<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 1998
REGISTRATION NO. 333-62413
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
EXODUS COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4813 77-0403076
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
----------------
2650 SAN TOMAS EXPRESSWAY
SANTA CLARA, CA 95051
(408) 346-2200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ELLEN M. HANCOCK
CHIEF EXECUTIVE OFFICER
2650 SAN TOMAS EXPRESSWAY
SANTA CLARA, CA 95051
(408) 346-2200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
EILEEN DUFFY ROBINETT, ESQ.
ROBERT A. FREEDMAN, ESQ.
FENWICK & WEST LLP
TWO PALO ALTO SQUARE
PALO ALTO, CALIFORNIA 94306
(650) 494-0600
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As promptly as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, 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(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. [_]
----------------
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 OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE +
+COMPANY 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 IS NOT SOLICITING AN OFFER TO BUY +
+THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 9, 1998
PROSPECTUS
OFFER FOR ALL OUTSTANDING 11 1/4%
SENIOR NOTES DUE 2008 WHICH WERE ISSUED AND SOLD IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED
IN EXCHANGE FOR 11 1/4% SENIOR NOTES DUE 2008 WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
OF
EXODUS COMMUNICATIONS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED.
Exodus Communications, Inc., a Delaware corporation (the "Company" or
"Exodus"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"), to exchange an aggregate principal
amount of up to $200,000,000 of 11 1/4% Senior Notes due 2008 of the Company
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act") (the "New Notes") for a like principal amount of the issued
and outstanding 11 1/4% Senior Notes due 2008 of the Company which were issued
and sold in a transaction exempt from registration under the Securities Act
(the "Old Notes" and, together with the New Notes, the "Notes") with the
Holders thereof. The terms of the New Notes are identical in all respects to
the terms of the Old Notes, except that the terms of the New Notes do not
include certain transfer restrictions and registration rights included in the
terms of the Old Notes. See "Description of Notes."
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on the
Old Notes, from July 1, 1998. Accordingly, if the relevant record date for
interest payment occurs after the consummation of the Exchange Offer,
registered Holders of New Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from July 1, 1998. If, however, the relevant record
date for interest payment occurs prior to the completion of the Exchange Offer,
registered holders of Old Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from July 1, 1998. Old Notes accepted for exchange will
cease to accrue interest from and after the date of completion of the Exchange
Offer, except as set forth in the immediately preceding sentence. Holders of
Old Notes whose Old Notes are accepted for exchange will not receive any
payment in respect of interest on such Old Notes otherwise payable on any
interest payment date, the record date for which occurs on or after
consummation of the Exchange Offer.
The Old Notes were issued on July 1, 1998 (the "Old Note Offering") in a
transaction not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of the Securities Act. Accordingly, the Old
Notes may not be reoffered, resold, pledged, hypothecated or otherwise
transferred in the United States unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is
available. The Old Notes are, and the New Notes will be, senior unsecured
obligations of the Company and will rank pari passu in right of payment with
all existing and future senior unsecured obligations of the Company (including
Additional Notes, as defined herein) and will be senior in right of payment to
any future subordinated indebtedness of the Company. The Notes will be
effectively subordinated to all secured indebtedness, to the extent of the
value of the assets securing such indebtedness and to any debt and other
liabilities of any future subsidiaries of the Company, including trade payables
and lease obligations. As of September 30, 1998, the aggregate amount of
outstanding indebtedness of the Company was $244.3 million, of which $44.3
million is secured. The Indenture (as defined herein) permits the Company to
incur additional indebtedness, subject to certain limitations. See "Description
of Notes--Covenants--Limitation on Debt."
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES
OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is , 1998.
<PAGE>
The New Notes will be evidenced by one or more global notes, in fully
registered form, without coupons, in denominations of $1,000 and integral
multiples thereof deposited with a custodian for, and registered in the name
of, a nominee of The Depository Trust Company ("DTC"). Except as described
herein, beneficial interests in the global note or notes representing the New
Notes will be shown on, and transfers thereof will be effected only through,
records maintained by DTC and its direct and indirect participants. See
"Description of Notes--Form, Denomination, Book-Entry Procedures and
Transfer."
The New Notes are being offered hereby to satisfy certain obligations of the
Company contained in the Exchange and Registration Rights Agreement dated July
1, 1998 (the "Registration Rights Agreement"), among the Company and the
initial purchasers of the Old Notes. The Company is making the Exchange Offer
in reliance on the position of the staff of the Division of Corporation
Finance (the "Staff") of the Securities and Exchange Commission (the
"Commission") as set forth in the Staff's Exxon Capital Holdings Corporation
no-action letter (available May 13, 1988) (the "Exxon Capital No-Action
Letter"), Morgan Stanley & Co. Incorporated no-action letter (available June
5, 1991) (the "Morgan Stanley No-Action Letter"), Shearman & Sterling no-
action letter (available July 2, 1993) (the "Shearman & Sterling No-Action
Letter"), and other interpretive letters addressed to third parties in other
transactions. However, the Company has not sought its own interpretive letter
addressing such matters and there can be no assurance that the Staff would
make a similar determination with respect to the Exchange Offer as it has in
such interpretive letters to third parties. Based on these interpretations by
the Staff, and subject to the two immediately following sentences, the Company
believes that New Notes issued pursuant to this Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by
Holders thereof (other than a Holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such Holder's business and that such Holder is not participating,
and has no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such New Notes.
However, any Holder who (i) is an "affiliate" of the Company (within the
meaning of Rule 405 under the Securities Act), (ii) does not acquire such New
Notes in the ordinary course of its business, (iii) intends to participate in
the Exchange Offer for the purpose of distributing New Notes or (iv) is a
broker-dealer who purchased such Old Notes directly from the Company, (a) will
not be able to rely on the interpretations of the Staff set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Old Notes in the Exchange Offer and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Old Notes unless such sale
is made pursuant to an exemption from such requirements. In addition, as
described below, if any broker-dealer holds Old Notes acquired for its own
account as a result of market-making or other trading activities and exchanges
such Old Notes for New Notes (a "Participating Broker-Dealer"), then such
Participating Broker-Dealer may be deemed to be a statutory "underwriter"
within the meaning of the Securities Act and must deliver a prospectus meeting
the requirements of the Securities Act in connection with any resales of such
New Notes. See "Plan of Distribution."
Each Holder who wishes to exchange Old Notes for New Notes in the Exchange
Offer will be required to represent that (i) it is not an affiliate of the
Company, (ii) any New Notes to be received by it are being acquired in the
ordinary course of its business and (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Notes for its own account as a result of
market-making activities or other trading activities (and not directly from
the Company) and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
Based on the position taken by the Staff in the interpretive letters referred
to above, the Company believes that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to the New Notes received
upon exchange of such Old Notes with a prospectus meeting the requirements of
the Securities Act, which may be the prospectus prepared for an exchange offer
so long as it contains a description of the plan of distribution with respect
to the resale of such
ii
<PAGE>
New Notes. Accordingly, this Prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating Broker-Dealer during the
period referred to below in connection with the resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer for its own account as a result of market-making
or other trading activities. Subject to certain provisions set forth in the
Registration Rights Agreement, the Company shall use its best efforts to keep
the Exchange Offer Registration Statement (as defined in "Available
Information") continuously effective, supplemented and amended to the extent
necessary to ensure that it is available for sales of New Notes by
Participating Broker-Dealers, and to ensure that the Exchange Offer
Registration Statement conforms with the requirements of the Securities Act
and the policies, rules and regulations of the Commission as announced from
time to time, for a period ending upon the earlier of 180 days from the date
on which the Exchange Offer has been completed or such time as such
Participating Broker-Dealers no longer own any Transfer Restricted Securities
(as defined in "The Exchange Offer--Registration Covenant; Exchange Offer").
See "Plan of Distribution." Any Participating Broker-Dealer who is an
affiliate of the Company may not rely on such interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. See "The Exchange
Offer--Resale of New Notes."
Each Participating Broker-Dealer who surrenders Old Notes pursuant to the
Exchange Offer will be deemed to have agreed, by execution of the Letter of
Transmittal, that, upon receipt of notice from the Company of the occurrence
of any event or the discovery of any fact which makes any statement contained
or incorporated by reference in this Prospectus untrue in any material respect
or which causes this Prospectus to omit to state a material fact necessary in
order to make the statements contained or incorporated by reference herein, in
light of the circumstances under which they were made, not misleading or of
the occurrence of certain other events specified in the Registration Rights
Agreement, such Participating Broker-Dealer will suspend the sale of New Notes
pursuant to this Prospectus until the Company has amended or supplemented this
Prospectus to correct such misstatement or omission and has furnished copies
of the amended or supplemented Prospectus to such Participating Broker-Dealer
or the Company has given notice that the sale of the New Notes may be resumed,
as the case may be.
The Old Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automatic Linkages market (the "PORTAL Market") of the
National Association of Securities Dealers, Inc. Prior to this Exchange Offer,
there has been no public market for the New Notes. If a market for the New
Notes develops, the New Notes could trade at a discount from their principal
amount. The Company does not intend to list the New Notes on any securities
exchange or to seek approval for quotation on any automated quotation system.
There is no assurance that an active public market for the New Notes will
develop. See "Risk Factors--Lack of Public Market for the Notes; Volatility."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange, but is otherwise subject to
customary conditions. The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1998, unless extended by the Company to such other date
and time as the Company, in its sole discretion, may determine (the
"Expiration Date"). Old Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date; otherwise such tenders are
irrevocable. Upon satisfaction or waiver of all of the conditions of the
Exchange Offer, the Company will accept, promptly after the Expiration Date,
all Old Notes property tendered (such date of acceptance, the "Exchange Date")
and will issue the New Notes promptly after acceptance of the Old Notes. There
will be no cash proceeds to the Company from the Exchange Offer. The Company
will pay all the expenses incident to the Exchange Offer.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 1
Disclosure Regarding Forward-Looking Statements.......................... 2
Prospectus Summary....................................................... 3
Risk Factors............................................................. 15
Recent Events............................................................ 30
Use of Proceeds.......................................................... 31
Capitalization........................................................... 32
Selected Financial Data.................................................. 33
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 36
Business................................................................. 47
Management............................................................... 66
Certain Transactions..................................................... 75
Principal Stockholders................................................... 78
Description of the New Credit Facility................................... 81
The Exchange Offer....................................................... 82
Description of Notes..................................................... 90
Certain United States Federal Income Tax Considerations.................. 118
Plan of Distribution..................................................... 121
Legal Matters............................................................ 122
Experts.................................................................. 122
Index to Financial Statements............................................ F-1
</TABLE>
<PAGE>
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN THE NOTES
TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
The Company is currently subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information can be inspected and copies at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's following Regional Offices: Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661; and 13th Floor, Seven World Trade Center, New
York, New York 10048. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. Information may be obtained
about the operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov. The Company's Common Stock is quoted for trading
on the Nasdaq National Market and reports, proxy statements and other
information concerning the Company also may be inspected at the offices of the
National Association of Securities Dealers, 9513 Key West Avenue, Rockville,
Maryland 20850.
Whether or not the Company is required to be subject to Section 13(a) or
15(d) of the Exchange Act, the Company is required by the terms of the
Indenture to file with the Commission the annual reports, quarterly reports
and other documents which the Company would have been required to file with
the Commission pursuant to such Section 13(a) or 15(d) or any successor
provision thereto if the Company were subject to such provisions. The
Indenture requires that the Company file such documents with the Commission on
or prior to the respective dates (each a "Required Filing Date", collectively,
the "Required Filing Dates") by which the Company would have been required to
file such documents if it were subject to Section 13(a) or 15(d) of the
Exchange Act. The Company is also required in any event (a) within 15 days of
each Required Filing Date (i) to transmit by mail to all Holders, as their
names and addresses appear in the Note Register, without cost to such Holders,
and (ii) to file with the Trustee, copies of the annual reports, quarterly
reports and other documents which the Company files with the Commission
pursuant to such Section 13(a) or 15(d) or any successor provision thereto or
would have been required to file with the Commission pursuant to such Section
13(a) or 15(d) or any successor provisions thereto if the Company were
required to be subject to such Sections and (b) if filing such documents by
the Company with the Commission is not permitted under the Exchange Act,
promptly upon written request to supply copies of such documents to any
prospective Holder.
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement") pursuant to the Securities
Act, and the rules and registrations promulgated thereunder, covering the New
Notes offered hereby. This Prospectus does not contain all the information set
forth in the Exchange Offer Registration Statement. For further information
with respect to the Company and the Exchange Offer, reference is made to the
Exchange Offer Registration Statement. Statements made in this Prospectus as
to the contents of any contract, agreement or other document referred to are
necessarily incomplete. With respect to each such contract, agreement or other
document filed as an exhibit to the Exchange Offer Registration Statement,
reference is made to the exhibit for a more complete description of the
document or matter involved, and each such statement shall be deemed qualified
in its entirety by such reference. Items omitted from this Prospectus but
contained in the Exchange Offer Registration Statement may be inspected and
copied as described above.
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. When
used in this Prospectus, the words "anticipate," "believe," "estimate,"
"will," "may," "intend" and "expect" and similar expressions identify certain
of such forward-looking statements. Although the Company believes that its
plans, intentions and expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such plans,
intentions or expectations will be achieved. Forward-looking statements in
this Prospectus include, but are not limited to, those relating to the general
rapid expansion of the Company's business, including the expansion of the
Company's network and number of customers through the opening of additional
Internet Data Centers and the timing of such openings, the upgrading and
expansion of the Company's telecommunications infrastructure, the Company's
planned introduction of certain new products and services, including HeadsUp
Site Monitor, the possibility of acquiring complementary businesses, products,
services and technologies, the planned expansion of the Company's consulting
services, the Company's development of relationships with providers of leading
Internet technologies, and the Company's ability to make required payments on
its current and future debt instruments. Actual results, performance or
achievements could differ materially from those contemplated, expressed or
implied by the forward-looking statements contained herein. Important factors
that could cause actual results to differ materially from the Company's
forward-looking statements are set forth in this Prospectus, including under
the heading "Risk Factors." Such factors are not intended to represent a
complete list of the general or specific factors that may affect the Company.
It should be recognized that other factors, including general economic factors
and business strategies, may be significant, presently or in the future, and
the factors set forth herein may affect the Company to a greater extent than
indicated. All forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements set forth herein. Except as required by law, the Company
undertakes no obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements, including the Notes to Financial
Statements, appearing elsewhere in this Prospectus. Investors should carefully
consider the information set forth under "Risk Factors." The Company is the
successor to a Maryland corporation that was formed in August 1992 and
reincorporated in California in May 1995. The Company reincorporated in
Delaware in February 1998. All information in this Prospectus reflect a one-
for-three reverse split of the Company's Common Stock in February 1998. Unless
the context otherwise requires, the terms "Company" and "Exodus" refer to
Exodus Communications, Inc. and its California and Maryland predecessors.
THE COMPANY
Exodus is a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations. The
Company's solutions include server hosting, Internet connectivity,
collaborative systems management and Internet technology services, which
together provide the high-performance, scalability and expertise that
enterprises need to optimize their Internet operations. The Company delivers
its services from geographically distributed, state-of-the-art Internet Data
Centers that are connected through a redundant, high performance, dedicated
backbone ring. The Company's tailored solutions are designed to be seamlessly
integrated with existing enterprise systems architectures and enable customers
to outsource the monitoring, administration and optimization of their
equipment, applications and overall Internet operations. As of September 30,
1998, the Company had over 600 Internet Data Center customers (including
installed and uninstalled customers under contract) and managed over 4,000
customer servers. The Company's customers range from pioneering Internet-based
businesses to Fortune 500 enterprises and include companies such as Computer
Associates International, Inc., DoubleClick Inc., GeoCities, Hotmail
Corporation (a subsidiary of Microsoft Corporation), Inktomi Corporation,
National Semiconductor Corporation, PC World Communications, Inc.,
software.net, SportsLine USA, Inc. and USA Today Information Network.
The Company began offering server hosting services in late 1995, opened its
first dedicated Internet Data Center in August 1996 and introduced its
collaborative systems management and Internet technology services in 1997. The
Company currently operates eight Internet Data Centers, consisting of
approximately 200,000 gross square feet, located in six metropolitan areas:
Boston, Los Angeles, New York, San Francisco, Seattle and Washington, D.C. The
Company also has a server hosting facility in the London metropolitan area. The
Company intends to expand domestically and internationally, including the
expected opening of additional Internet Data Centers in the Washington, D.C.
and Seattle metropolitan areas and new Internet Data Centers in the Chicago
metropolitan area in the first quarter of 1999 and the London metropolitan area
in the second quarter of 1999.
INDUSTRY BACKGROUND
Use of the Internet, including intranets and extranets, has grown rapidly in
recent years. As this use continues to grow, enterprises are increasing the
breadth and depth of their Internet product and service offerings. These
Internet operations are mission-critical for virtually all Internet-based
businesses and are becoming increasingly mission-critical for many mainstream
enterprises. In order to ensure the quality, reliability, availability and
redundancy of these mission-critical Internet operations, corporate IT
departments must make substantial investments in geographically distributed
state-of-the-art facilities and networks that are monitored and managed 24x7 by
experts in Internet technology, can be upgraded to reflect changing
technologies and can be scaled as the needs of enterprises evolve. However,
such a continuing significant investment of resources is often an inefficient
use of enterprises' overall resources. As a result, corporate IT departments
are increasingly seeking collaborative outsourcing arrangements that can
increase performance, provide continuous operation of their Internet solutions
and reduce Internet operating expenses. Exodus believes a significant
opportunity exists for a highly focused company to provide a combination of
server hosting, Internet connectivity, collaborative systems management and
Internet technology services that will enable reliable, high performance of
enterprises' mission-critical Internet operations.
3
<PAGE>
THE EXODUS SOLUTION
The Company's Internet system and network management solutions are based on a
core set of server hosting and Internet connectivity services, which are
enhanced by a growing number of collaborative systems management and Internet
technology services. The Company's Internet Data Centers provide a secure
platform for server hosting with uninterruptible power supply and back-up
generators, fire suppression, raised floors, HVAC, separate cooling zones,
seismically braced racks, 24x7 operations and high levels of physical security.
The Company's national backbone ring of multiple high-speed DS-3 lines, OC-3
lines and private and public network peering interconnections provide the
foundation for the Company's high performance, scalable Internet connectivity
services. The Company is currently in the process of upgrading its backbone in
order to accommodate expected traffic growth. The Company's collaborative
systems management services, including performance monitoring and site
management reports, enable customers and the Company to manage customers'
Internet operations jointly, proactively and continuously. Finally, the
Company's Internet technology services, including security and content
distribution, integrate best-of-breed technologies of leading vendors with the
Company's expertise and proprietary technology to provide customers with
scalable, secure and high performing Internet applications. The Company's
portfolio of layered services optimizes the development, deployment and
proactive management of enterprises' mission-critical Internet operations.
The Company's tailored solutions are designed to be seamlessly integrated
with existing enterprise systems architectures and enable customers to
outsource the monitoring, administration and optimization of their equipment,
applications and overall Internet operations. The Company believes that its
solutions enable customers to deploy and expand Internet operations rapidly and
cost-effectively, especially when compared to in-house solutions. The Exodus
solution provides the following key advantages to its customers:
High Performance. The Company supports enterprises' business objectives by
ensuring that their Internet sites perform effectively. The Company's solutions
provide the availability and reliability that customers need to be able to
depend on the Internet for mission-critical operations. The Company's solutions
are designed to maximize performance through features such as geographically
distributed Internet Data Centers, redundant and high speed network design,
content distribution technologies, security and 24x7 monitoring, diagnosis and
problem resolution.
Scalability. The Company's solutions are designed to be flexible and
scalable, ensuring customers a consistently high level of performance as their
Internet operations expand. The Company can quickly scale the amount of hosting
space, power, bandwidth or managed services that a customer receives, all in a
way transparent to the end-user. The Company believes that the scalability of
its solutions is a significant advantage over in-house solutions.
Internet System and Network Management Expertise. By leveraging the knowledge
gained from supporting many leading-edge Internet operations, the Company has
developed a specialized Internet system and network management expertise that
is difficult for any single customer to replicate in-house. Customers gain
access to the Company's experience in network, system, application and security
management.
Collaborative and Proactive Management. The Company believes that enterprises
value Internet service relationships that are collaborative and proactive.
Therefore, the Company has developed a collaborative systems management
approach that provides customers with detailed monitoring, reporting and
management tools that can be accessed through the Internet to control
customers' Internet hardware, network, software and application environments.
This approach focuses on identifying and resolving potential problems before
they impact an Internet site's availability or performance. Through the
Company's system and network management framework, customers are able to manage
both mission-critical Internet operations housed at the Company's Internet Data
Centers and in-house IT applications. The Company believes that this provides
an important advantage to enterprises that seek to outsource a portion of their
Internet operations and to link the management of the outsourced operations
with in-house operations.
4
<PAGE>
Cost-Effective Solution. The Company's customers benefit from leveraging the
significant capital, operating and labor investments that the Company has made
to support distributed, mission-critical Internet operations. Most enterprises
today do not have the infrastructure that mission-critical Internet operations
require, including data centers located adjacent to major Internet connection
points, 24x7 operations and specialized Internet technology expertise. The
Company believes that its solutions to optimize enterprises' Internet
operations are significantly more cost-effective than most in-house solutions.
THE EXODUS STRATEGY
The Company's objective is to become the leading provider of Internet system
and network management solutions for enterprises with mission-critical Internet
operations. To achieve this objective, the Company's strategy includes the
following key elements:
Extend Market Leadership. The Company has played a leading role in creating
and defining the market for Internet system and network management solutions
and plans to establish itself as the brand name and leader in this market. The
Company believes that its highly focused approach to serving this market
provides it with an advantage over competitors that also serve the entry-level
hosting market or the stand-alone Internet access market. The Company plans to
extend its leadership in the market for Internet system and network management
solutions both by aggressively continuing to expand its base of over 600
Internet Data Center customers (including installed and uninstalled customers
under contract) and by capitalizing on the growth of its customers' needs for
these solutions.
Focus on Collaborative Systems Management and Internet Technology
Services. The Company believes that developing new services to manage
enterprises' mission-critical Internet operations jointly, proactively and
continuously will offer a compelling value proposition to its customers. The
Company has invested and is continuing to invest in services that will ensure
high availability and performance of customers' Internet-based applications,
including systems administration, disaster recovery, security and systems and
network management. As part of this strategy, the Company intends to continue
to develop relationships with providers of leading Internet technologies and,
where appropriate, to develop or acquire proprietary technologies in order to
enhance its service offerings and meet its customers' evolving needs. The
Company also intends to expand the consulting services it offers to its
customers in order to provide enhanced support in planning customers'
strategies for managing mission-critical Internet operations and in
transitioning such operations to the Company's Internet Data Centers.
Accelerate Domestic Expansion and Establish Global Presence. The Company
intends to accelerate its program of building Internet Data Centers and to
expand direct sales coverage in the United States, and is also actively
evaluating a wide range of international opportunities. The Company believes
that having a number of widely distributed and networked Internet Data Centers
improves network performance and enhances overall site redundancy. In addition,
the Company's experience indicates that locating an Internet Data Center within
a geographic region can significantly enhance its ability to attract new
customers in that region. The Company intends to expand domestically and
internationally. The Company recently opened a server hosting site in the
London metropolitan area, an additional Internet Data Center in the San
Francisco metropolitan area and a new Internet Data Center in the Boston
metropolitan area and expects to open additional Internet Data Centers in the
Washington, D.C. and Seattle metropolitan areas and new Internet Data Centers
in the Chicago metropolitan area in the first quarter of 1999 and the London
metropolitan area in the second quarter of 1999.
Leverage Expertise to Address New Market Opportunities. The Company intends
to leverage its significant achievements with pioneering Internet-based
businesses to address broader customer markets, such as e-commerce and
extranets. For example, mainstream corporations are increasingly establishing
extranets with suppliers and customers. However, many of these enterprises lack
the infrastructure and Internet expertise required to operate mission-critical
Internet applications effectively and are looking for collaborative systems
5
<PAGE>
management assistance. The Company believes that its Internet system and
network management solutions can support the business needs of these mainstream
corporations by enabling them to deploy their mission-critical Internet
operations successfully.
Establish Strategic Relationships for Technology and Distribution. The
Company is establishing strategic relationships for technology and
distribution. The Company believes that establishing relationships with
technology developers enables it to leverage these enterprises' research and
development expertise cost-effectively. These relationships allow the Company
to gain more rapid access to new technologies and to provide value-added
integrated solutions for its customers. For example, the Company has worked
closely with Computer Associates to develop certain of the Company's
collaborative systems management services using Computer Associates' Unicenter
TNG(TM) technology. The Company's product development personnel will continue
to develop vendor relationships and technology-based relationships, such as
those with Cisco Systems, Inc., Raptor Systems, Inc., VeriFone, Inc. and
CheckPoint Software Technologies Limited, to enhance the Company's solutions.
In addition, the Company currently has distribution relationships with a number
of companies including @Work, a division of At Home Corporation, Computer
Associates International, Inc., GE Capital Services, Poppe Tyson, Inc. and
SAVVIS Communications, Inc. and believes it can expand its customer base by
establishing additional distribution relationships with content developers,
system integrators, system vendors, consulting companies and Internet Service
Providers ("ISPs") domestically and internationally.
RECENT EVENTS
Third Quarter Results. On October 28, 1998, the Company reported revenues of
$14.5 million for the quarter ended September 30, 1998 compared to $3.4 million
for the quarter ended September 30, 1997. Net loss and EBITDA loss (loss before
interest, taxes, depreciation, amortization and other non-cash charges) for the
third quarter of 1998 were $17.7 million and $9.4 million, respectively,
compared to a net loss and EBITDA loss of $6.6 million and $5.6 million,
respectively, for the third quarter of 1997.
The Company's revenues for the nine months ended September 30, 1998 were
$31.6 million compared to $7.5 million for the nine months ended September 30,
1997. Net loss and EBITDA loss for the nine months ended September 30, 1998
were $45.1 million and $29.5 million, respectively, compared to a net loss and
EBITDA loss of $14.6 million and $12.5 million, respectively, for the nine
months ended September 30, 1997.
Arca Systems Acquisition. On October 2, 1998, the Company entered into an
Asset Purchase Agreement with CyberGuard Corporation under which it purchased
substantially all of the assets, including all of Arca's customer agreements,
and assumed certain liabilities of Arca Systems, Inc. ("Arca"), a wholly-owned
subsidiary of CyberGuard Corporation. Arca is a provider of advanced network
and system security consulting services and designs and develops security
technology solutions for complex and sensitive information systems. The Company
also hired Arca's 37 employees. Arca will operate as a wholly-owned subsidiary
of the Company. The total consideration paid to CyberGuard Corporation in
connection with the purchase of assets, together with amounts paid to the Arca
employees in connection with their initial employment by the Company and
expenses associated with these transactions, amounted to an aggregate of less
than $8 million.
6
<PAGE>
ANTICIPATED NEW CREDIT FACILITY
The Company expects to enter into a new revolving credit facility with
Goldman Sachs Credit Partners L.P. (the "Credit Facility") under which, subject
to compliance with certain financial covenants and the satisfaction of
customary borrowing conditions, the Company will be permitted to borrow up to
approximately $50.0 million, of which $25.0 million will be available initially
and the balance will be available upon meeting certain financial tests. Loans
to the Company will be guaranteed by any future subsidiaries of the Company.
The Credit Facility is expected to be secured by a first priority lien on
substantially all of the Company's assets (subject to certain exceptions) and
the assets and stock of any future subsidiaries. The Credit Facility is subject
to the satisfaction of certain material conditions precedent and the specific
terms of the Credit Facility are subject to change pursuant to final loan
documentation. There can be no assurance as to whether, or on what terms, the
Company will enter into the Credit Facility. See "Description of the New Credit
Facility."
----------------
The Company's principal executive offices are located at 2650 San Tomas
Expressway, Santa Clara, California 95051. The Company's telephone number is
(408) 346-2200.
Exodus Communications, Exodus, CyberCabinet, CyberRack, HeadsUp Site Monitor,
Multipath Site, Multipath Net, SystemHealth Monitoring and Virtual Data Center
are trade names and trademarks of the Company. This Prospectus also includes
trade names and trademarks of other companies, including Unicenter and
Unicenter TNG, which are trademarks of Computer Associates International, Inc.,
and National Semiconductor, which is a trademark of National Semiconductor
Corporation.
7
<PAGE>
SUMMARY OF THE EXCHANGE OFFER
Securities Offered.......... $200,000,000 principal amount of 11 1/4% Senior
Notes due 2008. The terms of the New Notes and
the Old Notes are identical in all respects,
except certain transfer restrictions and
registration rights relating to the Old Notes
will not be applicable with respect to the New
Notes.
Issuance of Old Notes;
Registration Rights.........
The Old Notes were issued on July 1, 1998 to
Goldman, Sachs & Co., Donaldson, Lufkin &
Jenrette Securities Corporation, BT Alex. Brown
and NationsBanc Montgomery Securities LLC
(collectively, the "Initial Purchasers"), which
placed the Old Notes with "qualified
institutional buyers" (as that term is defined in
Rule 144A promulgated under the Securities Act).
In connection therewith, the Company executed and
delivered for the benefit of the holders of Old
Notes the Registration Rights Agreement, pursuant
to which the Company agreed to file the Exchange
Offer Registration Statement with respect to an
offer to exchange the Old Notes for New Notes. If
(i) the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any
holder of Transfer Restricted Securities notifies
the Company within the specified time period that
(A) it is prohibited by law or Commission policy
from participating in the Exchange Offer, (B) it
may not resell the New Notes acquired by it in
the Exchange Offer to the public without
delivering a prospectus and the prospectus
contained in the Exchange Offer Registration
Statement is not appropriate or available for
such resales or (C) it is a broker-dealer and
owns Notes acquired directly from the Company or
an affiliate of the Company, the Company is
required to provide a shelf registration
statement (the "Shelf Registration Statement") to
cover resales of the Notes by the Holders
thereof.
If (i) the Company fails to file the Exchange
Offer Registration Statement within 60 days of
July 1, 1998, or such Exchange Offer Registration
Statement fails to become effective within 150
days of July 1, 1998, or (ii) the Company is
obligated to provide a Shelf Registration
Statement and such Shelf Registration Statement
is not filed within 45 days (no less than 60 days
after July 1, 1998), or declared effective within
90 days (no less than 150 days after July 1,
1998), of the date on which the Company became so
obligated, or (iii) the Company fails to
consummate the Exchange Offer within 30 business
days of the date on which the Exchange Offer
Registration Statement was declared effective by
the Commission or (iv) the Shelf Registration
Statement or the Exchange Offer Registration
Statement is declared effective but shall
thereafter cease to be effective or usable in
connection with resales of the Notes during the
periods specified in the Registration Rights
Agreement (each such event referred to in clauses
(i) through (iv) above a "Registration Default"),
then the Company shall pay to each holder
8
<PAGE>
of Transfer Restricted Securities, with respect
to the first 90-day period following such
Registration Default, Liquidated Damages in an
amount equal to $0.05 per week per $1,000 in
principal amount of Transfer Restricted
Securities for the first 90-day period following
such Registration Default which will increase by
an amount equal to $0.05 per week per $1,000 in
principal amount of Transfer Restricted
Securities for each subsequent 90-day period
until such Registration Default has been cured,
up to maximum of $0.25 per week. Following the
cure of all Registration Defaults, the accrual of
all Liquidated Damages will cease. See "The
Exchange Offer--Registration Covenant; Exchange
Offer." Holders of the Old Notes do not have any
appraisal rights in connection with the Exchange
Offer.
The Exchange Offer.......... The New Notes are being offered in exchange of a
like principal amount of Old Notes. As of the
date hereof, $200,000,000 aggregate principal
amount of Old Notes is outstanding. The issuance
of the New Notes is intended to satisfy the
obligations of the Company contained in the
Registration Rights Agreement. Based on an
interpretation by the Staff set forth in no-
action letters issued to third parties, the
Company believes that New Notes issued pursuant
to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold and otherwise
transferred by such holder (other than any such
holder which is an affiliate of the Company or is
a broker-dealer which acquired such Old Notes
directly from the Company) without compliance
with the registration and prospectus delivery
provisions of the Securities Act, provided that
such New Notes are acquired in the ordinary
course of the holder's business and that such
holder does not intend to participate and has no
arrangement or understanding with any person to
participate in the distribution of such New
Notes. Each Participating Broker-Dealer that
acquired such Old Notes as a result of market
making or other trading activity and that
receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it
will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of
Distribution."
Any Holder who (i) is an affiliate of the
Company, (ii) does not acquire such New Notes in
the ordinary course of its business, (iii)
tenders in the Exchange Offer with the intention
to participate, or for the purpose of
participating, in a distribution of the New
Notes, or (iv) is a broker-dealer who acquired
such Old Notes directly from the Company, could
not rely on the position of the Staff enunciated
in the Exxon Capital No-Action Letter, the Morgan
Stanley No-Action Letter or similar no-action
letters and, in the absence of an exemption
therefrom, must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with the resale of
the New Notes. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities
Act for which the holder is not
9
<PAGE>
indemnified by the Company. Although there has
been no indication of any change in the Staff's
position, there is no assurance that the Staff of
the Commission would make determinations with
respect to the resale of the New Notes that are
similar to those described above.
Conditions to the Exchange The Exchange Offer is not conditioned upon any
Offer....................... minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange
Offer is subject to certain customary conditions,
which may, under certain circumstances, be waived
by the Company. See "The Exchange Offer--Certain
Conditions to the Exchange Offer." Except for the
requirements of applicable federal and state
securities laws, there are no federal or state
regulatory requirements to be complied with or
obtained by the Company in connection with the
Exchange Offer.
Procedures for Tendering.... Tendering Holders of Old Notes must complete and
sign the Letter of Transmittal in accordance with
the instructions contained therein and forward
the same by mail, facsimile or hand delivery,
together with any other required documents, to
the Exchange Agent, either with the Old Notes to
be tendered or in compliance with the specified
procedures for guaranteed delivery of Old Notes.
Holders of the Old Notes desiring to tender the
Old Notes in exchange for New Notes should allow
sufficient time to ensure timely delivery.
Certain brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders by book-entry transfer. Holders of Old
Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
are urged to contact such person promptly if they
wish to tender Old Notes pursuant to the Exchange
Offer. Letters of Transmittal and certificates
representing the Old Notes should not be sent to
the Company. These documents should only be sent
to the Exchange Agent. Questions regarding how to
tender and requests for information should also
be directed to the Exchange Agent. By executing
or agreeing to be bound by the Letter of
Transmittal, each holder will represent to the
Company that, among other things, the Holder or
the person receiving such New Notes, is acquiring
the New Notes in the ordinary course of business
and that neither the Holder nor any such other
person has any arrangement or understanding with
any person to participate in the distribution of
such New Notes within the meaning of the
Securities Act. See "The Exchange Offer--
Procedures for Tendering the Old Notes."
Tenders, Expiration Date The Exchange Offer will expire the earlier of
Withdrawal.................. 5:00 p.m., New York City time on , 1998 or
(ii) the date when all Old Notes have been
tendered, or such later date and time to which it
is extended, provided it may not be extended
beyond , 1998. The Company will accept for
exchange any and all Old Notes that are validly
tendered in the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration Date.
The tender of Old Notes
10
<PAGE>
pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date. Any Old
Note not accepted for exchange for any reason
will be returned without expense to the tendering
Holder thereof as promptly as practicable after
the expiration or termination of the Exchange
Offer. The New Notes issued pursuant to the
Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer; Period for
Tendering Old Notes" and "--Withdrawals of
Tenders."
Tax Considerations.......... For U.S. federal income tax purposes, the
exchange pursuant to the Exchange Offer should
not be considered a sale or exchange or otherwise
a taxable event to the holders of Notes or the
Company. See "Certain United States Federal
Income Tax Considerations."
Use of Proceeds............. There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Appraisal Rights............ Holders of Old Notes will not have dissenters'
rights or appraisal rights in connection with the
Exchange Offer.
Exchange Agent.............. Chase Manhattan Bank & Trust Company, National
Association is serving as Exchange Agent in
connection with the Exchange Offer.
Consequences of Not
Exchanging the Old Notes...
Holders of Old Notes who do not exchange Old
Notes for New Notes pursuant to the Exchange
Offer generally will not have any further
registration rights under the Registration Rights
Agreement and will continue to be subject to
certain restrictions on transfer. Accordingly,
the liquidity of the market for such Old Notes
could be adversely affected. The Old Notes are
currently eligible for sale pursuant to Rule 144A
through The Portal Market. Because the Company
anticipates that most Holders will elect to
exchange such Old Notes for New Notes due to the
absence of restrictions on the resale of New
Notes (except for applicable restrictions on any
Holder who is an affiliate of the Company or is a
broker-dealer which acquired the Old Notes
directly from the Company) under the Securities
Act, the Company anticipates that the liquidity
of the market for any Old Notes remaining after
the consummation of the Exchange Offer may be
substantially limited. See "Risk Factors--
Consequences of Failure to Exchange Old Notes"
and "The Exchange Offer--Consequences of Failure
to Exchange Old Notes."
11
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all respects,
except that the terms of the New Notes do not include certain transfer
restrictions and registration rights relating to the Old Notes.
The New Notes will bear interest from the most recent date to which interest
has been paid on the Old Notes or, if no interest has been paid on the Old
Notes, from July 1, 1998. Accordingly, registered Holders of New Notes on the
relevant record date for the first interest payment date following the
completion of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid or, if no interest has been paid,
from July 1, 1998. Old Notes accepted for exchange will cease to accrue
interest from and after the date of completion of the Exchange Offer. Holders
of Old Notes whose Old Notes are accepted for exchange will not receive any
payment in respect of interest on the Old Notes otherwise payable on any
interest payment date that occurs on or after completion of the Exchange Offer.
Maturity Date............... July 1, 2008.
Interest Payment Dates...... January 1 and July 1 of each year, commencing
January 1, 1999.
Escrow Proceeds............. The Company has deposited with the Escrow Agent
an amount of U.S. Government Securities
(approximately $42.4 million), that, together,
with the proceeds from the investment thereof,
will be sufficient to pay, when due, the first
four interest payments on the Notes, with any
balance to be retained by the Company. The Notes
are secured by a first priority security interest
in the Escrow Account. See "Description of
Notes--Disbursement of Funds; Escrow Account."
Optional Redemption......... Except as described herein, the Notes will not be
redeemable at the Company's option prior to July
1, 2003. The Notes will be subject to redemption,
at the option of the Company, in whole or in
part, at any time on or after July 1, 2003 and
prior to maturity, upon not less than 30 days'
nor more than 60 days' notice at the redemption
prices set forth herein plus accrued and unpaid
interest and Liquidated Damages (as defined), if
any, to but excluding the Redemption Date (as
defined).
In addition, at any time prior to July 1, 2001,
the Company may redeem up to 35% of the aggregate
outstanding principal amount of the Notes with
the Net Cash Proceeds (as defined) of one or more
sales of Capital Stock (as defined), other than
Disqualified Stock (as defined), at a redemption
price equal to 111.25% of the aggregate principal
amount thereof, plus accrued and unpaid interest
thereon and Liquidated Damages, if any, to the
date of redemption; provided that at least 65% of
the original principal amount of the Notes
remains outstanding immediately following such
redemption. In order to effect the foregoing
redemption, the Company must mail a notice of
redemption no later than 45 days after the
related sale of Capital Stock and must consummate
such redemption within 60 days of the closing of
the sale of Capital Stock.
12
<PAGE>
Change of Control........... In the event of Change of Control, each Holder
shall have the right to require that the Company
purchase the Notes at a price equal to 101% of
the principal amount thereof, plus accrued and
unpaid interest, and Liquidated Damages, if any,
to the date of purchase. See "Risk Factors--
Ability to Effect Repurchase of the Notes Upon
Change of Control."
Ranking.....................
The Notes will be senior unsecured indebtedness
of the Company ranking pari passu with the
Company's existing and future senior unsecured
obligations and senior in right of payment to all
subordinated indebtedness of the Company. The
Notes will be effectively subordinated to all
secured indebtedness and to any future
liabilities of any future subsidiaries of the
Company, including trade payables. As of
September 30, 1998, the Company had approximately
$244.3 million of indebtedness outstanding, $44.3
million of which was secured indebtedness. In
addition, the Company has received a commitment
for a new secured Credit Facility, and the Notes
would be effectively subordinated to any
borrowings under the Credit Facility. See "Risk
Factors--Substantial Indebtedness; Ability to
Service Debt" and "Description of The New Credit
Facility."
Restrictive Covenants....... The Indenture governing the Notes (the
"Indenture") contains certain covenants that,
among other things, limit the ability of the
Company to incur additional Debt (as defined),
pay dividends or distributions, make Investments
(as defined) or certain other Restricted Payments
(as defined), sell assets, enter into certain
transactions with affiliates, incur liens, engage
in mergers and consolidations and allow
Restricted Subsidiaries (as defined) to issue
Capital Stock (as defined) and make Guarantees
(as defined). See "Description of Notes."
RISK FACTORS
Holders of Old Notes should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
Prospectus before tendering their Old Notes in the Exchange Offer. The risk
factors set forth (other than "Risk Factors--Consequences of Failure to
Exchange Old Notes") are generally applicable to the Old Notes as well as the
New Notes.
13
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial information should be read in conjunction
with the Company's Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The summary financial information for
each of the years in the three-year period ended December 31, 1997 is derived
from financial statements of the Company that have been audited by KPMG Peat
Marwick LLP, independent auditors. The summary financial information as of June
30, 1998 and for the six months ended June 30, 1997 and 1998 is derived from
the unaudited financial statements of the Company for such periods. Historical
results are not necessarily indicative of the results to be expected in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $ 1,408 $ 3,130 $ 12,408 $ 4,062 $ 17,176
Operating loss................. (1,273) (4,094) (24,792) (7,879) (26,289)
Net loss....................... (1,311) (4,133) (25,298) (8,016) (27,397)
Cumulative dividends and
accretion on redeemable
convertible preferred stock... -- -- (1,413) -- (2,014)
Net loss attributable to common
stockholders.................. (1,311) (4,133) (26,711) (8,016) (29,411)
Basic and diluted net loss per
share (1)..................... (1.00) (2.16) (13.85) (4.16) (2.57)
Shares used in computing basic
and diluted net loss per share
(1)........................... 1,315 1,914 1,928 1,927 11,460
STATEMENT OF CASH FLOWS DATA:
Net cash used for operating
activities.................... $ (453) $(2,998) $(15,096) $ (5,493) $(16,670)
Net cash used for investing
activities.................... (77) (3,617) (22,911) (5,765) (17,842)
Net cash provided by financing
activities.................... 692 10,167 44,562 23,884 84,962
OTHER DATA:
EBITDA (2)..................... $(1,208) $(3,633) $(20,274) $ (6,917) $(20,062)
Depreciation and amortization.. 65 461 3,429 962 4,689
Capital expenditures........... 69 3,499 22,489 5,765 17,842
Deficiency of earnings
available to cover fixed
charges (3)................... (1,311) (4,133) (25,298) (8,016) (27,397)
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $60,720 $211,343
Restricted cash and investments (5).................... 1,938 44,315
Working capital........................................ 39,571 232,966
Total assets........................................... 113,040 313,040
Current portion of equipment loans, line of credit
facility and capital lease obligations................ 10,595 10,595
Equipment loans, line of credit facility and capital
lease obligations, less current portion............... 29,914 29,914
11 1/4% Senior Notes due 2008.......................... -- 200,000
Total stockholders' equity............................. 55,511 55,511
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
(2) Represents loss before net interest expense, income taxes, depreciation,
amortization (including amortization of deferred stock compensation) and
other noncash charges ("EBITDA"). Although EBITDA should not be used as an
alternative to operating loss or net cash provided by (used for) operating
activities, investing activities or financing activities, each as measured
under generally accepted accounting principles, and, although EBITDA may
not be comparable to other similarly titled information from other
companies, the Company's management believes that EBITDA is an additional
meaningful measure of performance and liquidity.
(3) Earnings consist of income (loss) before provision for income taxes plus
fixed charges. Fixed charges consist of interest charges and amortization
of debt expense and discount or premium related to indebtedness, whether
expensed or capitalized and that portion of rental expense the Company
believes to be representative of interest.
(4) As adjusted to reflect the application of the net proceeds from the sale of
the Old Notes. See "Use of Proceeds" and "Capitalization."
(5) As adjusted amounts include amounts set aside for four semi-annual payments
of interest on the Notes.
14
<PAGE>
RISK FACTORS
Holders of Old Notes should carefully consider the following risk factors,
as well as all other information set forth in this Prospectus, before
tendering their Old Notes in the Exchange Offer. The risk factors set forth
below (other than "Consequences of Failure to Exchange Old Notes") are
generally applicable to the Old Notes as well as the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Any Old Notes tendered and exchanged in the Exchange Offer will reduce the
aggregate principal amount of Old Notes outstanding. Following the
consummation of the Exchange Offer, Holders who did not tender their Old Notes
generally will not have any further registration rights under the Registration
Rights Agreement, and such Old Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the market for such
Old Notes could be adversely affected. The Old Notes are currently eligible
for sale pursuant to Rule 144A through The Portal Market. Because the Company
anticipates that most Holders will elect to exchange such Old Notes for New
Notes due to the absence of restrictions on the resale of New Notes (except
for applicable restrictions on any Holder who is an affiliate of the Company
or is a broker-dealer which acquired the Old Notes directly from the Company)
under the Securities Act, the Company anticipates that the liquidity of the
market for any Old Notes remaining after the consummation of the Exchange
Offer may be substantially limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Holders who do not tender their Old Notes, except for certain instances
involving the Initial Purchasers or Holders who are not eligible to
participate in the Exchange Offer, will not have any further registration
rights under the Registration Rights Agreement or otherwise or rights to
receive Liquidated Damages (as defined) for failure to register. Accordingly,
any Holder that does not exchange that Holder's Old Notes for New Notes will
continue to hold the untendered Old Notes and will be entitled to all the
rights and subject to all the limitations applicable thereto under the
Indenture, except to the extent that such rights or limitations, by their
terms, terminate or cease to have further effectiveness as a result of the
Exchange Offer.
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company or any of its subsidiaries, (ii) inside the
United States to a Qualified Institutional Buyer ("QIB") in a transaction
complying with Rule 144A, (iii) inside the United States to an institutional
"accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) (an "Accredited Investor") that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the
Trustee a signed letter containing certain representations and agreements
relating to the restrictions on transfer of the Securities (the form of which
letter can be obtained from such Trustee), (iv) outside the United States in
compliance with Rule 904 under the Securities Act, (v) pursuant to the
exemption from registration provided by Rule 144 under the Securities Act (if
available), or (vi) pursuant to an effective registration statement under the
Securities Act. Each Accredited Investor that is not a QIB and that is an
original purchaser of any of the Securities from the Initial Purchasers will
be required to sign a letter confirming that such person is an Accredited
Investor under the Securities Act and that such person acknowledges the
transfer restrictions summarized herein.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
While the Company began operations in 1992, it did not offer server hosting
services until 1995 and did not open its first dedicated Internet Data Center
until August 1996, at which time it refocused its business strategy on
providing Internet system and network management solutions for enterprises'
mission-critical Internet operations. As a result, the Company's business
model is still in an emerging state. Since it began to offer server hosting
services in 1995, the Company has experienced operating losses and negative
cash flows from operations in each quarterly and annual period. As of
September 30, 1998, the Company had an accumulated deficit of
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approximately $75.6 million. The revenue and income potential of the Company's
business and market is unproven, and the Company's limited operating history
makes an evaluation of the Company and its prospects difficult. Currently, the
Company anticipates making significant investments in new Internet Data
Centers and product development and sales and marketing programs and personnel
and therefore believes that it will continue to experience net losses on a
quarterly and annual basis for the foreseeable future. The Company and its
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies in the new and rapidly evolving market for Internet
system and network management solutions. To address these risks, among other
things, the Company must market its brand name effectively, provide scalable,
reliable and cost-effective services, ensure and enhance customer
satisfaction, continue to grow its infrastructure to accommodate new Internet
Data Centers and increased bandwidth use of its network, expand its channels
of distribution, retain and motivate qualified personnel and continue to
respond to competitive developments. Failure of the Company's products and
services to achieve market acceptance would have a material adverse effect on
the Company's business, results of operations and financial condition.
Although the Company has experienced significant growth in revenues in recent
periods, the Company does not believe that this growth rate necessarily is
indicative of future operating results, and there can be no assurance that the
Company will ever achieve profitability on a quarterly or an annual basis or
will sustain profitability if achieved. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS
The Company has experienced significant fluctuations in its results of
operations on a quarterly and an annual basis. The Company expects to continue
to experience significant fluctuations in its future quarterly and annual
results of operations due to a variety of factors, many of which are outside
the Company's control, including: demand for and market acceptance of the
Company's services and enhancements; introductions of services or enhancements
by the Company and its competitors; capacity utilization of its Internet Data
Centers; reliable continuity of service and network availability; the ability
to increase bandwidth as necessary, both on the Company's network and at its
interconnection points with other networks; the costs associated with
increasing bandwidth on the Company's network and at its interconnection
points with other networks; the timing of customer installations; providing
customer discounts and credits; the mix of services sold by the Company;
customer retention and satisfaction; the timing and success of marketing
efforts and service introductions by the Company; the timing and magnitude of
capital expenditures, including construction costs relating to the expansion
of operations; the timely expansion of existing Internet Data Centers and
completion of new Internet Data Centers; costs related to the acquisition of
backbone capacity; the introduction by third parties of new Internet and
networking technologies; increased competition in the Company's markets;
changes in the pricing policies of the Company and its competitors;
fluctuations in bandwidth used by customers; the retention of key personnel;
economic conditions specific to the Internet industry; and other general
economic factors. In addition, a relatively large portion of the Company's
expenses are fixed in the short-term, particularly with respect to
telecommunications, depreciation, certain substantial interest expenses, real
estate and personnel, and therefore the Company's results of operations are
particularly sensitive to fluctuations in revenues. Also, if the Company's
agreement with Computer Associates International, Inc. ("Computer Associates")
were to terminate and the Company continued to require Computer Associates'
software, the license fees paid by the Company could increase fixed costs
significantly. Furthermore, if the Company were to become unable to continue
leveraging third party products in the Company's services offerings, the
Company's product development costs could increase significantly. Although the
Company has not encountered significant difficulties in collecting upon
accounts receivable in the past, many of the Company's customers are in an
emerging stage, and there can be no assurance that the Company will be able to
collect receivables on a timely basis. See "--Risks Associated with
Accelerated Business Expansion" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH ACCELERATED BUSINESS EXPANSION
A key element of the Company's business strategy is the expansion of the
Company's network through the opening of additional Internet Data Centers in
geographically diverse locations. The Company currently has eight
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Internet Data Centers located in six metropolitan areas: Boston, San
Francisco, New York, Los Angeles, Seattle and Washington, D.C., and has a
server hosting facility in the London metropolitan area. The Company intends
to expand domestically and internationally, including the expected opening of
additional Internet Data Centers in the Washington, D.C. and Seattle
metropolitan areas and new Internet Data Centers in the Chicago metropolitan
area in the first quarter of 1999 and the London metropolitan area in the
second quarter of 1999. The Company intends to apply a portion of the proceeds
from the sale of the Old Notes to complete this accelerated geographic
expansion. The Company's continued expansion and development of its network
will depend on, among other things, the Company's ability to assess markets,
identify Internet Data Center sites, install facilities and establish local
peering interconnections with Internet service providers ("ISPs"), all in a
timely manner, at reasonable costs and on terms and conditions acceptable to
the Company. The Company's ability to manage this expansion effectively will
require it to continue to implement and improve its operational and financial
systems and to expand, train and manage its employee base. The Company's
inability to establish additional Internet Data Centers or manage effectively
its expansion would have a material adverse effect upon the Company's
business, results of operations and financial condition. See "Use of Proceeds"
and "--Substantial Leverage and Debt Service."
The establishment of each additional Internet Data Center will require the
Company to expend substantial resources for leases of real estate, significant
improvements of such facilities, purchase of equipment, implementation of
multiple telecommunications connections and hiring of network, administrative,
customer support and sales and marketing personnel. Capital expenditures,
including those for new Internet Data Centers, will be funded primarily
through existing and future equipment loans and lease lines and the proceeds
from the sale of the Old Notes and funds available under the Credit Facility.
Moreover, the Company expects to make significant investments in sales and
marketing and the development of new services as part of its expansion
strategy. During the next 12 months, the Company expects to meet its working
capital requirements, including such requirements associated with the
Company's planned expansion, with existing cash and cash equivalents and
short-term investments including the net proceeds from the sale of the Old
Notes, funds available under the Credit Facility, cash from sales of services
and proceeds from existing and future working capital lines of credit.
However, there can be no assurance that the Company will be successful in
generating sufficient cash from sales of services or in raising capital in
sufficient amounts on terms acceptable to it, including completion of
negotiations associated with the Credit Facility. The failure to generate
sufficient cash flows from sales of services or to raise sufficient funds may
require the Company to delay or abandon some or all of its development and
expansion plans or otherwise forego market opportunities and may make it
difficult for the Company to respond to competitive pressures, any of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
The Company typically requires at least six months to select the appropriate
location for an Internet Data Center, construct the necessary facilities,
install equipment and telecommunications infrastructure, and hire the
operations and sales personnel needed to conduct business at that site.
Expenditures related to an Internet Data Center commence well before the
Internet Data Center opens, and it takes an extended period to approach break-
even capacity utilization at each site. As a result, the Company expects that
individual Internet Data Centers will generally experience losses for in
excess of one year from the time they are opened. The Company experiences
further losses from sales personnel hired to test market the Company's
services in markets where there is no, and may never be an, Internet Data
Center. As a result, the Company expects to make investments in expanding the
Company's business rapidly into new geographic regions which, while
potentially increasing the Company's revenues in the long term, will lead to
significant losses for the foreseeable future. The Company's accelerated
expansion of the number of the Company's Internet Data Centers is likely to
increase the amount and duration of such losses. There can be no assurance
that the Company will be able to anticipate accurately the customer demand for
such additional Internet Data Centers or that the Company will be able to
attract a sufficient number of customers to such facilities. The Company's
inability to attract customers to new Internet Data Centers in a timely
manner, or at all, would have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company has significant amounts of outstanding indebtedness and interest
cost. The Company's level of indebtedness presents risks to investors,
including the possibility that the Company may be unable to generate cash
sufficient to pay the principal of and interest on the indebtedness when due.
At September 30, 1998, the Company had indebtedness of approximately $244.3
million and available borrowings of an aggregate of $5.1 million under a
working capital line of credit. In addition, the Company will have the right
to issue Additional Notes on or prior to July 1, 1999 in an aggregate
principal amount not to exceed $75.0 million. See "Description of Notes--
Issuance of Additional Notes." Furthermore, the Company expects to enter into
a new secured Credit Facility, and the Notes would be effectively subordinated
to any borrowings under the Credit Facility. Finally, at September 30, 1998,
the Company had borrowing availability under existing equipment loans and
lease lines of $1.1 million. The Company expects to incur additional equipment
loans and lease lines to finance capital expenditures for its Internet Data
Centers and may obtain additional working capital lines of credit and lease
lines. See "Description of the Notes."
The Company's ability to make principal and interest payments on the Notes,
and service other existing and future indebtedness, will be dependent on the
Company's future operating performance, which is itself dependent on a number
of factors, many of which are outside of the Company's control. These factors
include prevailing economic conditions and financial, competitive,
legislative, regulatory and other factors affecting the Company's business and
operations, and may be dependent on the availability of borrowings under the
expected Credit Facility or other borrowings. Although the Company believes,
based on current levels of operations, that its cash flow from operations,
together with other sources of liquidity, will be adequate to make required
payments of principal and interest on its debt (including the Notes), whether
at or prior to maturity, finance anticipated capital expenditures and fund
working capital requirements, there is no assurance in this regard. If the
Company is unable to generate sufficient cash flow from operations, or
additional equipment loans or equipment and working capital lines of credit,
in the future to service its debt, it may be required to sell assets, reduce
capital expenditures, refinance all or a portion of its existing indebtedness
or obtain other sources of financing. There can be no assurance that any such
refinancing would be available on commercially reasonable terms, or at all, or
that any other financing could be obtained, particularly in view of the
Company's high level of indebtedness and the fact that substantially all of
the Company's assets have been pledged to secure obligations under certain
existing indebtedness. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 3 and 6 of Notes to Financial
Statements.
The degree to which the Company is leveraged could have important
consequences to the Company's future operations, including but not limited to:
(i) increasing the Company's vulnerability to general adverse economic and
industry conditions; (ii) limiting the Company's ability to obtain additional
financing to fund future working capital, capital expenditures, acquisitions
and other general corporate requirements; (iii) requiring the dedication of a
substantial portion of the Company's cash flow from operations to the payment
of principal of, and interest on, its indebtedness, thereby reducing the
availability of such cash flow to fund working capital, capital expenditures
or other general corporate requirements; (iv) limiting the Company's
flexibility in planning for, or reacting to, changes in its business and the
industry in which it competes; and (v) placing the Company at a competitive
disadvantage vis-a-vis less leveraged or better capitalized competitors.
Certain of the Company's indebtedness is secured by the Company's assets. A
default under such indebtedness could result in the foreclosure on such
collateral, which would have a material adverse effect on the Company's
business, results of operations and financial condition.
EFFECTIVE SUBORDINATION
The Notes are effectively subordinated to secured indebtedness of the
Company to the extent of the value of the assets securing such indebtedness.
The Notes are also effectively subordinated to all debt and other liabilities
(including trade payables and lease obligations) of the Company's
subsidiaries, if any. While the Company does not currently have any
subsidiaries, the Indenture does not prohibit it from forming subsidiaries
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in the future. Any right of the Company to receive assets of any of its
subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the Holders of the Notes to participate in those assets)
will be effectively subordinated to the claims of that subsidiary's creditors
(including trade creditors) except to the extent that the Company is itself
recognized as a creditor of such subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
subsidiary and any debt of such subsidiary senior to that held by the Company.
As of September 30, 1998, there was approximately $44.3 million of
indebtedness of the Company to which holders of Notes would have been
effectively subordinated. In addition, the Company expects to enter into a new
secured Credit Facility, and the Notes are likely to be effectively
subordinated to any borrowings under the Credit Facility. The Indenture
contains certain limitations on the ability of the Company and its
subsidiaries to incur additional indebtedness. However, such limitations are
subject to a number of exceptions, and there can be no assurances that the
Company and its subsidiaries will not incur significant additional
indebtedness in the future, including indebtedness to which the holders of the
Notes would be effectively subordinated. See "Description of Notes--
Covenants--Limitation on Debt."
RISKS ASSOCIATED WITH FINANCING ARRANGEMENTS
Certain of the Company's existing financing arrangements are secured by
substantially all of the Company's assets. These financing arrangements
require that the Company satisfy certain financial covenants and currently
prohibit the payment of dividends and the repurchase of capital stock of the
Company without, in each case, the lender's consent. The Company's secured
lenders would be entitled to foreclose upon those assets in the event of a
default under the financing arrangements and to be repaid from the proceeds of
the liquidation of those assets before the assets would be available for
distribution to the holders of the Notes in the event that the Company is
liquidated. In addition, the collateral security arrangements under the
Company's existing financing arrangements may adversely affect the Company's
ability to obtain additional borrowings.
COMPETITION
The market served by the Company is intensely competitive, and such
competition is increasing. There are few substantial barriers to entry, and
the Company expects that it will face additional competition from existing
competitors and new market entrants in the future. The principal competitive
factors in this market include Internet system engineering expertise, customer
service, network capability, reliability, quality of service and scalability,
broad geographic presence, brand name, technical expertise and functionality,
the variety of services offered, the ability to maintain and expand
distribution channels, customer support, price, the timing of introductions of
new services, network security, financial resources and conformity with
industry standards. There can be no assurance that the Company will have the
resources or expertise to compete successfully in the future.
The Company's current and potential competitors in the market include: (i)
providers of server hosting services; (ii) national and regional ISPs; (iii)
global, regional and local telecommunications companies and Regional Bell
Operating Companies ("RBOCs"); and (iv) large IT outsourcing firms. The
Company's competitors may operate in one or more of these areas and include
companies such as certain subsidiaries of GTE Corporation and WorldCom, Inc.
("WorldCom"), International Business Machines Corporation ("IBM") and certain
business units of GlobalCenter, Inc. ("GlobalCenter"), which was recently
acquired by Frontier Corporation.
Many of the Company's competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than the Company. As a result, certain of these competitors may be
able to develop and expand their network infrastructures and service offerings
more quickly, adapt to new or emerging technologies and changes in customer
requirements more quickly, take advantage of acquisition and other
opportunities more readily, devote greater resources to the marketing and sale
of their products and adopt more aggressive pricing policies than can the
Company. In addition, these competitors have entered and will likely continue
to enter into joint ventures or consortiums to provide additional services
competitive with those provided by the Company.
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Certain of the Company's competitors may be able to provide customers with
additional benefits in connection with their Internet system and network
management solutions, including reduced communications costs, which could
reduce the overall costs of their services relative to the Company's. There
can be no assurance that the Company will be able to offset the effects of any
such price reductions. In addition, the Company believes that the businesses
in which the Company competes are likely to encounter consolidation in the
near future, which could result in increased price and other competition that
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Competition."
DEPENDENCE ON NEW MARKET; UNCERTAINTY OF ACCEPTANCE OF SERVICES
The market for Internet system and network management solutions has only
recently begun to develop, is evolving rapidly and likely will be
characterized by an increasing number of market entrants. There is significant
uncertainty regarding whether this market ultimately will prove to be viable
or, if it becomes viable, that it will grow. The Company's future growth, if
any, will be dependent on the willingness of enterprises to outsource the
system and network management of their mission-critical Internet operations
and the Company's ability to market its services in a cost-effective manner to
a sufficiently large number of customers. There can be no assurance that the
market for the Company's services will develop, that the Company's services
will be adopted or that businesses, organizations or consumers will use the
Internet for commerce and communication. If this market fails to develop, or
develops more slowly than expected, or if the Company's services do not
achieve market acceptance, the Company's business, results of operations and
financial condition would be materially and adversely affected. In addition,
in order to be successful in this emerging market, the Company must be able to
differentiate itself from its competition through its service offerings, such
as its recently introduced collaborative systems management and Internet
technology services. There can be no assurance that the Company will be
successful in differentiating itself or achieving market acceptance of its
services, or that it will not experience difficulties that could delay or
prevent the successful development, introduction or marketing of these
services. If the Company incurs increased costs or is unable, for technical or
other reasons, to develop and introduce new services or enhancements of
existing services in a timely manner, or if new products or services do not
achieve market acceptance in a timely manner or at all, the Company's
business, results of operations and financial condition could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISK OF SYSTEM FAILURE
The Company's operations are dependent upon its ability to protect its
network infrastructure and customers' equipment against damage from human
error, power loss, fire, earthquakes, floods, telecommunications failures,
sabotage, intentional acts of vandalism and similar events. Despite
precautions taken and planned to be taken by the Company, the occurrence of a
natural disaster or other unanticipated problems at one or more of the
Company's Internet Data Centers could result in interruptions in the services
provided by the Company or significant damage to customer equipment. In
addition, failure of any of the Company's telecommunications providers, such
as WorldCom or Qwest Communications Corporation ("Qwest"), to provide the data
communications capacity required by the Company, as a result of human error, a
natural disaster or other operational disruption, could result in
interruptions in the Company's services. Any damage to or failure of the
systems of the Company or its service providers could result in reductions in,
or terminations of, services supplied to the Company's customers, which could
have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, the Company's reputation
could be materially adversely affected. The Company has from time to time
experienced interruptions in specific circuits within its network resulting
from events outside the Company's control, which interruptions have caused
short-term degradation in the level of performance of the Company's network.
The Company's customer contracts currently provide a limited service level
warranty related to the continuous availability of service on a 24 hours per
day, seven days per week ("24x7") basis, except for certain scheduled
maintenance periods. This warranty is generally limited to a credit consisting
of free service for a specified limited period of time for disruptions in
Internet transmission services. To date, only a limited number
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of customers have been entitled to this warranty to receive credits for free
service. Should the Company incur significant obligations in connection with
system downtime, there can be no assurance that the Company's liability
insurance would be adequate to cover such expenses. The Company's customer
contracts provide for liability of the Company for personal injury or
equipment damage in only limited circumstances. Although these customer
contracts typically provide for no recovery with respect to incidental,
punitive, indirect and consequential damages resulting from damages to
equipment or disruption of service, there can be no assurance that, in the
event of such damages, the Company would not be found liable, and, in such
event, that such damages would not exceed the Company's liability insurance.
See "Business--Customers" and "--Network Design."
UNPROVEN NETWORK SCALABILITY
The Company must continue to expand and adapt its network infrastructure
(both its network and its interconnections to other networks) as the number of
users and the amount of information they wish to transport increase and to
meet changing customer requirements. The expansion and adaptation of the
Company's telecommunications infrastructure will require substantial
financial, operational and management resources as the Company negotiates
telecommunications capacity with its existing and other network infrastructure
suppliers. If the Company is required to expand significantly and rapidly its
network infrastructure due to increased usage, additional stress will be
placed upon the Company's network hardware and traffic management systems as
well as the capacity of the networks of the ISPs with which it interconnects.
Due to the limited deployment of the Company's services to date, the ability
of the Company's network to connect and manage a substantially larger number
of customers at high transmission speeds is as yet unknown, and the Company
faces risks related to the network's ability to be scaled up to its expected
customer levels while maintaining superior performance. As customers' usage of
bandwidth increases, the Company will need to make additional investments in
its infrastructure, including interconnections, to maintain adequate
downstream data transmission speeds, the availability of which may be limited
or the cost of which may be significant. The ability of the Company to
increase its interconnections depends largely on the ability and willingness
of other ISPs, which are outside of the control of the Company. In addition,
as the Company adds new customers that have significant bandwidth needs, it
may be required to increase quickly its network capacity which may be
difficult in light of current lead times within the industry for adding
capacity and interconnections. There can be no assurance that additional
network capacity and interconnections will be available from third-party
suppliers as needed by the Company. As a result, there can be no assurance
that the Company's network will be able to achieve or maintain a sufficiently
high capacity of data transmission, especially if the usage of the Company's
customers increases. The Company's failure to achieve or maintain high
capacity data transmission circuits and sufficient interconnections could
significantly reduce consumer demand for its services because of possible
degradation of service, and have a material adverse effect on its business,
results of operations and financial condition. In addition, as the Company
upgrades its telecommunications infrastructure to increase bandwidth available
to its customers, it is likely to encounter a certain level of equipment or
software incompatibility which may cause delays in implementation. There can
be no assurance that the Company will be able to expand or adapt its
telecommunications infrastructure to meet additional demand or its customers'
changing requirements, including its plans to add OC-12 circuits, on a timely
basis and at a commercially reasonable cost, or at all. See "Business--Network
Design."
DEPENDENCE UPON NETWORK INFRASTRUCTURE
The Company's success will depend upon the capacity, scalability,
reliability and security of its network infrastructure, including the capacity
leased from its telecommunications network suppliers. In particular, the
Company is dependent on WorldCom and Qwest and certain other
telecommunications providers for its backbone capacity (including the
Company's dedicated clear channel network and transit access to ISPs) and is
therefore dependent on such companies to maintain the operational integrity of
its backbone and interconnections. In addition, the Company relies on a number
of public and private peering interconnections to deliver its services. If the
carriers that operate the Internet exchange points ("IXPs") were to
discontinue their support of the peering points and no alternative providers
were to emerge, or such alternative providers were to increase the cost of
utilizing the IXPs, the distribution of content through the IXPs, including
content distributed by the Company, would be significantly constrained.
Furthermore, as traffic through the IXPs increases, if
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commensurate increases in bandwidth are not added, the Company's ability to
distribute content rapidly and reliably through these networks will be
adversely affected. Many of the companies with which the Company maintains
private peering interconnections are competitors of the Company. Currently,
the Company does not pay a fee for its public and private peering
interconnections. The Company and the operators of these public and private
peering interconnections have mutually agreed not to charge each other a fee
for the exchange of traffic between their respective networks, which is a
standard industry practice. If these organizations were to refuse to continue
to interconnect directly with the Company, or begin to impose additional costs
(including fees) on the Company to maintain and/or increase these
interconnections, the Company might be required to purchase transit access
services from these ISPs in order to allow the Company's customers to reach
the customers of these ISPs, which would increase the Company's costs and as a
result, the Company business, results of operations and financial condition
could be materially adversely affected. If the Company chose not to purchase
such access, there would be a lack of communication between the Company's
customers and the customers of such organization. In those cases where the
Company currently purchases backup capacity from other organizations, if these
organizations were to increase the pricing associated with such capacity, the
Company might be required to identify alternative methods through which it can
distribute its customers' content. If the Company were unable on a cost-
effective basis to access alternative networks to distribute its customers'
content or if it were unable to pass through any additional costs of utilizing
these networks to its customers, the Company's business, results of operations
and financial condition could be materially adversely affected. See
"Business--Network Design."
DEPENDENCE ON THE INTERNET AND INTERNET INFRASTRUCTURE DEVELOPMENT
The increased use of the Internet for retrieving, sharing and transferring
information among businesses, consumers, suppliers and partners has only
recently begun to develop, and the Company's success will depend in large part
on continued growth in the use of the Internet. Critical issues concerning the
commercial use of the Internet, including security, reliability, cost, ease of
access, quality of service and necessary increases in bandwidth availability,
remain unresolved and are likely to affect the development of the market for
the Company's services. The adoption of the Internet for information retrieval
and exchange, commerce and communications, particularly by those enterprises
that have historically relied upon alternative means of commerce and
communications, generally will require the acceptance of a new medium of
conducting business and exchanging information. Demand and market acceptance
of the Internet are subject to a high level of uncertainty and are dependent
on a number of factors, including the growth in consumer access to and
acceptance of new interactive technologies, the development of technologies
that facilitate interactive communication between organizations and targeted
audiences and increases in user bandwidth. In addition, the rate of
development and adoption of the Internet has been slower outside of the United
States and the cost of bandwidth has been higher. If the Internet as a
commercial or business medium fails to develop or develops more slowly than
expected, the Company's business, results of operations and financial
condition could be materially adversely affected. The recent growth in the use
of the Internet has caused frequent periods of performance degradation,
requiring the upgrade of routers and switches, telecommunications links and
other components forming the infrastructure of the Internet by ISPs and other
organizations with links to the Internet. Any perceived degradation in the
performance of the Internet as a whole could undermine the benefits of the
Company's services. Potentially increased performance provided by the services
of the Company and others is ultimately limited by and reliant upon the speed
and reliability of the networks operated by third parties. Consequently, the
emergence and growth of the market for the Company's services is dependent on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion. See "Business--Network Design."
RAPID TECHNOLOGICAL CHANGE; EVOLVING INDUSTRY STANDARDS
The Company's future success will depend, in part, on its ability to offer
services that incorporate leading technology, address the increasingly
sophisticated and varied needs of its current and prospective customers and
respond to technological advances and emerging industry standards and
practices on a timely and cost-effective basis. The market for the Company's
services is characterized by rapidly changing and unproven technology,
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evolving industry standards, changes in customer needs, emerging competition
and frequent new service introductions. There can be no assurance that future
advances in technology will be beneficial to, or compatible with, the
Company's business or that the Company will be able to incorporate such
advances on a cost-effective and timely basis into its business. Moreover,
technological advances may have the effect of encouraging certain of the
Company's current or future customers to rely on in-house personnel and
equipment to furnish the services currently provided by the Company. In
addition, keeping pace with technological advances in the Company's industry
may require substantial expenditures and lead time. For instance, certain
networking hardware may not be immediately compatible with leading edge
telecommunications infrastructure services which are not yet widely available
and therefore may require the Company to make significant investments to
achieve compatibility.
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its
services with products, services and architectures offered by various vendors.
Although the Company often works with various vendors in testing newly
developed products, there can be no assurance that such products will be
compatible with the Company's infrastructure or that such products will
adequately address changing customer needs. Although the Company currently
intends to support emerging standards, there can be no assurance that industry
standards will be established or, that if they become established, the Company
will be able to conform to these new standards in a timely fashion and
maintain a competitive position in the market. The failure of the Company to
conform to the prevailing standard, or the failure of a common standard to
emerge, could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, there can be no
assurance that products, services or technologies developed by others will not
render the Company's services uncompetitive or obsolete. See "Business--
Product Development."
SYSTEM SECURITY RISKS
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Certain
of the Company's services rely on encryption and authentication technology
licensed from third parties to provide the security and authentication
necessary to effect secure transmission of confidential information. Despite
the Company's design and implementation of a variety of network security
measures, there can be no assurance that unauthorized access, computer
viruses, accidental or intentional actions and other disruptions will not
occur. The Company's Internet Data Centers have in the past experienced and
may in the future experience delays or interruptions in service as a result of
the accidental or intentional actions of Internet users, current and former
employees or others. Furthermore, such inappropriate use of the network by
third parties could also potentially jeopardize the security of confidential
information, such as credit card and bank account numbers, stored in the
computer systems of the Company and its customers, which could result in
liability to the Company and the loss of existing customers or the deterrence
of potential customers. Although the Company intends to continue to implement
industry-standard security measures, such measures have been circumvented in
the past, and there can be no assurance that any such measures implemented by
the Company will not be circumvented in the future. The costs required to
eliminate computer viruses and alleviate other security problems could be
prohibitively expensive and the efforts to address such problems could result
in interruptions, delays or cessation of service to the Company's customers,
which could have a material adverse effect on the Company's business, results
of operations and financial condition. Concerns over the security of Internet
transactions and the privacy of users may also inhibit the growth of the
Internet, especially as a means of conducting commercial transactions. See
"Business--Network Design."
DEPENDENCE ON THIRD-PARTY SUPPLIERS
The Company is dependent on other companies to supply certain key components
of its telecommunications infrastructure and system and network management
solutions, including telecommunications services and networking equipment
that, in the quantities and quality demanded by the Company, are available
only from sole or limited sources. See "--Dependence Upon Network
Infrastructure." The routers, switches and modems used in the Company's
telecommunications infrastructure are currently supplied primarily by Cisco
Systems Inc.
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("Cisco"). The Company purchases these components pursuant to purchase orders
placed from time to time, does not carry significant inventories of these
components and has no guaranteed supply arrangements with these vendors. Any
failure to obtain required products or services on a timely basis and at an
acceptable cost would have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, any
failure of the Company's sole or limited source suppliers to provide products
or components that comply with evolving Internet and telecommunications
standards or that interoperate with other products or components used by the
Company in its communications infrastructure could have a material adverse
effect on the Company's business, results of operations and financial
condition. In addition, the Company expects to be dependent for a time on
third parties to deliver its services from and manage its international
operations, including its site in London. See "--Risks Associated with
International Operations" and "Business--Network Design."
The Company has also licensed certain software from Computer Associates that
allows the Company to monitor its customers' Internet operations and assist in
resolving performance issues that arise from time to time. Under the agreement
with Computer Associates, if the Company desires to offer a service that has a
substantially similar functionality to that provided by Computer Associates'
Unicenter(R) TNG(TM) family of software, or its ARCserve or InocuLAN products
(the "CA Products"), the Company must generally utilize the CA Products, as
long as they meet the Company's requirements. In addition, the Company is a
beta test site for new versions of the CA Products and must, upon commercial
deployment, replace existing software with new CA Products if they are
substantially similar in functionality. During the term of the agreement, the
Company is obligated to pay Computer Associates a royalty equal to one percent
of the Company's gross revenues. Either party may terminate this agreement
upon 60 days' prior written notice with no penalties. Should Computer
Associates or the Company decide to terminate this agreement, the Company has
the right to continue licensing software from Computer Associates at a forty
percent discount from Computer Associates' prevailing standard prices for five
years and the Company will no longer be obligated to pay a royalty to Computer
Associates. See "Business--Relationship with Computer Associates."
MANAGEMENT OF GROWTH
The Company is currently experiencing a period of rapid growth with respect
to the building of its Internet Data Centers, expansion of its customer base
and increase in the number of Company employees. This growth has placed, and
if it continues, will place, a significant strain on the Company's financial,
management, operational and other resources, including its ability to ensure
customer satisfaction. In addition, the Company may be required to manage
multiple relationships with a growing number of third parties as it seeks to
complement its service offerings. There can be no assurance that the Company's
management, personnel, systems, procedures and controls will be adequate to
support the Company's existing and future operations. The Company's ability to
manage its growth effectively will require it to continue to expand its
operating and financial procedures and controls, to replace or upgrade its
operational, financial and management information systems and to attract,
train, motivate, manage and retain key employees. The Company has recently
hired many key employees and officers, including its President, and as a
result, the Company's entire management team has worked together for only a
brief time. If the Company's executives are unable to manage growth
effectively, the Company's business, results of operations and financial
condition could be materially adversely affected. See "Management."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct federal, state or local
government regulation, other than regulations applicable to businesses
generally. There is currently only a small body of laws and regulations
directly applicable to access to or commerce on the Internet. However, due to
the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted at the federal, state and local
levels with respect to the Internet, covering issues such as user privacy,
freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. Although
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sections of the Communications Decency Act of 1996 (the "CDA") that, among
other things, proposed to impose criminal penalties on anyone distributing
"indecent" material to minors over the Internet, were held to be
unconstitutional by the U.S. Supreme Court, there can be no assurance that
similar laws will not be proposed and adopted. The nature of such similar
legislation and the manner in which it may be interpreted and enforced cannot
be fully determined and, therefore, legislation similar to the CDA could
subject the Company and/or its customers to potential liability, which in turn
could have an adverse effect on the Company's business, results of operations
and financial condition. The adoption of any such laws or regulations might
decrease the growth of the Internet, which in turn could decrease the demand
for the services of the Company or increase the cost of doing business or in
some other manner have a material adverse effect on the Company's business,
results of operations or financial condition. In addition, applicability to
the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy is uncertain. The vast majority of such laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies. Changes to such laws intended to address these issues, including
some recently proposed changes, could create uncertainty in the marketplace
which could reduce demand for the services of the Company or increase the cost
of doing business as a result of costs of litigation or increased service
delivery costs, or could in some other manner have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, as the Company's services are available over the Internet in
multiple states and foreign countries, and as the Company facilitates sales by
its customers to end users located in such states and foreign countries, such
jurisdictions may claim that the Company is required to qualify to do business
as a foreign corporation in each such state or foreign country. The Company is
qualified to do business in only a limited number of states, and failure by
the Company to qualify as a foreign corporation in a jurisdiction where it is
required to do so could subject the Company to taxes and penalties for the
failure to qualify and could result in the inability of the Company to enforce
contracts in such jurisdictions. Any such new legislation or regulation, or
the application of laws or regulations from jurisdictions whose laws do not
currently apply to the Company's business, could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Government Regulation."
RISKS ASSOCIATED WITH INFORMATION DISSEMINATED THROUGH THE COMPANY'S NETWORK
The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. It is possible that claims could be made
against online services companies and Internet access providers under both
United States and foreign law for defamation, negligence, copyright or
trademark infringement, or other theories based on the nature and content of
the materials disseminated through their networks. Several private lawsuits
seeking to impose such liability upon online services companies and Internet
access providers are currently pending. In addition, legislation has been
proposed that imposes liability for or prohibits the transmission over the
Internet of certain types of information. The imposition upon the Company and
other Internet network providers of potential liability for information
carried on or disseminated through their systems could require the Company to
implement measures to reduce its exposure to such liability, which may require
the expenditure of substantial resources, or to discontinue certain service or
product offerings. The increased attention focused upon liability issues as a
result of these lawsuits and legislative proposals could impact the growth of
Internet use. While the Company carries professional liability insurance, it
may not be adequate to compensate or may not cover the Company in the event
the Company becomes liable for information carried on or disseminated through
its networks. Any costs not covered by insurance incurred as a result of such
liability or asserted liability could have a material adverse effect on the
Company's business, results of operations and financial condition. Certain
businesses, organizations and individuals have in the past sent unsolicited
commercial e-mails from servers hosted at the Company's facilities to massive
numbers of people, typically to advertise products or services. This practice,
known as "spamming," can lead to complaints against service providers that
enable such activities, particularly where recipients view the materials
received as offensive. In addition, certain ISPs and other online services
companies could deny network access to companies that allow undesired content
or spamming to be transmitted through their networks. The Company has in the
past received, and may in the future receive, letters from recipients of
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information transmitted by the Company's customers objecting to such
transmission. Although the Company prohibits its customers by contract from
spamming, there can be no assurance that its customers will not engage in this
practice, which could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business--
Government Regulation."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A component of the Company's strategy is to expand into international
markets, and the Company recently opened a site in the London metropolitan
area. If revenue generated by any current or future international site or
Internet Data Center is not adequate to offset the expense of establishing and
maintaining any such international operation, the Company's business, results
of operations and financial condition could be materially adversely affected.
There can be no assurance that the Company will be able to market, sell and
deliver its services outside the United States successfully. In order to
expand its international operations, the Company may, among other things,
enter into joint ventures or outsourcing agreements with third parties,
acquire rights to high-bandwidth transmission capability, acquire
complementary businesses or operations, or establish and maintain new
operations outside of the United States. In addition, the rate of development
and adoption of the Internet has been slower outside of the United States, and
the cost of bandwidth has been higher, which may adversely affect the
Company's ability to expand its operations and may increase its cost of
operations internationally. In addition to the uncertainty as to the Company's
ability to expand into international markets, there are certain risks inherent
in conducting business internationally, such as unexpected changes in
regulatory requirements, export restrictions, tariffs and other trade
barriers, challenges in staffing and managing foreign operations, differing
technology standards, employment laws and practices in foreign countries,
longer payment cycles, problems in collecting accounts receivable, political
instability, fluctuations in currency exchange rates, imposition of currency
exchange controls, seasonal reductions in business activity and potentially
adverse tax consequences, any of which could adversely affect the Company's
international operations. Furthermore, certain foreign governments, such as
Germany, have enforced laws and regulations related to content distributed
over the Internet that are more strict than those currently in place in the
United States. There can be no assurance that one or more of these factors
will not have a material adverse effect on the Company's current or future
international operations and, consequently, on the Company's business, results
of operations and financial condition. In addition, there can be no assurance
that the Company will be able to obtain the necessary telecommunications
infrastructure in a cost-effective manner or compete effectively in
international markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends in significant part upon the continued
services of its key technical, sales and senior management personnel. Although
certain of the Company's executive officers participate in the Company's
Executive Employment Policy, none of the Company's officers is a party to an
employment agreement with the Company. Any officer or employee of the Company
can terminate his or her relationship with the Company at any time. The
Company's future success will also depend on its ability to attract, train,
retain and motivate highly qualified technical, marketing, sales and
management personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to attract and retain key
personnel. The loss of the services of one or more of the Company's key
employees or the Company's failure to attract additional qualified personnel
could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company does not carry key-man life
insurance for any of its employees. See "Business--Employees" and
"Management."
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
The Company believes that its future growth depends, in part, upon the
acquisition of complementary businesses, products, services or technologies.
There can be no assurance that the Company will successfully identify, acquire
on favorable terms or integrate such businesses, products, services or
technologies. The Company may face competition for acquisition opportunities,
which may inhibit the Company's ability to
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consummate suitable acquisitions and increase the costs of completing and the
time required to complete such acquisitions. Any such acquisitions will
require the Company to manage and integrate such acquired businesses,
products, services or technologies, coordinate (and possibly change) the
diverse operating structures, policies and practices of the acquired entities
and to integrate new employees into the Company's organization and culture.
