officer AGREED AND ACCEPTED: By:___________________________________ Print Name:___________________________ Address:______________________________ 7 ASSIGNMENT FORM (To assign the foregoing Warrant, execute this form and supply the required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the undersigned hereby, sells, assigns and transfers unto: ________________________________________________________________________________ whose address is________________________________________________________________ (Please Print) and whose Social Security or other Taxpayer Identification Number is:___________ the foregoing Warrant and all rights thereunder, hereby constituting and appointing_______________________________to transfer said Warrant on the books of the Company, with full power of substitution in the premises. Dated:___________________________, 19__. Holder's Signature:_______________________________ Print Name:_______________________________________ Holder's Address: __________________________________________________ __________________________________________________ __________________________________________________ Signature Guaranteed:_____________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever, and must be guaranteed by a bank or trust company or by a member of the National Association of Securities Dealers, Inc. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. 8 NOTICE OF EXERCISE TO: Colomotion, Inc. 1021 Mission Street San Francisco, CA 94103 ATTN: Secretary (1) The undersigned hereby elects to purchase ______________ shares of Common Stock (the "Shares") of Colomotion, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing the Shares in the name of the undersigned or in such other name as is specified below: (Print Name)__________________________ Address:_____________________________ (3) The undersigned confirms that the Shares are being acquired for the account of the undersigned for investment only 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 selling the Shares. (Date)____________________ (Signature)___________________________ (Print Name)__________________________ EX-10.22 7 ex10-22.txt FORM OF WARRANT TO PURCHASE SERIES C PREF. STOCK 1 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 OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, 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. COLO.COM WARRANT TO PURCHASE SHARES OF SERIES C PREFERRED STOCK THIS CERTIFIES THAT, for value received, _________ and its assignees are entitled to subscribe for and purchase that number of the fully paid and nonassessable shares of Series C Preferred Stock (as adjusted pursuant to Section 4 hereof, the "Shares") of COLO.COM, a California corporation (the "Company"), as is determined pursuant to the next paragraph hereof at the price per share as is determined pursuant to the next paragraph hereof (such price and such other price as shall result, from time to time, from the adjustments specified in Section 4 hereof is herein referred to as the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, (a) the term "Series Preferred" shall mean the Company's presently authorized Series C Preferred Stock, and any stock into or for which such Series C Preferred Stock may hereafter be converted or exchanged, and after the automatic conversion of the Series C Preferred Stock to Common Stock shall mean the Company's Common Stock, (b) the term "Date of Grant" shall mean November 9, 1999, and (c) the term "Other Warrants" shall mean any other warrants issued by the Company in connection with the transaction with respect to which this Warrant was issued, and any warrant issued upon transfer or partial exercise of or in lieu of this Warrant. The term "Warrant" as used herein shall be deemed to include Other Warrants unless the context clearly requires otherwise. Notwithstanding the foregoing, to the extent the Company has not authorized for issuance Series C Preferred Stock upon exercise of this Warrant, then the shares issuable under this Warrant shall be Common Stock of the Company. The Company covenants with the holder of this Warrant that as soon as is practicable and in no event later than March 31, 2000, it will cause to be authorized sufficient shares of Series C Preferred Stock to permit the full exercise of this Warrant and the Other Warrants into Series C Preferred Stock. The Warrant Price shall be the lower of (i) the Arithmetic Average, and (ii) Time Weighted Average. The "Arithmetic Average" shall equal 0.625 multiplied by the sum of (a) the Series B preferred stock price and (b) the Series C preferred stock price. The "Time Weighted Average" shall equal the sum of (a) the Series B preferred stock price, and (b) the Time Fraction multiplied by the Series C preferred stock price. The "Series B preferred stock price" is $0.50. The "Time Fraction" shall be a fraction, the numerator of which is the number of months (rounded to the nearest whole number) between the close of the Series B round and the Date of Grant, and the denominator of which is the number of months (rounded to the nearest whole number) between the close of the Series B round and 2 Series C round. If the Company has not closed the Series C round by March 31, 2000 or if a Liquidity Event (as defined below) or an IPO (as defined below) occurs prior to the close of the Series C round, then the Warrant Price shall be the Series B preferred stock price. The number of shares for which this Warrant is exercisable shall be the nearest whole number determined by dividing $_____ by the Warrant Price determined pursuant to this paragraph. 1. Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from the Date of Grant through the later of (i) ten (10) years after the Date of Grant or (ii) five (5) years after the closing of the Company's initial public offering of its Common Stock ("IPO") effected pursuant to a Registration Statement filed under the Securities Act of 1933, as amended (the "Act"). Upon request of the Company, the holder of this Warrant agrees that upon the sale of all of the assets or stock of the Company, or the merger of the Company under any of the following circumstances (A) such sale or merger is to a public company or (B) the sole consideration in any such transaction paid in respect of the Shares is cash (a "Liquidity Event") that either (i) the holder of this Warrant will exercise the purchase right under this Warrant (including without limitation by way of net issuance as provided in Section 10.2) and such exercise will be deemed effective upon completion of such sale or merger; or (ii) if the holder of this Warrant elects not to exercise the Warrant, this Warrant will expire upon completion of such sale or merger. The Company agrees to provide the holder of this Warrant not less than thirty (30) days' prior written notice of the Company's request that the holder exercise its purchase right hereunder in accordance with the provisions of Section 13 hereof. 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, at the election of the holder hereof, by (a) the surrender of this Warrant (with the notice of exercise substantially in the form attached hereto as Exhibit A-1 duly completed and executed) at the principal office of the Company and by the payment to the Company, by certified or bank check, or by wire transfer to an account designated by the Company (a "Wire Transfer") of an amount equal to the then applicable Warrant Price multiplied by the number of Shares then being purchased; (b) if in connection with a registered public offering of the Company's securities, the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-2 duly completed and executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by certified or bank check or by Wire Transfer from the proceeds of the sale of shares to be sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased; or (c) exercise of the "net issuance" right provided for in Section 10.2 hereof. The person or persons in whose name(s) any certificate(s) representing shares of Series Preferred shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such 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 shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty (30) days after such exercise and, unless this Warrant has been fully exercised or expired, a -2- 3 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; provided, however, at such time as the Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, if requested by the holder of this Warrant, the Company shall cause its transfer agent to deliver the certificate representing Shares issued upon exercise of this Warrant to a broker or other person (as directed by the holder exercising this Warrant) within the time period required to settle any trade made by the holder after exercise of this Warrant. 