Failure to integrate and manage acquired businesses, products, services and
technologies successfully could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, future acquisitions by the Company may result in the incurrence of
additional debt, large one-time write-offs and the creation of goodwill or
other intangible assets that could result in amortization expenses. These
factors could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of copyright, trademark, service mark
and trade secret laws and contractual restrictions to establish and protect
certain proprietary rights in its products and services. The Company currently
has no patented technology that would preclude or inhibit competitors from
entering the Company's market. The Company has entered into confidentiality
and invention assignment agreements with its employees and contractors, and
nondisclosure agreements with its suppliers, distributors and appropriate
customers in order to limit access to and disclosure of its proprietary
information. There can be no assurance that these contractual arrangements or
the other steps taken by the Company to protect its intellectual property will
prove sufficient to prevent misappropriation of the Company's technology or to
deter independent third-party development of similar technologies. The laws of
certain foreign countries may not protect the Company's products, services or
intellectual property rights to the same extent as do the laws of the United
States. The Company also relies on certain technologies that it licenses from
third parties, such as Computer Associates. See "--Dependence on Third-Party
Suppliers." There can be no assurance that these third-party technology
licenses will continue to be available to the Company on commercially
reasonable terms. The loss of such technology could require the Company to
obtain substitute technology of lower quality or performance standards or at
greater cost, which could materially adversely affect the Company's business,
results of operations and financial condition.
The Company has determined increasingly to develop or acquire additional
proprietary intellectual property in addition to licensing technologies from
third parties. There can be no assurance that third parties will not claim
infringement by the Company with respect to current or future products or
services, particularly if such products or services include more of its own
proprietary technology. The Company expects that participants in its markets
will be increasingly subject to infringement claims as the number of products
and services and competitors in the Company's industry segment grows. Any such
claim, whether meritorious or not, could be time consuming, result in costly
litigation, cause product installation delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements
might not be available on terms acceptable to the Company or at all. As a
result, any such claim could have a material adverse effect upon the Company's
business, results of operations and financial condition. See "Business--
Intellectual Property Rights."
YEAR 2000 RISKS
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, in less than two
years, computer systems or applications used by many companies in a wide
variety of industries will experience operating difficulties unless the
systems or applications are modified to process information related to the
century change adequately. Significant uncertainty exists in the software and
other industries concerning the scope and magnitude of problems associated
with the century change. To the extent Year 2000 issues cause significant
delay in, or cancellation of, decisions to purchase the Company's products or
product support, due to the reallocation of resources to address Year 2000
issues or otherwise, the Company's business, results of operations and
financial condition could be materially adversely affected.
Products. Based on its assessment to date, the Company believes that the
current versions of its products are either "Year 2000 compliant" or will not
require substantial effort or cost to make them Year 2000
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compliant. However, many of the Company's customers maintain their Internet
operations on servers which may be impacted by Year 2000 complications. The
failure of the Company's customers to ensure that their servers are Year 2000
compliant could have a material adverse effect on the Company's customers,
which in turn could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the costs of
defending and resolving Year 2000 related disputes, and any liability of the
Company for Year 2000-related damages, including consequential damages, could
have a material adverse effect on the Company's business, results of
operations and financial condition.
Operations. The Company has reviewed, and continues to review, its internal
management information and other systems in order to identify and modify those
products, services or systems that may not be Year 2000 compliant. Based on
its assessment to date, the Company believes that its internal management
information and other systems are either Year 2000 compliant or will not
require substantial effort or cost to make them Year 2000 compliant. The total
cost of these Year 2000 compliance activities has not been material to date.
There can be no assurance that the Company will identify and remedy any Year
2000 problems in a timely fashion, that remedial efforts in this regard will
not involve significant time and expense, or that such problems will not have
a material adverse effect on the Company's business, results of operations and
financial condition. The Company faces additional risk to the extent that
suppliers of products, services and systems purchased by the Company and
others with whom the Company transacts business are not Year 2000 compliant.
In the event that any such third parties cannot provide the Company with
products, services or systems that are Year 2000 compliant on a timely basis
(or in the event that Year 2000 issues prevent such third parties from
delivering products, services or systems required by the Company on a timely
basis), the Company's business, results of operations and financial condition
could be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS
The net proceeds to the Company from the sale of the Old Notes, after
deducting the underwriting discount and estimated offering expenses, are
estimated to be approximately $193.0 million. Approximately $42.4 million of
the net proceeds from the sale of the Old Notes are being held in an Escrow
Account for the benefit of the Holders of the Notes to fund when due the first
four scheduled interest payments on the Notes. The Company expects to use the
remaining net proceeds primarily (i) to fund accelerated expansion of the
Company's Internet Data Centers and facilities, including capital expenditures
and operating expenses associated with the initial operation of such Internet
Data Centers and facilities, and expansion of the Company's network
infrastructure, and (ii) for other general corporate purposes, including
increased research and development and the possible acquisition of or
investment in complementary businesses, products, services or technologies.
Accordingly, the Company's management has broad discretion as to the
allocation of the proceeds from the sale of the Old Notes. The failure of
management to apply such funds effectively could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Use of Proceeds."
ABILITY TO EFFECT REPURCHASE OF THE NOTES UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company may be required to
purchase all or a portion of the Notes then outstanding at a purchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase. Prior to commencing such an offer
to purchase, the Company may be required to (i) repay in full all indebtedness
of the Company that would prohibit the repurchase of the Notes, including
under the Credit Facility, or (ii) obtain any consent required to make the
repurchase. If the Company is unable to repay all of such indebtedness or is
unable to obtain the necessary consents, the Company will be unable to offer
to purchase the Notes and that failure would constitute an Event of Default
under the Indenture. There is no assurance that the Company will have
sufficient funds available at the time of any Change of Control to repurchase
the Notes. The events that require a repurchase upon a Change of Control under
the Indenture may also constitute events of default under the Credit Facility
or other indebtedness of the Company. See "Description of the Notes--
Repurchase at the Option of Holders."
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BANKRUPTCY RELATED TO ESCROW AMOUNT
The right of the Trustee (as defined) under the Indenture and the Escrow
Agreement (as defined) to foreclose upon and sell Escrow Collateral (as
defined) upon the occurrence of an Event of Default on the Notes is likely to
be significantly impaired by applicable bankruptcy law if a bankruptcy or
reorganization case were to be commenced by or against the Company or one or
more of its subsidiaries. Under applicable bankruptcy law, secured creditors
such as the holders of the Notes are prohibited from foreclosing upon or
disposing of a debtor's property without prior bankruptcy court approval. See
"Description of Notes--Disbursement of Funds; Escrow Account."
CONTROL BY PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS
As of September 30, 1998, the Company's executive officers, directors and
greater than 5% stockholders (and their affiliates), in the aggregate, owned
approximately 33.5% of the Company's outstanding Common Stock. As a result,
such persons, acting together, will have the ability to significantly
influence matters submitted to stockholders of the Company for approval
(including the election and removal of directors and any merger, consolidation
or sale of all or substantially all of the Company's assets) as well as the
management and affairs of the Company. See "Management."
LACK OF PUBLIC MARKET FOR THE NOTES; VOLATILITY
The Old Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") Market. The New Notes will be
new securities, and there is no existing trading market for the New Notes.
Accordingly, there is no assurance regarding the future development of a
trading market for the New Notes or the ability of the holders, or the price
at which such holders may be able, to sell their New Notes. If such a market
were to develop, the New Notes could trade at prices that may be higher or
lower than the exchange tender price of the Old Notes. Prevailing market
prices from time to time will depend on many factors, including then existing
interest rates, the Company's operating results and cash flow and the market
for similar securities.
Consequently, even if a trading market for the New Notes does develop, there
is no assurance as to the liquidity of that market. The Company does not
intend to apply for listing or quotation of the New Notes on any securities
exchange or in the over-the-counter market.
In addition, the liquidity of, and trading markets for, the New Notes may be
adversely affected by declines in the market for high-yield securities
generally. Such a decline may adversely affect liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
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RECENT EVENTS
Third Quarter Results. On October 28, 1998, the Company reported revenues of
$14.5 million for the quarter ended September 30, 1998 compared to $3.4
million for the quarter ended September 30, 1997. The Company's revenues for
the nine months ended September 30, 1998 were $31.6 million compared to $7.5
million for the nine months ended September 30, 1997. These increases
reflected the continuing increase in the number of customers, increases in
revenues from existing customers and the opening of new Internet Data Centers.
Net loss and EBITDA loss (loss before interest, taxes, depreciation,
amortization and other non-cash charges) for the third quarter of 1998 were
$17.7 million and $9.4 million, respectively, compared to a net loss and
EBITDA loss of $6.6 million and $5.6 million, respectively, for the third
quarter of 1997. Net loss and EBITDA loss for the nine months ended September
30, 1998 were $45.1 million and $29.5 million, respectively, compared to a net
loss and EBITDA loss of $14.6 million and $12.5 million, respectively, for the
nine months ended September 30, 1997. These increases in the level of losses
reflect increases in both the three and nine month periods ended September 30,
1998 in cost of revenues to $16.4 million and $39.3 million, respectively;
marketing and sales expenses to $6.9 million and $20.5 million, respectively;
general and administrative expenses to $3.9 million and $9.5 million,
respectively; and product development expenses to $953,000 and $2.3 million,
respectively, reflecting the costs associated with opening and maintaining
additional Internet Data Centers, including the hiring of additional
employees. In addition, net interest expense increased to $4.0 million and
$5.1 million for the three and nine month periods ended September 30, 1998,
respectively, which reflected increased interest expenses associated with the
$200 million of Notes issued by the Company on July 1, 1998 and increased
borrowings under equipment loans and lease agreements to finance the
construction of Internet Data Centers and working capital lines of credit to
finance working capital for operations.
As of September 30, 1998, the Company's cash and cash equivalents was $191.0
million and its working capital was $163.0 million. As of that date, the
Company also had total bank borrowings, debt and capital lease obligations of
$244.3 million. For the nine months ended September 30, 1998, the Company used
net cash for operating activities of $31.2 million (primarily due to net
losses) and net cash for investing activities of $26.5 million (primarily due
to capital expenditures related to the construction of Internet Data Centers,
leasehold improvements, furniture and fixtures and computers and other
equipment) and generated net cash of $238.5 million from financing activities
(primarily due to the Company's $200 million Note offering in July 1998). As
of September 30, 1998, the Company had commitments under the capital leases
and noncancellable operating leases of $12.7 million and $92.5 million,
respectively, through 2010.
Arca Systems Acquisition. On October 2, 1998, the Company entered into an
Asset Purchase Agreement with CyberGuard Corporation under which it purchased
substantially all of the assets, including all of Arca's customer agreements,
and assumed certain liabilities of Arca Systems, Inc. ("Arca"), a wholly-owned
subsidiary of CyberGuard Corporation. Arca is a provider of advanced network
and system security consulting services and designs and develops security
technology solutions for complex and sensitive information systems. The
Company also hired Arca's 37 employees. Arca will operate as a wholly-owned
subsidiary of the Company. The consideration paid to CyberGuard Corporation in
connection with the purchase of assets, together with amounts paid to Arca
employees in connection with their initial employment by the Company and
expenses associated with these transactions, amounted to an aggregate of less
than $8 million.
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USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the New Notes
offered pursuant to the Exchange Offer. In consideration for issuing the New
Notes as contemplated in this Prospectus, the Company will receive in exchange
Old Notes in like principal amount, the terms of which are identical in all
respects to the New Notes except for certain transfer restrictions and
registration rights. The Old Notes surrendered in exchange for New Notes will
be retired and canceled and cannot be reissued. Accordingly, issuance of the
New Notes will not result in any increase in the indebtedness of the Company.
The estimated net proceeds from the sale of the Old Notes, after deducting
the underwriting discounts and estimated offering expenses, were approximately
$193.0 million. Approximately $42.4 million of such net proceeds were invested
in U.S. Government Securities (as defined) and held in an Escrow Account for
the benefit of the Holders of the Notes to fund when due the first four
scheduled interest payments on the Notes. The remaining net proceeds, together
with borrowings under the Credit Agreement, will be used primarily (i) to fund
accelerated expansion of the Company's Internet Data Centers and facilities,
including capital expenditures and operating expenses associated with the
initial operation of such Internet Data Centers and facilities, and expansion
of the Company's network infrastructure, and (ii) for other general corporate
purposes, including increased research and development and the possible
acquisition of or investment in complementary businesses, products, services
or technologies. In the ordinary course of business, the Company evaluates
potential acquisitions of such businesses, products and technologies. However,
the Company has no present commitments or agreements with respect to any
acquisition of any material businesses, products, services or technologies.
Pending such uses, the Company has invested the net proceeds from the sale of
the Old Notes in investment-grade, short-term, interest-bearing securities.
See "Risk Factors--Broad Management Discretion in Allocation of Proceeds" and
"--Bankruptcy Related to Escrow Amount."
31
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of June 30, 1998 on an actual basis and as adjusted to reflect the receipt
of the estimated net proceeds from the sale of the Old Notes and the
application of the net proceeds therefrom.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................. $60,720 $211,343
======= ========
Restricted cash and investments........................... 1,938 44,315
======= ========
Current portion of equipment loans, line of credit
facility and capital lease
obligations (1).......................................... 10,595 10,595
======= ========
Debt (excluding current maturities) (1):
Bank borrowings......................................... -- --
Equipment loans and line of credit facility............. 21,453 21,453
Capital lease obligations............................... 8,461 8,461
11 1/4% Senior Notes.................................... -- 200,000
Stockholders' equity (2):
Preferred stock, $0.001 par value: 5,000,000 shares
authorized, no shares issued or outstanding............ -- --
Common stock, $0.001 par value: 50,000,000 shares
authorized, 19,477,098 shares issued and outstanding... 19 19
Additional paid-in capital.............................. 115,160 115,160
Notes receivable from stockholders...................... (53) (53)
Deferred stock compensation............................. (1,641) (1,641)
Accumulated deficit..................................... (57,974) (57,974)
------- --------
Total stockholders' equity.............................. 55,511 55,511
------- --------
Total capitalization.................................. $85,425 $285,425
======= ========
</TABLE>
- --------
(1) See Notes 3, 6 and 8 of Notes to Financial Statements.
(2) Does not include (i) 3,259,412 shares of Common Stock issuable upon the
exercise of stock options outstanding under the Company's stock option
plans as of June 30, 1998 with a weighted average per share exercise price
of $6.69, (ii) 1,777,624 shares of Common Stock available for future grant
as of June 30, 1998 under the Company's stock and option plans or (iii)
246,557 shares of Common Stock issuable upon the exercise of warrants
outstanding as of June 30, 1998 with a weighted average per share exercise
price of $7.94. See Notes 5 and 8 of Notes to Financial Statements.
32
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The statement of operations data for each of the
years in the three-year period ended December 31, 1997, and the balance sheet
data as of December 31, 1996 and 1997, are derived from financial statements
of the Company that have been audited by KPMG Peat Marwick LLP, independent
auditors, and are included elsewhere in this Prospectus. The statement of
operations data for the six month periods ended June 30, 1997 and 1998 and the
balance sheet data as of June 30, 1998 are derived from unaudited financial
statements included elsewhere in this Prospectus. The balance sheet data as of
December 31, 1994 and 1995 are derived from financial statements of the
Company that have been audited by KPMG Peat Marwick LLP that are not included
herein. The statement of operations data for the years ended December 31, 1993
and 1994 and the three months ended March 31, June 30, September 30 and
December 31, 1997 and March 31 and June 30, 1998 and the balance sheet data as
of December 31, 1993, are derived from unaudited financial statements that are
not included herein. The unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods. Historical results are not necessarily indicative
of the results to be expected in the future, and results of interim periods
are not necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------- ------------------
JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $ 1,408 $ 3,130 $ 12,408 $ 4,062 $ 17,176
-------- -------- -------- -------- --------
Cost and expenses:
Cost of revenues............ 1,128 2,990 16,868 4,898 22,864
Marketing and sales......... 1,056 2,734 12,702 4,376 13,580
General and administrative.. 427 1,056 5,983 2,079 5,657
Product development......... 70 444 1,647 588 1,364
-------- -------- -------- -------- --------
Total cost and expenses..... 2,681 7,224 37,200 11,941 43,465
-------- -------- -------- -------- --------
Operating loss.............. (1,273) (4,094) (24,792) (7,879) (26,289)
Net interest expense........ 38 39 506 137 1,108
-------- -------- -------- -------- --------
Net loss.................... (1,311) (4,133) (25,298) (8,016) (27,397)
Cumulative dividends and
accretion on redeemable
convertible preferred
stock...................... -- -- (1,413) -- (2,014)
-------- -------- -------- -------- --------
Net loss attributable to
common stockholders......... $ (1,311) $ (4,133) $(26,711) $ (8,016) $(29,411)
======== ======== ======== ======== ========
Basic and diluted net loss
per share (1)............... $ (1.00) $ (2.16) $ (13.85) $ (4.16) $ (2.57)
======== ======== ======== ======== ========
Shares used in computing
basic and diluted net loss
per share (1)............... 1,315 1,914 1,928 1,927 11,460
======== ======== ======== ======== ========
STATEMENT OF CASH FLOWS DATA:
Net cash used for operating
activities.................. $ (453) $ (2,998) $(15,096) $ (5,493) $(16,670)
Net cash used for investing
activities.................. (77) (3,617) (22,911) (5,765) (17,842)
Net cash provided by
financing activities........ 692 10,167 44,562 23.884 84,962
OTHER DATA:
EBITDA (2)................... $ (1,208) $ (3,633) $(20,274) $ (6,917) $(20,062)
Depreciation and
amortization................ 65 461 3,429 962 4,689
Capital expenditures......... 69 3,499 22,489 5,765 17,842
Deficiency of earnings
available to cover fixed
charges (3)................. (1,311) (4,133) (25,298) (8,016) (27,397)
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
(2) Represents loss before net interest expense, income taxes, depreciation,
amortization (including amortization of deferred stock compensation) and
other noncash charges ("EBITDA"). Although EBITDA should not be used as an
alternative to operating loss or net cash provided by (used for) operating
activities, investing activities or financing activities, each as measured
under generally accepted accounting principles, and, although EBITDA may
not be comparable to other similarly titled information from other
companies, the Company's management believes that EBITDA is an additional
meaningful measure of performance and liquidity.
(3) Earnings consist of income (loss) before provision for income taxes plus
fixed charges. Fixed charges consist of interest charges and amortization
of debt expense and discount or premium related to indebtedness, whether
expensed or capitalized, and that portion of rental expense the Company
believes to be representative of interest.
33
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
-------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 1,669 $ 2,393 $ 3,443 $ 4,903 $ 7,105 $ 10,071
-------- -------- -------- -------- -------- --------
Cost and expenses:
Cost of revenues....... 1,899 2,999 4,644 7,326 9,881 12,983
Marketing and sales.... 1,630 2,746 3,291 5,035 6,417 7,163
General and
administrative........ 916 1,163 1,447 2,457 2,657 3,000
Product development.... 203 385 512 547 645 719
-------- -------- -------- -------- -------- --------
Total cost and
expenses............. 4,648 7,293 9,894 15,365 19,600 23,865
-------- -------- -------- -------- -------- --------
Operating loss......... (2,979) (4,900) (6,451) (10,462) (12,495) (13,794)
Net interest expense... 56 81 105 264 826 282
-------- -------- -------- -------- -------- --------
Net loss.............. (3,035) (4,981) (6,556) (10,726) (13,321) (14,076)
Cumulative dividends
and accretion on
redeemable convertible
preferred stock....... -- -- (823) (590) (2,014) --
-------- -------- -------- -------- -------- --------
Net loss attributable to
common stockholders.... $ (3,035) $ (4,981) $ (7,379) $(11,316) $(15,335) $(14,076)
======== ======== ======== ======== ======== ========
Basic and diluted net
loss per share(1)...... $ (4.46) $ (0.73)
======== ========
Shares used in computing
basic and diluted net
loss per share(1)...... 3,436 19,412
======== ========
STATEMENT OF CASH FLOWS
DATA:
Net cash used for
operating activities.. $ (1,554) $ (3,519) $ (4,147) $ (5,876) $ (7,760) $ (8,910)
Net cash used for
investing activities.. (2,802) (3,383) (8,841) (7,885) (7,146) (10,696)
Net cash provided by
financing activities.. 3,496 20,388 530 20,148 78,789 6,173
OTHER DATA:
EBITDA(2).............. $ (2,629) $ (4,288) $ (5,566) $ (7,791) $ (9,617) $(10,445)
Depreciation and
amortization.......... 350 612 800 1,667 1,975 2,714
Capital expenditures... 2,606 3,159 9,010 7,714 7,225 10,617
Deficiency of earnings
available to cover
fixed charges(3)...... (3,035) (4,981) (6,556) (10,726) (13,321) (14,076)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994
------------- ------------
(IN THOUSANDS, EXCEPT
RATIO AND PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(4):
Revenues......................................... $ 266 $ 977
Operating income................................. 19 143
Net income....................................... 19 144
Basic and diluted net income per share........... $ 0.02 $ 0.14
Shares used in computing basic and diluted net
income per share................................ 1,000 1,000
Ratio of earnings to fixed charges(3)............ 11x 25x
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
(2) Represents loss before net interest expense, income taxes, depreciation,
amortization (including amortization of deferred stock compensation) and
other noncash charges ("EBITDA"). Although EBITDA should not be used as an
alternative to operating loss or net cash provided by (used for) operating
activities, investing activities or financing activities, each as measured
under generally accepted accounting principles, and, although EBITDA may
not be comparable to other similarly titled information from other
companies, the Company's management believes that EBITDA is an additional
meaningful measure of performance and liquidity.
(3) Earnings consist of income (loss) before provision for income taxes plus
fixed charges. Fixed charges consist of interest charges and amortization
of debt expense and discount or premium related to indebtedness, whether
expensed or capitalized, and that portion of rental expense the Company
believes to be representative of interest.
(4) The Company is the successor to a Maryland corporation that was formed in
August 1992 to provide computer consulting services. The Company began to
offer Internet connectivity services to enterprises in October 1994 and
server hosting services in late 1995. In August 1996, the Company opened
its first dedicated Internet Data Center and refocused its business
strategy on providing Internet system and network management solutions for
enterprises with mission-critical Internet operations.
34
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
---- ---- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 2 $ 1 $ 163 $ 3,715 $ 10,270 $ 60,720
Restricted cash and
investments.................... - - - 378 1,753 1,938
Working capital (deficiency).... (5) 93 (1,170) 1,892 (3,707) 39,571
Total assets.................... 32 320 840 8,289 40,973 113,040
Equipment loans, line of credit
facility and capital lease
obligations, less current
portion........................ - - 141 1,449 15,135 29,914
Total stockholders' equity
(deficit)...................... 25 169 (1,140) (5,234) (30,600) 55,511
</TABLE>
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements. Factors that may cause such a
difference include, but are not limited to, those set forth under "Risk
Factors."
OVERVIEW
Exodus is a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations. The
Company's solutions include server hosting, Internet connectivity,
collaborative systems management and Internet technology services, which
together provide the high performance, scalability and expertise that
enterprises need to optimize Internet operations. The Company delivers its
services from geographically distributed, state-of-the-art Internet Data
Centers that are connected through a redundant high-performance national
Internet backbone ring.
The Company is the successor to a Maryland corporation that was formed in
August 1992 to provide computer consulting services. The Company began to
offer Internet connectivity services to enterprises in October 1994 and server
hosting services in late 1995. In August 1996, the Company opened its first
dedicated Internet Data Center and refocused its business strategy on
providing Internet system and network management solutions for enterprises
with mission-critical Internet operations. Since refocusing its business
strategy, the Company has derived most of its revenues (and substantially all
of its growth in revenues) from customers for which it provides these
services. Each of the Company's Internet Data Center customers initially
purchases a subset of the Company's service offerings to address specific
departmental or enterprise Internet computing needs, and some of these
customers purchase additional services as the scale and complexity of their
Internet operations increase. The Company sells its services under contracts
that typically have terms of one year. Customers pay monthly fees for the
services utilized, as well as one-time fees for installation and for any
equipment that they choose to purchase from the Company. Beginning with the
quarter ended March 31, 1998, the Company determined not to disclose
separately the portions of total revenues and cost of revenues consisting of
service revenues and equipment revenues, as equipment revenues had, for each
quarterly period beginning in 1997, represented less than 10% of total
revenues and the Company expected, and continues to expect, equipment revenues
to remain less than 10% of total revenues going forward. However, the
foregoing forward-looking statement is subject to risks and uncertainties,
such as the level of customer equipment demands, which could cause actual
results to differ materially.
The Company opened its first Internet Data Center in the San Francisco
metropolitan area in August 1996. Since that time, the Company has opened
seven additional domestic Internet Data Centers in the metropolitan areas of
New York (March 1997), San Francisco (second site--August 1997; third site--
June 1998), Seattle (September 1997), Los Angeles (October 1997), Washington,
D.C. (December 1997) and Boston (July 1998), and has a server hosting facility
in London. See "Business--Facilities." These facilities serve as a base for
the array of solutions offered by the Company, including server hosting,
Internet connectivity, collaborative systems management and Internet
technology services. The building of Internet Data Centers has required the
Company to obtain substantial equity and debt financing. See "Risk Factors--
Substantial Leverage and Debt Service" and "--Liquidity and Capital Resources"
below.
The Company intends to expand domestically and internationally, including
the expected opening of additional Internet Data Centers in the Washington,
D.C. and Seattle metropolitan areas and Internet Data Centers in the Chicago
metropolitan area in the first quarter of 1999 and the London metropolitan
area in the second quarter of 1999. Prior to building an Internet Data Center
in a new geographic region, the Company employs various means to evaluate the
market opportunity in a given location, including the use of focus groups and
market research on Internet usage statistics, the pre-selling of services into
the proposed market and analysis
36
<PAGE>
of specific financial criteria. The Company typically requires at least six
months to select the appropriate location for an Internet Data Center,
construct the necessary facilities, install equipment and telecommunications
infrastructure, and hire the operations and sales personnel needed to conduct
business at that site. Expenditures related to an Internet Data Center
commence well before the Internet Data Center opens, and it takes an extended
period to approach break-even capacity utilization at each site. As a result,
the Company expects that individual Internet Data Centers will experience
losses in excess of one year from the time they are opened. The Company
experiences further losses from sales personnel hired to test market the
Company's services in markets where there is no, and may never be an, Internet
Data Center. As a result, the Company expects to make investments in expanding
the Company's business rapidly into new geographic regions which, while
potentially increasing the Company's revenues in the long term, will lead to
significant losses for the foreseeable future. See "Risk Factors--Risks
Associated with Accelerated Business Expansion" for risks related to the
foregoing forward-looking statements.
Since the Company began to offer server hosting services in 1995, it has
experienced operating losses and negative cash flows from operations in each
quarterly and annual period. As of September 30, 1998, the Company had an
accumulated deficit of approximately $75.6 million. The revenue and income
potential of the Company's business and market is unproven, and the Company's
limited operating history makes an evaluation of the Company and its prospects
difficult. Currently, the Company anticipates making significant investments
in new Internet Data Centers, product development and sales and marketing
programs and personnel and therefore believes that it will continue to
experience net losses on a quarterly and annual basis for the foreseeable
future. The Company and its prospects must be considered in light of the
risks, expenses and difficulties encountered by companies in the new and
rapidly evolving market for Internet system and network management solutions.
To address these risks, among other things, the Company must market its brand
name effectively, provide scalable, reliable and cost-effective services,
continue to grow its infrastructure to accommodate new Internet Data Centers
and increased bandwidth use of its network, expand its channels of
distribution, retain and motivate qualified personnel and continue to respond
to competitive developments. Failure of the Company's products and services to
achieve market acceptance would have a material adverse effect on the
Company's business, results of operations and financial condition. There can
be no assurance that the Company will ever achieve profitability on a
quarterly or an annual basis or will sustain profitability if achieved. See
"Risk Factors--Limited Operating History; History of Losses" for risks related
to the foregoing forward-looking statements.
37
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the three months ended March 31, June 30,
September 30 and December 31, 1997 and March 31 and June 30, 1998. This
information has been derived from the Company's unaudited financial
statements, which, in management's opinion, have been prepared on
substantially the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the financial information for the quarters
presented. This information should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. The
operating results in any quarter are not necessarily indicative of the results
for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------
Cost and expenses:
Cost of revenues...... 113.8 125.3 134.9 149.4 139.1 128.9
Marketing and sales... 97.7 114.8 95.6 102.7 90.3 71.1
General and
administrative....... 54.9 48.6 42.0 50.1 37.4 29.8
Product development... 12.1 16.0 14.8 11.2 9.1 7.1
------ ------ ------ ------ ------ ------
Total cost and
expenses........... 278.5 304.7 287.3 313.4 275.9 236.9
------ ------ ------ ------ ------ ------
Operating loss.......... (178.5) (204.7) (187.3) (213.4) (175.9) (136.9)
Net interest expense.... 3.4 3.4 3.1 5.4 11.6 2.8
------ ------ ------ ------ ------ ------
Net loss............ (181.9)% (208.1)% (190.4)% (218.8)% (187.5)% (139.7)%
====== ====== ====== ====== ====== ======
</TABLE>
Revenues
The Company's revenues consist of service revenues and equipment revenues.
Service revenues consist of monthly fees for server hosting, Internet
connectivity, collaborative systems management and Internet technology
services and one-time fees for installation. Service revenues (other than
installation fees) are generally billed and recognized ratably over the term
of the contract, generally one year. Installation fees are typically
recognized at the time that installation occurs. Equipment revenues consist of
sales to customers of third-party equipment, as an accommodation to facilitate
their purchase of services; thus, the Company's equipment revenues have varied
from quarter to quarter depending on particular customer needs. Revenues from
equipment sales are recognized at the time the equipment is shipped to the
customer or placed into service at an Internet Data Center. The Company's
customers generally do not have the right to return equipment purchased from
the Company, although the Company may elect from time to time to accept such a
return.
The Company's revenues increased sequentially each quarter with an overall
increase from $1.7 million in the quarter ended March 31, 1997 to $10.1
million in the quarter ended June 30, 1998. This growth in revenues resulted
primarily from the growth in the Company's service revenues due to increases
in the number of customers, increases in revenues per customer and the opening
of new Internet Data Centers. During 1997 and the first half of 1998, more
than 90% of the Company's total revenues were derived from service revenues,
and the Company expects that it will continue to derive substantially all of
its revenues from service revenues in the foreseeable future. However, the
foregoing forward-looking statement is subject to risks and uncertainties,
such as the level of customer equipment demands, which could cause actual
results to differ materially.
Cost of Revenues
Cost of revenues consists of cost of service revenues and cost of equipment
revenues. The Company's cost of service revenues is comprised primarily of the
Company's costs for its nationwide backbone network and local telco loops,
salaries and benefits for the Company's customer service and operations
personnel (including its
38
<PAGE>
network engineers, backbone engineers, network management and systems
personnel and installers), and depreciation, rent, repairs and utilities
related to the Company's Internet Data Centers. Cost of equipment revenues
represents the cost to the Company of third-party equipment sold to customers.
The Company's cost of revenues increased sequentially each of the last six
quarters, with an overall increase from $1.9 million in the quarter ended
March 31, 1997 to $13.0 million in the quarter ended June 30, 1998. Cost of
revenues as a percentage of revenues increased sequentially each quarter
through the quarter ended December 31, 1997 then declined somewhat in the
quarters ended March 31 and June 30, 1998, with an overall increase during the
periods presented from 113.8% in the quarter ended March 31, 1997 to 128.9% in
the quarter ended June 30, 1998. The overall increase in cost of revenues in
absolute dollars and as a percentage of revenues was primarily the result of
wages, depreciation and other costs associated with opening additional
Internet Data Centers, and the increased costs for the Company's network
infrastructure. The decrease in cost of revenues as a percentage of revenues
in the quarters ended March 31 and June 30, 1998 from the prior quarters
resulted from revenue growing faster than the Company's associated costs. Cost
of service revenues for each quarter represented in excess of 90% of cost of
revenues, and the Company expects that cost of service revenues will
constitute substantially all of its cost of revenues in the foreseeable
future. However, the foregoing forward-looking statement is subject to risks
and uncertainties, such as the level of customer equipment demands, which
could cause actual results to differ materially. The Company expects that its
cost of revenues as a percentage of revenues may remain above 100% through
most of the first half of 1999. However, the foregoing forward-looking
statement is subject to risks and uncertainties, such as the level of revenues
achieved by the Company. See "Risk Factors--Potential Fluctuations in
Operating Results."
Marketing and Sales
The Company's marketing and sales expenses are comprised primarily of
salaries and benefits for the Company's marketing and sales personnel,
printing and advertising costs, consultants' fees and travel and entertainment
expenses. Marketing and sales expenses have increased sequentially in each of
the last six quarters as a result of increased marketing and sales personnel,
increased marketing program expenses and other marketing efforts. Marketing
and sales expenses as a percentage of total revenues fluctuated from quarter
to quarter primarily due to increases in headcount and the timing of
advertising and other promotional activities such as trade shows. The Company
expects that marketing and sales expenses will continue to increase in
absolute dollars during the remainder of 1998 but will continue the decline as
a percentage of total revenues experienced in the quarters ended March 31 and
June 30, 1998 as recurring revenues from existing customers, which tend to
have lower marketing and sales expenses associated with them, become a higher
percentage of total revenues. However, the foregoing forward-looking statement
is subject to risks and uncertainties such as risks associated with the
Company's achievement of anticipated levels of revenues and expenses and
competition. See "Risk Factors--Competition," "--Dependence on New Market" and
"--Uncertainty of Acceptance of Services."
General and Administrative
The Company's general and administrative expenses consist primarily of
salaries and benefits for the Company's administrative and management
information systems personnel and fees paid for professional services and
recruiting. General and administrative expenses have increased primarily as a
result of additional personnel, recruiting fees, professional fees and
consulting costs. General and administrative expenses as a percentage of total
revenues increased during the quarters ended March 31 and June 30, 1997 due to
increased professional services and recruiting fees and increased during the
quarter ended December 31, 1997 primarily as a result of $656,000 of
amortization of deferred compensation expense and $278,000 of professional
services and recruiting fees. General and administrative expenses for the
quarters ended March 31 and June 30, 1998 decreased significantly as a
percentage of total revenues from the prior quarter due to faster growing
revenues and improved operating efficiencies and, with respect to the quarter
ended March 31, 1998, lower stock compensation expenses. The Company expects
that general and administrative expenses will continue to increase in absolute
dollars but will continue to decline as a percentage of total revenues as
existing overhead is spread
39
<PAGE>
over more substantial operations. However, the foregoing forward-looking
statement is subject to risks and uncertainties, such as risks associated with
the Company's achievement of anticipated levels of revenues and expenses,
which may cause actual results to differ materially. See "Risk Factors--
Potential Fluctuations in Operating Results."
Product Development
The Company's product development expenses consist primarily of salaries and
benefits for the Company's product development personnel and fees paid to
consultants, all of whom focus their efforts primarily on the integration of
best-of-breed products and services developed by leading technology vendors
with the Company's services and the development of the Company's proprietary
technologies. Product development expenses have increased in absolute dollars
every quarter since March 31, 1997 as a result of continuing efforts to
integrate and enhance best-of-breed third-party technologies to support the
Company's service offerings. Product development expenses as a percentage of
total revenues decreased during 1997 and the first two quarters of 1998
generally due to revenues growing faster than product development expenses.
However, from March 31, 1997 to June 30, 1997, product development expenses
increased as a percentage of total revenues due to an acceleration in the
costs of product development employees and consultants at a higher rate than
revenues. The Company expects that product development expenses will continue
to increase in absolute dollars as the Company makes additional investments in
developing proprietary technology, particularly related to its collaborative
systems management services, but will decline as a percentage of total
revenues as existing costs are spread over a larger revenue base. However, the
foregoing forward-looking statement is subject to risks and uncertainties,
such as risks associated with the Company's achievement of anticipated levels
of revenues and expenses, which may cause actual results to differ materially.
See "Risk Factors--Potential Fluctuations in Operating Results."
Stock Compensation Expense
In the quarters ended September 30 and December 31, 1997, the Company
recorded aggregate deferred stock compensation of approximately $3.5 million
in connection with the grant of certain stock options from March through
December 1997, which amount is generally being amortized over the 50 month
vesting period of such options. This amortization is being recorded in a
manner consistent with Financial Accounting Standards Board ("FASB")
Interpretation No. 28. The Company also recorded stock compensation of
approximately $261,000 in connection with stock grants in the quarter ended
June 30, 1998. Of the total deferred stock compensation, approximately $85,000
was amortized in the quarter ended September 30, 1997, approximately $1.0
million was amortized in the quarter ended December 31, 1997, approximately
$378,000 was amortized in the quarter ended March 31, 1998 and approximately
$374,000 was amortized in the quarter ended June 30, 1998. The Company expects
amortization of approximately $600,000 during the remainder of 1998, $700,000
during 1999, $300,000 during 2000 and $100,000 during 2001 related to these
options. These amortization amounts are allocated among the expense categories
discussed above. See Note 5 of Notes to Financial Statements.
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<PAGE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
The following table sets forth certain statement of operations data as a
percentage of total revenues for the years ended December 31, 1995, 1996 and
1997 and the six months ended June 30, 1997 and 1998. The information for the
years ended December 31, 1995, 1996 and 1997 has been derived from the
Company's audited financial statements included in this Prospectus. The
information for the six month periods ended June 30, 1997 and 1998 has been
derived from the Company's unaudited financial statements included in this
Prospectus, which, in management's opinion, have been prepared on
substantially the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the financial information for the quarters
presented. This information should be read in conjunction with the Financial
Statements and Notes thereto included herein. The operating results in any
quarter are not necessarily indicative of the results to be expected for any
future period.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -------------------
1995 1996 1997 1997 1998
----- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ------ ------ -------- --------
Cost and expenses:
Cost of revenues............. 80.1 95.5 135.9 120.6 133.1
Marketing and sales.......... 75.0 87.3 102.4 107.7 79.1
General and administrative... 30.3 33.8 48.2 51.2 32.9
Product development.......... 5.0 14.2 13.3 14.5 7.9
----- ------ ------ -------- --------
Total cost and expenses.... 190.4 230.8 299.8 294.0 253.0
----- ------ ------ -------- --------
Operating loss................. (90.4) (130.8) (199.8) (194.0) (153.0)
Net interest expense........... 2.7 1.2 4.1 3.4 6.5
----- ------ ------ -------- --------
Net loss................... (93.1)% (132.0)% (203.9)% (197.4)% (159.5)%
===== ====== ====== ======== ========
</TABLE>
Revenues
The Company's revenues increased 122% from $1.4 million in 1995 to $3.1
million in 1996 and increased an additional 296% to $12.4 million in 1997.
Service revenues increased 130% from $1.1 million in 1995 to $2.5 million in
1996. The growth in the Company's service revenues from 1995 to 1996 resulted
primarily from an increase in the number of customers to which the Company
provided Internet connectivity and to a lesser extent from an increase in
service revenues per Internet connectivity customer. Service revenues
increased 372% from $2.5 million in 1996 to $11.6 million in 1997. This growth
in service revenues was primarily the result of opening the Company's first
two Internet Data Centers in August 1996 and March 1997, increases in the
number of new customers, substantially all of which were Internet Data Center
customers, and increases in revenues per customer. Service revenue as a
percentage of total revenues increased from 75.9% in 1995 to 78.4% in 1996 and
to 93.4% in 1997. The Company sells third-party equipment to its customers as
an accommodation to facilitate their purchase of services. The Company's
equipment revenues increased 99% from $340,000 in 1995 to $676,000 in 1996 and
increased an additional 21% to $820,000 in 1997.
The Company's revenues increased 323% to $17.2 million for the six months
ended June 30, 1998 from $4.1 million in the same period of the prior year.
This growth in revenues resulted primarily from increases in the number of
customers, increases in revenues from existing customers and the opening of
new Internet Data Centers.
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Cost of Revenues
Cost of service revenues increased from $846,000 in 1995 to $2.5 million in
1996 and to $16.2 million in 1997. The Company's cost of service revenues as a
percentage of service revenues increased from 79% in 1995 to 103% in 1996 and
to 140% in 1997. The increases in cost of service revenues in absolute dollars
and as a percentage of service revenues were due to increased costs associated
with the build-out and operation of the Company's increasing number of
Internet Data Centers, including increased costs for its network backbone and
local telco loops, salaries and benefits for its customer service and
operations personnel, depreciation and rent. Costs for the Company's network
backbone and local telco loops increased by approximately $834,000 from 1995
to 1996 and by approximately $3.8 million from 1996 to 1997. Salaries and
benefits for its customer service and operations personnel increased by
approximately $341,000 from 1995 to 1996 and by approximately $3.5 million
from 1996 to 1997. Depreciation increased by approximately $346,000 from 1995
to 1996 and by approximately $3.0 million from 1996 to 1997. Rent expense
increased by approximately $36,000 from 1995 to 1996 and by approximately
$945,000 from 1996 to 1997. Cost of equipment revenues increased from $282,000
in 1995 to $452,000 in 1996 and to $640,000 in 1997. Cost of equipment
revenues varies primarily as a result of equipment revenues and, to a lesser
extent, the mix of equipment purchased by customers.
The Company's cost of revenues increased 367% to $22.9 million for the six
months ended June 30, 1998 from $4.9 million in the same period of the prior
year. Cost of revenues as a percentage of revenues increased to 133% for the
six months ended June 30, 1998 from 121% in the same period of the prior year.
These increases in cost of revenues in absolute dollars and as a percentage of
revenues were primarily the result of costs associated with the opening of
additional Internet Data Centers, including the hiring of additional
employees, and the Company's expansion and increased capacity of its
nationwide backbone network.
Marketing and Sales
The Company's marketing and sales expenses increased from $1.1 million in
1995 to $2.7 million in 1996 and to $12.7 million in 1997. These increases
were primarily the result of hiring additional marketing and sales personnel
and expanding marketing programs in connection with the Company's expansion of
its operations, including the number and scope of its Internet system and
network management solutions. Salaries and benefits for its sales and
marketing personnel increased by approximately $649,000 from 1995 to 1996 and
by approximately $6.1 million from 1996 to 1997, and costs associated with
tradeshows and advertising increased by approximately $328,000 from 1995 to
1996 and by approximately $977,000 from 1996 to 1997.
The Company's marketing and sales expenses increased 210% to $13.6 million
(including a one-time non-cash charge of $525,000 related to a warrant issued
to At Home Corporation in the first quarter of 1998 in connection with a
distribution relationship) for the six months ended June 30, 1998 from $4.4
million in the same period of the prior year. Marketing and sales expenses
increased as a result of additional marketing and sales personnel, increased
travel and entertainment expenses, increased trade shows and marketing events
and increased public relations expenses. Marketing and sales expenses as a
percentage of revenues decreased to 79% for the six months ended June 30, 1998
from 108% in the same period of the prior year. This decline was due primarily
to increased recurring revenues from existing customers, which tend to have
lower marketing and sales associated with them, as well as the Company's
general significant increase in revenues between the comparison periods.
General and Administrative
The Company's general and administrative expenses increased from $427,000 in
1995 to $1.1 million in 1996 and to $6.0 million in 1997. These increases were
primarily the result of increased hiring of general and administrative
personnel, costs for consultants and professional services providers, fees
paid for recruiting and amortization of deferred compensation. Salaries and
benefits for general and administrative personnel increased by approximately
$202,000 from 1995 to 1996 and by approximately $2.0 million from 1996 to
1997. Costs for consultants and professional services providers increased by
approximately $57,000 from 1995 to 1996 and by approximately $1.1 million from
1996 to 1997. Recruiting fees increased by approximately $193,000 from 1995
42
<PAGE>
to 1996 and by approximately $968,000 from 1996 to 1997. These increased
expenses reflected the Company's need for additional general and
administrative personnel to handle the expansion of the Company's operations.
The amortization of deferred compensation included in general and
administrative expenses was $741,000 in 1997, and there was no such expense
recorded in 1995 or 1996. See "--Stock Compensation Expense" below.
The Company's general and administrative expenses increased 172% to $5.7
million for the six months ended June 30, 1998 from $2.1 million in the same
period of the prior year. General and administrative expenses increased
primarily as a result of additional personnel and increased professional and
recruiting services. General and administrative expenses as a percentage of
revenues decreased to 33% for the six months ended June 30, 1998 from 51% in
the same period of the prior year. This decline was due primarily to the
Company's significant increase in revenues between the comparison periods.
Product Development
The Company's product development expenses increased from $70,000 in 1995 to
$444,000 in 1996 and to $1.6 million in 1997. The Company's product
development expenses grew between the comparison periods primarily because of
the addition of product development personnel to support the Company's
expanded service offerings.
The Company's product development expenses increased 132% to $1.4 million
for the six months ended June 30, 1998 from $588,000 in the same period of the
prior year. Product development expenses increased as a result of additional
personnel and the increase in fees paid to consultants. Product development
expenses as a percentage of revenues decreased to 8% for the six months ended
June 30, 1998 from 15% in the same period of the prior year. This decline was
due primarily to the Company's significant increase in revenues between the
comparison periods.
Net Interest Expense
The Company's net interest expense increased from $38,000 in 1995 to $39,000
in 1996 and to $506,000 in 1997. The increases in net interest expense between
the comparison periods were primarily the result of substantially increased
borrowings as the Company entered into equipment loans and lease agreements to
finance the construction of its Internet Data Centers.
The Company's net interest expense increased to $1.1 million for the six
months ended June 30, 1998 from $137,000 in the same period of the prior year.
The increase in net interest expense between the comparison periods was
primarily the result of substantially increased borrowings as the Company
entered into equipment loans and lease agreements to finance the construction
and expansion of its Internet Data Centers and working capital lines of credit
to finance working capital for its operations. The Company expects that net
interest expense will increase substantially as the Company begins to incur
interest payment obligations on the Notes and as the Company enters into
additional equipment leases and loans and obtains additional borrowings.
Stock Compensation Expense
During 1997, the Company recorded deferred stock compensation of
approximately $3.5 million in connection with the grant of certain stock
options from March through December 1997, which amount is generally being
amortized over the 50 month vesting period of such options. Of this amount,
approximately $1.1 million was amortized in 1997. The Company had stock
compensation expense of $1.0 million for the six months ended June 30, 1998
and had no such expense in the same period of the prior year. This
amortization is being recorded in a manner consistent with FASB Interpretation
No. 28. See Note 5 of Notes to Financial Statements.
EBITDA
The Company's loss before interest, taxes, depreciation, amortization and
other non-cash charges ("EBITDA") was $1.2 million in 1995, $3.6 million in
1996 and $20.3 million in 1997. EBITDA losses
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<PAGE>
increased from $6.9 million for the six months ended June 30, 1997 to $20.1
million for the six months ended June 30, 1998. The increases in the level of
EBITDA losses between the comparison periods was primarily due to increased
expenditures needed to support the Company's growth in operations, including
salaries and benefits for additional employees, network costs, rent, utilities
and other costs related to the increase in the number of Company's Internet
Data Centers as well as increased marketing and sales expenses, consulting
fees and professional services. Although EBITDA should not be used as an
alternative to operating loss or net cash provided by (used for) operating
activities, investing activities or financing activities, each as measured
under generally accepted accounting principles, the Company's management
believes that EBITDA is an additional meaningful measure of performance and
liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Since inception and through June 30, 1998, the Company has financed its
operations primarily through private sales of preferred stock, its initial
public offering in March 1998 and through various types of equipment loans and
lease lines and working capital lines of credit. At June 30, 1998, the
principal source of liquidity for the Company was $60.7 million of cash and
cash equivalents. As of that date, the Company also had equipment loans and
lease lines and working capital lines of credit under which it could borrow up
to an additional aggregate of $10.4 million for purchases of equipment and for
working capital. On July 1, 1998, the Company incurred an additional $200
million of indebtedness in connection with the issuance of the Old Notes. See
Note 8 of Notes to Financial Statements and "Description of Notes." In
addition, the Company expects to enter into the Credit Facility, under which
the Company will be permitted to borrow up to approximately $25.0 million or
up to approximately $50.0 million upon meeting certain financial tests.
However, there can be no assurance as to whether, or on what terms, the
Company will obtain the Credit Facility. See "Description of New Credit
Facility."
Since the Company began to offer server hosting services in 1995, the
Company has had significant negative cash flows from operating activities. Net
cash used for operating activities in 1995, 1996 and 1997 was $453,000, $3.0
million and $15.1 million, respectively. Net cash used for operating
activities for the six months ended June 30, 1998 was $16.7 million. Net cash
used for operating activities in each of these periods was primarily due to
net losses, offset in part by increases in accounts payable and accrued
expenses and depreciation and amortization.
Net cash used for investing activities in 1995, 1996 and 1997 was $77,000,
$3.6 million and $22.9 million, respectively. Net cash used for investing
activities in the six months ended June 30, 1998 was $17.8 million. Net cash
used for investing activities in each of these periods was due to capital
expenditures for the continued construction of Internet Data Centers,
leasehold improvements, furniture and fixtures, and computers and other
equipment. Cash provided by financing activities in 1995, 1996 and 1997 was
$692,000, $10.2 million and $44.6 million, respectively. Of this cash, $9.4
million in 1996 and $23.3 million in 1997 resulted from the issuance of
Preferred Stock, net of issuance costs, and related warrants, and $490,000,
$719,000 and $17.0 million in 1995, 1996 and 1997 resulted from debt, bank
borrowings and sale-leaseback financings offset by payments thereon and
required restricted deposits. Cash provided by financing activities for the
six months ended June 30, 1998 was $85.0 million, primarily due to the
proceeds from the Company's initial public offering.
As of June 30, 1998, the Company had commitments under capital leases and
under noncancellable operating leases of $11.8 million and $31.9 million,
respectively, through 2010. The Company intends to make significant capital
expenditures during the next 12 months, primarily for property and equipment,
in particular equipment needed for existing and future Internet Data Centers,
as well as office equipment, computers and telephones. The Company expects to
finance such capital expenditures primarily through existing and future
equipment loans and lease lines, net proceeds from the sale of the Old Notes
and borrowings under the expected Credit Facility. The Company expects to meet
its working capital and capital expenditure requirements over the next 12
months with existing cash and cash equivalents and short-term investments
including the proceeds from the sale of the Old Notes, borrowings under the
expected Credit Facility, cash from sales of services and proceeds from
existing and future working capital lines of credit. The Company may enter
into additional equipment loans and capital leases. The Company may also seek
to raise additional funds through public or private financing,
44
<PAGE>
strategic relationships or other arrangements. There can be no assurance that
the Company will be successful in generating sufficient cash flows from
operations or raising capital in sufficient amounts on terms acceptable to it.
See "Risk Factors--Risks Associated with Accelerated Business Expansion."
FACTORS AFFECTING RESULTS OF OPERATIONS
The Company expects to experience significant fluctuations in its future
quarterly and annual results of operations due to a variety of factors, many
of which are outside the Company's control including: demand for and market
acceptance of the Company's services and enhancements; introductions of
services or enhancements by the Company and its competitors; capacity
utilization of its Internet Data Centers; reliable continuity of service and
network availability; the ability to increase bandwidth as necessary; the
timing of customer installations; providing customer discounts and credits;
the mix of services sold by the Company; customer retention and satisfaction;
the timing and success of marketing efforts and service introductions by the
Company; the timing and magnitude of capital expenditures, including
construction costs relating to the expansion of operations; the timely
expansion of existing Internet Data Centers and completion of new Internet
Data Centers; costs related to the acquisition of backbone capacity; the
introduction by third parties of new Internet and networking technologies;
increased competition in the Company's markets; changes in the pricing
policies of the Company and its competitors; fluctuations in bandwidth used by
customers; the retention of key personnel; economic conditions specific to the
Internet industry; and other general economic factors. In addition, a
relatively large portion of the Company's expenses are fixed in the short-
term, particularly with respect to telecommunications, depreciation, real
estate and interest expenses and personnel, and therefore the Company's
results of operations are particularly sensitive to fluctuations in revenues.
Also, if the Company's agreement with Computer Associates were to terminate
and the Company continued to require Computer Associates' software, the
license fees paid by the Company could increase fixed costs significantly.
Furthermore, if the Company were to become unable to continue leveraging third
party products in the Company's services offerings, the Company's product
development costs could increase significantly. Although the Company has not
encountered significant difficulties in collecting upon accounts receivable in
the past, many of the Company's customers are in an emerging stage, and there
can be no assurance that the Company will be able to collect receivables on a
timely basis.
The market for Internet system and network management solutions has only
recently begun to develop, is evolving rapidly and likely will be
characterized by an increasing number of market entrants. There is significant
uncertainty regarding whether this market ultimately will prove to be viable
or, if it becomes viable, that it will grow. In order to be successful in this
emerging market, the Company must be able to differentiate itself from its
competition through its service offerings, such as its recently introduced
collaborative systems management and Internet technology services. There can
be no assurance that the Company will be successful in differentiating itself
or achieving market acceptance of its services, or that it will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these services. If the Company incurs increased
costs or is unable, for technical or other reasons, to develop and introduce
new services or enhancements of existing services in a timely manner, or if
new products or services do not achieve market acceptance in a timely manner
or at all, the Company's business, results of operations and financial
condition could be materially adversely affected. See "Risk Factors--
Dependence on New Market; Uncertainty of Acceptance of Services."
A component of the Company's strategy is to expand into international
markets, and the Company recently opened a server hosting facility in the
London metropolitan area. There can be no assurance that the Company will be
able to market, sell and deliver its services outside the United States
successfully. In order to expand its international operations, the Company
may, among other things, enter into joint ventures or outsourcing agreements
with third parties, acquire rights to high-bandwidth transmission capability,
or acquire complementary business or operations or establish and maintain new
operations outside the United States. In addition to the uncertainty as to the
Company's ability to expand into international markets, there are certain
risks inherent in conducting business internationally, such as unexpected
changes in regulatory requirements, export restrictions, tariffs and other
trade barriers, challenges in staffing and managing foreign operations,
45
<PAGE>
differing technology standards, employment laws and practices in foreign
countries, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates, imposition of
currency exchange controls, seasonal reductions in business activity and
potentially adverse tax consequences, any of which could adversely affect the
Company's international operations. In addition, there can be no assurance
that the Company will be able to obtain the necessary telecommunications
infrastructure in a cost-effective manner or compete effectively in
international markets. See "Risk Factors--Risks Associated with International
Operations."
Based on its assessment to date, the Company believes that the current
versions of its products are either "Year 2000 compliant" or will not require
substantial effort or cost to make them Year 2000 compliant. However, many of
the Company's customers maintain their Internet operations on servers which
may be impacted by Year 2000 complications. The failure of the Company's
customers to ensure that their servers are Year 2000 compliant could have a
material adverse effect on the Company's customers, which in turn could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, the costs of defending and resolving Year
2000 related disputes, and any liability of the Company for Year 2000-related
damages, including consequential damages, could have a material adverse effect
on the Company's business, results of operations and financial condition. The
Company has reviewed, and continues to review, its internal management
information and other systems in order to identify and modify those products,
services or systems that may not be Year 2000 compliant. Based on its
assessment to date, the Company believes that its internal management
information and other systems are either Year 2000 compliant or will not
require substantial effort or cost to make them Year 2000 compliant. The total
cost of these Year 2000 compliance activities has not been material to date.
There can be no assurance that the Company will identify and remedy any
significant Year 2000 problems in a timely fashion, that remedial efforts in
this regard will not involve significant time and expense, or that such
problems will not have a material adverse effect on the Company's business,
results of operations and financial condition. The Company faces additional
risk to the extent that suppliers of products, services and systems purchased
by the Company and others with whom the Company transacts business are not
Year 2000 compliant. In the event that any such third parties cannot provide
the Company with products, services or systems that are Year 2000 compliant on
a timely basis (or in the event that Year 2000 issues prevent such third
parties from delivering products, services or systems required by the Company
on a timely basis), the Company's business, results of operations and
financial condition could be materially adversely affected. See "Risk
Factors--Year 2000 Risks."
The Company believes that its future growth depends, in part, upon the
acquisition of complementary businesses, products, services or technologies.
These can be no assurance that the Company will successfully identify, acquire
on favorable terms or integrate such businesses, products, services or
technologies. The Company may face competition for acquisition opportunities,
which may inhibit the Company's ability to consummate suitable acquisitions
and increase the costs of completing and the time required to complete such
acquisitions. Any such acquisitions will require the Company to manage and
integrate such acquired businesses, products, services or technologies and
coordinate (and possibly change) the diverse operating structures, policies
and practices of the acquired entities and to integrate new employees into the
Company's organization and culture. Failure to integrate and manage acquired
businesses, products, services and technologies successfully could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, future acquisitions by the Company may
result in the incurrence of additional debt, large one-time write-offs and the
creation of goodwill or other intangible assets that could result in
amortization expense. These factors could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Risk Factors--Risks Associated with Potential Acquisitions."
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting of Comprehensive
Income. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a period except
those resulting from the issuance of shares of stock and distributions to
stockholders. To date, there have not been material differences between net
loss and comprehensive loss.
46
<PAGE>
BUSINESS
THE COMPANY
Exodus is a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations. The
Company's solutions include server hosting, Internet connectivity,
collaborative systems management and Internet technology services, which
together provide the high performance, scalability and expertise that
enterprises need to optimize their Internet operations. The Company delivers
its services from geographically distributed, state-of-the-art Internet Data
Centers that are connected through a redundant high performance dedicated
backbone ring. The Company's tailored solutions are designed to be seamlessly
integrated with existing enterprise systems architectures and enable customers
to outsource the monitoring, administration and optimization of their
equipment, applications and overall Internet operations. As of September 30,
1998, the Company had over 600 Internet Data Center customers (including
installed and uninstalled customers under contract) and managed over 4,000
customer servers. The Company's customers range from pioneering Internet-based
businesses to Fortune 500 enterprises and include companies such as Computer
Associates International, Inc., DoubleClick Inc., GeoCities, Hotmail
Corporation (a subsidiary of Microsoft Corporation), Inktomi Corporation,
National Semiconductor Corporation, PC World Communications, Inc.,
software.net, SportsLine USA, Inc. and USAToday Information Network.
The Company's Internet system and network management solutions are based on
a core set of server hosting and Internet connectivity services, which are
enhanced by a growing number of collaborative systems management and Internet
technology services. The Company's server hosting and Internet connectivity
services, through its Internet Data Centers, national backbone ring of
multiple high speed clear DS-3 lines, OC-3 lines and public and private
network peering interconnections, provide the foundation for high performance,
availability, scalability and reliability of customers' Internet operations.
The Company is currently in the process of upgrading its backbone in order to
accommodate expected traffic growth. The Company's collaborative systems
management services, including performance monitoring and site management
reports, enable customers and the Company to manage customers' Internet
operations jointly, proactively and continuously. Finally, the Company's
Internet technology services, which include security and content distribution,
integrate best-of-breed technologies of leading vendors with the Company's
expertise and proprietary technology to provide customers with scalable,
secure and high performing Internet applications. The Company's portfolio of
layered services optimizes the development, deployment and proactive
management of enterprises' mission-critical Internet operations.
The Company began offering server hosting services in late 1995, opened its
first dedicated Internet Data Center in August 1996 and introduced its
collaborative systems management and Internet technology services in 1997. The
Company currently operates eight Internet Data Centers, consisting of
approximately 200,000 gross square feet, located in six metropolitan areas:
Boston, Los Angeles, New York, San Francisco, Seattle and Washington, D.C. The
Company also has a server hosting facility in the London metropolitan area.
The Company intends to expand domestically and internationally, including the
expected opening of additional Internet Data Centers in the Washington, D.C.
and Seattle metropolitan areas and new Internet Data Centers in the Chicago
metropolitan area in the first quarter of 1999 and the London metropolitan
area in the second quarter of 1999.
INDUSTRY BACKGROUND
Use of the Internet, including intranets and extranets, has grown rapidly in
recent years, driven by a number of factors, including the large and growing
installed base of advanced personal computers, improvements in network
architectures, increasing numbers of network-enabled applications, the
emergence of compelling content and commerce-enabling technologies and easier,
faster and cheaper access. International Data Corporation estimated that by
the end of 1997 the number of World Wide Web users worldwide would be
approximately 50 million and will continue to grow to approximately 129
million by the end of 2000. As a result of this growing use, the Internet has
become an important new global communications and commerce medium and
represents an
47
<PAGE>
enormous opportunity for enterprises to interact in new and different ways
with a large number of customers, employees, suppliers and partners.
Enterprises are responding to this opportunity by rapidly increasing their
investments in Internet sites and services. In the last several years, many
enterprises that focus solely on delivering services over the Internet have
emerged, and, more recently, mainstream businesses have begun to implement
Internet sites and commerce applications. This projected increase in
commercial Internet use should drive rapid growth in revenues from Internet
commerce which, according to International Data Corporation, are expected to
increase from approximately $10 billion in 1997 to approximately $120 billion
in 2000.
As use of the Internet grows, enterprises are increasing the breadth and
depth of their Internet product and service offerings. Pioneering Internet-
based businesses have developed Internet products and services in areas such
as finance, banking, entertainment, education and advertising. In addition,
mainstream businesses have begun to use the Internet for an expanding variety
of applications, ranging from corporate publicity and advertising, to sales,
distribution, customer service, employee training and communication with
business partners. These Internet operations are mission-critical for
virtually all Internet-based businesses and are becoming increasingly mission-
critical for many mainstream enterprises. Loss of the availability of mission-
critical Internet sites often results in losses in revenue and impairment of
customer goodwill. As a result, to ensure the reliability of their mission-
critical Internet operations, enterprises are requiring that these operations
have 24x7 performance, scalability and expert management.
The proliferation of Internet services offered and the growth in mission-
critical Internet applications are driving an increase in the complexity of
commercial Internet sites. In order to ensure the quality, reliability,
availability and redundancy of these Internet operations, corporate IT
departments must make substantial investments in developing Internet expertise
and infrastructure. They need geographically distributed state-of-the-art
facilities and networks that are monitored and managed 24x7 by experts in
Internet technology, can be upgraded to reflect changing technologies and can
be scaled as the needs of enterprises evolve. However, such a continuing
significant investment of resources is often an inefficient use of
enterprises' overall resources. As a result, corporate IT departments are
increasingly seeking collaborative outsourcing arrangements that can increase
performance, provide continuous operation of their Internet solutions and
reduce Internet operating expenses. Forrester Research, Inc. ("Forrester")
estimates that Internet hosting revenues will increase from approximately $200
million in 1997 to almost $8 billion by the year 2000. Furthermore, Forrester
estimates that the broader market for distributed infrastructure services,
which includes Internet hosting as well as wide area network ("WAN")
management, network design and end-user support, will grow from approximately
$36 billion in 1997 to approximately $89 billion in 2000.
A variety of companies, such as regional ISPs, national ISPs and large IT
outsourcing firms, offer products and services that attempt to address
enterprises' Internet outsourcing needs. However, the solutions offered by
these companies fail to address certain elements required to ensure that
customers' mission-critical Internet operations are reliable, scalable and
high performing. For example, regional ISPs lack the geographically-
distributed data centers necessary to deliver content using replication or
caching technologies, which are becoming increasingly important as Internet
usage and bandwidth demands increase. National ISPs focus on providing
Internet access and generally have not developed sophisticated and reliable
server management capabilities. In addition, the Company believes that they
often oversubscribe their networks, resulting in poor performance and an
inability to handle effectively customers' sharp increases in bandwidth
demand. The Company believes that neither the regional nor the national ISPs
have developed the systems and application management, monitoring and customer
service capabilities required to support mission-critical Internet operations.
Finally, large IT outsourcing firms tend to focus on large enterprises that
want to outsource their entire IT infrastructure, not just their Internet
operations. These vendors often lack the network infrastructure and Internet
expertise required to provide mission-critical Internet system and network
management services. As a result, Exodus believes a significant opportunity
exists for a highly focused company to provide a combination of server
hosting, Internet connectivity, collaborative systems management and Internet
technology services that will enable reliable, high performance of
enterprises' mission-critical Internet operations.
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THE EXODUS SOLUTION
Exodus is a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations. The
Company's server hosting, Internet connectivity, collaborative systems
management and Internet technology services are designed to provide
enterprises with the high performance, scalability and expertise necessary to
optimize their Internet operations. The Company's tailored solutions are
designed to be seamlessly integrated with existing enterprise systems
architectures and enable customers to outsource the monitoring, administration
and optimization of their equipment, applications and overall Internet
operations. The Company believes that its solutions enable customers to deploy
and expand Internet operations rapidly and cost-effectively, especially when
compared to in-house solutions. The Exodus solution provides the following key
advantages to its customers:
High Performance. The Company supports enterprises' business objectives by
ensuring that their Internet sites perform effectively. The Company's
solutions provide the availability and reliability that customers need to be
able to depend on the Internet for mission-critical operations. The Company's
solutions are designed to maximize performance through features such as
geographically distributed Internet Data Centers, redundant and high speed
network design, content distribution technologies, security and 24x7
monitoring, diagnosis and problem resolution.
Scalability. The Company's solutions are designed to be flexible and
scalable, ensuring customers a consistently high level of performance as their
Internet operations expand. The Company can quickly scale the amount of
hosting space, power, bandwidth or managed services that a customer receives,
all in a way transparent to the end-user. The Company believes that the
scalability of its solutions is a significant advantage over in-house
solutions.
Internet System and Network Management Expertise. By leveraging the
knowledge gained from supporting many leading-edge Internet operations, the
Company has developed a specialized Internet system and network management
expertise that is difficult for any single customer to replicate in-house.
Customers gain access to the Company's experience in network, system,
application and security management.
Collaborative and Proactive Management. The Company believes that
enterprises value Internet service relationships that are collaborative and
proactive. Therefore, the Company has developed a collaborative systems
management approach that provides customers with detailed monitoring,
reporting and management tools that can be accessed through the Internet to
control customers' Internet hardware, network, software and application
environments. This approach focuses on identifying and resolving potential
problems before they impact an Internet site's availability or performance.
Through the Company's system and network management framework, customers are
able to manage both mission-critical Internet operations housed at the
Company's Internet Data Centers and in-house IT applications. The Company
believes that this provides an important advantage to enterprises that seek to
outsource a portion of their Internet operations and to link the management of
the outsourced operations with in-house operations.
Cost-Effective Solution. The Company's customers benefit from leveraging the
significant capital, operating and labor investments that the Company has made
to support distributed, mission-critical Internet operations. Most enterprises
today do not have the infrastructure that mission-critical Internet operations
require, including data centers located adjacent to major Internet connection
points, 24x7 operations and specialized Internet technology expertise. The
Company believes that its solutions to optimize enterprises' Internet
operations are significantly more cost-effective than most in-house solutions.
THE EXODUS STRATEGY
The Company's objective is to become the leading provider of Internet system
and network management solutions for enterprises with mission-critical
Internet operations. To achieve this objective, the Company's strategy
includes the following key elements:
49
<PAGE>
Extend Market Leadership. The Company has played a leading role in creating
and defining the market for Internet system and network management solutions
and plans to establish itself as the brand name and leader in this market. The
Company believes that its highly focused approach to serving this market
provides it with an advantage over competitors that also serve the entry-level
hosting market or the stand-alone Internet access market. The Company plans to
extend its leadership in the market for Internet system and network management
solutions both by aggressively continuing to expand its base of over 600
Internet Data Center customers (including installed and uninstalled customers
under contract) and by capitalizing on the growth of its customers' needs for
these solutions.
Focus on Collaborative Systems Management and Internet Technology
Services. The Company believes that developing new services to manage
enterprises' mission-critical Internet operations jointly, proactively and
continuously will offer a compelling value proposition to its customers. The
Company has invested and is continuing to invest in services that will ensure
high availability and performance of customers' Internet-based applications,
including systems administration, disaster recovery, security and systems and
network management. As part of this strategy, the Company intends to continue
to develop relationships with providers of leading Internet technologies and,
where appropriate, to develop or acquire proprietary technologies in order to
enhance its service offerings and meet its customers' evolving needs. The
Company also intends to expand the consulting services it offers to its
customers in order to provide enhanced support in planning customers'
strategies for managing mission-critical Internet operations and in
transitioning such operations to the Company's Internet Data Centers.
Accelerate Domestic Expansion and Establish Global Presence. The Company
intends to accelerate its program of building Internet Data Centers and to
expand direct sales coverage in the United States, and is also actively
evaluating a wide range of international opportunities. The Company believes
that having a number of widely distributed and networked Internet Data Centers
improves network performance and enhances overall site redundancy. In
addition, the Company's experience indicates that locating an Internet Data
Center within a geographic region can significantly enhance its ability to
attract new customers in that region. The Company intends to expand
domestically and internationally. The Company recently opened a server hosting
facility in the London metropolitan area, an additional Internet Data Center
in the San Francisco metropolitan area and a new Internet Data Center in the
Boston metropolitan area and expects to open additional Internet Data Centers
in the Washington, D.C. and Seattle metropolitan areas and new Internet Data
Centers in the Chicago metropolitan area in the first quarter of 1999 and the
London metropolitan area in the second quarter of 1999.
Leverage Expertise to Address New Market Opportunities. The Company intends
to leverage its significant achievements with pioneering Internet-based
businesses to address broader customer markets, such as e-commerce and
extranets. For example, mainstream corporations are increasingly establishing
extranets with suppliers and customers. However, many of these enterprises
lack the infrastructure and Internet expertise required to operate mission-
critical Internet applications effectively and are looking for collaborative
systems management assistance. The Company believes that its Internet system
and network management solutions can support the business needs of these
mainstream corporations by enabling them to deploy their mission-critical
Internet operations successfully.
Establish Strategic Relationships for Technology and Distribution. The
Company is establishing strategic relationships for technology and
distribution. The Company believes that establishing relationships with
technology developers enables it to leverage these enterprises' research and
development expertise cost-effectively. These relationships allow the Company
to gain more rapid access to new technologies and to provide value-added
integrated solutions for its customers. For example, the Company has worked
closely with Computer Associates to develop certain of the Company's
collaborative systems management services using Computer Associates'
Unicenter(R) TNG(TM) technology. The Company's product development personnel
will continue to develop vendor relationships and technology-based
relationships, such as those with Cisco, Raptor Systems, Inc., VeriFone, Inc.
and CheckPoint Software Technologies Limited, to enhance the Company's
solutions. In addition, the Company currently has distribution relationships
with a number of companies including @Work, a division of At Home Corporation,
Computer Associates, GE Capital Services, Poppe Tyson, Inc. and SAVVIS
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<PAGE>
Communications, Inc. and believes it can expand its customer base by
establishing additional distribution relationships with content developers,
system integrators, system vendors, consulting companies and ISPs.
SERVICES
The Company's services are designed to provide enterprises with the high
performance, scalability and expertise they need to optimize their mission-
critical Internet operations. The Company creates tailored solutions for its
customers based on their unique business and technical requirements, modifying
the services as customers' needs evolve. The services are delivered from
geographically distributed, state-of-the-art Internet Data Centers and include
server hosting, Internet connectivity, collaborative systems management and
Internet technology services. The server hosting and Internet connectivity
services provide the foundation for high performance, availability,
scalability and reliability of customers' Internet operations. The
collaborative systems management services enable customers and the Company to
manage customers' Internet operations jointly, proactively and continuously.
The Internet technology services integrate and enhance best-of-breed
technologies of leading vendors to support the Company's expertise to build
scalable, secure and high performing Internet applications. The Company also
offers consulting services and intends to expand such services to assist its
customers in planning their strategies for managing mission-critical Internet
operations and transitioning such operations to the Company's Internet Data
Centers. These services can be layered to allow customers to outsource an
increasing portion of the management of their Internet operations. Customers
pay monthly fees for the services utilized, as well as one-time fees for
installation and for any equipment purchased from the Company.
Server Hosting
The Company provides a broad range of server hosting services tailored to
meet the unique demands of sophisticated, multi-vendor mission-critical
Internet operations. The Company supports all leading Internet hardware and
software systems vendor platforms, including those from Compaq Computer
Corporation, Dell Computer Corporation, Hewlett-Packard Company, IBM,
Microsoft Corporation, Silicon Graphics, Inc., Sun Microsystems, Inc. and The
Santa Cruz Operation, Inc. This multi-vendor flexibility enables the customer
to retain complete control over the technical solution and enables its
Internet operations to be integrated into its existing IT technical
architecture. Because mission-critical Internet operations are typically very
dynamic and often require immediate hardware and software upgrades to maintain
targeted service levels, customers have unlimited 24x7 access to the Internet
Data Centers. Additional space and electrical power can be added as needed,
ensuring that the customer has access to additional server hosting services.
Customers can select from shared rack facilities, highly secure cabinets or
enclosed cage facilities based upon their business and technical requirements.
Most server hosting facilities include dedicated electrical power circuits to
ensure that each customer's electrical power requirements are met. Each
Internet Data Center is constructed based upon the requirements of high-
availability mission-critical computing with uninterruptible power supply and
back-up generators, fire suppression, raised floors, HVAC, separate cooling
zones, seismically braced racks, 24x7 operations and high levels of physical
security.
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<PAGE>
The following chart summarizes the key features of the Company's current
server hosting services:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION BENEFITS
- ------- ----------- --------
<S> <C> <C>
CyberRack 19" x 23" quarter, half or full rack . Entry-level service providing
economical solution for customers
that do not need dedicated
environments
. Secured environment that is
shared by multiple customers
CyberCabinet 19" x 23" full rack . Dedicated, locked cabinet
. Provides a single rack with the
security of a dedicated environment
. Dedicated power circuits
Virtual Data Center 7' x 4' or 7' x 8' cage . Dedicated, locked cage
or customized to order . Provides flexibility in designing and
configuring Internet servers,
including space for multiple racks
and other customer computing
products
. Provides ventilation for heat
generating equipment
. Dedicated power circuits
ExodusVault 8' x 8' or 8' x 12' vault or . Dedicated, enclosed security area
customized to order . Provides additional security for
sensitive Internet transactions by
financial institutions and on-line
merchants
. Includes biometric identification
for entry and exist, motion and
temperature detectors tiles bolted
to the floor, cameras, high impact
glass and secured data and electrical
lines
. Separate, dedicated power circuits
</TABLE>
Internet Connectivity
The Company's Internet connectivity services are designed to deliver the
scalability, high availability and performance required by high-volume,
mission-critical Internet operations. Since enterprises' mission-critical
Internet operations often experience network traffic spikes due to promotions
or events, the Company has a policy of undersubscribing its network by
provisioning significant excess capacity. In addition, customers can purchase
spare capacity and pay only for the bandwidth that is used.
To meet customers' requirements of near 100% availability, the Company's
network is designed to minimize the likelihood of any single point of failure.
Each Internet Data Center has multiple physical fiber paths into the facility.
The Company maintains multiple network links from multiple vendors into each
Internet connection point and regularly checks that its fiber backbone is
traversing physically-separated paths. Customers also enhance their Internet
site's availability by physically duplicating their site within multiple
Internet Data Centers and then synchronizing applications and content via the
Company's private fiber backbone network. This network architecture optimizes
the availability of a customer's site, even in the event of a link failure.
52
<PAGE>
The Company's Internet connectivity services are also designed to
consistently deliver low-latency and peak network performance. The Company's
backbone engineering personnel continuously monitor traffic patterns and
congestion points throughout the Internet and dynamically reroute traffic
flows to optimize end-user response times. The Company also provides peak
network performance by maintaining what it believes is one of the largest
number of direct public and private network peering interconnections in the
industry. The Company's network includes private peering interconnections with
over eight national ISPs and public peering interconnections with over 120
ISPs, including many of the largest providers.
For customers seeking a direct communications link to the site of another
customer that is located at the same Internet Data Center, the Company offers
highly secure, fast and efficient cross-connections.
Collaborative Systems Management
The Company's collaborative systems management services support mission-
critical Internet operations by providing the customer with detailed
monitoring, reporting and management tools to control their hardware, network,
software and application environments. Through the Company's system and
network management framework, customers are able to manage both mission-
critical Internet operations housed at the Company's Internet Data Centers and
in-house IT applications. The Company believes that this provides an important
advantage to enterprises that seek to outsource a portion of their Internet
operations and to link the management of the outsourced operations with in-
house operations. The Company's proactive service methodology focuses on
identifying and resolving potential problems before they ever impact an
Internet site's availability or performance. The Company's sophisticated
Internet system and network management solutions enable the Company to
identify and to begin to resolve hardware, software, network and application
problems, frequently before the customer is even aware that a problem exists.
The Company offers the services summarized in the following chart:
SERVICE DESCRIPTION BENEFIT
------- ----------- -------
. 24x7 proactive . Maximizes availability
SystemHealth Basic monitoring of Internet of customers' mission-
Monitoring Service server process critical Internet
. 24x7 rebooting of operations by
servers proactively
. Monthly and daily identifying potential
reports available via problems
the Web . Allows customers to
leverage Exodus'
systems expertise
SystemHealth Pro . System Health Basic . Includes advantages of
Monitoring Service Monitoring service SystemHealth Basic
plus an Exodus system Monitoring Service
administrator leads plus offloads problem
problem resolution if resolution to Exodus
problem arises
. Automated process
restarts
DatabaseHealth Basic . 24x7 proactive . Maximizes availability
Monitoring Service monitoring of SQL of customers' database
server processes resources by
. Automated customer proactively
notification of identifying potential
database problems problems
. Monthly and daily
reports available via
the Web
DatabaseHealth Pro . DatabaseHealth Basic . Includes advantages of
Monitoring Service Monitoring service DatabaseHealth Basic
plus an Exodus system Monitoring Service
administrator leads plus offloads problem
problem resolution if resolution to Exodus
problem arises
. Automated process
restarts
. Problem resolution
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<PAGE>
SERVICE DESCRIPTION BENEFIT
------- ----------- -------
. Bandwidth usage . Assists in capacity
Site Management reports planning and
Reports . Graphic and tabular management of network
statistics resources
. Information delivered
to customers via the
Internet on an hourly,
daily and semi-monthly
basis
Internet Disaster . Tape management . Maximizes the
Recovery services to restore availability of
sites after a system customers'
failure applications
. Distributed load . Provides additional
balancing services to redundancy in the
seamlessly re-route event of Web site
user traffic to an failure
alternate site in the
event of a failure
Internet Systems . Assigned project . Assures a smooth
Integration manager responsible transition to an
for developing a Exodus Internet Data
migration plan, Center
managing the site's . Provides for ongoing
installation and support
providing ongoing
account support
. Company acts as value-
added reseller of
Cisco products,
primarily routers,
hubs and switching
equipment, in
connection with server
hosting services
In addition, the following chart summarizes the key features of an
additional collaborative systems management service being developed by the
Company and expected to be available in the second half of 1998:
SERVICE DESCRIPTION BENEFIT
------- ----------- -------
HeadsUp Site Monitor . Will provide an .Will allow customers to
integrated platform view the status of their
for delivering key entire Internet
customer information operations located at
. Will perform real-time Exodus through the
monitoring of URLs, Internet via a single
bandwidth, server integrated console
performance and .Will proactively alert
Internet Data Center customers with updates
activities on any internal or
external network event
that might impact their
site
54
<PAGE>
Internet Technology
The Company's Internet technology services are developed by integrating
best-of-breed technologies of leading vendors with its own Internet expertise
and its own proprietary technologies. Customers may select any or all of the
Company's available Internet technology services, depending on their needs.
The following chart summarizes the key features of the Internet technology
services currently offered by the Company:
SERVICE DESCRIPTION BENEFIT
------- ----------- -------
Exodus SAFE (Secure . Full range of . Enhances site security
Access from Exodus) perimeter firewall and integrity
security, penetration
testing, automated
intrusion detection,
site security auditing
and consulting
services
. Potential intruders
identified and blocked
from customer's site
. Site's security probed
and tested 24x7 and
audit reports
generated on potential
security risks
. Proactive agendas
developed before site
integrity is comprised
Exodus Multipath . Site requests . Increases availability
Site intelligently balanced and performance for
across multiple multi-server mission-
servers located within critical Internet
a single Internet Data sites
Center based on server
utilization,
availability and
response times
Exodus Multipath IDC . Intelligent routing . Maximizes availability
services that and performance for
geographically Internet sites located
distribute end-user across multiple
requests Internet Data Centers
. Traffic routed based . Optimizes end-user
upon server response time
performance and . Provides sophisticated
availability, Internet Internet site
traffic patterns and redundancy
the geographic
locations of the
requesters
Exodus NetHost . Turnkey infrastructure . Cost-effective
services for solution for one-time
delivering high- events such as
performance cybercast software releases and
events concerts
. Includes high-
bandwidth
connectivity, high
performance UNIX and
NT servers and
specialized systems
administration and
management before and
during the event
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<PAGE>
CUSTOMERS
The Company has established a diversified base of customers in a wide range
of industries, including finance, entertainment, high technology, education,
healthcare and publishing. As of September 30, 1998, the Company had over 600
Internet Data Center customers (including installed and uninstalled customers
under contract). The following is a representative list of the Company's
Internet Data Center customers, each of which are expected to generate
annualized revenues for the Company in excess of $67,000 based upon the
monthly recurring charges for such customers in July 1998. Based upon such
expected annualized revenues and assuming no addition of new customers, the
following customers would represent in the aggregate approximately 38% of the
Company's total expected annualized revenues, and none of such customers
individually would represent in excess of 10% of such total expected
annualized revenues.
<TABLE>
<S> <C> <C>
AdKnowledge (formerly Hearst New Media & The Santa Cruz
FocaLink) Technology Operation, Inc.
Applied Materials, Inc. Hotmail Corporation (a Sierra On-Line, Inc.
Blizzard Entertainment subsidiary of Microsoft software.net
BMG Entertainment Corporation) Sony Online Ventures,
Computer Associates Inktomi Corporation Inc.
International, Inc. Internet Profiles Synopsys, Inc.
CondeNet Inc. Corporation ("I/Pro") Tripod, Inc.
DoubleClick Inc. Juno Online Services, L.P. United Media
E-Loan Mpath Interactive, Inc. USA Today
Eidos Interactive, Inc. National Semiconductor Visto Corporation
GeoCities Corporation (formerly RoamPage,
GolfWeb, Inc. Oracle Corporation Inc.)
PC World Communications, Inc Web Communications
Poppe Tyson, inc. WhoWhere? Inc.
</TABLE>
The Company's contracts with its customers generally cover the provision of
services by the Company for a one year period and may contain, among other
things, certain service level warranties. Service agreements entered into with
customers prior to August 1997 typically included service level warranties
which provided that, if the Company failed to provide Internet Data Center
services to a customer for more than 24 consecutive hours, such customer's
account would be credited for the charges the customer paid for services it
did not receive during such period. Between August 1997 and July 1998, the
Company's service agreements typically included service level warranties which
provide that, if the Company fails to provide Internet Data Center services to
a customer for more than two consecutive hours, such customer's account would
be credited for one day of service and, if for more than eight consecutive
hours, one week of service, with each customer limited to one credit per
month. Since July 1998, the Company's service agreements have typically
included service level warranties which provide that, if the Company fails to
provide Internet Data Center services to a customer for more than 15 minutes,
such customer's account would be credited for one day of service, up to a
maximum of seven days in any month. In addition, the Company provides
additional credits for packet loss and transmission latency. Certain customers
have received more favorable terms than those described above. To date, only a
limited number of customers have been entitled to these warranties to receive
a credit for a period of free service. See "Risk Factors--Risk of System
Failure." As the Company did not open its first dedicated Internet Data Center
until August 1996, the Company has had Internet Data Center customers for only
a short period of time. Accordingly, most of the Company's customers are
within the first year of their service contracts with the Company. The Company
has had limited experience with customers whose initial one year service
contract terms have been completed and whose contracts are therefore eligible
for renewal. However, of the Internet Data Center customers whose initial one
year service contracts have become eligible for renewal, substantially all
have elected to renew.
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<PAGE>
The following examples illustrate how the Company's customers use its server
hosting, Internet connectivity, collaborative systems management and Internet
technology services.
GeoCities
In 1997, GeoCities, one of the largest and fastest growing communities on
the Internet, selected the Company to co-locate its Internet servers and
administer its rapidly growing Internet computing requirements. GeoCities is
one of the most frequently visited sites on the Internet measuring over 850
million page views each month according to I/PRO's April 1998 report. The
Relevant Knowledge April 1998 report ranks GeoCities sixth in reach, with over
14 million unique visitors. GeoCities relied upon the Company's advanced
professional service capabilities to plan and manage the successful migration
of the GeoCities site into Exodus' Internet Data Center facilities. This
migration posed unique challenges, including minimizing downtime for
Geocities' then one million "homesteaders" (users), physically migrating more
than 45 Internet servers and shifting in real-time the network routing of more
than 80 Mbps of sustained Internet traffic. The Company currently provides
GeoCities and its more than 1.1 million users with reliable connectivity,
scalable bandwidth and 24x7 monitoring, systems administration and disaster
recovery services.
Hotmail Corporation
In 1996, Hotmail Corporation ("Hotmail"), a leading provider of globally
accessible, free Web-based electronic mail, engaged the Company to host its
Internet servers to gain access to greater bandwidth and redundancy to support
Hotmail's growing customer base. Hotmail's primary challenge was to find a
company that could support the exponential growth in subscribers they were
experiencing. Hotmail selected the Company, based upon the scalability and
high performance of the Company's Internet Data Centers and network solutions,
as well as on the Company's reputation for high-quality customer service.
Since Hotmail has co-located their Internet operations with the Company, their
subscriber base had grown from 400,000 to over 10 million as of June 1998,
growing at a rate of 90,000 new subscribers each weekday at that time. As of
June 1998, Hotmail was processing on average 10 million e-mail messages per
day.
National Semiconductor Corporation
In 1997, National Semiconductor Corporation ("National"), a global
semiconductor manufacturer, selected the Company for its application
management expertise. National depends on the Company to support its Internet,
extranet and intranet sites. National depends on a Java-based e-commerce
application on its Internet site to sell components. This application reduces
the time it takes for customers to determine which components they need, and
National views it as a competitive advantage. National's Internet site serves
a broad array of additional functions, and use of it has grown significantly
in the last 18 months to a few hundred thousand hits per day. In supporting
National's Internet operations, Exodus provides the systems administration,
hardware maintenance and tape back-up necessary to manage these applications
and to keep them available to internal employees and 1.2 million customers
worldwide.
Hearst New Media & Technology
In 1997, Hearst New Media & Technology ("Hearst"), a unit of the Hearst
Corporation, decided to co-locate Internet hosting for its Web sites,
including "HomeArts.com," a leading site for women on the Web, to the
Company's Internet Data Center located in the New York metropolitan area.
Hearst chose the Company for its 24-hour per day monitoring services and its
array of systems management services. Hearst's objective was to improve
network performance, monitoring and systems management capabilities, allowing
the Hearst team to focus on further refinement and expansion of the site. The
Company now monitors Hearst's systems through its Unicenter(R) TNG(TM)-based
services and sends Hearst frequent Web-based reports that track the status of
over 40 domains.
57
<PAGE>
SALES, DISTRIBUTION AND MARKETING
The Company's sales, distribution and marketing objective is to achieve
broad market penetration by targeting enterprises that depend upon the
Internet for mission-critical operations. As of September 30, 1998, the
Company had 154 employees engaged in sales, distribution and marketing.
The Company sells its services to enterprises directly through its sales
force and indirectly through its channel partners. The Company is actively
seeking to increase its sales and distribution capabilities and coverage in
the United States and to expand internationally as new Internet Data Centers
are installed outside of the United States. Currently, most of the Company's
sales are derived through the efforts of its sales force. The Company's sales
force is organized into three separate groups, consisting of field sales,
strategic accounts and telesales, each of which is further divided into four
geographical regions within the United States. Sales engineers and client
integration engineers support the Company's sales force, providing pre- and
post-sales support to ensure that customer services are implemented properly
and efficiently.
The Company's sales force is also developing an indirect sales channel for
the Company's products by targeting content developers, system integrators,
system vendors, consulting companies and ISPs. The Company currently has
distribution relationships with a number of companies, including @Work, a
division of At Home Corporation, Computer Associates, GE Capital Services
Corporation, SAVVIS Communications, Inc. and Poppe Tyson, Inc. and intends to
expand its distribution relationships in the future. The Company's channel
partners typically receive referral fees for bringing customers to the
Company.
The Company's marketing organization is responsible for product management,
public relations and marketing communications. Product management includes
defining the product roadmap and bringing to market the portfolio of services
and programs that will enable the Company to meet its business objectives.
These activities include product strategy and definition, pricing, competitive
analysis, product launches, channel program management and product lifecycle
project management. The Company stimulates product demand through a broad
range of marketing communications and public relations event sponsorship and
management of the Company's Web site. Public relations focuses on cultivating
industry analyst and media relationships with the goal of securing broad media
coverage and public recognition of the Company's leadership position in the
market for Internet system and network management solutions.
CUSTOMER SERVICE
The Company offers superior customer service by understanding the technical
requirements and business objectives of its customers and fulfilling their
needs proactively on an individual basis. By working closely with its
customers, the Company is able to optimize the performance of its customers'
Internet operations, avoid downtime, resolve quickly any problems that may
arise and make appropriate adjustments in services as customer needs change
over time. As the Company works with its customers over time, it solicits
their feedback to ensure that it is offering the appropriate types and quality
of service. The Company uses advanced software tools to aid in its customer
monitoring and service efforts. Many customer service employees have been
specifically trained and, as appropriate, certified by the vendors of the
Company's software tools, including Sun Microsystems, Inc., Microsoft
Corporation, Oracle Corporation and Computer Associates.
Customer service begins before a sale, when the Company provides technical
support for complex orders. During the installation phase, the Company assigns
a transition team and a project manager, who also retains responsibility for
the account after installation, to assist the new customer with the
installation process. In addition, the Company provides system integration
services between the customer's Web site and legacy systems. After
installation, the primary customer support area is each Internet Data Center's
Network Control Center, which is operated 24x7 by engineers who answer
customer calls, monitor site and network operations and activate teams to
solve problems that arise. To solve complex problems, the Company draws on the
collective expertise at all of its Internet Data Centers, creating a
nationwide engineering pool. The Company's customer service personnel are also
available to assist customers whose operations require specialized procedures.
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<PAGE>
Finally, the Company employs network engineers who collaborate with a
customer to design and maintain the LAN environment within the Internet Data
Center and integrate the customer's home LAN and WAN with its Internet site.
The network engineers are trained on NT and Solaris and other UNIX platforms
as well as Cisco routers and switches, and they serve as the second level of
support for customer issues that cannot be resolved by the Network Control
Center. The Company also employs a group of backbone engineers who are
responsible for designing the network that connects the Company's Internet
Data Centers. This group constantly monitors the network design and
effectiveness to optimize performance for customers, rerouting and redesigning
traffic as conditions require.
As of September 30, 1998, the Company had 156 employees dedicated to
customer service and network and backbone engineering.
NETWORK DESIGN
The Company's high performance server network is designed to provide the
highest possible availability in order to enable its customers to achieve
reliable Internet operations. It is comprised of the Company's six Internet
Data Centers interconnected by a high-performance network backbone ring and
connected to the Internet through public peering interconnections and private
peering interconnections. Within each Internet Data Center, a virtual LAN
environment provides redundant, high-speed internal connectivity.
The Company's Internet Data Centers are located near most of the major
Internet exchange points ("IXPs") and are connected to their local IXPs by
multiple DS-3 or OC-3c links, provisioned by Teleport Communications Group
Inc., MFS Communications Company, Inc., Brooks Fiber Properties, Inc. and
Regional Bell Operating Companies. These links to the local exchange points,
combined with private exchanges with ISPs, connect the customers' traffic to
the Internet. In order to provide for high redundancy, performance and
capacity, and to perform real-time content replication or caching across its
Internet Data Centers, the Company has multiple clear channel DS-3 links and
OC-3c links interconnecting the Internet Data Centers. The Company has
engineered its backbone with a geographically diverse fiber path to provide
high availability, even in the event of a link failure. The Company is
currently in the process of upgrading its backbone in order to accommodate
expected traffic growth. For customers with servers located at multiple
Internet Data Centers, the Company provides dynamic response time and load
balancing technologies for optimal routing of traffic.
Within each Internet Data Center, the Company deploys a virtual LAN
environment to increase reliability and performance and provides customers
with redundant connectivity to the Exodus backbone and the Internet. DS-3 and
OC-3c lines are strategically placed on different routers to avoid any single
points of failure. The Company uses a combination of public and private
peering interconnections to achieve fast and reliable delivery of content. It
has private peering interconnections with eight national ISPs, public peering
interconnections with over 120 ISPs, including many of the largest providers,
and a presence at each of the major U.S. IXPs. The Company will continue to
work with ISPs to establish direct private peering interconnections at each of
its Internet Data Centers to provide low latency content delivery. This broad
combination of private and public peering interconnections provides customers
with the reliability and redundancy that they need to ensure their content
reaches its intended destination. The Company has a general policy of keeping
significant unutilized network capacity for its LAN, WAN and public and
private peering links to allow for spikes in demand or line outages.
If the carriers that operate the IXPs were to discontinue their support of
the peering points and no alternative providers were to emerge, or such
alternative providers were to increase the cost of utilizing the IXPs, the
distribution of content through the IXPs, including content distributed by the
Company, would be significantly constrained. Furthermore, as traffic through
the IXPs increases, if commensurate increases in bandwidth are not added, the
Company's ability to distribute content rapidly and reliably through these
networks will be adversely affected. Many of the companies with which the
Company maintains private peering interconnections are competitors of the
Company. Currently, the Company does not pay a fee for its public and private
peering
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interconnections. If these organizations were to refuse to continue to
interconnect directly with the Company, or begin to impose additional costs
(including fees) on the Company to maintain and/or increase these
interconnections, the Company might be required to purchase transit access
services from these ISPs in order to allow the Company's customers to reach
the customers of these ISPs, which would increase the Company's costs and as a
result, the Company's business, results of operations and financial condition
could be materially adversely affected. If the Company chose not to purchase
such access, there would be a lack of communication between the Company's
customers and the customers of such organization. In those cases where the
Company currently purchases backup capacity from other organizations, if these
organizations were to increase the pricing associated with their such
capacity, the Company might be required to identify alternative methods
through which it can distribute its customers' content. See "Risk Factors--
Dependence Upon Network Infrastructure."
The Company is dependent on other companies to supply certain key components
of its telecommunications infrastructure and system and network management
solutions, including telecommunications services and networking equipment
that, in the quantities and quality demanded by the Company, are available
only from sole or limited sources. In particular, the Company is dependent on
WorldCom and Qwest and certain other telecommunications providers for its
backbone capacity (including the Company's dedicated clear channel network and
transit access to ISPs) and is therefore dependent on such companies to
maintain the operational integrity of its backbone and interconnections. The
routers, switches and modems used in the Company's telecommunications
infrastructure are currently supplied primarily by Cisco. The Company
purchases these components pursuant to purchase orders placed from time to
time, does not carry significant inventories of these components and has no
guaranteed supply arrangements with these vendors. Any failure to obtain
required products or services on a timely basis and at an acceptable cost
would have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, any failure of the Company's
sole or limited source suppliers to provide products or components that comply
with evolving Internet and telecommunications standards or that interoperate
with other products or components used by the Company in its communications
infrastructure could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Risk Factors--Dependence
Upon Network Infrastructure" and""--Dependence on Third-Party Suppliers."
The Company must continue to expand and adapt its network infrastructure
(both its network and its interconnections to other networks) as the number of
users and the amount of information they wish to transport increase and to
meet changing customer requirements. The expansion and adaptation of the
Company's telecommunications infrastructure will require substantial
financial, operational and management resources as the Company negotiates
telecommunications capacity with its existing and other network infrastructure
suppliers. Due to the limited deployment of the Company's services to date,
the ability of the Company's network to connect and manage a substantially
larger number of customers at high transmission speeds is as yet unknown, and
the Company faces risks related to the network's ability to be scaled up to
its expected customer levels while maintaining superior performance. In
addition, as the Company upgrades its telecommunications infrastructure to
increase bandwidth available to its customers, it is likely to encounter a
certain level of equipment or software incompatibility which may cause delays
in implementation. See "Risk Factors--Unproven Network Scalability."
The Company's operations are dependent upon its ability to protect its
network infrastructure and customers' equipment against damage from human
error, power loss, fire, earthquakes, floods, telecommunications failures,
sabotage, intentional acts of vandalism and similar events. Despite
precautions taken and planned to be taken by the Company, the occurrence of a
natural disaster or other unanticipated problems at one or more of the
Company's Internet Data Centers could result in interruptions in the services
provided by the Company or significant damage to customer equipment. In
addition, failure of any of the Company's telecommunications providers, such
as WorldCom or Qwest, to provide the data communications capacity required by
the Company, as a result of human error, a natural disaster or other
operational disruption, could result in interruptions in the Company's
services. See "Risk Factors--Risk of System Failure."
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The increased use of the Internet for retrieving, sharing and transferring
information among businesses, consumers, suppliers and partners has only
recently begun to develop, and the Company's success will depend in large part
on continued growth in the use of the Internet. Critical issues concerning the
commercial use of the Internet, including security, reliability, cost, ease of
access, quality of service and necessary increases in bandwidth availability,
remain unresolved and are likely to affect the development of the market for
the Company's services. The recent growth in the use of the Internet has
caused frequent periods of performance degradation, requiring the upgrade of
routers and switches, telecommunications links and other components forming
the infrastructure of the Internet by ISPs and other organizations with links
to the Internet. Any perceived degradation in the performance of the Internet
as a whole could undermine the benefits of the Company's services. Potentially
increased performance provided by the services of the Company and others is
ultimately limited by and reliant upon the speed and reliability of the
networks operated by third parties. Consequently, the emergence and growth of
the market for the Company's services is dependent on improvements being made
to the entire Internet infrastructure to alleviate overloading and congestion.
See "Risk Factors--Dependence on the Internet and Internet Infrastructure
Development."
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Certain
of the Company's services rely on encryption and authentication technology
licensed from third parties to provide the security and authentication
necessary to effect secure transmission of confidential information. Despite
the Company's design and implementation of a variety of network security
measures, there can be no assurance that unauthorized access, computer
viruses, accidental or intentional actions and other disruptions will not
occur. See "Risk Factors--System Security Risks."
PRODUCT DEVELOPMENT
The Company's product development group is primarily responsible for
evaluating and integrating best-of-breed technologies with the Company's
service offerings to support its customers' mission-critical Internet
operations. The Company is also developing proprietary technologies which are
expected to be integrated with such best-of-breed technologies. The Company
believes that establishing relationships with technology enterprises enables
it to leverage these enterprises' research and development expertise. These
relationships allow the Company to gain quicker access to new technologies and
to provide value-added integrated solutions for its customers. For example,
the Company has worked very closely with Computer Associates, including having
dedicated Computer Associates engineers located at the Company, to develop
certain of the Company's collaborative systems management services using
Computer Associates' Unicenter TNG technology. See""--Relationship with
Computer Associates." The Company's product development personnel will
continue to develop strategic relationships, such as the one with Computer
Associates, and vendor and technology-based relationships, such as those it
has with Raptor Systems, Inc., VeriFone, Inc. and Checkpoint Software
Technologies Limited, to enhance the Company's services through the
integration of leading technologies. To the extent that the Company is unable
to obtain the technology necessary to meet its customers' needs from a third
party, the Company may need to develop the technology itself. As of September
30, 1998, the Company employed 17 persons in product development.
The Company's future success will depend, in part, on its ability to offer
services that incorporate leading technology, address the increasingly
sophisticated and varied needs of its current and prospective customers and
respond to technological advances and emerging industry standards and
practices on a timely and cost-effective basis. The market for the Company's
services is characterized by rapidly changing and unproven technology,
evolving industry standards, changes in customer needs, emerging competition
and frequent new service introductions. There can be no assurance that future
advances in technology will be beneficial to, or compatible with, the
Company's business or that the Company will be able to incorporate such
advances on a cost-effective and timely basis into its business. Moreover,
technological advances may have the effect of encouraging certain of the
Company's current or future customers to rely on in-house personnel and
equipment to furnish the services currently provided by the Company. In
addition, keeping pace with technological advances in the Company's industry
may require substantial expenditures and lead time.
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The Company incurred $70,000, $444,000, $1.6 million and $1.4 million in
product development expenses during the years ended December 31, 1995, 1996
and 1997 and the six months ended June 30, 1998, respectively.
RELATIONSHIP WITH COMPUTER ASSOCIATES
The Company has a strategic relationship with Computer Associates
encompassing sales, marketing, operations and engineering. Under the terms of
the Company's agreement with Computer Associates, the Company is deploying the
Unicenter(R) TNG(TM) systems, network and application management software
products (including the Cheyenne ARCserve(R) product) to manage the Company's
customer service operations and to monitor its customers' Internet solutions.
The Unicenter technology is the Company's primary enterprise management tool
and is the technology on which many of the Company's value-added services are
and will be based. To facilitate the Company's deployment of Unicenter(R)
TNG(TM), Computer Associates has located dedicated software engineers at the
Company. By becoming one of the leading Unicenter(R) TNG(TM) implementations,
the Company has also become a primary reference account for Computer
Associates' extensive sales force, which has also created opportunities for
the Company to market its services actively into large enterprises.
Under the agreement with Computer Associates, if the Company desires to
offer a service that has a substantially similar functionality to that
provided by Computer Associates' Unicenter(R) TNG(TM) family of software, or
its ARCserve or InocuLAN products (the "CA Products"), the Company must
generally utilize the CA Products as long as they meet the Company's
requirements. In addition, the Company is a beta test site for new versions of
the CA Products and must, upon commercial deployment, replace existing
software with new CA Products if they are substantially similar in
functionality. During the term of the agreement, the Company is obligated to
pay Computer Associates a royalty equal to one percent of the Company's gross
revenues. Either party may terminate this agreement upon 60 days' prior
written notice with no penalties. Should Computer Associates or the Company
decide to terminate this agreement, the Company has the right to continue
licensing software from Computer Associates at a forty percent discount from
Computer Associates' prevailing standard prices for five years and the Company
will no longer be obligated to pay a royalty to Computer Associates. In
connection with this agreement, the Company agreed to host Computer
Associates' hosting servers at prices below the Company's standard rates.
COMPETITION
The market served by the Company is intensely competitive, and such
competition is increasing. There are few substantial barriers to entry, and
the Company expects that it will face additional competition from existing
competitors and new market entrants in the future. The principal competitive
factors in this market include Internet system engineering expertise, customer
service, network capability, reliability, quality of service and scalability,
broad geographic presence, brand name, technical expertise and functionality,
the variety of services offered, the ability to maintain and expand
distribution channels, customer support, price, the timing of introductions of
new services, network security, financial resources and conformity with
industry standards. There can be no assurance that the Company will have the
resources or expertise to compete successfully in the future.
The Company's current and potential competitors in the market include: (i)
providers of server hosting services; (ii) national and regional ISPs; (iii)
global, regional and local telecommunications companies and RBOCs; and (iv)
large IT outsourcing firms. The Company's competitors may operate in one or
more of these areas and include companies such as certain subsidiaries of GTE
Corporation and WorldCom, IBM and certain business units of GlobalCenter,
which was recently acquired by Frontier Corporation.
Many of the Company's competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than the Company. As a result, certain of these competitors may be
able to develop and expand their network infrastructures and service offerings
more quickly, adapt to new or emerging technologies and
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changes in customer requirements more quickly, take advantage of acquisition
and other opportunities more readily, devote greater resources to the
marketing and sale of their products and adopt more aggressive pricing
policies than can the Company. In addition, these competitors have entered and
will likely continue to enter into joint ventures or consortiums to provide
additional services competitive with those provided by the Company.
Certain of the Company's competitors may be able to provide customers with
additional benefits in connection with the Internet system and network
management solutions, including reduced communications costs, which could
reduce the overall costs of their services relative to the Company's. There
can be no assurance that the Company will be able to offset the effects of any
such price reductions. In addition, the Company believes that the businesses
in which the Company competes are likely to encounter consolidation in the
near future, which could result in increased price and other competition that
could have a material adverse effect on the Company's business, results of
operations and financial condition.
INTELLECTUAL PROPERTY RIGHTS
The Company currently relies on a combination of copyright, trademark,
service mark and trade secret laws and contractual restrictions to establish
and protect certain proprietary rights in its products and services. The
Company currently has no patented technology that would preclude or inhibit
competitors from entering the Company's market. The Company has entered into
confidentiality and invention assignment agreements with its employees and
contractors, and nondisclosure agreements with its suppliers, distributors and
appropriate customers in order to limit access to and disclosure of its
proprietary information. There can be no assurance that these contractual
arrangements or the other steps taken by the Company to protect its
intellectual property will prove sufficient to prevent misappropriation of the
Company's technology or to deter independent third-party development of
similar technologies. The laws of certain foreign countries may not protect
the Company's products, services or intellectual property rights to the same
extent as do the laws of the United States. The Company also relies on certain
technologies that it licenses from third parties, such as Computer Associates.
See "Risk Factors--Dependence on Third-Party Suppliers." There can be no
assurance that these third-party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss of such
technology could require the Company to obtain substitute technology of lower
quality or performance standards or at greater cost, which could materially
adversely affect the Company's business, results of operations and financial
condition.
The Company has determined increasingly to develop or acquire additional
proprietary intellectual property in addition to licensing technology from
third parties. There can be no assurance that third parties will not claim
infringement by the Company with respect to current or future products or
services, particularly if such products or services include more of its own
proprietary technology. The Company expects that participants in its markets
will be increasingly subject to infringement claims as the number of products
and competitors in the Company's industry segment grows. Any such claim,
whether meritorious or not, could be time consuming, result in costly
litigation, cause product installation delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements
might not be available on terms acceptable to the Company or at all. As a
result, any such claim could have a material adverse effect upon the Company's
business, results of operations and financial condition.
GOVERNMENT REGULATION
The Company is not currently subject to direct federal, state or local
government regulation, other than regulations applicable to businesses
generally. There is currently only a small body of laws and regulations
directly applicable to access to or commerce on the Internet. However, due to
the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted at the federal, state and local
levels with respect to the Internet, covering issues such as user privacy,
freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. The adoption of any such laws or regulations might
decrease the growth of the Internet, which in turn could decrease
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the demand for the services of the Company or increase the cost of doing
business or in some other manner have a material adverse effect on the
Company's business, results of operations or financial condition. In addition,
applicability to the Internet of existing laws governing issues such as
property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. The vast
majority of such laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or address the
unique issues of the Internet and related technologies. In addition, as the
Company's services are available over the Internet in multiple states and
foreign countries, and as the Company facilitates sales by its customers to
end users located in such states and foreign countries, such jurisdictions may
claim that the Company is required to qualify to do business as a foreign
corporation in each such state or foreign country. The Company is qualified to
do business in only a limited number of states, and failure by the Company to
qualify as a foreign corporation in a jurisdiction where it is required to do
so could subject the Company to taxes and penalties for the failure to qualify
and could result in the inability of the Company to enforce contracts in such
jurisdictions. See "Risk Factors--Governmental Regulation and Legal
Uncertainties."
The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. It is possible that claims could be made
against online services companies and Internet access providers under both
United States and foreign law for defamation, negligence, copyright or
trademark infringement, or other theories based on the nature and content of
the materials disseminated through their networks. Several private lawsuits
seeking to impose such liability upon online services companies and Internet
access providers are currently pending. Certain businesses, organizations and
individuals have in the past sent unsolicited commercial e-mails from servers
hosted at the Company's facilities to massive numbers of people, typically to
advertise products or services. This practice, known as "spamming," can lead
to complaints against service providers that enable such activities,
particularly where recipients view the materials received as offensive. In
addition, certain ISPs and other online services companies could deny network
access to companies that allow undesired content or spamming to be transmitted
through their networks. The Company has in the past received, and may in the
future receive, letters from recipients of information transmitted by the
Company's customers objecting to such transmission. Although the Company
prohibits its customers by contract from spamming, there can be no assurance
that its customers will not engage in this practice, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors--Risks Associated With Information
Disseminated Through the Company's Network."
EMPLOYEES
As of September 30, 1998, the Company had 386 employees, including 154
employees in sales, distribution and marketing, 17 employees in product
development, 156 employees in customer service and network and backbone
engineering and 59 employees in finance and administration. The Company
believes that its future success will depend in part on its continued ability
to attract, hire and retain qualified personnel. The competition for such
personnel is intense, and there can be no assurance that the Company will be
able to identify, attract and retain such personnel in the future. None of the
Company's employees is represented by a labor union, and management believes
that its employee relations are good. See "Risk Factors--Dependence on Key
Personnel" and "--Management of Growth."
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FACILITIES
The Company's executive offices are located in Santa Clara, California and
consist of approximately 36,000 square feet that are leased pursuant to an
agreement that expires in 2002. The Company leases the facilities for its
current Internet Data Centers in the following metropolitan areas and specific
cities, which cover an aggregate of approximately 200,000 gross square feet
and expire in the years indicated below:
<TABLE>
<CAPTION>
LEASE
METROPOLITAN AREA CITY AND STATE EXPIRATION
----------------- --------------- ----------
<S> <C> <C>
San Francisco Santa Clara, CA 2001
Santa Clara, CA 2002
Santa Clara, CA 2009
New York Jersey City, NJ 2007
Seattle Seattle, WA 2007
Los Angeles Irvine, CA 2007
Washington, D.C. Herndon, VA 2004
Boston Waltham, MA 2008
</TABLE>
Most of the Company's leases provide for a renewal option upon the
expiration of the initial term. The Company currently maintains sales offices
in unutilized space in its Internet Data Centers. The Company intends to
expand domestically and internationally, including the expected addition of
additional Internet Data Centers in the Washington, D.C. and Seattle
metropolitan areas and new Internet Data Centers in the Chicago metropolitan
area in the first quarter of 1999 and the London metropolitan area in the
second quarter of 1999. The Company has recently entered into leases for the
space needed for the additional site in the Washington, D.C. metropolitan area
which covers approximately 88,000 square feet and expires in 2008.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
K.B. Chandrasekhar...... 38 Chairman of the Board of Directors
Ellen M. Hancock........ 55 Chief Executive Officer, President and Director
Richard S. Stoltz....... 54 Chief Operating Officer and Chief Financial Officer
Sam S. Mohamad.......... 39 Vice President, Worldwide Sales
Louis J. Muggeo......... 47 Vice President, Customer Support and Services
Robert V. Sanford III... 50 Vice President, Operations
James J. McInerney...... 46 Vice President, Engineering
Susan R. Farber......... 47 Vice President, Marketing and Strategy
Frederick W.W.
Bolander(1)............ 37 Director
John R. Dougery(2)...... 58 Director
Mark Dubovoy(3)......... 51 Director
Max D. Hopper........... 64 Director
Peter A. Howley(1)...... 58 Director
Daniel C. Lynch......... 57 Director
Thadeus J.
Mocarski(1)(3)......... 36 Director
Kanwal S. Rekhi(2)...... 52 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Finance Committee.
Each director will hold office until the next Annual Meeting of Stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal. Each officer serves at the discretion of the Board of
Directors (the "Board").
K.B. CHANDRASEKHAR has served as Chairman of the Board of Directors of the
Company since its incorporation in California in February 1995, as President
from such incorporation until March 1998 and as Chief Executive Officer from
such incorporation until September 1998. From 1992 to May 1995, he served as
President and a director of Fouress, Inc., a network software design and
development firm and the Company's predecessor, which he co-founded. Mr.
Chandrasekhar holds a B.S. degree in physics from Madras University and a
B.Tech. degree in electronics and communications from the Madras Institute of
Technology.
ELLEN M. HANCOCK has served as President of the Company since March 1998 and
Chief Executive Officer of the Company since September 1998 and has been a
director of the Company since April 1998. She has also served as the acting
Vice President, Marketing from July 1998 to October 1998. From July 1996 to
July 1997, she served as Executive Vice President for Research and Development
and Chief Technology Officer of Apple Computer, Inc. From September 1995 to
May 1996, Mrs. Hancock served as an Executive Vice President and Chief
Operating Officer of National Semiconductor Corporation. From 1966 to February
1995, she served in various staff, managerial and executive positions at
International Business Machines Corporation, most recently as Senior Vice
President and Group Executive. Mrs. Hancock is also a director of Colgate-
Palmolive Company, Siemens Business Communications, Inc. and Aetna Inc. She
holds a B.A. degree in mathematics from The College of New Rochelle and an
M.A. degree in mathematics from Fordham University.
RICHARD S. STOLTZ has served as Chief Operating Officer and Chief Financial
Officer of the Company since October 1995 and was a director of the Company
from January 1996 to October 1996. From February 1994 to
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September 1995, he was an independent consultant specializing in financial and
management information system issues. From 1992 to January 1994, Mr. Stoltz
served as Vice President of Finance, Treasurer and Chief Financial Officer of
Radius Inc., a computer hardware company. Mr. Stoltz holds a B.S.B.A. degree
in marketing and an M.B.A. from The American University.
SAM S. MOHAMAD has served as Vice President, Worldwide Sales of the Company
since February 1997. From March 1996 to January 1997, he served as Vice
President of Sales and Marketing of Genuity, Inc., a provider of data center
products and services. From 1987 to February 1996, Mr. Mohamad held various
positions at Oracle Corporation, most recently as Vice President of Direct
Sales and Marketing.
LOUIS J. MUGGEO has served as Vice President, Customer Support and Services
of the Company since February 1998. From May 1993 to February 1998, he served
in various positions at Sybase, Inc., a client/server relational database
management software company, most recently as Vice President/General Manager
for Western Area Field Services. From 1990 to May 1993, Mr. Muggeo served in
various positions at ViewStar Corporation (now Mosaix, Inc.), a document
management and workflow software company, most recently as Director, Education
Services.
ROBERT V. SANFORD III has served as Vice President, Operations of the
Company since April 1997. From February 1994 to April 1997, he was an
independent consultant specializing in management information system issues,
and from October 1992 to February 1994, he served as Director of IS at Radius
Inc. Mr. Sanford holds a B.A. degree in business administration from
California State University, San Bernardino.
JAMES J. MCINERNEY has served as Vice President, Engineering of the Company
since October 1998. From November 1995 to October 1998, he served as Vice
President of Software Engineering at Synopsys, Inc., a provider of software
tools for electronic design automation. From 1974 to October 1995, Mr.
McInerney served in various research, managerial and executive positions at
International Business Machines Corporation, most recently as Director,
Intelligent Communication Services. He holds B.S. and M.S. degrees in
mathematics from Polytechnic University in New York.
SUSAN R. FARBER has served as Vice President, Marketing and Strategy of the
Company since November 1998. From April 1998 to October 1998, she served as
Chief Operating Officer of Fusion Telecommunications. From July 1996 to April
1998, Ms. Farber served as Vice President, Business Markets, for GTE. From
1994 to July 1996, she served as Consultant, International Technology Practice
for Heidrick & Struggles. From 1993 to 1994, Ms. Farber served as Vice
President, Marketing for Nielsen Europe. Ms. Farber holds a B.A. degree from
Georgetown University and an M.B.A. from George Washington University.
FREDERICK W. W. BOLANDER has served as a director of the Company since
October 1996. He has been associated with Apex Investment Partners, a venture
capital firm, in various capacities since October 1994 and has been a general
partner of the firm since April 1996. From May 1993 to September 1993, Mr.
Bolander was a consultant to the African Communications Group, a venture
capital and project management firm, and from September 1985 to September
1992, Mr. Bolander held the position of manager for AT&T Corporation. Mr.
Bolander is also a director of Concord Communications, Inc. Mr. Bolander holds
B.S. and M.S. degrees in electrical engineering from the University of
Michigan and an M.B.A. from Harvard University.
JOHN R. DOUGERY has served as a director of the Company since February 1996.
He has been President of Dougery Ventures, a venture capital firm, since
January 1998. Prior to that he was a general partner of Dougery & Wilder, a
venture capital from 1981 to December 1997. Mr. Dougery is also a director of
Printronix, Inc. Mr. Dougery holds an A.B. degree in mathematics from the
University of California, Berkeley and an M.B.A. from Stanford University.
MARK DUBOVOY has served as a director of the Company since October 1996. He
was a founder and has served as a general partner of Information Technology
Ventures since September 1994. Prior to that time, he
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was a general partner of Grace/Horn Ventures from 1991 to August 1994. Mr.
Dubovoy holds a B.S. degree in physics from the National University of Mexico
and an M.A. degree and Ph.D. in physics from the University of California,
Berkeley.
MAX D. HOPPER has served as a director of the Company since January 1998.
Mr. Hopper has been the Chief Executive Officer of Max D. Hopper Associates,
Inc., an IS management consulting firm, since January 1995. From 1985 to
January 1995, he served in various positions at American Airlines, a
subsidiary of AMR Corporation, most recently as Senior Vice President,
Information Systems and Chairman of the SABRE Group. Mr. Hopper is also a
director of Gartner Group, Inc., USData Corporation, VTEL Corporation,
Worldtalk Corporation, Metrocall, Inc. and Payless Cashways, Inc. From April
1996 to August 1997, he served as a director of BBN Corporation. From March
1995 to February 1998, he served as a director of Centura Software
Corporation. From August 1994 to February 1998, he served as a director of
Computer Language Research, Inc. He holds a B.S. degree in mathematics and an
M.B.A. from the University of Houston.
PETER A. HOWLEY has served as a director of the Company since September
1996. Mr. Howley has been a private consultant since May 1994. From 1985 until
April 1994, he served as Chairman of the Board, Chief Executive Officer and
President of Centex Telemanagement, Inc., a telecommunications management
company, which was acquired. Mr. Howley is also a director of FaxSAV, Inc. and
WorldPort Communications, Inc. Mr. Howley holds a B.I.E. degree and an M.B.A.
from New York University.
DANIEL C. LYNCH has served as director of the Company since January 1998.
Mr. Lynch has been the owner of Lynch Enterprises, a venture capital firm,
since August 1993. From April 1994 to August 1996, he was a director of UUNet
Technologies, Inc., an Internet service provider. From 1991 to August 1993, he
was the Chairman of the Board of Interop, a conference and trade show company,
which he founded and which is now a division of ZD Comdex Forums. Mr. Lynch
has also been Chairman of the Board of Directors of Cybercash, Inc. since
August 1994 when he founded the Company. He holds a B.S. degree in mathematics
from Loyola Marymount University and an M.A. degree in mathematics from the
University of California, Los Angeles.
THADEUS J. MOCARSKI has served as a director of the Company since June 1997.
Mr. Mocarski has been an officer of various entities affiliated with Fleet
Equity Partners since January 1994. Prior to joining Fleet Equity Partners,
Mr. Mocarski was an attorney with the law firm of Edwards & Angell from 1989
to January 1994. Mr. Mocarski is also a director of Dobson Communications
Corporation and Dobson Wireline Company. Mr. Mocarski holds a B.A. in
economics and government from Colby College and a J.D. degree from the
Washington College of Law.
KANWAL S. REKHI has served as a director of the Company since December 1995.
Mr. Rekhi has been the Chief Executive Officer of Cybermedia Inc., a consumer
software company, since May 1998. He was retired from January 1995 to May
1998. He served as Executive Vice President and a director at Novell Inc., a
network software company, from 1989 to December 1994. Mr. Rekhi is also a
director of Cybermedia Inc. Mr. Rekhi holds a B.Tech. degree in electrical
engineering from the Indian Institute of Technology, Bombay and an M.S. degree
in electrical engineering from Michigan Technology Institute.
BOARD COMMITTEES
The Audit Committee of the Board consists of Mr. Dougery and Mr. Rekhi. The
Audit Committee reviews the Company's financial statements and accounting
practices, makes recommendations to the Board regarding the selection of
independent auditors and reviews the results and scope of the audit and other
services provided by the Company's independent auditors. The Compensation
Committee of the Board consists of Mr. Bolander, Mr. Howley and Mr. Mocarski.
The Compensation Committee makes recommendations to the Board concerning
salaries and incentive compensation for the Company's officers and employees
and administers the Company's employee benefit plans. The Finance Committee of
the Board consists of Mr. Dubovoy and Mr. Mocarski. The Finance Committee
reviews, evaluates and makes recommendations regarding future financing
requirements of the Company.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board was at any
time since the formation of the Company an officer or employee of the Company.
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on the Board or the Compensation Committee of the
Board.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their services
as directors but are reimbursed for their reasonable expenses in attending
meetings of the Board. In December 1995 and October 1996, Mr. Rekhi and Mr.
Howley were granted warrants to acquire 16,666 shares of Common Stock and
19,841 shares of Series B1 Preferred Stock (which converted into shares of
Common Stock at the closing of the Company's initial public offering),
respectively, at an exercise price of $2.40 and $2.52 per share, respectively,
in connection with their service on the Board. In addition, in October 1996,
Mr. Howley was granted an option to purchase 25,000 shares of Common Stock at
an exercise price of $0.30 per share, in connection with his service on the
Board. In November 1997, Mr. Rekhi exercised the Common Stock warrant in full.
In October 1997, Mr. Howley exercised the warrant for Series B1 Preferred
Stock in full and exercised the option for 13,000 of the shares of Common
Stock subject thereto.
In January 1998, the Board adopted, and in February 1998 the stockholders
approved, the 1998 Directors Stock Option Plan (the "Directors Plan") and
reserved a total of 200,000 shares of the Company's Common Stock for issuance
thereunder. Members of the Board who are not employees of the Company, or any
parent or subsidiary of the Company, are eligible to participate in the
Directors Plan. Each eligible director who was or becomes a member of the
Board on or after the Company's initial public offering of Common Stock in
March 1998 ("Effective Date") will automatically be granted an option for
20,000 shares (an "Initial Grant") on the earlier of the Effective Date or the
date such director first becomes a director; provided that a director that was
a member of the Board of Exodus Communications, Inc., a California
corporation, is not eligible to receive an Initial Grant. Thus Messrs. Lynch
and Hopper are the only current directors who received an Initial Grant, which
were at an exercise price of $15.00 per share. At each annual meeting of
stockholders thereafter, each eligible director will automatically be granted
an additional option to purchase 5,000 shares (an "Annual Grant") if such
director has served continuously as a member of the Board since the date of
such director's Initial Grant (or since the Effective Date if such director
did not receive an Initial Grant). Initial Grants will vest as to 33 1/3% of
the total shares on each annual anniversary of the date of grant, provided the
optionee continues as a member of the Board or as a consultant to the Company.
Annual Grants will vest as to 25% of the total shares on each annual
anniversary of the date of grant, provided the optionee continues as a member
of the Board or as a consultant to the Company. Options will cease vesting
once the individual ceases to provide services as a director or consultant.
Following the individual's cessation of services to the Company, he or she
will have seven months in which to exercise the options granted under the
Directors Plan, twelve months if the cessation of services resulted from the
individual's death or disability. The exercise price of all options granted
under the Directors Plan will be the fair market value of the Common Stock on
the date of grant. On May 19, 1998, the Company granted options to purchase
5,000 shares of the Company's Common Stock under the Company's 1998 Plan to
each of Messrs. Bolander, Dougery, Dubovoy, Hopper, Howley, Lynch, Mocarski
and Rekhi, at exercise prices of $30.688 per share, and otherwise subject to
the terms and conditions of Annual Grants under the Directors Plan.
In February 1998, the Company sold shares of Series D Preferred Stock
convertible into 33,333 and 5,848 shares of Common Stock at a purchase price
per share of $8.55 to Messrs. Lynch and Hopper, respectively.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the year
ended December 31, 1997 by (i) the Company's chief executive officer
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and (ii) the four other most highly compensated executive officers other than
the chief executive officer who were serving as executive officers as of
December 31, 1997 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------------------- ----------------------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITIONS SALARY ($) BONUS ($) COMPENSATION ($) UNDERLYING OPTIONS (#)
- ---------------------------- ---------- --------- ---------------- ----------------------
<S> <C> <C> <C> <C>
K.B. Chandrasekhar......
President and Chief
Executive Officer (1) $160,000 $75,000 $5,373(2) 250,002
Sam S. Mohamad..........
Vice President, World-
wide Sales 273,626(3) 70,000 -- 166,668
Richard S. Stoltz.......
Chief Operating Officer
and Chief Financial Of-
ficer 147,500 40,000 -- 58,334
B.V. Jagadeesh..........
Vice President, Engi-
neering 135,000 40,000 -- 58,334
Robert V. Sanford III...
Vice President, Opera-
tions 101,250 35,000 -- 91,667
</TABLE>
- --------
(1) Mr. Chandrasekhar ceased serving as President of the Company in March 1998
and as Chief Executive Officer in September 1998 when Ellen M. Hancock was
appointed to those positions. Mr. Chandrasekhar remains as Chairman of the
Board of Directors.
(2) Represents a car allowance.
(3) Includes sales commissions of $130,542.
As indicated in the table above, in March 1998 and September 1998, Ellen M.
Hancock was appointed President and Chief Executive Officer, respectively, of
the Company. She will be compensated at an initial base salary of $200,000 per
year and is eligible for bonuses totalling up to $100,000 for 1998. See "--
Option Grants in 1997."
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The following table sets forth further information regarding option grants
to each of the Named Executive Officers during 1997. In accordance with the
rules of the Securities and Exchange Commission, the table sets forth the
hypothetical gains or "option spreads" that would exist for the options at the
end of their respective terms. These gains are based on assumed rates of
annual compound stock price appreciation of 5% and 10% from the date the
option was granted to the end of the option term using the price of $15.00 per
share from the Company's initial public offering as the base value.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM (2)
OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION ----------------------------
NAME GRANTED(#)(1) IN 1997 PER SHARE($) DATE 5% 10%
---- ------------- ------------- -------------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
K.B. Chandrasekhar...... 41,667 2.6% $0.30 6/26/07 $ 1,005,567 $ 1,608,602
83,334 5.2 0.75 10/15/07 1,973,634 3,179,704
83,334 5.2 0.75 10/15/07 1,973,634 3,179,704
41,667 2.6 0.75 10/15/07 986,817 1,589,852
Sam S. Mohamad.......... 66,667 4.1 0.30 2/17/07 1,608,903 2,573,755
8,334 0.5 0.30 6/26/07 201,128 321,744
25,000 1.6 0.75 10/15/07 592,085 953,903
66,667 4.1 0.75 10/15/07 1,578,903 2,543,755
Richard S. Stoltz....... 14,584 0.9 0.30 6/26/07 351,962 563,032
43,750 2.7 0.75 10/15/07 1,036,150 1,669,331
B.V. Jagadeesh.......... 14,584 0.9 0.30 6/26/07 351,962 563,032
43,750 2.7 0.75 10/15/07 1,036,150 1,669,331
Robert V. Sanford III... 75,000 4.7 0.30 2/17/07 1,810,006 2,895,460
4,167 0.3 0.30 6/26/07 100,564 160,872
12,500 0.8 0.75 10/15/07 296,043 476,952
</TABLE>
- --------
(1) These options generally are incentive stock options that were granted at
fair market value and vest over a 50-month period so long as the
individual is employed by the Company. With regard to Mr. Chandrasekhar,
both options for 83,334 shares vest in full on the fifth anniversary of
the date of grant, one of which accelerated to start vesting at 2% per
month upon the closing of the Company's initial public offering in March
1998 and the other of which will accelerate to start vesting at 2% per
month upon the hiring of certain additional executive management
personnel. The potential realizable value is based on the term of the
option at the time of grant, which is ten years for each of the options
set forth in this table. All amounts have been calculated using the price
of $15.00 per share from the Company's initial public offering as the base
value and assumed annual rates of stock price appreciation of 5% and 10%.
(2) The 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
In January 1998, Mr. Chandrasekhar was granted two options, each for 166,667
shares of Common Stock, at per share exercise prices of $9.00 and $18.00,
respectively, that vest in full upon the third and fifth anniversaries of the
date of grant, respectively. Both options will accelerate and become fully
vested if the Company is acquired or sells all or substantially all of its
assets or if Mr. Chandrasekhar is terminated other than for cause. In
addition, in February 1998, Richard S. Stoltz and B.V. Jagadeesh were each
granted options to purchase 60,000 shares of Common Stock at an exercise price
of $7.65 per share, with vesting over a 50 month period. All of the above-
described options expire ten years from the date of grant.
In March 1998, Mrs. Hancock was granted an option for 721,981 shares of
Common Stock at a per share exercise price of $9.00 that vests as to 12% of
such shares in September 1998 and vests as to an additional 2%
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per month thereafter. The option expires ten years from the date of grant. In
addition, she purchased 50,000 shares of Common Stock of the Company at a
purchase price of $9.00 per share.
The following table sets forth the number of shares acquired upon the
exercise of stock options during 1997 and the number of shares covered by both
exercisable and unexercisable stock options held by each of the Named
Executive Officers at December 31, 1997. Also reported are values of
unexercised "in-the-money" options, which represent the positive spread
between the respective exercise prices of outstanding stock options and the
price of $15.00 per share from the Company's initial public offering.
AGGREGATED OPTION EXERCISES IN 1997 AND YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT YEAR-END AT YEAR-END
ON VALUE ------------------------- ------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXECISABLE
- ---- ----------- ----------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
K.B. Chandrasekhar...... -- -- 18,334 231,668 $265,385 $3,315,894
Sam S. Mohamad.......... -- -- 18,668 148,000 272,319 2,136,450
Richard S. Stoltz....... 10,500 $1,181 2,334 45,500 184,329 653,494
B.V. Jagadeesh.......... -- -- 12,834 45,500 184,329 653,494
Robert V. Sanford III... -- -- 31,333 60,334 460,160 881,720
</TABLE>
Executive Employment Policy. In December 1997, the Board adopted a form of
Executive Employment Policy (the "Policy") to be entered into between the
Company and each of its executive officers and certain other officers of the
Company (together, the "Executives"). Pursuant to the Policy, in the event of
a "Termination" (as defined in the Policy) resulting from a "Change of
Control" (as defined in the Policy) of the Company, each Executive's base
salary and medical benefits would continue as follows: Chief Executive Officer
and President--18 months; Chief Operating Officer and Chief Financial
Officer--12 months; Vice President, Worldwide Sales--12 months; certain other
Vice Presidents--six months; and other Executives--three months. In addition,
in the event of a Change in Control, each Executive's options would become
exercisable with respect to 50% of such Executive's remaining unvested shares
subject to such options. In the event of an "Involuntary Termination" (as
defined in the Policy), base salary and medical benefits would generally
continue for shorter time periods than those set forth above and the
Executive's options would continue to vest during such period. An Executive
that "Voluntarily Terminates" (as defined in the Policy) or is terminated for
"Cause" (as defined in the Policy) would generally not receive any
compensation, additional stock option vesting or other benefits after the date
of termination. Pursuant to the Policy, during the term of any payments made
to an Executive after termination, such Executive would not be permitted to
manage, operate, control, participate in the management, operation or control
of or be employed by any other person or entity that is engaged in providing
services that are directly competitive with the services offered by the
Company.
EMPLOYEE BENEFIT PLANS
1997 Equity Incentive Plan. In January 1997, the Board adopted the 1997
Plan. In October 1997, the Board increased the number of shares of Common
Stock reserved for issuance under the 1997 Plan to a total of 2,200,000. The
stockholders approved the 1997 Plan and the share increase in October 1997.
The 1997 Plan became effective in January 1997 and serves as the successor to
the 1995 Stock Option Plan (the "1995 Plan"). Options granted under the 1995
Plan before its termination in January 1997 continue to remain outstanding in
accordance with their terms, but no further options may be granted under the
1995 Plan. The 1997 Plan provides for the grant of stock options and the
issuance of restricted stock by the Company to its employees, officers,
directors and consultants. The 1997 Plan permits the grant of options that are
either incentive stock options ("ISOs") (as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code")) or nonqualified stock
options ("NQSOs"), on terms (including the exercise price, which may not be
less than 85% of the fair market value of the Company's Common Stock, and the
vesting schedule) determined by the Board, subject to certain statutory and
other limitations in the 1997 Plan. In addition to, or in tandem with, stock
options
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<PAGE>
under the 1997 Plan, the Board may grant participants restricted stock awards
to purchase the Company's Common Stock for not less than 85% of its fair
market value at the time of grant. The other terms of such restricted stock
awards may be determined by the Board.
On the effective date of the Company's initial public offering, the 1997
Plan was terminated. Options granted under the 1997 Plan before its
termination continue to remain outstanding in accordance with their terms, but
no further options will be granted under the 1997 Plan.
1998 Equity Incentive Plan. In January 1998, the Board adopted, and in
February 1998 the stockholders approved, the 1998 Equity Incentive Plan (the
"1998 Plan") to provide for the grant of stock options, restricted stock and
stock bonuses to employees, officers, directors, consultants, independent
contractors and advisors of the Company or any parent or subsidiary of the
Company. The 1998 Plan is the successor to the 1997 Plan. Although the 1997
Plan terminates, options granted thereunder remain outstanding according to
their terms. The total number of shares reserved and available for grant and
issuance pursuant to the 1998 Plan is 1,500,000 plus shares that pour over
from the 1997 Plan. The shares that pour over from the 1997 Plan are shares
that (i) remain available for grant under the 1997 Plan on the effective date
of the 1998 Plan, (ii) are subject to issuance upon exercise of an option
granted under the 1997 Plan that cease to be subject to such option for any
reason other than exercise of such option and (iii) are issued under awards
granted under the 1997 Plan, but are repurchased by the Company at the price
at which the shares were originally issued. Shares that are subject to (x)
issuance upon exercise of an option granted under the 1998 Plan that cease to
be subject to such option for any reason other than exercise, (y) awards
granted under the 1998 Plan that are forfeited or are repurchased by the
Company at the original issue price and (z) awards that otherwise terminate
without shares being issued will again be available for grant and issuance in
connection with future awards under the 1998 Plan.
The 1998 Plan will terminate in January 2008, unless earlier terminated by
the Board. No person will be eligible to receive more than 750,000 shares in
any calendar year pursuant to equity awards under the 1998 Plan, other than a
new employee who will be eligible to receive no more than 1,250,000 shares in
the calendar year in which such employee commences employment. The 1998 Plan
will be administered by the Compensation Committee of the Board. The
Compensation Committee has the authority to construe and interpret the 1998
Plan and any agreement made thereunder, grant equity awards and make all other
determinations necessary or advisable for the administration of the 1998 Plan.
The 1998 Plan permits the grant of ISOs and NQSOs. ISOs may be granted only to
employees of the Company or of any parent or subsidiary of the Company. NQSOs,
stock bonuses and restricted stock may be granted to all individuals eligible
to receive grants under the 1998 Plan. The exercise price of ISOs must be at
least equal to the fair market value of the Company's Common Stock on the date
of grant. The exercise price of NQSOs must be at least equal to 85% of the
fair market value of the Company's Common Stock on the date of grant. The
purchase price of restricted stock will be determined by the Compensation
Committee. The maximum term of an option is ten years. Options typically vest
over a four-year period. Vesting will stop if the optionee ceases to provide
services to the Company or any parent or subsidiary of the Company, but
options will generally remain exercisable for a period of three months
following the termination of services. If the optionee's termination is for
cause, his or her options will generally terminate immediately. If the
optionee's termination is due to death or disability, the optionee or his or
her estate will generally have twelve months in which to exercise. In the
event of certain changes in control transactions, outstanding equity awards
may be assumed or substituted by the successor corporation, if the successor
corporation does not assume or substitute the awards, the awards will
terminate prior to the effectiveness of the transaction.
1998 Employee Stock Purchase Plan. In January 1998, the Board adopted and
subsequently amended, and in February 1998 the stockholders approved, the 1998
Employee Stock Purchase Plan (the "1998 Purchase Plan") and reserved a total
of 600,000 shares of the Company's Common Stock for issuance thereunder. The
Purchase Plan became effective on the first business day on which price
quotations for the Company's Common Stock were available on the Nasdaq
National Market. The Purchase Plan permits eligible employees to acquire
shares of the Company's Common Stock through payroll deductions. The Purchase
Plan is intended to qualify as an "employee stock purchase plan" under Section
423 of the Code. Except for the initial offering, each offering
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<PAGE>
under the Purchase Plan will be for a period of 24 months (the "Offering
Period") commencing on May 1 and November 1 of each year and ending on October
31 and April 30 of the second year thereafter. The first Offering Period began
on the date on which price quotations for the Company's Common Stock were
first available on the Nasdaq National Market and will end on April 30, 2000,
unless otherwise determined by the Board. Except for the first Offering
Period, each Offering Period will consist of four purchase periods, each six
months in length ("Purchase Period"). The Board has the power to change the
duration of Offering Periods or Purchase Periods without stockholder approval,
provided that the change is announced at least 15 days prior to the scheduled
beginning of the first Offering Period or Purchase Period to be affected.
Eligible employees may select a rate of payroll deduction between 2% and 10%
of their base compensation, subject to certain limits set forth in the
Purchase Plan. The purchase price for the Company's Common Stock purchased
under the Purchase Plan is 85% of the lesser of the fair market value of the
Company's Common Stock on the first day of the applicable Offering Period or
on the last day of the respective Purchase Period.
401(k) Plan. The Company sponsors the Exodus Communications, Inc. 401(k)
Plan (the "401(k) Plan"). Employees who complete three months of service with
the Company are eligible to participate ("Participants"). Participants may
contribute up to 20% of their current compensation, up to a statutorily
prescribed annual limit, to the 401(k) Plan. Each Participant is fully vested
in his or her salary reduction contributions. Participant contributions are
held in trust as required by law. Individual Participants may direct the
trustee to invest their accounts in authorized investment alternatives. The
Company may make discretionary matching contributions to the 401(k) Plan,
although it has not done so to date, in an amount equal to a percentage the
Company from time to time may deem advisable of the Participant's salary
reduction contributions. Salary reduction contributions in excess of 6% of the
Participant's compensation are disregarded for purposes of the match. The
Company may also make fully vested qualified non-elective contributions on
behalf of employees who are not "highly compensated." In addition, the Company
may make discretionary contributions, although it has not done so to date.
Discretionary and matching contributions are subject to a vesting schedule.
The 401(k) Plan is intended to qualify under Section 401(a) of the Internal
Revenue Code so that contributions to the 401(k) Plan, and income earned on
such contributions, are not taxable to Participants until withdrawn or
distributed from the 401(k) Plan.
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CERTAIN TRANSACTIONS
Since September 1, 1995, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which the
Company was or is to be a party in which the amount involved exceeds $60,000
and in which any director, executive officer or holder of more than 5% of the
Common Stock of the Company had or will have a direct or indirect interest
other than (i) compensation arrangements, which are described where required
under "Management" and (ii) the transactions described below.
For clarity of presentation, share numbers and per share prices for the
transactions described below reflect the one-for-three reverse stock split for
the Common Stock which occurred in February 1998 and an adjustment to reflect
the conversion ratio of one-for-three for the Preferred Stock which was
effected upon the closing of the Company's initial public offering.
In October 1995, Richard S. Stoltz, the current Chief Operating Officer and
Chief Financial Officer of the Company, and his wife purchased 250,000 shares
of the Company's Common Stock for a purchase price of $60,000 pursuant to two
promissory notes, of which $47,263 remains outstanding. Also in October 1995,
Fred R. Sibayan, Jr., a former Vice President, Sales of the Company, purchased
150,000 shares of the Company's Common Stock for a purchase price of $36,000
pursuant to a promissory note, which has since been repaid in full. Of such
shares, 43,334 shares were repurchased by the Company in connection with Mr.
Sibayan's resignation in January 1997.
In December 1995, Kanwal S. Rekhi, a director of the Company, loaned the
Company $200,000 in exchange for a promissory note. In February 1996, as part
of the financing described in the next paragraph, Mr. Rekhi converted the
promissory note into 161,459 shares of Series A Preferred Stock.
In February and March 1996, the Company sold shares of Series A Preferred
Stock convertible into 2,599,481 shares of Common Stock to a group of entities
and individuals for an aggregate purchase price of $3,219,994, which amount
was paid in cash and through the conversion of debt. These transactions
included sales to (i) Productivity Fund II, L.P. and Productivity Fund III,
L.P. (the "Productivity Funds"), partnerships associated with First Analysis
Corporation ("First Analysis"), a greater than 5% stockholder of the Company,
of shares convertible into 565,107 shares of Common Stock, (ii) J.F. Shea &
Co., Inc., a greater than 5% stockholder of the Company, of shares convertible
into 484,378 shares of Common Stock, (iii) John R. Dougery, a director of the
Company, and his wife and trusts for which Mr. Dougery or his wife is a
trustee (the "Dougery Trusts"), of shares convertible into 201,823 shares of
Common Stock, and (iv) the Rekhi Family Trust dated 12/15/89 (the "Rekhi
Family Trust"), for which Kanwal S. Rekhi is a trustee, of shares convertible
into 161,459 shares of Common Stock.
In March 1996, the Rekhi Family Trust and two other trusts, for which Kanwal
S. Rekhi is a trustee, purchased an aggregate of 94,333 shares of the
Company's Common Stock for an aggregate purchase price of $22,640.
In April 1996, John R. Dougery purchased 40,000 shares of the Company's
Common Stock for a purchase price of $9,600.
In October 1996, the Company sold shares of Series B Preferred Stock
convertible into 2,579,355 shares of Common Stock to a group of entities and
individuals for an aggregate purchase price of $6,500,000, which amount was
paid in cash. This included sales to (i) Apex Investment Fund III, L.P., which
is affiliated with both Frederick W.W. Bolander, a director of the Company,
and First Analysis, of shares convertible into 694,444 shares of Common Stock,
(ii) Information Technology Ventures, L.P. and ITV Affiliates Fund, L.P. (the
"ITV Partnerships"), which are both associated with Mark Dubovoy, a director
of the Company, and which comprise a greater than 5% stockholder group of the
Company, of shares convertible into 694,444 shares of Common Stock, (iii) the
Productivity Funds of shares convertible into 277,777 shares of Common Stock,
(iv) J.F. Shea & Co., Inc., of shares convertible into 158,730 shares of
Common Stock, (v) John R. Dougery and his wife and the
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Dougery Trusts of shares convertible into 39,680 shares of Common Stock and
(vi) Peter A. Howley, a director of the Company, of shares convertible into
39,682 shares of Common Stock.
In March 1997, the Company obtained bridge loans of $2,473,866 pursuant to
convertible promissory notes due in September 1997 (the "First Bridge Notes")
from a group of entities and individuals, including (i) $517,895 from Apex
Investment Fund III, L.P. and Apex Strategic Partners, L.L.C. (the "Apex
Funds"), which are both associated with Frederick W.W. Bolander and First
Analysis, (ii) $496,000 from J.F. Shea & Co., Inc., as Nominee 1996-II, (iii)
$324,000 from the Productivity Funds, (iv) $268,000 from the ITV Partnerships,
(v) $96,000 from John R. Dougery and his wife and the Dougery Trusts, (vi)
$62,001 from the Rekhi Family Trust and (vii) $49,986 from Peter A. Howley.
The First Bridge Notes were unsecured and provided for automatic conversion
into Preferred Stock upon the closing of the next Preferred Stock financing to
occur prior to the September 1997 maturity date. In connection with obtaining
these bridge loans, the Company also sold to the holders of the First Bridge
Notes, for an aggregate purchase price of $1,039, five-year warrants, which
were exercised before the closing of the Company's initial public offering in
March 1998, to purchase shares of Series B Preferred Stock convertible into
41,240 shares of Common Stock at an exercise price of $2.52 per share,
including warrants for shares convertible into 8,632, 8,267, 5,401, 4,466,
1,603, 1,034, and 833 shares of Common Stock to the Apex Funds, J.F. Shea &
Co., Inc., as Nominee 1996-II, the Productivity Funds, the ITV Partnerships,
John R. Dougery and his wife and the Dougery Trusts, the Rekhi Family Trust
and Peter A. Howley, respectively.
In June 1997, the Company obtained bridge loans of $1,500,000 pursuant to
convertible promissory notes due in September 1997 (the "Second Bridge Notes")
from a group of entities and individuals, including (i) $252,450 from the Apex
Investment Fund III, L.P., (ii) $243,000 from the Productivity Funds, (iii)
$207,463 from J.F. Shea & Co., Inc., as Nominee 1996-II, (iv) $201,000 from
the ITV Partnerships, (v) $163,690 from the Rekhi Family Trust, (vi) $96,000
from John R. Dougery and his wife and the Dougery Trusts, and (vii) $12,000
from Peter A. Howley. The Second Bridge Notes were unsecured and provided for
automatic conversion into Preferred Stock upon the closing of the next
Preferred Stock financing to occur prior to the September 1997 maturity date.
In connection with obtaining this bridge loan, the Company also sold to the
holders of the Second Bridge Notes, for an aggregate purchase price of $630,
five-year warrants, which were exercised before the closing of the Company's
initial public offering in March 1998, to purchase shares of Series B
Preferred Stock convertible into 25,008 shares of Common Stock at an exercise
price of $2.52 per share, including warrants for shares convertible into
4,208, 4,050, 3,458, 3,348, 2,727, 1,603, and 200 shares of Common Stock, to
Apex Investment Fund III, L.P., the Productivity Funds, J.F. Shea & Co., Inc.,
as Nominee 1996-II, the ITV Partnerships, the Rekhi Family Trust, John R.
Dougery and his wife and the Dougery Trusts and Peter A. Howley, respectively.
In June 1997, the Company sold shares of Series C Preferred Stock
convertible into 5,263,270 shares of Common Stock and five-year warrants to
purchase shares of Series C Preferred Stock at an exercise price of $4.0869
per share, and convertible into 526,349 shares of Common Stock, at an
aggregate purchase price of $21,510,574 (including $37 for the warrants),
including $4,010,970 in principal and interest owed to the holders of the
First Bridge Notes and the Second Bridge Notes. This included issuances to (i)
Fleet Resources, Inc., Fleet Equity Partners VI, L.P., Chisholm Partners III,
L.P. and Kennedy Plaza Partners, all of which are funds (the "Fleet Funds")
associated with Thadeus J. Mocarski, a director of the Company, and which
together comprise a greater than 5% stockholder group of the Company, of
shares convertible into 1,835,120 shares of Common Stock and warrants to
purchase shares convertible into 183,515 shares of Common Stock, (ii) Oak
Investment Partners VII and Oak VII Affiliate Fund (the "Oak Partnerships"), a
greater than 5% stockholder group of the Company, of shares convertible into
1,468,100 shares of Common Stock and warrants to purchase shares convertible
into 146,811 shares of Common Stock, (iii) JK&B Capital L.P. and JK&B Capital
II, L.P. (the "JK&B Partnerships"), then a greater than 5% stockholder group
of the Company, of shares convertible into 611,705 shares and warrants to
purchase shares convertible into 61,172 shares of Common Stock, (iv) the Apex
Funds of shares convertible into 190,334 shares of Common Stock and warrants
to purchase shares convertible into 19,035 shares of Common Stock, (v) J.F.
Shea & Co., Inc., as Nominee 1996-II, of shares convertible into
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173,884 shares of Common Stock and warrants to purchase shares convertible
into 17,389 shares of Common Stock, (vi) the Productivity Funds of shares
convertible into 139,945 shares of Common Stock and warrants to purchase
shares convertible into 13,995 shares of Common Stock, (vii) the ITV
Partnerships of shares convertible into 115,756 shares of Common Stock and
warrants to purchase shares convertible into 11,574 shares of Common Stock,
(viii) the Rekhi Family Trust of shares convertible into 55,521 shares of
Common Stock and warrants to purchase shares convertible into 5,552 shares of
Common Stock, (ix) John R. Dougery and his wife and the Dougery Trusts of
shares convertible into 47,367 shares of Common Stock and warrants to purchase
shares convertible into 4,739 shares of Common Stock and (x) Peter A. Howley
of shares convertible into 15,337 shares of Common Stock and warrants to
purchase shares convertible into 1,534 shares of Common Stock. The warrants
were exercised by the holders thereof prior to the closing of the Company's
initial public offering in March 1998.
In December 1997, the Company sold shares of Series D Preferred Stock
convertible into 877,180 shares of Common Stock at an aggregate purchase price
of $7,500,000 which amount was paid in cash. This included sales to (i) the
Fleet Funds of shares convertible into 175,437 shares of Common Stock, (ii)
the Oak Partnerships of shares convertible into 114,764 shares of Common
Stock, (iii) the Apex Funds of shares convertible into 85,272 shares of Common
Stock, (iv) J.F. Shea & Co., Inc. of shares convertible into 78,710 shares of
Common Stock, (v) the Productivity Funds of shares convertible into 71,512
shares of Common Stock, (vi) the ITV Partnerships of shares convertible into
58,955 shares of Common Stock, (vii) the JK&B Partnerships of shares
convertible into 47,818 shares of Common Stock, (viii) the Rekhi Family Trust
and two other trusts, for which Mr. Rekhi is a trustee, of shares convertible
into 36,221 shares of Common Stock, (ix) Dougery Ventures LLC, of which John
R. Dougery is President, and one of the Dougery Trusts of shares convertible
into 31,331 shares of Common Stock and (x) Peter A. Howley of shares
convertible into 7,203 shares of Common Stock.
In February 1998, the Company sold shares of Series D Preferred Stock
convertible into 33,333 and 5,848 shares of Common Stock at a purchase price
per share of $8.55 to two directors of the Company, Daniel C. Lynch and Max D.
Hopper, respectively.
In February 1998, the Company reincorporated into Delaware. In connection
with the reincorporation, the Company issued shares of Common Stock, Series A
Preferred Stock, Series B Preferred Stock, Series B1 Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock and options and warrants in
exchange for shares, options and warrants, respectively, in the predecessor
California entity. Each of the individuals and entities listed above received
the number of shares of such class or series identified in the preceding
paragraphs.
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PRINCIPAL STOCKHOLDERS
Except as otherwise noted, the following table sets forth certain
information known to the Company with respect to beneficial ownership of the
Company's Common Stock as of September 30, 1998 by (i) each stockholder known
by the Company to be the beneficial owner of more than 5% of the Company's
Common Stock, (ii) each director of the Company, (iii) each of the five most
highly compensated executive officers of the Company in 1997 and (iv) all
current executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED
- ------------------------ --------------------- ------------------
<S> <C> <C>
Thadeus J. Mocarski
Fleet Funds(2)....................... 2,149,226 10.9%
First Analysis Corporation(3)......... 2,034,426 10.3
Frederick W.W. Bolander
Apex Funds(4)........................ 979,953 5.0
Mark Dubovoy
ITV Partnerships(5).................. 895,543 4.5
K.B. Chandrasekhar(6)................. 819,496 4.1
B.V. Jagadeesh(7)..................... 463,331 2.3
John R. Dougery(8).................... 373,127 1.9
Kanwal S. Rekhi(9).................... 355,430 1.8
Richard S. Stoltz(10)................. 262,489 1.3
Peter A. Howley(11)................... 123,669 *
Sam S. Mohamad(12).................... 43,666 *
Daniel C. Lynch(13)................... 39,333 *
Robert V. Sanford III(14)............. 7,000 *
Max D. Hopper(15)..................... 5,848 *
All current executive officers and
directors as a group
(17 persons)(16)..................... 6,698,128 33.5
</TABLE>
- --------
* Represents less than 1% of the Company's outstanding Common Stock.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Shares of Common Stock subject to options that are currently
exercisable or exercisable within 60 days of September 30, 1998 are
deemed to be outstanding and to be beneficially owned by the person
holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(2) Represents 1,181,428 shares held by Fleet Venture Resources, Inc.;
506,357 shares held by Fleet Equity Partners VI, L.P.; 429,844 shares
held by Chisholm Partners III, L.P.; and 31,597 shares held by Kennedy
Plaza Partners. Mr. Mocarski, a director of the Company, is a Senior Vice
President of each of (i) Fleet Venture Resources, Inc., (ii) Fleet Growth
Resources II, Inc., a general partner of Fleet Equity Partners VI, L.P.
and (iii) Silverado III, Corp., the general partner of Silverado III,
L.P., the general partner of Chisholm Partners III, L.P. Mr. Mocarski is
also a general partner of Kennedy Plaza Partners. Mr. Mocarski may be
deemed to share investment and voting power in the aforementioned
securities with Mr. Robert M. Van Degna and Mr. Habib Y. Gorgi in their
capacities as Chairman and Chief Executive Officer, and President,
respectively, of each of (i) Fleet Venture Resources, Inc., (ii) Fleet
Growth Resources II, Inc. and (iii) Silverado III, Corp. and as managing
general partners of Kennedy Plaza Partners. Messrs. Mocarski, Van Degna
and Gorgi disclaim beneficial ownership of such securities except to the
extent of their respective pecuniary interests therein. The address of
Mr. Mocarski and the Fleet
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Funds is c/o Fleet Equity Partners, Mail Stop: RI MO F12C, 50 Kennedy
Plaza, Providence, Rhode Island 02903.
(3) Represents 755,727 shares held by Productivity Fund III, L.P.; 298,746
shares held by Productivity Fund II, L.P.; and the shares held by the
Apex Funds described in footnote (4). First Analysis Corporation ("First
Analysis") is a general partner of the general partner of each of Apex
Investment Fund III, L.P., Productivity Fund II, L.P. and Productivity
Fund III, L.P. In addition, First Analysis is a managing member of Apex
Management III, L.L.C., the manager of Apex Strategic Partners, L.L.C.
First Analysis disclaims beneficial ownership of all shares directly
owned by the funds except to the extent of its proportionate pecuniary
interests therein. The address of First Analysis is 233 Wacker Drive,
Suite 9500, Chicago, Illinois 60606.
(4) Represents 937,955 shares held by Apex Investment Fund III, L.P.; and
41,998 shares held by Apex Strategic Partners, L.L.C. Mr. Bolander, a
director of the Company, is a general partner of the general partner of
Apex Investment Fund III, L.P. and a managing member of Apex Management
III, L.L.C., the manager of Apex Strategic Partners, L.L.C. The address
of Mr. Bolander and the Apex Funds is 233 Wacker Drive, Suite 9500,
Chicago, Illinois 60606.
(5) Includes 865,954 shares held by Information Technology Ventures, L.P.;
and 22,589 shares held by ITV Affiliates Fund, L.P. Mr. Dubovoy, a
director of the Company, is a principal member of ITV Management, LLC,
the general partner of Information Technology Ventures, L.P. and ITV
Affiliates Fund, L.P. The address of Mr. Dubovoy and the ITV Partnerships
is 3000 Sand Hill Road, Building 1, Suite 280, Menlo Park, California
94025.
(6) Includes 79,998 shares held by Mr. Chandrasekhar and his wife as trustees
for three trusts for their minor children, 2,128 shares held by the K.B.
Chandrasekhar Family Foundation, of which Mr. Chandrasekhar is a trustee,
and 57,499 shares subject to options exercisable within 60 days of
September 30, 1998. Mr. Chandrasekhar is the Chief Executive Officer and
Chairman of the Board of Directors of the Company. The address of Mr.
Chandrasekhar is 2650 San Tomas Expressway, Santa Clara, California
95051.
(7) Includes 28,238 shares held by Mr. Jagadeesh and his wife as trustees for
two trusts for their minor children and 37,667 shares subject to options
exercisable within 60 days of September 30, 1998. Mr. Jagadeesh is Vice
President, Engineering of the Company.
(8) Represents 219,804 shares held in the Dougery Revocable Trust, of which
Mr. Dougery and his wife are the trustees; 111,774 shares held by Mr.
Dougery as trustee of three trusts for his children; 26,150 shares held
by Mr. Dougery's wife as trustee for a separate trust; and 15,399 shares
held by Dougery Ventures LLC, of which Mr. Dougery is President. Mr.
Dougery is a director of the Company.
(9) Represents 290,208 shares held by Mr. Rekhi and his wife as trustees for
the Rekhi Family Trust; 11,662 shares held by Mr. Rekhi as custodian for
minor children; and 53,560 shares held by Mr. Rekhi, his wife and one
other individual as trustees for two other trusts. Mr. Rekhi is a
director of the Company.
(10) Represents 235,322 shares held by Mr. Stoltz and his wife and 27,167
shares subject to options exercisable within 60 days of September 30,
1998. Mr. Stoltz is Chief Operating Officer and Chief Financial Officer
of the Company.
(11) Includes 12,000 shares subject to options exercisable within 60 days of
September 30, 1998. Mr. Howley is a director of the Company.
(12) Includes 45,333 shares subject to options exercisable within 60 days of
September 30, 1998. Mr. Mohamad is Vice President, Worldwide Sales of the
Company.
(13) Mr. Lynch is a director of the Company.
(14) Includes 3,667 shares subject to options exercisable within 60 days of
September 30, 1998. Mr. Sanford is Vice President, Operations of the
Company.
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(15) Mr. Hopper is a director of the Company.
(16) Includes 137,638 shares and 42,379 shares subject to options exercisable
within 60 days of September 30, 1998 held by executive officers not named
in this table and the shares and options referenced in footnotes 2 and 5
through 15.
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DESCRIPTION OF THE NEW CREDIT FACILITY
The Company expects to enter into a credit arrangement with Goldman Sachs
Credit Partners L.P. ("GSCP") and certain other lenders to provide a revolving
credit facility (the "Credit Facility") of up to approximately $50.0 million,
of which $25.0 million will be available initially and the balance will be
available upon meeting certain financial tests. The Company expects that GSCP
will act as arranger and syndication agent with respect to the Credit
Facility. Loans to the Company will be guaranteed by any future subsidiaries
of the Company. The Credit Facility is expected to be secured by a first
priority lien on substantially all of the Company's assets (subject to certain
exceptions) and the assets and stock of any future subsidiaries. The Credit
Facility is subject to the satisfaction of certain material conditions
precedent and the specific terms of the Credit Facility are subject to change
pursuant to final loan documentation. There can be no assurance as to whether,
or on what terms, the Company will obtain the Credit Facility.
The Credit Facility will allow for the borrowings of revolving credit loans
from time to time until the third anniversary of the closing of the Credit
Facility, at which time any outstanding loans will convert into an amortizing
term loan with a term of two years. The proceeds of the Credit Facility may be
used to finance additional Internet Data Centers and for general corporate
purposes. The ability of the Company to borrow under the Credit Facility will
be subject to, among other things, compliance with covenants, including
financial ratios and customary borrowing conditions.
Loans under the Credit Facility will bear interest, at the Company's option,
at (i) a Base Rate (as defined) plus a specified margin or (ii) the reserve
adjusted Eurodollar Rate plus a specified margin which will vary based on the
Company's ratio of total debt to annualized EBITDA and certain other
conditions.
The Credit Facility is expected to contain affirmative and negative
covenants, including provisions that will restrict, among other things, the
Company's (and any future subsidiaries') ability (i) to incur additional
indebtedness; (ii) to incur liens on their property; (iii) to make certain
investments; (iv) to engage in certain sales of assets; (v) to engage in
acquisitions; (vi) to incur capital expenditures; (vii) to make certain
restricted payments and (viii) to engage in certain transactions with
affiliates. The Credit Facility is also expected to require that the Company
maintain certain financial ratios, including (i) Total Debt and Total Senior
Secured Debt to Total Capitalization; (ii) Annualized EBITDA; (iii) Maximum
Leverage Ratio; (iv) Minimum Interest Coverage; (v) Minimum Fixed Charge
Coverage Ratio; and (vi) Debt Service Coverage (all as defined). The Credit
Facility will contain customary events of defaults.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
The Old Notes were sold by the Company on July 1, 1998 to the Initial
Purchasers pursuant to a Purchase Agreement dated June 26, 1998 by and among
the Company and the Initial Purchasers. Upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal, the Company will accept for exchange any and all Old Notes that
are properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on , 1998; provided, however, that if the Company, in
its sole discretion, has extended the period of time for which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended.
As of the date of this Prospectus, $200,000,000 aggregate principal amount
of the Old Notes was outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about the date set forth on the cover
page to all holders of Old Notes at the addresses set forth in the security
register with respect to Old Notes maintained by the Trustee. The Company's
obligation to accept Old Notes for exchange pursuant to the Exchange Offer is
subject to certain conditions as set forth under "--Certain Conditions to the
Exchange Offer" below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by mailing written
notice of such extension to the holders thereof as described below. During any
extension, all Old Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Old Notes
not accepted for exchange for any reason will be returned without expense to
the tendering holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be $1,000 in principal amount
or any integral multiple thereof.
The Company will mail written notice of any extension, amendment, non-
acceptance or termination to the holders of the Old Notes as promptly as
practicable, such notice to be mailed to the holders of record of the Old
Notes no later than 9:00 a.m. New York City time, on the next business day
after the previously scheduled Expiration Date or other event giving rise to
such notice requirement.
REGISTRATION COVENANT; EXCHANGE OFFER
Pursuant to the Registration Rights Agreement, the Company has agreed to
file with the Commission the Exchange Offer Registration Statement on the
appropriate form under the Securities Act with respect to the New Notes. Upon
the effectiveness of the Exchange Offer Registration Statement, the Company
will offer to the Holders pursuant to the Exchange Offer who are able to make
certain representations the opportunity to exchange their Old Notes for New
Notes. If (i) the Company is not permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) any Holder of Notes notifies the Company prior to the 20th day
following consummation of the Exchange Offer (A) that it is prohibited by law
or Commission policy from participating in the Exchange Offer or (B) that it
may not resell the New Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales or (C) that it is a broker-dealer and owns Old Notes acquired directly
from the Company or an affiliate of the Company, the Company will file with
the Commission a Shelf Registration Statement to cover resales of Transfer
Restricted Securities by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. The Company will use its best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Commission. For purposes of the foregoing, "Transfer
Restricted Securities" means each Old Note until the earliest of (i) the date
on which such Old Note has been exchanged by a person other than a broker-
dealer for a New Note in the Exchange Offer, (ii)
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following the exchange by a broker-dealer in the Exchange Offer of an Old Note
for a New Note, the date on which such New Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy
of the prospectus contained in the Exchange Offer Registration Statement,
(iii) the date on which such Old Note has been effectively registered under
the Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such Old Note is distributed to the public
pursuant to Rule 144 under the Securities Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 60
days after the date of original issuance of the Old Notes (the "Closing
Date"), (ii) the Company will use its best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to 150
days after the Closing Date, (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Company will commence
the Exchange Offer and use its best efforts to issue, on or prior to 30
business days after the date on which the Exchange Offer Registration
Statement was declared effective by the Commission, New Notes in exchange for
all Old Notes tendered prior thereto in the Exchange Offer, and (iv) if
obligated to file the Shelf Registration Statement, the Company will use its
best efforts to file the Shelf Registration Statement with the Commission on
or prior to 45 days after such filing obligation arises (but in no event less
than 60 days after the Closing Date) and to cause the Shelf Registration to be
declared effective by the Commission on or prior to 90 days after such
obligation arises (but in no event less than 150 days after the Closing Date).
If (a) the Company fails to file any of the Registration Statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (b) any of such Registration Statements is not declared effective by
the Commission on or prior to the date specified for such effectiveness, (c)
the Company fails to complete the Exchange Offer within 30 business days of
the date of effectiveness of the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement
is declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Securities during the period
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), then the Company will
pay Liquidated Damages to each Holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of the
first Registration Default in an amount equal to $0.05 per week such
Registration Default continues per $1,000 principal amount of Transfer
Restricted Securities held by such Holder. The amount of the Liquidated
Damages will increase by an additional $0.05 per week such Registration
Default continues per $1,000 principal amount of Transfer Restricted
Securities with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages for all Registration Defaults of $0.25 per week per $1,000 principal
amount of Transfer Restricted Securities. All accrued Liquidated Damages will
be paid by the Company on each Interest Payment Date to the Holders of the
Notes by wire transfer of immediately available funds or by federal funds
check and to Holders of Certificated Securities by wire transfer to the
accounts specified by them or by mailing checks to their registered addresses
if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus constitutes a part.
INTEREST ON EXCHANGE NOTES
Each New Note will bear interest from the most recent date to which interest
has been paid or duly provided for on the Old Note surrendered in exchange for
such New Note or, if no such interest has been paid or duly provided for on
such Old Note, from July 1, 1998. Holders of the Old Notes whose Old Notes are
accepted for exchange will not receive accrued interest on such Old Notes for
any period from and after the last Interest Payment Date to which interest has
been paid or duly provided for on such Old Notes prior to the original issue
date of the New Notes or, if no such interest has been paid or duly provided
for, will not receive any accrued interest on such Old Notes, and will be
deemed to have waived the right to receive any interest on such Old
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Notes accrued from and after such Interest Payment Date or, if no such
interest has been paid or duly provided for, from and after July 1, 1998.
Interest on the Notes will be payable semi-annually in arrears on each January
1 and July 1, commencing on January 1, 1999.
PROCEDURES FOR TENDERING OLD NOTES
To tender in the Exchange Offer, a Holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes and any other required documents, to the Exchange Agent so as to be
received by the Exchange Agent at the address set forth below prior to 5:00
p.m., New York City time, on the Expiration Date. Delivery of the Old Notes
may be made by book-entry transfer in accordance with the procedures described
below. Confirmation of such book-entry transfer must be received by the
Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the Company
the representations set forth below in the second paragraph under the heading
"--Resale of New Notes."
The tender by a Holder and the acceptance thereof by the Company will
constitute an agreement between such Holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES
OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker-
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto (i) are signed by the
registered Holder, unless such Holder has completed the box entitled "Special
Exchange Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) are tendered for the account of an Eligible Institution.
In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., a commercial bank or
trust company having an office or correspondent in the United States, or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
Holder as such registered Holder's name appears on such Old Notes, with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
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determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Old Notes, none of the
Company, the Exchange Agent or any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived
will be returned by the Exchange Agent to the tendering Holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
Tender of Existing Notes Held Through DTC
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for ATOP, the DTC Automated Tender Offer Program. Accordingly, DTC
participants may, in lieu of physically completing and signing the applicable
Letter of Transmittal and delivering it to the Exchange Agent, electronically
transmit their acceptance of the Exchange Offer by causing DTC to transfer Old
Notes to the Exchange Agent in accordance with DTC's ATOP procedures for
transfer. DTC will then send an Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which
states that DTC has received an expressed acknowledgment from a participant in
DTC that is tendering Old Notes which are the subject of such Book-Entry
Confirmation, that such participant has received and agrees to be bound by the
terms of the applicable Letter of Transmittal (or, in the case of an Agent's
Message relating to guaranteed delivery, that such participant has received
and agrees to be bound by the applicable Notice of Guaranteed Delivery), and
that the Company may enforce such agreement against such participant.
Book-Entry Delivery Procedures
Within two business days after the date hereof, the Exchange Agent will
establish accounts with respect to the Old Notes at DTC (the "Book-Entry
Transfer Facility") for purposes of the Exchange Offer. Any financial
institution that is a participant in the Book-Entry Transfer Facility systems
may make book-entry delivery of the Old Notes by causing DTC to transfer such
Old Notes into the Exchange Agent's account at such Book-Entry Transfer
Facility in accordance with such Book-Entry Transfer Facility's procedures for
such transfer. Timely book-entry delivery of Old Notes pursuant to the
Exchange Offer, however, requires receipt of a Book-Entry Confirmation prior
to the Expiration Date. In addition, although delivery of Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility, the Letter of Transmittal (or a mutually signed
facsimile thereof), together with any required signature guarantees and any
other required documents, or an Agent's Message in connection with a book-
entry transfer, must, in any case, be delivered or transmitted to and received
by the Exchange Agent at its address set forth under "--Exchange Agent" below
prior to the Expiration Date to receive New Notes for tendered Old Notes, or
the guaranteed delivery procedure described below must be complied with.
Tender will not be deemed made until such documents are received by the
Exchange Agent. Delivery of documents to the Book-Entry Transfer Facility does
not constitute delivery to the Exchange Agent.