3. Stock Fully Paid; Reservation of Shares. 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. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Series Preferred or, to the extent specified herein, Common Stock to provide for the exercise of the rights represented by this Warrant and a sufficient number of shares of its Common Stock to provide for the conversion of the Series Preferred into Common Stock. 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. Except as provided in Section 1 of this Warrant, in case of any reclassification or change 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 the Company with or into another corporation (other than a merger with another corporation in which the Company 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 the Company, the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the holder of this Warrant a new Warrant (in form and substance satisfactory to the holder of this Warrant), or the Company shall make appropriate provision without the issuance of a new 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 of Series Preferred theretofore issuable upon exercise of this Warrant, (i) the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change, merger or sale by a holder of the number of shares of Series Preferred then purchasable under this Warrant, or (ii) in the case of such a merger or sale in which the consideration paid consists all or in part of assets other than securities of the successor or purchasing corporation, at the option of the Holder of this Warrant, the securities of the successor or purchasing corporation having a value at the time of the transaction equivalent to the valuation of the Series Preferred at the time of the transaction. Any new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to -3- 4 the adjustments provided for in this Section 4. The provisions of this subparagraph (a) shall similarly apply to successive reclassifications, changes, mergers and transfers. (b) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its outstanding shares of Series Preferred, the Warrant Price shall be proportionately decreased and the number of Shares issuable hereunder shall be proportionately increased in the case of a subdivision and the Warrant Price shall be proportionately increased and the number of Shares issuable hereunder shall be proportionately decreased in the case of a combination. (c) Stock Dividends and Other Distributions. If the Company at any time while this Warrant is outstanding and unexpired shall (i) pay a dividend with respect to Series Preferred payable in Series Preferred, then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (A) the numerator of which shall be the total number of shares of Series Preferred outstanding immediately prior to such dividend or distribution, and (B) the denominator of which shall be the total number of shares of Series Preferred outstanding immediately after such dividend or distribution; or (ii) make any other distribution with respect to Series Preferred (except any distribution specifically provided for in Sections 4(a) and 4(b)), then, in each such case, provision shall be made by the Company such that the holder of this Warrant shall receive upon exercise of this Warrant a proportionate share of any such dividend or distribution as though it were the holder of the Series Preferred (or Common Stock issuable upon conversion thereof) as of the record date fixed for the determination of the shareholders of the Company entitled to receive such dividend or distribution. (d) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Shares of Series Preferred 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) Antidilution Rights. The Shares of Series Preferred purchasable hereunder shall be entitled to the antidilution rights which are or become applicable to the Series Preferred when authorized by the Company and shall be set forth in the Company's Articles of Incorporation. A true and complete copy of the Company's Articles of Incorporation, as amended through the Date of Grant, is attached hereto as Exhibit B (the "Charter"). The Company shall promptly provide the holder hereof with any restatement, amendment, modification or waiver of the Charter promptly after the same has been made. 5. Notice of Adjustments. Whenever the Warrant Price or the number of Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company shall make a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring -4- 5 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, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant. In addition, whenever the conversion price or conversion ratio of the Series Preferred shall be adjusted, the Company shall make a certificate signed by its chief financial 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 conversion price or ratio of the Series Preferred after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant. 6. Fractional Shares. No fractional shares of Series Preferred will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the fair market value of the Series Preferred on the date of exercise as reasonably determined in good faith by the Company's Board of Directors. 7. Compliance with Act; Disposition of Warrant or Shares of Series Preferred. (a) Compliance with Act. The holder of this Warrant, by acceptance hereof, agrees that this Warrant, and the shares of Series Preferred to be issued upon exercise hereof and any Common Stock issued upon conversion thereof are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant, or any shares of Series Preferred to be issued upon exercise hereof or any Common Stock issued upon conversion thereof except under circumstances which will not result in a violation of the Act or any applicable state securities laws. Upon exercise of this Warrant, unless the Shares being acquired are registered under the Act and any applicable state securities laws or an exemption from such registration is available, the holder hereof shall confirm in writing that the shares of Series Preferred so purchased (and any shares of Common Stock issued upon conversion thereof) are being acquired for investment and not with a view toward distribution or resale in violation of the Act and shall confirm such other matters related thereto as may be reasonably requested by the Company. This Warrant and all shares of Series Preferred issued upon exercise of this Warrant and all shares of Common Stock issued upon conversion thereof (unless registered under the Act and any applicable state securities laws) 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 OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, 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 THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY." -5- 6 Said legend shall be removed by the Company, upon the request of a holder, at such time as the restrictions on the transfer of the applicable security shall have terminated. In addition, in connection with the issuance of this Warrant, the holder specifically represents to the Company by acceptance of this Warrant as follows: (1) The holder is aware of the Company's business affairs and financial condition, and has acquired information about the Company sufficient to reach an informed and knowledgeable decision to acquire this Warrant. The holder is acquiring this Warrant for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof in violation of the Act. (2) The holder understands