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange
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Agent or (iii) who cannot complete the procedures for book-entry transfer,
prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof), together with the certificate(s)
representing the Old Notes (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at DTC) and any other
documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at DTC) and
all other documents required by the Letter of Transmittal, are received by
the Exchange Agent within three New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at the address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case
of Old Notes transferred by book-entry transfer, the name and number of the
account at DTC to be credited), (iii) be signed by the Holder in the same
manner as the original signature on the Letter of Transmittal by which such
Old Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee register
the transfer of such Old Notes into the name of the person withdrawing the
tender and (iv) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time or receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for purposes of the Exchange Offer and no New Notes will
be issued with respect thereto unless the Old Notes so withdrawn are validly
retendered. Any Old Notes which have been tendered but which are not accepted
for exchange will be returned to such Holder without cost to such Holder as
soon as practicable after withdrawal, rejection of tender or termination of
the Exchange Offer. Properly withdrawn Old Notes may be retendered by
following one of the procedures described above under "--Procedures for
Tendering Old Notes" at any time prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other terms of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate the Exchange Offer as provided herein before the acceptance
of such Old Notes if, in the sole judgment of the Company, the Exchange Offer
would violate any law, statute, rule or regulation or an interpretation
thereof of the Staff of the Commission. If the Company determines in its sole
discretion that this condition is not satisfied, the Company may (i) refuse to
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accept any Old Notes and return all tendered Old Notes to the tendering
Holders, (ii) extend the Exchange Offer and retain all Old Notes tendered
prior to the Expiration Date, subject, however, to the rights of Holders to
withdraw such Old Notes (see "--Withdrawals of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
validly tendered Old Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered Holders, and the Company will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
Holders, if the Exchange Offer would otherwise expire during such five-to-ten
business-day period.
EXCHANGE AGENT
Chase Manhattan Bank & Trust Company, National Association has been
appointed as the Exchange Agent for the Exchange Offer. All executed Letters
of Transmittal should be directed to the Exchange Agent at the address set
forth below. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notices of Guaranteed Delivery should be directed to the Exchange Agent,
addressed as follows:
By Mail or by Hand:
Chase Manhattan Bank & Trust Company, National Association, Exchange Agent
Suite 2725
101 California Street
San Francisco, California 94111
By Facsimile:
415) 693-8850
Confirm Facsimile by Telephone:
(415) 954-9581
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer tax in connection therewith, except that Holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering Holder will be responsible for the payment of
any applicable transfer tax thereon.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is the aggregate principal amount of the Old Notes, as reflected in the
Company's accounting records on the date of exchange. Accordingly, no gain or
loss for accounting purposes will be recognized in connection with the
Exchange Offer. The expenses of the Exchange Offer will be amortized over the
term of the New Notes.
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APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN
CONNECTION WITH THE EXCHANGE OFFER.
RESALE OF NEW NOTES
The New Notes are being offered hereby to satisfy certain obligations of the
Company contained in the Registration Rights Agreement. The Company is making
the Exchange Offer in reliance on the position of the Staff of the Commission
as set forth in the Exxon Capital No-Action Letter, the Morgan Stanley No-
Action Letter, the Shearman & Sterling No-Action Letter, and other
interpretive letters addressed to third parties in other transactions.
However, the Company has not sought its own interpretive letter addressing
such matters and there can be no assurance that the Staff would make a similar
determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, and subject to the two immediately following sentences, the Company
believes that New Notes issued pursuant to this Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by
holders thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and that such holder is not participating,
and has no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such New Notes.
However, any holder who (i) is an "affiliate" of the Company (within the
meaning of Rule 405 under the Securities Act), (ii) does not acquire such New
Notes in the ordinary course of its business, (iii) intends to participate in
the Exchange Offer for the purpose of distributing New Notes or (iv) is a
broker-dealer who purchased such Old Notes directly from the Company, (a) will
not be able to rely on the interpretations of the Staff set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Old Notes in the Exchange Offer and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Old Notes unless such sale
is made pursuant to an exemption from such requirements. In addition, as
described below, if any broker-dealer holds Old Notes acquired for its own
account as a result of market-making or other trading activities and exchanges
such Old Notes for New Notes (a "Participating Broker-Dealer"), then such
Participating Broker-Dealer may be deemed to statutory "underwriter" within
the meaning of the Securities Act and must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Notes. See "Plan of Distribution."
Each Holder who wishes to exchange Old Notes for New Notes in the Exchange
Offer will be required to represent that (i) it is not an affiliate of the
Company, (ii) any New Notes to be received by it are being acquired in the
ordinary course of its business and (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Notes for its own account as a result of
market-making activities or other trading activities (and not directly from
the Company) and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
Based on the position taken by the Staff in the interpretive letters referred
to above, the Company believes that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to the New Notes received
upon exchange of such Old Notes with a prospectus meeting the requirements of
the Securities Act, which may be the prospectus prepared for an exchange offer
so long as it contains a description of the plan of distribution with respect
to the resale of such New Notes. Accordingly, this Prospectus, as it may be
amended or supplemented from time to time, may be used by a Participating
Broker-Dealer during the period referred to below in connection with the
resales of New Notes received in exchange for Old Notes where such Old Notes
were acquired by such Participating Broker-Dealer for its own account as a
result of market-making or other trading activities. Subject to certain
provisions set forth in the Registration Rights Agreement, the Company shall
use its best efforts to keep the Exchange Offer
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Registration Statement continuously effective, supplemented and amended to the
extent necessary to ensure that it is available for sales of New Notes by
Participating Broker-Dealers, and to ensure that the Exchange Offer
Registration Statement conforms with the requirements of the Securities Act
and the policies, rules and regulations of the Commission as announced from
time to time, for a period ending upon the earlier of 180 days after the
Exchange Offer has been completed or such time as such Participating Broker-
Dealers no longer own any Transfer Restricted Securities. See "Plan of
Distribution." Any Participating Broker-Dealer who is an affiliate of the
Company may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
Each Participating Broker-Dealer who surrenders Old Notes pursuant to the
Exchange Offer will be deemed to have agreed, by execution of the Letter of
Transmittal, that, upon receipt of notice from the Company of the occurrence
of any event or the discovery of any fact which makes any statement contained
or incorporated by reference in this Prospectus untrue in any material respect
or which causes this Prospectus to omit to state a material fact necessary in
order to make the statements contained or incorporated by reference herein, in
light of the circumstances under which they were made, not misleading or of
the occurrence of certain other events specified in the Registration Rights
Agreement, such Participating Broker-Dealer will suspend the sale of New Notes
pursuant to this Prospectus until the Company has amended or supplemented this
Prospectus to correct such misstatement or omission and has furnished copies
of the amended or supplemented Prospectus to such Participating Broker-Dealer
or the Company has given notice that the sale of the New Notes may be resumed,
as the case may be.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Any Old Notes tendered and exchanged in the Exchange Offer will reduce the
aggregate principal amount of Old Notes outstanding. Following the
consummation of the Exchange Offer, Holders who did not tender their Old Notes
generally will not have any further registration rights under the Registration
Rights Agreement, and such Old Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the market for such
Old Notes could be adversely affected. The Old Notes are currently eligible
for sale pursuant to Rule 144A through The Portal Market. Because the Company
anticipates that most Holders will elect to exchange such Old Notes for New
Notes due to the absence of restrictions on the resale of New Notes (except
for applicable restrictions on any Holder who is an affiliate of the Company
or is a broker-dealer which acquired the Old Notes directly from the Company)
under the Securities Act, the Company anticipates that the liquidity of the
market for any Old Notes remaining after the consummation of the Exchange
Offer may be substantially limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Holders who do not tender their Old Notes, except for certain instances
involving the Initial Purchasers or Holders who are not eligible to
participate in the Exchange Offer, will not have any further registration
rights under the Registration Rights Agreement or otherwise or rights to
receive Liquidated Damages (as defined) for failure to register. Accordingly,
any Holder that does not exchange that Holder's Old Notes for New Notes will
continue to hold the untendered Old Notes and will be entitled to all the
rights and subject to all the limitations applicable thereto under the
Indenture, except to the extent that such rights or limitations, by their
terms, terminate or cease to have further effectiveness as a result of the
Exchange Offer.
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company or any of its subsidiaries, (ii) inside the
United States to a Qualified Institutional Buyer ("QIB") in a transaction
complying with Rule 144A, (iii) inside the United States to an institutional
"accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) (an "Accredited Investor") that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the
Trustee a signed letter containing certain representations and agreements
relating to the restrictions on transfer of the Securities (the form of which
letter can be obtained from such Trustee), (iv) outside the United States in
compliance with Rule 904 under the Securities Act, (v) pursuant
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to the exemption from registration provided by Rule 144 under the Securities
Act (if available), or (vi) pursuant to an effective registration statement
under the Securities Act. Each Accredited Investor that is not a QIB and that
is an original purchaser of any of the Securities from the Initial Purchasers
will be required to sign a letter confirming that such person is an Accredited
Investor under the Securities Act and that such person acknowledges the
transfer restrictions summarized herein.
DESCRIPTION OF NOTES
GENERAL
As used below in this "Description of Notes" section, references to the
"Notes" refer to the Old Notes and the New Notes, unless the context otherwise
requires.
The Old Notes were and the New Notes will be issued under an Indenture,
dated as of July 1, 1998 (the "Indenture"), between the Company and Chase
Manhattan Bank and Trust Company, National Association, as trustee (the
"Trustee" and "Escrow Agent"). The statements under this caption relating to
the Notes and the Indenture are summaries and do not purport to be complete,
and are subject to, and are qualified in their entirety by reference to, all
the provisions of the Indenture (which is incorporated herein by reference),
including the definitions of certain terms therein. The Indenture is by its
terms subject to and governed by the Trust Indenture Act of 1939, as amended.
Where reference is made to particular provisions of the Indenture or to
defined terms not otherwise defined herein, such provisions or defined terms
are incorporated herein by reference. Copies of the Indenture and the
Registration Rights Agreement are available for review at the corporate office
of the Trustee and may also be obtained from the Company upon request.
The Notes will be senior unsecured obligations of the Company, will rank
pari passu in right of payment with all existing and future senior unsecured
debt of the Company and senior in right of payment to all existing and future
subordinated debt (if any) of the Company.
The Notes will be effectively subordinated to secured indebtedness of the
Company to the extent of the value of the assets securing such indebtedness.
The Notes will also be effectively subordinated to all debt and other
liabilities (including trade payables and lease obligations) of the Company's
subsidiaries, if any. Any right of the Company to receive assets of any of its
subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the Holders of the Notes to participate in those assets)
will be effectively subordinated to the claims of that subsidiary's creditors
(including trade creditors) except to the extent that the Company is itself
recognized as a creditor of such Subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
Subsidiary and any debt of such Subsidiary senior to that held by the Company.
See "Risk Factors--Effective Subordination."
As of June 30, 1998, there was approximately $40.5 million of indebtedness
of the Company to which holders of Notes would have been effectively
subordinated. The Indenture contains certain limitations on the ability of the
Company and its subsidiaries to incur additional indebtedness. However, such
limitations are subject to a number of exceptions, and there can be no
assurances that the Company and its subsidiaries will not incur significant
additional indebtedness in the future, including indebtedness to which the
holders of the Notes would be effectively subordinated.
Under certain circumstances, the Company will be able to designate current
or future Subsidiaries as Unrestricted Subsidiaries, which will not be subject
to many of the restrictive covenants set forth in the Indenture.
The Notes will not be entitled to any security, except as described under
"--Disbursement of Funds; Escrow Account" and will not be entitled to the
benefit of any guarantees except under the circumstances described under "--
Covenants--Limitation on Guarantees of Company Debt by Restricted
Subsidiaries."
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PRINCIPAL, INTEREST AND MATURITY
The Notes will mature on July 1, 2008 and will be limited to $200.0 million,
together with any Additional Notes issued after the date of the Indenture.
Each Note will bear interest at 11.25% per annum from July 1, 1998 or from the
most recent interest payment date to which interest has been paid, payable
semiannually on January 1 and July 1 of each year, commencing January 1, 1999,
to the Person in whose name the Note (or any predecessor Note) is registered
at the close of business on the December 15 and June 15 immediately preceding
such interest payment date. Interest will be computed on the basis of a 360-
day year comprising 12 30-day months.
The Company has agreed to file and cause to become effective a registration
statement relating to an exchange offer for the Notes, or, in lieu thereof, to
file and cause to become effective a resale shelf registration for the Notes.
If such exchange offer or shelf registration statement is not filed or is not
declared effective, or if such exchange offer is not consummated, within the
time periods set forth herein, special interest will accrue and be payable on
the Notes. See "--Registration Covenant; Exchange Offer" above.
Principal, premium, if any, interest and Liquidated Damages, if any, on the
Notes will be payable, and the Notes may be presented for registration of
transfer and exchange, at the office or agency of the Company maintained for
that purpose in the Borough of Manhattan, The City of New York; provided that
at the option of the Company, payment of interest on the Notes may be made by
check mailed to the address of the Person entitled thereto as it appears in
the Note Register. Until otherwise designated by the Company, such office or
agency will be the corporate trust office of the Trustee, as Paying Agent and
Registrar.
No service charge will be made for any registration of transfer or exchange
of Notes, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
DISBURSEMENT OF FUNDS; ESCROW ACCOUNT
Pursuant to the Indenture, the Company has deposited with the Escrow Agent
approximately $42.4 million of the net proceeds from the offering of the Old
Notes in an escrow account (the "Escrow Account") held by the Escrow Agent for
the benefit of the Holders in accordance with an escrow agreement entered
into, as of July 1, 1998, between the Company and the Escrow Agent (the
"Escrow Agreement"). The Escrow Agreement provides, among other things, that
funds may be disbursed from the Escrow Account for interest payments the
Company makes on the Notes. All funds in the Escrow Account have been
invested, pending disbursement, in U.S. Government Securities. The funds in
the Escrow Account will be sufficient to pay, when due, the first four semi-
annual interest payments on the Notes.
Under the Escrow Agreement, the Company has granted to the Escrow Agent, for
the benefit of the Holders, a first priority and exclusive security interest
in the Escrow Account and the proceeds thereof (the "Escrow Collateral"). The
Escrow Agreement provides that the Escrow Agent may foreclose on the Escrow
Collateral upon acceleration of the maturity of the Notes. Under the terms of
the Indenture, the proceeds of the Escrow Collateral will be applied, first,
to amounts owing to the Escrow Agent in respect of fees and expenses of the
Escrow Agent, and second, to the obligations of the Company to the holders
under the Notes and the Indenture. The ability of holders to realize upon the
Escrow Collateral may be subject to certain bankruptcy law limitations in the
event of the bankruptcy of the Company.
Upon payment in full of the first four scheduled semi-annual interest
payments, if no Default has occurred and is continuing, the Escrow Collateral,
if any then remaining, will be released to the Company.
ISSUANCE OF ADDITIONAL NOTES
The Company will have the right to issue Additional Notes on or prior to
July 1, 1999, in an aggregate principal amount not to exceed $75.0 million,
upon prior written notice to the Trustee; provided, that the
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Company shall have deposited with the Escrow Agent funds sufficient to pay,
when due, each interest payment accruing on the Additional Notes coming due on
or prior to July 1, 2000.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The Old Notes were offered and sold to qualified institutional buyers in
reliance on Rule 144A ("Rule 144A Notes"). Notes were also offered and sold in
offshore transactions in reliance on Regulation S ("Regulation S Notes").
Notes will be issued only in full registered form, without interest coupons,
in minimum denominations of $1,000 and integral multiples thereof.
The New Notes initially will be represented by one or more notes in
registered, global form without interest coupons (the "New Global Notes"). The
New Global Notes will be deposited upon issuance with the Trustee as custodian
for DTC in New York, New York, and registered in the name of DTC or its
nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below.
Except as set forth below, the New Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or
its nominee. Beneficial interests in the New Global Notes may not be exchanged
for New Notes in certificated form except in the limited circumstances
described below. See "--Exchanges of Book-Entry New Notes for Certificated New
Notes." In addition, the transfer of beneficial interests in the New Global
Notes will be subject to the applicable rules and procedures of DTC and its
direct or indirect participants (including, if applicable, those of Euroclear
and Cedel), which may change from time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The New Notes
may be presented for registration of transfer and exchange at the offices of
the Registrar.
Depository Procedures
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interest and transfer
of ownership interest of each actual purchaser of each security held by or on
behalf of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised the Company that pursuant to procedures established by
it, (i) upon deposit of the New Global Notes, DTC will credit the accounts of
Participants with portions of the principal amount of the New Global Notes and
(ii) ownership of such interests in the New Global Notes will be shown on, and
the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or by the Participants
and the Indirect Participants (with respect to other owners of beneficial
interests in the New Global Notes).
Holders of the New Global Notes may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations (including Euroclear and Cedel) which are Participants in such
system. Euroclear and Cedel will hold interests in the New Global Notes on
behalf of their Participants through customers' securities accounts in their
respective names on the books of their respective depositaries, which are
Morgan Guaranty Trust Company of New York, Brussels office, as operator of
Euroclear,
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and Citibank, N.A., as operator of Cedel. The depositaries, in turn, will hold
such interests in the New Global Notes in customers' securities accounts in
the depositaries' names on the books of DTC. All interests in a New Global
Note, including those held through Euroclear or Cedel, will be subject to the
procedures and requirements of DTC. Those interests held through Euroclear or
Cedel will also be subject to the procedures and requirements of such systems.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a New Global Note to such persons may be
limited to that extent. Because DTC can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants and certain banks, the
ability of a person having beneficial interests in a New Global Note to pledge
such interests to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests. For
certain other restrictions on the transferability of the Notes, see "--
Exchanges of Book-Entry New Notes for Certificated New Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE NEW GLOBAL NOTES WILL
NOT HAVE NEW NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
DELIVERY OF NEW NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE
REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of (and premium and Liquidated Damages,
if any) and interest on a New Global Note registered in the name of DTC or its
nominee will be payable by the Trustee to DTC or its nominee in its capacity
as the registered holder under the Indenture. Under the terms of the
Indenture, the Company and the Trustee will treat the persons in whose names
the New Notes, including the New Global Notes, are registered as the owners
thereof for the purpose of receiving such payments and for any and all other
purposes whatsoever. Consequently, none of the Company, the Trustee nor any
agent of the Company or the Trustee has or will have any responsibility or
liability for (i) any aspect of DTC's records or any Participants or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the New Global Notes, or for maintaining, supervising
or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
New Global Notes, or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants.
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the New Notes (including principal
and interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the relevant security
such as the New Global Notes as shown on the records of DTC unless DTC has
reason to believe it will not receive payment on such payment date. Payments
by the Participants and the Indirect Participants to the beneficial owners of
New Notes will be governed by standing instructions and customary practices
and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of DTC, the Trustee or the
Company. Neither the Company nor the Trustee will be liable for any delay by
DTC or any of its Participants in identifying the beneficial owners of the New
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee as the registered
owner of the New Notes for all purposes.
Except for trades involving only Euroclear and Cedel participants, interests
in the New Global Notes will trade in DTC's settlement system and secondary
market trading activity in such interests will therefore settle in immediately
available funds, subject in all cases to the rules and procedures of DTC and
its Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear and Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the New
Notes described herein, cross-market transfers between the Participants in
DTC, on the one hand, and Euroclear or Cedel participants, on the
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other hand, will be effected through DTC in accordance with DTC's rules on
behalf of Euroclear or Cedel, as the case may be, by its respective
depositary; however, such cross-market transactions will require delivery of
instructions to Euroclear or Cedel, as the case may be, by the counter party
in such system in accordance with the rules and procedures and within the
established deadlines (Brussels time) of such system. Euroclear or Cedel, as
the case may be, will, if the transaction meets its settlement requirements,
deliver instructions to its respective depositary to take action to effect
final settlement on its behalf by delivering or receiving interests in the
relevant New Global Note in DTC, and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Euroclear participants and Cedel participants may not deliver instructions
directly to the depositories for Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a New Global Note from a
Participant in DTC will be credited, and any such crediting will be reported
to the relevant Euroclear or Cedel participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Cedel) immediately following the settlement date of DTC. DTC has advised the
Company that cash received in Euroclear or Cedel as a result of sales of
interests in a New Global Note by or through a Euroclear or Cedel participant
to a Participant in DTC will be received with value on the settlement date of
DTC but will be available in the relevant Euroclear or Cedel cash account only
as of the business day for Euroclear or Cedel following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of New Notes only at the direction of one or more
Participants to whose account with DTC interests in the New Global Notes are
credited and only in respect of such portion of the aggregate principal amount
of the New Notes as to which such Participant or Participants has or have
given such direction. However, if there is an Event of Default (as defined
below) under the New Notes, DTC reserves the right to exchange the New Global
Notes for legended New Notes in certificated form, and to distribute such New
Notes to its Participants.
The information in this section concerning DTC, Euroclear and Cedel and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the New Global Notes among participants
in DTC, Euroclear and Cedel, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued
at any time. Neither the Company nor the Trustee will have any responsibility
for the performance by DTC, Euroclear or Cedel or their respective
participants or indirect participants of their respective obligations under
the rules and procedures governing their operations.
Exchanges of Book-Entry New Notes for Certificated New Notes
A New Global Note is exchangeable for definitive New Notes in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for such New Global Note and the Company
thereupon fails to appoint a successor depository within 90 days of such
notice, or (y) has ceased to be a clearing agency registered under the
Exchange Act, (ii) the Company, at its option, notifies the Trustee in writing
that it elects to cause the issuance of the New Notes in certificated form or
(iii) there shall have occurred and be continuing a Default or an Event of
Default with respect to the New Notes. In all cases, certificated New Notes
delivered in exchange for any New Global Note or beneficial interests therein
will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures).
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OPTIONAL REDEMPTION
Except as described below, the Notes will not be redeemable at the Company's
option prior to July 1, 2003.
The Notes are subject to redemption, at the option of the Company, in whole
or in part, at any time on or after July 1, 2003 and prior to maturity, upon
not less than 30 nor more than 60 days' notice mailed to each Holder of Notes
to be redeemed at such Holder's address appearing in the Note Register, in
amounts of $1,000 or an integral multiple of $1,000, at the following
Redemption Prices (expressed as percentages of the principal amount) plus
accrued and unpaid interest and Liquidated Damages, if any, to but excluding
the Redemption Date (subject to the right of Holders of record on the
immediately preceding Record Date to receive interest due on an Interest
Payment Date that is on or prior to the Redemption Date), if redeemed during
the 12-month period beginning July 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003.............................................................. 105.625%
2004.............................................................. 103.750%
2005.............................................................. 101.875%
2006 and thereafter............................................... 100.000%
</TABLE>
In addition, at any time prior to July 1, 2001, the Company may redeem up to
35% of the aggregate outstanding principal amount of the Notes with the Net
Cash Proceeds of one or more sales of Capital Stock (other than Disqualified
Stock) at a redemption price equal to 111.25% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon and Liquidated
Damages, if any, to the date of redemption; provided that at least 65% of the
original principal amount of the Notes remains outstanding immediately
following such redemption. In order to effect the foregoing redemption, the
Company must mail a notice of redemption no later than 45 days after the
related sale of Capital Stock and must consummate such redemption within 60
days of the closing of the sale of Capital Stock.
If less than all the Notes are to be redeemed, selection of Notes for
redemption will be made by the Trustee, in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed, or, if the Notes are not so listed, on a pro rata basis, by lot or in
such manner as it shall deem fair and appropriate; provided that after such
redemption in part, all Notes shall be in amounts of $1,000 or integral
multiples thereof. Notices of redemption may not be conditional. If any Note
is to be redeemed in part only, the notice of redemption that relates to such
Note shall state the portion of the principal amount thereof to be redeemed. A
new Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Note. Notes called for redemption become due on the date fixed for redemption.
On and after the redemption date, interest ceases to accrue on Notes or
portions of them called for redemption and, unless the Company defaults in the
payment of the redemption price, Notes or portions of them called for
redemption will no longer be deemed outstanding.
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
If a Change of Control shall occur at any time, then each Holder of Notes
shall have the right to require that the Company purchase such Holder's Notes,
in whole or in part in integral multiples of $1,000, at a purchase price in
cash, in an amount equal to 101% of the principal amount of such Notes or
portion thereof, plus accrued and unpaid interest and Liquidated Damages, if
any, to the date of purchase, pursuant to the Offer to Purchase and in
accordance with the other procedures set forth in the Indenture. Within 30
days following the Change of
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Control, the Company will mail an Offer to Purchase to each Holder describing
the transaction or transactions that constitute the Change of Control and
offering to purchase Notes on the date specified in the Offer to Purchase. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the purchase of the
Notes pursuant to the Offer to Purchase.
The terms of agreements governing Senior Loan Facility Debt will likely
restrict the Company's ability to prepay debt, including the Notes, and also
to provide that certain change of control events with respect to the Company
would constitute an event of default thereunder. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing the
Notes, the Company could seek the consent of its lenders to the purchase of
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an
Event of Default under the Indenture, which would, in turn, likely constitute
a default under the terms of agreements governing such Senior Loan Facility
Debt. See "Risk Factors--Ability to Effect Repurchase of the Notes Upon Change
of Control."
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Company will not be required to make an Offer to Purchase upon a Change
of Control if a third party makes the Offer to Purchase in the manner, at the
times and otherwise in compliance with the requirements set forth in the
Indenture applicable to the Offer to Purchase made by the Company and
purchases all Notes validly tendered and not withdrawn under such Offer to
Purchase.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. There is
no precise established definition of the phrase "substantially all" under
applicable law. Accordingly, the ability of a Holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Debt
The Company will not, and will not permit any of its Restricted Subsidiaries
to, Incur any Debt (other than the Notes and Debt existing on the Closing
Date); provided that the Company may Incur Debt if, after giving effect to the
Incurrence of such Debt and the receipt and application of the proceeds
therefrom, the Consolidated Debt to EBITDA Ratio would be greater than zero
and less than 6:1.
Notwithstanding the foregoing limitation, the following Debt may be
Incurred, each item to be given independent effect:
(i) Permitted Senior Bank Debt;
(ii) Debt owed (A) to the Company evidenced by a promissory note, or (B)
to any Restricted Subsidiary; provided that any event which results in any
such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of such Debt (other than to the Company or another
Restricted Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Debt not permitted by this clause (ii);
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(iii) Debt of the Company or any Restricted Subsidiary (A) in respect of
performance, surety or appeal bonds or letters of credit in the ordinary
course of business, (B) under Permitted Interest Rate or Currency
Protection Agreements, or (C) arising under, or arising from, agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company Incurred in
connection with the disposition of any business, assets (other than
Guarantees of Debt Incurred by any Person acquiring all or any portion of
such business, assets or Restricted Subsidiary for the purpose of financing
such acquisition), in a principal amount not to exceed the gross proceeds
actually received by the Company or any Restricted Subsidiary in connection
with such disposition;
(iv) Debt which is exchanged for or the proceeds of which are used to
refinance or refund, or any extension or renewal of (each a "refinancing"),
(a) the Notes, (b) Debt incurred pursuant to clauses (iii), (v), (vi),
(viii) and (ix) of this paragraph and this clause (iv), in each case in an
aggregate principal amount not to exceed the principal amount of the Debt
so refinanced (together with any accrued interest and any premium and other
payment required to be made with respect to the Debt being refinanced or
refunded, and any fees, costs, expenses, underwriting discounts or
commissions and other payments paid or payable with respect to the Debt
incurred pursuant to this clause (iv)); provided, however, that (A) Debt,
the proceeds of which are used to refinance the Notes, or Debt which is
pari passu with or subordinate in right of payment to the Notes, shall only
be permitted if (x) in the case of any refinancing of the Notes or Debt
which is pari passu to the Notes, the refinancing Debt is Incurred by the
Company and made pari passu to the Notes or subordinated to the Notes, and
(y) in the case of any refinancing of Debt which is subordinated to the
Notes, the refinancing Debt is Incurred by the Company and is subordinated
to the Notes in a manner that is at least as favorable to the Holders as
that of the Debt refinanced; (B) the refinancing Debt by its terms, or by
the terms of any agreement or instrument pursuant to which such Debt is
issued, does not have a final maturity prior to the final maturity of the
Debt being refinanced and has an Average Life longer than the Average Life
of the Debt being refinanced; and (C) in the case of any refinancing of
Debt Incurred by the Company, the refinancing of Debt may be Incurred only
by the Company, and in the case of any refinancing of Debt Incurred by a
Restricted Subsidiary, the refinancing Debt may be Incurred only by such
Restricted Subsidiary or the Company;
(v) Acquisition Debt of the Company or any Restricted Subsidiary;
(vi) the New Notes issued in the Exchange Offer and Additional Notes
issued under the Indenture;
(vii) Debt of the Company not to exceed, at any time outstanding, two
times the Net Cash Proceeds received by the Company after the Closing Date
from the issuance and sale of its Capital Stock (other than Disqualified
Stock) to a Person that is not a Subsidiary of the Company, to the extent
that such Net Cash Proceeds have not been used pursuant to clause (C)(3) of
the first paragraph or clauses (iii), (iv) or (vi) of the second paragraph
of the "Limitation on Restricted Payments" covenant described below to make
a Restricted Payment; provided that such Debt does not have a final
maturity prior to the final maturity of the Notes and has an Average Life
longer than the Average Life of the Notes;
(viii) Existing Debt of the Company;
(ix) Debt of the Company or any Restricted Subsidiary Incurred to finance
the purchase or other acquisition of any property, inventory, asset or
business directly or indirectly, by the Company or any Restricted
Subsidiary used in, or to be used in, the System and Network Management
Business;
(x) Subordinated Debt of the Company not to exceed $300.0 million in
principal outstanding at any time; and
(xi) other Debt of the Company or any Restricted Subsidiary not to exceed
$50.0 million at any one time outstanding.
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the types of Debt
described in the above clauses, or is permitted in part under the
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first paragraph of this covenant and in part under one or more of the above
clauses, the Company, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Debt.
For purposes of determining any particular amount of Debt under this
covenant, Guarantees, Liens or obligations with respect to letters of credit
supporting Debt otherwise included in the determination of such particular
amount shall not be included.
Limitation on Guarantees of Company Debt by Restricted Subsidiaries
The Company may not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee, assume or in any other manner become liable for the
payment of any Debt of the Company (other than Debt of the Company Incurred
pursuant to clauses (i), (iii), (v), (ix) or (xi) of the second paragraph of
"Limitations on Debt" or refinanced pursuant to clause (iv) of the second
paragraph of "Limitation on Debt" of Debt originally incurred under clause
(iii), (v) or (ix) of the second paragraph of "Limitation on Debt") that is
pari passu with or subordinate in right of payment to the Notes unless: (i)
(A) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture providing for a Guarantee of payment of the Notes by
such Restricted Subsidiary; and (B) with respect to any Guarantee of Debt of
the Company that is subordinate in right of payment to the Notes, such
Guarantee shall be subordinated to such Restricted Subsidiary's Guarantee with
respect to the Notes at least to the same extent as such Debt is subordinated
to the Notes, and (ii) such Restricted Subsidiary waives, and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Guarantee until the Notes have been paid in
full.
Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary may
provide by its terms that it shall be automatically and unconditionally
released and discharged upon (i) any sale, exchange or transfer, to any Person
not an Affiliate of the Company, of all of the Company's and each Restricted
Subsidiary's Capital Stock in, or all or substantially all of the assets of,
such Restricted Subsidiary (which sale, exchange or transfer is not prohibited
by the Indenture) or (ii) the release or discharge of the Guarantee which
resulted in the creation of such Restricted Subsidiary's Guarantee with
respect to the Notes, except a discharge or release by or as a result of
payment under such Guarantee.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary directly
or indirectly to:
(i) declare or pay any dividend or make any distribution on or with
respect to its Capital Stock to Persons other than the Company or any of
its Restricted Subsidiaries (other than (x) dividends or distributions
payable solely in shares of its Capital Stock (other than Disqualified
Stock), or in options, warrants or other rights to acquire shares of such
Capital Stock; (y) pro rata dividends or distributions on Common Stock of
Restricted Subsidiaries held by minority stockholders, or (z) dividends in
respect of Disqualified Stock);
(ii) purchase, redeem, retire or otherwise acquire for value any shares
of Capital Stock of (A) the Company or an Unrestricted Subsidiary
(including options, warrants or other rights to acquire such shares of
Capital Stock) held by any Person, or (B) a Restricted Subsidiary
(including options, warrants or other rights to acquire such shares of
Capital Stock) held by any Person other than the Company or a Wholly Owned
Restricted Subsidiary of the Company;
(iii) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Debt of the Company that is subordinated in right
of payment to the Notes; or
(iv) make any Investment, other than a Permitted Investment, in any
Person,
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(such payments or any other actions described in clauses (i) through (iv)
above being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be continuing;
(B) the Company could not Incur at least $1.00 of Debt under the first
paragraph of the "Limitation on Debt" covenant; or
(C) the aggregate amount of all Restricted Payments (the amount, if other
than in cash, to be determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of: (1)
cumulative Consolidated EBITDA since the date of original issuance of the
Notes through the last day of the last full fiscal quarter ending
immediately preceding the date of such Restricted Payment for which
quarterly or annual financial statements are available; minus (2) 1.5 times
cumulative Consolidated Interest Expense of the Company since the date of
original issuance of the Notes through the last day of the last full fiscal
quarter ending immediately preceding the date of such Restricted Payment
for which quarterly or annual financial statements are available, plus (3)
the aggregate Net Cash Proceeds received by the Company after the Closing
Date from the issuance and sale permitted by the Indenture of its Capital
Stock (other than Disqualified Stock) to a Person who is not a Subsidiary
of the Company, including an issuance or sale permitted by the Indenture of
Debt of the Company for cash subsequent to the Closing Date upon the
conversion of such Debt into Capital Stock (other than Disqualified Stock)
of the Company, or from the issuance to a Person who is not a Subsidiary of
the Company of any options, warrants or other rights to acquire Capital
Stock of the Company (in each case, exclusive of any Disqualified Stock or
any options, warrants or other rights that are redeemable at the option of
the holder, or are required to be redeemed, prior to the stated final
maturity date of the Notes), in each case except to the extent such Net
Cash Proceeds are used to Incur Debt pursuant to clause (vii) of the second
paragraph under the "Limitation on Debt" covenant, plus (4) an amount equal
to the net reduction in Investments (other than reductions in Permitted
Investments) in any Person resulting from payments of interest on Debt,
dividends, repayments of loans or advances, or other transfers of assets,
in each case to the Company or any Restricted Subsidiary or from the Net
Cash Proceeds from the sale of any such Investment (except, in each case,
to the extent any such payment or proceeds are included in the calculation
of Consolidated EBITDA), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries, not to exceed, in each case, the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Debt that is subordinated in right of payment to
the Notes including premium, if any, and accrued and unpaid interest, with
the proceeds of, Debt Incurred under clause (iv) of the second paragraph of
the "Limitation on Debt" covenant;
(iii) the repurchase, redemption or other acquisition of Capital Stock of
the Company or a Subsidiary of the Company (or options, warrants or other
rights to acquire such Capital Stock) in exchange for (including upon
exercise of a conversion right), or out of the proceeds of a capital
contribution or a substantially concurrent offering of, shares of Capital
Stock (other than Disqualified Stock) of the Company (or options, warrants
or other rights to acquire such Capital Stock);
(iv) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Debt of the
Company which is subordinated in right of payment to the Notes in exchange
for, or out of the proceeds of, a capital contribution or a substantially
concurrent offering of, shares of the Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock);
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(v) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger
or transfer of assets that complies with the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially
all of the property and assets of the Company, and payments of cash in lieu
of fractional shares;
(vi) Investments in any Person; provided that the aggregate amount of
Investments made pursuant to this clause (vi) does not exceed the sum of
(a) $50.0 million, plus (b) the amount of Net Cash Proceeds received by the
Company after the Closing Date from the sale of its Capital Stock (other
than Disqualified Stock) to a Person who is not a Subsidiary of the
Company, except to the extent such Net Cash Proceeds are used to Incur Debt
pursuant to clause (vii) of the second paragraph of the "Limitation on
Debt" covenant or to make Restricted Payments pursuant to clause (C)(3) of
the first paragraph, or clauses (iii) or (iv) of this paragraph, of this
"Limitation on Restricted Payments" covenant, plus (c) the net reduction in
Investments made pursuant to this clause (vi) resulting from distributions
on or repayments of such Investments or from the Net Cash Proceeds from the
sale of any such Investment (except in each case to the extent any such
payment or proceeds is included in the calculation of Consolidated EBITDA)
or from such Person becoming a Restricted Subsidiary; provided that the net
reduction in any Investment shall not exceed the amount of such Investment;
(vii) Investments acquired in exchange for Capital Stock (other than
Disqualified Stock) of the Company;
(viii) the purchase, redemption or other acquisition or retirement of
Common Stock of the Company or any option or other right to acquire shares
of Common Stock of the Company (I) if such Common Stock, option or other
right was issued pursuant to a plan or arrangement approved by the
Company's Board of Directors, and such purchase, redemption or other
acquisition or retirement, (x) occurs in accordance with the terms of such
plan or arrangement, from former employees of the Company and its
Subsidiaries or their estates or (y) is from an employee of the Company and
the price paid by the Company to such employee is equal to the exercise or
purchase price paid by such employee and (II) from employees of the Company
or its Subsidiaries in an amount not to exceed $5.0 million in any fiscal
year; provided that, in the case of clause (II), amounts not paid for any
such purchase, redemption or other acquisition or retirement in any fiscal
year may be accumulated and paid in any subsequent fiscal year;
(ix) additional Restricted Payments not to exceed $50.0 million in the
aggregate; or
(x) the acquisition of Capital Stock of the Company by the Company in
connection with the cashless exercise of any options, warrants or similar
rights issued by the Company.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof and an exchange
of Capital Stock for Capital Stock or Debt referred to in clause (iii) or (iv)
thereof), and the Net Cash Proceeds from any issuance of Capital Stock
referred to in clauses (iii), (iv) and (vi), shall be included in calculating
whether the conditions of clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant have been met with respect to any
subsequent Restricted Payments. In the event the proceeds of an issuance of
Capital Stock of the Company are used for the redemption, repurchase or other
acquisition of the Notes, or Debt that is pari passu with the Notes, then the
Net Cash Proceeds of such issuance shall be included in clause (C) of the
first paragraph of this "Limitation on Restricted Payments" covenant only to
the extent such proceeds are not used for such redemption, repurchase or other
acquisition of Debt.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless (i) the Company or the applicable Restricted
Subsidiary, as the case may be, receives consideration at the time of such
Asset Sale at least equal to the fair market value of the assets sold or
otherwise disposed of (as evidenced by a resolution of the Board of
Directors), and (ii) at least 75% of the consideration received by the Company
or the Restricted Subsidiary, as the case may be, from such Asset Sale shall
be cash or other Qualified Consideration.
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The Company or any Restricted Subsidiary may, within 365 days of the Asset
Sale, invest the Net Cash Proceeds thereof (A) in property or assets used, or
to be used, in the System and Network Management Business, or in a company
engaged primarily in the System and Network Management Business (if and to the
extent otherwise permitted under the Indenture), or (B) to repay Secured Debt
of the Company or any Restricted Subsidiary. The amount of such Net Cash
Proceeds not used or invested within 365 days of the Asset Sale in the manner
described in clauses (A) and (B) above shall constitute "Excess Proceeds."
In the event that Excess Proceeds exceed $10.0 million, the Company shall
make an Offer to Purchase that amount of Notes equal to the amount of Excess
Proceeds at a price equal to 100% of the principal amount of the Notes to be
purchased, plus accrued and unpaid interest and Liquidated Damages thereon, if
any, to the date of purchase and, to the extent required by the terms thereof,
any other Debt of the Company that is pari passu with the Notes or Debt of a
Restricted Subsidiary. Each Offer to Purchase shall be mailed within 30 days
following the date that the Company shall become obligated to purchase Notes
with any Excess Proceeds. Following the completion of an Offer to Purchase,
the amount of Excess Proceeds shall be deemed to be reset at zero and, to the
extent there are any remaining Excess Proceeds the Company may use such Excess
Proceeds for any use which is not otherwise prohibited by the Indenture.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
purchase of Notes pursuant to such Offer to Purchase.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary (i) to pay dividends (in cash or otherwise) or make any other
distributions in respect of its Capital Stock owned by the Company or any
other Restricted Subsidiary or pay any Debt or other obligation owed to the
Company or any other Restricted Subsidiary; (ii) to make loans or advances to
the Company or any other Restricted Subsidiary; or (iii) to transfer any of
its property or assets to the Company or any other Restricted Subsidiary.
Notwithstanding the foregoing, the Company may, and may permit any Restricted
Subsidiary to, suffer to exist any such encumbrance or restriction:
(a) pursuant to any agreement in effect on the date of original issuance
of the Notes, and any amendments, extensions, refinancings, renewals or
replacements of such agreements, provided that the amendments, encumbrances
and restrictions in any such extensions, refinancings, renewals or
replacements are no less favorable in any material respect to the Holders,
than those encumbrances or restrictions that are then in effect and that
are being extended, refinanced, renewed or replaced;
(b) existing under or by reason of applicable law;
(c) existing in connection with any Permitted Senior Bank Debt or any
Debt incurred pursuant to clause (v) of the second paragraph of
"Limitations on Debt;"
(d) pursuant to an agreement existing prior to the date on which such
Person became a Restricted Subsidiary and not Incurred in anticipation of
becoming a Restricted Subsidiary, which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person so acquired;
(e) pursuant to an agreement entered into in connection with Debt
Incurred under clause (iv) of the second paragraph of the "Limitation on
Debt" covenant; provided, however, that the provisions contained in such
agreement related to such encumbrance or restriction are no more
restrictive in any material respect than the provisions contained in the
agreement the subject of the refinancing such clause (iv) of the second
paragraph of the "Limitation on Debt" covenant;
(f) restrictions contained in any agreement relating to a Lien of a
Restricted Subsidiary or the Company otherwise permitted under the
Indenture, but only to the extent such restrictions restrict the transfer
of the property subject to such Lien;
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(g) customary nonassignment provisions entered into in the ordinary
course of business in leases, licenses and other contracts to the extent
such provisions restrict the transfer, sublicensing or any such license or
subletting of any such lease or the assignment of rights under any such
contract;
(h) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of
such Restricted Subsidiary; provided that consummation of such transaction
would not result in an Event of Default or an event that, with the passing
of time or the giving of notice or both, would constitute an Event of
Default, that such restriction terminates if such transaction is closed or
abandoned and that the closing or abandonment of such transaction occurs
within one year of the date such agreement was entered into;
(i) any restriction imposed pursuant to contracts for the sale of assets
with respect to the transfer of the assets to be sold pursuant to such
contract;
(j) arising or agreed to in the ordinary course of business, not relating
to any Debt, and that do not, individually, or in the aggregate, detract
from the value of property or assets of the Company or any Restricted
Subsidiary in any manner material to the Company or any Restricted
Subsidiary; or
(k) such encumbrance or restriction is contained in the terms of any
agreement pursuant to which such Debt was issued if (A) the encumbrance or
restriction applies only in the event of a payment default or a default
with respect to a financial covenant contained in such Debt or agreement,
(B) the encumbrance or restriction is not materially more disadvantageous
to the Holders of the Notes than is customary in comparable financings, and
(C) the Company determines that any such encumbrance or restriction will
not materially affect the Company's ability to make principal or interest
payments on the Notes.
Limitation on Liens
The Company may not, and may not permit any Restricted Subsidiary to, Incur
or suffer to exist any Lien, on or with respect to any property or assets now
owned or hereafter acquired to secure any Debt without making, or causing such
Restricted Subsidiary to make, effective provision for securing the Notes (x)
equally and ratably with such Debt as to such property or assets for so long
as such Debt will be so secured or (y) in the event such Debt is Debt of the
Company which is subordinate in right of payment to the Notes, prior to such
Debt as to such property or assets for so long as such Debt will be so
secured.
The foregoing restrictions shall not apply to:
(i) Liens in existence on the date of original issuance of the Notes;
(ii) Liens securing only the Notes and any Lien in favor of the Trustee
for the benefit of the Holders arising under the provisions in the
Indenture or the Escrow Agreement;
(iii) Liens granted by a Restricted Subsidiary in favor of the Company or
any Restricted Subsidiary;
(iv) Liens to secure Permitted Senior Bank Debt;
(v) Liens securing Purchase Money Secured Debt;
(vi) Liens on property existing immediately prior to the time of
acquisition thereof (and not Incurred in anticipation of the financing of
such acquisition);
(vii) Liens on property of a Person existing at the time such Person
becomes a Restricted Subsidiary and not incurred in anticipation of
becoming a Restricted Subsidiary;
(viii) any interest in or title of a lessor to any property subject to a
Capital Lease Obligation which is permitted under the Indenture; or
(ix) Liens to secure Debt Incurred pursuant to clause (iv) of the second
paragraph of the "Limitation on Debt" covenant; provided that such Lien
does not extend to any property other than the property securing the Debt
being refinanced pursuant to clause (iv) of the second paragraph of the
"Limitation on Debt" covenant.
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Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been
permitted to be made under the "Limitation on Restricted Payments" covenant if
made on the date of such issuance or sale; or (iv) issuances or sales of
Common Stock of a Restricted Subsidiary.
Transactions with Affiliates and Related Persons
The Company may not, and may not permit any Restricted Subsidiary to, enter
into any transaction (or series of related transactions) not in the ordinary
course of business with an Affiliate or Related Person of the Company (other
than the Company or a Wholly Owned Restricted Subsidiary) involving aggregate
consideration in excess of $5.0 million, including any Investment, either
directly or indirectly, unless such transaction is on terms no less favorable
to the Company or such Restricted Subsidiary than those that could be obtained
in a comparable arm's-length transaction with an entity that is not an
Affiliate or Related Person and is in the best interests of the Company or
such Restricted Subsidiary. For any transaction (or series of related
transactions) that involves less than or equal to $10.0 million, the Chief
Executive Officer, President or Chief Operating Officer of the Company shall
determine that the transaction satisfies the above criteria and shall evidence
such a determination by an Officer's Certificate filed with the Trustee. For
any transaction that involves in excess of $10.0 million, (a) a majority of
the disinterested members of the Board of Directors shall determine that the
transaction satisfies the above criteria or (b) the Company shall obtain a
written opinion of a nationally recognized investment banking or appraisal
firm stating that the transaction is fair to the Company or such Restricted
Subsidiary.
The foregoing limitation does not apply, and shall not apply, to (i) any
transaction solely between the Company and any Restricted Subsidiary or solely
between any Restricted Subsidiaries; (ii) the payment of reasonable and
customary regular fees to directors of the Company who are not employees of
the Company; (iii) any payments or other transactions pursuant to any tax-
sharing agreement between the Company and any other Person with which the
Company files a consolidated tax return or with which the Company is part of a
consolidated group for tax purposes; (iv) licensing or sublicensing or the use
of any intellectual property by the Company or any Restricted Subsidiary to
the Company or any Restricted Subsidiary; (v) any transaction entered into for
the purpose of granting or altering registration rights with respect to any
Capital Stock of the Company; (vi) any Restricted Payments not prohibited by
the "Limitation on Restricted Payments" covenant or (vii) compensation,
severance and employee benefit arrangements with any officer, director or
employee of the Company or any Restricted Subsidiary, including under any
stock option or stock incentive plans, in the ordinary course of business.
Limitation on Sale-Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties, whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties that the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess
of three years; (ii) the sale-leaseback transaction is consummated within 180
days after the purchase of the assets subject to such transaction; (iii) the
transaction is solely between the
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Company and any Wholly Owned Restricted Subsidiary or solely between Wholly
Owned Restricted Subsidiaries; or (iv) the Company or such Restricted
Subsidiary, within 12 months after the sale or transfer of any assets or
properties is completed, applies an amount no less than the Net Cash Proceeds
received from such sale in accordance with clause (A) or (B) of "--Limitation
on Asset Sales."
Provision of Financial Information
Whether or not the Company is required to be subject to Section 13(a) or
15(d) of the Exchange Act, the Company is required by the terms of the
Indenture to file with the Commission the annual reports, quarterly reports
and other documents which the Company would have been required to file with
the Commission pursuant to such Section 13(a) or 15(d) or any successor
provision thereto if the Company were subject to such provisions. The
Indenture requires that the Company file such documents with the Commission on
or prior to the respective dates (each a "Required Filing Date", collectively,
the "Required Filing Dates") by which the Company would have been required to
file such documents if it were subject to Section 13(a) or 15(d) of the
Exchange Act. The Company is also required in any event (a) within 15 days of
each Required Filing Date (i) to transmit by mail to all Holders, as their
names and addresses appear in the Note Register, without cost to such Holders,
and (ii) to file with the Trustee, copies of the annual reports, quarterly
reports and other documents which the Company files with the Commission
pursuant to such Section 13(a) or 15(d) or any successor provision thereto or
would have been required to file with the Commission pursuant to such Section
13(a) or 15(d) or any successor provisions thereto if the Company were
required to be subject to such Sections and (b) if filing such documents by
the Company with the Commission is not permitted under the Exchange Act,
promptly upon written request to supply copies of such documents to any
prospective Holder.
Unrestricted Subsidiaries
The Company may designate any Subsidiary of the Company to be an
"Unrestricted Subsidiary" as provided below in which event such Subsidiary and
each other Person that is then, or thereafter becomes, a Subsidiary of such
Subsidiary will be deemed to be an Unrestricted Subsidiary. "Unrestricted
Subsidiary" means (1) any Subsidiary designated as such by the Board of
Directors as set forth below where (a) no default with respect to any Debt of
such Subsidiary or any Subsidiary of such Subsidiary (including any right
which the holders thereof may have to take enforcement action against such
Subsidiary) would permit (upon notice, lapse of time or both) any holder of
any other Debt in a principal amount in excess of $10.0 million of the Company
and its Subsidiaries (other than another Unrestricted Subsidiary) to declare a
default on such other Debt or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity and (b) the Company could make a
Restricted Payment in an amount equal to the greater of the fair market value
and book value of such Subsidiary pursuant to "Limitation on Restricted
Payments" and such amount is thereafter treated as a Restricted Payment for
the purpose of calculating the aggregate amount available for Restricted
Payments thereunder and (2) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may not designate a Subsidiary to be an Unrestricted
Subsidiary if such Subsidiary owns any Capital Stock of, or owns or holds any
Lien on any property of, any other Subsidiary of the Company which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary a
Restricted Subsidiary and shall be deemed to have made such designation if at
such time the condition set forth in clause (a) in the definition of
"Unrestricted Subsidiary" shall cease to be true.
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company may not, in a single transaction or a series of related
transactions, (i) consolidate or merge with or into any other Person or permit
any other Person to consolidate or merge with or into the Company or (ii)
directly or indirectly transfer, sell, lease or otherwise dispose of all or
substantially all of its assets, unless:
(1) in a transaction in which the Company does not survive or in which
the Company sells, leases or otherwise disposes of all or substantially all
of its assets, the successor entity to the Company shall be organized and
validly existing under the laws of the United States of America, any State
thereof or the
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District of Columbia, and shall expressly assume, by a supplemental
Indenture executed and delivered to the Trustee in form satisfactory to the
Trustee, all of the Company's obligations under the Indenture;
(2) immediately before and after giving effect to such transaction and
treating any Debt which becomes an obligation of the Company or a
Restricted Subsidiary as a result of such transaction as having been
Incurred by the Company or such Restricted Subsidiary at the time of the
transaction, no Event of Default or event that with the passing of time or
the giving of notice, or both, would constitute an Event of Default shall
have occurred and be continuing;
(3) except in the case of any such consolidation or merger of the Company
with or into, or any such transfer, sale, lease or other disposition of
assets to, a Wholly Owned Restricted Subsidiary, immediately after giving
effect to such transaction, the Consolidated Net Worth of the Company (or
other successor entity to the Company) is equal to or greater than that of
the Company immediately prior to the transaction; and
(4) except in the case of any such consolidation or merger of the Company
with or into, or any such transfer, sale, lease or other disposition of
assets to, a Wholly Owned Restricted Subsidiary, immediately after giving
effect to such transaction and treating any Debt which becomes an
obligation of the Company or a Restricted Subsidiary as a result of such
transaction as having been Incurred by the Company or such Restricted
Subsidiary at the time of the transaction, the Company (including any
successor entity to the Company) could Incur at least $1.00 of additional
Debt pursuant to the provisions of the Indenture described in the first
paragraph under "Limitation on Debt" above.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquisition Debt" means Debt of a Person existing at the time such Person
becomes a Restricted Subsidiary or assumed in connection with an Asset
Acquisition, and not Incurred in connection with, or in anticipation of, such
Person becoming a Restricted Subsidiary or such Asset Acquisition.
"Additional Notes" means Notes issued by the Company after the Closing Date
subject to the terms and conditions of the Indenture in an aggregate principal
amount not to exceed $75.0 million and any Notes of like terms and tenor
issued in exchange therefor.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means an acquisition by the Company or any of its
Restricted Subsidiaries of the property and assets of any Person other than
the Company or any of its Restricted Subsidiaries that constitute
substantially all of a division or line of business of such Person; provided
that the property and assets acquired are to be used in the System and Network
Management Business.
"Asset Sale" by any Person means any transfer, conveyance, sale, lease,
license or other disposition by such Person or any of its Restricted
Subsidiaries (including a consolidation or merger or other sale of any such
Restricted Subsidiary with, into or to another Person in a transaction in
which such Restricted Subsidiary ceases to be a Restricted Subsidiary)
(collectively a "transfer") of (i) shares of Capital Stock (other than
directors' qualifying shares) or other ownership interests of a Restricted
Subsidiary of such Person, (ii) all or substantially all of the assets of such
Person or any of its Restricted Subsidiaries, or (iii) any other property,
assets or rights (including intellectual property rights) of such Person or
any of its Restricted Subsidiaries outside of the ordinary
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course of business; provided that "Asset Sale" shall not include (A) any
transfer of all or substantially all of the assets of the Company in a
transaction that is made in compliance with the requirements of provisions of
the Indenture described under "--Mergers, Consolidations and Certain Sales of
Assets," (B) any transfer by the Company to any Wholly Owned Restricted
Subsidiary or by any Wholly Owned Restricted Subsidiary to any other Wholly
Owned Subsidiary or to the Company in a manner that does not otherwise violate
the terms of the Indenture, (C) transfers made in compliance with the
requirements of provisions of the Indenture described under "Limitation on
Restricted Payments," (D) transfers constituting the granting of a Permitted
Lien, (E) exchanges of equipment used in the System and Network Management
Business for other equipment to be used in the System and Network Management
Business; provided any such exchange for equipment with a fair market value in
excess of $2.0 million must be approved by the Company's Board of Directors,
and (F) transfers of assets, property or other rights (including intellectual
property rights) with a fair market value of less than $2.0 million.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from the date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the
amount of such principal payment, by (ii) the sum of all such principal
payments.
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required
to be classified and accounted for as a capital lease or a liability on the
face of a balance sheet of such Person in accordance with GAAP. The principal
amount of such obligation shall be the capitalized amount thereof that would
appear on the face of a balance sheet of such Person in accordance with GAAP.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general
or limited, of such Person.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States government or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities of six months from the
date of acquisition, (ii) certificates of deposit with maturities of not more
than six months or less from the date of acquisition, bankers' acceptances
with maturities not exceeding six months and overnight bank deposits, in each
case with any domestic commercial bank having capital and surplus in excess of
$500.0 million and a Thompson Bank Watch Rating of "B" or better, (iii)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (i) and (ii) above entered into
with any financial institution meeting the qualifications specified in clause
(ii) above, (iv) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Ratings Group and in each
case maturing within six months after the date of acquisition and (v) money
market funds at least 95% of the assets of which constitute Cash Equivalents
of the kinds described in clauses (i)-(iv) of this definition.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets of
the Company and its Subsidiaries, taken as a whole, to any Person or group of
related Persons, as defined in Section 13(d) of the Exchange Act (a "Group");
(ii) the approval by the holders of capital stock of the Company of any plan
or proposal for the liquidation or dissolution of the Company (whether or not
otherwise in compliance with the provisions of the applicable Indenture);
(iii) any Person or Group (other than Fleet National Bank or any of its
Affiliates) shall become the owner, directly or indirectly, beneficially or of
record, of shares representing more than 50% of the aggregate ordinary voting
power represented by the issued and outstanding Voting Stock of the Company or
any successor to all or substantially all of its assets; or (iv) during any
period of two consecutive years, individuals who at the beginning of such
period constituted the Board of Directors of the Company (together with any
new directors whose election to the Board of Directors or whose nomination for
election by the stockholders of the Company was approved by a vote of a
majority of the directors then still in office who were either directors at
the beginning of such period or whose election or nomination for
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election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding
up of such Person, to shares of Capital Stock of any other class of such
Person.
"Consolidated Debt to EBITDA Ratio" means the ratio of (a) the total
consolidated Debt as of the date of calculation (the "Determination Date") to
(b) four times the Consolidated EBITDA for the latest fiscal quarter for which
financial information is available immediately preceding such Determination
Date (the "Measurement Period"). For purposes of calculating Consolidated
EBITDA for the Measurement Period immediately prior to the relevant
Determination Date, (i) any Person that is a Restricted Subsidiary on the
Determination Date (or would become a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated EBITDA) will be deemed to have been a
Restricted Subsidiary at all times during such Measurement Period, (ii) any
Person that is not a Restricted Subsidiary on such Determination Date (or
would cease to be a Restricted Subsidiary on such Determination Date in
connection with the transaction that requires the determination of such
Consolidated EBITDA) will be deemed not to have been a Restricted Subsidiary
at any time during such Measurement Period, and (iii) if the Company or any
Restricted Subsidiary shall have in any manner (x) acquired (through an
acquisition or the commencement of activities constituting such operating
business) or (y) disposed of (by an Asset Sale or the termination or
discontinuance of activities constituting such operating business) any
operating business during such Measurement Period or after the end of such
period and on or prior to such Determination Date, such calculation will be
made on a pro forma basis in accordance with GAAP as if, in the case of an
acquisition or the commencement of activities constituting such operating
business, all such transactions had been consummated prior to the first day of
such Measurement Period (it being understood that in calculating Consolidated
EBITDA the exclusions set forth in clauses (a) through (f) of the definition
of Consolidated Net Income shall apply to any Person acquired as if it were a
Restricted Subsidiary).
"Consolidated EBITDA" means, with respect to any period, Consolidated Net
Income for such period increased (without duplication), to the extent deducted
in calculating such Consolidated Net Income, by (a) Consolidated Income Tax
Expense for such period; (b) Consolidated Interest Expense for such period
without regard to the proviso therein; and (c) depreciation, amortization and
any other non-cash items for such period, less any non-cash items to the
extent they increase Consolidated Net Income (including the partial or entire
reversal of reserves taken in prior periods) for such period, of the Company
and any Restricted Subsidiary, including, without limitation, amortization of
capitalized debt issuance costs for such period, all of the foregoing
determined on a consolidated basis for the Company and its Restricted
Subsidiaries in accordance with GAAP; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of Consolidated EBITDA attributable to
such Restricted Subsidiary multiplied by (B) the percentage ownership interest
in such Restricted Subsidiary not owned on the last day of such period by the
Company or any of its Restricted Subsidiaries.
"Consolidated Income Tax Expense" for any period means the consolidated
provision for income taxes of the Company and its Restricted Subsidiaries for
such period calculated on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means for any period the consolidated
interest expense included in a consolidated income statement (without
deduction of interest income) of the Company and its Restricted Subsidiaries
for such period calculated on a consolidated basis in accordance with GAAP,
including without limitation or duplication (or, to the extent not so
included, with the addition of), (i) the amortization of Debt discounts; (ii)
any payments or fees with respect to letters of credit, bankers' acceptances
or similar facilities; (iii) fees (net of any amounts received) with respect
to any Interest Rate or Currency Protection Agreement; (iv) interest on Debt
guaranteed by the Company and its Restricted Subsidiaries, to the extent paid
by the Company
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or any Restricted Subsidiary; and (v) the portion of any Capital Lease
Obligation allocable to interest expense; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated Interest
Expense shall be reduced (to the extent not otherwise reduced in accordance
with GAAP) by an amount equal to (A) the amount of Consolidated Interest
Expense attributable to such Restricted Subsidiary multiplied by (B) the
percentage ownership interest in such Restricted Subsidiary not owned on the
last day of such period by the Company or any of its Restricted Subsidiaries.
"Consolidated Net Income" for any period means the consolidated net income
(or loss) of the Company and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP; provided that
there shall be excluded therefrom (a) the net income (or loss) of any Person
acquired by the Company or a Restricted Subsidiary of the Company in a
pooling-of-interests transaction for any period prior to the date of such
transaction, (b) the net income (or loss) of any Person that is not a
Restricted Subsidiary of the Company except to the extent of the amount of
dividends or other distributions actually paid to the Company or a Restricted
Subsidiary of the Company by such Person during such period, (c) gains or
losses on Asset Sales by the Company or its Restricted Subsidiaries, (d) all
extraordinary gains and extraordinary losses, (e) the cumulative effect of
changes in accounting principles and (f) the tax effect of any of the items
described in clauses (a) through (e) above.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less amounts attributable to Disqualified Stock of such Person; provided
that, with respect to the Company, adjustments following the date of the
Indenture to the accounting books and records of the Company in accordance
with Accounting Principles Board Opinions Nos. 16 and 17 (or successor
opinions thereto), or otherwise resulting from the acquisition of control of
the Company by another Person shall not be given effect.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or
not contingent, (i) every obligation of such Person for money borrowed, (ii)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, including obligations incurred in connection with the
acquisition of property, assets or businesses, (iii) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person
(including reimbursement obligations with respect thereto, but excluding
obligations with respect to trade letters of credit securing obligations
entered into in the ordinary course of business to the extent such letters of
credit are not drawn upon or, if drawn upon, to the extent such drawing is
reimbursed no later than the third Business Day following receipt by such
Person of a demand for reimbursement), (iv) every obligation of such Person
issued or assumed as the deferred purchase price of property or services
(including securities repurchase agreements), (v) every Capital Lease
Obligation of such Person, (vi) all Disqualified Stock issued by such Person,
(vii) if such Person is a Restricted Subsidiary, all Preferred Stock issued by
such Person, (viii) every obligation under Interest Rate or Currency
Protection Agreements of such Person and (ix) every obligation of the type
referred to in clauses (i) through (ix) of another Person and all dividends of
another Person the payment of which, in either case, such Person has
Guaranteed or is responsible or liable, directly or indirectly, as obligor,
Guarantor or otherwise. The "amount" or "principal amount" of Debt at any time
of determination as used herein represented by (a) any contingent Debt, shall
be the maximum principal amount thereof, (b) any Debt issued at a price that
is less than the principal amount at maturity thereof, shall be the amount of
the liability in respect thereof determined in accordance with GAAP, (c) any
Disqualified Stock, shall be the maximum fixed redemption or repurchase price
in respect thereof, and (d) any Preferred Stock, shall be the maximum
voluntary or involuntary liquidation preference plus accrued and unpaid
dividends in respect thereof, in each case as of such time of determination.
In no event shall "Debt" include any trade payable or accrued expenses arising
in the ordinary course of business.
"Disqualified Stock" of any Person means any Capital Stock of such Person
that by its terms (or by the terms of any security into which it is
convertible, or for which it is exchangeable, at the option of the holder
thereof) or otherwise matures or is required to be redeemed (pursuant to any
sinking fund obligation or otherwise, but other than as a result of the death
or disability of the holder thereof or the termination of the employment
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with the Company of the holder thereof) or is convertible into or exchangeable
for Debt or is redeemable at the option of the holder thereof, in whole or in
part, at any time prior to the final maturity of the Notes; provided, however,
that any Capital Stock which would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require the Company or
a Restricted Subsidiary to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or a "change of control" occurring prior to the
final maturity date of the Notes shall not constitute Disqualified Stock if
such provisions applicable to such Capital Stock are no more favorable to the
holders of such stock than the corresponding provisions applicable to the
Notes contained in the Indenture and such provisions applicable to such
Capital Stock specifically provide that the Company and its Restricted
Subsidiaries will not repurchase or redeem any such stock pursuant to such
provisions prior to the repurchase of such Notes as are required to be
repurchased pursuant to the Indenture upon an Asset Sale or a Change of
Control.
"Existing Debt" shall mean Debt of the Company and its Restricted
Subsidiaries in existence on the Closing Date.
"GAAP" means generally accepted accounting principles in the United States
which are in effect on the date of original issuance of the Notes,
consistently applied.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether
directly or indirectly, and including, without limitation, any obligation of
such Person, (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt or to purchase (or to advance or supply
funds for the purchase of) any security for the payment of such Debt, (ii) to
purchase property, securities or services for the purpose of assuring the
holder of such Debt of the payment of such Debt, or (iii) to maintain working
capital, equity capital or other financial statement condition or liquidity of
the primary obligor so as to enable the primary obligor to pay such Debt (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative
to the foregoing); provided, however, that the Guaranty by any Person shall
not include endorsements by such Person for collection or deposit, in either
case, in the ordinary course of business.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other
obligation including by acquisition of Restricted Subsidiaries or the
recording, as required pursuant to GAAP or otherwise, of any such Debt or
other obligation on the balance sheet of such Person (and "Incurrence,"
"Incurred," "Incurrable" and "Incurring" shall have meanings correlative to
the foregoing); provided, however, that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Debt shall not be
deemed an Incurrence of such Debt.
"Interest Rate or Currency Protection Agreement" of any Person means any
forward contract, futures contract, swap, option or other financial agreement
or arrangement (including, without limitation, caps, floors, collars and
similar agreements) relating to, or the value of which is dependent upon,
interest rates or currency exchange rates or indices.
"Internal Revenue Code" means the Internal Revenue Code of 1986 and any
successor thereto.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) to, or purchase or acquisition of
Capital Stock, bonds, notes, debentures or other securities or evidence of
Debt issued by, any other Person, including any payment on a Guarantee of any
obligation of such other Person.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or
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preferential arrangement of any kind or nature whatsoever on or with respect
to such property or assets (including, without limitation, any conditional
sale or other title retention agreement having substantially the same economic
effect as any of the foregoing).
"Material Restricted Subsidiary" means, at any date of determination, any
Restricted Subsidiary that represents more than 10% of the Company's total
consolidated assets at the end of the most recent fiscal quarter for which
financial information is available, or more than 10% of the Company's
consolidated net sales or consolidated operating income for the most recent
four quarters for which financial information is available.
"Net Cash Proceeds" means (i) with respect to any Asset Sale by any Person,
cash or Cash Equivalents received (including by way of sale or discounting of
a note, installment receivable or other receivable, but excluding any other
consideration received in the form of assumption of Debt or other obligations
relating to such properties or assets) therefrom by such Person, net of (A)
all legal, title and recording tax expenses, commissions and other fees and
expenses Incurred and all federal, state, foreign and local taxes required to
be accrued as a liability as a consequence of such Asset Sale, (B) all
payments made by such Person or its Restricted Subsidiaries on any Debt which
is secured by such assets in accordance with the terms of any Lien upon or
with respect to such assets or which must by the terms of such Lien, or in
order to obtain a necessary consent to such Asset Sale or by applicable law,
be repaid out of the proceeds from such Asset Sale, (C) all distributions and
other payments made to minority interest holders in Restricted Subsidiaries of
such Person or joint ventures as a result of such Asset Sale and (D)
appropriate amounts to be provided by such Person or any Restricted Subsidiary
thereof, as the case may be, as a reserve in accordance with GAAP against any
liabilities associated with such assets and retained by such Person or any
Restricted Subsidiary thereof, as the case may be, after such Asset Sale,
including, without limitation, liabilities under any indemnification
obligations and severance and other employee termination costs associated with
such Asset Sale, in each case as determined by the Board of Directors, in its
reasonable good faith judgment evidenced by a resolution of the Board of
Directors filed with the Trustee; provided, however, that any reduction in
such reserve within twelve months following the consummation of such Asset
Sale will be treated for all purposes of the Indenture and the Notes as a new
Asset Sale at the time of such reduction with Net Cash Proceeds equal to the
amount of such reduction, (ii) with respect to the issuance or sale of Capital
Stock, or options, warrants or rights to purchase Capital Stock, or debt
securities or Disqualified Stock that has been converted into or exchanged for
Capital Stock, the proceeds of such issuance or sale in the form of cash or
Cash Equivalents, including payments in respect of deferred payment
obligations, net of attorney's fees, accountant's fees and brokerage,
consultation, underwriting and other fees and expenses actually incurred in
connection with such issuance or sale, conversion or exchange and net of any
Consolidated Interest Expense attributable to any debt securities paid to the
holders thereof prior to the conversion or exchange and net of taxes paid or
payable as a result thereof.
"Note Register" shall mean the note registry maintained by the Registrar.
"Offer to Purchase" means a written offer (the "Offer") sent by the Company
by first class mail, postage prepaid, to each Holder at his address appearing
in the Note Register on the date of the Offer offering to purchase up to the
principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration
date (the "Offer Expiration Date") of the Offer to Purchase which shall be,
subject to any contrary requirements of applicable law, not less than 30 days
or more than 60 days after the date of such Offer and a settlement date (the
"Purchase Date") for purchase of Notes within five Business Days after the
Offer Expiration Date. The Company shall notify the Trustee at least 15
Business Days (or such shorter period as is acceptable to the Trustee) prior
to the mailing of the Offer of the Company's obligation to make an Offer to
Purchase, and the Offer shall be mailed by the Company or, at the Company's
request, by the Trustee in the name and at the expense of the Company. The
Offer shall contain information concerning the business of the Company and its
Restricted Subsidiaries which the Company in good faith believes will enable
such Holders to make an informed decision with respect to the Offer to
Purchase (which at a minimum will include (i) the most recent annual and
quarterly financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the documents
required to be filed with the Trustee pursuant to the Indenture (which
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requirements may be satisfied by delivery of such documents together with the
Offer), (ii) a description of material developments in the Company's business
subsequent to the date of the latest of such financial statements referred to
in clause (i) (including a description of the events requiring the Company to
make the Offer to Purchase), (iii) if applicable, appropriate pro forma
financial information concerning the Offer to Purchase and the events
requiring the Company to make the Offer to Purchase and (iv) any other
information required by applicable law to be included therein. The Offer shall
contain all instructions and materials necessary to enable such Holders to
tender Notes pursuant to the Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to Purchase
is being made;
(2) the Offer Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the outstanding Notes offered to be
purchased by the Company pursuant to the Offer to Purchase (including, if
less than 100%, the manner by which such has been determined pursuant to
the Section of the Indenture requiring the Offer to Purchase) (the
"Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000
aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the "Purchase Price");
(5) that the Holder may tender all or any portion of the Notes registered
in the name of such Holder and that any portion of a Note tendered must be
tendered in an integral of $1,000 principal amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Notes not tendered or tendered but not purchased
by the Company pursuant to the Offer to Purchase will continue to accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each Holder electing to tender a Note pursuant to the Offer to
Purchase will be required to surrender such Note at the place or places
specified in the Offer prior to the close of business on the Offer
Expiration Date (such Note being, if the Company or the Trustee so
requires, duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to the Company and the Trustee duly executed
by, the Holder thereof or his attorney duly authorized in writing);
(10) that Holders will be entitled to withdraw all or any portion of
Notes tendered if the Company (or their Paying Agent) receives, not later
than the close of business on the Offer Expiration Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Note the Holder tendered, the certificate number of
the Note the Holder tendered and a statement that such Holder is
withdrawing all or a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, the Company shall purchase all such Notes and (b)
if Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the
Company shall purchase Notes having an aggregate principal amount equal to
the Purchase Amount on a pro rata basis (with such adjustments as may be
deemed appropriate so that only Notes in denominations of $1,000 or
integral multiples thereof shall be purchased); and
(12) that in the case of any Holder whose Note is purchased only in part,
the Company shall execute, and the Trustee shall authenticate and deliver
to the Holder of such Note without service charge, a new Note or Notes, of
any authorized denomination as requested by, such Holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of
the Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with
the Offer for such Offer to Purchase.
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"Permitted Interest Rate or Currency Protection Agreement" of any Person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions that is designed to protect such Person against
fluctuations in interest rates or currency exchange rates with respect to Debt
Incurred and which shall have a notional amount no greater than the payments
due with respect to the Debt being hedged thereby and not for purposes of
speculation.
"Permitted Investment" means (i) an Investment in the Company or a Wholly
Owned Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Wholly Owned Restricted Subsidiary or be merged or
consolidated with or into or transfer or convey all or substantially all its
assets to, the Company or a Wholly Owned Restricted Subsidiary; provided that
such Person's primary business or the assets to be transferred or conveyed are
related, ancillary or complementary to the System and Network Management
Business; (ii) Cash Equivalents; (iii) payroll, travel, relocation and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses in accordance with GAAP; (iv) stock,
obligations or securities received (x) in satisfaction of judgments or (y) in
connection with the sale or disposition of a Person, assets or business; (v)
Investments in prepaid expenses, negotiable instruments held for collection
and lease, utility and worker's compensation, performance and other similar
deposits; (vi) Permitted Interest Rate or Currency Agreements; (vii) Strategic
Investments; (viii) loans or advances to officers or employees of the Company
or any Restricted Subsidiary (other than loans or advances made pursuant to
clause (ix) below) that do not in the aggregate exceed $10.0 million at any
time outstanding; (ix) accounts receivable in the ordinary course of business
(and Investments obtained in exchange or settlement of accounts receivable for
which the Company has determined that collection is not likely); and (x) loans
or advances to Persons who own Debt or Capital Stock (other than any Affiliate
of the Company or any Restricted Subsidiary) of any Person if such loans or
advances are made as part of, or in connection with, a transaction pursuant to
which such Person becomes a Restricted Subsidiary of the Company or any other
Restricted Subsidiary or substantially all of the assets of such Person are
acquired by the Company or any Restricted Subsidiary, in an aggregate amount
not to exceed 20% of the total consideration paid in connection with such
acquisition.
"Permitted Lien" means any Lien on the assets of the Company or any
Restricted Subsidiary permitted under the "Limitation on Liens" covenant.
"Permitted Senior Bank Debt" means Debt Incurred by Company or any
Restricted Subsidiary pursuant to the Senior Loan Facility, or one or more
other senior commercial term loan and/or revolving credit facilities
(including any letter of credit subfacility) entered into principally with
commercial banks and/or other financial institutions typically party to
commercial loan agreements, and any replacement, extension, renewal,
refinancing or refunding thereof; provided that the aggregate principal amount
of all Permitted Senior Bank Debt, at any one time outstanding, shall not
exceed $100.0 million plus 85% of the Company's consolidated net accounts
receivable.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such Person, to shares
of Capital Stock of any other class of such Person.
"Purchase Money Secured Debt" of any Person means Debt of such Person
secured by a Lien on real or personal property of such Person which Debt (a)
constitutes all or a part of the purchase price or construction cost of such
property or (b) is Incurred prior to, at the time of or within 180 days after
the acquisition or substantial completion of such property for the purpose of
financing all or any part of the purchase price or construction cost thereof;
provided, however, that (w) the Debt so incurred does not exceed 100% of the
purchase price or construction cost of such property and related expenses, (x)
such Lien does not extend to or cover any property other than such item of
property and any improvements on such item and proceeds thereof, (y) the
purchase price or construction cost for such property is or should be included
in "addition to property, plant and equipment" in accordance with GAAP, and
(z) the purchase or construction of such property is not part of any
acquisition of a Person or business unit or line of business.
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"Qualified Consideration" shall mean: (i) cash; (ii) Cash Equivalents; (iii)
assets that are used or useful in the System and Network Management Business;
(iv) any securities or other obligations that are converted into or exchanged
for cash or Cash Equivalents within six months after the Asset Sale or (v)
liabilities of the Company or a Restricted Subsidiary assumed by the
transferee (or its designee) such that the Company or such Restricted
Subsidiary has no further liability therefor, the amount of the liability to
be determined in accordance with GAAP.
"Related Person" of any Person means any other Person directly or indirectly
owning (a) 5% or more of the outstanding Common Stock of such Person (or, in
the case of a Person that is not a corporation, 5% or more of the equity
interest in such Person) or (b) 5% or more of the combined voting power of the
Voting Stock of such Person.
"Restricted Subsidiary" means any Subsidiary of the Company, whether
existing on or after the date of the Indenture, unless such Subsidiary is an
Unrestricted Subsidiary.
"Secured Debt" means Permitted Senior Bank Debt, Purchase Money Secured Debt
and other Debt secured by a Permitted Lien.
"Senior Loan Facility" means the loan facility expected to be provided
pursuant to a credit agreement to be entered into by and among the Company,
Goldman Sachs Credit Partners L.P., as arranger and syndication agent, certain
lenders from time to time party thereto, and the administrative agent party
thereto, and any credit agreements governing Debt Incurred to refund, replace
or refinance borrowings or commitments then outstanding under or permitted to
be Incurred or outstanding under such facility, and all promissory notes,
guaranties, letters of credit, security agreements, pledge agreements,
mortgages, deeds of trust and other instruments, documents or agreements
executed pursuant to such credit agreements, in each case as the same may be
amended, extended, renewed, supplemented, restated or otherwise modified from
time to time.
"Strategic Investment" means an Investment in any Person (other than an
Unrestricted Subsidiary of the Company) whose primary business is related,
ancillary or complementary to the System and Network Management Business, and
such Investment is determined by the Board of Directors of the Company to
promote or significantly benefit the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment.
"Subordinated Debt" means Debt of the Company as to which the payment of
principal of (and premium, if any) and interest and other payment obligations
in respect of such Debt shall be subordinate to the prior payment in full of
the Notes to at least the following extent: (i) no payments of principal of
(or premium, if any) or interest on, or otherwise due in respect of such Debt,
may be permitted for so long as any default in the payment of principal (or
premium, if any) or interest on the Notes exists; (ii) in the event that any
other default that with the passing of time or the giving of notice, or both,
would constitute an Event of Default with respect to the Notes, upon notice by
25% or more in principal amount of the Notes to the Trustee, the Trustee shall
have the right to give notice to the Company and the holders of such Debt (or
trustees or agents therefor) of a payment blockage, and thereafter no payments
of principal of (or premium, if any) or interest on or otherwise due in
respect of such Debt may be made for a period of 179 days from the date of
such notice; and (iii) such Debt may not (x) provide for payments of principal
of such Debt at the Maturity thereof or by way of a sinking fund applicable
thereto or by way of any mandatory redemption, defeasance, retirement or
repurchase thereof by the Company (including any redemption, retirement or
repurchase which is contingent upon events or circumstances, but excluding any
retirement required by virtue of acceleration of such Debt upon an event of
default thereunder), in each case prior to the final maturity date of the
Notes or (y) permit redemption or other retirement (including pursuant to an
offer to purchase made by the Company) of such other Debt at the option of the
holder thereof prior to the final maturity date of the Notes, other than a
redemption or other retirement at the option of the holder of such Debt
(including pursuant to an offer to purchase made by the Company) which is
conditioned upon a change of control of the Company pursuant to provisions
substantially similar to those described under "Change of Control" (and which
shall provide that such Debt will not be repurchased pursuant to such
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provisions prior to the Company's repurchase of the Notes required to be
repurchased by the Company pursuant to the provisions described under "Change
of Control"); provided, however, that any Debt which would constitute
Subordinated Debt but for provisions thereof giving holders thereof the right
to require the Company or a Restricted Subsidiary to repurchase or redeem such
Subordinated Debt upon the occurrence of an asset sale occurring prior to the
final maturity of the Notes shall constitute Subordinated Debt if such
provisions applicable to such Subordinated Debt are no more favorable to the
holders of such Debt than the provisions applicable to the Notes contained in
the covenant described under "Limitation on Asset Sales" and such provisions
applicable to such Debt specifically provide that the Company and its
Restricted Subsidiaries will not repurchase or redeem any such Debt pursuant
to such provisions prior to the repurchase of such Notes as are required to be
repurchased pursuant to the covenant described under "Limitation on Asset
Sales."
"Subsidiary" of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Restricted Subsidiaries thereof,
or (ii) any other Person (other than a corporation) in which such Person, or
one or more other Subsidiaries of such Person or such Person and one or more
other Subsidiaries thereof, directly or indirectly, has the power to direct
the policies, management and affairs thereof.
"System and Network Management Business" means: (i) server and other
hardware hosting, (ii) connectivity, data networking, telecommunications or
content for computer or data networks or systems; (iii) management of computer
or data networks or systems; (iv) technology services, equipment sales or
leasing or software licensing for computer or data networks or systems
(including Internet Protocol and any successor protocol(s) based networks);
and (v) businesses reasonably related, complementary or incidental thereto.
"U.S. Government Securities" means securities that are direct obligations of
the United States of America, direct obligations of the Federal Home Loan
Mortgage Corporation, direct obligations of the Federal National Mortgage
Association, securities which the timely payment of whose principal and
interest is unconditionally guaranteed by the full faith and credit of the
United States of America, trust receipts or other evidence of a direct claim
upon the instruments described above and money market mutual funds that invest
solely in such securities.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons
performing similar functions) at such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture:
(a) failure to pay principal of (or premium, if any, on) any Note when
due (upon acceleration, optional or mandatory redemption, required
repurchase or otherwise);
(b) failure to pay interest on any Note when due, and such default
continues for a period of 30 days;
(c) default in the payment of principal and interest on Notes required to
be purchased pursuant to an Offer to Purchase as described under "Change of
Control" and "Asset Sales" when due and payable;
(d) failure to perform or comply with the provisions described under
"Merger, Consolidation and Certain Sales of Assets;"
(e) failure to perform any other covenant or agreement of the Company
under the Indenture or the Notes and such failure continues for 60 days
after written notice to the Company by the Trustee or Holders of at least
25% in aggregate principal amount of outstanding Notes;
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(f) (i) any default by the Company or any Material Restricted Subsidiary
in the payment of the principal, premium, if any, or interest has occurred
with respect to amounts in excess of $10.0 million under any agreement,
indenture or instrument evidencing Debt when the same shall become due and
payable in full and such default shall have continued after any applicable
grace period and shall not have been cured or waived and, if not already
matured at its final maturity in accordance with its terms, the holders of
such Debt shall have the right to accelerate such Debt, or (ii) any event
of default as defined in any agreement, indenture or instrument of the
Company or any Restricted Subsidiary evidencing Debt in excess of $10.0
million shall have occurred and the Debt thereunder, if not already matured
at its final maturity in accordance with its terms, shall have been
accelerated;
(g) the rendering of a final judgment or judgments against the Company or
any Material Restricted Subsidiary in an amount in excess of $10.0 million
which remains undischarged or unstayed for a period of 60 days after the
date on which the right to appeal has expired;
(h) certain events of bankruptcy, insolvency or reorganization affecting
the Company or any Material Restricted Subsidiary; and
(i) the Company shall challenge the Lien on the Escrow Collateral under
the Escrow Agreement prior to the time that the Escrow Collateral is to be
released to the Company or the Escrow Agreement becomes, or the Company
asserts that the Escrow Agreement is, invalid or unenforceable, otherwise
than in accordance with its terms.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default (as defined) shall occur and be
continuing, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
Holders, unless such Holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of the Trustee,
the Holders of a majority in aggregate principal amount of the outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee.
If an Event of Default (other than an Event of Default described in Clause
(h) above) shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the outstanding Notes may
accelerate the maturity of all Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the
Holders of a majority in aggregate principal amount of outstanding Notes may,
under certain circumstances, rescind and annul such acceleration if all Events
of Default, other than the nonpayment of accelerated principal, have been
cured or waived as provided in the Indenture. If an Event of Default specified
in Clause (h) above occurs, the principal of and any accrued interest on the
Notes then outstanding will ipso facto become immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
For information as to waiver of defaults, see "Modification and Waiver."
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder
shall have previously given to the Trustee written notice of a continuing
Event of Default (as defined) and unless also the Holders of at least 25% in
aggregate principal amount of the outstanding Notes shall have made written
request, and offered reasonable indemnity, to the Trustee to institute such
proceeding as trustee, and the Trustee shall not have received from the
Holders of a majority in aggregate principal amount of the outstanding Notes a
direction inconsistent with such request and shall have failed to institute
such proceeding within 60 days. However, such limitations do not apply to a
suit instituted by a Holder of a Note for enforcement of payment of the
principal of and premium, if any, or interest on such Note on or after the
respective due dates expressed in such Note.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
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SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect as to all outstanding Notes
(except as to (i) rights of registration of transfer and exchange and the
Company's right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders
to receive payment of principal and interest on the Notes, (iv) rights,
obligations and immunities of the Trustee under the Indenture and (v) rights
of the Holders of the Notes as beneficiaries of the Indenture with respect to
any property deposited with the Trustee payable to all or any of them), if (x)
the Company will have paid or caused to be paid the principal of and interest
on the Notes as and when the same will have become due and payable or (y) all
outstanding Notes (except lost, stolen or destroyed Notes which have been
replaced or paid) have been delivered to the Trustee for cancellation.
DEFEASANCE
At the option of the Company, (a) if applicable, the Company will be
discharged from any and all obligations in respect of the outstanding Notes or
(b) if applicable, the Company may omit to comply with certain restrictive
covenants, that such omission shall not be deemed to be an Event of Default
under the Indenture and the Notes, in either case (a) or (b) upon irrevocable
deposit with the Trustee, in trust, of money and/or U.S. government
obligations which will provide money in an amount sufficient, in the opinion
of a nationally recognized firm of independent certified public accountants,
to pay the principal of and premium, if any, and each installment of interest
if any, on the outstanding Notes. With respect to clause (b), the obligations
under the Indenture other than with respect to such covenants and the Events
of Default other than the Events of Default relating to such covenants above
shall remain in full force and effect. Such trust may only be established if,
among other things:
(i) with respect to clause (a), the Company has received from, or there
has been published by, the Internal Revenue Service a ruling or there has
been a change in law, which in the Opinion of Counsel provides that Holders
of the Notes will not recognize gain or loss for U.S. federal income tax
purposes as a result of such deposit, defeasance and discharge and will be
subject to U.S. federal income tax on the same amount, in the same manner
and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred; or, with respect to clause (b),
the Company has delivered to the Trustee an Opinion of Counsel to the
effect that the Holders of the Notes will not recognize gain or loss for
U.S. federal income tax purposes as a result of such deposit and defeasance
and will be subject to U.S. federal income tax on the same amount, in the
same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred;
(ii) such deposit, defeasance and discharge will not result in a breach
or violation of, or constitute a default under, any agreement or instrument
to which the Company or any Restricted Subsidiary is a party or by which
the Company and any Restricted Subsidiary is bound;
(iii) no Event of Default or event that with the passing of time or the
giving of notice, or both, shall constitute an Event of Default, shall have
occurred and be continuing;
(iv) the Company has delivered to the Trustee an Opinion of Counsel to
the effect that such deposit shall not cause the Trustee or the trust so
created to be subject to the Investment Company Act of 1940; and
(v) certain other customary conditions precedent are satisfied.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of a majority in aggregate
principal amount of the outstanding Notes; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
outstanding Note affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, (b) reduce the
principal amount of, or premium or interest on, any Note, (c) change the place
or currency of payment of principal of, or premium or interest on, any Note,
(d) impair the right to institute suit for the
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enforcement of any payment on or with respect to any Note, (e) reduce the
above-stated percentage of outstanding Notes necessary to modify or amend the
Indenture, (f) reduce the percentage of aggregate principal amount of
outstanding Notes necessary for waiver of compliance with certain provisions
of the Indenture or for waiver of certain defaults, (g) modify any provisions
of the Indenture relating to the modification and amendment of the Indenture
or the waiver of past defaults or covenants, except as otherwise specified, or
(h) following the mailing of any Offer to Purchase, modify any Offer to
Purchase for the Notes required under the "Limitation on Asset Sales" and the
"Change of Control" covenants contained in the Indenture in a manner
materially adverse to the Holders thereof.
Notwithstanding the foregoing, without the consent of any Holder, the
Company and the Trustee may amend or supplement the Indenture or the Notes to
cure any ambiguity, defect or inconsistency; provided that such action does
not adversely affect the interests of the Holders of the Notes in any material
respect, to provide for the assumption of the Company's obligations to Holders
of Notes in the case of a merger or consolidation, to secure the Notes, to add
to the covenants of the Company for the benefits of the Holders or to comply
with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
The Holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. Subject to certain
rights of the Trustee, as provided in the Indenture, the Holders of a majority
in aggregate principal amount of the outstanding Notes, on behalf of all
Holders of Notes, may waive any past default under the Indenture, except a
default in the payment of principal, premium or interest or a default arising
from failure to purchase any Note tendered pursuant to an Offer to Purchase.
GOVERNING LAW
The Indenture and the Old Notes are, and the New Notes will be, governed by
the laws of the State of New York.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the
Trustee will exercise such rights and powers vested in it under the Indenture
and use the same degree of care and skill in its exercise as a prudent person
would exercise under the circumstances in the conduct of such persons own
affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claim
as security or otherwise. The Trustee is permitted to engage in other
transactions with the Company or any Affiliate, provided, however, that if it
acquires any conflicting interest (as defined in the Indenture or in the Trust
Indenture Act), it must eliminate such conflict or resign.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain U.S. federal income
considerations relevant to holders of the Notes including certain U.S. federal
income tax consequences of the exchange of Old Notes for New Notes pursuant to
the Exchange Offer. This discussion is based upon the Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations, Internal Revenue Service
("IRS") rulings and judicial decisions now in effect, all of which are subject
to change (possibly with retroactive effect) or different interpretations.
There can be no assurance that the IRS will not challenge one or more of the
tax consequences described herein, and the Company has not obtained, nor does
it intend to obtain, a ruling from the IRS with respect to the U.S. federal
income tax, state tax, local tax, foreign tax or other tax consequences of
acquiring or holding Notes. This discussion does not purport to deal with all
aspects of U.S. federal income taxation that may be relevant to a particular
holder in light of the holder's circumstances (for example, persons subject to
the alternative minimum tax provisions of the Code). Also, it is not intended
to be wholly applicable to all categories of investors, some of which (such as
dealers in securities, banks, insurance companies, tax-exempt (employment,
charitable or other) organizations, and persons holding Notes as part of a
hedging or conversion transaction or straddle or persons deemed to sell Notes
under the constructive sale provisions of the Code) may be subject to special
rules. The discussion also does not discuss any aspect of state, local or
foreign law, or U.S. federal estate and gift tax law as applicable to U.S.
Holders (as defined below). This discussion is limited to purchasers of Notes
who hold the Notes as "capital assets" within the meaning of Section 1221 of
the Code.
ALL PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES.
U.S. HOLDERS
As used herein, the term "U.S. Holder" means the beneficial holder of a Note
that for United States federal income tax purposes is (i) a citizen or
resident (as defined in Section 7701 (b) of the Code) of the United States,
(ii) a corporation, partnership or other entity formed under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is subject to U.S. federal income taxation regardless of its source
or (iv) a trust which is subject to the supervision of a court within the
United States and the control of a United States person as described in
Section 7701(a)(30) of the Code. A "Non-U.S. Holder" is any holder other than
a U.S. Holder.
Interest
Stated interest on the Notes will generally be includable in a U.S. Holder's
gross income and taxable as ordinary income for U.S. federal income tax
purposes at the time it is paid or accrued in accordance with the U.S.
Holder's regular method of accounting.
Sale, Exchange or Redemption
Each U.S. Holder generally will recognize capital gain or loss upon the
sale, exchange, redemption or other disposition of the Notes measured by the
difference (if any) between (i) the amount of cash and the fair market value
of any property received (except to the extent that such cash or other
property is attributable to the payment of accrued interest not previously
included in income, which amount will be taxable as ordinary income) and (ii)
such holder's adjusted tax basis in the Notes. Capital gain recognized by an
individual U.S. Holder generally will be subject to a maximum United States
Federal income tax rate of (i) 39.6% if the U.S. Holder held the asset for not
more than one year before the disposition, (ii) 28% if the U.S. Holder held
the asset for more than one year but not more than 18 months before the
disposition, and (iii) 20% if the U.S. Holder held the asset for more than 18
months before the disposition. A holder's initial tax basis in a Note will be
the amount paid therefor.
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The exchange of the Old Notes for the New Notes pursuant to the Exchange
Offer should not be treated as an "exchange" for federal income tax purposes
because the New Notes should not differ materially in either kind or extent
from the Old Notes and because the exchange will occur by operation of the
terms of the Old Notes. A U.S. Holder's adjusted tax basis in the New Notes
should be the same as such Holder's adjusted tax basis in the Old Notes. A
U.S. Holder's holding period for the New Notes received pursuant to the
Exchange Offer should include its holding period for the Old Notes surrendered
therefor.
Information Reporting and Backup Withholding
A U.S. Holder of Notes may be subject to "backup withholding" at a rate of
31% with respect to certain "reportable payments," including interest
payments, and, under certain circumstances, principal payments on the Notes
and proceeds from the sale, exchange or redemption of the Notes. These backup
withholding rules apply if the U.S. Holder, among other things, (i) fails to
furnish a social security number or other taxpayer identification number
("TIN") certified under penalties of perjury within a reasonable time after
the request therefor, (ii) furnishes a TIN as to which the IRS provides
notification that it is an incorrect TIN, (iii) fails to report properly
interest, or (iv) under certain circumstances, fails to provide a certified
statement, signed under penalties of perjury, that the TIN furnished is
correct and that such U.S. Holder is not subject to backup withholding. A U.S.
Holder who does not provide the Company with its correct TIN also may be
subject to penalties imposed by the IRS. Any amount withheld from a payment to
a U.S. Holder under the backup withholding rules is creditable against the
U.S. Holder's federal income tax liability, provided that the required
information is furnished to the IRS. Backup withholding will not apply,
however, with respect to payments made to certain holders, including
corporations, tax-exempt organizations and certain foreign persons, provided
their exemptions from backup withholding are properly established.
The Company will report to the U.S. Holders of Notes and to the IRS the
amount of any "reportable payments" for each calendar year and the amount of
tax withheld, if any, with respect to such payments.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Non-U.S. Holder. Non-U.S. Holders should consult
their own tax advisors concerning the state, local, foreign and other tax
consequences of the purchase, ownership and disposition of the Notes.
For purposes of U.S. federal income tax on interest discussed below, a Non-
U.S. Holder (as defined above) includes a non-resident fiduciary of an estate
or trust. For purposes of the following discussion, interest and gain on the
sale, exchange or other disposition of a Note will be considered to be "U.S.
trade or business income" if such income or gain is (i) effectively connected
with the conduct of a trade or business within the U.S. of such Non-U.S.
Holder or (ii) in the case of certain residents of certain countries which
have an income tax treaty in force with the U.S., attributable to a permanent
establishment (or, in the case of an individual, a fixed base) in the United
States as such terms are defined in the applicable treaty.
Stated Interest
Generally any interest paid to a Non-U.S. Holder of a Note that is not U.S.
trade or business income will not be subject to U.S. federal income tax if the
interest qualifies as "portfolio interest." Generally interest on the Notes
will qualify as portfolio interest if (i) the Non-U.S. Holder does not
actually or constructively own 10% or more of the total combined voting power
of all classes of stock of the Company entitled to vote and is not a
"controlled foreign corporation" with respect to which the Company is a
"related person" within the meaning of the appropriate provisions of the Code,
(ii) the Non-U.S. Holder, under penalty of perjury, in general certifies that
the Non-U.S. Holder is not a U.S. person and such certificate provides the
Non-U.S. Holder's name and address, (iii) the Non-U.S. Holder is not a bank
receiving interest on an extension of credit made pursuant to a loan agreement
made in the ordinary course of its trade or business, and (iv) the Notes are
in registered form.
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The gross amount of payments of interest to a Non-U.S. Holder that do not
qualify for the portfolio interest exemption and that are not U.S. trade or
business income will be subject to U.S. federal income tax at the rate of 30%,
unless a U.S. income tax treaty applies to reduce or eliminate such tax.
Interest payments that are considered as U.S. trade or business income will be
taxed at regular U.S. income tax rates rather than the 30% gross rate. In the
case of a Non-U.S. Holder that is a corporation, such U.S. trade or business
income may also be subject to the branch profits tax (which is generally
imposed on a foreign corporation on the actual or deemed repatriation from the
United States of earnings and profits attributable to U.S. trade or business
income) at a 30% rate unless a U.S. income tax treaty applies to reduce or
eliminate such tax. To claim the benefit of a tax treaty or to claim exemption
from withholding because the income is U.S. trade or business income, the Non-
U.S. Holder must provide a properly executed IRS Form 1001 or IRS Form 4224
(or such successor forms as the IRS designates), as applicable, prior to the
payment of interest. Under recently issued U.S. Treasury Regulations that will
generally be effective on and after January 1, 2000 (the "Withholding
Regulations"), the required Forms 1001 and 4224 will be replaced by a new Form
W-8. Under the Withholding Regulations, a Non-U.S. Holder may under certain
circumstances be required to obtain a U.S. taxpayer identification number and
make certain certifications to the Company. Special procedures are provided in
the Withholding Regulations for payments through qualified intermediaries.
Investors should consult their tax advisors regarding the effect, if any, of
the Withholding Regulations.
Sale, Exchange or Redemption of Notes
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a Note generally will not be subject to U.S. federal income tax,
unless (i) such gain is U.S. trade or business income, (ii) subject to certain
exceptions, the Non-U.S. Holder is an individual who holds the Note as a
capital asset and is present in the United States for 183 days or more in the
taxable year of the disposition or (iii) the Non-U.S. Holder is subject to tax
pursuant to the provisions of U.S. tax law applicable to certain U.S.
expatriates (including certain former citizens or residents of the United
States).
The exchange of the Old Notes for the New Notes pursuant to the Exchange
Offer should not be treated as an "exchange" for federal income tax purposes
because the New Notes should not differ materially in either kind or extent
from the Old Notes and because the exchange will occur by operation of the
terms of the Old Notes. A U.S. Holder's adjusted tax basis in the New Notes
should be the same as such Holder's adjusted tax basis in the Old Notes. A
U.S. Holder's holding period for the New Notes received pursuant to the
Exchange Offer should include its holding period for the Old Notes surrendered
therefor.
Information Reporting and Backup Withholding
The Company must report annually to the IRS and to each Non-U.S. Holder any
interest that is subject to withholding, or that is exempt from U.S.
withholding tax pursuant to a tax treaty, or interest that is exempt from U.S.
tax under the portfolio interest exception or because it is U.S. trade or
business income. Copies of these information returns may also be made
available under the provisions of a specific treaty or agreement to the tax
authorities of the country in which the Non-U.S. Holder resides. Under certain
circumstances the Company will have to report to the IRS payments of
principal.
Generally, information reporting and backup withholding of United States
federal income tax at a rate of 31% may apply to payments made by the Company
or any agent thereof to Non-U.S. Holders if the payee fails to make the
appropriate certification that the holder is a non-U.S. person or if the
Company or its paying agent has actual knowledge that the payee is a United
States person.
The payment of the proceeds from the disposition of Notes to or through a
United States office of a United States or foreign broker will be subject to
information reporting and backup withholding unless the owner provides
certification as to its Non-U.S. Holder status under penalty of perjury or
otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a U.S. person or that the
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conditions of any other exemption are not, in fact, satisfied. The proceeds of
the disposition by a Non-U.S. Holder of the Notes to or through a foreign
office of a broker will generally not be subject to backup withholding.
However, if such broker is a U.S. person, a controlled foreign corporation for
United States tax purposes, or a foreign person 50% or more of whose gross
income from all sources for certain periods is effectively connected with a
United States trade or business, information reporting will apply unless such
broker has documentary evidence in its files of the Non-U.S. Holder's foreign
status and has no actual knowledge to the contrary or unless the Non-U.S.
Holder otherwise establishes an exemption. Both backup withholding and
information reporting will apply to the proceeds of such dispositions if the
broker has actual knowledge that the payee is a U.S. Holder. The Withholding
Regulations alter the foregoing rules in certain respects. Investors should
consult their tax advisors regarding the effect, if any, of the Withholding
Regulations.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures for claiming such refund or credit are followed.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO PARTICULAR
U.S. FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES TO IT OF
PURCHASING, HOLDING AND DISPOSING OF THE NOTES OF THE COMPANY, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY
PROPOSED CHANGES IN APPLICABLE LAWS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in connection
with the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
the Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period ending upon the
earlier of (i) 180 days after the Exchange Offer has been completed and (ii)
the date on which broker-dealers no longer own any Transfer Restricted
Securities, it will make available and provide promptly upon reasonable
request this Prospectus (as amended or supplemented), in a form meeting the
requirements of the Securities Act to any broker-dealer for use in connection
with any such resale.
The Company will receive no proceeds in connection with the Exchange Offer.
New Notes received by broker-dealers for their own account pursuant to the
Exchange Offer may be sold from time to time in one or more transactions in
the over-the-counter market, in negotiated transactions, through the writing
of options on the New Notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer and/or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver, and by delivering, a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The Company has agreed
to indemnify such broker-dealers against certain liabilities, including
liabilities under the Securities Act.
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LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon on behalf of
the Company by Fenwick & West LLP, Palo Alto, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997,
and for each of the years in the three-year period ended December 31, 1997,
have been included herein and in the Registration Statement in reliance upon
the report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in auditing and
accounting.
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EXODUS COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors..................... F-2
Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998
(unaudited).............................................................. F-3
Statements of Operations for the years ended December 31, 1995, 1996 and
1997 and the six months ended June 30, 1997 and 1998 (unaudited)......... F-4
Statements of Stockholders' (Deficit) Equity for the years ended December
31, 1995, 1996 and 1997 and the six months ended June 30, 1998
(unaudited).............................................................. F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997 and the six months ended June 30, 1997 and 1998 (unaudited)......... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Exodus Communications, Inc.:
We have audited the accompanying balance sheets of Exodus Communications,
Inc. as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' (deficit) equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Exodus Communications,
Inc. as of December 31, 1996 and 1997, and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Mountain View, California
February 13, 1998, except as to Note
8 which is as of March 10, 1998
F-2
<PAGE>
EXODUS COMMUNICATIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1996 1997 1998
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 3,715 $ 10,270 $ 60,720
Accounts receivable........................... 521 1,837 4,384
Prepaid expenses and other current assets..... 121 1,377 2,082
------- -------- --------
Total current assets........................ 4,357 13,484 67,186
Property and equipment, net................... 3,410 25,170 43,105
Restricted cash and investments............... 378 1,753 1,938
Other assets.................................. 144 566 811
------- -------- --------
$ 8,289 $ 40,973 $113,040
======= ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Bank borrowings............................... $ -- $ 3,000 $ --
Current portion of equipment loans and line of
credit facility.............................. 296 3,777 7,301
Current portion of capital lease obligations.. 224 1,143 3,294
Accounts payable.............................. 1,163 6,252 11,144
Accrued expenses.............................. 581 2,808 5,835
Deferred revenue.............................. 201 211 41
------- -------- --------
Total current liabilities................... 2,465 17,191 27,615
Equipment loans and line of credit facility,
less current portion......................... 1,000 12,693 21,453
Capital lease obligations, less current
portion...................................... 449 2,442 8,461
------- -------- --------
Total liabilities........................... 3,914 32,326 57,529
------- -------- --------
Redeemable convertible preferred stock and
warrants, $0.001 par value: 32,596,966,
74,960,124 and no shares authorized as of
December 31, 1996 and 1997, and June 30,
1998, respectively; 15,536,578, 34,117,371
and no shares issued and outstanding as of
December 31, 1996 and 1997, and June 30,
1998, respectively; aggregate liquidation
preference of $9,720 and $39,640 as of
December 31, 1996 and 1997, respectively..... 9,609 39,247 --
------- -------- --------
Stockholders' (deficit) equity:
Preferred stock, $0.001 par value: 5,000,000
shares authorized and no shares issued or
outstanding as of June 30, 1998.............. -- -- --
Common stock, $0.001 par value: 41,200,000,
53,281,579 and 50,000,000 shares authorized
as of December 31, 1996 and 1997, and June
30, 1998, respectively; 1,945,966, 2,067,253
and 19,477,098 shares issued and outstanding
as of December 31, 1996 and 1997, and June
30, 1998, respectively....................... 2 2 19
Additional paid-in capital.................... 229 2,508 115,160
Notes receivable from stockholders............ (186) (140) (53)
Deferred stock compensation................... -- (2,393) (1,641)
Accumulated deficit........................... (5,279) (30,577) (57,974)
------- -------- --------
Total stockholders' (deficit) equity........ (5,234) (30,600) 55,511
------- -------- --------
$ 8,289 $ 40,973 $113,040
======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
EXODUS COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ 1,408 3,130 12,408 $ 4,062 $ 17,176
------- ------- -------- ------- --------
Cost and expenses:
Cost of revenues.............. 1,128 2,990 16,868 4,898 22,864
Marketing and sales........... 1,056 2,734 12,702 4,376 13,580
General and administrative.... 427 1,056 5,983 2,079 5,657
Product development........... 70 444 1,647 588 1,364
------- ------- -------- ------- --------
Total cost and expenses..... 2,681 7,224 37,200 11,941 43,465
------- ------- -------- ------- --------
Operating loss.................. (1,273) (4,094) (24,792) (7,879) (26,289)
Net interest expense............ 38 39 506 137 1,108
------- ------- -------- ------- --------
Net loss.................... (1,311) (4,133) (25,298) (8,016) (27,397)
Cumulative dividends and
accretion on redeemable
convertible preferred stock.... -- -- (1,413) -- (2,014)
------- ------- -------- ------- --------
Net loss attributable to common
stockholders................... $(1,311) $(4,133) $(26,711) $(8,016) $(29,411)
======= ======= ======== ======= ========
Basic and diluted net loss per
share.......................... $ (1.00) $ (2.16) $ (13.85) $ (4.16) $ (2.57)
======= ======= ======== ======= ========
Shares used in computing basic
and diluted net loss per
share.......................... 1,315 1,914 1,928 1,927 11,460
======= ======= ======== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
EXODUS COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE RETAINED EARNINGS STOCKHOLDERS'
-------------- PAID-IN FROM DEFERRED STOCK (ACCUMULATED (DEFICIT)
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT) EQUITY
------ ------ ---------- ------------ -------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December
31, 1994............... 1,000 $ 1 $ 3 $ -- $ -- $ 165 $ 169
Sale of common stock to
officers............... 734 1 175 (176) -- -- --
Issuance of common stock
in connection with
stock purchase plan.... 96 -- 23 (21) -- -- 2
Repurchase of common
stock.................. (9) -- (2) -- -- -- (2)
Repayment of notes
receivable from
stockholders........... -- -- -- 2 -- -- 2
Net loss................ -- -- -- -- -- (1,311) (1,311)
------ ---- -------- ----- ------- -------- --------
Balance as of December
31, 1995............... 1,821 2 199 (195) -- (1,146) (1,140)
Issuance of common
stock.................. 134 -- 32 -- -- -- 32
Issuance of common stock
in connection with
stock purchase plan.... 11 -- 3 (3) -- -- --
Issuance of common stock
in connection with
exercise of stock
options................ 5 -- 1 -- -- -- 1
Repurchase of common
stock.................. (25) -- (6) 6 -- -- --
Repayment of notes
receivable from
stockholders........... -- -- -- 6 -- -- 6
Net loss................ -- -- -- -- -- (4,133) (4,133)
------ ---- -------- ----- ------- -------- --------
Balances as of December
31, 1996............... 1,946 2 229 (186) -- (5,279) (5,234)
Issuance of common stock
in connection with
exercise of stock
options and warrants... 172 -- 222 -- -- -- 222
Repurchase of common
stock.................. (51) -- (12) 12 -- -- --
Repayment of notes
receivable from
stockholders........... -- -- -- 34 -- -- 34
Deferred stock
compensation related to
stock option grants.... -- -- 3,482 -- (3,482) -- --
Amortization of deferred
stock compensation..... -- -- -- -- 1,089 -- 1,089
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock.................. -- -- (750) -- -- -- (750)
Accretion on Series C
and D redeemable
convertible preferred
stock.................. -- -- (663) -- -- -- (663)
Net loss................ -- -- -- -- -- (25,298) (25,298)
------ ---- -------- ----- ------- -------- --------
Balances as of December
31, 1997............... 2,067 2 2,508 (140) (2,393) (30,577) (30,600)
Issuance of common stock
in connection with
exercise of stock
options and warrants
(unaudited)............ 248 -- 119 -- -- -- 119
Issuance of common stock
in conjunction with
initial public offering
(unaudited)............ 5,125 5 69,886 -- -- -- 69,891
Issuance of common stock
to an officer for cash
(unaudited)............ 50 -- 450 -- -- -- 450
Issuance of common stock
and common stock
warrants (unaudited)... -- -- 786 -- -- -- 786
Repayment of notes
receivable from
stockholders
(unaudited)............ -- -- -- 87 -- -- 87
Conversion of redeemable
convertible preferred
stock into common stock
(unaudited)............ 11,987 12 43,425 -- -- -- 43,437
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- -- 752 -- 752
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock (unaudited)...... -- -- (462) -- -- -- (462)
Accretion on Series C
and D redeemable
convertible preferred
stock (unaudited)...... -- -- (1,552) -- -- -- (1,552)
Net loss (unaudited).... -- -- -- -- -- (27,397) (27,397)
------ ---- -------- ----- ------- -------- --------
Balances as of June 30,
1998 (unaudited)....... 19,477 $ 19 $115,160 $ (53) $(1,641) $(57,974) $ 55,511
====== ==== ======== ===== ======= ======== ========
</TABLE>
See accompanying notes to financial statements
F- 5
<PAGE>
EXODUS COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1995 1996 1997 1997 1998
-------- -------- --------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................... $ (1,311) $ (4,133) $ (25,298) $(8,016) $ (27,397)
Adjustments to reconcile
net loss to net cash used
for operating activities:
Depreciation and
amortization.............. 65 461 3,429 962 4,689
Loss on disposal of
property and equipment.... -- -- -- -- 248
Noncash common stock and
warrant expense........... -- -- -- -- 786
Amortization of deferred
stock compensation........ -- -- 1,089 -- 752
Amortization of debt
issuance costs............ -- -- -- -- 198
Changes in operating
assets and liabilities:
Accounts receivable....... (13) (265) (1,316) (419) (2,547)
Prepaid expenses and
other current assets..... (50) (71) (326) (394) (1,148)
Accounts payable.......... 420 671 5,089 2,478 4,892
Accrued expenses.......... 201 373 2,227 (55) 3,027
Deferred revenue.......... 235 (34) 10 (49) (170)
-------- -------- --------- ------- ---------
Net cash used for
operating activities.... (453) (2,998) (15,096) (5,493) (16,670)
-------- -------- --------- ------- ---------
Cash flows from investing
activities:
Capital expenditures....... (69) (3,499) (22,489) (5,765) (17,842)
Other assets............... (8) (118) (422) -- --
-------- -------- --------- ------- ---------
Net cash used for
investing activities.... (77) (3,617) (22,911) (5,765) (17,842)
-------- -------- --------- ------- ---------
Cash flows from financing
activities:
Proceeds from issuance of
redeemable convertible
preferred stock and
warrants.................. -- 9,409 23,320 17,449 2,176
Proceeds from issuance of
common stock.............. -- 32 222 28 70,460
Proceeds from issuance of
bridge financing
convertible notes......... -- -- 3,975 3,975 --
Notes receivable from
stockholders, net......... 2 7 34 (7) 87
Bank borrowings, net....... 100 (100) 3,000 -- (3,000)
Proceeds from sale-
leaseback transactions.... -- 552 932 932 4,035
Payments on capital leases
obligations............... (47) (154) (720) (570) (895)
Proceeds from debt......... 497 1,296 16,480 3,383 14,448
Repayment of debt.......... (60) (497) (1,306) (1,306) (2,164)
Restricted cash............ -- (378) (1,375) -- (185)
Proceeds from note payable
to stockholder............ 200 -- -- -- --
-------- -------- --------- ------- ---------
Net cash provided by
financing activities.... 692 10,167 44,562 23,884 84,962
-------- -------- --------- ------- ---------
Net increase in cash and
cash equivalents........... 162 3,552 6,555 12,626 50,450
Cash and cash equivalents at
beginning of period........ 1 163 3,715 3,715 10,270
-------- -------- --------- ------- ---------
Cash and cash equivalents at
end of period.............. $ 163 $ 3,715 $ 10,270 $16,341 $ 60,720
======== ======== ========= ======= =========
Supplemental disclosures of
cash flow information:
Cash paid -- interest...... $ -- $ -- $ 699 $ 175 $ 1,016
======== ======== ========= ======= =========
Non-cash investing and
financing activities:
Assets recorded under
capital leases............ $ 283 $ 27 $ 2,700 $ 290 $ 5,030
======== ======== ========= ======= =========
Conversion of note payable
to stockholder to
preferred stock........... $ -- $ 200 $ -- $ -- $ --
Cumulative dividends and
accretion on Series C and
D redeemable convertible
preferred stock........... $ -- $ -- $ 1,413 $ -- $ 2,014
======== ======== ========= ======= =========
Deferred compensation on
grants of stock options... $ -- $ -- $ 3,482 $ -- $ --
======== ======== ========= ======= =========
Warrants issued for
financing commitments..... $ -- $ -- $ 730 $ -- $ --
======== ======== ========= ======= =========
Conversion of bridge
financing convertible
notes to redeemable
convertible preferred
stock..................... $ -- $ -- $ 3,975 $ 3,975 $ --
======== ======== ========= ======= =========
Conversion of redeemable
convertible preferred
stock to common stock..... $ -- $ -- $ -- $ -- $ 43,437
======== ======== ========= ======= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
(1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
The Company
Unless the context otherwise requires, the term "Company" or "Exodus" refers
to Exodus Communications, Inc. and its California and Maryland predecessors.
Exodus is a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues consist of monthly fees for server hosting, Internet connectivity,
collaborative systems management and Internet technology services, equipment
sales to customers and one-time fees for installation. Revenues (other than
installation fees and equipment sales to customers) are generally billed and
recognized ratably over the term of the contract, generally one year.
Installation fees are typically recognized at the time that installation
occurs, and equipment sales are typically recognized when the equipment is
delivered to the customer or placed into service at the Internet Data Center.
Financial Instruments and Concentration of Credit Risk
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, bank borrowings and debt
approximates fair market value. Financial instruments that potentially expose
the Company to a concentration of credit risk principally consist of cash and
cash equivalents and accounts receivable.
The Company's customer base is primarily composed of businesses throughout
the United States. The Company performs ongoing credit evaluations of its
customers and maintains reserves for potential credit losses. To date, such
losses have not been significant. The balance of the allowance for bad debts
was $22,000, $15,000, $187,000 and $344,000 as of December 31, 1995, 1996 and
1997, and June 30, 1998, respectively. In 1995, revenues from a single
customer comprised 24% of total revenues.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over their respective estimated useful lives, which are generally three
to five years. Equipment recorded under capital leases and leasehold
improvements are amortized using the straight-line method over the shorter of
the respective lease term or estimated useful life of the asset.
F-7
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
Software Development Costs
The Company capitalizes software development costs incurred to develop
certain of the Company's collaborative systems management services that are
included in the Company's co-location services in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed. Costs are
capitalized after technological feasibility is achieved; generally upon the
development of a working model. To date, software development costs
capitalizable under SFAS No. 86 have not been material.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be recovered.
Stock-Based Compensation
The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets or intangibles may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Unaudited Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, the accompanying
unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair statement of the
Company's financial position as of June 30, 1998, and the results of its
operations and its cash flows for the six month periods ended June 30, 1997
and 1998.
F-8
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
Net Loss Per Share
Basic and diluted net loss per share has been computed by dividing the net
loss attributable to common stockholders by the weighted average number shares
of common stock outstanding during the period. Diluted net loss per share does
not include the effect of the following common equivalent shares as the effect
of their inclusion is antidilutive during each period (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------
1995 1996 1997 1997 1998
--------------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Shares issuable under stock op-
tions............................ 125 292 1,709 832 3,259
Shares issuable pursuant to
warrants to purchase common and
redeemable convertible preferred
stock............................ 85 637 2,813 870 247
Shares of redeemable convertible
preferred stock on an "as if
converted" basis................. -- 15,537 34,117 10,444 --
</TABLE>
Recent Accounting Pronouncements
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting of Comprehensive
Income. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a period except
those resulting from the issuance of shares of stock and distributions to
stockholders. To date, there have not been material differences between net
loss and comprehensive loss for all periods presented.
(2) FINANCIAL STATEMENT COMPONENTS
Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1996 1997 1998
------ ------- --------
(UNAUDITED)
<S> <C> <C> <C>
Data centers and related equipment.............. $2,278 $16,316 $33,332
Furniture, fixtures, computer equipment and oth-
er............................................. 690 12,815 14,504
Construction in progress........................ 974 -- 3,729
------ ------- -------
3,942 29,131 51,565
Less accumulated depreciation and amortization.. 532 3,961 8,460
------ ------- -------
$3,410 $25,170 $43,105
====== ======= =======
</TABLE>
Computer equipment and certain data center infrastructure are recorded under
capital leases that aggregated $860,000, $4,492,000 and $13,557,000 as of
December 31, 1996 and 1997 and June 30, 1998, respectively. Accumulated
amortization on the assets recorded under capital leases aggregated $221,000,
$722,000 and $1,561,000 as of December 31, 1996 and 1997, and June 30, 1998,
respectively.
F-9
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1998 IS UNAUDITED)
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll and related expenses............... $ 239 $ 1,183 $3,459
Other.............................................. 342 1,625 2,376
----- ------- ------
$ 581 $ 2,808 $5,835
===== ======= ======
</TABLE>
Net Interest Expense
Net interest expense consisted of the following (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest expense.............. $ 38 $ 107 $ 699 $ 165 $ 2,039
Interest income............... -- (68) (193) (28) (931)
------- ------- -------- ------- ---------
$ 38 $ 39 $ 506 $ 137 $ 1,108
======= ======= ======== ======= =========
</TABLE>
F-10
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
(3) BANK BORROWINGS, EQUIPMENT LOANS, LINE OF CREDIT FACILITY AND DEBT
During 1997, the Company had a $1,000,000 bank line of credit bearing
interest at the bank's prime rate plus 1% (9.5% at December 31, 1997) and
collateralized by accounts receivable. In December 1997, the line of credit
was amended to increase the available line to $5,000,000 and $3,000,000 was
outstanding as of December 31, 1997. In March 1998, the Company repaid the
$3,000,000 outstanding under the line of credit and in May 1998, the available
line was increased to $7,000,000. The line of credit expires in December 1998.
A summary of equipment loans and line of credit facilities follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1996 1997 1998
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
$850,000 equipment term loan with a financial
institution; prime rate plus 2.5% (11.0% as of
December 31, 1997); principal and interest due
monthly for 42 months............................. $ 267 $ 178 $ 134
$1,800,000 equipment line of credit facility;
effective interest rate of approximately 16.4%;
principal and interest due April 2000 through
September 2000; collateralized by equipment (see
Note 5)........................................... 1,029 1,393 1,164
$3,000,000 equipment line of credit facility-April
1997; effective interest rate of approximately
12.9%; principal and interest due monthly through
July 2001; collateralized by equipment (see Note
5)................................................ -- 2,756 2,429
$6,500,000 equipment line of credit facility;
effective interest rate of approximately 15.9%;
principal and interest due monthly through July
2001; collateralized by equipment (see Note 5).... -- 6,312 5,428
$3,000,000 equipment line of credit facility-August
1997; effective interest rate of approximately
16.2%; principal and interest due monthly through
May 2001; collateralized by equipment (see Note
5)................................................ -- 2,787 2,477
$5,000,000 equipment line of credit facility;
effective interest rate of 16.4%; principal and
interest due monthly through July 2001;
collateralized by equipment (see Note 5).......... -- 3,044 3,500
$10,000,000 equipment line of credit facility;
effective interest rate of approximately 13.8%,
principal and interest due monthly through July
2002; collateralized by equipment................. -- -- 5,622
$8,000,000 line of credit facility; interest rate
of 12.95%; principal and interest due monthly
through January 2000; collateralized by all of the
Company's assets (see Note 5)..................... -- -- 8,000
------ ------- -------
1,296 16,470 28,754
Less current portion............................... 296 3,777 7,301
------ ------- -------
Equipment loans and line of credit facility, less
current portion................................... $1,000 $12,693 $21,453
====== ======= =======
</TABLE>
Aggregate maturities for equipment loans and line of credit facility
outstanding as of December 31, 1997, for fiscal 1998, 1999, 2000 and 2001 are
$3,777,000, $4,478,000, $4,979,000 and $3,236,000, respectively.
F-11
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
Debt Offering
On July 1, 1998, the Company issued $200,000,000 of 11 1/4% Senior Notes due
2008 for aggregate net proceeds of approximately $193,000,000 (net of
discounts to the initial purchasers and estimated offering expenses). The
Company deposited approximately $42,400,000 with an escrow agent that will be
used to pay the first four semi-annual interest payments when due.
(4) NOTE PAYABLE TO STOCKHOLDER
As of December 31, 1995, the Company had a $200,000 note payable to a
stockholder bearing interest at the prime rate plus 2.5%. During 1996, this
note was converted into 484,378 shares of Series A preferred stock.
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
As of December 31, 1997, the Company was authorized to issue 53,281,579
shares of common stock, 7,798,483 shares each of Series A and A1, 8,600,000
shares each of Series B and B1, 17,850,000 shares each of Series C and C1 and
3,231,579 shares each of Series D and D1 redeemable convertible preferred
stock.
Redeemable Convertible Preferred Stock
In February and March 1996, the Company issued 7,798,483 shares of Series A
redeemable convertible preferred stock at $0.413 per share. In October 1996,
the Company issued 7,738,095 shares of Series B redeemable convertible
preferred stock at $0.84 per share. In March and June 1997, the Company
received a total of approximately $3,975,000 in cash in exchange for bridge
financing convertible promissory notes. In June 1997, the Company issued
15,789,868 shares of Series C redeemable convertible preferred stock for
$1.362 per share in exchange for approximately $17,500,000 in cash and the
conversion of the bridge financing notes. In December 1997, the Company issued
2,631,579 shares of Series D redeemable convertible preferred stock at $2.85
per share for aggregate cash proceeds of $7,500,000.
The rights, preferences, privileges and restrictions of the redeemable
convertible preferred stock are as follows:
. Shares of Series A, A1, B, B1, C, C1, D and D1 preferred stock are
convertible at the option of the holder into an equal number of shares
of common stock subject to certain price-based antidilution adjustments
for the Series A, B, C and D redeemable convertible preferred stock.
Such price-based antidilution adjustments will be made on a weighted
average formula basis upon certain issuances of Common Stock by the
Company made below the respective conversion price of the Series A, B, C
or D preferred stock, as applicable.
. Conversion is automatic upon either (i) the closing of a public offering
of the Company's common stock at an offering price of not less than
$8.55 per share and aggregate proceeds of at least $30,000,000 (a
"Qualified IPO") or (ii) the election of the majority of the
stockholders of Series A, A1, B and B1 and two-thirds of the
stockholders of Series C, C1, D and D1 redeemable convertible preferred
stock, with the A and A1, B and B1, C and C1 and D and D1 voting as four
separate classes.
. The holders of Series A, A1, B and B1 redeemable convertible preferred
stock are entitled to noncumulative dividends at annual rates of $0.04,
$0.04, $0.084 and $0.084 per share, respectively, when and if declared
by the Board of Directors. The holders of Series C, C1, D and D1
redeemable convertible preferred stock are entitled to cumulative
dividends at the annual rate of $0.095, $0.095, $0.20 and $0.20 per
share, respectively. In the event of a Qualified IPO or conversion, all
accrued but unpaid dividends with respect to the Series C, C1, D and D1
preferred stock will be forfeited.
F-12
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
. Shares of Series A, A1, B, B1, C, C1, D and D1 redeemable convertible
preferred stock have liquidation preferences of $0.413, $0.413, $0.84,
$0.84, $1.362, $1.362, $2.85 and $2.85 per share, respectively, plus all
declared but unpaid dividends.
. After payment has been made to the holders of redeemable convertible
preferred stock of the full preferential amounts, holders of common
stock will receive all remaining assets pro rata based on the number of
shares of common stock held.
. At any time after June 25, 2002, upon notification by not less than a
majority of the holders of Series A, A1, B and B1 redeemable convertible
preferred stock, the Company must redeem up to 50% of the outstanding
shares of Series A, A1, B and B1 redeemable convertible preferred stock
by paying in cash a sum per share equal to the original issue price (as
adjusted for any stock dividends, combinations or splits with respect to
such shares) plus all declared but unpaid dividends. The holders of
Series A, A1, B and B1 redeemable convertible preferred stock can
request redemption of any remaining shares at any time after June 25,
2003. At the option of the holders of the Series C, C1, D and D1
redeemable convertible preferred stock, up to one-half of the Series C,
C1, D and D1 redeemable convertible preferred stock must be redeemed
after June 25, 2002 and any remaining shares after June 25, 2003 at a
redemption price equal to the greater of $1.362 and $2.85 per share,
respectively, plus cumulative dividends, or their fair market values. As
of December 31, 1997, the Company had accreted $663,000 towards the fair
market values of the Series C and D redeemable convertible preferred
stock.
. Each share of Series A, A1, B, B1, C, C1, D and D1 redeemable
convertible preferred stock has voting rights on an "as if converted"
basis.
In the event the Company proposes to issue additional shares of any series of
preferred stock, the current holders of such shares will have the right of
first refusal to participate on a pro rata basis. In the event of a dilutive
subsequent financing, the holders of Series A, B, C and D redeemable
convertible preferred stock are provided with antidilution protection if they
purchase their pro rata share of such dilutive financing. If they do not
purchase their pro rata share, their Series A, B, C and D redeemable
convertible preferred stock will convert to Series A1, B1, C1 and D1
redeemable convertible preferred stock, respectively, which will have no such
antidilution protection.
Redeemable convertible preferred stock and warrants issued and outstanding
as of December 31, 1997 was as follows:
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
<TABLE>
<CAPTION>
ISSUED AND
SERIES SHARES DESIGNATED OUTSTANDING CARRYING VALUE
------ ----------------- ----------- --------------
<S> <C> <C> <C>
A............................... 7,798,483 7,798,483 $ 3,168,000
A1.............................. 7,798,483 -- --
B............................... 8,600,000 7,775,930 6,473,000
B1.............................. 8,600,000 65,524 55,000
C............................... 17,850,000 15,845,855 20,333,000
C1.............................. 17,850,000 -- --
D............................... 3,231,579 2,631,579 7,246,000
D1.............................. 3,231,579 -- --
---------- ---------- -----------
74,960,124 34,117,371 $37,275,000
========== ========== ===========
</TABLE>
F-13
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
WARRANTS:
<TABLE>
<CAPTION>
ISSUED AND
SERIES OUTSTANDING CARRYING VALUE
------ ----------- --------------
<S> <C> <C>
B................................................. 160,862 $ --
B1................................................ 466,072 --
C................................................. 1,523,024 1,242,000
C1................................................ 271,598 --
D1................................................ 372,826 730,000
========= ==========
Total........................................... 2,794,382 $1,972,000
========= ==========
</TABLE>
Stock Purchase Plans
During 1995, the Company adopted a Stock Purchase Plan under which 366,667
shares of common stock are authorized. Awards totaling 96,334 and 11,034
shares of common stock were granted to individuals in 1995 and 1996,
respectively, at an exercise price of $0.24 per share, the estimated fair
market value of the shares on the date of the award. No awards were granted
during the year ended December 31, 1997. Generally, the shares are subject to
a 50-month vesting period. As of December 31, 1997, 14,434 shares remained
unvested. Unvested shares are subject to repurchase, at the Company's option,
at the original purchase price upon a participant's termination. Of the shares
granted, 41,734 had been repurchased by the Company as of December 31, 1997.
In January 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved a total of 600,000 shares of the Company's
common stock for issuance thereunder. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions at a purchase
price of 85% of the lower of the fair market value of the common stock on the
first day of the offering period or on the last day of the purchase period.
Stock Options
In January 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan"), which serves as the successor to the Company's 1995 Stock Option
Plan (the "1995 Plan"). Options granted under the 1995 Plan before its
termination continue to remain outstanding in accordance with their terms, but
no further options may be granted under the 1995 Plan. Options granted under
the 1995 Plan were granted with exercise prices not less than fair market
value at the date of grant as determined by the Board of Directors, generally
vested 12% after six months from the date of grant and 2% per month
thereafter, and generally are exercisable for a term of ten years after the
date of grant. Under the 1997 Plan, the Company has reserved 2,200,000 shares
of the Company's common stock for issuance to employees and consultants which
may be granted as either incentive or nonqualified stock options. Options
granted under the 1997 Plan generally vest 12% after six months from the date
of grant and 2% per month thereafter and are generally exercisable for a term
of ten years after the date of grant.
In January 1998, the Company adopted the 1998 Equity Incentive Plan (the
"1998 Plan"). On the effective date of the Company's initial public offering
("IPO"), the 1998 Plan became effective as the successor to the 1997 Plan. The
Company has reserved 1,500,000 shares of common stock for issuance under the
1998 Plan in addition to the shares that remain from the 1997 Plan. The 1998
Plan permits the grant of either incentive or nonqualified stock options.
Options granted under the 1998 Plan will have a maximum term of ten years and
generally will vest over four years. The 1998 Plan will terminate in January
2008.
F-14
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
In January 1998, the Company adopted the 1998 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 200,000 shares of the Company's
common stock for issuance thereunder. Each nonemployee director who is or
becomes a member of the Board of Directors on or after the effective date of
the Company's IPO, with certain limited exceptions, will initially be granted
an option for 20,000 shares of the Company's common stock and, thereafter, an
option to purchase an additional 5,000 shares of the Company's common stock
annually. Initial options granted under the Directors Plan will vest as to 33
1/3% of the shares on each annual anniversary of the date of grant. Annual
grants will vest 25% on each annual anniversary of the date of grant. The
exercise price of the options granted under the Directors Plan will be at the
fair market value of the Company's common stock on the date of grant.
The Company uses the intrinsic value method in accounting for its plans.
Accordingly, no compensation cost has been recognized for any of its stock
options because the exercise price of each option equaled or exceeded the fair
value of the underlying common stock as of the grant date for each stock
option, except for options granted from March through December 1997. With
respect to the options granted from March to December 1997, the Company
recorded deferred stock compensation of $3,482,000 for the difference at the
grant date between the exercise price and the fair value of the common stock
underlying the options. This amount is being amortized consistent with the
method described in FASB Interpretation No. 28 over the vesting period of the
individual options, generally 50 months. Had compensation cost been determined
in accordance with SFAS No. 123, the Company's 1995, 1996 and 1997 net loss
would not have been significantly affected.
The fair value of each option is estimated on the date of grant using the
minimum value method with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Dividends................................... None None None
Expected life............................... 3.20 years 2.55 years 2.59 years
Risk free interest rates.................... 5.71% 6.28% 5.91%
</TABLE>
F-15
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
A summary of the status of the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1995 1996 1997
----------------------- ----------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ -- $ -- 125,083 $0.24 292,033 $0.25
Granted............... 131,467 0.24 224,734 0.26 1,611,800 0.82
Forfeited............. (6,384) 0.24 (52,850) 0.24 (105,860) 0.64
Exercised............. -- -- (4,934) 0.25 (88,687) 0.32
------- ------- ---------
Outstanding at end of
period................. 125,083 0.24 292,033 0.25 1,709,286 0.76
======= ======= =========
Options exercisable at
end of year............ 35,667 0.24 80,667 0.25 223,950 0.45
======= ======= =========
Weighted-average fair
value of options
granted during the year
at market.............. 131,407 0.05 224,734 0.04 333,267 0.04
Weighted-average fair
value of options
granted during the year
at less than market.... -- -- 1,278,533 2.30
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------ --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.24 to 0.30........... 1,003,228 9.14 years $0.29 186,423 $0.28
$0.75................... 569,725 9.79 0.75 30,860 0.75
$3.75 to 5.25........... 136,333 9.86 4.32 6,667 3.75
--------- -------
1,709,286 9.42 0.77 223,950 0.45
========= =======
</TABLE>
Warrants
In 1995, in connection with various financing arrangements and the
appointment of a director, the Company issued warrants to purchase an
aggregate of 85,173 shares of the Company's common stock at prices ranging
from $2.40 to $4.50 per share. These warrants expire at various dates through
December 1997.
In 1996, in connection with various financing arrangements, the Company
issued warrants to purchase an aggregate of 17,157 shares of the Company's
common stock at prices ranging from $2.40 to $2.67 per share. These warrants
expire at various dates in 2001. Also in 1996, in connection with various
lease agreements and other matters, the Company issued warrants to purchase
329,167 shares of the Company's Series B1 redeemable convertible preferred
stock at $0.84 per share. These warrants expire at various dates from June
2003 through August 2004.
F-16
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
In March and June 1997, in connection with the bridge financing convertible
promissory notes discussed above, the Company issued warrants to purchase
198,697 shares of the Company's Series B redeemable convertible preferred
stock at $0.84 per share. The warrants expire in 2002 or upon the closing of
an IPO. In April 1997, in connection with the $3,000,000 equipment line of
credit (see Note 3), the Company issued warrants to purchase 196,429 shares of
the Company's Series B1 redeemable convertible preferred stock at $0.84 per
share. These warrants expire in April 2007. In June 1997, in connection with
the issuance of the Company's Series C redeemable convertible preferred stock,
the Company issued warrants to purchase 1,579,011 shares of the Company's
Series C redeemable convertible preferred stock at $1.362 per share. These
warrants expire the earlier of June 2002 or immediately prior to the closing
of a Qualified IPO. In August and September 1997, in connection with the
$3,000,000 and the $6,500,000 equipment lines of credit (see Note 3), the
Company issued warrants to purchase a total of 271,598 shares of the Company's
Series C1 redeemable convertible preferred stock at $1.362 per share. These
warrants expire through September 2004. In December 1997, in connection with
the $8,000,000 line of credit facility and the $5,000,000 equipment line of
credit (see Note 3), the Company issued warrants to purchase 247,826 and
125,000 shares, respectively, of the Company's Series D1 redeemable
convertible preferred stock at $2.85 per share, expiring in December 2007 and
June 2003, respectively.
The fair value of all warrant issuances, calculated using the Black-Scholes
option pricing module, using the following assumptions: dividends--none;
expected life--contractual term; risk free interest rates--5.7% to 6.7%;
volatility--60%, was not material except as follows:
. The 1,579,011 warrants issued in connection with the sale of the Series
C redeemable convertible preferred stock for which the fair value was
determined to be $1,200,000. This amount was recorded as a reduction in
the carrying value of the Series C redeemable convertible preferred
stock and recorded as the carrying value of the Series C warrants as
reflected in the accompanying December 31, 1997 balance sheet, to be
accreted to the redemption price through June 2003.
. The 247,826 and 125,000 warrants issued in connection with the
$8,000,000 line of credit facility and $5,000,000 equipment line of
credit, respectively, for which the values were determined to be
$530,000 and $200,000, respectively. These amounts will be amortized on
a straight-line basis through the commitment periods of the credit
facilities.
Initial Public Offering
On March 24, 1998, the Company completed its IPO of 5,125,000 shares of its
common stock. Net proceeds to the Company, after deducting underwriting
discounts and commissions and offering expenses, aggregated approximately
$69,900,000. At the closing of the IPO, all redeemable convertible preferred
stock was converted to common stock and all warrants to purchase redeemable
convertible preferred stock were converted to warrants to purchase common
stock on a one-for-three basis. In connection with the IPO, certain warrant
holders exercised their warrants to purchase redeemable convertible preferred
stock (which converted into common stock), which resulted in additional
proceeds of $1,842,000.
(6) COMMITMENTS AND CONTINGENCIES
Leases
The Company has entered into a number of operating leases for its
facilities. The leases expire from 1998 through 2007. As of December 31, 1997,
the Company had collateralized letters of credit with certificates of deposit
aggregating $1,753,000 for these leases. The Company also leases certain data
center infrastructure and
F-17
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
equipment under capital leases (see Note 5). Certain of these capital leases
were entered into as sales-leaseback transactions. No gain or loss was
recorded in any such transaction due to the short holding period from the time
the assets was purchased until the time of the sale-leaseback. Future minimum
lease payments as of December 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
1998....................................................... $1,543 $ 3,160
1999....................................................... 1,476 3,282
2000....................................................... 1,357 3,366
2001....................................................... -- 3,316
2002....................................................... -- 2,702
Thereafter................................................. -- 10,910
------ -------
Total minimum lease payments............................... 4,376 $26,736
=======
Less amount representing imputed interest.................. 791
------
Present value of minimum lease payments.................... 3,585
Less current portion....................................... 1,143
------
Capital lease obligations, less current portion............ $2,442
======
</TABLE>
In December 1997, the Company entered into an agreement for a 42-month
$4,000,000 equipment lease facility for equipment delivered no later than
March 31, 1998. Subsequent to December 31, 1997, the Company drew down the
entire amount under this facility.
Subsequent to December 31, 1997, the Company entered into approximately
$3,100,000 of additional capital leases and has approximately $3,900,000
remaining under an equipment lease facility.
The Company's rent expense was $85,000, $248,000, $1,764,000, $454,000 and
$2,069,000 for the years ended December 31, 1995, 1996 and 1997, and the six
months ended June 30, 1997 and 1998, respectively.
Telecommunications Agreements
In September 1997, the Company entered into an agreement to obtain
telecommunications services for a period of 60 months with a minimum
commitment of $230,000 per month.
In July 1998, the Company entered into an agreement to obtain
telecommunication services for a period of 36 months with a minimum commitment
of approximately $500,000 per month.
Royalty Agreement
In April 1997, the Company entered into an agreement with a software company
under which the Company licensed certain software for a royalty based on 1% of
the Company's gross revenues. Royalty expenses related to this agreement have
not been significant to date.
F-18
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
Contingencies
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes that it has adequate legal defenses
and that the ultimate outcome of these actions will not have a material effect
on the Company's financial position and results of operations.
(7) INCOME TAXES
As of December 31, 1997, the Company had federal and California net
operating loss carryforwards of approximately $29,600,000 and $14,800,000,
respectively, which can be used to offset the Company's future tax
liabilities. The federal and California net operating loss carryforwards will
begin expiring in 2011 and 2001, respectively.
Federal and California tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift in the
ownership of the Company that constitutes an "ownership change" as defined by
Section 382 of the Internal Revenue Code. As stated in Note 5, the Company has
had numerous equity transactions. These transactions most likely have
subjected its net operating loss to the aforementioned restrictions. The
Company plans to compute exact limitations upon realization of taxable
earnings and associated utilization of the net operating loss carryforwards.
The Company has deferred tax assets as of December 31, 1996 and 1997 of
approximately $2,000,000 and $11,700,000, respectively, which have been fully
offset by valuation allowances. The deferred tax assets principally resulted
from the net operating loss carryforwards. The Company has provided a
valuation allowance due to the uncertainty of generating future profits that
would allow for the realization of such deferred tax assets. Accordingly, no
tax benefit was recorded in the accompanying statements of operations.
(8) SUBSEQUENT EVENTS
Reincorporation and Reverse Stock Split
In February 1998, the Company reincorporated in the state of Delaware.
Following the closing of the Company's IPO, the Certificate of Incorporation
of the Delaware successor corporation authorized 50,000,000 shares of common
stock, $0.001 par value per share, and 5,000,000 shares of preferred stock,
$0.001 par value per share. The reincorporation resulted in a one-for-three
reverse stock split of the Company's common stock. The accompanying financial
statements have been retroactively restated to give effect to the
reincorporation and reverse stock split but the numbers of shares of
redeemable convertible preferred stock have not been adjusted as the reverse
stock split adjusts the conversion ratio but not the number of outstanding
preferred shares.
Leases
In February 1998, the Company entered into an additional facility operating
lease with a 120-month term. Future minimum lease payments commence at
approximately $20,000 per month and increases to approximately $60,000 per
month upon completion of construction of the related facility.
F-19
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
Stock Options
In January 1998, the Company granted stock options to purchase 333,334
shares of Common Stock to an officer of the Company, of which half have an
exercise price of $9.00 per share and vest 100% after three years and half
have an exercise price of $18.00 per share and vest 100% after five years. The
stock options accelerate and become fully vested if the Company is acquired or
sells all or substantially all of its assets.
In March 1998, the Company granted a stock option to an officer of the
Company to purchase 721,981 shares of Common Stock with an exercise price of
$9.00 per share that vests as to 12% of such shares in September 1998 and
vests as to an additional 2% per month thereafter.
F-20
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the Bylaws of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and executive officers to the fullest extent permitted
by the Delaware General Corporation Law; (ii) the Registrant may, in its
discretion, indemnify other officers, employees and agents as set forth in the
Delaware General Corporation Law; (iii) upon receipt of an undertaking to
repay such advances if indemnification is determined to be unavailable, the
Registrant is required to advance expenses, as incurred, to its directors and
executive officers to the fullest extent permitted by the Delaware General
Corporation Law in connection with a proceeding (except if a determination is
reasonably and promptly made by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to the proceeding or, in
certain circumstances, by independent legal counsel in a written opinion that
the facts known to the decision-making party demonstrate clearly and
convincingly that such person acted in bad faith or in a manner that such
person did not believe to be in, or not opposed to, the best interests of the
corporation); (iv) the rights conferred in the Bylaws are not exclusive and
the Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees and agents; (v) the Registrant may not
retroactively amend the Bylaw provisions relating to indemnity; and (vi) to
the fullest extent permitted by the Delaware General Corporation Law, a
director or executive officer will be deemed to have acted in good faith and
in a manner he or she reasonably believed to be in, or not opposed to, the
best interests of the Registrant and, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe that his or her conduct
was unlawful if his or her action is based on the records or books of account
of the corporation or on information supplied to him or her by officers of the
corporation in the course of their duties or on the advice of legal counsel
for the corporation or on information or records given or reports made to the
corporation by independent certified public accountants or appraisers or other
experts.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers. The indemnification agreements
provide that directors and executive officers will be indemnified and held
harmless to the fullest possible extent permitted by law including against all
expenses (including attorneys' fees), judgments, fines and settlement amounts
paid or reasonably incurred by them in any action, suit or proceeding,
including any derivative action by or in the right of the Registrant, on
account of their services as directors, officers, employees or agents of the
Registrant or as directors, officers, employees or agents of any other company
or enterprise when they are serving in such capacities at the request of the
Registrant. The Registrant will not be obligated pursuant to the agreements to
indemnify or advance expenses to an indemnified party with respect to
proceedings or claims (i) initiated or brought voluntarily by the indemnified
party and not by way of defense, except with respect to a proceeding to
establish or enforce a right to indemnify under the indemnification agreements
or any other agreement or insurance policy or under the Registrant's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
indemnification, or authorized by the Board of Directors or as otherwise
required under Delaware statute or law, regardless of whether the indemnified
party is ultimately determined to be entitled to such indemnification, (ii)
for expenses and the payment of profits arising from the purchase and sale by
the indemnified party of securities in violation of Section 16(b) of the
Securities Exchange Act of 1934 or any similar successor statute or (iii) if a
final decision by a court having jurisdiction in the matter shall determine
that such indemnification is not lawful.
The indemnification agreement also provides for contribution in certain
situations in which the Registrant and a director or executive officer are
jointly liable but indemnification is unavailable, such contribution to be
II-1
<PAGE>
based on the relative benefits received and the relative fault of the
Registrant and the director or executive officer. No contribution is allowed
to a person found guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act of 1933) from any person who was not
found guilty of such fraudulent misrepresentation.
The indemnification agreement requires a director or executive officer to
reimburse the Registrant for all expenses advanced only to the extent it is
ultimately determined that the director or executive officer is not entitled,
under Delaware law, the Bylaws, the indemnification agreement or otherwise, to
be indemnified for such expenses. The form of indemnification agreement
provides that it is not exclusive of any rights a director or executive
officer may have under the Certificate of Incorporation, Bylaws, other
agreements, any majority-in-interest vote of the stockholders or vote of
disinterested directors, Delaware law or otherwise.
The indemnification provision in the Bylaws, and the form of indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's executive officers and directors for liabilities arising under
the Securities Act of 1933, as amended (the "Securities Act").
As authorized by the Registrant's Bylaws, the Registrant, with approval by
the Board, expects to purchase director and officer liability insurance.
In addition, Mr. Mocarski is indemnified in certain circumstances by Fleet
Financial Group, Inc.
See also the undertakings set out in response to Item 22.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
-------- --------------
<S> <C>
Registrant's Restated Certificate of Incorporation............ 3.01
Registrant's Bylaws........................................... 3.02
Form of Indemnification Agreement............................. 10.08
</TABLE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
2.01 Agreement and Plan of Merger between Fouress, Inc. and Registrant
dated April 26, 1995. (Incorporated by reference to Exhibit 2.01 from
the Registrant's Registration Statement on Form S-1 (file No. 333-
44469), as amended, declared effective by the Securities and Exchange
Commission on March 18, 1998 (the "Form S-1")).
2.02 Form of Agreement and Plan of Merger by and between Registrant and
Exodus. (Incorporated by reference from Exhibit 2.20 to the Form S-1).
3.01 Registrant's Restated Certificate of Incorporation. (Incorporated by
reference from Exhibit 3.07 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 (the "March 1998 Form 10-
Q")).
3.02 Registrant's Bylaws. (Incorporated by reference from Exhibit 3.06 to
the Form S-1).
4.01 Form of Specimen Certificate for Registrant's Common Stock.
(Incorporated by reference from Exhibit 4.01 to the Form S-1).
4.02 Form of Senior Note.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
4.03 Indenture between Exodus Communications, Inc. as Issuer and Chase
Manhattan Bank and Trust Company, National Association, as Trustee
dated July 1, 1998. (Incorporated by reference from Exhibit 10.30 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (the "June 1998 Form 10-Q")).
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
5.02 Opinion of Debevoise & Plimpton regarding legality of the securities
being registered.
10.01 Amended and Restated Investors Rights Agreement, dated as of June 25,
1997 between the Registrant and certain investors, as amended December
15, 1997. (Incorporated by reference from Exhibit 10.01 to the Form S-
1).
10.02 Registrant's 1995 Stock Option Plan and related forms of agreements.
(Incorporated by reference from Exhibit 10.02 to the Form S-1).
10.03 Registrant's 1995 Stock Purchase Plan and related forms of agreements.
(Incorporated by reference from Exhibit 10.03 to the Form S-1).
10.04 Registrant's 1997 Equity Incentive Plan and related forms of
agreements. (Incorporated by reference from Exhibit 10.04 to the Form
S-1).
10.05 Registrant's 1998 Equity Incentive Plan and related forms of
agreements. (Incorporated by reference from Exhibit 10.05 to the Form
S-1).
10.06 Registrant's 1998 Directors Stock Option Plan and related forms of
agreements. (Incorporated by reference from Exhibit 10.06 to the Form
S-1).
10.07 Registrant's 1998 Employee Stock Purchase Plan. (Incorporated by
reference from Exhibit 10.07 to the Form S-1).
10.08 Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers, as amended. (Incorporated by
reference from Exhibit 10.08 to the Form S-1).
10.09 Facility Lease between Washcop Associates Limited Partnership and the
Registrant dated April 18, 1996. (Incorporated by reference from
Exhibit 10.09 to the Form S-1).
10.10 Facility Lease between Cal-Harbor II & III Urban Renewal Associates
and Registrant dated December 30, 1996, as amended April 29, 1997 and
January 27, 1998. (Incorporated by reference from Exhibit 10.10 to the
Form S-1).
10.11 Facility Lease between McCandless-San Tomas N. 2 and Registrant dated
April 18, 1997. (Incorporated by reference from Exhibit 10.11 to the
Form S-1).
10.12 Facility Lease between Sabey Corporation and Registrant dated April
24, 1997. (Incorporated by reference from Exhibit 10.12 to the Form S-
1).
10.13 Facility Lease between The Manufacturers Life Insurance Company and
Registrant dated June 27, 1997. (Incorporated by reference from
Exhibit 10.13 to the Form S-1).
10.14 Facility Lease between JBG/Spring Park Limited Partnership and
Registrant dated June 30, 1997. (Incorporated by reference from
Exhibit 10.14 to the Form S-1).
10.15 Application for Data Services between WorldCom, Inc. and the
Registrant dated September 18, 1997. (Incorporated by reference from
Exhibit 10.15 to the Form S-1).
10.16 Software License and Marketing Agreement between Computer Associates
International, Inc. and the Registrant dated April 1997. (Incorporated
by reference from Exhibit 10.16 to the Form S-1).
10.17 Form of Executive Employment Policy to be entered into between the
Registrant and certain officers. (Incorporated by reference from
Exhibit 10.17 to the Form S-1).
10.18 Equipment Lease Line of Credit between Transamerica Business Credit
Corporation and Registrant dated August 28, 1997. (Incorporated by
reference from Exhibit 10.18 to the Form S-1).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.19 Loan and Security Agreement between Silicon Valley Bank and Registrant
dated June 14, 1996, as amended on March 25, 1997, June 13, 1997,
November 24, 1997 and December 8, 1997. (Incorporated by reference
from Exhibit 10.19 to the Form S-1).
10.20 Loan and Security Agreement among MMC/GATX Partnership No. 1,
Transamerica Business Credit Corporation and Registrant dated December
31, 1997. (Incorporated by reference from Exhibit 10.20 to the Form S-
1).
10.21 Equipment Lease Line of Credit between Venture Lending & Leasing II,
Inc. and Registrant dated December 23, 1997. (Incorporated by
reference from Exhibit 10.21 to the Form S-1).
10.22 Equipment Lease Line of Credit Commitment ("Commitment Letter")
between Finova Technology Finance, Inc. ("Finova") and Registrant
dated December 17, 1997; Master Lease Agreement ("Master Lease")
between Finova and Registrant dated December 19, 1997; and
Modification to Commitment Letter and Master Lease between Finova and
Registrant dated February 6, 1998. (Incorporated by reference from
Exhibit 10.22 to the Form S-1).
10.23 Sublease Agreement dated January 12, 1998 between Amdahl Corporation
and Registrant. (Incorporated by reference from Exhibit 10.23 to the
Form S-1).
10.24 Nonqualified Stock Option Agreements between Registrant and K.B.
Chandrasekhar dated January 27, 1998. (Incorporated by reference from
Exhibit 10.24 to the Form S-1).
10.25 Form of Nonqualified Stock Option Agreement between Registrant and
Ellen M. Hancock dated March 10, 1998. (Incorporated by reference from
Exhibit 10.25 to the Form S-1).
10.26 Form of Agreement used to sell stock to certain directors and an
officer of the Registrant. (Incorporated by reference from Exhibit
10.26 to the Form S-1).
10.27 Facility Lease between 600 Winter Street, L.L.C. and Registrant, dated
as of December 23, 1997. (Incorporated by reference from Exhibit 10.27
to the March 1998 Form 10-Q). Certain exhibits to this agreement have
been omitted from this filing and will be furnished supplementally to
the Securities and Exchange Commission upon request.
10.28 Amendment to Loan and Security Agreement between Silicon Valley Bank
and Registrant dated June 14, 1996. (Incorporated by reference from
Exhibit 10.28 to the March 1998 Form 10-Q.)
10.29 First Amendment to Loan and Security Agreement, dated as of February
20, 1998, by and between the Registrant and MMC/GATX Partnership No. 1
and Transamerica Business Credit Corporation. (Incorporated by
reference from Exhibit 10.29 to the amendment on Form 10-Q/A amending
the March 1998 Form 10-Q).
10.30 Exchange and Registration Rights Agreement among Exodus
Communications, Inc., Goldman, Sachs & Co., Donaldson Lufkin &
Jenrette Securities Corporation, BT Alex. Brown Incorporated and
NationsBanc Montgomery Securities LLC dated July 1, 1998.
(Incorporated by reference from Exhibit 10.31 to the June 1998 Form
10-Q).
10.31 Escrow Agreement among Chase Manhattan Bank and Trust Company,
National Association, as escrow agent, Chase Manhattan Bank and Trust
Company, National Association, as trustee, and Exodus Communications,
Inc., dated July 1, 1998. (Incorporated by reference from Exhibit
10.32 to the June 1998 Form 10-Q).
10.32 Purchase Agreement among Exodus Communications, Inc., Goldman, Sachs &
Co., Donaldson Lufkin & Jenrette Securities Corporation, BT Alex.
Brown Incorporated and NationsBanc Montgomery Securities LLC, dated
June 26, 1998. (Incorporated by reference from Exhibit 10.33 to the
June 1998 Form 10-Q).
10.33 Form of Notice of Debt Offering and Waiver of Registration Rights
among the Company and certain holders of stock of the Company.
(Incorporated by reference from Exhibit 10.34 to the June 1998 Form
10-Q).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.34 Amended and Restated Master Loan and Security Agreement between Exodus
Communications, Inc. and Transamerica Business Credit Corporation
dated June 30, 1998. (Incorporated by reference from Exhibit 10.35 to
the June 1998 Form 10-Q).
10.35 Agreement between Cisco Systems Capital Corporation and Exodus
Communications, Inc., dated June 1, 1998. (Incorporated by reference
from Exhibit 10.36 to the June 1998 Form 10-Q.)
10.36* Qwest Communications Private Line Service Agreement Business Services,
between Qwest Communications Corporation and the Registrant, dated as
of July 17, 1998. (Incorporated by reference from Exhibit 10.37 to the
June 1998 Form 10-Q).
10.37+ Consent and Second Amendment to the Second Amended and Restated
Investors' Rights Agreement.
10.38 Lease Agreement dated August 31, 1998 between Reynolds Metals
Development Company and Registrant.
10.39 Building Lease dated September 22, 1998 between Centerpoint Properties
Trust and Registrant.
10.40 Sublease Agreement dated September 4, 1998 between S3, Incorporated
and Registrant.
12.01+ Statement regarding Computation of Ratios.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG Peat Marwick LLP, independent auditors.
24.01+ Power of Attorney.
25.01+ Statement of Eligibility of Trustee.
27.01 Financial Data Schedule. (Incorporated by reference from Exhibit 27.01
to the June 1998 Form 10-Q).
99.01 Form of Letter of Transmittal.
99.02+ Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
* Confidential treatment has been granted for certain portions of this
document pursuant to an application for confidential treatment sent to the
Securities and Exchange Commission. Such portions have been redacted and
marked with a triple asterisk. The non-redacted version of this document has
been sent to the Securities and Exchange Commission.
+ Previously filed with Form S-4 on August 28, 1998.
ITEM 22. UNDERTAKINGS
a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
II-5
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA CLARA, STATE OF
CALIFORNIA, ON THE 6TH DAY OF NOVEMBER, 1998.
Exodus Communications, Inc.
/s/ Ellen M. Hancock
By __________________________________
ELLEN M. HANCOCK
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C>
SIGNATURE TITLE DATE
PRINCIPAL EXECUTIVE OFFICER:
/s/ Ellen M. Hancock Chief Executive November 6, 1998
- ------------------------------------- Officer, President
ELLEN M. HANCOCK and Director
PRINCIPAL FINANCIAL
OFFICER AND
PRINCIPAL ACCOUNTING
OFFICER:
/s/ Richard S. Stoltz Chief Financial November 6, 1998
- ------------------------------------- Officer and Chief
RICHARD S. STOLTZ Operating Officer
ADDITIONAL DIRECTORS:
/s/ K.B. Chandrasekhar* Chairman of the November 6, 1998
- ------------------------------------- Board of Directors
K.B. CHANDRASEKHAR
/s/ Frederick W.W. Bolander* Director November 6, 1998
- -------------------------------------
FREDERICK W.W. BOLANDER
/s/ Mark Dubovoy* Director November 6, 1998
- -------------------------------------
MARK DUBOVOY
- ------------------------------------- Director November , 1998
JOHN R. DOUGERY
/s/ Max D. Hopper* Director November 6, 1998
- -------------------------------------
MAX D. HOPPER
</TABLE>
II-7
<PAGE>
<TABLE>
<S> <C>
SIGNATURE TITLE DATE
/s/ Peter A. Howley* Director November 6, 1998
- -------------------------------------
PETER A. HOWLEY
/s/ Daniel C. Lynch* Director November 6, 1998
- -------------------------------------
DANIEL C. LYNCH
/s/ Thadeus Mocarski* Director November 6, 1998
- -------------------------------------
THADEUS MOCARSKI
/s/ Kanwal S. Rekhi* Director November 6, 1998
- -------------------------------------
KANWAL S. REKHI
*By /s/ Richard S. Stoltz
----------------------------------
RICHARD S. STOLTZ
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
2.01 Agreement and Plan of Merger between Fouress, Inc. and Registrant
dated April 26, 1995. (Incorporated by reference to Exhibit 2.01 from
the Registrant's Registration Statement on Form S-1 (file No. 333-
44469), as amended, declared effective by the Securities and Exchange
Commission on March 18, 1998 (the "Form S-1")).
2.02 Form of Agreement and Plan of Merger by and between Registrant and
Exodus. (Incorporated by reference from Exhibit 2.20 to the Form S-1).
3.01 Registrant's Restated Certificate of Incorporation. (Incorporated by
reference from Exhibit 3.07 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 (the "March 1998 Form 10-
Q")).
3.02 Registrant's Bylaws. (Incorporated by reference from Exhibit 3.06 to
the Form S-1).
4.01 Form of Specimen Certificate for Registrant's Common Stock.
(Incorporated by reference from Exhibit 4.01 to the Form S-1).
4.02 Form of Senior Note.
4.03 Indenture between Exodus Communications, Inc. as Issuer and Chase
Manhattan Bank and Trust Company, National Association, as Trustee
dated July 1, 1998. (Incorporated by reference from Exhibit 10.30 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (the "June 1998 Form 10-Q")).
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
5.02 Opinion of Debevoise & Plimpton regarding legality of the securities
being registered.
10.01 Amended and Restated Investors Rights Agreement, dated as of June 25,
1997 between the Registrant and certain investors, as amended December
15, 1997. (Incorporated by reference from Exhibit 10.01 to the Form S-
1).
10.02 Registrant's 1995 Stock Option Plan and related forms of agreements.
(Incorporated by reference from Exhibit 10.02 to the Form S-1).
10.03 Registrant's 1995 Stock Purchase Plan and related forms of agreements.
(Incorporated by reference from Exhibit 10.03 to the Form S-1).
10.04 Registrant's 1997 Equity Incentive Plan and related forms of
agreements. (Incorporated by reference from Exhibit 10.04 to the Form
S-1).
10.05 Registrant's 1998 Equity Incentive Plan and related forms of
agreements. (Incorporated by reference from Exhibit 10.05 to the Form
S-1).
10.06 Registrant's 1998 Directors Stock Option Plan and related forms of
agreements. (Incorporated by reference from Exhibit 10.06 to the Form
S-1).
10.07 Registrant's 1998 Employee Stock Purchase Plan. (Incorporated by
reference from Exhibit 10.07 to the Form S-1).
10.08 Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers, as amended. (Incorporated by
reference from Exhibit 10.08 to the Form S-1).
10.09 Facility Lease between Washcop Associates Limited Partnership and the
Registrant dated April 18, 1996. (Incorporated by reference from
Exhibit 10.09 to the Form S-1).
10.10 Facility Lease between Cal-Harbor II & III Urban Renewal Associates
and Registrant dated December 30, 1996, as amended April 29, 1997 and
January 27, 1998. (Incorporated by reference from Exhibit 10.10 to the
Form S-1).
10.11 Facility Lease between McCandless-San Tomas N. 2 and Registrant dated
April 18, 1997. (Incorporated by reference from Exhibit 10.11 to the
Form S-1).
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.12 Facility Lease between Sabey Corporation and Registrant dated April
24, 1997. (Incorporated by reference from Exhibit 10.12 to the Form S-
1).
10.13 Facility Lease between The Manufacturers Life Insurance Company and
Registrant dated June 27, 1997. (Incorporated by reference from
Exhibit 10.13 to the Form S-1).
10.14 Facility Lease between JBG/Spring Park Limited Partnership and
Registrant dated June 30, 1997. (Incorporated by reference from
Exhibit 10.14 to the Form S-1).
10.15 Application for Data Services between WorldCom, Inc. and the
Registrant dated September 18, 1997. (Incorporated by reference from
Exhibit 10.15 to the Form S-1).
10.16 Software License and Marketing Agreement between Computer Associates
International, Inc. and the Registrant dated April 1997. (Incorporated
by reference from Exhibit 10.16 to the Form S-1).
10.17 Form of Executive Employment Policy to be entered into between the
Registrant and certain officers. (Incorporated by reference from
Exhibit 10.17 to the Form S-1).
10.18 Equipment Lease Line of Credit between Transamerica Business Credit
Corporation and Registrant dated August 28, 1997. (Incorporated by
reference from Exhibit 10.18 to the Form S-1).
10.19 Loan and Security Agreement between Silicon Valley Bank and Registrant
dated June 14, 1996, as amended on March 25, 1997, June 13, 1997,
November 24, 1997 and December 8, 1997. (Incorporated by reference
from Exhibit 10.19 to the Form S-1).
10.20 Loan and Security Agreement among MMC/GATX Partnership No. 1,
Transamerica Business Credit Corporation and Registrant dated December
31, 1997. (Incorporated by reference from Exhibit 10.20 to the Form S-
1).
10.21 Equipment Lease Line of Credit between Venture Lending & Leasing II,
Inc. and Registrant dated December 23, 1997. (Incorporated by
reference from Exhibit 10.21 to the Form S-1).
10.22 Equipment Lease Line of Credit Commitment ("Commitment Letter")
between Finova Technology Finance, Inc. ("Finova") and Registrant
dated December 17, 1997; Master Lease Agreement ("Master Lease")
between Finova and Registrant dated December 19, 1997; and
Modification to Commitment Letter and Master Lease between Finova and
Registrant dated February 6, 1998. (Incorporated by reference from
Exhibit 10.22 to the Form S-1).
10.23 Sublease Agreement dated January 12, 1998 between Amdahl Corporation
and Registrant. (Incorporated by reference from Exhibit 10.23 to the
Form S-1).
10.24 Nonqualified Stock Option Agreements between Registrant and K.B.
Chandrasekhar dated January 27, 1998. (Incorporated by reference from
Exhibit 10.24 to the Form S-1).
10.25 Form of Nonqualified Stock Option Agreement between Registrant and
Ellen M. Hancock dated March 10, 1998. (Incorporated by reference from
Exhibit 10.25 to the Form S-1).
10.26 Form of Agreement used to sell stock to certain directors and an
officer of the Registrant. (Incorporated by reference from Exhibit
10.26 to the Form S-1).
10.27 Facility Lease between 600 Winter Street, L.L.C. and Registrant, dated
as of December 23, 1997. (Incorporated by reference from Exhibit 10.27
to the March 1998 Form 10-Q). Certain exhibits to this agreement have
been omitted from this filing and will be furnished supplementally to
the Securities and Exchange Commission upon request.
10.28 Amendment to Loan and Security Agreement between Silicon Valley Bank
and Registrant dated June 14, 1996. (Incorporated by reference from
Exhibit 10.28 to the March 1998 Form 10-Q.)
10.29 First Amendment to Loan and Security Agreement, dated as of February
20, 1998, by and between the Registrant and MMC/GATX Partnership No. 1
and Transamerica Business Credit Corporation. (Incorporated by
reference from Exhibit 10.29 to the amendment on Form 10-Q/A amending
the March 1998 Form 10-Q).
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.30 Exchange and Registration Rights Agreement among Exodus
Communications, Inc., Goldman, Sachs & Co., Donaldson Lufkin &
Jenrette Securities Corporation, BT Alex. Brown Incorporated and
NationsBanc Montgomery Securities LLC dated July 1, 1998.
(Incorporated by reference from Exhibit 10.31 to the June 1998 Form
10-Q).
10.31 Escrow Agreement among Chase Manhattan Bank and Trust Company,
National Association, as escrow agent, Chase Manhattan Bank and Trust
Company, National Association, as trustee, and Exodus Communications,
Inc., dated July 1, 1998. (Incorporated by reference from Exhibit
10.32 to the June 1998 Form 10-Q).
10.32 Purchase Agreement among Exodus Communications, Inc., Goldman, Sachs &
Co., Donaldson Lufkin & Jenrette Securities Corporation, BT Alex.
Brown Incorporated and NationsBanc Montgomery Securities LLC, dated
June 26, 1998. (Incorporated by reference from Exhibit 10.33 to the
June 1998 Form 10-Q).
10.33 Form of Notice of Debt Offering and Waiver of Registration Rights
among the Company and certain holders of stock of the Company.
(Incorporated by reference from Exhibit 10.34 to the June 1998 Form
10-Q).
10.34 Amended and Restated Master Loan and Security Agreement between Exodus
Communications, Inc. and Transamerica Business Credit Corporation
dated June 30, 1998. (Incorporated by reference from Exhibit 10.35 to
the June 1998 Form 10-Q).
10.35 Agreement between Cisco Systems Capital Corporation and Exodus
Communications, Inc., dated June 1, 1998. (Incorporated by reference
from Exhibit 10.36 to the June 1998 Form 10-Q.)
10.36* Qwest Communications Private Line Service Agreement Business Services,
between Qwest Communications Corporation and the Registrant, dated as
of July 17, 1998. (Incorporated by reference from Exhibit 10.37 to the
June 1998 Form 10-Q).
10.37+ Consent and Second Amendment to the Second Amended and Restated
Investors' Rights Agreement.
10.38 Lease Agreement dated August 31, 1998 between Reynolds Metals
Development Company and Registrant.
10.39 Building Lease dated September 22, 1998 between Centerpoint Properties
Trust and Registrant.
10.40 Sublease Agreement dated September 4, 1998 between S3, Incorporated
and Registrant.
12.01+ Statement regarding Computation of Ratios.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG Peat Marwick LLP, independent auditors.
24.01+ Power of Attorney.
25.01+ Statement of Eligibility of Trustee.
27.01 Financial Data Schedule. (Incorporated by reference from Exhibit 27.01
to the June 1998 Form 10-Q).
99.01 Form of Letter of Transmittal.
99.02+ Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
* Confidential treatment has been granted for certain portions of this
document pursuant to an application for confidential treatment sent to the
Securities and Exchange Commission. Such portions have been redacted and
marked with a triple asterisk. The non-redacted version of this document has
been sent to the Securities and Exchange Commission.
+ Previously filed with Form S-4 on August 28, 1998.
3
<PAGE>
EXHIBIT 4.02
------------
[FACE OF SECURITY]
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A
SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE
REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE
THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
<PAGE>
EXODUS COMMUNICATIONS, INC.
11 1/4% Senior Note due 2008
CUSIP No._______________
No. ____ $200,000,000.00
Exodus Communications, Inc., a corporation duly organized and existing
under the laws of Delaware (herein called the "Issuer", which term includes any
successor Person under the Indenture hereinafter referred to), for value
received, hereby promise to pay to Cede & Co., or registered assigns, the
principal sum of Two-Hundred Million Dollars (such amount the "principal amount"
of this Security), or such other principal amount (which, when taken together
with the principal amounts of all other Outstanding Securities, shall not exceed
$200,000,000 in the aggregate at any time) as may be set forth in the records of
the Trustee as referred to in accordance with the Indenture, on July 1, 2008 and
to pay interest thereon from July 1, 1998 or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, payable in
arrears semi-annually on January 1 and July 1 in each year, commencing January
1, 1999 at the rate of 11 1/4% per annum, until the principal hereof is paid or
made available for payment. The interest so payable, and punctually paid or
duly provided for, on any Interest Payment Date will, as provided in such
Indenture, be paid to the Person in whose name this Security (or one or more
Predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest, which shall be the June 15 or December 15
(whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date. Any such interest not so punctually paid or duly
provided for will forthwith cease to be payable to the Holder on the relevant
Regular Record Date and may either be paid to the Person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee in accordance with Section 308 of the Indenture, notice
whereof shall be given to Holders of Securities not less than 10 days prior to
such Special Record Date, or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the
Securities may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in said Indenture. Interest on this
Security shall be computed on the basis set forth in the Indenture.