that this Warrant has not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the holder's investment intent as expressed herein. (3) The holder further understands that this Warrant must be held indefinitely unless subsequently registered under the Act and qualified under any applicable state securities laws, or unless exemptions from registration and qualification are otherwise available. The holder is aware of the provisions of Rule 144, promulgated under the Act. (4) The holder is an "accredited investor" as such term is defined in Rule 501 of Regulation D promulgated under the Act. (b) Disposition of Warrant or Shares. With respect to any offer, sale or other disposition of this Warrant or any shares of Series Preferred acquired pursuant to the exercise of this Warrant prior to registration of such Warrant or shares, the holder hereof agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, or other evidence, if reasonably satisfactory to the Company, 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 securities law then in effect) of this Warrant or such shares of Series Preferred or Common Stock and indicating whether or not under the Act certificates for this Warrant or such shares of Series Preferred 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 or other evidence, the Company, as promptly as practicable but no later than fifteen (15) days after receipt of the written notice, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such shares of Series Preferred or Common Stock, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 7(b) that the opinion of counsel for the holder or other evidence is not reasonably satisfactory to the Company, the Company shall so notify the holder promptly with details thereof after such determination has been made. Notwithstanding the foregoing, this Warrant or such shares of Series Preferred or Common Stock may, as to such federal laws, be offered, sold or otherwise disposed of in accordance with Rule 144 or 144A under the Act, provided that the Company shall have been furnished with such information as the Company may reasonably request to provide a -6- 7 reasonable assurance that the provisions of Rule 144 or 144A have been satisfied. Each certificate representing this Warrant or the shares of Series Preferred thus transferred (except a transfer pursuant to Rule 144 or 144A) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. (c) Applicability of Restrictions. Neither any restrictions of any legend described in this Warrant nor the requirements of Section 7(b) above shall apply to any transfer of, or grant of a security interest in, this Warrant (or the Series Preferred or Common Stock obtainable upon exercise thereof) or any part hereof (i) to a partner of the holder if the holder is a partnership or to a member of the holder if the holder is a limited liability company, (ii) to a partnership of which the holder is a partner or to a limited liability company of which the holder is a member, or (iii) to any affiliate of the holder if the holder is a corporation; provided, however, in any such transfer, if applicable, the transferee shall on the Company's request agree in writing to be bound by the terms of this Warrant as if an original holder hereof. 8. Rights as Shareholders; Information. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Series Preferred or any other securities of the Company 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 shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders 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. Notwithstanding the foregoing, the Company will transmit to the holder of this Warrant such information, documents and reports as are generally distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the shareholders. 9. Market Stand-Off Agreement. During the time period not to exceed 180 days specified by the Company and an underwriter of securities of the Company, following the effective date of a registration statement of the Company filed under the Act (the "Lock-up"), the holder shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to transferees or donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except those included in such registration; provided, however, that this Section 9 shall be applicable (a) only to the first such registration statement of the Company pursuant to which Common Stock (or other securities) of the Company are to be sold on its behalf to the public in an underwritten offering, and (b) only if all officers and directors of the Company enter into similar agreements, and (c) such underwriters certify to the holder of this Warrant in writing that (1) they have determined that the holder must be so bound during the Lock-up or it would have a material negative impact on the offering, and (2) all other holders of warrants of the Company have agreed to be similarly restricted. In order to enforce -7- 8 the foregoing covenant, the Company may impose stop-transfer restrictions with respect to the Shares of the holder (and the shares or securities of every person subject to the foregoing restriction) until the end of such period. The holder agrees to execute an agreement stating these terms as may be requested by such underwriters. 10. Additional Rights. 10.1 Acquisition Transactions. The Company shall provide the holder of this Warrant with at least twenty (20) days' written notice prior to closing thereof of the terms and conditions of any of the following transactions (to the extent the Company has notice thereof): (i) the sale, lease, exchange, conveyance or other disposition of all or substantially all of the Company's property or business, or (ii) its merger into or consolidation with any other corporation (other than a wholly-owned subsidiary of the Company), or any transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of the Company is disposed of. 10.2 Right to Convert Warrant into Stock: Net Issuance. (a) Right to Convert. In addition to and without limiting the rights of the holder under the terms of this Warrant, the holder shall have the right to convert this Warrant or any portion thereof (the "Conversion Right") into shares of Series Preferred (or Common Stock if the Series Preferred has been automatically converted into Common Stock) as provided in this Section 10.2 at any time or from time to time during the term of this Warrant. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the "Converted Warrant Shares"), the Company shall deliver to the holder (without payment by the holder of any exercise price or any cash or other consideration) that number of shares of fully paid and nonassessable Series Preferred (or Common Stock if the Series Preferred has been automatically converted into Common Stock) as is determined according to the following formula: X = B - A ----- Y Where: X = the number of shares of Series Preferred (or Common Stock if the Series Preferred has been automatically converted to Common Stock) that shall be issued to holder Y = the fair market value of one share of Series Preferred (or Common Stock if the Series Preferred has been automatically converted to Common Stock) A = the aggregate Warrant Price of the specified number of Converted Warrant Shares immediately prior to the exercise of the Conversion Right (i.e., the number of Converted Warrant Shares multiplied by the Warrant Price) -8- 9 B = the aggregate fair market value of the specified number of Converted Warrant Shares (i.e., the number of Converted Warrant Shares multiplied by the fair market value of one Converted Warrant Share) No fractional shares shall be issuable upon exercise of the Conversion Right, and, if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as hereinafter defined). For purposes of Section 10 of this Warrant, shares issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of this Warrant. (b) Method of Exercise. The Conversion Right may be exercised by the holder by the surrender of this Warrant at the principal office of the Company together with a written statement (which may be in the form of Exhibit A-1 or Exhibit A-2 hereto) specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in Section 10.2(a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"), and, at the election of the holder hereof, may be made contingent upon the closing of the sale of the Company's Common Stock to the public in a public offering pursuant to a Registration Statement under the Act (a "Public Offering"). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder within thirty (30) days following the Conversion Date. (c) Determination of Fair Market Value. For purposes of this Section 10.2, "fair market value" of a share of Series Preferred (or Common Stock if the Series Preferred has been automatically converted into Common Stock) as of a particular date (the "Determination Date") shall mean: (i) If the Conversion Right is exercised in connection with and contingent upon a Public Offering, and if the Company's Registration Statement relating to such Public Offering ("Registration Statement") has been declared effective by the Securities and Exchange Commission, then the initial "Price to Public" specified in the final prospectus with respect to such offering. (ii) If the Conversion Right is not exercised in connection with and contingent upon a Public Offering, then as follows: (A) If traded on a securities exchange, the fair market value of the Common Stock shall be deemed to be the average of the closing prices of the Common Stock on such exchange over the 30-day period ending five business days prior to the Determination Date, and the fair market value of the Series Preferred shall be deemed to be such fair market value of the Common Stock multiplied by the number of shares of Common Stock into which each share of Series Preferred is then convertible; -9- 10 (B) If traded on the Nasdaq Stock Market or other over-the-counter system, the fair market value of the Common Stock shall be deemed to be the average of the closing bid prices of the Common Stock over the 30-day period ending five business days prior to the Determination Date, and the fair market value of the Series Preferred shall be deemed to be such fair market value of the Common Stock multiplied by the number of shares of Common Stock into which each share of Series Preferred is then convertible; and (C) If there is no public market for the Common Stock, then fair market value shall be determined by mutual agreement of the holder of this Warrant and the Company. 10.3 Exercise Prior to Expiration. Except as provided in Section 1 of this Warrant, to the extent this Warrant is not previously exercised as to all of the Shares subject hereto, and if the fair market value of one share of the Series Preferred is greater than the Warrant Price then in effect, this Warrant shall be deemed automatically exercised pursuant to Section 10.2 above (even if not surrendered) immediately before its expiration. For purposes of such automatic exercise, the fair market value of one share of the Series Preferred upon such expiration shall be determined pursuant to Section 10.2(c). To the extent this Warrant or any portion thereof is deemed automatically exercised pursuant to this Section 10.3, the Company agrees to promptly notify the holder hereof of the number of Shares, if any, the holder hereof is to receive by reason of such automatic exercise. 11. Representations and Warranties; Covenants. The Company represents and warrants and covenants to the holder of this Warrant as follows: (a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law or principles at equity governing specific performance, injunctive relief and other equitable remedies, except that as of the Date of Grant, there is not a sufficient number of shares of Series C Preferred Stock reserved for issuance in the Articles of Incorporation to provide the Series Preferred upon exercise of the rights of the holder of this Warrant; there is, however, a sufficient number of shares of Common Stock reserved for issuance to provide to the holder upon exercise of this Warrant; (b) No later than March 31, 2000, the Shares of Series C Preferred Stock will have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and non-assessable; (c) Sufficient shares of Common Stock have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and non-assessable; (d) No later than March 31, 2000, the rights, preferences, privileges and restrictions granted to or imposed upon the Series Preferred and the holders thereof will be as set forth in the Charter, and each share of the Series Preferred represented by this Warrant will be -10- 11 convertible into one share of Common Stock upon the Company's authorization and issuance of Series Preferred; (e) The shares of Common Stock issuable upon conversion of the Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms of the Charter will be validly issued, fully paid and nonassessable; (f) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's Charter or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person, except for the filing of notices pursuant to federal and state securities laws, which filings will be effected by the time required thereby; and (g) There are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Company to perform its obligations under this Warrant. (h) The number of shares of Common Stock of the Company outstanding on the date hereof, on a fully diluted basis (assuming the conversion of all outstanding convertible securities and the exercise of all outstanding options and warrants), does not exceed 44,141,451 shares. 12. 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. 13. Notices. Any notice, request, communication or other document required or permitted to be given or delivered to the holder hereof or the Company 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 the Company or to the Company at the address indicated therefor on the signature page of this Warrant. 14. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company relating to the Series Preferred issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. -11- 12 15. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that, upon receipt of evidence reasonably satisfactory to the Company 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 the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company 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. 16. 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. The language in this Warrant shall be construed as to its fair meaning without regard to which party drafted this Warrant. 17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 18. Survival of Representations, Warranties and Agreements. All representations and warranties of the Company and the holder hereof contained herein shall survive the Date of Grant, the exercise or conversion of this Warrant (or any part hereof) or the termination or expiration of rights hereunder. All agreements of the Company and the holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative. 19. 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 the Company), or the Company (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. 20. No Impairment of Rights. The Company will not, by amendment of its Charter or 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. 21. Severability. The invalidity or unenforceability of any provision of this Warrant in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction, or affect any other provision of this Warrant, which shall remain in full force and effect. 22. Recovery of Litigation Costs. If any legal action or other proceeding is brought for the enforcement of this Warrant, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Warrant, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other reasonable costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled. -12- 13 23. Entire Agreement; Modification. This Warrant constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes all prior and contemporaneous agreements, representations, and undertakings of the parties, whether oral or written, with respect to such subject matter. The Company has caused this Warrant to be duly executed and delivered as of the Date of Grant specified above. COLO.COM By:__________________________________ Printed Name:________________________ Title:_______________________________ Address: 2000 Sierra Point Parkway Suite 601 Brisbane, CA 94005-1819 [NAME] By:__________________________________ Printed Name:________________________ Title:_______________________________ Address:_____________________________ -13- 14 EXHIBIT A-1 NOTICE OF EXERCISE To: COLO.COM (the "Company") 1. The undersigned hereby: [ ] elects to purchase________ shares of [Series Preferred Stock] [Common Stock] of the Company pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full, or [ ] elects to exercise its net issuance rights pursuant to Section 10.2 of the attached Warrant with respect to________Shares of [Series Preferred Stock] [Common Stock]. 2. Please issue a certificate or certificates representing ________ 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, all except as in compliance with applicable securities laws. _____________________________________________ (Signature) _______________ (Date) 15 EXHIBIT A-2 NOTICE OF EXERCISE To: COLO.COM (the "Company") 1. Contingent upon and effective immediately prior to the closing (the "Closing") of the Company's public offering contemplated by the Registration Statement on Form S___, filed________, 19__, the undersigned hereby: [ ] elects to purchase________shares of [Series Preferred Stock] [Common Stock] of the Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant, or [ ] elects to exercise its net issuance rights pursuant to Section 10.2 of the attached Warrant with respect to________Shares of [Series Preferred Stock] [Common Stock]. 2. Please deliver to the custodian for the selling shareholders a stock certificate representing such________shares. 3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $________or, if less, the net proceeds due the undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing. _____________________________________________ (Signature) _______________ (Date) 16 EXHIBIT B CHARTER EX-10.23 8 ex10-23.txt WARRANT AGREEMENT TO PURCHASE SHARES 1 EXHIBIT 10.23 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. WARRANT AGREEMENT TO PURCHASE SHARES OF THE SERIES C PREFERRED STOCK OF COLO.COM DATED AS OF OCTOBER 22, 1999 (THE "EFFECTIVE DATE") WHEREAS, COLO.COM, a California corporation (the "Company") has entered into a Loan and Security Agreement dated as of October 22, 1999, and related Promissory Note(s) (collectively, the "Loans") with Comdisco, Inc., a Delaware corporation (the "Warrantholder"); and WHEREAS, the Company desires to grant to Warrantholder, in consideration for such Loans, the right to purchase shares of its Series C Preferred Stock; NOW, THEREFORE, in consideration of the Warrantholder executing and delivering such Loans and in consideration of mutual covenants and agreements contained herein, the Company and Warrantholder agree as follows: 1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK. For value received, the Company hereby grants to the Warrantholder, and the Warrantholder is entitled, upon the terms and subject to the conditions hereinafter set forth, to subscribe for and purchase from the Company that number of fully paid and assessable shares of the Company's Series C Preferred Stock ("Preferred Stock") equal to $560,000 divided by the Exercise Price ("Exercise Price"). The Exercise Price shall equal to the sum of $0.50 per share (the "Last Round") plus the product of (a) the difference between the price per share of the next round of equity financing (the "Next Round") and the Last Round, multiplied by (b) the fraction resulting from dividing (x) the number of days from the date of closing of the Last Round (ie. April 27, 1999) to the date of execution of the Leases, by (y) the number of days from the date of the closing of the Last Round to the date of closing of the Next Round; provided however, if the Next Round is not successfully completed by December 31, 1999, then the Exercise Price shall be equal to $0.50 per share. The Next Round shall be defined as the earlier of Company's (i) initial public offering, (ii) merger or (iii) private equity round. The number and purchase price of such shares are subject to adjustment as provided in Section 8 hereof. 2. TERM OF THE WARRANT AGREEMENT. Except as otherwise provided for herein, the term of this Warrant Agreement and the right to purchase Preferred Stock as granted herein shall commence on the Effective Date and shall be exercisable for a period of (i) ten (10) years or (ii) five (5) years from the effective date of the Company's initial public offering, whichever is longer. If at any time the Company proposes to merge with or into any other corporation, effect a reorganization, or sell or convey all or substantially all of its assets to any other entity in a transaction in which the shareholders of the Company immediately before the transaction own immediately after the transaction less than a majority of the outstanding voting securities of the surviving entity (or its parent), then the Company shall give the Warrantholder thirty (30) days notice of the proposed effective date of the transaction and, if the Warrant has not been exercised by the effective date of the transaction, the Warrant shall terminate. -1- 2 3. EXERCISE OF THE PURCHASE RIGHTS. The purchase rights set forth in the Warrant Agreement are exercisable by the Warrantholder, in whole or in part, at any time, or from time to time, prior to the expiration of the term set forth in Section 2 above, by tendering to the Company at its principal office a notice of exercise in the form attached hereto as Exhibit I (the "Notice of Exercise"), duly completed and executed. Promptly upon receipt of the Notice of Exercise and the payment of the purchase price in accordance with the terms set forth below, and in no event later than twenty-one (21) days thereafter, the Company shall issue to the Warrantholder a certificate for the number of shares of Preferred Stock purchased and shall execute the acknowledgment of exercise in the form attached hereto as Exhibit II (the "Acknowledgment of Exercise") indicating the number of shares which remain subject to future purchases, if any. The Exercise Price may be paid at the Warrantholder's election either (i) by cash or check, or (ii) by surrender of Warrants ("Net Issuance") as determined below. If the Warrantholder elects the Net Issuance method, the Company will issue Preferred Stock in accordance with the following formula: X = Y(A-B) ------ A Where: X = the number of shares of Preferred Stock to be issued to the Warrantholder. Y = the number of shares of Preferred Stock requested to be exercised under this Warrant Agreement. A = the fair market value of one (1) share of Preferred Stock. B = the Exercise Price. For purposes of the above calculation, current fair market value of Preferred Stock shall mean with respect to each share of Preferred Stock: (i) if the exercise is in connection with an initial public offering of the Company's Common Stock, and if the Company's Registration Statement relating to such public offering has been declared effective by the SEC, then the fair market value per share shall be the product of (x) the initial "Price to Public" specified in the final prospectus with respect to the offering and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise; (ii) If this Warrant is exercised after, and not in connection with the Company's initial public offering, and: (a) if traded on a securities exchange, the fair market value shall be deemed to be the product of (x) the average of the closing prices over a five (5) day period ending three days before the day the current fair market value of the securities is being determined and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise; or (b) if actively traded over-the-counter, the fair market value shall be deemed to be the product of (x) the average of the closing bid and asked prices quoted on the NASDAQ system (or similar system) over the five (5) day period ending three days before the day the current fair market value of the securities is being determined and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise; (iii) If at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the current fair market value of Preferred Stock shall be the product of (x) the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by its Board of Directors and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise, unless the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the fair market value of Preferred Stock shall be deemed -2- 3 to be the value received by the holders of the Company's Preferred Stock on a common equivalent basis pursuant to such merger or acquisition. Upon partial exercise by either cash or Net Issuance, the Company shall promptly issue an amended Warrant Agreement representing the remaining number of shares purchasable hereunder. All other terms and conditions of such amended Warrant Agreement shall be identical to those contained herein, including, but not limited to the Effective Date hereof. 