Payment of the principal of (and premium, if any) and any such interest on
this Security will be made at the office or agency of the Issuer in the Borough
of Manhattan, The City of New York, New York, maintained for such purpose and at
any other office or agency maintained by the Issuer for such purpose, in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts; provided, however, that at
the option of the Issuer payment of interest may be made by check mailed to the
address of the Person entitled thereto as such address shall appear in the
Security Register; provided further that all payments of the principal (and
premium, if any) and interest on Securities, the Holders of
2
<PAGE>
which hold more than $5.0 million in principal amount and have given wire
transfer instructions to the Issuer or its agent at least 10 Business Days
prior to the applicable payment date, will be required to be made by wire
transfer of immediately available funds to the accounts specified by such
Holders in such instructions.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
3
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly
executed.
EXODUS COMMUNICATIONS, INC.
By:___________________________________
Name: K.B. Chandrasekhar
Title: Chief Executive Officer
Attest:_______________________________
Name: Adam W. Wegner
Title: Secretary
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities referred to in the within-mentioned Indenture.
Dated: _________________
CHASE MANHATTAN BANK AND TRUST COMPANY,
NATIONAL ASSOCIATION,
as Trustee
By:___________________________________
Authorized Signatory
4
<PAGE>
[REVERSE OF SECURITY]
This Security is one of a duly authorized issue of Securities of the Issuer
designated as its 11 1/4% Senior Notes due 2008 (herein called the
"Securities"), issued and to be issued under an Indenture, dated as of July 1,
1998 (herein called the "Indenture", which term shall have the meaning assigned
to it in such instrument), among the Issuer and Chase Manhattan Bank and Trust
Company, National Association, as Trustee (herein called the "Trustee", which
term includes any successor trustee under the Indenture), to which Indenture and
all indentures supplemental thereto reference is hereby made for a statement of
the respective rights, limitations of rights, duties and immunities thereunder
of the Issuer, the Trustee and the Holders of the Securities and of the terms
upon which the Securities are, and are to be, authenticated and delivered.
Prior to or concurrently with the issuance of this Security, the Issuer
shall have deposited funds with the Escrow Agent in the Escrow Account held by
the Escrow Agent for the benefit of the holders in accordance with an Escrow
Agreement. The funds in the Escrow Account will be sufficient to pay, when due,
the first four semi-annual interest payments on all Securities. The Escrow
Agreement will provide, among other things, that funds may be disbursed from the
Escrow Account for interest payments the Issuer makes on the Securities. The
Escrow Agent will be instructed to cause all funds in the Escrow Account to be
invested, pending disbursement, in U.S. Government Securities.
The Securities are subject to redemption, at the option of the Issuer, in
whole or in part, at any time on or after July 1, 2003 and prior to maturity,
upon not less than 30 nor more than 60 days' notice mailed to each Holder of
Securities to be redeemed at such Holder's address appearing in the Security
Register, in amounts of $1,000 or an integral multiple of $1,000, at the
following Redemption Prices (expressed as percentages of the principal amount)
plus accrued and unpaid interest and Liquidated Damages, if any, to but
excluding the Redemption Date (subject to the right of Holders of record on the
immediately preceding Record Date to receive interest due on an Interest Payment
Date that is on or prior to the Redemption Date), if redeemed during the 12-
month period beginning July 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- -----
<S> <C>
2003............................................................................... 105.625%
2004............................................................................... 103.750%
2005............................................................................... 101.875%
2006 and thereafter................................................................ 100.000%
</TABLE>
In addition, at any time prior to July 1, 2001, the Issuer may redeem up to
35% of the aggregate Outstanding principal amount of the Securities with the Net
Cash Proceeds of one or more sales of Capital Stock (other than Disqualified
Stock) at a Redemption Price equal to 111.25% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon and Liquidated Damages, if
any, to the date of redemption; provided that at least 65% of the original
principal amount of the Securities remains Outstanding immediately following
such redemption. In order to effect the foregoing redemption, the Issuer must
mail a notice of redemption no later
<PAGE>
than 45 days after the related sale of Capital Stock and must consummate such
redemption within 60 days of the closing of the sale of Capital Stock.
The Securities do not have the benefit of any sinking fund obligations.
In the event of redemption or purchase pursuant to an Offer to Purchase of
this Security in part only, a new Security or Securities for the unredeemed or
unpurchased portion hereof will be issued in the name of the Holder hereof upon
the cancellation hereof.
If an Event of Default shall occur and be continuing, there may be declared
due and payable the principal amount of (together with accrued and unpaid
interest on) the Securities, in the manner and with the effect provided in the
Indenture.
The Indenture provides that, subject to certain conditions, if (i) certain
Net Cash Proceeds are available to the Issuer as a result of an Asset Sale or
(ii) a Change of Control occurs, the Issuer shall be required to make an Offer
to Purchase for all or a specified portion of the Securities.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Issuer and the rights of the Holders of the Securities under the Indenture at
any time by the Issuer and the Trustee with the consent of the Holders of a
majority in aggregate principal amount of the Securities at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
specified percentages in aggregate principal amount of the Securities at the
time Outstanding, on behalf of the Holders of all the Securities, to waive
compliance by the Issuer with certain provisions of the Indenture and certain
past defaults under the Indenture and its consequences. Any such consent or
waiver by the Holder of this Security shall be conclusive and binding upon such
Holder and upon all future Holders of this Security and of any Security issued
upon the registration of transfer hereof or in exchange herefor or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Security.
As provided in and subject to the provisions of the Indenture, the Holder
of this Security shall not have the right to institute any proceeding with
respect to the Indenture or for the appointment of a receiver or trustee or for
any other remedy thereunder, unless such Holder shall have previously given the
Trustee written notice of a continuing Event of Default with respect to the
Securities, the Holders of not less than 25% in principal amount of the
Securities at the time Outstanding shall have made written request to the
Trustee to institute proceedings in respect of such Event of Default as Trustee
and offered the Trustee reasonable indemnity and the Trustee shall not have
received from the Holders of a majority in principal amount of Securities at the
2
<PAGE>
time Outstanding a direction inconsistent with such request and shall have
failed to institute any such proceeding for 60 days after receipt of such
notice, request and offer of indemnity. The foregoing shall not apply to
certain suits described in the Indenture, including any suit instituted by the
Holder of this Security for the enforcement of any payment of principal hereof
or any premium or interest hereon on or after the respective due dates expressed
herein (or, in the case of redemption, on or after the Redemption Date or, in
the case of any purchase of this Security required to be made pursuant to an
Offer to Purchase, on the Purchase Date).
No reference herein to the Indenture and no provision of this Security or
of the Indenture shall alter or impair the obligation of the Issuer, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Security is registrable in the Security Register,
upon surrender of this Security for registration of transfer at the office or
agency of the Issuer in the Borough of Manhattan, The City of New York, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Issuer and the Security Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Securities, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
The Securities are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Securities are
exchangeable for a like aggregate principal amount of Securities of a different
authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or
exchange, but the Issuer may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the
Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the
Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Issuer, the
Trustee nor any such agent shall be affected by notice to the contrary.
Interest on this Security shall be computed on the basis of a 360-day year
of twelve 30-day months.
All terms used in this Security which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
The Indenture and this Security shall be governed by and construed in
accordance with the laws of the State of New York.
3
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased in its entirety by the
Issuer pursuant to Section 1015 or 1016 of the Indenture, check the box:
[_]
If you want to elect to have only a part of this Security purchased by the
Issuer pursuant to Section 1015 or 1016 of the Indenture, state the amount:
$_____________
Dated: Your Signature:______________________________________________
(Sign exactly as name appears on the other
side of this Security)
Signature Guarantee:___________________________________
(Signature must be guaranteed by an
eligible Guarantor Institution (banks,
stockbrokers, savings and loan
associations and credit unions) with
membership in an approved signature
medallion program pursuant to Securities
and Exchange Commission Rule 17Ad-15.)
4
<PAGE>
EXHIBIT 5.01
{LETTERHEAD OF FENWICK & WEST LLP]
November 6, 1998
Exodus Communications, Inc.
2650 San Tomas Expressway
Santa Clara, CA 95051
Gentlemen/Ladies:
At your request, we have examined the Registration Statement on Form S-4
(File Number 333-62413) (the "Registration Statement") filed by you with the
Securities and Exchange Commission (the "Commission") on August 28, 1998, as
subsequently amended, in connection with the proposed exchange by you of
$200,000,000 aggregate principal amount of the Company's unsecured 11 1/4%
Senior Notes due 2008 to be issued pursuant to the Registration Statement (the
"New Notes") for $200,000,000 aggregate principal amount of your outstanding
unsecured 11 1/4% Senior Notes due 2008 issued on July 1, 1998 (the "Old
Notes").
In rendering this opinion, we have examined the following:
(1) Your quarterly report on Form 10-Q for the period ended June 30, 1998
filed with the Commission, together with the exhibits filed as a part
thereof including:
(a) the Form of New Note;
(b) the Indenture between the Company and Chase Manhattan Bank and
Trust Company, National Association (the "Trustee") dated July 1,
1998 (the "Indenture"); and
(c) the Exchange and Registration Rights Agreement among the Company,
Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities
Corporation, BT Alex. Brown Incorporated and NationsBanc
Montgomery Securities LLC dated July 1, 1998 (the "Exchange
Agreement");
(2) the Registration Statement, together with the exhibits filed as a part
thereof including:
(a) the Form of Letter of Transmittal; and
(b) the Form of Notice of Guaranteed delivery;
(3) the Prospectuses prepared in connection with the Registration
Statement;
(4) the minutes of meetings and actions by written consent of the
stockholders and Board of Directors that are contained in your minute
books, that are in our possession;
<PAGE>
Exodus Communications, Inc.
November 6, 1998
Page -2-
(5) a Management Certificate addressed to us and dated of even date
herewith executed by the Company containing certain factual and other
representations; and
(6) the opinion of Debevoise & Plimpton (the "Debevoise Opinion") of even
date herewith with respect to matters governed by the laws of the
State of New York.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies, the legal capacity of all natural persons executing the same, the lack
of any undisclosed terminations, modifications, waivers or amendments to any
documents reviewed by us and the due execution and delivery of all documents
where due execution and delivery are prerequisites to the effectiveness thereof.
As to matters of fact relevant to this opinion, we have relied solely upon
our examination of the documents referred to above. We have made no independent
investigation or other attempt to verify the accuracy of any of the information
referred to above or to determine the existence or non-existence of any other
factual matters; however, we are not aware of any facts that would cause us to
-------
believe that the opinion expressed herein is not accurate.
We are admitted to practice law in the State of California, and we express
no opinion herein with respect to the application or effect of the laws of any
jurisdiction other than the existing laws of the United States of America and
the State of California and (without reference to case law or secondary sources)
the existing Delaware General Corporation Law. With respect to the opinion in
clause (ii) of the paragraph below, we have relied solely on the Debevoise
Opinion subject to the same limitations and exceptions that apply to the
Debevoise Opinion as stated in such Opinion.
Based upon the foregoing, and subject to the limitations, qualifications
and assumptions expressed below, we are of the opinion that when executed by the
Company and authenticated by the Trustee in accordance with the terms of the
Indenture, the Exchange Agreement and the Letter of Transmittal and delivered
against exchange therefor of the Old Notes pursuant to the exchange offer
described in the Registration Statement, the New Notes will be (i) validly
issued and (ii) will constitute valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms.
<PAGE>
Exodus Communications, Inc.
November 6, 1998
Page -3-
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us, if any, in the
Registration Statement, the Prospectus constituting a part thereof and any
amendments thereto.
This opinion speaks only as of its date and we assume no obligation to
update this opinion should circumstances change after the date hereof. This
opinion is intended solely for your use as an exhibit to the Registration
Statement for the purpose of the above exchange of the New Notes for Old Notes
and is not to be relied upon for any other purpose.
Very truly yours,
FENWICK & WEST LLP
By: /s/ Eileen Duffy Robinett
-----------------------------------
<PAGE>
EXHIBIT 5.02
November 6, 1998
Exodus Communications, Inc.
2650 San Tomas Expressway
Santa Clara, CA 95051
Registration Statement on Form S-4
of Exodus Communications, Inc.
(Registration No. 333-62413)
--------------------------------
Ladies and Gentlemen:
We have acted as special New York counsel to Exodus Communications, Inc.,
a Delaware corporation (the "Company"), in connection with the preparation of
this opinion letter and the filing thereof with the Securities and Exchange
Commission (the "Commission") as an exhibit to a post-effective amendment to the
Registration Statement on Form S-4 referred to above (as so amended, the
"Registration Statement"). We understand that the Registration Statement
relates to the proposed exchange by the Company of $200,000,000 aggregate
principal amount of the Company's 11-1/4% Senior Notes due 2008 (the "New
Notes") for $200,000,000 aggregate principal amount of the Company's
outstanding 11-1/4% Senior Notes due 2008 (the "Existing Notes"). We further
understand that the Existing Notes were issued pursuant to the Indenture, dated
as of July 1, 1998 (the "Indenture"), among the Company, and The Chase Manhattan
Bank as trustee (the "Trustee"), and that the New Notes will be issued pursuant
to such Indenture.
<PAGE>
November 6, 1998
In so acting, we have examined and relied upon copies, provided to us on
your behalf by your counsel Fenwick & West, L.L.P. and identified by them to us
as being complete and correct copies, of (i) the Indenture, (ii the form of the
New Notes, in the form to be executed by the Company and authenticated by the
Trustee, (iii) the Purchase Agreement, dated June 26, 1998 (the "Purchase
Agreement"), among the Company, and Goldman, Sachs & Co. and certain other
financial institutions as Initial Purchasers (the "Initial Purchasers"), and (v)
the Exchange and Registration Rights Agreement, dated as of July 1, 1998, among
the Company, and the Initial Purchasers. We have also examined and relied upon
the originals, or copies certified or otherwise identified to our satisfaction,
of such other documents as in our judgment are necessary or appropriate to
enable us to render the opinion expressed below.
In all such examinations, we have assumed without investigation the legal
capacity of all natural persons executing documents, the genuineness of all
signatures on original or certified copies, the authenticity of all original or
certified copies and the conformity to original or certified documents of all
copies submitted to us as conformed or reproduction copies. We have relied as
to factual matters upon, and have assumed without investigation the accuracy of,
the representations and warranties contained in the Purchase Agreement and other
statements of or information from public officials and officers and
representatives of the Company and others.
Based upon the foregoing, and subject to the limitations, qualifications
and assumptions hereinafter expressed, we are of the opinion that when executed
by the Company and authenticated by the Trustee in accordance with the terms of
the Indenture and delivered against exchange therefor of the Existing Notes
pursuant to the exchange offer described in the Registration Statement, the New
Notes will be validly issued and will constitute valid and binding obligations
of the Company, enforceable against the Company in accordance with their terms.
The foregoing opinion is limited by and subject to the effects of (i)
bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer,
reorganization, moratorium or other similar laws relating to or affecting
enforcement of creditors' rights or remedies generally and (ii) general
principles of equity (whether such principles are considered in a proceeding at
law or equity), including the discretion of the court before which any
proceeding may be brought, concepts of good faith, reasonableness and fair
dealing, and standards of materiality. General principles of equity may limit
the enforceability of (without limitation) any provision that any waiver or
amendment
<PAGE>
November 6, 1998
may only be effected in writing, any exculpation of a party from liability to
the extent arising from its unlawful conduct, any provision that a guarantee is
enforceable regardless of any circumstance that might constitute a legal or
equitable discharge or defense of the guarantor (including invalidity or
unenforceability of any guaranteed obligation), or any severability provision.
The enforceability of any provision that an agreement may not be used to
interpret another agreement may be limited by and subject to the authority of a
court to apply rules of evidence or procedure.
With your permission, for purposes of the opinion expressed herein, we
have assumed without investigation that (i) the Company and the Trustee are and
at all prior times have been duly organized, validly existing and in good
standing under the laws of their respective jurisdictions of organization, (ii)
the parties to the Indenture had and have the corporate power and authority to
enter into and perform the Indenture, the Indenture has been duly authorized,
executed and delivered by each of them, and (assuming all other parties are
bound thereby) the Indenture is valid, binding and enforceable with respect to
the Trustee, (iii) the Company has the corporate power and authority to execute,
deliver and perform the New Notes and (iv) the New Notes have been duly
authorized by the Company.
We express no opinion as to the effect of any laws regarding fraudulent
transfers or conveyances. We express no opinion as to the laws of any
jurisdiction other than the laws of the State of New York.
Except to the limited extent described in the first sentence of this
opinion letter, we have not participated in the preparation or filing with the
Commission of the Registration Statement and we do not assume any obligation
with respect thereto. The opinion expressed herein is rendered as of the date
of this opinion letter, and we assume no obligation to supplement this opinion
letter if any applicable laws change after the date hereof or if we become aware
of any facts that might change any opinion expressed herein after the date
hereof.
We have provided a copy of this opinion to your counsel Fenwick & West,
L.L.P. Such counsel may rely on this opinion in giving their opinion to be
<PAGE>
November 6, 1998
filed as an exhibit to the Registration Statement.
We consent to the filing of this opinion letter as an exhibit to the
Registration Statement. In giving such consent, we do not hereby concede that
we are within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
Commission thereunder.
Very truly yours,
Debevoise & Plimpton
<PAGE>
EXHIBIT 10.38
LEASE
EXODUS COMMUNICATIONS, INC.
ARTICLE I
PARTIES
THIS LEASE, dated August 31, 1998, is made between REYNOLDS METALS
DEVELOPMENT COMPANY, a Delaware Corporation ("LANDLORD") and EXODUS
COMMUNICATIONS, INC., a Delaware Corporation ("TENANT"). The effective date
shall be the date of execution hereof on behalf of Landlord, as set forth on the
signature page.
ARTICLE II
PREMISES
Landlord hereby leases to Tenant and Tenant leases from Landlord, upon all
of the terms and conditions set forth herein, that certain real property
comprising of 6.17 acre parcel with an approximately 88,489 square feet building
as indicated on Exhibit A attached hereto (the "PREMISES"), of the project known
as Nokes Plaza, with an address of 45901 Nokes Boulevard, Sterling, Virginia
(the "PROJECT").
ARTICLE III
TERM AND TENANT IMPROVEMENTS
SECTION 3.1 TERM. The term of this Lease (the "TERM") is 10 years
----
commencing (1) on the date of the issuance of a Certificate of Occupancy, (2)
the date Tenant commences beneficial use of the premises (for purposes of this
section, beneficial use is defined as the first date on which Tenant's first
customer installs its equipment on the premises and begins receiving services
from Tenant), or (3) 120 days from the effective date of the lease, whichever
occurs first (the "COMMENCEMENT DATE") and ending at midnight, 120 months
thereafter (the "EXPIRATION DATE"), unless sooner terminated pursuant to any
provisions hereof. Landlord and Tenant shall execute a lease commencement
letter to confirm the actual Commencement Date and Expiration Date.
SECTION 3.2 EARLY POSSESSION. It is understood that the Tenant is
----------------
authorized to enter the premises prior to the Commencement Date for the specific
purpose of constructing the tenant inprovements, which entry shall not be deemed
to be a beneficial use of the premises as defined in Section 3.1 hereof. In the
event that (1) Tenant commences beneficial use of the
<PAGE>
premises other than for the purpose of construction of the tenant improvements,
(2) a Certficate of Occupancy is issued, or (3) if 120 days pass from the
Effective Date of this Lease, whichever occurs first, Tenant shall begin paying
rent.
SECTION 3.3 HOLDING OVER.
------------
(a) If Tenant, with Landlord's consent, remains in possession of the
Premises or any part thereof after the expiration of the Term hereof, such
occupancy shall be a tenancy from month-to-month upon all the provisions of this
Lease pertaining to the obligations of Tenant, except all options and rights of
first refusal, if any, granted under the terms of this Lease shall be deemed
terminated and be of no further effect during said month-to-month tenancy.
(b) If Tenant shall hold over after the Expiration Date or earlier
termination of this Lease, and Landlord shall desire to regain possession of the
Premises, then Landlord, after delivery of written notice to Tenant, may
forthwith re-enter and take possession of the Premises without process, or by
any appropriate legal process. Tenant shall indemnify Landlord against all
reasonable liabilities and damages sustained by Landlord by reason of such
retention of possession.
SECTION 3.4 TENANT IMPROVEMENTS. Tenant will cause to be prepared at
-------------------
Tenant's expense construction plans, drafts of which are be attached hereto as
Exhibit B, and which may be amended from time to time unilaterally by Tenant.
Landlord's execution of this Lease shall, for purposes of this section,
constitute consent of the Landlord as to those Tenant Improvements listed in
Exhibit B, provided such plans are approved, if approval is required, by any
local zoning agency. For any additional Tenant Improvements that may be
required from time to time, Tenant will cause to be prepared at Tenant's expense
construction plans. Such plans shall be presented to the Landlord in written
form prepared by a professional architect or engineer. The Tenant Improvements
shall be subject to the reasonable consent of the Landlord, which shall not be
unreasonably withheld or delayed. If Landlord shall give its consent, the
consent shall be deemed conditioned upon Tenant acquiring a permit from the
appropriate governmental agency to permit the completion of the work, furnishing
a copy thereof to Landlord prior to the commencement of the work, and compliance
with all conditions of said permit in a prompt and expeditious manner. All work
shall be performed in a good and workmanlike manner. Following completion of
such work, Tenant shall furnish to landlord a set of "as-built" drawings showing
the Tenant Improvements.
SECTION 3.5 SATISFACTION OF CLAIMS FOR LABOR AND MATERIALS. Tenant shall
----------------------------------------------
pay, when due, all claims for labor and materials furnished to or for Tenant, at
or for use in the premises. Tenant shall give Landlord not less than ten (10)
days notice prior to commencement of such work in the Premises and Landlord
shall have the right to post notices of nonresponsibility in or on the Premises.
If the mechanic's or materialman's lien shall be filed against the Premises, the
building or any part of the Project for work done or claim to have been done or
materials furnished or claimed to have been done or materials furnished or
<PAGE>
claimed to have been furnished to or for the benefit of Tenant, Tenant shall
discharge and release such lien of record within fifteen (15) days after Tenant
receives advice of the filing of such lien, at Tenant's expense by the payment
of the amount claimed or by the filing of a bond as prescribed by law. If
Tenant shall fail to do so, Landlord may (but shall not be obligated to)
discharge the same, and the cost thereof, including legal fees, shall be
Additional Rent payable by Tenant within three (3) days following demand by
Landlord. Such discharge by Landlord shall not be deemed to waive or release
the default of Tenant in not discharging the same. The Landlord's consent nor
any provisions of this Lease shall be deemed to be the Agreement or consent of
Landlord to subject Landlord's interest in the Premises or the Project to any
such liens.
SECTION 3.6 LANDLORD'S PROPERTY. Unless Landlord requires the removal,
-------------------
all alterations, improvements and conditions which may be made on the Premises,
shall become the property of Landlord and remain upon and be surrendered with
the Premises at the expiration of the term. Notwithstanding the provisions of
this Section, Tenant's trade fixtures, furnishings and equipment, other than
that which was affixed to the Premises so that it cannot be removed without
material damage to the Premises, as well as the items listed in Exhibit "C"
shall remain the property of the Tenant and may be removed by Tenant at the
expiration of the Lease.
SECTION 3.7 LANDLORD'S CONTRIBUTION TO TENANT IMPROVEMENTS. Landlord
----------------------------------------------
agrees to reimburse Tenant up to an amount of $822,000 for the Tenant
Improvements. Such sum shall be payable within thirty (30) days after receipt
of invoices from Tenant evidencing the same, and the issuance by the local
municipality of a permanent or temporary certificate of occupancy, unless an
Event of Default exists.
SECTION 3.8 REVISIONS TO PLANS FOR TENANT IMPROVEMENTS. Landlord and
------------------------------------------
Tenant acknowledge that the Tenant may require changes to the tenant
improvements from time to time after the Effective Date of this Lease. The cost
of any such revisions shall be the Tenant's sole expense and subject to the
reasonable consent of the Landlord, which shall not be unreasonably withheld or
delayed. The Tenant shall furnish the Landlord with copies or all changes,
revisions or amendments to the Tenant improvement plans, and such changes,
revisions and amendments shall be reflected on the "as-built" drawings.
ARTICLE IV
RENT
SECTION 4.1 BASE RENT. Tenant shall pay to Landlord base rent ("Base
---------
Rent") in the amount of $730,034.00 per year subject to the payment schedule
and rental adjustment set forth below.
SECTION 4.2 PAYMENT OF BASE RENT. As long as Tenant is not in default
--------------------
hereunder, Base Rent shall be paid in equal monthly installments, in advance, on
the first business day of
<PAGE>
each month of the Term hereof, except the first installment of Base Rent, which
shall be paid upon execution of this Lease by Tenant. Base Rent shall be
prorated if the Term does not commence on the first day of a calendar month or
expire on the last day of a calendar month. Rent shall be paid to Landlord c/o
Reynolds Metals Development Company, at 6601 West Broad Street, Richmond,
Virginia 23230, Attn: W. S. Wasilewski, Controller, or at such other address as
may be specified in written notice to Tenant.
SECTION 4.3 ANNUAL RENT ADJUSTMENT. The Base Rent shall be increased
----------------------
commencing on the first anniversary of the Lease Commencement Date, and on each
anniversary of the Commencement Date of this Lease thereafter in an amount equal
to 3% of the last preceding year's Base Rent.
SECTION 4.4 OTHER CHARGES ADDED TO ANNUAL BASE RENT. Tenant shall pay to
---------------------------------------
Landlord, as Additional Rent an annual management and accounting fee of Ten
Thousand and 00/100 Dollars ($10,000.00). Said annual management and accounting
fee shall be payable on the first business day of the first month of each
anniversary during the Lease Term. In addition, Tenant shall pay to Landlord on
the first business day of the first month of each anniversary during the Lease
Term as Additional Rent all property owner association fees and insurance costs
incurred by Landlord and related to the Premises.
SECTION 4.5 ADDITIONAL RENT. All other monetary obligations of Tenant to
---------------
Landlord under the terms of this Lease shall be deemed to be "ADDITIONAL RENT",
and shall be due and payable with the next due monthly installment of Base Rent,
unless otherwise indicated herein.
ARTICLE V
SECURITY DEPOSIT
Tenant shall deposit with Landlord upon execution hereof an amount equal to
$61,000.00 as security for Tenant's faithful performance of Tenant's obligations
hereunder (the "SECURITY DEPOSIT"). It is expressly understood that the
Security Deposit is not an advance rental payment or a measure of Landlord's
damages in the event of default. If Tenant fails to pay rent or other charges
due hereunder, or otherwise defaults with respect to any provision of this
Lease, Landlord may use, apply or retain all or any portion of the Security
Deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Landlord may become obligated by reason of
Tenant's default, or to compensate Landlord for any loss or damage which
Landlord may suffer thereby. If Landlord so uses or applies all or any portion
of the Security Deposit, Tenant shall within ten days after written demand
therefor, deposit cash with Landlord in an amount sufficient to restore the
Security Deposit to the full amount hereinabove stated and Tenant's failure to
do so shall be a material breach of this Lease. Landlord shall not be required
to keep the Security Deposit separate from its general accounts. If Tenant
performs all of Tenant's obligations hereunder, the Security Deposit, or so much
thereof as previously has not been applied by Landlord, shall be returned
without payment of interest to
<PAGE>
Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's
interest hereunder) following the termination hereof, and after Tenant has
vacated the Premises. No trust relationship is created herein between Landlord
and Tenant with respect to the Security Deposit.
ARTICLE VI
USE
SECTION 6.1 PERMITTED USE. The Premises shall be used and occupied as an
-------------
office and data center and other related purposes, including but not limited to
general warehouse and light industrial use, and for no other purpose.
SECTION 6.2 COMPLIANCE WITH LAW. Tenant shall, at Tenant's expense,
-------------------
comply promptly with all present and future applicable statutes, ordinances,
rules, regulations, orders, permits, covenants and restrictions of record, and
any other requirements of any federal, state or local authority in effect during
the Term or any part of the Term hereof, regulating the use or condition of the
Premises, including, but not limited to, environmental matters and employee
health and safety. Tenant shall not use nor permit the use of the Premises in
any unlawful or dangerous manner.
SECTION 6.3 ENVIRONMENTAL MATTERS.
---------------------
(a) Tenant shall not use the Premises, or the Project for the storage,
treatment, generation, transportation, processing, handling or disposal of any
Hazardous Substance (defined below) in quantities subject to regulation under
Environmental Laws (defined below). Further, Tenant shall not cause or in any
way directly or indirectly contribute to any condition that is or may be
characterized by any federal, state or local government or agency as an actual
or potential threat or endangerment to health or the environment.
(b) For purposes of this Section 6.3,
(i) "HAZARDOUS SUBSTANCE" means (a) any hazardous wastes or toxic
chemicals, materials, substances or wastes as defined by any
Environmental Laws (defined below), (b) any "oil" as defined by the
Clean Water Act and regulations promulgated thereunder (including crude
oil or any fraction of crude oil), (c) any substance, the presence of
which is now or in the future prohibited, regulated or controlled by any
Environmental Law or any other law, regulation, statute or ordinance of
any of any governmental authority, (d) any asbestos or asbestos
containing materials, (e) any polychlorinated biphenyls, (f) urea
formaldehyde, (g) atmospheric radon at levels over four picocuries per
cubic liter, (h) any solid, liquid, gaseous or thermal irritant or
contaminant, such as smoke, vapor, soot, fumes, alkalis, acids,
<PAGE>
chemicals, pesticides, herbicides, sewage, industrial sludge or similar
wastes, and (i) any industrial, nuclear or medical by-products. However
"Hazardous Substances" do not include (A) immaterial quantities of
automotive motor oil; leaked inadvertently from vehicles in the ordinary
course of the operation of the Premises cleaned up in accordance with
reasonable property management procedures and any applicable law, (B)
immaterial quantities of substances customarily and prudently used in
the cleaning and maintenance of the Premises in accordance with
applicable law, or (C) substances customarily used in connection with
any uses permitted by Section 6.1 of this Lease, provided all are in
accordance with all applicable laws and regulations; and
(ii) "ENVIRONMENTAL LAWS" means all applicable present and future laws,
statutes, ordinances, rules, regulations, orders, and determinations of
any governmental authority pertaining to health, underground storage
tank regulation or removal, protection of the environment, natural
resources, wetlands, conservation, wildlife, waste management,
regulation of activities involving Hazardous Substances, and pollution,
or relating to waste disposal or environmental protection with respect
to the exposure to, or manufacture, possession, presence, use,
generation, storage, transportation, treatment, release, emission,
discharge, disposal, abatement, cleanup, removal, remediation or
handling of any Hazardous Substances, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Sec. 9601 et seq., the Superfund Amendments and Reauthorization
Act of 1986, 42 U.S.C. Sec. 9601(20)(D), the Resource Conservation and
Recovery Act, 42 U.S.C. Sec. 9601 et seq., the Federal Water Pollution
Control Act, as amended by the Clean Water Act, 33 U.S.C. Sec. 1251 et
seq., the Clean Air Act, 42 U.S.C. Sec. 7401 et seq. and the Toxic
Substances Control Act, 15 U.S.C. Sec. 2601 et seq., all as amended from
time to time.
(c) At any time during the term of this Lease if Landlord reasonably
believes the Premises may have been contaminated by any Hazardous Substance as a
result of Tenant's breach of this Lease, and within 180 days after the
termination or expiration of this Lease, Landlord and its consultants shall have
the right, but not the obligation, to sample, analyze, inspect and monitor the
air, soil, the surface water, the ground water and any materials or substances
(whether or not belonging to Tenant) in, on or about the Premises, the Building
or the Project, for the purpose of determining the presence of any Hazardous
Substance. If Landlord's reasonable assessment confirms the existence of any
contamination from Hazardous Substances on, under or about the Premises caused
by Tenant's use of or activities in the Premises in breach of this Lease, Tenant
shall reimburse Landlord for the costs of such assessment, and shall in addition
pay for (as Additional Rent) all costs associated with (i) the removal of any
such Hazardous Substance from the Premises, the Building, the Project or any
adjoining property if such Hazardous Substance migrated to any adjoining
property, (ii) the
<PAGE>
disposal of the same strictly in accordance with applicable law, and (iii) any
remediation work on the Premises, the Building or the Project required by
Environmental Laws. Landlord or its environmental consultants shall prepare the
work plan for such removal, disposal and remediation, and Landlord shall retain
such engineers or other persons as it deems appropriate to carry out the work
plan. Upon completion of the work, the Premises shall be in compliance with
existing standards of Environmental Laws as determined by Landlord's
environmental consultant, or in the event there are no such standards for any
particular contaminant, then the Premises shall be free of any Hazardous
Substance to a standard of background levels of contamination, meaning the level
of contaminants naturally occurring in or under the air, soil, surface water or
ground water, as determined by Landlord's environmental consultant or whatever
higher levels which, in the reasonable determination of the Landlord's
environmental consultant, presents no significant environmental or health risks.
(d) Tenant shall not, without the consent of Landlord, disclose to any
third party or to the public any information obtained through any environmental
assessment or investigation of the Premises or the Project which is not publicly
known. Notwithstanding the foregoing, any such confidential information may be
disclosed to a governmental agency or to the public if Tenant believes in good
faith that such disclosure is required by pertinent law, and Tenant notifies
Landlord in writing of its intent to disclose such confidential information
within a reasonable period of time before such disclosure.
(e) Tenant shall defend, indemnify and hold Landlord harmless from and
against any and all claims, response or remediation costs, losses, damages,
penalties, other costs, actions, judgments, expenses, and liabilities of every
kind and nature whatsoever (including, without limitation, attorneys' and
consultants' fees and costs and expenses of investigation, remediation or
defense) (i) which arise either directly or indirectly from Tenant's violation
of any Environmental Law, or (ii) which arise either directly or indirectly from
the generation, treatment, storage, spillage, handling, disposal or release on,
under or from the Premises or the Project by Tenant or any of its affiliates,
agents, contractors, employees, or invitees of any Hazardous Substance in
violation of this Lease. This indemnity and the provision of this section shall
survive the termination or expiration of this Lease.
(f) Tenant warrants, represents and covenants that:
(i) its operations on the Premises are not expected to result in the
presence of Hazardous Substances on the Premises or the Project;
(ii) it shall, at its own expense, comply promptly with all
applicable Environmental Laws;
(iii) it shall immediately notify Landlord of any notice of violation,
noncompliance or other written communication by any governmental
authority or others of any violation of any Environmental Laws; and
(iv) it shall immediately inform Landlord if Tenant becomes
<PAGE>
aware of or causes a release of Hazardous Substances on the Premises,
the Building, the Project or anywhere in the vicinity of the foregoing.
(g) Landlord warrants, represents and covenants that:
(i) that as of the Lease Commencement Date, or the Date on which the
Tenant enters upon the premises for the purposes of construction of the
tenant improvements, whichever occurs first, that there are no hazardous
substances on the premises.
(ii) that Landlord has complied with all applicable environmental laws.
(iii) that Landlord shall immediately inform Tenant if it becomes aware
of any violation of any environmental laws occurring prior to the Lease
Commencement Date or the date on which the Tenant enters the premises
for the purpose of constructing the Tenant Improvements, whichever
occurs earlier.
(h) Landlord shall defend, indemnify and hold Tenant harmless from and
against any and all claims, response or remediation costs, losses, damages,
penalties, other costs, actions, judgments, expenses and liability of every kind
and nature whatsoever (including, without limitation, attorney's fees and
consultant's fees and costs and expenses of investigation, remediation or
defense) which arise either directly or indirectly from a breach of the
warranties, representations and covenants set forth in (g) hereof.
SECTION 6.4 STATUS OF PROPERTY.
------------------
(a) Tenant hereby accepts the Premises, subject to all applicable zoning,
municipal, county and state laws, ordinances and regulations governing and
regulating the use and condition of the Project and/or Premises, and any
covenants or restrictions of record and accepts this Lease subject thereto and
to all matters disclosed thereby.
(b) Tenant acknowledges that neither Landlord nor Landlord's agent has made
any representation or warranty as to the present or future suitability of the
Premises for the conduct of Tenant's business.
SECTION 6.5 AUCTIONS. Tenant shall not conduct, nor permit to be
--------
conducted, whether voluntarily or involuntarily, any in-person auctioneering on
the Premises with the public invited, without first having obtained Landlord's
prior written consent. Notwithstanding anything to the contrary in this Lease,
Landlord shall not be obligated to exercise any standard of reasonableness in
determining whether to grant such consent.
SECTION 6.6 SIGNS. No sign, door plaques, advertisement, or notice shall
-----
be displayed,
<PAGE>
painted or affixed by Tenant on any part of the Project, building, parking
facilities, or Premises without the prior written consent of Landlord, which
shall not be unreasonably withheld or delayed. The color, size, character, style
and material and placement shall be submitted to Landlord for approval, and
shall be subject to any applicable governmental laws, ordinances, regulations or
other requirements. Tenant shall remove all such signs at the termination of
this Lease. Such installations and removals shall be made in such manner as to
avoid injury or defacement of the Project and other improvements, and Tenant, at
its sole expense, shall repair any injury or defacement, reasonable wear and
tear excepted.
ARTICLE VII
UTILITIES AND SERVICES
SECTION 7.1 TENANT RESPONSIBILITY. Tenant shall pay for all water, gas,
---------------------
heat, light, electric power, telephone, landscaping and lawn maintenance, snow
and ice removal, interior painting, cleaning and repairing windows, interior
wall and floor coverings, repair and maintenance of paving and unpaved surfaces,
lighting, trash removal and other utilities and services (including, without
limitation, janitorial services) supplied to the Premises, together with any
taxes thereon and connection charges to the Premises and other expenses and
costs, whether or not similar in connection with operating, repairing and
maintaining the land and building.
SECTION 7.2 SECURITY MEASURES. Tenant hereby acknowledges that the rent
-----------------
payable to Landlord hereunder does not include the cost of guard service or
other security measures, and that Landlord shall have no obligation whatsoever
to provide same. Tenant assumes all responsibility for the protection of
Tenant, its property, its agents and invitees from acts of third parties.
SECTION 7.3 SPECIAL COSTS. Tenant shall be responsible for the
-------------
installation and maintenance of any dilution tanks, holding tanks, settling
tanks, sewer sampling devices, sand traps, grease traps or similar devices which
may be required by the appropriate governmental subdivision for Tenant's use of
the sanitary sewer system. If obstructions or stoppages in the common sewer
lines at the Project result from discharges from tanks and items noted above and
Tenant can be identified by Landlord as being responsible for such obstructions
or stoppages, then Tenant shall pay the entire cost of repair, upon demand, as
Additional Rent.
ARTICLE VIII
TAXES
SECTION 8.1 PAYMENT OF REAL PROPERTY TAXES. Tenant shall pay, as
------------------------------
Additional Rent, the Real Property Taxes (defined below) applicable to the
Premises during the Term of this Lease. All such payments shall be made within
ten business days after receipt of a written
<PAGE>
statement from Landlord setting forth such taxes and a copy of the applicable
real estate tax bill or bills. If any Real Property Taxes paid by Landlord
covers any period of time prior to or after the expiration of the Term hereof,
Tenant's Share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year during which this Lease shall be in
effect. Landlord shall have the option, exercisable at any time during the Term,
to elect to have Tenant pay Real Property Taxes in monthly installments, in
advance, based on Landlord's reasonable estimate of Real Property Taxes for such
year.
SECTION 8.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
----------------------------------
"REAL PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, gross receipts tax, improvement bond or bonds, levy or tax (other
than inheritance, personal income or estate taxes) imposed on the Landlord or
the Premises by any authority having the direct or indirect power to tax,
including any city, county, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage or other improvement district
thereof, as against any legal or equitable interest of Landlord in the Premises
or in the real property of which the Premises are a part, as against Landlord's
right to rent or obtain other income therefrom, and as against Landlord's
business of leasing the Premises. The term Real Property Taxes also shall
include any tax, fee, levy, assessment or charge (i) in substitution of,
partially or totally, any tax, fee, levy, assessment or charge hereinabove
included within the definition of Real Property Taxes, or (ii) the nature of
which was hereinbefore included within the definition of Real Property Taxes, or
(iii) which is imposed by reason of this transaction or any modifications or
changes hereto.
SECTION 8.3 JOINT ASSESSMENT. If the Premises are not separately
----------------
assessed, Tenant's liability shall be an equitable proportion of the Real
Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Landlord from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available. Landlord's reasonable determination
thereof, in good faith, shall be conclusive.
SECTION 8.4 PAYMENT OF PERSONAL PROPERTY TAXES.
----------------------------------
(a) Tenant shall pay, prior to delinquency, all taxes assessed against and
levied upon trade fixtures, furnishings, equipment and all other personal
property of Tenant contained in the Premises. When possible, Tenant shall cause
said trade fixtures, furnishings, equipment and all other personal property to
be assessed and billed separately from the real property of Landlord.
(b) If any of the Tenant's personal property shall be assessed with the
Landlord's real property, Tenant shall pay Landlord the taxes attributable to
Tenant within ten days after receipt of a written statement setting forth the
taxes applicable to Tenant's property.
SECTION 8.5 SALES AND USE TAX. In addition to the Base Rent required
-----------------
hereunder, Tenant shall also be solely responsible for all sales tax applicable
thereon, or applicable to any
<PAGE>
other charges or payments due hereunder.
ARTICLE IX
MAINTENANCE, REPAIRS AND ALTERATIONS
SECTION 9.1 TENANT'S OBLIGATIONS.
--------------------
(a) Tenant, at Tenant's expense, shall keep in good order, condition and
repair the nonstructural portions of the Premises and every part thereof,
including by way of illustration, all plumbing, heating, air conditioning,
ventilating, electrical, mechanical and lighting facilities and equipment
located within the Premises; light bulbs and tubes; interior surfaces of
exterior walls; ceilings; interior and exterior of windows; interior and
exterior doors and entrance ways; truck doors and dock bumpers; windows and
plate glass; floors and floor coverings; and Tenant's signs located on or about
the Premises or the Project. Tenant shall be obligated to make the repairs
required hereunder, ordinary or extraordinary, foreseen or unforeseen, and
whether or not such portion of the Premises requiring repair, or the means of
repairing the same are reasonably or readily accessible to Tenant, and whether
or not the need for such repairs occurs as a result of Tenant's use, the
elements, or the age of such portion of the Premises. The term "repair" shall
be deemed to include replacements. In addition to Tenant's obligations set forth
herein, Tenant shall, at its expense, repair and replace any and all portions of
the Premises, structural or nonstructural, for which the Tenant shall be
responsible to keep in good order, condition and repair, which are damaged by
Tenant's acts or omissions or the acts or omissions of Tenant's employees,
agents, contractors, invitees, or any others for whom Tenant may be responsible.
(b) Tenant shall pay all charges for pest control and extermination within
the Premises. Landlord represents the premises are delivered free and clear of
infestation.
(c) If Tenant fails to perform (or to commence and diligently pursue such
performance) Tenant's obligations under this Section 9.1 within ten business
days after receipt of written notice thereof, Landlord may at Landlord's option
enter upon the Premises (except in the case of emergency, in which case no
notice shall be required), perform such obligations on Tenant's behalf and/or
put the Premises in good order, condition and repair, and the reasonable cost
thereof shall be due and payable as Additional Rent within ten days following
receipt of a statement of such costs.
(d) On the last day of the Term hereof, or on any sooner termination,
Tenant shall surrender the Premises to Landlord in the same condition as
received, ordinary wear and tear excepted, and the Premises shall be delivered
to Landlord clean, uncontaminated and free of debris. Tenant shall remove its
trade fixtures, furnishings and equipment from the Premises and shall repair any
damage to the Premises occasioned by the installation or removal of its trade
fixtures, furnishings and equipment. Notwithstanding anything contained herein
to the contrary, Landlord's approval of Tenant Improvements pursuant to Sections
3.4 or 3.7 of this Lease shall relieve Tenant of any responsibility to restore
the Premises to pre-Tenant Improvement condition upon termination.
(e) Notwithstanding the foregoing, Tenant shall not be obligated to pay the
costs of
<PAGE>
repairs due to damage caused by an insured casualty if insurance proceeds are
available for such repairs, and Tenant did not cause such damage.
SECTION 9.2 LANDLORD'S OBLIGATIONS. Landlord shall keep in good order,
----------------------
condition and repair, all of the structural portions of the Premises which shall
be limited to the roof, the exterior walls, the foundation and interior
structural portions (e.g., support beams, etc.). The term "walls" as used in
the preceding sentence shall not include windows, glass or plate glass, interior
doors, special entries, exterior doors, or any other item mentioned in Section
9.1 as being an obligation of Tenant. Landlord represents that all structural
portions of the premises are free of defects and have been constructed in
accordance with plans and specifications previously submitted to Tenant. In
addition, Landlord represents that all non-structural portions of the premises
constructed by the Landlord prior to the entry of the Tenant on the premises for
the purpose of constructing the Tenant Improvements are in good working order.
In the event that such structural portions are not free of defects, or such non-
structural portions are not in good working order, of if Landlord fails to keep
the structural portions of the premises free of defect, then Tenant may perform
such obligations on Landlord's behalf, and the cost thereof shall be charged
against the rent due under the Lease. Landlord shall have no obligation to make
repairs under this Section 9.2 until a reasonable time after receipt of written
notice of the need for such repairs.
SECTION 9.3 ALTERATIONS AND ADDITIONS.
-------------------------
(a) Any alterations, improvements or additions in the Premises that Tenant
shall desire to make shall be presented to Landlord in written form with
proposed detailed plans prepared by a professional architect or engineer. If
Landlord shall give its consent, the consent shall be deemed conditioned upon
Tenant acquiring a permit from appropriate governmental agencies to perform the
work (if required), furnishing a copy thereof to Landlord prior to the
commencement of the work, and complying with all conditions of said permit in a
prompt and expeditious manner. Prior to the commencement of the work, Tenant
must obtain Landlord's written approval as to (i) the contractor and
subcontractors selected to perform such work, and (ii) if required by Landlord,
a copy of payment and performance bonds acceptable to Landlord naming Landlord
as obligee. All work shall be performed in a good and workmanlike manner.
Tenant shall bear the cost of inspection and/or supervision of such work by
Landlord's representative. If such work is not performed as herein required,
Landlord shall have the right to halt any further work and/or to require Tenant
to either comply with such requirements or restore the Premises to their
condition prior to such work. Following completion of such work, Tenant shall
furnish to Landlord a set of "as-built" drawings showing such alterations,
additions or improvements. Landlord's consent or approval as required herein
shall not be unreasonably withheld or delayed.
(c) Tenant shall pay, when due, all claims for labor or materials
furnished to or for Tenant, at or for use in the Premises. Tenant shall give
Landlord not less than ten days' notice prior to the commencement of any such
work in the Premises, and Landlord shall have the right to post notices of
nonresponsibility in or on the Premises. If any mechanic's or materialmen's
lien shall be filed against the Premises, the Building or any part of the
Project
<PAGE>
for work done or claimed to have been done or materials furnished or claimed to
have been furnished to or for the benefit of Tenant, Tenant shall discharge and
release such lien of record within fifteen days thereafter at Tenant's expense,
by the payment of the amount claimed or by filing of a bond as prescribed by
law. If Tenant shall fail to do so, Landlord may (but shall not be obligated to)
discharge the same, and the cost thereof, including legal fees, shall be
Additional Rent payable by Tenant within three days following demand by
Landlord. Such discharge by Landlord shall not be deemed to waive or release the
default of Tenant in not discharging the same. Neither Landlord's consent nor
any provision of this Lease shall be deemed to be the agreement or consent of
Landlord to subject Landlord's interest in the Premises, the Building or the
Project to any such liens.
(d) Unless Landlord requires their removal, all alterations, improvements
and additions which may be made on the Premises, shall become the property of
Landlord and remain upon and be surrendered with the Premises at the expiration
of the Term. Notwithstanding the provisions of this Section 9.3, Tenant's trade
fixtures, furnishings and equipment, other than that which is affixed to the
premises so that it cannot be removed without material damage to the Premises,
and the items listed in Exhibit "C" shall remain the property of Tenant and may
be removed by Tenant subject to the provisions of Section 9.l(e ).
ARTICLE X
INSURANCE AND INDEMNITY
SECTION 10.1 INSURANCE TO BE MAINTAINED BY TENANT. Tenant shall maintain
------------------------------------
at its own cost throughout the Term all insurance coverage specified below.
Tenant's insurance company shall be licensed to do business in the state in
which the Project is located and shall be acceptable to Landlord. All policies
shall designate Tenant and Landlord (and, if Landlord so requests, the managing
agent and/or any lender secured by a lien against the Project) as additional
named insureds, as their interests may appear, and shall state that such
insurance shall remain in effect notwithstanding that the insured has waived its
right of action against any party prior to the occurrence of the loss. On or
before the Commencement Date, Tenant shall deliver to Landlord certificates of
such insurance, and upon the request of Landlord, copies of all policies. Each
certificate shall indicate that the policy may not be canceled or be subject to
reduction in coverage without at least 30 days' prior written notice to
Landlord.
(a) LIABILITY INSURANCE. Tenant shall obtain comprehensive general
-------------------
liability insurance with a combined single limit of not less than $1,000,000 per
occurrence for personal injury and property damage insuring both Landlord and
Tenant against liability arising out of Tenant's use, occupancy and maintenance
of the Premises and all other areas appurtenant thereto, and containing
endorsements for the following coverages:
(i) Contractual liability insurance relating to all obligations of
Tenant pursuant to this Lease, including its indemnification of
Landlord.
<PAGE>
(ii) Automobile coverage.
(iii) Employee liability.
(iv) Boiler and machinery coverage (if there are pressure vessels in
the Premises).
(b) WORKMEN'S COMPENSATION. If and to the extent required by applicable
----------------------
law, Tenant shall provide adequate workmen's compensation insurance.
SECTION 10.2 INSURANCE TO BE MAINTAINED BY LANDLORD. Landlord shall keep
--------------------------------------
in force during the Term of this Lease insurance covering LOSS or damage to the
Project providing protection against all perils included within the
classification of fire, lightning and extended coverage.
SECTION 10.3 WAIVER OF SUBROGATION. Tenant and Landlord each hereby
---------------------
release the other, and waive their entire right of recovery against the other
for loss, damage or liability in connection with this Lease and/or Tenant's use
or occupancy of the Premises, whether due to the negligence of Landlord or
Tenant or their agents, employees, contractors and/or invitees, but only to the
extent that such loss or damage is actually covered by insurance, and only to
the extent that the insured party has received proceeds of insurance therefor.
SECTION 10.4 INDEMNITY.
---------
(a) Tenant agrees to pay, and to defend, indemnify and save harmless
Landlord from and against any and all liabilities, losses, damages, costs,
expenses (including reasonable attorneys fees) in connection with any injury to,
or the death of, any person or any damage to or loss of property in, on or about
the Premises arising, directly or indirectly, from Tenant's use or occupancy of
the Premises, excepting herefrom such liabilities, losses, damages, costs,
expenses (including reasonable attorneys fees) arising out of a breach by
Landlord of the provisions set forth in Paragraph 9.2 hereof, or from the
negligence or willful misconduct of Tenant, its agents, employees, contractors
and/or invitees. If any action or proceeding is brought against Landlord by
reason of any such claim, Tenant upon notice from Landlord shall defend the same
at Tenant's expense by counsel satisfactory to Landlord.
(b) Landlord agrees to pay, and to defend, indemnify and save harmless
Tenant from and against any and all liabilities, losses, damages, costs,
expenses (including reasonable attorneys fees) in connection with any injury to,
or the death of, any person or any damage to or loss of property in, on or about
the premises, arising, directly or indirectly, from the breach by Landlord of
any of the terms and conditions set forth in Paragraph 9.2 hereof.
SECTION 10.5 EXEMPTION OF LANDLORD FROM LIABILITY. Tenant hereby agrees
------------------------------------
that Landlord shall not be liable for injury to Tenant's business or any loss of
income therefrom or for damage to the goods, wares, merchandise or other
property of Tenant, Tenant's employees, invitees, customers, or any other person
in or about the Premises, for any reason whatsoever (other than a breach of this
Lease caused by Landlord's willful misconduct); nor shall Landlord be liable for
injury to the person of Tenant, Tenant's employees, agents or
<PAGE>
contractors, whether such damage or injury is caused BY or results from fire,
steam, electricity, gas, water, wind or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures, robbery, assault, or theft, whether the
said damage or injury results from conditions arising upon the Premises or upon
other portions of the Project, or from other sources or places and regardless of
whether the cause of such damage or injury or the means of repairing the same is
inaccessible to Tenant. Landlord shall not be liable for any damages arising
from any act or neglect of any other tenant, if any, of the Project. In the
event Landlord installs a security system in the Project or engages the services
of a professional security provider, such action shall in no way increase
Landlord's liability for occurrences and/or consequences such a system is
designed to avert or detect.
ARTICLE XI
DAMAGE OR DESTRUCTION
SECTION 11.1 DEFINITIONS.
-----------
(a) "PARTIAL DAMAGE" means damage or destruction to (i) the Project to the
extent that the cost of repair is less than 50% of the fair market value of the
Project immediately prior to such damage or destruction, or (ii) the Premises to
the extent that the damage can be repaired within 120 days following the date of
such damage, as reasonably determined by Landlord.
(b) "SUBSTANTIAL DESTRUCTION" means damage or destruction to (i) the
Project to the extent that the cost of repair is 50% or more of the fair market
value of the Project immediately prior to such damage or destruction, or (ii)
the Premises to the extent that the damage cannot be repaired within 120 days
following the date of such damage, as reasonably determined by Landlord.
SECTION 11.2 PARTIAL DAMAGE. If at any time during the Term of this
--------------
Lease there is damage which falls within the classification of Partial Damage,
Landlord shall diligently proceed to repair such damage and this Lease shall
continue in full force and effect.
SECTION 11.3 SUBSTANTIAL DESTRUCTION. If at any time during the Term of
-----------------------
this Lease there is damage which falls into the classification of Substantial
Destruction, Landlord shall have the option to either (i) repair such damage
(such repair to be completed in ninety (90) days of the date of substantial
destruction) in which event this Lease shall continue in full force and effect,
or (ii) terminate this Lease upon written notice to Tenant within 90 DAYS after
the occurrence of such damage, effective as of the date of such Substantial
Destruction.
SECTION 11.4 ABATEMENT OF RENT. If Landlord repairs or restores the
-----------------
Premises pursuant to the provisions of this Article XIII, the Base Rent payable
hereunder for the period during which such damage, repair or restoration
continues shall be abated in proportion to the degree to which Tenant's use of
the Premises is impaired; provided, however, that there shall
<PAGE>
be no abatement of Base Rent if the damage was caused in whole or in part by
Tenant, its agents, employees, contractors and/or invitees. Except for abatement
of Base Rent, if any, Tenant shall have no claim against Landlord as a result of
any such damage.
SECTION 11.5 LIMITATION ON OBLIGATION. Notwithstanding the foregoing,
------------------------
Landlord shall not be obligated to repair or restore the Premises and/or the
Project or any portion thereof in the event of Partial Damage or Substantial
Destruction occurring during the last 24 months of the Term, or in the event
that insurance proceeds available to Landlord (reduced by any proceeds payable
to any lender secured by a lien against the Premises) are insufficient to cover
the costs of repair and/or restoration.
ARTICLE XII
CONDEMNATION
If the Premises or the Project or any portion thereof are taken under the
power of eminent domain, or sold under the threat of the exercise of said power
(all of which are herein called "CONDEMNATION"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than 5O% of the rentable area of
the Premises shall be taken by Condemnation, Tenant may, at Tenant's option to
be exercised in writing only within ten days after Landlord shall have given
Tenant written notice of such Condemnation (or in the absence of such notice,
within ten days after the condemning authority shall have taken possession),
terminate this Lease as of the date the condemning authority takes such
possession. Landlord also shall have an option to terminate this Lease by
notice to Tenant given within the time limits set forth above if in Landlord's
opinion reasonably exercised, it would not be economically feasible to continue
leasing the Premises to Tenant. If this Lease is not terminated in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the Base Rent shall be reduced in
the proportion that the square feet of the Premises which is taken bears to the
total square feet of the Premises. Tenant shall have no claim against Landlord
as a result of any such Condemnation. Any award for the Condemnation of all or
any part of the Premises under the power of eminent domain or any payment made
under threat of the exercise of such power shall be the property of Landlord,
whether such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages; provided,
however, that Tenant shall be entitled to pursue a separate claim against the
condemning authority, for moving expenses, loss of business claims, and for the
taking of any property which does not become the property of Landlord upon
expiration of this Lease, provided that any award to Tenant shall not result in
a diminution of any award to Landlord. In the event that this Lease is not
terminated by reason of such Condemnation, Landlord shall, at Landlord's
expense, promptly repair any damage to the Premises caused by such Condemnation.
ARTICLE XIII
<PAGE>
ASSIGNMENT AND SUBLETTING
SECTION 13.1 LANDLORD'S CONSENT REQUIRED. Except as required in
---------------------------
connection with the granting of a security interest in connection with a senior
secured credit facility provided by Goldman, Sachs & Co., Tenant shall not
voluntarily or by operation of law assign, transfer, mortgage, sublet, or
otherwise transfer or encumber all or any part of Tenant's interest in this
Lease or in the Premises, without Landlord's prior written consent, which
consent shall not be unreasonably withheld, provided (i) such assignment is to
an entity/individual(s) whose financial integrity is reasonably sound; and (ii)
proof thereof satisfactory to Landlord has been delivered to Landlord at least
ten (10) days prior to the effective date of any such transfer. Any attempted
assignment, transfer, mortgage, encumbrance or subletting without such consent
shall be void, and shall constitute a breach of this Lease. Any sale,
assignment or other transfer of controlling stock interest in Tenant shall
constitute an "assignment" for purposes hereof.
SECTION 13.2 NO RELEASE OF TENANT. Regardless of Landlord's consent, no
--------------------
subletting or assignment shall release Tenant of Tenant's obligation or alter
the primary liability of Tenant to pay the rent and to perform all other
obligations to be performed by Tenant hereunder. The acceptance of rent by
Landlord from any other person shall not be deemed to be a waiver by Landlord of
any provision hereof. Consent to one assignment or subletting shall not be
deemed consent to any subsequent assignment or subletting. In the event of
default by an assignee of Tenant or any successor of Tenant, in the performance
of any of the terms hereof, Landlord may proceed directly against Tenant without
the necessity of exhausting remedies against such assignee or successor.
Landlord may consent to subsequent assignments or subletting of this Lease or
amendments or modifications to this Lease with assignees of Tenant, without
notifying Tenant, or any successor of Tenant and without obtaining its or their
consent thereto and such action shall not relieve Tenant of liability under this
Lease.
SECTION 13.3 ATTORNEY'S FEES. In the event Tenant shall assign or sublet
---------------
the Premises, then Tenant shall pay Landlord's reasonable attorney's fees
incurred in connection therewith.
SECTION 13.4 LANDLORD'S OPTION TO TERMINATE. Except in connection with
------------------------------
any assignment or sublease associated with the security interest granted in
connection with a senior secured credit facility provided by Goldman Sachs &
Co., in the event that at any time during the Term, Tenant desires to assign
this Lease or to sublet all or part of the Premises, and provided that Tenant is
in compliance with the provisions of Section 13.1 and 13.2 hereof, Tenant shall
notify Landlord in writing of the terms of the proposed assignment or subletting
and the area so proposed to be sublet and Landlord shall have the option to
terminate this Lease wholly in the event of a proposed assignment or sublet of
the whole Premises, or partially as to the portion of the Premises proposed to
be sublet, upon written notice to Tenant within 45 days after receipt of notice
of Tenant's intention to assign or sublet. If Landlord's election to terminate
involves only a portion of the Premises, the rent specified in this Lease shall
be adjusted proportionately on the basis of the number of square feet retained
by Tenant
<PAGE>
and this Lease shall continue in full force and effect in all other respects.
ARTICLE XIV
DEFAULTS; REMEDIES
SECTION 14.1 DEFAULTS. The occurrence of any one or more of the
--------
following events ("EVENT(S) OF DEFAULT") shall constitute a material default and
breach of this Lease by Tenant:
(a) The abandonment of the Premises by Tenant.
(b) The failure by Tenant to make any payment of Base Rent or Additional
Rent or any other payment required to be made by Tenant hereunder, as and when
due, where such failure shall continue for a period of seven (7) days after
written notice thereof from Landlord to Tenant. In the event that Landlord
serves Tenant with a notice to pay rent or quit pursuant to applicable unlawful
detainer statutes, such notice to pay rent or quit shall also constitute the
notice required by this section.
(c) The failure by Tenant to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Tenant,
other than described in Section 14.1(b) above, where such failure shall continue
for a period of 30 days after written notice thereof from Landlord to Tenant;
provided, however, that if the nature of Tenant's default is such that more than
30 days are required for its cure, then Tenant shall not be deemed to be in
default if Tenant commences such cure within the 30 day period and thereafter
diligently prosecutes such cure to completion.
(d) (i) The making by Tenant of any general arrangement or assignment for
the benefit of creditors; (ii) Tenant becomes a "debtor" as defined in 11 U.S.C.
Section 101 or any successor statute thereto or any other law or statute
relating to bankruptcy (unless, in the case of a petition filed against Tenant,
the same is dismissed within sixty days); or (iii) the appointment of a trustee
or receiver to take possession of substantially all of Tenant's assets or of
Tenant's interest in this Lease, where possession is not restored to Tenant
within 30 days.
SECTION 14.2 REMEDIES. Upon the occurrence of an Event of Default by
--------
Tenant, Landlord may, at any time thereafter, with or without notice or demand:
(a) Terminate this Lease and Tenant's right of possession of the Premises,
in which case the rent due for the balance of the Term shall become immediately
due and payable. In addition, Landlord shall be entitled to recover from Tenant
all damages incurred by Landlord by reason of Tenant's default including, but
not limited to: the cost of recovering possession of the Premises; the expense
of reletting, including, without limitation, costs of renovation and alteration
of the Premises, attorney's fees, and real estate commission(s) paid to obtain a
new tenant; and that portion of the leasing commission paid by Landlord pursuant
to Article XV
<PAGE>
applicable to the unexpired term of this Lease.
(b) Terminate Tenant's right to possession of the premises without
terminating this Lease, in which event Landlord may, but shall not be obligated
to, relet the Premises, or any part thereof, for the account of Tenant, for such
rent and term and upon such other conditions as are acceptable to Landlord. For
purposes of such reletting, Landlord is authorized to redecorate, repair, alter
and improve the Premises to the extent deemed necessary in Landlord's sole
discretion. Until Landlord relets the Premises, Tenant shall remain obligated
to pay rent to Landlord as provided in this Lease. If and when the Premises are
relet and if a sufficient sum is not realized from such reletting after payment
of all Landlord's expenses of reletting (including, without limitation, rental
concessions to new tenants, repairs, alterations, legal fees and brokerage
commissions) to satisfy the payment of rent due under this Lease for any month,
Tenant shall pay Landlord any such deficiency upon demand. Tenant agrees that
Landlord may file suit to recover any sums due under this Section from time to
time and that such suit or recovery of any amount due Landlord shall not be any
defense to any subsequent action brought for any amount not previously reduced
to judgment in favor of Landlord. Tenant also agrees that if Landlord relets
the Premises for a term which equals or exceeds the Term of this Lease, then the
difference in rent between Tenant's rental obligations hereunder and the sum
realized from such reletting for the balance of the Term, being then
ascertainable, shall become immediately due and payable, at Landlord's option,
and Landlord shall be entitled to bring one suit to recover the entire amount of
such difference.
(c) Re-enter and repossess the Premises and remove all persons and effects
therefrom, by summary proceeding, ejectment or other legal means as may be
necessary. Landlord shall have no liability by reason of any such re-entry,
repossession or removal.
(d) Recover from Tenant, to the extent permitted under the laws of the
state in which the Project is located, the value and/or cost of all concessions
to Tenant under this Lease; including any sums reimbursed to Tenant for Tenant
Improvements; net of all repayments made by Tenant to Landlord.
(e) Without terminating this Lease and without entering into possession of
the Premises, continue this Lease in effect whether or not Tenant shall have
abandoned the Premises, and in such event Landlord shall be entitled to enforce
all of Landlord's rights and remedies under this Lease, including the right to
recover the rent as it becomes due hereunder.
(f) Pursue any other remedy now or hereafter available to Landlord in
equity or at law in the state in which the Project is located; any remedy or
election hereunder not being exclusive, but rather, wherever possible, being
cumulative with all other remedies at law or in equity.
This Lease shall not be deemed to be terminated by Landlord's entry on the
Premises, or by any other act unless Landlord specifically expresses its intent
to terminate this Lease, in writing duly executed on behalf of Landlord.
<PAGE>
SECTION 14.3 RIGHTS UPON POSSESSION. If Landlord takes possession
----------------------
pursuant to this Article 14, with or without terminating this Lease, Landlord
may, at its option and upon notice to Tenant, enter into the Premises, remove
Tenant's alterations, signs, personal property, equipment and other evidence of
tenancy, and store them at Tenant's risk and expense or dispose of them as
Landlord may see fit except with respect to equipment owned by third-party
customers of Tenant, which is labeled as such, in which case Landlord will use
its best efforts to provide 30 days notice to such third-party customers of such
intent to dispose, and take and hold possession of the Premises; provided,
however, that if Landlord elects to take possession only without terminating
this Lease, such entry and possession shall not terminate this Lease or release
Tenant or any guarantor, in whole or in part, from the obligation to pay the
Base Rent reserved hereunder for the full Term or from any other obligation
under this Lease or any guaranty thereof.
SECTION 14.4 NO WAIVER. If Landlord shall institute proceedings against
---------
Tenant and a compromise or settlement thereof shall be made, the same shall not
constitute a waiver of any other covenant, condition or agreement herein
contained, nor of any of Landlord's rights hereunder. No waiver by Landlord of
any breach shall operate as a waiver of such covenant, condition or agreement
itself, or of any subsequent breach thereof. 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. No payment
of rent BY Tenant or acceptance of rent by Landlord shall operate as a waiver of
any breach or default by Tenant under this Lease. No payment by Tenant or
receipt by Landlord of a lesser amount than the monthly installment of rent
herein stipulated shall be deemed to be other than a payment on account of the
earliest unpaid rent, nor shall any endorsement or statement on any check or
communication accompanying a check for the payment of rent be deemed an accord
and satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such rent or to pursue
any other remedy provided in this Lease. No re-entry by Landlord, and no
acceptance by Landlord of keys from Tenant, shall be considered an acceptance of
a surrender of the Lease.
SECTION 14.5 RIGHT OF LANDLORD TO CURE TENANT'S DEFAULT. If an Event
------------------------------------------
of Default shall occur, then Landlord may (but shall not be obligated to) make
such payment or do such act to cure the Event of Default, and charge the amount
to the expense thereof, together with interest thereon at the Interest Rate (as
defined in Section 17.3 below), to Tenant. Such payment shall be due and
payable upon demand; however, the making of such payment or the taking of such
action by Landlord shall not be deemed to cure the Event of Default or to stop
Landlord from the pursuit of any remedy to which Landlord would otherwise be
entitled.
SECTION 14.6 DEFAULT BY LANDLORD. Landlord shall not be in default
-------------------
unless Landlord fails to perform obligations required of Landlord within a
reasonable time, but in no event later than thirty days after written notice by
Tenant to Landlord and to each lender secured by a lien against the Project
whose name and address shall have previously been furnished to Tenant in
writing, specifying the obligation Landlord has failed to perform; provided,
<PAGE>
however, that if the nature of Landlord's obligation is such that more than
thirty days are required for performance, then Landlord shall not be in default
if Landlord commences performance within such thirty day period and thereafter
diligently prosecutes the same to completion.
SECTION 14.7 LATE CHARGES. Tenant hereby acknowledges that late payment
------------
by Tenant to Landlord of rent and other sums due hereunder will cause Landlord
to incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Tenant shall
not be received by Landlord or Landlord's designee within five business days
after such amount shall be due then, without any requirement for notice to
Tenant (notwithstanding Section 14.1(b)), Tenant shall pay to Landlord a late
charge equal to four (4) percent of such overdue amount. The parties hereby
agree that such late charge represents a fair and reasonable estimate of the
costs Landlord will incur by reason of late payment by Tenant. Acceptance of
such late charge by Landlord shall in no event constitute a waiver of Tenant's
default with respect to such overdue amount, nor prevent Landlord from
exercising any of the other rights and remedies granted hereunder. In the event
that a late charge is payable hereunder, whether or not collected, for three
consecutive installments of Base Rent, then at Landlord's option Base Rent shall
become due and payable quarterly in advance, rather than monthly,
notwithstanding Article IV or any other provision of this Lease to the contrary.
ARTICLE XV
BROKERS
Each party represents and warrants to the other that it has not dealt with
any broker, finder or similar agent in connection with any transaction
contemplated hereunder except for C.B. RICHARD ELLIS, INC., whose fee is the
responsibility of Landlord under a separate written agreement. Each party
hereby covenants and agrees to defend, indemnify, hold harmless and reimburse
the other party for, from and against all claims of any kind of any other
brokers, finders or similar agents purporting to represent the indemnifying
party in connection with any transaction contemplated hereunder.
ARTICLE XVI
ESTOPPEL CERTIFICATE
SECTION 16.1 TENANT CERTIFICATION. Tenant shall, at any time upon not
--------------------
less than twenty (20) days' prior notice from Landlord, execute, acknowledge and
deliver to Landlord a statement in writing certifying that (i) this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modifications and certifying that this Lease, as so
<PAGE>
modified, is in full force and effect); (ii) the amount(s) of and the date to
which the rent and other charges are paid in advance, if any; (iii) that the
Term has commenced and specifying the Commencement and Expiration Dates; (iv)
that all Tenant Improvements required by the Lease have been made to Tenant's
satisfaction; (v) that there are no existing set-offs, charges, claims or
defenses against the enforcement of any right hereunder; (vi) that there are
not, to Tenant's knowledge, any uncured defaults on the part of Landlord
hereunder, or specifying such defaults if any are claimed; and (vii) any other
information as may be reasonably requested by Landlord. Any such statement may
be conclusively relied upon by any prospective purchaser or encumbrancer of the
Premises.
SECTION 16.2 FAILURE TO PROVIDE CERTIFICATION. At Landlord's option,
--------------------------------
Tenant's failure to deliver such statement within such time shall be a material
breach of this Lease or shall be conclusive upon Tenant as to all information
set forth in such statement.
SECTION 16.3 TENANT FINANCIAL STATEMENTS. If Landlord desires to
---------------------------
finance, refinance, or sell the Premises, or any part thereof, it may request
financial statements from Tenant. Within twenty (20) days of a request therefor
Tenant shall deliver to Landlord or to any lender or purchaser designated by
Landlord, such financial statements of Tenant as may be reasonably required by
such lender or purchaser. All such financial statements shall be received by
Landlord and such lender or purchaser in confidence and shall be used only for
the purposes herein set forth.
ARTICLE XVII
MISCELLANEOUS
SECTION 17.1 LANDLORD'S LIABILITY. The term "Landlord" as used herein
--------------------
shall mean only the owner or owners at the time in question of the fee title or
a tenant's interest in a ground lease of the Premises. In the event of any
transfer of such title or interest, Landlord herein named (and in case of any
subsequent transfers, then the grantor) shall be relieved from and after the
date of such transfer of all liability in respect of Landlord's obligations
thereafter to be performed, provided that any funds in the hands of Landlord or
the then grantor at the time of such transfer, in which Tenant has an interest,
shall be delivered to the grantee. The obligations contained in this Lease to
be performed by Landlord shall, subject as aforesaid, be binding on Landlord's
successors and assigns, only during their respective periods of ownership.
Neither Landlord nor its agents, whether disclosed or undisclosed, shall have
any personal liability under any provision of this Lease. If Landlord defaults
in the performance of any of its obligations hereunder or otherwise, Tenant
shall look solely to Landlord's equity, interest and rights in the Land or
Building (or any applicable proceeds of insurance) for satisfaction of Tenant's
remedies on account thereof.
SECTION 17.2 SEVERABILITY. The invalidity of any provision of this Lease
------------
as determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
<PAGE>
SECTION 17.3 INTEREST ON PAST-DUE OBLIGATION. Except as expressly herein
-------------------------------
provided, any amount due to Landlord not paid when due shall bear interest at
the lesser of 12% per annum or the maximum rate then allowable by law from the
date due (the "Interest Rate"). Payment of such interest shall not excuse or
cure any default by Tenant under this Lease. Interest shall not be payable on
late charges incurred by Tenant nor on any amounts upon which late charges are
paid by Tenant until 30 days after the due date of such payment.
SECTION 17.4 NOTICES. Notices shall be in writing and shall be delivered
-------
to the following address(es):
If to Landlord: Reynolds Metals Development Company
6601 West Broad Street
Richmond, Virginia 23230
Attn: Corporate Secretary
Fax: 804-281-2721
with a copy to: Reynolds Metals Development Company
3300 Vickery Drive
North Syracuse, New York 13212
Attn: Frederick J. Jackson
Fax: 315-461-8817
If to Tenant: Exodus Communications, Inc.
2650 San Tomas Expressway
Santa Clara, CA 95051
Attn: Dick Stoltz, Chief Operating
Officer and Chief Financial Officer
Fax: 408-348--2206
with a copy to: Exodus Communications, Inc.
2650 San Tomas Expressway
Santa Clara, CA 95051
Attn: General Counsel
Fax: 408-348-2206
A notice shall be delivered by: (a) prepaid U.S. express, registered or
certified mail or prepaid express courier service; (b) hand delivery during
regular business hours; or (c) telecopy with an original, signed copy of the
notice delivered in the manner described in (a) or (b). The notifying party,
with the other party's cooperation, shall obtain a receipt evidencing delivery.
A notice shall be effective upon receipt or refusal to accept receipt, except
that a telecopy notice shall be effective upon confirmation of receipt by the
receiving party. Any notice provided in a manner not specified in this Lease
shall not be effective unless the parties otherwise agree. A party may change
its address or fax number for purposes of this section by giving the other party
notice to that effect, except that upon Tenant's taking possession of the
Premises, the Premises, in addition to the address set forth above, shall
constitute Tenant's address for notice purposes. Unless otherwise specified in
this Lease, "notice" includes any communication required or permitted by this
Lease. A copy of all notices required or permitted to be given to Landlord
hereunder shall be concurrently transmitted to such party or
<PAGE>
parties at such addresses as Landlord may from time to time hereafter designate
by notice to Tenant.
SECTION 17.5 BINDING EFFECT; CHOICE OF LAW. Subject to any provisions
-----------------------------
hereof restricting assignment or subletting by Tenant, this Lease shall bind the
parties, their personal representatives, successors and assigns. This Lease
shall be governed by the laws of the state in which the Project is located.
SECTION 17.6. SUBORDINATION.
-------------
(a) This Lease shall be subordinate to any ground lease, mortgage, deed of
trust, assignment of lease, or any other hypothecation or security
(collectively, "Mortgage") now or hereafter placed upon the real property of
which the Premises are a part and to any and all advances made on the security
thereof and to all renewals, modifications, consolidations, replacements and
extensions thereof. If the holder of any obligation, note or reversionary
interest secured or evidenced by a Mortgage (the "Mortgagee") shall elect to
have this Lease superior to the lien of its Mortgage and shall give written
notice thereof to Tenant, this Lease shall be deemed superior to such Mortgage
whether this Lease is dated prior or subsequent to the date of said Mortgage or
the date of recording thereof.
(b) Tenant agrees to execute any documents reasonably required by Landlord
to effectuate an attornment, a subordination or to make this Lease superior to
the lien of any Mortgage. Tenant's failure to execute such documents within
twenty (20) days after written demand shall constitute a material default by
Tenant hereunder, or, at Landlord's option, Landlord shall execute such
documents on behalf of Tenant as Tenant's attorney-in-fact. Tenant does hereby
make, constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact
and in Tenant's name, place and stead, to execute such documents in accordance
with this Section 17.6.
(c) Tenant agrees to give any Mortgagee by certified mail, return receipt
requested, a copy of any notice of default served upon Landlord, provided that
before such notice Tenant has been notified in writing of the address of such
Mortgagee. Tenant further agrees that if Landlord shall have failed to cure
such default within the time provided for in this Lease, then Mortgagee shall
have an additional 30 days within which to cure such default; provided, however,
that if such default cannot be reasonably cured within that time, then such
Mortgagee shall have such additional time as may be necessary to cure such
default (including, without limitation, the commencement of foreclosure
proceedings, if necessary), in which event this Lease shall not be terminated or
rent abated while such remedies are being so diligently pursued. In the event
of the sale of the Project or the Building, by foreclosure or deed in lieu
thereof, the Mortgagee or purchaser at such sale shall not be (a) responsible
for any act, omission, or default by any prior landlord (including Landlord),
(b) be responsible for the return of the Security Deposit, or the payment of any
tenant allowance or other concession, (c) be bound by any rent paid more than
one month in advance, or (d) be subject to any offset, defense, or counterclaim
against any prior landlord (including Landlord). Tenant agrees to attorn to
such Mortgagee or purchaser as its lessor under this Lease.
<PAGE>
(d) If, in connection with obtaining the construction or permanent
financing for the Premises or the Project, any lender (or Mortgagee) shall
request reasonable modifications of this Lease as a condition to such financing,
Tenant shall promptly execute a modification of this Lease, provided such
modifications do not increase Base Rent or materially adversely affect the
leasehold interest hereby created or Tenant's reasonable use and enjoyment of
the Premises in accordance with Section 6.1. Tenant and any guarantor shall
each, prior to execution and throughout the Term, upon request from time to
time, provide such financial information and documentation about itself to
Landlord or Mortgagee as may be requested.
SECTION 17.7 ATTORNEY'S FEES. If either party named herein brings an
---------------
action to enforce the terms hereof or declare rights hereunder, the prevailing
party in any such action, on trial or appeal, shall be entitled to reasonable
attorney's fees to be paid by the losing party as determined by the court.
SECTION 17.8 LANDLORD'S ACCESS. Landlord and Landlord's agents shall
-----------------
have the right to enter the Premises at reasonable times in compliance with
Tenant's reasonable rules and regulations for the purposes of (a) inspecting the
same; (b) showing the same to prospective purchasers, lenders, or tenants; (c)
making such alterations, repairs, improvements or additions to the Premises or
the Project as Landlord may deem necessary or desirable (but without adversely
impacting Tenant's business), but without any obligation to do so except as
specifically set forth herein; and (d) taking air, water or soil samples,
samples of other materials or substances in or about the Premises or the
Project, and conducting such other tests or analyses as Landlord deems in its
sole discretion to be desirable in connection with investigating any potential
environmental claim or in connection with monitoring Tenant's activities in or
about the Premises for compliance with the terms of this Lease. The foregoing
shall not impose upon Landlord any obligation to undertake such investigation or
monitoring activities. Landlord may at any time, with the consent of the
Tenant, which consent shall not be unreasonably withheld, place on or about the
premises any ordinary "for sale" signs, and Landlord may at any time during the
last 12 months of the Term hereof place on or about the Premises any ordinary
"For Lease", signs, all without reduction of rent or liability to Tenant.
SECTION 17.9 MERGER. The voluntary or other surrender of this Lease by
------
Tenant, or a mutual cancellation thereof, or a termination by Landlord, shall
not work a merger, and shall, at the option of Landlord either: (i) terminate
all or any existing subtenancies, or (ii) operate as an assignment to Landlord
of any or all of such subtenancies.
SECTION 17.10 QUIET POSSESSION. Upon Tenant paying the rent for the
----------------
Premises and observing and performing all of the covenants, conditions and
provisions on Tenant's part to be observed and performed hereunder, Tenant shall
have quiet possession of the Premises subject to all of the provisions of this
Lease and any Mortgage to which this Lease is subordinate, and any easements,
conditions and restrictions of record affecting the land on which the Building
is situated.
SECTION 17.11 EASEMENTS. Landlord reserves to itself the right, from time
---------
to time, to
<PAGE>
grant such easements, rights, and dedications that Landlord deems necessary or
desirable, and to cause the recordation of site plans, parcel maps, restrictions
and similar instruments so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Tenant, in accordance with Section 6.1 and do not materially increase Tenant's
costs or expenses or materially impair Tenant's ability to conduct its business.
Tenant shall sign any of the aforementioned documents upon request of Landlord
and failure to do so shall constitute a material breach of this Lease.
SECTION 17.12 PERFORMANCE UNDER PROTEST. If at any time a dispute shall
-------------------------
arise as to any amount or sum of money to be paid by one party to the other
under the provisions hereof, the party against whom the obligation to pay the
money is asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment, and there shall survive
the right on the part of said party to institute a suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part of
said party to pay such sum or any part thereof, said party shall be entitled to
recover such sum with interest or so much thereof as it was not legally required
to pay under the provisions of this Lease.
SECTION 17.13 AUTHORITY. If Tenant is a corporation, trust, or general or
---------
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on behalf of said entity, that the entity is duly formed and
validly existing and qualified to do business in the state in which the Project
is located, and that the entity has full power and authority to enter into this
Lease.
SECTION 17.14 SURVIVAL. Each term, agreement obligation or provision of
--------
this Lease to be performed by Tenant and Landlord shall be construed to be both
a covenant and a condition, all of which shall survive the expiration or
termination of this Lease and any renewals or extensions of this Lease.
SECTION 17.15 CONFLICT. Any conflict between the typewritten or printed
--------
provisions of this Lease and the handwritten provisions shall be controlled by
the handwritten provisions, provided such handwritten revisions are signed and
initialled by both Landlord and Tenant.
SECTION 17.16 ABANDONED PROPERTY. Any of Tenant's personal property left
------------------
on or in the Premises, the Project or the Common Areas after the Expiration Date
or earlier termination of this Lease shall be deemed to be abandoned, and, at
Landlord's option, title shall pass to Landlord under this Lease, or Landlord
may cause the same to be removed and stored, or disposed of, and Tenant shall be
liable for all Costs incurred by Landlord.
SECTION 17.17 WAIVER OF JURY TRIAL. Tenant hereby waives trial by jury
--------------------
in any action, proceeding or counterclaim brought by Landlord against Tenant
with respect to any matter whatsoever arising out of or in any way connected
with this Lease, the relationship of Landlord and Tenant hereunder or Tenant's
use or occupancy of the Premises. In the event Landlord commences any
proceedings for nonpayment of rent, Tenant shall not interpose any
counterclaims. This shall not, however, be construed as a waiver of Tenant's
right to assert such claims in any separate action brought by Tenant.
<PAGE>
SECTION 17.18 GENDER AND NUMBER. All terms and words used in this Lease,
-----------------
regardless of the number or gender in which they are used shall be deemed to
include any other number or gender as the context may require.
SECTION 17.19 NO PARTNERSHIP. Nothing contained in this Lease shall be
---------------
deemed or construed to create a partnership or joint venture of or between
Landlord and Tenant, or to create any other relationship between Landlord and
Tenant other than that of landlord and tenant.
SECTION 17.20 ATTORNEY-IN-FACT. If Tenant fails or refuses to execute and
----------------
deliver any instrument or certificate required to be delivered by Tenant
hereunder within the time periods required herein, then Tenant hereby appoints
Landlord as its attorney-in-fact with full power and authority to execute and
deliver such instrument or certificate for and in the name of Tenant, provided
Landlord first delivers written notice to Tenant of its intent to rely on this
Section 17.20, and Tenant is given a reasonable opportunity to object thereto.