4. RESERVATION OF SHARES. As of March 31, 2000 and during the term of this Warrant Agreement thereafter, the Company will at all times have authorized and reserved a sufficient number of shares of its Preferred Stock to provide for the exercise of the rights to purchase Preferred Stock as provided for herein. 5. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 8. NO RIGHTS AS SHAREHOLDER. This Warrant Agreement does not entitle the Warrantholder to any voting rights or other rights as a shareholder of the Company prior to the exercise of the Warrant. 7. WARRANTHOLDER REGISTRY. The Company shall maintain a registry showing the name and address of the registered holder of this Warrant Agreement. 8. ADJUSTMENT RIGHTS. The purchase price per share and the number of shares of Preferred Stock purchasable hereunder are subject to adjustment, as follows: (a) Merger and Sale of Assets. If at any time there shall be a capital reorganization of the shares of the Company's stock (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or a merger or consideration of the Company with or into another corporation whether or not the Company is the surviving corporation, or the sale of all or substantially all of the Company's properties and assets to any other person (hereinafter referred to as a "Merger Event"), then, as a part of such Merger Event, lawful provision shall be made so that the Warrantholder shall thereafter be entitled to receive, upon exercise of the Warrant, the number of shares of preferred stock or other securities of the successor corporation resulting from such Merger Event, equivalent in value to that which would have been issuable if Warrantholder had exercised this Warrant immediately prior to the Merger Event. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant Agreement with respect to the rights and interest of the Warrantholder after the Merger Event to the end that the provisions of this Warrant Agreement (including adjustments of the Exercise Price and number of shares of Preferred Stock purchasable) shall be applicable to the greatest extent possible. (b) Reclassification of Shares. If the Company at any time shall, by combination, reclassification, exchange or subdivision of securities or otherwise, change any of the securities as to which purchase rights under this Warrant Agreement exist into the same or a different number of securities of any other class or classes, this Warrant Agreement shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant Agreement immediately prior to such combination, reclassification, exchange, subdivision or other change. (c) Subdivision or Combination of Shares. If the Company at any time shall combine or subdivide its Preferred Stock, the Exercise Price shall be proportionally decreased in the case of a subdivision, or proportionately increased in the case of a combination. -3- 4 (d) Right to Purchase Additional Stock. If the Company has not paid any Promissory Note(s) entered into pursuant to the Loan(s) in its entirety by the Maturity Date (as defined in the applicable Subordinated Promissory Note(s)), then for each additional month, or portion thereof, thereafter that the outstanding principal is not paid, Warrantholder shall have the right to purchase from the Company, at the Exercise Price (adjusted as set forth herein), an additional number of shares of Preferred Stock which number shall be determined by (i) multiplying the outstanding principal amount which due but unpaid by 1% and (ii) dividing the product thereof by the Exercise Price. (f) Antidilution Rights. Additional antidilution rights applicable to the Preferred Stock purchasable hereunder are as set forth in the Company's Articles of incorporation, as amended through the Effective Date, a true and complete copy of which is attached hereto as Exhibit __ (the "Charter"). The Company shall promptly provide the Warrantholder with any restatement, amendment, modification or waiver of the Charter. The Company shall provide Warrantholder the same notices that it provides holders of its Preferred Stock. (g) Notice of Adjustments. If: (i) the Company shall declare any dividend or distribution upon its stock, whether in cash, property, stock or other securities; (ii) the Company shall offer for subscription prorata to the holders of any class of its Preferred or other convertible stock any additional shares of stock of any class or other rights; (iii) there shall be any Merger Event; (iv) there shall be an initial public offering; or (v) there shall be any voluntary dissolution, liquidation or winding up of the Company; then, in connection with each such event, the Company shall send to the Warrantholder: (A) at least twenty (20) days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution, subscription rights (specifying the date on which the holders of Preferred Stock shall be entitled thereto) or for determining rights to vote in respect of such Merger Event, dissolution, liquidation or winding up; (B) in the case of any such Merger Event, dissolution, liquidation or winding up, at least twenty (20) days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Preferred Stock shall be entitled to exchange their Preferred Stock for securities or other property deliverable upon such Merger Event, dissolution, liquidation or winding up); and (C) in the case of a public offering, the Company shall give the Warrantholder at least twenty (20) days written notice prior to the effective date thereof. Each such written notice shall set forth, in reasonable detail, (i) the event requiring the adjustment, (ii) the amount of the adjustment, (iii) the method by which such adjustment was calculated, (iv) the Exercise Price, and (v) the number of shares subject to purchase hereunder after giving effect to such adjustment, and shall be given by first class mail, postage prepaid, addressed to the Warrantholder, at the address as shown on the books of the Company. (h) Timely Notice. Failure to timely provide such notice required by subsection (g) above shall entitle Warrantholder to retain the benefit of the applicable notice period notwithstanding anything to the contrary contained in any insufficient notice received by Warrantholder. The notice period shall begin on the date Warrantholder actually receives a written notice containing all the information specified above. 