SECTION 17.21 EFFECTIVENESS. The furnishing of the form of this Lease
-------------
shall not constitute an offer and this Lease shall become effective upon and
only upon its execution by and delivery to each party hereto.
SECTION 17.22 TIME OF THE ESSENCE. Time is of the essence as to Tenant's
-------------------
and Landlord's obligations contained in this Lease.
SECTION 17.23 FORCE MAJEURE. Neither party shall be required to perform
-------------
any of its obligations under this Lease, nor shall either party be liable for
loss or damage for failure to do so, where such failure arises from or through
acts of God, strikes, lockouts, labor difficulties, explosions, sabotage,
accidents, riots, civil commotions, acts of war, results of any warfare or
warlike conditions in this or any foreign country, fire or casualty, legal
requirements, requirements of any governmental body or agency, shortages or
unavailability of materials or labor, energy shortage or other causes beyond the
reasonable control of either party, unless such loss or damage results from
willful misconduct or gross negligence of the party. In the event that Landlord
shall not be able to perform its obligations under this Lease for the foregoing
recited reasons for a period of more than forty-five (45) days, then Tenant
shall have the option to terminate this Lease. Notwithstanding anything
contained herein to the contrary, a force majeure event will not relieve Tenant
of its continuing obligation to make scheduled rent payments.
SECTION 17.24 HEADINGS. Captions and headings are for convenience of
--------
reference only.
SECTION 17.25 EXHIBITS. The Exhibits attached to and referenced in the
--------
body of this Lease are incorporated into and expressly made part of this Lease.
SECTION 17.26 MEMORANDUM OF LEASE. Tenant shall not record a memorandum
-------------------
of
<PAGE>
this Lease without Landlord's consent. In the event Landlord requests or
consents to recordation of a memorandum of this Lease, Tenant shall be obligated
to pay all costs, fees and taxes, if any, associated with such recordation.
SECTION 17.27 FURTHER ASSURANCES. Tenant will execute, acknowledge, and
------------------
deliver all such instruments and take all actions as Landlord from time to time
may require to document and maintain the tenancy created hereby including, but
not limited to, estoppel letters and subordination agreements.
SECTION 17.28 INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease
---------------------------------------------
and the Exhibits and Lease Summary attached hereto contain all agreements of the
parties with respect to any matter mentioned herein. No prior agreement or
understanding pertaining to any such matter shall be effective. This Lease may
be modified in writing only, signed by the parties in interest at the time of
the modification. Except as otherwise stated in this Lease, Tenant hereby
acknowledges that neither the real estate broker(s) listed in Article XVII
hereof nor any cooperating broker on this transaction nor the Landlord or any
employees or agents of any of said persons has made any oral or written
warranties or representations to Tenant relative to the condition or use by
Tenant of said Premises, except as herein set forth. The taking of possession
of the Premises by Tenant shall be conclusive evidence that the Premises and the
Project are in good and satisfactory condition at such time, unless Tenant shall
notify Landlord otherwise within thirty (30) days of entry upon the Premises for
the purpose of constructing the Tenant Improvements.
SECTION 17.29 LIMITATION OF WARRANTIES. THERE ARE NO IMPLIED WARRANTIES
------------------------
OF MERCHANTABILITY OR FITNESS OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE.
SECTION 17.30 OPTION TO RENEW. Tenant is hereby granted the option to
---------------
renew this Lease for two (2) full five-year terms. To exercise these Renewal
Options, Tenant shall notify the Landlord in writing of its intention 270 days
before the end of the initial term, or the first renewal term, as the case may
be. The rent payable by Tenant for the Premises during each renewal term shall
be the Fair Market Rental Rate for the Premises prevailing at the beginning of
the renewal term in question. Landlord and Tenant shall have sixty (60) days
following Landlord's receipt of Tenant's written notice of election to execute
an addendum to this Lease setting forth their mutual agreement on the base rent
payable by Tenant at the commencement of each five (5) year renewal term. If
Landlord and Tenant have both attempted, in good faith, to determine the base
rent for the Premises and are unable to agree prior to the end of the sixty (60)
day period, then, within five (5) days after the expiration of the sixty (60)
day period, Landlord and Tenant shall each select and notify the other of an
independent real estate broker who is licensed by the Commonwealth of Virginia
and has at least ten (10) continuous years of experience in leasing light
industrial projects in the Washington, D.C. metropolitan area. Within five (5)
days after the selection and notification of both brokers, the two brokers shall
jointly select a third independent broker who is licensed by the Commonwealth of
Virginia and has at least ten (10) continuous years of experience in leasing
light industrial projects in the Washington D.C. metropolitan area. Within
thirty (30) days after the selection
<PAGE>
of the third broker, all three brokers shall meet Landlord and Tenant and shall,
through the agreement of no fewer than two of the brokers, determine what the
Fair Market Rental Rate of the premises for the applicable renewal term shall
be. The decision of the brokers shall be the base rent payable by Tenant for the
Premises during the applicable renewal term, and such base rent shall be
increased commencing on the first anniversary of the renewal term and on each
anniversary thereafter in an amount equal to 3% of the last preceding years base
rent, as previously adjusted. Tenant shall also pay other charges and additional
rent as set forth in Paragraphs 4.4 and 4.5 hereof. The brokers' fees shall be
divided equally between Landlord and Tenant. In determining such rental, the
brokers shall take into acount Landlord's and Tenant's agreement that the term
"Fair Market Rental Rate" for the Premises shall mean the annual rent that
Landlord could obtain from a non-equity, renewal, non-expansion tenant (a bona
fide tenant") desiring to lease the Premises for the applicable renewal term
without making or having made any additional improvements to the Premises,
taking into account the age of the Building and the Premises, the size, location
and floor levels of the Building and the Premises, the quality of construction
of the Building and the Premises, the services provided under the terms of this
Lease, the rent then being obtained from bona fide tenants for renewal leases of
space comparable to the Premises in the locality of the Premises (comparable
transactions in Landlord's own development(s) in that area shall receive no less
weight than other comparable transactions in other developments) and all other
factors that would be relevant in determining the rent such a bona fide tenant
would be willing to pay, and such a landlord would be willing to accept, for the
Premises.
SECTION 17.31 LEASE SECURITY. As security for Tenant's faithful
--------------
performance of all of the terms and conditions of this Lease, Tenant shall
deposit with Landlord an unconditional and irrevocable Letter of Credit in a
form acceptable to Landlord's counsel drawn upon a bank with a credit rating
acceptable to Landlord (minimum of A rating). Said Letter of Credit shall be in
the amount of $300,000.00, for lease years 1 through 3, which will be reduced to
the amount of $100,000.00 for lease years 4 and 5. Said Letter of Credit shall
be delivered on a date which coincides with that date on which rent payments
commence, but in all events prior to the date on which Tenant receives
reinforcement from Landlord for the Tenant Improvements.
SECTION 17.32 CONFIDENTIALITY. Except as required by the ordinary course
---------------
of business and/or financing or sale requirements of the parties or as otherwise
required by law, neither the Landlord nor the Tenant shall misappropriate,
disclose or make available to anyone for use outside of their respective
organizations at any time any of the terms and conditions of this lease.
WITNESS, the parties hereto have executed this Lease on the dates specified
immediately below their respective signatures.
LANDLORD:
REYNOLDS METALS DEVELOPMENT
COMPANY
<PAGE>
/s/ Frederick J. Jackson
By:_________________________________
Vice President
Title:______________________________
Witness:__________________________ Date:_______________________________
Witness:__________________________
TENANT:
EXODUS COMMUNICATIONS, INC.
/s/ Richard S. Stoltz
By:__________________________________
COO/CFO
Title: ______________________________
Witness:_________________________ Date: _______________________________
Witness:_________________________
<PAGE>
EXHIBIT A
PREMISES
[Description of Premises]
<PAGE>
EXHIBIT B
PLANS FOR TENANT IMPROVEMENTS
[To Be Provided]
<PAGE>
EXHIBIT C
SPECIAL LIST OF ITEMS OF TRADE FIXTURES, FURNISHINGS,
AND EQUIPMENT WHICH REMAIN PROPERTY OF
TENANT AT EXPIRATION OF LEASE TERM,
IN ADDITION TO THOSE ITEMS TENANT MAY REMOVE
PURSUANT TO SECTION 3.6.
<PAGE>
EXHIBIT 10.39
Property Address:
1808 Swift Drive
Oak Brook, Illinois
BUILDING LEASE
--------------
THIS LEASE is made as of this 22nd day of September, 1998 between
CENTERPOINT PROPERTIES TRUST, a Maryland real estate investment trust
("Landlord"), and EXODUS COMMUNICATIONS INC., a Delaware corporation ("Tenant").
ARTICLE I
---------
LEASE TERMS
-----------
SECTION 1.1. DEFINITIONS. In addition to the other terms, which are
-----------
elsewhere defined in this Lease, the following terms and phrases, whenever used
in this Lease shall have the meanings set forth in this Section 1.1, and only
such meanings, unless such meanings are expressly contradicted, limited or
expanded elsewhere herein.
A. BASE RENT SCHEDULE:
<TABLE>
<CAPTION>
Annual Monthly
Period (by lease month) Base Rent Base Rent
----------------------- --------- ---------
<S> <C> <C>
January 1, 1999 - December 31, 1999 $447,829.50 $ 37,319.13
January 1, 2000 - December 31, 2000 $447,829.50 $ 37,319.13
January 1, 2001 - December 31, 2001 $447,829.50 $ 37,319.13
January 1, 2002 - December 31, 2002 $447,829.50 $ 37,319.13
January 1, 2003 - December 31, 2003 $447,829.50 $ 37,319.13
January 1, 2004 - December 31, 2004 $555,792.72 $ 46,316.06
January 1, 2005 - December 31, 2005 $555,792.72 $ 46,316.06
January 1, 2006 - December 31, 2006 $555,792.72 $ 46,316.06
January 1, 2007 - December 31, 2007 $555,792.72 $ 46,316.06
January 1, 2008 - December 31, 2008 $555,792.72 $ 46,316.06
January 1, 2009 - December 31, 2009 $555,792.72 $ 46,316.06
January 1, 2010 - September 30, 2010 $555,792.72 $ 46,316.06
</TABLE>
B. SECURITY DEPOSIT: $223,914.78
C. TENANT'S PROPORTION: 49.0%
D. INITIAL MONTHLY RENT ADJUSTMENT DEPOSIT: $10,692.00
(i) Initial Tax Deposit: $7,666.00
(ii) Initial Expense Deposit: $3,026.00
E. INITIAL TERM: The initial eleven (11) year, nine (9) month
term, commencing as of the Commencement Date.
<PAGE>
F. COMMENCEMENT DATE: January 1, 1999
G. TERMINATION DATE: September 30, 2010
H. TERM: The Initial Term as same may be extended or sooner
terminated.
I. USE: Office and data center, general warehousing, light
industrial and other related uses.
J. OPTION TO RENEW: See Article XXXIII
K. LANDLORD'S MAILING ADDRESS:
1808 Swift Road
Oak Brook, Illinois 60611
Attn: Chief Operating Officer
L. RIGHTS OF FIRST OPPORTUNITY: See Article XXXIV
M. TENANT'S MAILING ADDRESS:
2650 San Tomas Expressway
Santa Clara, California 95051
Attn: Chief Financial Officer and General Counsel
N. LANDLORD'S BROKER: CB Richard Ellis, Inc.
O. TENANT'S BROKER: CB Richard Ellis, Inc.
SECTION 1.2. SIGNIFICANCE OF DEFINITIONS. Each reference in this
---------------------------
Lease to any of the Definitions contained in Section 1.1 of this Article shall
be deemed and construed to incorporate all of the terms provided under each such
Definition.
SECTION 1.3. ENUMERATION OF EXHIBITS. The exhibits in this Section
-----------------------
and attached to this Lease are incorporated in this Lease by this reference and
are to be construed as a part of this Lease.
EXHIBIT "A" - Premises
EXHIBIT "B" - Legal Description
EXHIBIT "C" - Form of Estoppel Certificate
EXHIBIT "D" - Rights of First Opportunity Premises
EXHIBIT "E" - Removable Equipment/Improvements
ARTICLE II
----------
PREMISES
--------
SECTION 2.1. LEASE. Landlord, for and in consideration of the rents
-----
herein reserved and of the covenants and agreements herein contained on the part
of Tenant to be kept, observed and performed, does by these presents, lease to
Tenant, and Tenant hereby leases from Landlord, the demised premises
("Premises"), being depicted in the plan attached hereto as EXHIBIT "A" in the
building located at 1808 Swift Road, Oak Brook, Illinois ("Building"), and
legally described on EXHIBIT "B" attached hereto and by this reference
incorporated herein ("Land") (the Land and Building are sometimes
<PAGE>
collectively referred to as the "Project"), subject to covenants, conditions,
agreements, easements, encumbrances and restrictions of record as of the date
hereof affecting the Land and the Building ("Restrictions").
ARTICLE III
-----------
TERM
----
SECTION 3.1. TERM. The Initial Term of this Lease shall commence on
----
the Commencement Date and shall end on the Termination Date, unless sooner
terminated as hereinafter set forth.
ARTICLE IV
----------
CONDITION OF DEMISED PREMISES
-----------------------------
SECTION 4.1. CONDITION OF PREMISES. To the best of Landlord's
---------------------
knowledge, (i) fiber optic cabling is available to Swift Drive from Ameritech
and (ii) Tenant will be permitted to abandon the water sprinkler system in the
Premises and install an FM200 fire suppression system subject to the approval of
the Village of Oak Brook. Except as set forth above, Tenant agrees to accept
the Premises in an absolutely "as-is" condition, and Tenant acknowledges that
Landlord, its agents, attorneys, representatives and employees have not and do
not make any representations or warranties, express or implied, to Tenant
regarding the Premises or the Project, including, but not limited to: (i) the
zoning of the Premises or the Project; (ii) the condition of any underground,
above ground or surface improvements; (iii) the size, area, use or type of the
Premises or the fitness of the Premises for any intended or particular use; (iv)
the nature of the soil on and underlying the Premises or the Project or its
suitability for development or any other use thereof; (v) any financial
information pertaining to the operation of the Premises or the Project; (vi) the
status of any requirements or obligations imposed, implied or to be undertaken
by the owner or developer of the Premises or the Project pursuant to any zoning,
subdivision, development laws or agreements with any governmental entities;
(vii) the presence or absence of any toxic wastes, hazardous materials or
structural defects in, on or under the Premises or the Project or any
improvements thereon; or (viii) the presence or absence of any rights of any
governmental authority, or of owners of property in the vicinity of the Premises
or the Project, to obtain reimbursement, recapture or special assessments from
any owner of the Premises or the Project for all or a portion of the cost of any
utilities, roads or other improvements heretofore or hereafter located on or in
the vicinity of the Premises or the Project, any and all such representations
and warranties, express or implied, being hereby expressly waived by Tenant and
disclaimed by Landlord. Tenant waives any claim that may exist for patent
and/or latent defects or for mutual or unilateral mistake of fact. No promise
of Landlord to alter, remodel, decorate, clean or improve the Premises or any
portion thereof and no representation respecting the condition of the Premises
or any portion thereof have been made by Landlord to Tenant except that Landlord
shall cause all existing systems (without adding any system) in the Premises to
be in working order on the Commencement Date.
ARTICLE V
---------
RENT
----
SECTION 5.1. BASE RENT. In consideration of the leasing aforesaid,
---------
Tenant agrees to
<PAGE>
pay Landlord, without offset or deduction, base rent for the Initial Term ("Base
Rent"), payable monthly in advance in the amount of the Monthly Base Rent set
forth in the Base Rent Schedule commencing on the Commencement Date and
continuing on the first (1st) day of each month thereafter for the balance of
the Term of this Lease, and in addition thereto, shall pay such charges as are
herein described as "Additional Rent". The term "Rent" when used in this Lease
shall include all Base Rent payable under this Section 5.1., as well as the
charges herein described as Additional Rent. All Rent payable hereunder shall be
payable to Landlord and Landlord's Mailing Address, or as Landlord may otherwise
from time to time designate in writing.
SECTION 5.2. BASE RENT ADJUSTMENT. In addition to the Base Rent
--------------------
payable by Tenant hereunder, commencing on the Commencement Date and on the
first business day of each and every month thereafter, Tenant shall pay to
Landlord, as Additional Rent, the Rent Adjustment described in this Section 5.2
without set off or deduction. Until such time as Tenant receives the first
Adjustment Statement provided for in clause (C) of this Section 5.2, Tenant
shall, commencing on the Commencement Date and on the first (1st) day of each
and every month thereafter, make the Initial Monthly Rent Adjustment Deposit
specified in Article I hereof.
A. For the purposes of this Lease:
(1) The term "Calendar Year" shall mean each calendar year or a
portion thereof during the Term.
(2) The term "Expenses" shall mean and include all expenses paid
or incurred by Landlord or its beneficiaries for managing, owning,
maintaining, operating, insuring, replacing and repairing the Project, the
Land, appurtenances and personal property used in conjunction therewith.
Expenses shall not include (i) depreciation charges, (ii) interest and
principal payments on mortgages, (iii) ground rental payments, (iv) real
estate brokerage and leasing commissions, (v) legal fees for the
negotiation or enforcement of leases, (vi) Taxes, (vii) cost of repair from
a casualty or taking, and (viii) cost of altering the space of other
tenants. If the Building is not fully occupied during all or a portion of
any Calendar Year, then Landlord may elect to make an appropriate
adjustment of the Expenses which vary due to occupancy for such Calendar
Year employing sound accounting and management principles, to determine the
amount of Expenses that would have been paid or incurred by Landlord had
the Building been fully occupied and the amount so determined shall be the
amount of Expenses attributable to such Calendar Year.
(3) The term "Rent Adjustments" shall mean all amounts owed by
Tenant as Additional Rent on account of Expenses or Taxes, or both.
(4) The term "Rent Adjustment Deposit" shall mean an amount equal
to Landlord's estimate of Rent Adjustments due for any Calendar Year made
from time to time during the Term.
(5) The term "Taxes" shall mean real estate taxes, assessments,
sewer rents, rates and charges, transit taxes, taxes based upon the receipt
of rent, and any other federal, state or local governmental charge,
general, special, ordinary or extraordinary, which accrue during the Term
and are levied or assessed or become a lien against the Project or any
portion thereof in any Calendar Year during the Term and any tax in
substitution of any of the foregoing, provided, however, in determining the
income of Landlord if necessary with respect to any such substituted taxes,
only income from the Building shall be included. Taxes shall not include
any franchise, capital, stock, transfer, inheritance or income (other than
a rental income tax imposed by the State of Illinois) tax imposed on
Landlord. In case of special taxes or assessments which may be payable in
installments, only the amount of each installment and
<PAGE>
interest paid thereon paid during a Calendar Year shall be included in
Taxes for that Calendar Year. Taxes shall also include any personal
property taxes (attributable to the year in which paid) imposed upon the
furniture, fixtures, machinery, equipment, apparatus, systems and
appurtenances of Landlord used in connection with the operation of the
Building. Taxes also include Landlord's reasonable costs and expenses
(including reasonable attorney's fees) in obtaining a reduction in Taxes
levied or assessed or which will become a lien against the Project or any
portion thereof in any Calendar Year during the Term. Taxes shall be
reduced by any recovery or refund received of Taxes previously paid by the
Landlord, provided such refund relates to taxes paid during the Term of
this Lease.
B. Tenant shall pay to the Landlord as Additional Rent Tenant's
Proportion of Expenses and Taxes attributable to each Calendar Year of the
Term. The amount of Taxes attributable to a Calendar Year shall be the
amount assessed for any such Calendar Year, even though the assessment for
such Taxes may be payable in a different Calendar Year.
C. As soon as reasonably feasible after the expiration of each
Calendar Year, Landlord will furnish Tenant a statement ("Adjustment
Statement") showing the following:
(1) Expenses and Taxes for Calendar Year last ended and the
amount of Expenses and Taxes payable by Tenant for such Calendar Year;
(2) The amount of Rent Adjustments due Landlord for the Calendar
Year last ended, less credits for Rent Adjustment Deposits paid, if any;
and
(3) The Rent Adjustment Deposit due in the current Calendar Year.
D. Within thirty (30) days after Tenant's receipt of each Adjustment
Statement, Tenant shall pay to Landlord:
(1) The amount of Rent Adjustment shown on said statement to be
due Landlord for the Calendar Year last ended; plus
(2) The amount, which when added to the Rent Adjustment Deposit
theretofore paid in the current Calendar Year would provide that Landlord
has then received such portion of the Rent Adjustment Deposit as would have
theretofore been paid to Landlord had Tenant paid one twelfth (1/12) of the
Rent Adjustment Deposit, for the current Calendar Year, to Landlord monthly
on the first (1st) day of each month of such Calendar Year.
Commencing on the first (1st) day of the first (1st) month after Tenant's
receipt of each Adjustment Statement, and on the first day of each month
thereafter until Tenant receives a more current Adjustment Statement,
Tenant shall pay to Landlord one twelfth (1/12) of the Rent Adjustment
Deposit shown on said statement. During the last complete Calendar Year,
Landlord may include in the Rent Adjustment Deposit its estimate of the
Rent Adjustment which may not be finally determined until after the
expiration of the Term. The Tenant's obligation to pay the Rent Adjustment
shall survive the Term.
E. Tenant's payment of the Rent Adjustment Deposit for each Calendar
Year shall be credited against the Rent Adjustments for such Calendar Year.
All Rent Adjustment Deposits may be co-mingled and no interest shall be
paid to Tenant thereon. If the Rent Adjustment Deposit paid by Tenant for
any Calendar Year exceeds the Rent Adjustments for such Calendar Year, then
Landlord shall give a credit to Tenant in an amount equal to such excess
against the Rent Adjustments due for the next succeeding Calendar Year,
except that if any such excess relates to the last Calendar Year of the
Term, then, provided that no default of Tenant exists
<PAGE>
hereunder, Landlord shall refund such excess to Tenant.
F. Tenant or its representative shall have the right to examine
Landlord's books and records with respect to the items in the Adjustment
Statement during normal business hours at any time within twenty business
(20) days following the furnishing by Landlord to Tenant of such Adjustment
Statement. Unless Tenant shall take written exception to any item within
thirty (30) days after the furnishing of the foregoing statement, such
statement shall be considered as final and accepted by Tenant. Any amount
due to Landlord as shown on any such statement, whether or not written
exception is taken thereto, shall be paid by Tenant within thirty (30) days
after Landlord shall have submitted the statement, without prejudice to any
such written exception.
G. If the Commencement Date is on any day other than the first (1st)
day of January or if the Termination Date is on any day other than the last
day of December, then any Rent Adjustments due Landlord shall be prorated.
SECTION 5.3. INTEREST AND LATE CHARGES ON LATE PAYMENTS. Rent not
------------------------------------------
paid within thirty (30) days of the date when due shall bear interest from the
date when the same is payable under the terms of this Lease until the same shall
be paid at an annual rate of interest equal to the rate of interest announced
from time to time by The First National Bank of Chicago ("First") as its
Corporate Base Rate, plus three percent (3%), unless a lesser rate shall then be
the maximum rate permissible by law, in which event said lesser rate shall be
charged ("Lease Interest Rate"). The term "Corporate Base Rate" means that rate
of interest announced by First from time to time as its "Corporate Base Rate" of
interest, changing automatically and simultaneously with each change in the
Corporate Base Rate made by First from time to time. Any publication issued or
published by First from time to time or a certificate signed by an officer of
First stating its Corporate Base Rate as of a date shall be conclusive evidence
of the Corporate Base Rate on that date. Tenant further acknowledges that its
late payment of any Rent will cause Landlord to incur certain costs and expenses
not contemplated under this Lease, the exact amount of which is extremely
difficult or impracticable to fix. Such costs and expenses will include,
without limitation, loss of use of money, administrative and collection costs
and processing and accounting expenses. Therefore, if any installment of
monthly Base Rent is not received by Landlord when due or any other sum due
hereunder is not paid when due, Tenant shall immediately pay to Landlord a late
charge equal to three percent (3%) of the unpaid amount. Such late charge is in
addition to any interest due pursuant to the first (1st) sentence of this
Section 5.3. Landlord and Tenant agree that this late charge represents a
reasonable estimate of costs and expenses incurred by Landlord from, and is fair
compensation to Landlord for, its loss suffered, by such non-payment by Tenant.
Acceptance of the late charge shall not constitute a waiver of Tenant's default
with respect to such non-payment by Tenant or prevent Landlord from exercising
any other rights and remedies available to Landlord under this Lease. Failure
to pay the late charge shall constitute a default under this Lease.
SECTION 5.4. RENT ABATEMENT. Notwithstanding anything to the
--------------
contrary contained in this Article V, so long as Tenant is not in default under
the terms and conditions of this Lease as of the date any monthly installment of
Base Rent would otherwise be due and owing during the Abatement Period (as
hereinafter defined), Tenant shall be entitled to an abatement of Base Rent for
the period commencing on the Commencement Date and ending on September 30, 1999
(hereinafter referred to as the "Abatement Period"). In the event Tenant is in
default (after any applicable grace or cure periods) under the terms and
conditions of this Lease on the day any installment of Base Rent would have been
due hereunder but for the abatement of Base Rent during the Abatement Period,
then, in such event, the rent abatements attributable to Base Rent, as set forth
above, shall no longer be in effect and Tenant shall be obligated, during the
period of such uncured default, to pay the monthly installment of Base Rent that
would have been due and owing hereunder but for the abatement of Base Rent
(hereinafter referred to as the "Rent Default Payments"). Tenant shall not be
entitled to a proration of any Rent Default Payments so paid whether or not
Tenant cures the default at any time prior to the last day of the calendar
<PAGE>
month for which such installments were paid. Tenant shall further be obligated
to make all required Rent Default Payments until the subject default is cured.
After such default is cured, Tenant shall then again be entitled to the monthly
Base Rent abatement unless another default occurs. In no event shall Tenant be
entitled to any extension of the Abatement Period because of any payment of a
full monthly installment of Rent made due to defaults.
ARTICLE VI
----------
UTILITIES AND SERVICES
----------------------
SECTION 6.1. UTILITIES AND SERVICES. Tenant shall pay, directly to
----------------------
the appropriate supplier, all costs of natural gas, electricity, heat, light,
power, sewer service, telephone, water, refuse disposal and other utilities and
janitorial, security and other services supplied to the Premises. Landlord
shall, at Landlord's sole cost and expense, separately meter the Premises. If,
however, at any time, any services or utilities are jointly metered, Landlord
shall make a reasonable determination of Tenant's proportionate share thereof
and Tenant shall pay its proportionate share, as Additional Rent hereunder,
within fifteen (15) days after receipt of Landlord's written statement. Landlord
shall not in any way be liable or responsible to Tenant for any cost or damage
or expense which Tenant may sustain or incur if either the quality or character
of such service is changed or is no longer available or suitable for Tenant's
requirements. Landlord agrees that Landlord shall not cause Tenant's utility
service to be interrupted.
ARTICLE VII
-----------
USE
---
SECTION 7.1. USE. The Premises shall be used for the Use only, and
---
for no other purpose.
SECTION 7.2. PROHIBITED USES. Tenant shall not permit the Premises,
---------------
or any portion thereof, to be used in such manner which impairs Landlord's
right, title or interest in the Premises or any portion thereof, or in such
manner which gives rise to a claim or claims of adverse possession or of a
dedication of the Premises, or any portion thereof, for public use. Tenant
shall not use or occupy the Premises or permit the Premises to be used or
occupied contrary to any restrictive covenant existing on the Commencement Date,
statute, rule, order, ordinance, requirement or government regulation applicable
thereto or in any manner which would violate any certificate of occupancy
affecting the same or which would render the insurance thereon void or the
insurance risk more hazardous, or which would cause structural injury to the
Building or cause the value or usefulness of the Premises or any part thereof to
diminish or which would constitute a public or private nuisance or waste, and
Tenant agrees that it will, promptly upon discovery of any such use, immediately
notify Landlord and take all necessary steps to compel the discontinuance of
such use.
ARTICLE VIII
------------
MAINTENANCE, REPAIRS AND REPLACEMENTS OF PREMISES
-------------------------------------------------
SECTION 8.1. MAINTENANCE, REPAIRS AND REPLACEMENTS.
-------------------------------------
A. TENANT'S OBLIGATIONS. Tenant agrees, at Tenant's sole cost and
--------------------
expense, to
<PAGE>
take good care of the Premises and keep same and all parts thereof, together
with any and all alterations and additions thereto, in good order, condition and
repair, suffering no waste or injury. Tenant shall, at its sole cost and
expense, promptly make all necessary repairs and replacements, ordinary as well
as extraordinary, foreseen as well as unforeseen, in and to any equipment now or
hereafter located in the Premises, including without limitation, water, sewer,
gas, HVAC and electricity connections, pipes, mains and all other fixtures,
machinery, apparatus, equipment, overhead cranes and appurtenances now or
hereafter belonging to, connected with or used in conjunction with the Premises.
All such repairs and replacements shall be of first class quality and sufficient
for the proper maintenance and operation of the Premises. Tenant shall keep and
maintain the Premises safe, secure and clean, specifically including, but not by
way of limitation, removal of waste and refuse matter. Tenant shall not permit
anything to be done upon the Premises (and shall perform all maintenance and
repairs thereto so as not) to invalidate, in whole or in part, or prevent the
procurement of any insurance policies which may, at any time, be required under
the provisions of this Lease. Tenant shall not obstruct or permit the
obstruction of any parking area, adjoining street or sidewalk, provided,
however, Tenant may utilize the parking areas as may be reasonably necessary in
connection with any alterations to the Premises performed by Tenant pursuant to
the terms of this Lease provided that Tenant shall not obstruct access to the
Building or the parking areas and shall not unreasonably interfere with the use
of the same by Landlord or third parties.
B. LANDLORD'S OBLIGATIONS. Subject to the provisions of Articles X
----------------------
and XIII hereof, Landlord shall keep, maintain, repair and replace the roof and
structural members of the Building and the parking lot, sidewalks and
appurtenances thereto, including, as necessary, snow and ice removal and the
cost thereof shall be deemed an Expense. Landlord shall commence repairs
required by landlord under this Section 8.1.B. within thirty (30) days after
receipt of written notice from Tenant and shall at all times thereafter
diligently pursue completion of such repairs subject to actions of Tenant or any
member of the Tenant Group and forces beyond the control of Landlord. In the
event Landlord fails to perform its obligations under this Section 8.1.B.,
Tenant may perform such obligations and the cost thereof shall be promptly paid
to Tenant by Landlord.
SECTION 8.2. GOVERNMENTAL REQUIREMENTS. Except with respect to a
-------------------------
Pre-Existing Condition (defined in Section 30.1 D hereof), subject to Tenant's
obligations set forth in Section 30.4 hereof, Tenant at its own cost and expense
also shall promptly comply with any and all governmental requirement to or
affecting the Premises or any part thereof, irrespective of the nature of the
work required to be done, extraordinary as well as ordinary, whether or not the
same involve or require any structural changes or additions in or to the
Improvements and irrespective of whether or not such changes or additions be
required on account of any particular use to which the Premises or any part
thereof are being put. Included in the obligations set forth above, but not in
limitation thereof, Tenant, at its own cost and expense, shall promptly comply
with OSHA regulations relating to overhead cranes (CFR 1910-179(j)(2) and
184(d), CFR 1910-179(j)(3), CFR 1910-179(e)(1) through (4) and CFR 1910-
179(b)(5)).
SECTION 8.3. TENANT'S RESPONSIBILITIES. Except as set forth in
-------------------------
Section 8.1B hereof, (i) Landlord shall not be required to furnish any services
or facilities whatsoever to the Premises, and (ii) Tenant hereby assumes full
and sole responsibility for condition, operation, repair, alteration,
improvement, replacement, maintenance and management of the Premises.
ARTICLE IX
----------
TENANT'S INSURANCE
------------------
SECTION 9.1. COVERAGE REQUIRED. Tenant shall procure and maintain,
-----------------
or cause to be maintained, at all times during the term of this Lease, at
Tenant's sole cost and expense, and until each
<PAGE>
and every obligation of Tenant contained in the Lease has been fully performed,
the types of insurance specified below, with insurance companies authorized to
do business in the State of Illinois covering all operations under this Lease,
whether performed by Tenant or by Contractors. For purposes of this Article IX,
"Contractors" shall mean Tenant and contractors and subcontractors and
materialmen or any tier providing services, material, labor, operation or
maintenance on, about or adjacent to the Premises, whether or not in privity
with Tenant, but excluding those retained by Landlord.
A. IN GENERAL. Upon execution of the Lease, Tenant shall procure and
----------
maintain the following kinds and amounts of insurance:
(i) WORKER'S COMPENSATION AND OCCUPATIONAL HAZARD
---------------------------------------------
INSURANCE. Worker's Compensation and Occupational Hazard Insurance,
---------
in statutory amounts, covering all employees who provide a service
under this Lease. Employer's liability coverage with limits of not
less than $100,000 each accident or illness shall be included.
--------
(ii) COMMERCIAL LIABILITY INSURANCE (PRIMARY AND
-------------------------------------------
UMBRELLA). Commercial Liability Insurance or equivalent with limits
---------
of not less than $5,000,000 per occurrence, combined single limit, for
----------
bodily injury, personal injury, and property damage liability.
Products/completed operation, independent contractors, broad form
property damage and contractual liability (with no limitation)
coverages are to be included. Landlord is to be named as additional
insureds, on a primary, non-contributory basis for any liability,
arising directly or indirectly from this Lease.
(iii) AUTOMOBILE LIABILITY INSURANCE. When any motor
------------------------------
vehicles are used in connection with this Lease, Tenant shall provide
Automobile Liability Insurance with limits of not less than $1,000,000
----------
per occurrence combined single limit, for bodily and property damage.
Landlord is to be named as additional insureds on a primary non-
contributory basis.
(iv) CONTENTS INSURANCE. Insurance against fire,
------------------
sprinkler leakage, vandalism, and the extended coverage perils for the
full insurable value of all contents of Tenant within the Premises,
and of all office furniture, trade fixtures, office equipment,
merchandise and all other items of Tenant's property on the Premises
and business interruption insurance.
B. CONSTRUCTION. During any construction performed by or on behalf
------------
of Tenant, Tenant shall procure and maintain, or cause Contractors to
maintain, the following kinds and amounts of insurance:
(i) WORKER'S COMPENSATION AND OCCUPATIONAL HAZARD
----------------------------------------------
INSURANCE. Worker's Compensation and Occupational Hazard Insurance,
---------
in statutory amounts, covering all employees who are to provide a
service under this construction. Employer's liability coverage with
limits of not less than $500,000 for each accident or illness shall be
--------
included.
(ii) COMMERCIAL LIABILITY INSURANCE (PRIMARY AND
-------------------------------------------
UMBRELLA). Commercial Liability Insurance or equivalent with limits
---------
of not less than $5,000,000 per occurrence, combined single limit, for
----------
bodily injury, personal injury, and property liability.
Products/completed operations, explosion, collapse, underground,
independent contractors, broad form property damage and contractual
liability coverages are to be included. Landlord is to be named as
additional insureds on a primary non-contributory basis for any
liability arising directly or indirectly from the Lease.
<PAGE>
(iii) AUTOMOBILE LIABILITY INSURANCE (PRIMARY AND
-------------------------------------------
UMBRELLA). When any motor vehicles are used in connection with work
---------
to be performed, Tenant or contractor shall provide Automobile
Liability Insurance with limits of not less than $1,000,000 per
----------
occurrence combined single limit, for bodily injury and property
damage. Landlord is to be named as an additional insured on a primary
non-contributory basis.
(iv) ALL RISK BUILDERS RISK INSURANCE. Tenant or
--------------------------------
Contractor shall provide All Risk Blanket Builder's Risk Insurance to
cover the materials, supplies, equipment, machinery and fixtures that
are or will be part of the Project. Coverage extensions shall include
the following: right to partial occupancy, material stored off-site
and in-transit, boiler and machinery, earthquake, flood (including
surface water backup), collapse, water damage, debris removal, faulty
workmanship or materials, testing, mechanical-electrical breakdown and
failure, deletion of freezing and temperature exclusions, business
interruption, extra expense, loss of revenue, loss of rents and loss
of use of property, as applicable, Landlord shall be named as loss
payee.
(v) PROFESSIONAL LIABILITY. When any architects,
----------------------
engineers, or consulting firms perform work in connection with this
Lease, Professional Liability Insurance shall be maintained with
limits of $1,000,000. The policy shall have an extended reporting
----------
period of two (2) years. When policies are renewed or replaced, the
policy retroactive date must coincide with, or precede, start of work.
SECTION 9.2. POLICIES. All insurance policies shall be written
--------
with insurance companies and shall be in form reasonably satisfactory to
Landlord. All insurance policies shall name Landlord as an additional
insured and loss payee as their respective interests may appear and shall
provide that they may not be terminated or adversely modified without thirty
(30) days' advance written notice to Landlord. The minimum limits of insurance
specified in this Section shall in no way limit or diminish Tenant's liability
under this Lease. Tenant shall furnish to Landlord, not less than fifteen (15)
days prior to the date such insurance is first required to be carried by Tenant,
and thereafter at least fifteen (15) days prior to the expiration of each such
policy, true and correct photocopies of all insurance policies required under
this Section, together with any amendments and endorsements to such policies,
certificates of insurance, and such other evidence of coverages as Landlord may
reasonably request, and evidence of payment of all premiums and other expenses
owed in connection therewith. Upon Tenant's default in obtaining or delivering
the policy for any such insurance or Tenant's failure to pay the charges
therefor, Landlord may, at its option, on or after the tenth (10th) day after
written notice thereof is given to Tenant, procure or pay the charges for any
such policy or policies and the total cost and expense (including attorneys'
fees) thereof shall be immediately paid by Tenant to Landlord as Additional Rent
upon receipt of a bill therefor. Within thirty (30) days after demand by
Landlord that the minimum amount of any coverage be so increased, Tenant shall
furnish Landlord with evidence of Tenant's compliance with such demand.
SECTION 9.3. SUBROGATION. Landlord and Tenant agree to have all
-----------
fire and extended coverage and material damage insurance which may be carried by
either of them endorsed with a clause providing that any release from liability
of or waiver of claim for recovery from the other party or any of the parties
named in Section 9.2 above entered into in writing by the insured thereunder
prior to any loss or damage shall not affect the validity of said policy or the
right of the insured to recover thereunder, and providing further that the
insurer waives all rights of subrogation which such insurer might have against
the other party or any of the parties named in Section 9.2 above. Without
limiting any release or waiver of liability or recovery contained in any other
Section of this Lease but rather in confirmation and furtherance thereof,
Landlord and any beneficiaries of Landlord waive all claims for recovery from
Tenant, and Tenant waives all claims for recovery from Landlord, any
beneficiaries of Landlord and the managing agent for the Project and their
respective agents, partners and employees, for any loss or
<PAGE>
damage to any of its property insured under valid and collectible insurance
policies to the extent of any recovery collectible under such insurance
policies. Notwithstanding the foregoing or anything contained in this Lease to
the contrary, any release or any waiver of claims shall not be operative, nor
shall the foregoing endorsements be required, in any case where the effect of
such release or waiver is to invalidate insurance coverage or invalidate the
right of the insured to recover thereunder or increase the cost thereof
(provided that in the case of increased cost the other party shall have the
right, within ten (10) days following written notice, to pay such increased
cost, thereby keeping such release or waiver in full force and effect).
SECTION 9.4. MISCELLANEOUS INSURANCE PROVISIONS. Landlord and
----------------------------------
Tenant further agree as follows:
A. Tenant and Contractors expressly understand and agree that any
insurance coverages and limits furnished by the Tenant and Contractors
shall in no way limit the Tenant's and Contractor's liabilities and
responsibilities specified under the Lease, or contracts executed relating
to the Project, or by law.
B. The failure of Landlord to obtain such evidence from Tenant or
Contractors before permitting Tenant or Contractors to commence work shall
not be deemed to be a waiver by Landlord, and Tenant or contractors shall
remain under continuing obligation to maintain the insurance coverage.
C. Any and all deductibles on referenced insurance coverages shall be
borne by Tenant and Contractors.
D. Tenant expressly understands and agrees that any insurance
maintained by Landlord shall apply in excess of and not contribute with
insurance provided by the Tenant or Contractor under the Lease.
E. If Tenant or any Contractors desire additional coverage, higher
limits of liability, or other modifications for their own protection,
Tenant and such Contractors shall be responsible for the acquisition and
cost of such additional protection.
F. Tenant agrees, and shall cause each Contractor in connection with
the Project to agree, that all insurers shall waive their rights of
subrogation against Landlord.
G. Tenant shall not violate or permit to be violated any of the
conditions or provisions of any of the insurance policies, and Tenant shall
so perform and satisfy or cause to be performed and satisfied the
requirements of the companies writing such policies so that at all times
companies of good standing, satisfactory to Landlord shall be willing to
write and continue such insurance.
H. Landlord shall not be limited in the proof of any damages which
Landlord may claim against Tenant and Contractors arising out of or by
reason of Tenant's and Contractor's failure to provide and keep in force
insurance, as aforesaid, to the amount of the insurance premium or premiums
not paid or incurred by Tenant and Contractors and which would have been
payable under such insurance, but Landlord shall also be entitled to
recover as damages for such breach the uninsured amount of any loss, to the
extent of any deficiency in the insurance required by the provisions of
this Lease, and damages, costs and expenses of suit suffered or incurred by
reason of damage to, or destruction of, the Project or the Premises
occurring during any period when Tenant or Contractors shall have failed or
neglected to provide insurance as aforesaid.
<PAGE>
I. The insurance required by this Lease, at the option of Tenant or
Contractors, may be effected by blanket or umbrella policies issued to
Tenant or Contractors covering the Premises and other properties owned or
leased by Tenant or Contractors, provided that the policies otherwise
comply with the provisions of this Lease and allocate to the Premises the
specified coverage, without possibility of reduction or coinsurance by
reason of, or damage to, any other premises covered therein.
J. All insurance companies shall have a Best rating of not less than
A/VII, or an equivalent rating in the event Best ceases to exist or provide
a rating.
K. Tenant and Contractors shall provide and keep in force such other
insurance in such amounts as may from time to time be reasonably required
by Landlord against such other insurable hazards as at the time are
commonly insured against in the case of prudent owners of properties
similar to the Project and the Premises, and in that connection Landlord
may require changes in the forms, types and amounts of insurance required
pursuant to this Section or add to, modify or delete other requirements;
and in any event, if under applicable law, rule, regulation or ordinance of
any governmental authority, state or federal, having jurisdiction in the
Premises, liability may be imposed upon Landlord on account of the use or
operation of the Premises or the Project or other improvements, insurance
within limits reasonably satisfactory to Landlord shall be maintained by
Tenant and Contractors against any such liability.
L. The required insurance to be carried shall not be limited by any
limitations expressed in the indemnification language herein.
ARTICLE X
---------
DAMAGE OR DESTRUCTION
---------------------
SECTION 10.1. TOTAL DAMAGE. In the event that (a) the Premises are
------------
made untenantable by fire or other casualty and Landlord shall decide not to
restore or repair same, or (b) the Building is so damaged by fire or other
casualty that Landlord shall decide to demolish or not rebuild the same, then,
in any of such events, Landlord shall have the right to terminate this Lease by
notice to Tenant given within ninety (90) days after the date of such fire or
other casualty and the Rent shall be apportioned on a per diem basis and paid to
the date of such fire or other casualty. In the event the Premises are made
untenantable by fire or other casualty and Landlord shall decide to rebuild and
restore the same, this Lease shall not terminate and Landlord shall repair and
restore the Premises at Landlord's expense within one hundred eighty (180) days
after the date of such fire or other casualty, subject, however to (i)
reasonable delays for insurance adjustments and (ii) delays caused by matters
beyond Landlord's control, and Rent shall abate on a per diem basis during the
period of reconstruction and repair.
SECTION 10.2. PARTIAL DAMAGE. In the event the Premises are
--------------
partially damaged by fire or other casualty but are not made wholly
untenantable, then Landlord shall, except during the last year of the Term
hereof, proceed with all due diligence to repair and restore the Premises,
subject, however, to (i) reasonable delays for insurance adjustments, and (ii)
delays caused by forced beyond Landlord's control. In such event, Rent shall
abate in proportion to the non-useability of the Premises during the period
while repairs are in progress unless such partial damages are due to the fault
or neglect of Tenant. If the partial damage is the result of the fault or
neglect of Tenant, Rent shall not abate during said period. If the Premises are
made partially untenantable as aforesaid during the last six (6) months of the
Term hereof, Landlord and Tenant shall have the right to terminate this Lease as
of the date of fire or other casualty upon thirty (30) days' prior notice to the
other party in which event, Rent shall be
<PAGE>
apportioned on a per diem basis and paid to the date of such fire or other
casualty.
ARTICLE XI
----------
LIENS
-----
SECTION 11.1. LIEN CLAIMS. Tenant shall not do any act which shall
-----------
in any way encumber the title of Landlord in and to the Premises or the
Building, nor shall any interest or estate of Landlord in the Premises or the
Building be in any way subject to any claim by way of lien or encumbrance,
whether by operation of law or by virtue of any express or implied contract by
Tenant, and any claim to or lien upon the Premises or the Building arising from
any act or omission of Tenant shall accrue only against the leasehold estate of
Tenant and shall in all respects be subject and subordinate to the paramount
title and rights of Landlord in and to the Premises or the Building. Tenant
will not permit the Premises or the Building to become subject to any
mechanics', laborers' or materialmen's lien on account of labor or material
furnished to Tenant or claimed to have been furnished to Tenant in connection
with work of any character performed or claimed to have been performed on the
Premises by or at the direction of sufferance of Tenant; provided, however that
Tenant shall have the right to contest in good faith and with reasonable
diligence, the validity of any such lien or claimed lien if Tenant shall first
give to Landlord a surety bond reasonably acceptable to Landlord or an amount
equal to one hundred twenty percent (120%) of the amount of the lien or claimed
lien which, together with interest earned thereon, shall be held by Landlord as
security to insure payment thereof and to prevent any sale, foreclosure or
forfeiture of the Premises by reason of non-payment thereof. The amount so
deposited with Landlord, if applicable, shall be held by Landlord in an account
established at a federally insured banking institution until satisfactory
removal of said lien or claim of lien. On any final determination of the lien
or claim for lien, Tenant will immediately pay any judgment rendered, with all
proper costs and charges, and will, at its own expense, have the lien released
and any judgment satisfied. Should Tenant fail to diligently contest and pursue
such lien contest, Landlord may, at its option, use the sums so deposited to
discharge any such lien upon the renewal of such lien or encumbrance Landlord
shall pay all such sums remaining on deposit to Tenant.
SECTION 11.2. LANDLORD'S RIGHT TO CURE. If Tenant shall fail to
------------------------
contest the validity of any lien or claimed lien or fail to give security to
Landlord to insure payment thereof, or shall fail to prosecute such contest with
diligence, or shall fail to have the same released and satisfy any judgment
rendered thereon, then Landlord may, at its election (but shall not be so
required) remove or discharge such lien or claim for lien (with the right, in
its discretion, to settle or compromise the same), and any amounts advanced by
Landlord, including reasonable attorneys' fees, for such purposes shall be so
much additional rent due from Tenant to Landlord at the next rent date after any
such payment, with interest thereon at the Lease Interest Rate from the date so
advanced.
ARTICLE XII
-----------
TENANT ALTERATIONS
------------------
SECTION 12.1. ALTERATIONS. Tenant shall not at any time during the
-----------
Term of this Lease make any addition that will increase the size of the
Premises. Notwithstanding the foregoing, Landlord will allow the expansion of
the Premises into the parking lot in the form of an addition to the Building,
subject to the approval of the Village of Oak Brook, Illinois ("VILLAGE"), and
Landlord and Tenant reaching a subsequent agreement with respect to the area to
be expanded, timing, notification, length of lease term upon expansion, payment
of costs for such expansion and such other matters reasonably required to be
resolved to the satisfaction of Landlord. In the event that Landlord and Tenant
are unable to agree
<PAGE>
upon all such matters in their respective sole discretion, Tenant may not expand
the Premises.
Except as set forth in Article XXXV, Tenant shall not make alterations
to the structural components of the Premises, alterations which affect the
mechanical, electrical, plumbing, life safety or other systems in the Premises
or alterations which cost in excess of $25,000.00 either individually or in the
aggregate over a twelve (12) month period of time (hereinafter referred to as
"MAJOR ALTERATIONS") without the advance written consent of Landlord, which
consent may be granted or denied at Landlord's sole discretion. Tenant may make
alterations to the Premises which are not Major Alterations (hereinafter
referred to as "MINOR ALTERATIONS") without the prior written consent of
Landlord. (Major Alterations and Minor Alterations are hereinafter collectively
referred to as "ALTERATIONS".) An addition to or expansion of the Premises
shall be deemed to be a Major Alteration. No Alterations to the Premises for
which Landlord's consent is required shall be commenced by Tenant until Tenant
has furnished Landlord with a satisfactory certificate or certificates from an
insurance company acceptable to Landlord, evidencing insurance coverage required
under Section 9.2 hereof. Any Alterations by Tenant hereunder shall be done in
a good and workmanlike manner in compliance with any legal requirements. Upon
completion of any Major Alterations by Tenant hereunder, Tenant shall furnish
Landlord with a copy of the "as built" plans covering such construction.
Tenant, at its sole cost and expense, will make all Alterations on the Premises
which may be necessary by the act or neglect of any other person or corporation
(public or private), except Landlord, its agents, employees or contractors.
Before commencing any Major Alterations: (a) plans and specifications therefor,
prepared by a licensed architect, shall be submitted to and approved by
Landlord; (b) Tenant shall furnish to Landlord an estimate of the cost of the
proposed work, certified by the architect who prepared such plans and
specifications; (c) all contracts for any proposed work and Contractor's
performing work shall be submitted to and approved by Landlord; (d) Tenant shall
either furnish to Landlord a payment and performance bond from the Contractor in
form and substance satisfactory to Landlord, or shall deposit an amount equal to
100% of the cost of completing the Alterations in an escrow reasonably
satisfactory to Landlord to insure payment for the completion of all work free
and clear of liens; (e) evidence of insurance as required by Article IX hereof;
and (f) such other requirements as Landlord may reasonably require to be
satisfied. Before commencing any Major Alterations and if requested by
Landlord, Tenant shall provide Landlord with a written certification that the
Major Alterations do not have any materially adverse environmental impact on the
Premises. Prior to the commencement of any construction activity for which
Landlord's consent shall be required, certificates of such insurance coverages
shall be provided to Landlord and renewal certificates shall be delivered to
Landlord prior to the expiration date of the respective policies.
Notwithstanding the foregoing, no expansion of the Premises or
Alterations of any kind shall be made which would (i) change the general use or
structure of the Premises or any part thereof; (ii) decrease the size of the
Premises or any part thereof; (iii) reduce or impair, to any material extent,
the value, rentability or usefulness of the Premises or constitute waste; or
(iv) give to any owner, lessee or occupant of any other property or to any other
person or corporation any easement, right-of-way or any other right over the
Premises.
Any Alterations shall be made with reasonable dispatch and in a good
and workmanlike manner and in compliance with all applicable permits and
authorizations and buildings and zoning laws and with all other legal
requirements. If any work does not comply with the provisions of this Lease,
Landlord may, by thirty (30) days' notice to Tenant, require that Tenant stop
the work and take steps necessary to cause corrections to be made, or Landlord
may, itself, perform the work, at Tenant's cost.
SECTION 12.2. OWNERSHIP OF ALTERATIONS. All Alterations (except
------------------------
Tenant's Equipment, as defined in Section 19.2 hereof), put in at the expense of
Tenant shall become the property of Landlord and shall remain upon and be
surrendered with the Premises as a part thereof at the termination of this
Lease, or at Landlord's option, provided Landlord shall have advised Tenant in
writing at the time of its consent to said Alteration is sought that same must
be removed and restored to its original condition.
<PAGE>
Notwithstanding the foregoing, Tenant shall remove the items described on
EXHIBIT "E" attached hereto and by this reference made a part hereof upon the
termination of the Lease and shall repair all damage to the Premises caused by
such removal.
SECTION 12.3. SIGNS. Tenant shall not place any signs on any part
-----
of the Building or Land without the prior written consent of Landlord.
Notwithstanding any of the immediately foregoing provisions of this Section
12.3, Tenant may place a lighted sign visible from the Tollway on the east side
of the Premises and a building standard sign adjacent to the entrance to the
Premises, provided that (i) the installation and dimensions of said signs are in
strict accordance with applicable law, ordinances and Restrictions; (ii) Tenant
continually maintains said signs in a first-class manner, (iii) Tenant, at
Tenant's sole cost and expense, removes said signs at the expiration of the Term
and restores the area in which said sign is placed to its condition prior to the
installation of said signs, and (iv) Landlord approves the signs, which
approval shall not be unreasonably withheld or delayed.
SECTION 12.4. TENANT INDEMNITY. Tenant hereby agrees to indemnify
----------------
and hold the Landlord, its beneficiaries, shareholders, partners or members and
their respective agents and employees harmless from any and all liabilities of
every kind and description which may arise out of or be connected in any way
with said Alterations except to the extent the same arise out of Landlord's
gross negligence or willful misconduct. Any mechanic's lien filed against the
Premises for work claimed to have been furnished to Tenant shall be discharged
of record by Tenant within ten (10) days thereafter, at Tenant's expense. Upon
completing any Alterations, Tenant shall furnish Landlord with contractors'
affidavits and full and final waivers of lien and receipted bills covering all
labor and materials expended and used. All Alterations shall comply with all
insurance requirements and with all ordinances and regulations of any pertinent
governmental authority. All alterations and additions shall be constructed in a
good and workmanlike manner and only good grades of materials shall be used.
SECTION 12.5. ENVIRONMENTAL IMPACT. Notwithstanding any other
--------------------
term, covenant or condition contained in this Lease, in the event that any
Alteration has any material adverse environmental impact on the Premises,
Landlord may deny the Tenant the right to proceed in Landlord's sole and
absolute discretion.
ARTICLE XIII
------------
CONDEMNATION
------------
SECTION 13.1. TAKING: LEASE TO TERMINATE. If a portion of the
---------------------------
Building or the Premises shall be lawfully taken or condemned for any public or
quasi-public use or purpose, or conveyed under threat of such condemnation and
as a result thereof the Premises cannot be used for the same purpose and with
the same utility as before such taking or conveyance, the Term of this Lease
shall end upon, and not before, the date of the taking of possession by the
condemning authority, and without apportionment of the award. Tenant hereby
assigns to Landlord, Tenant's interest in such award, if any. Current Rent shall
be apportioned as of the date of such termination. If any part of the Building
shall be so taken or condemned, or if the grade of any street or alley adjacent
to the Building is changed by any competent authority and such taking or change
of grade makes it necessary or desirable to demolish, substantially remodel, or
restore the Building, the Landlord shall have the right to cancel this Lease
upon not less than ninety (90) days' prior notice to the date of cancellation
designed in the notice.
SECTION 13.2. TAKING: LEASE TO CONTINUE. In the event only a part
--------------------------
of the Premises shall be taken as a result of the exercise of the power of
eminent domain or condemned for a public or quasi-public use or purpose by any
competent authority or sold to the condemning authority under threat of
condemnation, and as a result thereof the balance of the Premises can be used
for the same purpose
<PAGE>
as before such taking, sale or condemnation, this Lease shall not terminate and
Landlord, at its sole cost and expense up to the amount of any condemnation
award, shall, to the extent practical, promptly repair and restore the Premises,
subject to extension due to delay because of changes, deletion or additions,
acts of Tenant, strikes, lockouts, casualties, acts of God, war, fuel or energy
shortages, material or labor shortages, governmental regulation or control,
severe weather conditions or other causes beyond the actual control of Landlord
and Landlord's receipt of insurance proceeds. Any award paid as a consequence of
such taking, sale or condemnation, shall be paid to Landlord. Any sums not so
disbursed shall be retained by Landlord. In the event of a taking of land only,
this Lease shall not terminate and Landlord shall not be obligated to repair or
restore the Premises.
SECTION 13.3. TENANT'S CLAIM. To the extent permitted by law and
--------------
subject to the rights of any lender with respect to the Premises, Tenant shall
be allowed to pursue a claim against the condemning authority (hereinafter
referred to as the "Tenant's Claim") that shall be independent of and wholly
separate from any action, suit or proceeding relating to any award to Landlord
for reimbursement of relocation expenses or for Tenant's Equipment and personal
property, provided: (i) Tenant's Claim shall in no way limit, affect, alter or
diminish in any kind or way whatsoever Landlord's award as a result of such
taking, sale or condemnation; (ii) Tenant's Claim shall in no event include any
claim for any interest in real property, it being expressly understood and
agreed that all sums paid with respect to the real property interests taken,
sold or condemned shall be the sole property of Landlord; and (iii) Tenant's
Claim shall in no event be joined with Landlord's proceeding or argued or heard
concurrently therewith and if the tribunal hearing Tenant's Claim orders such
joinder, Tenant agrees to voluntarily dismiss Tenant's Claim without prejudice
until such time as Landlord has received its award for such taking, sale or
condemnation.g: Lease to Continue.
ARTICLE XIV
-----------
ASSIGNMENT -- SUBLETTING BY TENANT
----------------------------------
SECTION 14.1. NO ASSIGNMENT, SUBLETTING OR OTHER TRANSFER. Tenant
-------------------------------------------
shall not assign this Lease or any interest hereunder, nor shall Tenant sublet
in excess of 20,000 square feet of the Premises or permit the use or occupancy
of the Premises or any part thereof by anyone other than Tenant, without the
express prior written consent of Landlord which consent shall not be
unreasonably withheld. No assignment or subletting shall relieve Tenant of its
obligations hereunder, and Tenant shall continue to be liable as a principal and
not as a guarantor or surety, to the same extent as though no assignment or
sublease had been made, unless specifically provided to the contrary in
Landlord's consent. Consent by Landlord pursuant to this Article shall not be
deemed, construed or held to be consent to any additional assignment or
subletting, but each successive act shall require similar consent of Landlord.
Landlord shall be reimbursed by Tenant for any costs or expenses incurred
pursuant to any request by Tenant for consent to any such assignment or
subletting. In the consideration of the granting or denying of consent,
Landlord may, at its option, take into consideration: (i) the business
reputation and credit worthiness of the proposed subtenant or assignee; (ii) any
required alteration of the Premises; (iii) the intended use of the Premises by
the proposed subtenant or assignee; and (iv) any other factors which Landlord
shall deem relevant.
SECTION 14.2. OPERATION OF LAW. Tenant shall not allow or permit any
----------------
transfer of this Lease, or any interest hereunder, by operation of law, or
convey, mortgage, pledge or encumber this Lease or any interest hereunder;
provided, however, that Tenant may enter into a mortgage of its leasehold
interest hereunder in favor of Goldman Sachs in connection with providing
security for a Tenant credit facility.
SECTION 14.3. EXCESS RENTAL. If Tenant shall, with Landlord's
-------------
prior consent as herein
<PAGE>
required, sublet the Premises, an amount equal to fifty percent (50%) of the
rental (after deducting reasonable actual costs of subletting) in excess of the
Base Rent and any Additional Rent herein provided to be paid shall be for
benefit of Landlord and shall be paid by Tenant to Landlord promptly when due
under any such subletting as Additional Rent due hereunder.
SECTION 14.4. MERGER OR CONSOLIDATION. If Tenant is a corporation
-----------------------
whose stock is not publicly traded, any transaction or series of transactions
(including, without limitation, any dissolution, merger, consolidation or other
reorganization of Tenant, or any issuance, sale, gift, transfer or redemption of
any capital stock of Tenant, whether voluntary, involuntary or by operation of
law, or any combination of any of the foregoing transactions) resulting in the
transfer of control of Tenant, other than by reason of death, shall be deemed to
be a voluntary assignment of this Lease by Tenant subject to the provisions of
this Section 14. If Tenant is a partnership, any transaction or series of
transactions (including without limitation any withdrawal or admittance of a
partner or a change in any partner's interest in Tenant, whether voluntary,
involuntary or by operation of law, or any combination of any of the foregoing
transactions) resulting in the transfer of control of Tenant, other than by
reason of death, shall be deemed to be a voluntary assignment of this Lease by
Tenant subject to the provisions of this assignment of this Lease by Tenant
subject to the provisions of this Section 14. If Tenant is a privately held
corporation, a change or series of changes in ownership of stock which would
result in direct or indirect change in ownership by the stockholders or an
affiliated group of stockholders of less than fifty percent (50%) of the
outstanding stock as of the date of the execution and delivery of this Lease
shall not be considered a change of control. If Tenant is a publicly held
corporation, any one or connected series of stock transactions which would
result in direct or indirect change in ownership by the stockholders or an
affiliated group of stockholders of greater than fifty percent (50%) of the
outstanding stock as of the date of the execution and delivery of this Lease
shall be considered a change of control. Notwithstanding the immediately
foregoing, Tenant may, upon notice to, but without Landlord's consent, assign
this Lease to any corporation resulting from a merger or consolidation of
Tenant, provided that the total assets and the total net worth of such assignee
after such consolidation or merger shall be in excess of the greater of (i) the
net worth of Tenant immediately prior to such consolidation or merger, or (ii)
the net worth of Tenant as of the date hereof, determined by generally accepted
accounting principles and provided that Tenant is not at such time in default
hereunder, and provided further that such successor shall execute an instrument
in writing, acceptable to Landlord in its reasonable discretion, fully assuming
all of the obligations and liabilities imposed upon Tenant hereunder and deliver
the same to Landlord. Tenant shall provide in its notice to Landlord such
information as may be reasonably required by Landlord to determine that the
requirements of this Section 14.4 have been satisfied. As used in this Section
14.4, the term "control" means possession of the power to vote not less than a
majority interest of any class of voting securities and partnership or limited
liability company interests or to direct or cause the direction (directly or
indirectly) of the management or policies of a corporation, or partnership or
limited liability company through the ownership of voting securities,
partnership interests or limited liability company interests, respectively.
SECTION 14.5. UNPERMITTED TRANSACTION. Any assignment, subletting,
-----------------------
use, occupancy, transfer or encumbrance of this Lease or the Premises without
Landlord's prior written consent shall be of no effect and shall, at the option
of Landlord, constitute a default under this Lease.
SECTION 14.6. PERMITTED TRANSFERS. Landlord's consent shall not be
-------------------
required for an assignment or sublet to a Tenant Successor or Tenant Affiliate
(as such terms are hereinafter defined), and Landlord shall not terminate this
Lease with respect to the Premises or any portion of the Premises as a result of
such assignment or sublease to a Tenant Successor or Tenant Affiliate, as long
as (i) Tenant gives reasonable prior notice to Landlord of the proposed
assignment or sublease, (ii) if an assignment, such assignee assumes the
obligations of Tenant under this Lease, and (iii) in the reasonable judgment of
Landlord, such assignee or subtenant has a net worth (computed in accordance
with generally accepted accounting principles) equal to or greater than the
greater of the (y) net worth of the original named
<PAGE>
Tenant at the time of such assignment or (z) the net worth of the original named
Tenant at the date of execution of this Lease. As used herein, the term "Tenant
Successor" shall mean any entity (i) which results from a merger or
consolidation with the original Tenant under this Lease or (ii) which acquires
all or substantially all of the assets of the original Tenant under this lease
for a legitimate business purpose; and the term "Tenant Affiliate" shall mean
any entity which is controlled by, controls, or is under common control with (A)
the original Tenant named in this lease, or (B) a Tenant Successor. For purposes
of the foregoing, the term "control" means the power to direct the management
and policies of the subject entity, either directly or indirectly, whether
through the ownership of voting securities or other beneficial interests or
otherwise.
ARTICLE XV
----------
ANNUAL STATEMENTS
-----------------
SECTION 15.1. ANNUAL STATEMENTS. Tenant agrees to furnish Landlord
-----------------
annually, within ninety (90) days of the end of such fiscal year with a copy of
its annual audited statements, together with applicable footnotes and any other
financial information reasonably requested by Landlord (hereinafter collectively
referred to as, the "Financial Information") and agrees that Landlord may
deliver such Financial Information to any mortgagee, prospective mortgagee or
prospective purchaser of the Premises.
ARTICLE XVI
-----------
INDEMNITY FOR LITIGATION
------------------------
SECTION 16.1. INDEMNITY FOR LITIGATION. Tenant agrees to pay, and
------------------------
to indemnify and defend Landlord against, all costs and expenses (including
reasonable attorney's fees) incurred by or imposed upon Landlord by or in
connection with any litigation to which Landlord becomes or is made a party
without fault on its part and arising out of or in any way connected with this
Lease or Tenant's use and occupancy of the Premises, whether commenced by or
against Tenant, or any other person or entity or that may be incurred by
Landlord in enforcing any of the covenants and agreements of this Lease with or
without the institution of any action or proceeding relating to the Premises or
this Lease, or in obtaining possession of the Premises after an Event of Default
hereunder or upon expiration or earlier termination of this Lease. The
foregoing notwithstanding, Tenant's responsibility under this Section 16.1 to
pay Landlord's costs and expenses (including reasonable attorneys' fees) shall
not extend to such costs and expenses incurred in defending an action brought by
Tenant to enforce the terms of this Lease in which there is a court
determination that Landlord failed to perform its obligations under this Lease.
The provisions of this Section 16.1 shall survive the expiration or earlier
termination of this Lease.
ARTICLE XVII
------------
ESTOPPEL CERTIFICATES
---------------------
SECTION 17.1. ESTOPPEL CERTIFICATE. Tenant agrees that on the
--------------------
Commencement Date and at any time and from time to time thereafter, upon not
less than ten business (10) days' prior written request by Landlord, it will
execute, acknowledge and deliver to Landlord, or Landlord's mortgagee to the
extent factually accurate, a statement in writing in the form of EXHIBIT "C"
attached hereto and by this reference incorporated herein; provided, however,
that Tenant agrees to certify to any prospective purchaser or mortgagee any
other reasonable information specifically requested by such prospective
<PAGE>
purchaser or mortgagee.
ARTICLE XVIII
-------------
INSPECTION OF PREMISES
----------------------
SECTION 18.1. INSPECTIONS. Tenant agrees to permit Landlord and
-----------
any authorized representatives of Landlord, to enter the Premises at all
reasonable times on reasonable advance notice, except in the case of emergency,
for the purpose of inspecting the same. Any such inspections shall be solely
for Landlord's purposes and may not be relied upon by Tenant or any other
person. Tenant shall have the right to have one of Tenant's agents or employees
escort Landlord during any inspection hereunder.
SECTION 18.2. SIGNS. Tenant agrees to permit Landlord and any
-----
authorized representative of Landlord to enter the Premises at all reasonable
times during business hours on reasonable advance notice to exhibit the same for
the purpose of sale, mortgage or lease, and during the final nine month period
of the Term hereof or any extension thereof, Landlord may display on the
Premises customary "For Sale" or "For Rent" signs. Tenant shall have the right
to have one of Tenant's agents or employees escort Landlord during any
inspection hereunder.
ARTICLE XIX
-----------
FIXTURES
--------
SECTION 19.1. BUILDING FIXTURES. All improvements and all
-----------------
plumbing, heating, lighting, electrical and air conditioning fixtures and
equipment, and other articles of personal property used in the operation of the
Premises (as distinguished from operations incident to the business of Tenant),
whether or not attached or affixed to the Premises ("Building Fixtures"), shall
be and remain a part of the Premises and shall constitute the property of
Landlord.
SECTION 19.2. TENANT'S EQUIPMENT. All of Tenant's trade fixtures
------------------
and all personal property, fixtures, apparatus, machinery and equipment now or
hereafter located upon the Premises, other than Building Fixtures, including,
but not limited to the items set forth on EXHIBIT "E" attached hereto, shall be
and remain the personal property of Tenant, and the same are herein referred to
as "Tenant's Equipment."
SECTION 19.3. REMOVAL OF TENANT'S EQUIPMENT. Tenant's Equipment
-----------------------------
may be removed from time to time by Tenant; provided, however, that if such
removal shall injure or damage the Premises, Tenant shall repair the damage and
place the Premises in the same condition as it would have been if such Tenant's
Equipment had not been installed.
ARTICLE XX
----------
DEFAULT
-------
SECTION 20.1. EVENTS OF DEFAULT. Tenant agrees that any one or
-----------------
more of the following events shall be considered "Events of Default" as said
term is used herein:
<PAGE>
(a) If an order, judgment or decree shall be entered by any court
adjudicating Tenant a bankrupt or insolvent, or approving a petition
seeking reorganization of Tenant or appointing a receiver, trustee or
liquidator of Tenant, or of all or a substantial part of its assets, and
such order, judgment or decree shall continue unstayed and in effect for
any period of sixty (60) days; or
(b) Tenant shall file an answer admitting the material
allegations of a petition filed against Tenant in any bankruptcy,
reorganization or insolvency proceeding or under any laws relating to the
relief of debtors, readjustment or indebtedness, reorganization,
arrangements, composition or extension; or
(c) Tenant shall make any general assignment for the benefit of
creditors or shall apply for or consent to the appointment of a receiver,
trustee or liquidator of Tenant, or any of the assets of Tenant; or
(d) Tenant shall file a voluntary petition in bankruptcy, or
shall admit in writing its inability to pay its debts as they come due, or
shall file a petition or an answer seeking reorganization or arrangement
with creditors or take advantage of any insolvency law; or
(e) A decree or order appointing a receiver of the property of
Tenant shall be made and such decree or order shall not have been vacated
within sixty (60) days from the date of entry or granting thereof; or
(f) Tenant shall abandon the Premises during the Term hereof; or
(g) Tenant shall default in making any payment of Rent or other
payment required to be made by Tenant hereunder when due as herein provided
and Tenant does not cure such default within three (3) days after written
notice from Landlord; provided, however, in the event that Landlord gives
Tenant more than two notices pursuant to this Section during any twelve
month period of time, no further notices shall be required to be delivered
to Tenant pursuant to this Section 20.1 (g) and it shall be an Event of
Default if the referenced amounts are not paid when due; or
(h) Tenant shall be in default in the performance of or
compliance with any of the agreements, terms, covenants or conditions in
this Lease other than those referred to in the foregoing subparagraphs (a)
through (g) of this Section for a period of twenty (20) days after written
notice from Landlord to Tenant specifying the items in default, or in the
case of a default which cannot, with due diligence, be cured within said
twenty (20)-day period, Tenant fails to proceed within said twenty (20)
day-period to cure the same and thereafter to prosecute the curing of such
default with due diligence (it being intended in connection with a default
not susceptible of being cured with due diligence within said twenty (20)-
day period that the time of Tenant within which to cure the same shall be
extended for such period as may be necessary to complete the same with all
due diligence).
Upon the occurrence of any one or more of such Events of Default,
Landlord may at its election terminate this Lease or terminate Tenant's right to
possession only, without terminating this Lease. Upon termination of this Lease
or of Tenant's right to possession, Tenant shall immediately surrender
possession and vacate the Premises, and deliver possession thereof to Landlord,
and Landlord or Landlord's agents may immediately or any time thereafter without
notice, re-enter the Premises and remove all persons and all or any property
therefrom, either by any suitable action or proceeding at law or equity, without
being liable in indictment, prosecution or damages, therefor, and
<PAGE>
repossess and enjoy the Premises, together with the right to receive all income
of, and from, the Premises.
If Landlord elects to terminate Tenant's right to possession only,
without terminating this Lease, Landlord may, at Landlord's option, enter into
the Premises, remove Tenant's signs and other evidences of tenancy, and take and
hold possession thereof as hereinabove provided, without such entry and
possession terminating this Lease or releasing Tenant, in whole or in part, from
Tenant's obligations to pay the Rent hereunder for the full Term or from any
other obligations of Tenant under this Lease. Landlord shall use commercially
reasonably efforts to relet all or any part of the Premises for such rent and
upon terms as are commercially reasonable (including the right to relet the
Premises for a term greater or lesser than that remaining of the Term of
premises and the right to relet the Premises as a part of a larger area, the
right to change the character or use made of the Premises and the right to grant
concessions of free rent). For the purpose of such reletting, Landlord may
decorate or make any repairs, changes, alterations, or additions in or to the
Premises that may be necessary or desirable. If Landlord is unable to relet the
Premises after using such commercially reasonably efforts to do so, Landlord
shall have the right to terminate this Lease, in which event, Tenant shall pay
to Landlord liquidated damages (because the parties hereto recognize that as of
the date hereof actual damages are not ascertainable and are of imprecise
calculation and not as a penalty) equal to sixty percent (60%) of the Rent, and
other sums provided herein to be paid by Tenant for the remainder of the Term.
If the Premises are relet and sufficient sums shall not be realized from such
reletting after payment of all expenses of such decorations, repairs, changes,
alterations, additions and the expenses of repossession and such reletting, and
the collection of the Rent herein provided and other payments required to be
made by Tenant under the provisions of this Lease for the remainder of the Term
of this Lease then, in such event, Tenant shall pay to Landlord on demand any
such deficiency and Tenant agrees that Landlord may file suit to recover any
sums falling due under the terms of this Section from time to time, and all
costs and expenses of Landlord, including attorneys' fees, incurred in
connection with any such suit shall be paid by Tenant.
SECTION 20.2. WAIVERS. Tenant hereby expressly waives, so far as
-------
permitted by law, the service of any notice of intention to re-enter provided
for in any statute, and except as is herein otherwise provided. The terms
"enter," "re-enter," "entry" or "re-entry" as used in this Lease are not
restricted to their technical legal meanings.
SECTION 20.3. BANKRUPTCY. If Landlord shall not be permitted to
----------
terminate this Lease, as provided in this Article XX because of the provisions
of the United States Code relating to Bankruptcy, as amended (the "Bankruptcy
Code"), then Tenant as a debtor-in-possession or any trustee for Tenant agrees
promptly, within no more than sixty (60) days after the filing of the bankruptcy
petition, to assume or reject this Lease. In such event, Tenant or any trustee
for Tenant may only assume this Lease if: (a) it cures or provides adequate
assurances that the trustee will promptly cure any default hereunder; (b)
compensates or provides adequate assurance that Tenant will promptly compensate
Landlord of any actual pecuniary loss to Landlord resulting from Tenant's
default; and (c) provides reasonably adequate assurance of performance during
the fully stated term hereof of all of the terms, covenants, and provisions of
this Lease to be performed by Tenant. In no event after the assumption of this
Lease shall any then-existing default remain uncured for a period in excess of
the earlier of ten (10) days or the time period set forth herein. Adequate
assurance of performance of this Lease, as set forth hereinabove, shall include,
without limitation, adequate assurance (i) of the source of rent reserved
hereunder; and (ii) that the assumption of this Lease will not breach any
provision hereunder.
If Tenant assumes this Lease and proposes to assign the same pursuant
to the provisions of the Bankruptcy Code to any person or entity who shall have
made a bona fide offer to accept an assignment of this Lease on terms acceptable
to Tenant, then notice of such proposed assignment, setting forth: (i) the name
and address of such person; (ii) all of the terms and conditions of such offer;
and (iii) the adequate assurance to be provided Landlord to assure such person's
future
<PAGE>
performance under the Lease, including, without limitation, the assurance
referred to in Section 365(b)(3) of the Bankruptcy Code, shall be given to
Landlord by the Tenant no later than twenty (20) days after receipt by the
Tenant but in any event no later than ten (10) days prior to the date that the
Tenant shall make application to a court of competent jurisdiction for authority
and approval to enter into such assignment and assumption, and Landlord shall
thereupon have the prior right and option, to be exercised by notice to the
Tenant given at any time prior to the effective date of such proposed
assignment, to accept an assignment of this Lease upon the same terms and
conditions and for the same consideration, if any, as the bona fide offer made
by such person, less any brokerage commissions which may be payable out of the
consideration to be paid by such person for the assignment of this Lease.
If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code any and all monies or other considerations
payable or otherwise to be delivered to Landlord, shall be and remain the
exclusive property of Landlord and shall not constitute property of Tenant or of
the estate of the Tenant within the meaning of the Bankruptcy Code. Any and all
monies or other considerations constituting the Landlord's property under the
preceding sentence not paid or delivered to the Landlord shall be held in trust
for the benefit of Landlord and shall be promptly paid to the Landlord.
Any person or entity to which this Lease is assigned pursuant to the
provisions of the Bankruptcy Code shall be conclusively 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. Any
such assignee shall be permitted to use the Leased Premises only for the Use.
Nothing contained in this Section shall, in any way, constitute a
waiver of the provisions of Article XIV of this Lease relating to alienation.
Tenant shall not, by virtue of this Section, have any further rights relating to
assignment other than those granted in the Bankruptcy Code. Notwithstanding
anything in this Lease to the contrary, all amounts payable by Tenant to or on
behalf of Landlord under this Lease, whether or not expressly denominated as
rent, shall constitute rent for the purpose of Section 501(b)(6) or any
successive section of the Bankruptcy Code.
ARTICLE XXI
-----------
LANDLORD'S PERFORMANCE OF TENANT'S COVENANTS
--------------------------------------------
SECTION 21.1. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS. In
------------------------------------------------
the event Tenant shall fail to maintain any insurance required to be paid by it
under the terms hereof, or in an Emergency Situation or upon occurrence of an
Event of Default, Landlord may (but shall not be obligated so to do), and
without waiving or releasing Tenant from any obligation of Tenant hereunder,
make any payment or perform any other act which Tenant is obligated to make or
perform under this Lease in such manner and to such extent as Landlord may deem
desirable; and in so doing Landlord shall also have the right to enter upon the
Premises for any purpose reasonably necessary in connection therewith and to pay
or incur any other necessary and incidental costs and expenses, including
reasonable attorneys' fees. All sums so paid and all liabilities so incurred by
Landlord, together with interest thereon at the rate per annum which is the
lesser of (i) the Lease Interest Rate or (ii) the highest rate permitted by law
shall be deemed Additional Rent hereunder and shall be payable to Landlord upon
demand as Additional Rent. Landlord shall use reasonable efforts to give prior
notice (which may be oral) of its performance, if reasonably feasible under the
circumstances. The performance of any such obligation by Landlord shall not
constitute a waiver of Tenant's default in failing to perform the same.
Inaction of Landlord shall never be considered as a waiver of any right accruing
to it pursuant to this Lease. Landlord, in making any
<PAGE>
payment hereby authorized: (a) relating to Taxes, may do so according to any
bill, statement or estimate, without inquiry into the validity of any tax,
assessment, sale, forfeiture, tax lien or title or claim thereof; (b) for the
discharge, compromise or settlement of any lien, may do so in such amounts and
to such persons as Landlord reasonably may deem appropriate; or (c) in
connection with the completion of construction of improvements to the Premises
or the repair, maintenance or the payment of operating costs thereof, may do so
in such amounts and to such persons as Landlord reasonably may deem appropriate.
Nothing contained herein shall be construed to require Landlord to advance
monies for any purpose. Landlord shall not in any event be liable for
inconvenience, annoyance, disturbance, loss of business or other damage of
Tenant or any other occupant of the Premises or any part thereof, by reason of
making repairs or the performance of any work on the Premises or on account of
bringing materials, supplies and equipment into or through the Premises during
the course thereof and the obligations of Tenant under this Lease shall not
thereby be affected in any manner. In doing so, however, Landlord shall use
reasonable efforts not to interfere with the normal operation of the Premises.
The term "EMERGENCY SITUATION" shall mean a situation which has caused or is
likely to cause bodily injury to persons, contamination of or material physical
damage to the Premises or adjoining property or economic liability or criminal
jeopardy to Landlord. Tenant shall have the right to have one of Tenant's agents
or employees escort Landlord during any entry hereunder.
ARTICLE XXII
------------
EXERCISE OF REMEDIES
--------------------
SECTION 22.1. CUMULATIVE REMEDIES. No remedy contained herein or
-------------------
otherwise conferred upon or reserved to Landlord, shall be considered exclusive
of any other remedy, but the same shall be cumulative and shall be in addition
to every other remedy given herein, now or hereafter existing at law or in
equity or by statute, and every power and remedy given by this Lease to Landlord
may be exercised from time to time and as often as occasion may arise or as may
be deemed expedient. No delay or omission of Landlord to exercise any right or
power arising from any default shall impair any such right or power or shall be
construed to be a waiver of any such default or an acquiescence therein.
SECTION 22.2. NO WAIVER. No waiver of any breach of any of the
---------
covenants of this Lease shall be construed, taken or held to be a waiver of any
other breach, or a waiver, acquiescence in or consent to any further or
succeeding breach of the same covenant. The acceptance by Landlord of any
payment of Rent or other sums payable hereunder after the termination by
Landlord of this Lease or of Tenant's right to possession hereunder shall not,
in the absence of agreement in writing to the contrary by Landlord, be deemed to
restore this Lease or Tenant's right to possession hereunder, as the case may
be, but shall be construed as a payment on account and not in satisfaction of
damages due from Tenant to Landlord. Receipt of Rent by Landlord, with
knowledge of any breach of this Lease by Tenant or of any default by Tenant in
the observance or performance of any of the conditions or covenants of this
Lease, shall not be deemed to be a waiver of any provision of this Lease.
SECTION 22.3. EQUITABLE RELIEF. In the event of any breach or
----------------
threatened breach by Tenant of any of the agreements, terms, covenants or
conditions contained in this Lease, Landlord shall be entitled to enjoin such
breach or reasonably threatened breach and shall have the right to invoke any
right and remedy allowed at law or in equity or by statute as though re-entry,
summary proceedings, and other remedies were not provided for in this Lease.
ARTICLE XXIII
-------------
SUBORDINATION TO MORTGAGES
--------------------------
<PAGE>
SECTION 23.1. SUBORDINATION. Landlord may execute and deliver a
-------------
mortgage or trust deed in the nature of a mortgage (both sometimes referred to
as "Mortgage") against the Premises or any portion thereof. This Lease and the
rights of Tenant hereunder, shall automatically, and without the requirement of
the execution of any further documents, be and are hereby made expressly subject
and subordinate at all times to the lien of any Mortgage now or hereafter
encumbering any portion of the Project, and to all advances made or hereafter to
be made upon the security thereof; provided, however, the holder of said
Mortgage agrees in writing not to disturb the rights of Tenant under this Lease
so long as Tenant is not in default hereunder. Notwithstanding the foregoing,
Tenant agrees to execute and deliver such instruments subordinating this Lease
to the lien of any such Mortgage as may be reasonably requested in writing by
Landlord from time to time. Notwithstanding anything to the contrary contained
herein, any mortgagee under a Mortgage may, by notice in writing to the Tenant,
subordinate its Mortgage to this Lease.
SECTION 23.2. MORTGAGE PROTECTION. Tenant agrees to give the holder
-------------------
of any Mortgage, by registered or certified mail, a copy of any notice of
default served upon the Landlord by Tenant, provided that prior to such notice
Tenant has received notice (by way of service on Tenant of a copy of an
assignment of rents and leases, or otherwise) of the address of such mortgagee
and containing a request therefor. Tenant further agrees that if Landlord shall
have failed to cure such default within the time provided for in this Lease,
then said mortgagee shall have an additional thirty (30) days after receipt of
notice thereof within which to cure such default or, if such default cannot be
cured within that time, then such additional time as may be necessary, if,
within such thirty (30) days, any mortgagee has commenced and is diligently
pursuing the remedies necessary to cure such default (including but not limited
to commencement of foreclosure proceedings, if necessary to effect such cure).
Such period of time shall be extended by any period within which such mortgagee
is prevented from commencing or pursuing such foreclosure proceedings by reason
of Landlord's bankruptcy. Until the time allowed as aforesaid for said
mortgagee to cure such defaults has expired without cure, Tenant shall have no
right to, and shall not, terminate this Lease on account of default. This Lease
may not be modified or amended so as to reduce the Rent or shorten the Term, or
so as to adversely affect in any other respect to any material extent the rights
of the Landlord, nor shall this Lease be cancelled or surrendered, without the
prior written consent, in each instance, of the mortgagee.