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. (a) Reservation of Preferred Stock. The Company covenants that no later than March 31, 2000, the Preferred Stock issuable upon exercise of the Warrantholder's rights will be duly and validly reserved and, when issued in accordance with the provisions of this Warrant Agreement, will be validly issued, fully paid and non-assessable, and will be free of any taxes, liens, charges or encumbrances of any nature whatsoever; provided, however, that the Preferred Stock issuable pursuant to this Warrant Agreement may be subject to restrictions on transfer under state and/or Federal securities laws. The Company has made available to the Warrantholder true, correct and complete copies of its Charter and Bylaws, as amended. The issuance of certificates for shares of Preferred Stock upon exercise of the Warrant Agreement shall be made without charge to the Warrantholder for any issuance tax in respect thereof, or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Preferred Stock. The Company shall not be required to pay any tax which may be payable in respect of any transfer involved and the issuance and delivery of any certificate in a name other than that of the Warrantholder. (b) Due Authority. The execution and delivery by the Company of this Warrant Agreement and the performance of all obligations of the Company hereunder, including the issuance to Warrantholder of the right to acquire the shares of Preferred Stock, have been duly authorized by all necessary corporate action on the part of the Company, and the Loans and this Warrant Agreement are not inconsistent with the Company's Charter or Bylaws, do not contravene any law or governmental rule, regulation or order applicable to it, do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a -4- 5 party or by which it is bound, and the Loans and this Warrant Agreement constitute legal, valid and binding agreements of the Company, enforceable in accordance with their respective terms except that, at the Effective Date, there is not a sufficient number of shares of Series C Preferred Stock reserved for issuance in the Articles of Incorporation, to provide the Preferred stock upon exercise of the Warrantholder's rights. (c) Consents and Approvals. No consent or approval of, giving of notice to, registration with, or taking of any other action in respect of any state, Federal or other governmental authority or agency is required with respect to the execution, delivery and performance by the Company of its obligations under this Warrant Agreement, except for the filing of notices pursuant to Regulation D under the 1933 Act and any filing required by applicable state securities law, which filings will be effective by the time required thereby. (d) Issued Securities. All issued and outstanding shares of Common Stock, Preferred Stock or any other securities of the Company have been duly authorized and validly issued and are fully paid and nonaccessable. All outstanding shares of Common Stock, Preferred Stock, and any other securities were issued in full compliance with all Federal and state securities laws. In addition: (i) The authorized capital of the Company consists of (A) 50,000,000 shares of Common Stock, of which 9,362,864 shares are issued and outstanding, and (B) 29,750,000 shares of preferred stock, of which 28,761,730 shares are issued and outstanding and are convertible into 28,761,730 shares of Common Stock. (ii) The Company has reserved (A) 5,471,357 shares of Common Stock for issuance under its 1998 Stock Plan, under which 3,521,500 options are outstanding at an exercise price ranging from $0.03 to $0.50 per share. Other than outstanding warrants for the purchase of 545,500 shares of Common Stock, there are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities of the Company. (iii) In accordance with the Company's Articles of Incorporation, no shareholder of the Company has preemptive rights to purchase new issuances of the Company's capital stock. (e) Insurance. The Company has in full force and effect insurance policies, with extended coverage, insuring the Company and its property and business against such losses and risks, and in such amounts, as are customary for corporations engaged in a similar business and similarly situated and as otherwise may be required pursuant to the terms of any other contract or agreement. (f) Other Commitments to Register Securities. Except as set forth in the Amended and Restated Investors Rights Agreement by and among the Company and certain Preferred Stock investors, the Company is not, pursuant to the terms of any other agreement currently in existence, under any obligation to register under the 1933 Act any of its presently outstanding securities or any of its securities which may hereafter be issued. (g) Exempt Transaction. Subject to the accuracy of the Warrantholder's representations in Section 10 hereof, the issuance of the Preferred Stock upon exercise of this Warrant will constitute a transaction exempt from (i) the registration requirements of Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the qualification requirements of the applicable state securities laws. (h) Compliance with Rule 144. At the written request of the Warrantholder, who proposes to sell Preferred Stock issuable upon the exercise of the Warrant in compliance with Rule 144 promulgated by the Securities and Exchange Commission, the Company shall furnish to the Warrantholder, within ten days after receipt of such request, a written statement confirming the Company's compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule, as such Rule may be amended from time to time. 10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER. This Warrant Agreement has been entered into by the Company in reliance upon the following representations and covenants of the Warrantholder: (a) Investment Purpose. The right to acquire Preferred Stock or the Preferred Stock issuable upon exercise of the Warrantholder's rights contained herein will be acquired for investment and not with a view to the sale -6- 6 or distribution of any part thereof, and the Warrantholder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. (b) Private Issue. The Warrantholder understands (i) that the Preferred Stock issuable upon exercise of this Warrant is not registered under the 1933 Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant Agreement will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 10. (c) Disposition of Warrantholder's Rights. In no event will the Warrantholder make a disposition of any of its rights to acquire Preferred Stock or Preferred Stock issuable upon exercise of such rights unless and until (i) it shall have notified the Company of the proposed disposition, and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to the Warrantholder) satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the 1933 Act has been taken, or (B) an exemption from the registration requirements of the 1933 Act is available. Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire Preferred Stock or Preferred Stock issuable on the exercise of such rights do not apply to transfers from the beneficial owner of any of the forementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to any particular share of Preferred Stock when (1) such security shall have been effectively registered under the 1933 Act and sold by the holder thereof in accordance with such registration or (2) such security shall have been sold without registration in compliance with Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the Warrantholder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the 1933 Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, the Warrantholder or holder of a share of Preferred Stock then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such shares of Preferred Stock not bearing any restrictive legend. (d) Financial Risk. The Warrantholder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its Investment, and has the ability to bear the economic risks of its investment. (e) Risk of No Registration. The Warrantholder understands that if the Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the 1934 Act (the "1934 Act"), or file reports pursuant to Section 15(d), of the 1934 Act, or if a registration statement covering the securities under the 1933 Act is not in effect when it desires to sell (i) the rights to purchase Preferred Stock pursuant to this Warrant Agreement, or (ii) the Preferred Stock issuable upon exercise of the right to purchase, it may be required to hold such securities for an indefinite period. The Warrantholder also understands that any sale of its rights of the Warrantholder to purchase Preferred Stock or Preferred Stock which might be made by it in reliance upon Rule 144 under the 1933 Act may be made only in accordance with the terms and conditions of that Rule. (f) Accredited Investor. Warrantholder is an "accredited investor" within the meaning of the Securities and Exchange Rule 501 of Regulation D, as presently in effect. 11. TRANSFERS. Subject to the terms and conditions contained in Section 10 hereof and further subject to the written consent of the Company on 30 days written notice, this Warrant Agreement and all rights hereunder are transferable in whole or in part by the Warrantholder and any successor transferee, provided, however, in no event shall the number of transfers of the rights and interests in all of the Warrants exceed three (3) transfers. The transfer shall be recorded on the books of the Company upon receipt by the Company of a notice of transfer in the form attached hereto as Exhibit III (the "Transfer Notice"), at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. -6- 7 12. MARKET STANDOFF In connection with the initial public offering of the Company's securities, the Warrantholder agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of or hedge if ownership risks of any securities of the Company (other than those included in the registration) without the prior written consent of the Company for a period of one hundred eighty (180) days from the effective date of such registration. The Warrantholder agrees that the Company may instruct its transfer agent to place stock-transfer notifications in its records to enforce the provisions of this Section 12. The Warrantholder agrees to execute a reasonable and customary agreement reflecting the foregoing as may be requested by the managing underwriters at the time of the Company's initial underwritten public offering. 13. MISCELLANEOUS. (a) Effective Date. The provisions of this Warrant Agreement shall be construed and shall be given effect in all respects as if it had been executed and delivered by the Company on the date hereof. This Warrant Agreement shall be binding upon any successors or assigns of the Company. (b) Attorney's Fees. In any litigation, arbitration or court proceeding between the Company and the Warrantholder relating hereto, the prevailing party shall be entitled to reasonable attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant Agreement. (c) Governing Law. This Warrant Agreement shall be governed by and construed for all purposes under and in accordance with the laws of the State of Illinois. (d) Counterparts. This Warrant Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, facsimile transmission (provided that the original is sent by personal delivery or mail as hereinafter set forth) or seven (7) days after deposit in the United States mail, by registered or certified mail, addressed: (1) to the Warrantholder at 6111 North River Road, Rosemont, Illinois 60018, attention: Venture Lease Administration, cc: Legal Department, attn.: General Counsel, (and/or, if by facsimile, (847) 518-5465 and (847) 518-5088 and (ii) to the Company at 2000 sierra Point, 6th Floor, Brisbane, CA 84005, Attention: Chief Financial Officer (and/or if by facsimile, (650) 244-7727) or at such other address as any such party may subsequently designate by written notice to the other party. (f) Remedies. In the event of any default hereunder, the non-defaulting party may proceed to protect and enforce 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 default, and/or an action for specific performance for any default where Warrantholder will not have an adequate remedy at law and where damages will not be readily ascertainable. The Company expressly agrees that it shall not oppose an application by the Warrantholder or any other person entitled to the benefit of this Agreement requiring specific performance of any or all provisions hereof or enjoining the Company from continuing to commit any such breach of this Agreement. (g) No Impairment of Rights. The Company will not, by amendment of its Charter or 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 actions as may be necessary or appropriate in order to protect the rights of the Warrantholder against impairment. (h) Survival. The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant Agreement shall survive the execution and delivery of this Warrant Agreement. (i) Severability. In the event any one or more of the provisions of this Warrant Agreement shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. -7- 8 (j) Amendments. Any provision of this Warrant Agreement may be amended by a written instrument signed by the Company and by the Warrantholder. (k) Additional Documents. The Company, upon execution of this Warrant Agreement, shall provide the Warrantholder with certified resolutions with respect to the representations, warranties and covenants set forth in subparagraphs (a) through (d), (f) and (g) of Section 9 above. The Company shall also supply such other documents as the Warrantholder may from time to time reasonably request. IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be executed by its offices thereunto duly authorized as of the Effective Date. COMPANY: COLO.COM By: /s/ GARY J. SANDERS ----------------------------- Title: CFO -------------------------- WARRANTHOLDER: COMDISCO, INC. By: /s/ JAMES LABE ----------------------------- Title: James Labe, President Comdisco Ventures Division -------------------------- OCT 29 1998 -8- 9 EXHIBIT 1 NOTICE OF EXERCISE TO: _______________________ (1) The undersigned Warrantholder hereby selects to purchase _________ shares of the Series ___ Preferred Stock of ___________________, pursuant to the terms of the Warrant Agreement dated the ____ day of _____________, 19___ (the "Warrant Agreement") between ___________________________ and the Warrantholder, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any. (2) In exercising its rights to purchase the Series ___ Preferred Stock of ________________________, the undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 10 of the Warrant Agreement. (3) Please issue a certificate or certificates representing said shares of Series ___ Preferred Stock in the name of the undersigned or in such other name as is specified below. - ----------------------------- (Name) - ----------------------------- (Address) WARRANTHOLDER: COMDISCO, INC. By: ------------------------ Title: ------------------------ Date: ------------------------ -9- 10 EXHIBIT II ACKNOWLEDGMENT OF EXERCISE The undersigned ___________________________, hereby acknowledges receipt of the "Notice of Exercise" from Comdisco, Inc., to purchase ________ shares of the Series ___ Preferred Stock of ___________________, pursuant to the terms of the Warrant Agreement, and further acknowledges that _________ shares remain subject to purchase under the terms of the Warrant Agreement. COMPANY: By: ------------------------ Title: ------------------------ Date: ------------------------ -10- 11 EXHIBIT III TRANSFER NOTICE (TO TRANSFER OR ASSIGN THE FOREGOING WARRANT AGREEMENT, EXECUTE THIS FORM AND SUPPLY REQUIRED INFORMATION. DO NOT USE THIS FORM TO PURCHASE SHARES.) FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights evidenced thereby are hereby transferred and assigned to _________________________________________________ (Please Print) whose address is ________________________________ _________________________________________________ Dated:____________________________ Holder's Signature:_______________ Holder's Address:_________________ __________________________________ Signature Guaranteed: ___________________________ NOTE: The signature to this Transfer Notice must correspond with the name as it appears on the face of the Warrant Agreement, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant Agreement. -11- EX-21.1 9 ex21-1.txt LIST OF SUBSIDIARIES 1 Exhibit 21.1 LIST OF SUBSIDIARIES COLO.COM, Ltd. (United Kingdom) COLO.COM GmbH (Germany) COLOCOM Iberia, S.A. (Spain) COLO.COM, Ltd. (Canada) COLO.COM, B.V. (Netherlands) COLO.COM, Inc. (Delaware) EX-23.1 10 ex23-1.txt CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated January 24, 2000 (and to all references to our Firm) included in or made a part of this registration statement on Form S-1. /s/ ARTHUR ANDERSEN LLP - -------------------------------- San Francisco, California July 19, 2000 -----END PRIVACY-ENHANCED MESSAGE-----