ARTICLE XXIV
------------
INDEMNITY AND WAIVER
--------------------
SECTION 24.1. INDEMNITY. Tenant shall not do or permit any act or
---------
thing to be done or omit to do any act or thing upon the Premises which may
subject Landlord to any liability or responsibility for injury, damage to
persons or property, or to any liability by reason of any violation of
applicable laws and shall exercise such control over the Premises so as to fully
protect Landlord against any such liability. Tenant shall defend, indemnify and
save Landlord, and any official, agent, beneficiary, contractor, director,
employee, lessor, mortgagee, officer, parent, partner, shareholder and trustee
of Landlord (each an "INDEMNIFIED PARTY") representatives, successors and
assigns harmless from and against any and all liabilities, suits, judgments,
settlements, obligations, fines, damages, penalties, claims, costs, charges and
expenses, including, without limitation, engineers', architects' and attorneys'
fees, court costs and disbursements, which may be imposed upon or incurred by or
asserted against any Indemnified Party (other than due to the negligence or
willful misconduct of Landlord) by reason of any of the following occurring
during or after (but attributable to a period of time falling within) the Term:
A. any demolition or razing or construction of any improvements or
any other work or thing done in, on or about the Premises or any part
thereof by Tenant or any member of the
<PAGE>
Tenant Group (defined below), including any claim that such work
constitutes "public works";
B. any use, nonuse, possession, occupation, alteration, repair,
condition, operation, maintenance or management of the Premises or any part
thereof or of any tunnel, creek, ditch, detention area, sidewalk, curb or
vault adjacent thereto by Tenant or any member of the Tenant Group;
C. any negligent act or omission or willful misconduct on the part of
Tenant or any member of the Tenant Group;
D. any accident, injury (including death) or damage to any person or
property occurring in, on or about the Premises or any part thereof or in,
on or about any tunnel, creek, ditch, detention area, sidewalk, curb or
vault adjacent thereto as a result of the act or neglect of Tenant or any
member of the Tenant Group;
E. any failure to perform or comply with any of the covenants,
agreements, terms or conditions in this Lease on Tenant's part to be
performed or complied with (other than the payment of money);
F. any lien or claim which may be alleged to have arisen against or
on the Premises, or any lien or claim which may be alleged to have arisen
out of this Lease and created or permitted to be created by Tenant or any
member of the Tenant Group against any assets of Landlord, or any liability
which may be asserted against Landlord with respect thereto;
G. any failure on the part of Tenant to keep, observe and perform any
of the terms, covenants, agreements, provisions, conditions or limitations
contained in the contracts and agreements affecting the Premises on
Tenant's part to be kept, observed or performed; and
H. any contest permitted pursuant to the provisions of this Lease.
No agreement or covenant of Tenant in this Section 24.1 shall be
deemed to exempt Landlord from, and Tenant's obligations under this Section 24.1
shall not include liability or damages for injury to persons or damage to
property caused by or resulting from the negligence of Landlord, its agents or
employees.
The obligations of Tenant under this Section 24.1 shall not be
affected in any way by the absence in any case of covering insurance or by the
failure or refusal of any insurance carrier to perform any obligation on its
part under insurance policies affecting the Premises or any part thereof.
SECTION 24.2. WAIVER OF CLAIMS. Tenant waives all claims it may
----------------
have against Landlord and Landlord's agents for damage or injury to person or
property sustained by Tenant or any persons claiming through Tenant or by any
occupant of the Premises, or by any other person, resulting from any part of the
Premises becoming out of repair, or resulting from any accident on or about the
Premises or resulting directly or indirectly from any act or neglect of any
person, except as a result of Landlord's negligence, willful misconduct or
willful breach of this Lease. This Section 24.2. shall include, but not by way
of limitation, damage caused by water, snow, frost, steam, excessive heat or
cold, sewage, gas, odors or noise, or caused by bursting or leaking pipes or
plumbing fixtures, and shall apply equally whether any such damage results from
the act or neglect of Tenant or of any other person, and whether such damage be
caused or result from anything or circumstance above mentioned or referred to,
or to any other thing or circumstance whether of a like nature or of a wholly
different nature. All Tenant's Equipment and other personal property belonging
to Tenant or any occupant of the Premises that is in or on any part of the
Premises shall be there at the risk of Tenant or of such other person only, and
Landlord shall not be liable for any damage thereto (except as a result of
Landlord's negligence or
<PAGE>
willful misconduct) or for the theft or misappropriation thereof.
ARTICLE XXV
-----------
SURRENDER
---------
SECTION 25.1. CONDITION. Upon the termination of this Lease
---------
whether by forfeiture, lapse of time or otherwise, or upon the termination of
Tenant's right to possession of the Premises, Tenant will at once surrender and
deliver up the Premises to Landlord, broom clean, in good order, condition and
repair, reasonable wear and tear excepted. "Broom clean" means free from all
debris, dirt, rubbish, personal property of Tenant, oil, grease, tire tracks or
other substances, inside and outside of the Improvements and on the grounds
comprising the Premises. Any damage caused by removal of Tenant from the
Premises, including any damages caused by removal of Tenant's Equipment as
defined above, shall be repaired and paid for by Tenant prior to the expiration
of the Term.
All Alterations temporary or permanent, excluding Tenant's Equipment
and the items described on EXHIBIT "E" hereto, in or upon the Premises placed
there by Tenant, shall become Landlord's property and shall remain upon the
Premises upon such termination of this Lease by lapse of time or otherwise,
without compensation or allowance or credit to Tenant, unless Landlord requests
their removal. If Landlord so requests removal of said additions, hardware,
Alterations or improvements and Tenant does not make such removal by the
termination of this Lease, or within ten (10) days after such request, whichever
is later, Landlord may remove the same and deliver the same to any other place
of business of Tenant or warehouse same, and Tenant shall pay the cost of such
removal, delivery and warehousing to Landlord on demand.
SECTION 25.2. REMOVAL OF TENANT'S EQUIPMENT. Upon the termination
-----------------------------
of this Lease by lapse of time, or otherwise, Tenant may remove Tenant's
Equipment provided, however, that Tenant shall repair any injury or damage to
the Premises which may result from such removal. If Tenant does not remove
Tenant's Equipment from the Premises prior to the end of the Term, however
ended, Landlord may, at its option, remove the same and deliver the same to any
other place of business of Tenant or warehouse the same, and Tenant shall pay
the cost of such removal (including the repair of any injury or damage to the
Premises resulting from such removal), delivery and warehousing to Landlord on
demand, or Landlord may treat tenant's equipment as having been conveyed to
Landlord with this Lease as a Bill of Sale, without further payment or credit by
Landlord to Tenant.
SECTION 25.3. HOLDOVER. If Tenant retains possession of the
--------
Premises or any part thereof after the termination of the Term, by lapse of time
and otherwise, then Tenant shall pay to Landlord monthly rent, at double the
rate payable for the month immediately preceding said holding over (including
increases for additional rent which Landlord may reasonably estimate), computed
on a per-month basis, for each month or part thereof (without reduction for any
such partial month) that Tenant thus remains in possession, and in addition
thereto, Tenant shall pay Landlord all damages, consequential as well as direct,
sustained by reason of Tenant's retention of possession. Alternatively, in the
event that Tenant retains possession of the Premises or any part thereof after
termination of the Term, by lapse or otherwise, for a period of more than thirty
(30) days, at the election of Landlord expressed in a written notice to Tenant
and not otherwise, such retention of possession shall constitute a renewal of
this Lease for six (6) months, at a rental equal to one hundred twenty percent
(120%) of the Rent during the previous year. The provisions of this paragraph
do not exclude the Landlord's rights of re-entry or any other right hereunder.
Any such extension or renewal shall be subject to all other terms and conditions
herein contained.
<PAGE>
ARTICLE XXVI
------------
COVENANT OF QUIET ENJOYMENT
---------------------------
SECTION 26.1. COVENANT OF QUIET ENJOYMENT. Landlord covenants that
---------------------------
Tenant, on paying the Rent and all other charges payable by Tenant hereunder,
and on keeping, observing and performing all the other terms,covenants,
conditions, provisions and agreements herein contained on the part of Tenant to
be kept, observed and performed, all of which obligations of Tenant are
independent of Landlord's obligations hereunder, shall, during the Term,
peaceably and quietly have, hold and enjoy the Premises subject to the terms,
covenants, conditions, provisions and agreement hereof free from hindrance by
Landlord or any person claiming by, through or under Landlord.
ARTICLE XXVII
-------------
NO RECORDING
------------
SECTION 27.1. NO RECORDING. This Lease shall not be recorded.
------------
ARTICLE XXVIII
--------------
NOTICES
-------
SECTION 28.1. NOTICES. All notices, consents, approvals to or
-------
demands upon or by Landlord or Tenant desired or required to be given under the
provisions hereof, shall be in writing. Any notices or demands from Landlord to
Tenant shall be deemed to have been duly and sufficiently given if a copy
thereof has been personally served, forwarded by expedited messenger or
recognized overnight courier service with evidence of delivery or mailed by
United States registered or certified mail in an envelope properly stamped and
addressed to Tenant at Tenant's Mailing Address, or at such other address as
Tenant may theretofore have furnished by written notice to Landlord. Any
notices or demands from Tenant to Landlord shall be deemed to have been duly and
sufficiently given if forwarded by expedited messenger or recognized overnight
courier service with evidence of delivery or mailed by United States registered
or certified mail in an envelope properly stamped and addressed to Landlord at
Landlord's Mailing Address, with a copy to Mark S. Richmond, Katz Randall &
Weinberg, 333 West Wacker Drive, Suite 1800, Chicago, Illinois 60606, or at such
other address as Landlord may theretofore have furnished by written notice to
Tenant. The effective date of such notice shall be the date of actual delivery,
except that if delivery is refused, the effective date of notice shall be the
date delivery is refused.
ARTICLE XXIX
------------
COVENANTS RUN WITH LAND
-----------------------
SECTION 29.1. COVENANTS. All of the covenants, agreements,
---------
conditions and undertakings in this Lease contained shall extend and inure to
and be binding upon the heirs, executors, administrators, successors and assigns
of the respective parties hereto, the same as if they were in every case
specifically named, and shall be construed as covenants running with the Land,
and wherever in this Lease reference is made to either of the parties hereto, it
shall be held to include and apply to, wherever applicable, the heirs,
executors, administrators, successors and assigns of such party. Nothing herein
contained shall be construed to grant or confer upon any person or persons,
firm, corporation or
<PAGE>
governmental authority, other than the parties hereto, their heirs, executors,
administrators, successors and assigns, any right, claim or privilege by virtue
of any covenant, agreement, condition or undertaking in this Lease contained.
SECTION 29.2. RELEASE OF LANDLORD. The term "Landlord", as used in
-------------------
this Lease, so far as covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner or owners at the
time in question of title to the Premises, and in the event of any transfer or
transfers of the title, Landlord herein named (and in the case of any subsequent
transfers or conveyances, the then grantor) shall be automatically freed and
relieved, from and after the date of such transfer or conveyance, of all
personal liability as respects the performance of any covenants or obligations
on the part of Landlord contained in this Lease thereafter to be performed;
provided that any funds in the hands of such Landlord or the then grantor at the
time of such transfer, in which Tenant has an interest, shall be turned over to
the grantee.
ARTICLE XXX
-----------
ENVIRONMENTAL MATTERS
---------------------
SECTION 30.1. DEFINED TERMS.
-------------
A. The term "HAZARDOUS MATERIALS", when used herein, shall include,
but shall not be limited to, any substances, materials or wastes that are
regulated by any local governmental authority, the state where the Premises or
the Project is located, or the United States of America because of toxic,
flammable, explosive, corrosive, reactive, radioactive or other properties that
may be hazardous to human health or the environment, including without
limitation, above or underground storage tanks, flammables, explosives,
radioactive materials, radon, petroleum and petroleum products, petroleum
products (other than petroleum products that are normally contained in motor
vehicles to the extent such products are not released), urea formaldehyde foam
insulation, methane, lead-based paint, polychlorinated biphenyl compounds,
hydrocarbons or like substances and their additives or constituents, pesticides
and any other special, toxic or hazardous materials, wastes, substances or
materials of any kind, including without limitation, those now or hereafter
defined, determined or identified as "hazardous substances," "hazardous
materials," "toxic substances" or "hazardous wastes" in any Environmental Law.
B. "ENVIRONMENTAL LAW" shall mean any Federal, state or local law,
statute, ordinance, code, rule, regulation, policy, common law, license,
authorization, decision, order, injunction, which pertains to health, safety,
any Hazardous Material, or the environment (including but not limited to ground
or air or water or noise pollution or contamination, and underground or above-
ground tanks) and shall include, without limitation, the Resource Conservation
and Recovery Act ("RCRA"), 42 U.S.C. (S)6901 et seq., as amended by the
-------
Hazardous and Solid Waste Amendments of 1984; the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, 42 U.S.C. (S)9601 et seq.
-------
("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of
1986 ("SARA"); the Hazardous Materials Transportation Act, 49 U.S.C. (S)1801 et
--
seq.; the Federal Water Pollution Control Act, 33 U.S.C. (S)1251 et seq.; the
- ---- -------
Clean Air Act, 42 U.S.C. (S)7401 et seq.; the Toxic Substances Control Act, 15
-------
U.S.C. (S)2601 et seq.; the Safe Drinking Water Act, 42 U.S.C. (S)300f et seq.;
------- -------
the Illinois Environmental Protective Act, 415 ILCS 4/1 et seq.; the Municipal
-------
Code of the City of Chicago; the Clean Air Act (42 U.S.C. (S)7401 et seq.,
-------
"CAA"); the Rivers and Harbors Act, (33 U.S.C. (S)401 et seq., "RHA"); the
-------
Emergency Planning and Community Right-to-Know Act of 1986 (41 U.S.C. 11001 et
--
seq., "EPCRA"), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C.
- ----
136 to 136y); the Oil Pollution Act of 1990 (33 U.S.C. 2701 et seq., "OPA"); and
-------
the Occupational Safety and Health Act (29 U.S.C. 651 et seq., "OSHA"); and any
-------
other local, state or federal environmental statutes, and all rules,
<PAGE>
regulations, orders and decrees now or hereafter promulgated under any of the
foregoing, as any of the foregoing now exist or may be changed or amended or
come into effect in the future.
C. "ENVIRONMENTAL CLAIM" shall mean and include any demand, notice
of violation, inquiry, cause of action, proceeding or suit for damages
(including reasonable attorneys' and experts' fees), losses, injuries to person
or property, damages to natural resources, fines, penalties, interest, cost
recovery, compensation, or contribution resulting from or in any way arising in
connection with any Hazardous Material or any Environmental Law.
D. "PRE-EXISTING CONDITION" shall mean the presence of any Hazardous
Material on the Premises, to the extent such Hazardous Material was not
introduced onto the Premises after the Commencement Date.
E. "ENVIRONMENTAL CONDITION" shall mean the existence of any
Hazardous Material on the Premises other than a Pre-Existing Condition, (i) in
violation of, or requiring cleanup under, any Environmental Law or the
provisions of this Article XXX; or (ii) which subjects Landlord to liability for
any Environmental Claim or which must be remediated to prevent Landlord from
incurring liability as a result of such Environmental Claim.
F. "ENVIRONMENTAL REMEDIATION" shall mean any investigative, cleanup,
removal, containment, remedial or other action relating to an Environmental
Condition (i) required pursuant to any Environmental Law, or (ii) necessary to
prevent Landlord from incurring, or relieve Landlord from, liability as a result
of an Environmental Claim.
G. "REMEDIATING PARTY" shall mean that party which has elected (or
is deemed to have elected) to perform any Environmental Remediation.
H. "TENANT GROUP" shall mean any of all of Tenant's agents,
employees, representatives, contractors, workmen, mechanics, suppliers,
customers, guests, licensees, invitees, sublessees, assignees and all of their
respective successors and assigns or any party claiming by, through or under any
of them.
SECTION 30.2. TENANT'S COVENANTS WITH RESPECT TO ENVIRONMENTAL
------------------------------------------------
MATTERS. During the Term, Tenant, at its sole cost and expense, shall:
- -------
A. comply with all Environmental Laws relating to the use and
operation of the Premises;
B. keep the Premises free of Hazardous Materials (except for Pre-
Existing Conditions except to the extent the same are known to
and exacerbated by Tenant or any member of the Tenant Group);
C. not exacerbate a known Pre-Existing Condition;
D. in the case of an Environmental Condition:
(1) promptly, but not later than three (3) business days after
the discovery of an Environmental Condition, notify Landlord of the
Environmental Condition;
(2) furnish a letter of credit, personal guaranty, escrow of
funds or other security reasonably acceptable to Landlord to secure
performance of Environmental Remediation and to assure Landlord that
all necessary funds are readily available to Landlord to pay the costs
and expenses of Environmental Remediation;
(3) submit to Landlord for review and approval prior to
commencement of
<PAGE>
any Environmental Remediation, a proposed scope of work and timetable
therefor, and provide Landlord with a cost estimate for same;
(4) diligently perform Environmental Remediation, as approved by
Landlord;
(5) submit to Landlord in a timely manner for review and comment
the documentation and information required by Sections 30.5 and 30.6
relating to each phase of the Environmental Remediation; and
(6) comply with applicable release reporting requirements and
provide Landlord with any information necessary to comply;
E. not install or operate any above or below ground tank, sump, pit,
pond, lagoon or other storage or treatment vessel or device on the Premises
without first obtaining Landlord's prior written consent;
F. not handle, use, generate, treat, dispose of or permit the use,
handling, generation, treatment, storage or disposal of any Hazardous
Materials in, on, under, around or above the Premises or Project at any
time during the Term.
SECTION 30.3. CONDUCT OF TENANT. If Tenant, with the prior written
-----------------
authorization of Landlord, which authorization may be granted or denied by
Landlord in its sole and absolute discretion generates, uses, transports,
stores, treats or disposes of any Hazardous Materials:
A. Tenant shall, at its own cost and expense, comply with all
Environmental Laws relating to Hazardous Materials other than Pre-Existing
Conditions;
B. Tenant shall (i) not dispose of any Hazardous Materials in
dumpsters or trash containers or at any other location at the Project; (ii)
not discharge any Hazardous Materials into drains or sewers; (iii) not
cause or allow the release, discharge, emission or run-off of any Hazardous
Materials to air, to surface waters, to the land, to ground water, whether
directly or indirectly; (iv) at Tenant's own cost and expense, arrange for
the lawful transportation and off-site disposal of all Hazardous Materials
generated by Tenant; (v) provide secondary containment around all Hazardous
Materials storage containers, storage facilities and above ground storage
tanks; (vi) conduct all necessary environmental inspections, such as, but
not limited to, asbestos inspections prior to any renovation or demolition,
as required by 40 CFR Part 61 and provide copies of all such reports to the
Landlord; (vii) comply with all reporting requirements under any local,
state or federal ordinance, statute or regulation, such as, but not limited
to, toxics inventory reporting under the Emergency Planning and Community
Right-to-Know Act, the provisions under 40 CFR Part 61, or various
regulations controlling the emissions into the atmosphere of volatile
organic compounds and provide copies of all such reports and notifications
to Landlord; and (viii) use only highly skilled people to address all
environmental issues associated with the leasehold, that such people and
all employees of the Tenant shall receive all required training or
certification under any local, state or federal law specifically mentioned
or alluded to in Section 30.1 of this Lease;
C. Tenant shall promptly provide Landlord with copies of all
communications, permits or agreements with any governmental authority or
agency (federal, state or local) or any private entity relating in any way
to the violation or alleged violation of any Environmental Laws or to any
violation of Tenant's obligations under subparagraph (B) above;
D. Landlord and Landlord's agents and employees shall have the right
to enter the Premises and/or conduct appropriate tests for the purpose of
ascertaining that Tenant complies
<PAGE>
with all applicable laws, rules or permits relating in any way to the
presence of Hazardous Materials on the Premises and/or the Project provided
Tenant shall have the right to have one of Tenant's agents or employees
escort Landlord during any entry hereunder; and
E. Upon the written request of Landlord no more frequently than once
every year, or on any other occasion in the event that Landlord has reason
to believe an environmental problem exists at the Premises, Tenant shall
provide Landlord the results of appropriate tests of air, water and soil to
demonstrate (i) that Tenant is in compliance with all applicable laws,
rules or permits relating in any way to the presence of any Hazardous
Materials on the Premises or the Project and (ii) the lack of any releases,
discharges or emissions.
If the presence, release, threat of release, placement on or in the
Premises and/or the Project occurs or is caused in whole or in part during the
Term of this Lease, or the generation, transportation, storage, treatment, or
disposal at the Premises and/or the Project occurs or is caused in whole or in
part during the Term of this Lease of any Hazardous Materials gives rise to
liability (including, but not limited to, a response action, remedial action, or
removal action) under any Environmental Laws or common law theory, including,
but not limited to nuisance, strict liability, negligence and trespass, Tenant
shall promptly take any and all remedial and removal action necessary to clean
up the Premises and/or the Project containing such Hazardous Materials and
mitigate exposure to liability arising from the Hazardous Materials, whether or
not required by law.
SECTION 30.4. EXACERBATION. If Tenant exacerbates a known Pre-
------------
Existing Condition (including as a result of Tenant's investigative or
remediation activities) during the Lease term, that the provisions of this
Article XXX shall apply to such exacerbation of the Pre-Existing Condition, and
Tenant shall perform Environmental Remediation as to such exacerbation. Tenant
shall be responsible for all fines and penalties caused by Tenant or to the
extent exacerbated by Tenant (including Tenant's environmental investigation or
remediation activities) at any time during the Lease Term.
SECTION 30.5. RIGHTS OF INSPECTION. Landlord and their respective
--------------------
agents and representatives shall have a right of entry and access to the
Premises at any time in Landlord's discretion for the purposes of (i) inspection
of the documentation relating to Hazardous Materials or environmental matters
maintained by Tenant or occupant of the Premises; (ii) ascertaining the nature
of the activities being conducted on the Premises and investigating whether
Tenant is in compliance with its obligations under Article XXX of this Lease;
and (iii) determining the type, kind and quantity of all products, materials and
substances brought onto the Premises, or made or produced thereon. Landlord and
its agents and representatives shall have the right to take samples in
quantities sufficient for analysis of all products, materials and substances
present on the Premises including, but not limited to, samples, products,
materials or substances brought onto or made or produced on the Premises by
Tenant or occupant of the Premises or their respective agents, employees,
contractors or invitees and shall also have the right to conduct other tests and
studies as may be reasonably determined by Landlord to be appropriate in order
to investigate whether Tenant is in compliance with its obligations under
Article XXX. Tenant shall have the right to have one of Tenant's agents or
employees escort Landlord during any entry hereunder.
SECTION 30.6. COPIES OF NOTICES. During the term of this Lease,
-----------------
Tenant and Landlord shall each provide the other promptly with copies of all
summons, citations, directives, information inquiries or requests, notices of
potential responsibility, notices of violation or deficiency, orders or decrees,
Environmental Claims, complaints, investigations, judgments, letters, notices of
environmental liens or response actions in progress, and other communications,
written or oral, actual or threatened, received in the case of Tenant, by Tenant
or occupant of the Premises, or in the case of Landlord, by Landlord, from the
United States Environmental Protection Agency, Occupational Safety and Health
Administration, Illinois Environmental Protection Agency, or other federal,
state or local agency or authority, or any other entity or individual (including
both governmental and non-governmental entities and individuals), concerning (a)
any actual or alleged release of a Hazardous Material on, to or from the
<PAGE>
Premises; (b) the imposition of any lien on the Premises relating to any
Hazardous Material; (c) any actual or alleged violation of or responsibility
under Environmental Laws; or (d) any actual or alleged liability under any
theory of common law tort or toxic tort, including without limitation,
negligence, trespass, nuisance, strict liability or ultrahazardous activity.
SECTION 30.7. TESTS AND REPORTS.
-----------------
A. Upon reasonable written request by Landlord, Tenant shall provide
Landlord, at Tenant's expense, with (i) copies of all environmental reports and
tests prepared or obtained by or for Tenant or occupant of the Premises; (ii)
copies of transportation and disposal contracts (and related manifests,
schedules, reports and other information) entered into or obtained by Tenant
with respect to any Hazardous Materials; (iii) copies of any permits issued to
Tenant under Environmental Laws with respect to the Premises; (iv) prior to
filing, copies of any and all reports, notifications and other filings to be
made by Tenant or occupant of the Premises to any federal, state or local
environmental authorities or agencies and after filing, copies of such filings;
and (v) any other applicable documents and information with respect to
environmental matters relating to the Premises. Tenant shall be obligated to
provide such documentation only to the extent within Tenant's reasonable
possession or control.
B. In addition, Landlord shall ever reasonably believe that there
exists any breach by Tenant of the terms of this Article XXX, or if any
Environmental Claim is made or if a default shall have occurred under the Lease,
or at Landlord's discretion, one (1) time per Lease Year, Landlord shall have
the right, but not the duty, to enter upon the Premises and conduct an
environmental assessment of the Premises, including but not limited to a visual
site inspection, review of records pertaining to the site and interviews of
Tenant's representatives or others concerning the site use and history and other
matters. Tenant shall have the right to have one of Tenant's agents or employees
escort Landlord during any entry hereunder. The investigation may also include
reasonable subsurface or other invasive investigation of the Premises including
but not limited to soil borings and sampling of site soil and ground or surface
water for laboratory analysis, as may be recommended by the consultant as part
of its inspection of the Premises or based upon such other reasonable evidence
of Environmental Conditions warranting such subsurface or other invasive
investigation. Landlord shall have the right, but not the duty, to retain any
independent professional consultant to conduct any such environmental
assessment; provided, however, that Landlord agrees to limit, in the absence of
an Environmental Claim or default under this Article XXX, the number of such
environmental assessments to one (1) per Lease Year for the Lease Term. Tenant
will cooperate with the Landlord's consultant and will supply to the consultant,
promptly upon request, any information reasonably requested by Landlord to
facilitate the completion of the environmental assessment. Landlord and its
designees are hereby granted access to the Premises at any time or times, upon
reasonable notice (which may be written or oral) to perform such environmental
assessment. In exercising its right, Landlord shall use its reasonable efforts
to minimize disruption of operations at the Premises. Any costs associated with
performance of the environmental assessment, including but not limited to the
consultant fees and restoration of any property damaged by such environmental
assessment, shall be paid by Landlord, unless such investigation discloses an
Environmental Condition, in which case Tenant shall pay such costs.
SECTION 30.8. INDEMNIFICATION. Tenant shall reimburse, defend,
---------------
indemnify and hold Landlord and any other Indemnified Party free and harmless
from and against any and all Environmental Claims, response costs, losses,
liabilities, damages, costs and expenses, including, without limitation, loss of
rental income, loss due to business interruption, and reasonable attorneys' fees
and costs, arising out of or in any way connected with any or all of the
following:
A. any Hazardous Materials (other than a Pre-Existing Condition)
which, at any time during the Term, are or were actually or allegedly
generated, stored, treated, released, disposed of or otherwise located on
or at the Premises as a result of the act or omission of any member of the
Tenant Group (regardless of the location at which such Hazardous Materials
are
<PAGE>
now or may in the future be located or disposed of), including, but not
limited to any and all (i) liabilities under any common law theory of tort,
nuisance, strict liability, ultrahazardous activity, negligence or
otherwise based upon, resulting from or in connection with any Hazardous
Material; (ii) obligations to take response, cleanup or corrective action
pursuant to any Environmental Laws; and (iii) the costs and expenses of
investigation or remediation in connection with the decontamination,
removal, transportation, incineration or disposal of any of the foregoing;
and
B. any actual or alleged illness, disability, injury or death of any
person, in any manner arising out of or allegedly arising out of exposure
to Hazardous Materials or other substances or conditions present at the
Premises as a result of the act or omission of any member of the Tenant
Group (including, but not limited to, ownership, operation and disposal of
any equipment which generates, creates or uses electromagnetic files, x-
rays, other forms of radiation and radioactive materials), regardless of
when any such illness, disability, injury or death shall have occurred or
been incurred or manifested itself; and
C. any actual or alleged failure of Tenant or any member of the
Tenant Group at any time and from time to time to comply with all
applicable Environmental Laws;
D. any failure by Tenant to comply with its obligations under this
Article XXX relating to an Environmental Condition for which Tenant is
Remediating Party;
E. Tenant's failure to provide all information, make all submissions,
and take all steps required by all applicable governmental authorities;
F. the imposition of any lien for damages caused by, or the recovery
of any costs for, the remediation cleanup of Hazardous Material as a result
of events that took place during the Term of this Lease as a result of the
act or omission of Tenant or any member of the Tenant Group excluding any
exacerbation of any unknown Pre-Existing Condition;
G. costs of removal of any and all Hazardous Material from all or any
portion of the Premises, which Hazardous Material were placed on the
Premises during the Term of this Lease as a result of the act or omission
of Tenant or any member of the Tenant Group;
H. costs incurred to comply, in connection with all or any portion of
the Premises, with all governmental regulations with respect to Hazardous
Materials on, in, under or affecting the Premises, which Hazardous
Materials were placed on the Premises during the Term of this Lease as a
result of the act or omission of Tenant or any member of the Tenant Group;
I. any spills, discharges, leaks, escapes, releases, dumping,
transportation, storage, treatment or disposal of any Hazardous Materials
which occur during the Term of this Lease, but only to the extent that such
Hazardous Materials originated from or were or are located on the Premises,
other than Pre-Existing Conditions.
In the event Environmental Claims or other assertion of liability
shall be made against any Indemnified Party for which the Indemnified Party is
entitled to indemnity hereunder, the procedure set forth in Section 24.1 shall
apply. The obligations of Tenant under this Section 30.8 shall survive any
termination or expiration of this Lease.
SECTION 30.9. TENANT REPRESENTATIONS WITH RESPECT TO ENVIRONMENTAL
----------------------------------------------------
MATTERS. Tenant acknowledges that the Premises are being leased in their
- -------
present "as is" condition. Tenant further acknowledges that Landlord has made
no representation whatsoever regarding Hazardous Materials on or about the
Premises.
<PAGE>
SECTION 30.10. NO LIABILITY OF LANDLORD.
------------------------
A. Notwithstanding the foregoing provisions of this Section 30.10
and subject to the Tenant's obligations under Section 30.4 above, Landlord
shall, at its sole cost and expense, remediate any Pre-Existing Condition to the
extent required by and in a manner permitted by applicable Environmental Laws.
ARTICLE XXXI
------------
SECURITY DEPOSIT
----------------
SECTION 31.1. SECURITY DEPOSIT. Tenant agrees to deposit with
----------------
Landlord, upon the execution of this Lease, the Security Deposit as security for
the full and faithful performance by Tenant of each and every term, provision,
covenant and condition of this Lease. If Tenant defaults beyond any applicable
grace and/or cure period in respect to any of the terms, provisions, covenants
and conditions of this Lease including, but not limited to, payment of all
rental and other sums required to be paid by Tenant hereunder, Landlord may use,
apply or retain the whole or any part of the Security Deposit for the payment of
such rent in default, for any sum which Landlord may expend or be required to
expend by reason of Tenant's default including, without limitation, any damages
or deficiency in the reletting of the Premises, whether such damages or
deficiency shall have accrued before or after re-entry by Landlord. If any of
the Security Deposit shall be so used, applied or retained by Landlord at any
time or from time to time, Tenant shall promptly, in each such instance, within
five (5) days of written demand therefor by Landlord, pay to Landlord such
additional sums as may be necessary to restore the Security Deposit to the
original amount set forth in the first Section of this Lease. If Tenant shall
fully and faithfully comply with all the terms, provisions, covenants and
conditions of this Lease, the Security Deposit, or the balance thereof, shall be
returned to Tenant within thirty (30) days after the later of (a) the time fixed
as the expiration of the Term of this Lease, including any early termination
pursuant to the terms of Articles X and XIII; (b) the removal of Tenant from the
Premises; (c) the surrender of the Premises by Tenant to Landlord in accordance
with this Lease; and (d) final determination of all amounts payable by Tenant
hereunder and payment of same. Except as otherwise required by law, Tenant shall
not be entitled to any interest on the aforesaid Security Deposit. In the
absence of evidence satisfactory to Landlord of an assignment of the right to
receive the Security Deposit or the remaining balance thereof, Landlord may
return the security deposit to the original Tenant, regardless of one or more
assignments of this Lease.
SECTION 31.2. LETTER OF CREDIT. Notwithstanding the foregoing, the
----------------
Security Deposit may, at the option of Tenant, be in the form of an
unconditional and irrevocable letter of credit (hereinafter referred to as the
"Letter of Credit") in the amount of the Security Deposit, in the form and
issued by a bank satisfactory to Landlord. The first such Letter of Credit
shall expire no earlier than thirty (30) days after the first (1st) anniversary
of the Commencement Date and all subsequent replacement Letters of Credit shall
expire no earlier than twelve (12) months from the expiry date of the then
outstanding and expiring Letter of Credit. The Letter of Credit may contain an
"evergreen clause" providing that the Letter of Credit shall automatically renew
for one year intervals unless thirty (30) days prior to any expiration date,
Landlord is notified in writing by certified mail from the Letter of Credit
issuer that the Letter of Credit will not be renewed. Otherwise, Tenant shall
ensure that at all times during the term of this Lease and for thirty (30) days
after expiration of the Term, an unexpired Letter of Credit in the face amount
of the Security Deposit or cash in such amount shall be in the possession of
Landlord. During the Term, Tenant shall deliver a replacement Letter of Credit
to Landlord no later than thirty (30) days prior to the expiration date of the
then outstanding and expiring Letter of Credit. Failure by Tenant to deliver
any replacement Letter of Credit as required above shall entitle Landlord to
draw under the outstanding Letter of Credit and to retain the entire proceeds
thereof for application as the Security
<PAGE>
Deposit under this Lease. Each Letter of Credit shall be for the benefit of
Landlord and its successors and assigns and shall entitle Landlord or its
successors or assigns to draw from time to time under the Letter of Credit in
portions or in whole upon presentation of a sight draft and statement by
Landlord that Landlord is entitled to draw thereunder pursuant to the terms and
provisions of this Lease. If Tenant defaults in respect to any of the terms,
provisions, covenants or conditions of this Lease, including, but not limited
to, payment of Base Rent, Additional Rent, or any other amount payable by Tenant
hereunder, and such default is not cured by Tenant within the applicable notice
and cure periods contained in this Lease, if any, Landlord may draw upon the
Letter of Credit in part or in whole and may use, apply or retain the whole or
any part of the proceeds thereof or any cash or other Security Deposit for any
such payment, or for any other sum which Landlord may expend or be required to
expend by reason of Tenant's default, including without limitation any damages
or deficiency in the reletting of the Premises, whether such damages or
deficiency shall have occurred before or after any re-entry by Landlord. If the
Letter of Credit shall be so drawn upon or otherwise if any of the Security
Deposit shall be so used, applied or retained in each such instance, upon the
written demand therefor by Landlord, pay to Landlord such additional sum as may
be necessary to restore the Security Deposit or deliver a replacement Letter of
Credit.
SECTION 31.3. SUCCESSORS. Landlord may deliver the Letter of
----------
Credit or any cash Security Deposit funds deposited hereunder by Tenant to the
transferee of Landlord's interest in the Premises in the event that such
interest is transferred, and thereupon Landlord shall be discharged from any
further liability with respect to said Letter of Credit or cash Security
Deposit. Tenant hereby agrees not to look to any mortgagee as mortgagee,
mortgagee in possession, or successor in title to the Project for any letter of
Credit or cash Security Deposit required by Landlord hereunder, unless said
Letter of Credit or sums have actually been received by said mortgagee as
security for Tenant's performance of this Lease.
SECTION 31.4. RETURN OF SECURITY DEPOSIT. In the event that Tenant
--------------------------
has not been in default under this Lease at any time prior to September 30,
2004, the Security Deposit shall be reduced to one monthly Base Rent payment on
October 1, 2004. In such event, Landlord shall promptly return the excess
portion of the Security Deposit to Tenant or return any Letter of Credit held by
Landlord upon receipt of a cash deposit or a replacement Letter of Credit in the
correct amount.
ARTICLE XXXII
-------------
MISCELLANEOUS
-------------
SECTION 32.1. CAPTIONS. The captions of this Lease are for
--------
convenience only and are not to be construed as part of this Lease and shall not
be construed as defining or limiting in any way the scope or intent of the
provisions hereof.
SECTION 32.2. SEVERABILITY. If any covenant, agreement or
------------
condition of this Lease or the application thereof to any person, firm or
corporation or to any circumstances, shall to any extent be invalid or
unenforceable, the remainder of this Lease, or the application of such covenant,
agreement or condition to persons, firms or corporations or to circumstances
other than those as to which it is invalid or unenforceable, shall not be
affected thereby. Each covenant, agreement or condition of this Lease shall be
valid and enforceable to the fullest extent permitted by law.
SECTION 32.3. APPLICABLE LAW. This Lease shall be construed and
--------------
enforced in accordance with the laws of the state where the Premises are
located.
SECTION 32.4. AMENDMENTS IN WRITING. None of the covenants, terms
---------------------
or conditions
<PAGE>
of this Lease, to be kept and performed by either party, shall in any manner be
altered, waived, modified, changed or abandoned, except by a written instrument,
duly signed, acknowledged and delivered by the other party.
SECTION 32.5. RELATIONSHIP OF PARTIES. Nothing contained herein
-----------------------
shall be deemed or construed by the parties hereto, nor by any third party, as
creating the relationship of principal and agent or of partnership, or of joint
venture by the parties hereto, it being understood and agreed that no provision
contained in this Lease nor any acts of the parties hereto shall be deemed to
create any relationship other than the relationship of Landlord and Tenant.
SECTION 32.6. BROKERAGE. Tenant warrants that it has no dealings
---------
with any real estate broker or agent in connection with this lease other than
Landlord's Broker and Tenant's Broker, and Tenant covenants to pay, hold
harmless and indemnify Landlord from and against any and all cost, expense or
liability for any compensation, commissions and charges claimed by any other
broker or other agent with respect to this Lease or the negotiation thereof
arising out of any acts of Tenant.
SECTION 32.7. NO ACCORD AND SATISFACTION. No payment by Tenant or
--------------------------
receipt by Landlord of a lesser amount than the monthly rent herein stipulated
and additional rent shall be deemed to be other than on account of the earliest
stipulated rent, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment as rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such rent or pursue any other remedy
in this Lease provided.
SECTION 32.8. JOINT EFFORT. The preparation of this Lease has been
------------
a joint effort of the parties hereto and the resulting documents shall not,
solely as a matter of judicial construction, be construed more severely against
one of the parties than the other.
SECTION 32.9. WAIVER OF JURY TRIAL. Tenant hereby waives a jury
--------------------
trial in action brought by Landlord hereunder. If Landlord commences any
proceeding for nonpayment of rent or any other sum due to be paid by Tenant
under this Lease, Tenant hereby agrees that Tenant will not impose any
counterclaim of any nature or description in any such proceeding, provided
however, that such agreement of Tenant shall not be construed as a waiver of the
right of Tenant to assert such claim in a separate action or actions brought by
Tenant.
SECTION 32.10. TIME. Time is of the essence of this Lease, and all
----
provisions herein relating thereto shall be strictly construed.
SECTION 32.11. LANDLORD'S CONSENT. Landlord's granting of any
------------------
consent under this Lease, or Landlord's failure to object to any action taken by
Tenant without Landlord's consent required under this Lease, shall not be deemed
a waiver by Landlord of its rights to require such consent for any further
similar act by Tenant. No waiver by Landlord of any other breach of the
covenants of this Lease shall be construed, taken or held to be a waiver of any
other breach or to be a waiver, acquiescence in or consent to any further or
succeeding breach of the same covenant. None of the Tenant's covenants under
this Lease, and no breach thereof, shall be waived, altered or modified except
by a written instrument executed by Landlord.
SECTION 32.12. NO PARTNERSHIP. Landlord is not, and shall not be
--------------
deemed to be, in any way or for any purpose, the partner, employer, principal,
master or agent of or with Tenant.
SECTION 32.13. LANDLORD'S LIABILITY. Notwithstanding anything to
--------------------
the contrary herein contained, there shall be absolutely no personal liability
asserted or enforceable against Landlord or on any persons, firms or entities
who constitute Landlord with respect to any of the terms, covenants, conditions
and provisions of this Lease, and Tenant shall, subject to the rights of any
mortgagee, look
<PAGE>
solely to the interest of Landlord, its successors and assigns in the Project
for the satisfaction of each and every remedy of Tenant in the event of default
by Landlord hereunder; such exculpation of personal liability is absolute and
without any exception whatsoever. If the entity constituting Landlord is a
partnership, Tenant agrees that the deficit capital account of any such partner
shall not be deemed an asset or property of said partnership.
SECTION 32.14. LANDLORD RIGHTS. This Lease does not grant any
---------------
rights to light or air over or about the Premises. Landlord specifically
excepts and reserves to itself the use of any roofs, the exterior and structural
components of the Building, all rights to the land and improvements below the
improved floor level of the Building, to the improvements and air rights above
the Building and to the improvements and air rights located outside the demising
walls of the building and to such areas within the Building required for
installation of utility lines and other installations and to such portions of
the Premises necessary to access, maintain and repair same, and no rights with
respect thereto are conferred upon Tenant. Notwithstanding the foregoing,
Landlord shall provide, at no additional charge to Tenant, 6,000 square feet of
roof area above the Premises for condenser units, an antenna and a microwave
dish all of which may be placed on the roof subject to compliance with the other
terms and conditions of this Lease.
SECTION 32.15. ENTIRE AGREEMENT. It is understood and agreed that
----------------
all understandings and agreements heretofore had between the parties hereto are
merged in this Lease, the exhibits annexed hereto and the instruments and
documents referred to herein, which alone fully and completely express their
agreements, and that no party hereto is relying upon any statement or
representation, not embodied in this Lease, made by the other. Each party
expressly acknowledges that, except as expressly provided in this Lease the
other party and the agents and representatives of the other party have not made,
and the other party is not liable for or bound in any manner by, any express or
implied warranties, guaranties, promises, statements, inducements,
representations or information pertaining to the transactions contemplated
hereby.
SECTION 32.16. RENT ABSOLUTE. Except as otherwise expressly
-------------
provided herein, this Lease shall be deemed and construed to be a "net lease"
and Tenant agrees to pay all costs and expenses of every kind and nature
whatsoever, ordinary and extraordinary, arising out of or in connection with the
ownership, maintenance, repair, replacement, use and occupancy of the Premises
during the Term of this Lease, which, except for the execution and delivery
hereof, would otherwise have been payable by Landlord.
SECTION 32.17. TENANT AUTHORITY. Simultaneously with the execution
----------------
and delivery of this Lease by Tenant, Tenant shall deliver to Landlord:
A. Certified resolutions of its board of directors of Tenant
executing this Lease on behalf of Tenant authorizing the execution and
delivery of this Lease.
B. A certificate of incumbency executed by the secretary of any
corporate partner of Tenant executing this Lease on behalf of Tenant
identifying by name, office and facsimile signature the officers of Tenant.
C. A current certificate of good standing issued by the Secretary of
State of the state of incorporation of Tenant and the State of Illinois.
ARTICLE XXXIII
--------------
RENEWAL OPTIONS
---------------
<PAGE>
SECTION 33.1. FIRST RENEWAL OPTION. Tenant shall have the option
--------------------
("First Renewal Option") to renew the Initial Term for all of the Premises as of
the expiration date of the Initial Term, for one (1) additional period of five
(5) years ("First Renewal Term") upon the following terms and conditions:
A. Tenant gives Landlord written notice of its exercise of the
First Renewal Option at least six (6) months prior to the expiration of the
Initial Term.
B. Tenant is not in default under this Lease either on the date
Tenant delivers the notice required under Section 33.1A above or at any
time thereafter prior to the commencement of the First Renewal Term.
C. Landlord shall be provided with evidence satisfactory to it
of Tenant's compliance with the terms and conditions of Article XXX hereof.
D. All of the terms and provisions of this Lease (except this
Section 33.1) shall be applicable to the First Renewal Term, except that
Base Rent for the First Renewal Term shall be determined as follows: Base
Rent for the First Renewal Term shall be equal to the greater of: (i) one
hundred percent (100%) of the Base Rent for the last year of the Initial
Term, or (ii) Landlord's determination of the Fair Value (as hereinafter
defined). For purposes of this Lease, "Fair Value" shall mean Landlord's
determination, utilizing its reasonable judgment, of an annual amount per
rentable square foot for each year of the applicable renewal term for which
Fair Value is being determined beginning with the first (1st) day of the
subject period that a willing, creditworthy, new non-equity tenant leasing
comparable space to Tenant's would pay and a willing, comparable landlord
of a building comparable to the Building in the Chicago metropolitan area
("Market") would accept at arm's length, giving appropriate consideration
to annual rental rate per rentable square foot, rental escalations, length
of lease term, size and location of the premises being leased, and other
generally applicable terms and conditions prevailing for comparable space
in comparable buildings located in the Market. In the event Tenant
notifies Landlord within ten (10) days after receipt of notice of
Landlord's determination of Fair Value that Tenant disagrees with
Landlord's determination, then, at the option of Landlord or Tenant,
Landlord and Tenant shall institute an appraisal procedure to determine the
Fair Value by jointly nominating and appointing, within ten (10) days after
receipt of notice from the other party, one appraiser who shall make a
determination of the Fair Value of the Premises. If Landlord and Tenant
fail to jointly agree on the nomination and appointment of one appraiser
within said ten (10) day period, each party shall then each nominate and
appoint one appraiser within fifteen (15) days after the end of the initial
ten (10) day period and give notice of such appointment to the other party.
Upon the appointment of the two appraisers as aforesaid, the two appraisers
so appointed shall jointly make a determination of the Fair Value of the
Premises. If either party fails to appoint an appraiser within said fifteen
(15) day period, the appraiser appointed by the other party shall make the
determination of the Fair Value. If the two appraisers are unable to agree
upon a determination of the Fair Value of the Premises within fifteen (15)
days after the appointment of the second appraiser, the two appraisers
shall jointly nominate and appoint a third appraiser within fifteen (15)
days after the expiration of said fifteen (15) day period and give written
notice of such appointment to both parties. In the event the two appraisers
fail to appoint such third appraiser within said fifteen (15) day period,
either party may thereafter apply to the United States District Court for
the Northern District of Illinois for the appointment of such third
appraiser. The third appraiser shall make a determination of the Fair
Value. In the event the three appraisers are unable to agree upon a
determination of the Fair Value of the Premises within fifteen (15) days
after the appointment of the third appraiser, then the Fair Value shall be
an amount equal to the average of the three values contained in the
respective written appraisals submitted by the appraisers. The appraisers
shall make their determination in writing and give notice thereof to both
parties. Each appraiser shall afford both parties a hearing and
<PAGE>
the right to submit evidence, with the privilege of cross-examination in
connection with its determination of the Fair Value. In the event any
appraiser appointed as aforesaid shall die or become unable or unwilling to
act before completion of the appraisal, such appraiser's successor shall be
appointed in the same manner as provided above. Any appraiser appointed
hereunder shall (x) be independent of both parties (and of all persons and
entities with interest in either party); (y) have not less than five (5)
years' experience in the appraisal of real property; and (z) hold the
professional designation M.A.I., or if the M.A.I. ceases to exist, a
comparable designation from an equivalent professional appraiser
organization. All appraisal fees and expenses shall be borne equally by the
parties.
SECTION 33.2. SECOND RENEWAL OPTION. Tenant shall have the option
---------------------
(hereinafter referred to as the "Second Renewal Option") to renew the Term for
all of the Premises as of the expiration date of the First Renewal Term, for one
(1) additional period of five (5) years ("Second Renewal Term") upon the
following terms and conditions:
A. Tenant gives Landlord written notice of its exercise of the
Second Renewal Option at least six (6) months prior to the expiration of
the First Renewal Term.
B. Tenant is not in default under this Lease either on the date
Tenant delivers the notice required under (1) above or at any time
thereafter prior to the commencement of the Second Renewal Term so
exercised.
C. Landlord shall be provided with evidence satisfactory to it
of Tenant's compliance with the terms and conditions of Article XXX hereof.
D. All of the terms and provisions of this Lease (except this
Article XXXIII) shall be applicable to the Second Renewal Term, except that
Base Rent for the Second Renewal Term shall be determined as follows: Base
Rent for the Second Renewal Term shall be equal to the greater of: (i) one
hundred percent (100%) of the Base Rent for the last year of the First
Renewal Term, or (ii) Landlord's determination of the Fair Value.
SECTION 33.3. "AS IS" CONDITION. Tenant agrees to accept the
-----------------
Premises to be covered by this Lease during the First Renewal Term and the
Second Renewal Term in an "as is" physical condition and Tenant shall not be
entitled to receive any allowance, credit, concession or payment from Landlord
for the improvement thereof.
SECTION 33.4. AMENDMENT. In the event Tenant exercises the First
---------
Renewal Option or the Second Renewal Option, Landlord and Tenant shall mutually
execute and deliver an amendment to this Lease reflecting the renewal of the
Term on the terms herein provided, which amendment shall be executed and
delivered promptly after the determination of Base Rent to be applicable to the
First Renewal Term or Second Renewal Term as hereinabove provided.
SECTION 33.5. TERMINATION. The First Renewal Option and the Second
-----------
Renewal Option herein granted shall automatically terminate upon the earliest to
occur of (i) the expiration or termination of this Lease, (ii) the termination
of Tenant's right to possession of the Premises, (iii) any assignment or
subletting by Tenant, except as expressly allowed under this Lease, or (iv) the
failure of Tenant to timely or properly exercise the First Renewal Option or the
Second Renewal Option.
SECTION 33.6. NO COMMISSIONS. Landlord and Tenant acknowledge and
--------------
agree that no real estate brokerage commission or finder's fee shall be payable
by Landlord in connection with any exercise by Tenant of the First Renewal
Option or the Second Renewal Option herein contained.
<PAGE>
ARTICLE XXXIV
-------------
RIGHT OF FIRST OPPORTUNITY
--------------------------
SECTION 34.1. Provided Tenant is not in default under the terms and
conditions of this Lease as of the date Tenant notifies Landlord of its desire
to exercise a Right of First Opportunity" (as hereinafter defined), Tenant shall
have a right of first opportunity through the end of the Term ("Right of First
Opportunity") to lease that portion of the Building depicted on EXHIBIT "D"
attached hereto and made a part hereof ("Right of First Opportunity Premises"),
subject to the terms and conditions hereof. Prior to the date on which Landlord
contemplates submitting a "Proposal" to a third party with respect to the
leasing of all of the Right of First Opportunity Premises, provided Tenant is
not in default under any of its obligations under this Lease, Landlord shall
notify Tenant, in writing, as to the date in the future ("Availability Date") as
of which the Right of First Opportunity Premises shall be available to Tenant
("Landlord's Notice"). Tenant must notify Landlord, in writing, within five (5)
business days immediately following Tenant's receipt of Landlord's Notice of
Tenant's desire to exercise its Right of First Opportunity. Tenant's Right of
First Opportunity must be exercised as to one hundred percent (100%) of the
Right of First Opportunity Premises. If Tenant does not notify Landlord of its
election to exercise its Right of First Opportunity with respect to the Right of
First Opportunity Premises within said five (5) business day period, then,in
such case, Tenant shall be deemed to have elected not to exercise its Right of
First Opportunity and shall waive its Right of First Opportunity. If Tenant
elects to exercise its Right of First Opportunity and so notifies Landlord of
same within the aforesaid five (5) business day period, then, in such case,
Tenant shall lease the Right of First Opportunity Premises as of the
Availability Date in its then "as-is" condition and on the same terms and
conditions contained in the Lease, except (i) Base Rent for the Right of First
Opportunity Premises shall be the Fair Value for the Right of First Opportunity
Space as determined pursuant to Section 33.1D hereof for the remainder of the
then applicable portion of the Term (i.e., Initial Term, First Renewal Term or
Second Renewal Term), (ii) the term "Premises" for all purposes of this Lease
shall include the Right of First Opportunity Premises, and (iii) Tenant's
Proportionate Share shall increase to 100%. Notwithstanding the immediately
foregoing, Tenant shall be required to commence paying Rent for the Right of
First Opportunity Premises on the Availability Date.
ARTICLE XXXV
------------
TENANT IMPROVEMENTS
-------------------
SECTION 35.1. TENANT IMPROVEMENTS.
-------------------
A. Tenant is hereby granted access to the Premises, commencing on
September 1, 1998, for the purposes of making such inspections and
measurements and testing as the Tenant deems necessary to enable Tenant to
prepare the "Tenant's Plans" (as hereinbelow defined) for the construction
of an office and data center in the Premises. However, Tenant shall not
commence actual construction within the Premises until Tenant has obtained
the prior approval to Tenant's Plans from Landlord (which approval shall
not be unreasonably withheld or delayed and provided which approval may not
be withhled merely because Tenant will be constructing a data center on the
Premises) and the Village and Tenant has submitted to Landlord the
insurance as required elsewhere in this Lease and the appropriate building
permits.
B. Tenant shall, at Tenant's sole cost and expense (subject to Tenant
Allowance, defined below), cause to be prepared and submitted to Landlord
for Landlord's prior approval, plans and specifications ("Tenant's Plans"),
including, but not limited to, all space plans, working drawings,
mechanical and engineering drawings, disclosing all construction to be
performed by Tenant in the Premises. Landlord's approval shall not be
unreasonably withheld. Landlord
<PAGE>
agrees to review and either approve or disapprove (and noting with such
disapproval the specific items not approved and the reasons therefor)
Tenant's Plans within ten (10) business days of Landlord's receipt of a
complete set of Tenant's Plans. In the event Tenant's Plans are
disapproved, Tenant shall revise and resubmit Tenant's Plans and Landlord
shall review the same and notify Tenant of its approval or disapproval
within ten (10) business days thereafter in the same manner as required for
the initial submittal.
C. Tenant is hereby granted the right to utilize contractors of
Tenant's own choice ("Tenant's Contractor") to build out the Premises in
compliance with the approved Tenant's Plans ("Tenant's Work"), subject to
Landlord's reasonable approval as to the qualifications of the general
contractor and subcontractors with contracts in excess of $25,000.00, which
approval shall not be unreasonably withheld. Prior to commencing any work
on or to the Premises, Tenant shall submit all written contracts with
Tenant's Contractor for Landlord's approval. All installations,
alterations and additions shall be constructed in a good and workmanlike
manner and only new and good grades of material shall be used. Such work
performed by Tenant's Contractor shall comply with all applicable insurance
requirements, all laws, statutes, ordinances and regulations of the
Village, the State of Illinois and the United States of America. Tenant
shall permit Landlord to observe all construction operations within the
Premises performed by Tenant's Contractor. No silence or statement by any
representative of Landlord shall be deemed or construed as an assumption by
said person or Landlord of any responsibility for or in relation to the
construction of the Premises or any guarantee that the work completed
within the Premises complies with laws or with Tenant's Plans, or is
suitable or acceptable to Tenant for Tenant's intended business purposes.
D. Tenant, at its sole cost and expense, shall file all necessary
plans with the appropriate governmental authorities having jurisdiction
over Tenant's Work. Tenant shall be responsible for obtaining all permits,
authorizations and approvals necessary to perform and complete Tenant's
Work. Tenant shall not commence Tenant's Work until the required permits
authorizations and approvals for such work are obtained and delivered to
Landlord.
E. Tenant shall at all times keep the Premises and adjacent areas
free from accumulations of waste materials or rubbish caused by its
suppliers, contractors or workmen. Landlord reserves the right to do
clean-up at the expense of Tenant if Tenant fails to comply with Landlord's
reasonable cleanup requirements and Landlord notifies Tenant of such
failure and Tenant does not cure such failure within five (5) days
thereafter. At the completion of Tenant's Work, Tenant's Contractor shall
forthwith remove all rubbish and all tools, equipment and surplus materials
from and about the Premises and Building. Any damage caused by Tenant's
Contractor to any portion of the Building or to any property of Landlord
shall be repaired forthwith by Tenant at its expense to its condition prior
to such damage.
F. Tenant and Tenant's Contractor shall assume responsibility for the
prevention of accidents and shall take all reasonable safety precautions
with respect to Tenant's Work and shall comply with all reasonable safety
measures initiated by Landlord and with all applicable laws, ordinances,
rules, regulations and orders applicable to Tenant's Work including those
of any public authority for the safety of persons or property. Tenant shall
advise Tenant's Contractor to report to Landlord any injury to any of its
agents or employees and shall furnish Landlord a copy of the accident
report filed with its insurance carrier within three (3) days of its
occurrence.
G. The Landlord and its agents and their representatives shall at all
times have access to the Tenant's Work wherever it is in preparation or
progress for the purpose of observing and reviewing the same; provided,
however, Landlord shall not unreasonably interfere with the performance of
Tenant's Work in connection with any such observations or reviews.
<PAGE>
Tenant and Contractors shall provide reasonable facilities for such access
and for inspection.
H. The Tenant Allowance, defined below, shall be limited to
improvements or alterations by Tenant to the Building and shall not be used
by Tenant to purchase any equipment or personal property which shall be
solely used in the conduct of Tenant's business and is not to be
incorporated into the Building.
SECTION 35.2. TENANT ALLOWANCE. Provided no default exists under
----------------
this Lease, Landlord shall pay Tenant as Landlord's contribution for the costs
of construction of the Tenant Work a sum equal to ONE HUNDRED FIFTY THOUSAND AND
NO/100 ($150,000.00) DOLLARS ("Tenant Allowance"). The cost of all work
necessary to construct the Tenant's Work (including, but not limited to, all
labor, material, permits) and to pay architectural fees, permit fees and
engineering fees shall, subject to the Tenant's Allowance, be the responsibility
of the Tenant. The Tenant's Allowance shall be paid in installments by the
Landlord to the Tenant's Contractor as the Work progresses within ten (10) days
of Tenant's presentation of reasonable documentation evidencing (i) the amounts
due, in relation to the work, to the general contractor and any subcontractors
and materialmen, including, but not limited to, general contractor's statement
and partial and final lien waivers, as the case may be, covering all Work for
which the Tenant is requesting payment; (ii) the percentage of the Work
completed; (iii) a sworn statement from Tenant setting forth in detail all
contractors and material suppliers with whom Tenant has contracted, their
addresses, work or materials to be furnished, amounts of contracts, amounts paid
to date, amounts of current payments and balances due; and (iv) a report by the
person or entity that prepared the Tenant's Plans certifying that the Tenant's
Work has been completed and materials are in place as indicated by the request
for payment of Tenant's Contractor. Tenant shall be responsible for obtaining
and submitting to Landlord all documentation reasonably required by the Landlord
in relation to Tenant's Allowance draw requests made by Tenant. Tenant's
Allowance draw amounts shall never exceed, in the aggregate, the lesser of: (i)
the remaining unpaid amount of the Tenant's Allowance, or (ii) that amount equal
to ninety percent (90%) of the cost of all Tenant's Work completed in accordance
with the Tenant's Plans, as evidenced by the documentation furnished with such
request (including lien waivers). The ten percent (10%) of the cost of Tenant's
Work not disbursed ("Holdback") shall be disbursed to Tenant's Contractor with
the final payment for Tenant's Work, which shall include any amounts to be paid
by Tenant in excess of the Tenant Allowance. The disbursement of the Tenant's
Allowance and any additional funds due from Tenant shall be made through a
construction escrow ("Construction Escrow") established with Chicago Title
Insurance Company ("Escrowee"). The parties shall execute a standard form of
construction escrow agreement utilized by the Escrowee with such revisions
thereto as may be necessary to conform to the provisions hereof. The parties,
Tenant's Contractor and all subcontractors shall furnish to the Escrowee such
other documents, information and undertakings as may be reasonably requested by
the Escrowee to enable it to advise Landlord and Tenant, with respect to the
periodic disbursement made through the construction escrow, that all statements
and lien waivers are in proper form for the purpose of releasing and waiving any
and all rights to file mechanics lien claims against the Premises or any portion
thereof and that there are no liens of public record. Landlord shall fund the
Tenant's Allowance into the Construction Escrow periodically by the transfer of
funds upon approval of documents submitted in connection with each construction
draw and upon the Escrowee's determination, with respect to the periodic
disbursements made through the construction escrow, that it is prepared to
advise Landlord that all statements and lien waivers are in proper form for the
purpose of releasing and waiving any and all rights to file mechanics lien
claims against the Premises or any portion thereof and that there are no liens
of public record through the date of disbursement of funds.
All costs of Tenant's Work in excess of the Tenant's Allowance shall be
paid by Tenant and, if at any time during the course of completion of Tenant's
Work the total unpaid cost of completing Tenant's Work as indicated by any of
the sworn statements provided hereunder exceeds the balance of the Tenant's
<PAGE>
Allowance, Landlord need not make further disbursements of Tenant's Allowance
until Tenant has deposited in the Construction Escrow the sum necessary, along
with the balance of the Tenant's Allowance, to make all available funds equal to
the unpaid cost of construction or has paid such excess costs directly. The
final payment for the Tenant's Work (inclusive of the entire Holdback) shall not
be made until the architect who prepared the Tenant's Plans shall have certified
to Landlord and Tenant that the Tenant's Work is substantially complete in
accordance with the Tenant's Plans, any applicable certificate of occupancy or
other governmental license or permit has been issued, all final waivers of lien
have been deposited with the Escrowee and the Escrowee is prepared to advise
Landlord that there are no liens of public record resulting from the Tenant's
Work and is prepared to issue a date-down endorsement to Landlord's then
existing Title Insurance Policy issued by Chicago Title Insurance Company free
of any exceptions relating to Tenant's Work. The payment for expenses incurred
in connection with the Construction Escrow and issuance of the Title Insurance
Policy date-down endorsement shall be paid from the Tenant's Allowance as an
element of the cost of Tenant's Work.
IN WITNESS WHEREOF, the parties have executed this Lease as of the
date set forth above.
LANDLORD: CENTERPOINT PROPERTIES TRUST, a Maryland real estate
- -------- investment trust
By: /s/ Michael M. Mullen
_______________________________________
Its: Chief Operating Officer
By:
_______________________________________
Its:
TENANT: EXODUS COMMUNICATIONS INC., a Delaware corporation
- ------
By: /s/ Richard S. Stoltz
_______________________________________
Its
Attest:
By:
Its:
<PAGE>
EXHIBIT "A"
PREMISES
--------
[Description of Premises]
<PAGE>
EXHIBIT "B"
LEGAL DESCRIPTION
-----------------
LOT 1 IN TOLLWAY PLAZA SUBDIVISION, BEING A SUBDIVISION IN THE SOUTH EAST 1/4 OF
SECTION 24, TOWNSHIP 39 NORTH, RANGE 11, EAST OF THE THIRD PRINCIPAL MERIDIAN,
ACCORDING TO THE PLAT THEREOF RECORDED OCTOBER 16, 1973 AS DOCUMENT R73-65094,
IN DUPAGE COUNTY, ILLINOIS.
<PAGE>
EXHIBIT "C"
TENANT ESTOPPEL CERTIFICATE
---------------------------
Property Name:
_________________________________________________
("Property")
Tenant:
_________________________________________________
To:
_________________________________________________
DEFINITIONS:
- -----------
Lease Date:
_________________________________________________
Landlord:
_________________________________________________
Tenant:
_________________________________________________
Security Deposit:
_________________________________________________
Date of Possession:
_________________________________________________
Rent Commencement Date:
_________________________________________________
Monthly Base Rent:
_________________________________________________
Annual Base Rental Amount:
_________________________________________________
Monthly Deposits:
_________________________________________________
<PAGE>
Term:
_________________________________________________
Termination Date:
_________________________________________________
Renewal Option(s):
_________________________________________________
Square Footage:
_________________________________________________
Use:
_________________________________________________
Tenants Address For Notices:
_________________________________________________
["Purchaser"] ["Lender"] proposes to [purchase the Property] [finance the
Property] and this Tenant Estoppel Certificate is to be made and delivered in
connection with that [purchase] [financing].
The undersigned Tenant under the above-referenced lease dated as of the
Lease Date between Landlord and Tenant ("Lease"), certifies, represents,
confirms and agrees in favor of [Purchaser] [Lender] the following:
1. The above-described Lease has not been cancelled, modified, assigned,
extended or amended and contains the entire agreement between Landlord and
Tenant except as follows:
2. Rent has been paid to _______________________________________. There
is no Prepaid Rent. The amount of the Security Deposit is as set forth above,
which is currently being held by Landlord.
3. Tenant took possession of the leased premises on the Date of
Possession, and commenced to pay rent on the Rent Commencement Date, in the
amount of the Monthly Base Rent, each payable in advance. Our current Annual
Base Rental Amount is as set forth above, payable in equal monthly installments,
subject to percentage rental, common area maintenance charges, escalation
charges and other charges in accordance with the terms and provisions of the
Lease, which as of the date hereof total the Monthly Deposit Amount, each
payable in equal monthly installments in advance. We are currently in occupancy
of the leased premises. No "discounts", "free rent", "discounted rent" or
"abatements of rent" have been agreed to or are in effect.
4. The Lease is for the Term set forth above and ending on the
Termination Date, and we have the Renewal Option(s) set forth above.
<PAGE>
5. COMPLIANCE WITH SPACE LEASE AND GROUND LEASE. All of the terms,
--------------------------------------------
provisions, covenants and conditions contained in the Ground Leases, and in the
Space Lease (other than paragraphs 1, 2, 4, 7, 37, 39 (captioned "Option to
Lease"), Exhibits B, C and D, and the provisions of the Space Lease which
conflict directly with the provisions of this Sublease), are hereby made a part
of this Sublease, and Sublessee agrees to comply fully and faithfully with each
and every obligation of the Ground Leases and the Space Lease, as the same may
be amended from time to time, in each case as fully and faithfully as if
Sublessee were the "Tenant" under and as defined in the Space Lease. Sublessor
agrees to comply fully and faithfully with each and every obligation to the
Ground Leases and the Space Lease, as the same may be amended from time to time,
in each case as fully and faithfully as if Sublessor were the "Landlord" under
and as defined in the Space Lease. Notwithstanding the foregoing, Sublessee
shall not have the right to make any Alterations (as defined in the Space Lease)
without obtaining the prior written consent of Sublessor (which consent shall be
given or withheld in accordance with paragraph 10 of the Space Lease) and
Landlord. Sublessee further covenants and agrees not to do any act which will
result in a violation of any term of the Space Lease or the Ground Leases.
Sublessor shall not be liable to Sublessee for any default by Landlord under the
Space Lease, or by any party under the Ground Leases, and Sublessee shall not
make any claim upon Sublessor for any damages which may arise by reason of
Landlord's default under the Space Lease. Sublessor agrees that Sublessee shall
be entitled to receive all services and repairs to be provided by Landlord to
Sublessor under the Space Lease. Sublessor shall cooperate with Sublessee in
reasonable ways (so long as Sublessor does not incur any material out of pocket
costs in connection therewith) if Landlord fails to provide any such services or
repairs. Any condition resulting from a default by Landlord shall not constitute
as between Sublessor and Sublessee an eviction, actual or constructive, of
Sublessee and no such default shall excuse Sublessee from the performance or
observance of any of its obligations to be performed or observed under this
Sublease, or entitle Sublessee to receive any reduction in or abatement of the
rent provided for in this Sublease. In furtherance of the foregoing, Sublessee
hereby waives any cause of action and any right to bring any action against
Sublessor by reason of any act or omission of Landlord under the Space Lease.
6. The Lease is (a) in full force and effect, and (b) free from default
by both Landlord and Tenant; and we have no claims, liens, charges or credits
against Landlord or offsets against rent.
7. The undersigned has not assigned or sublet the Lease, nor does the
undersigned hold the Property under assignment or sublease.
8. There are no other agreements written or oral, between the undersigned
and Landlord with respect to the Lease and/or the leased premises and building.
Landlord has satisfied all commitments, arrangements or understandings made to
induce Tenant to enter into the Lease, and Landlord is not in any respect in
default in the performance of the terms and provisions of the Lease, nor is
there now any fact or condition which, with notice or lapse of time or both,
would become such a default.
9. The leased premises are currently being used for the Use set forth
above.
10. Tenant is maintaining (free of default) all insurance policies that
the Lease requires Tenant to maintain.
11. Neither Landlord nor [Purchaser] [Lender] nor any of their respective
successor or assigns, has or will have any personal liability of any kind or
nature under or in connection with the Lease; and, in the event of a default by
Landlord or [Purchaser] [Lender] under the Lease, Tenant shall look solely to
Landlord's or [Purchaser's] [Lender's] interest in the building in which the
leased premises are located.
12. Tenant is not in any respect in default under the terms and provisions
of the Lease (nor is there now any fact or condition which, with notice or lapse
of time or both, would become such a default), and Tenant has not assigned,
transferred or hypothecated its interest under the Lease.
13. Tenant (i) does not have any option or preferential right to purchase
all or any part of the leased premises or all or any part of the building of
which the leased premises are a part; and (ii) does not have any right, title or
interest with respect to the leased premises other than as lessee under the
Lease.
14. We understand that [Purchaser] [Lender] is planning to [purchase]
[finance] the Property on which the leased premises is located to Purchaser, and
we agree to make all payments required under the Lease to [Purchaser] [Lender]
upon our receipt of notice from Landlord and/or [Purchaser] [Lender]. Further,
upon receipt of such notice, we will thereafter look to [Purchaser] [Lender] and
not Landlord as the landlord under the Lease. We agree to give all notices
required to be given by us to Landlord under the Lease to [Purchaser] [Lender]
upon our receipt of said notice.
15. The statements contained herein may be relied upon by [Purchaser]
[Lender] and by any prospective purchaser or lender of the Property.
16. If Tenant is a Corporation, the undersigned is a duly appointed
officer of the corporation signing this Agreement, and is the incumbent in the
office indicated under his or her name. If Tenant is a partnership or joint
venture, the undersigned is a duly appointed partner or officer of the
partnership or joint venture signing this certificate. In any event, the
undersigned individual is duly authorized to
<PAGE>
execute this Agreement on behalf of Tenant.
17. Tenant (a) executes this certificate with the understanding that
[Purchaser] [Lender] is contemplating [purchasing] [financing] the Property, and
that if [Purchaser] [Lender] [purchases] [finances] the Property, [Purchaser]
[Lender] will do so in material reliance on this certificate; and (b) agrees
that the certifications and representations made herein shall survive such
acquisition.
18. The current address to which all notices to Tenant as required under
the Lease should be sent is the Tenant's Address for Notices.
19. [Purchaser's] [Lender's] rights hereunder shall inure to its
successors and assigns.
IN WITNESS WHEREOF, Tenant has executed this estoppel certificate as of
this ______ day of ________________, 199__.
___________________________, a
_______________________
By:
Its:
<PAGE>
EXHIBIT "D"
RIGHT OF FIRST OPPORTUNITY PREMISES
-----------------------------------
[Diagram of Premises]
<PAGE>
EXHIBIT "E"
REMOVABLE EQUIPMENT/IMPROVEMENTS
--------------------------------
1. Permanent and temporary generator systems including enclosures and fuel
tanks with the associated electronic and manual switch gear.
2. Mechanical Systems i.e., Air Conditioning, and condenser systems, air
handlers and electrical dampers.
3. Raised Flooring, Racking, Cage materials, cabinets and patch panels.
4. UPS Battery Systems including electrical switch gear.
5. Any customer satellite dishes installed on roof or parking lot areas.
6. FM200 fire suppression canisters, piping and nozzles.
7. VESDA or smoke sensor stations in ceiling or floor area.
8. Inside or outside security cameras, access card reader stations, VCR,
multiplexer, monitors and computers.
9. Partition and conference room furniture systems and freestanding,
cabinets, storage units.
10. Telephone and voice mail system with desk stations and receptionist,
computers, servers, printers, phone sets.
11. Fiber Muxes or other Telco equipment installed in MPOE rooms.
12. Emergency distribution board and telephone backboard with connectors.
13. Maintenance bypass electronic and manual switch gear.
14. Transformers and Power Distributions Units installed on premises.
15. Kitchen appliances like microwaves, refrigerators and vending machines.
16. Console monitors, screen projection and screens in command center.
17. Bulletproof/resistant glass.
18. Satellite dishes or other communications equipment installed on roof or
in parking lot.
<PAGE>
EXHIBIT 10.40
SUBLEASE
--------
THIS SUBLEASE ("Sublease"), is made and entered into as of the 4th day of
--------
September, 1998, by and between S3, INCORPORATED, a Delaware corporation
----------------
("Sublessor"), and EXODUS COMMUNICATIONS, INC., a Delaware corporation
--------- ---------------------------
("Sublessee"), with reference to the following facts:
---------
RECITALS
--------
A. Sublessor has entered into that certain Lease dated as of November 29,
1995, as amended by that certain First Amendment to Lease, dated as of March 19,
1996 (collectively, the "Space Lease"), pursuant to which Sublessor has agreed
-----------
to lease from Mission Real Estate, L.P., a California limited partnership
("Landlord"), two office buildings containing approximately 300,000 rentable
--------
square feet of space commonly known as 2831 and 2841 Mission College Boulevard,
Santa Clara, California (the "2831 Building" and the "2841 Building,"
------------- -------------
respectively, and collectively the "Buildings"). A copy of the Space Lease is
---------
attached to this Sublease as Exhibit A and incorporated herein by reference. A
site plan (the "Site Plan") showing the location of the Buildings and certain
---------
other improvements related to the Buildings is attached to this Sublease as
Exhibit B and incorporated herein by reference. The 2831 Building and the 2841
Building are designated on the Site Plan as "Building 1" and "Building 2,"
respectively.
B. The Space Lease is subject and subordinate to: (i) that certain
Master Ground Lease, dated as of April 26, 1996 (the "Master Ground Lease"),
-------------------
between West Valley-Mission Community College District, a California community
college district ("Ground Lessor"), as ground lessor, and Mission-West Valley
-------------
Land Corporation, a California non-profit public benefit corporation ("Mission-
-------
West"), as ground lessee, a memorandum of which was recorded on April 26, 1996,
- ----
as Document No. 0013275060 of the Official Records of Santa Clara County,
California; and (ii) that certain Phase I Ground Lease, dated as of April 26,
1996 (the "Phase I Ground Lease"), between Mission-West, as ground sublessor,
--------------------
and Landlord, as ground sublessee, a memorandum of which was recorded on April
26, 1996, as Document No. 0013275061 of the Official Records of Santa Clara
County, California. The Master Ground Lease and the Phase I Ground Lease are
collectively referred to herein as the "Ground Leases."
-------------
C. Sublessor desires to sublease to Sublessee, and Sublessee desires to
sublease from Sublessor, all of the space in the 2831 Building on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements herein contained, the parties hereby agree as follows:
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<PAGE>
1. SUBLEASE OF 2831 BUILDING.
-------------------------
(a) Initial Demise. During the period commencing on October 1, 1998 (the
--------------
"Commencement Date") and ending on June 30, 1999 (the "Sublessor Occupancy
- ------------------ -------------------
Period"), Sublessor hereby subleases to Sublessee, and Sublessee hereby
- ------
subleases from Sublessor, all of the 2831 Building other than the fourth floor
of the 2831 Building (the "Fourth Floor") on all of the terms and conditions
------------
hereof, but subject to (i) the terms, covenants and conditions of the Space
Lease (except as otherwise provided in paragraph 5) and the Ground Leases, and
(ii) Sublessor's rights to use certain portions of the 2831 Building as
specifically provided in this Sublease. During the Sublessor Occupancy Period,
Sublessor shall retain exclusive possession of, and the right to use, occupy and
enjoy, all of Fourth Floor. Sublessor and its officers, directors, employees,
contractors and invitees (collectively, the "Sublessor Parties") shall access
-----------------
the Fourth Floor by the following means:
(i) The Sublessor Parties shall enter the 2831 Building through the
"Courtyard Door" as designated on the Site Plan, and shall use the elevator
in the 2831 Building marked as the "S3 Elevator" on the floor plan of the
first floor of the 2831 Building (the "Floor Plan") attached to this
----------
Sublease as Exhibit C and incorporated herein by reference. Prior to the
Commencement Date, Sublessor, at its cost, shall program such elevator to
provide access to only the first floor and the Fourth Floor of the 2831
Building. During the Sublessor Occupancy Period, Sublessee may propose an
alternate means of elevator access to the Fourth Floor, which shall be
subject to Sublessor's prior written approval (which approval shall not be
unreasonably withheld or delayed); provided, however, Sublessee shall bear
all costs and expenses to implement such alternate elevator access.
Sublessor agrees that if its contractors or invitees require access to any
portion of the 2831 Building, such contractors and invitees shall register
in the lobby of the 2841 Building and shall be accompanied by an employee
of Sublessor through the Courtyard Door to the applicable portions of the
2831 Building reserved to Sublessor hereunder. If the Sublessor Parties
require access to the 2831 Building other than through the Courtyard Door,
then Sublessor shall give reasonable prior notice (which may be oral or
written) to Sublessee's Facilities Manager to permit Sublessee's
representative to be present during such access by the Sublessor Parties.
As of the date of this Sublease, Sublessee's Facilities Manager is Mr. Tex
Tyner and his telephone number is (408) 346-2366.
(ii) The Sublessor Parties shall have security card access to use all
stairwells of the 2831 Building, which security cards shall be programmed
to provide access to only the first floor and Fourth Floor of the 2831
Building.
(b) Demise of Fourth Floor. Commencing on July 1, 1999 and for the
----------------------
remainder of the Sublease Term (as defined in
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<PAGE>
paragraph 2), Sublessor hereby subleases to Sublessee, and Sublessee hereby
subleases from Sublessor, all of the space in the 2831 Building on all of the
terms and conditions hereof, but subject to (i) the terms, covenants and
conditions of the Space Lease (except as otherwise provided in paragraph 5) and
the Ground Leases, and (ii) Sublessor's rights to use certain portions of the
2831 Building as specifically provided in this Sublease.
(c) Freight Elevator. During the Sublessor Occupancy Period, the Sublessor
----------------
Parties may use the freight elevator of the 2831 Building from time to time
provided that Sublessor has given reasonable prior notice (which may be oral or
written) to Sublessee's Facilities Manager.
(d) Telecom Rooms. Notwithstanding the demise of the 2831 Building to
-------------
Sublessee pursuant to this Sublease, during the Sublessor Occupancy Period,
Sublessor shall also have access to, and the right to use, occupy and enjoy, the
data transmission and telecommunications equipment rooms located on the first
floor of the 2831 Building, which are more particularly marked on the Floor Plan
as "T1A" and "T1B", provided that Sublessor has given reasonable prior notice
(which may be oral or written) to Sublessee's Facilities Manager. Sublessee
acknowledges that data transmission and telecommunications equipment and lines
connect the two Buildings, and Sublessor shall have the right to use, maintain,
repair, replace and alter such equipment and lines during the Sublessor
Occupancy Period. On or before June 30, 1999, Sublessor shall discontinue use
of the data transmission and telecommunications connection between the
Buildings, and Sublessor shall remove any and all equipment related thereto from
the 2831 Building; provided, however, Sublessor shall not be obligated to remove
the cabling and wiring between the Buildings. Sublessor shall repair any damage
to the 2831 Building caused by Sublessor's removal of such equipment.
(e) Early Access. Prior to the Commencement Date, Sublessee may have
------------
access to the 2831 Building to install its computer and telecommunications
equipment provided that Sublessee delivers reasonable prior notice (which may be
oral or written) to Sublessor's Facilities Manager to coordinate such access,
and provided that Sublessee has procured and maintains all insurance required
pursuant to the Space Lease and has delivered to Sublessor certificates
evidencing the same and naming Sublessor as an additional insured. As of the
date of this Sublease, Sublessor's Facilities Manager is Mr. Richard Sayle and
his telephone number is (408) 588-8045.
(f) Delay in Occupancy. If, for any reason, Sublessor cannot deliver to
------------------
Sublessee possession of all or any portion of the 2831 Building on Commencement
Date, or if Sublessor cannot deliver to Sublessee possession of the Fourth Floor
on July 1, 1999, Sublessor shall not be liable to Sublessee for any resulting
loss or damage, nor shall such failure affect the validity of this Sublease or
extend the Sublease Term; provided, however, Sublessee shall not be obligated to
pay the applicable
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<PAGE>
rent (as defined in paragraph 3(c)) until possession of the applicable portion
of the 2831 Building is tendered to Sublessee. Sublessor agrees to deliver to
Sublessee written notice of any such delay as soon as is reasonably possible,
and Sublessor agrees that any such delay shall not exceed thirty (30) days.
(g) Common Area. At all times during the Sublease Term, Sublessee and its
-----------
officers, directors, employees, contractors and invitees (collectively, the
"Sublessee Parties"), and the Sublessor Parties shall have the non-exclusive
- ------------------
right to use the Common Area (as defined in the Space Lease). With respect to
the "Courtyard" between the Buildings and as depicted on the Site Plan, each of
Sublessor and Sublessee shall have the right from time to time to hold events in
the Courtyard, during which the other party and its employees, contractors and
invitees shall not have the right to use the Courtyard. Sublessor and Sublessee
agree that each party's Facilities Manager (or such other person as either party
may designate by written notice to the other party) shall coordinate the
scheduling of such events. Each party agrees to act in good faith and to
cooperate reasonably with the other party in scheduling events to minimize
interference with the other party's use, occupancy and enjoyment of its Building
and the Common Area. Each party agrees that it shall not grant, sell, license,
assign, transfer or otherwise convey any right to use any or all of the Common
Area, except that the foregoing shall not prohibit use of the Common Area by
either the Sublessor Parties or the Sublessee Parties, or either party's
permitted assignees or subtenants.
(h) Cafeteria. Approximately 6,600 rentable square feet of space located
---------
at the north end on the first floor of the 2831 Building is improved as a
cafeteria (the "Cafeteria"). The location of the Cafeteria is depicted on the
---------
Floor Plan. Sublessor and Sodexho Services, Inc. ("Sodexho") have entered into
-------
that certain Management Fee Contract, dated as of June 3, 1997 (the "Cafeteria
---------
Contract"), with respect to the operation of the Cafeteria through June 30,
- --------
1999. Sublessee hereby acknowledges receipt of a copy of the Cafeteria
Contract. Notwithstanding the demise of the 2831 Building to Sublessee pursuant
to this Sublease, during the Sublease Term the Sublessor Parties and the
Sublessee Parties shall have the non-exclusive right to purchase food and other
products and services from Sodexho (or any other operator of the Cafeteria) and
to use the Cafeteria, subject to such hours of operation and rules and
regulations as may from time to time be in effect with respect to the Cafeteria.
The parties further agree as follows with respect to the use and operation of
the Cafeteria:
(i) As soon as is reasonably possible, but in no event later than
December 31, 1998, Sublessee shall determine whether or not the proposed
"Double Door" designated on the Floor Plan can be constructed in
approximately the location shown thereon in compliance with applicable
laws, ordinances, rules, regulations and codes (collectively, "Laws").
----
Sublessee shall deliver to Sublessor written notice of such fact promptly
after such determination is
-4-
<PAGE>
made. If Sublessee determines that such Double Door can be constructed in
compliance with applicable Laws, then Sublessee shall obtain one (1) or
more bids of the cost to construct such Double Door and such bid(s) to
Sublessor for its prior written approval, which approval shall not be
unreasonably withheld or delayed. After Sublessor approves of the costs to
construct such Double Door, Sublessee shall proceed to construct the same
as soon as is reasonably possible, and Sublessor shall reimburse Sublessee
for fifty percent (50%) of all costs approved by Sublessor and actually
incurred in connection therewith within thirty (30) days after receipt of
invoices or other reasonably satisfactory evidence of the out of pocket
costs incurred. If Sublessee determines that the Double Door cannot be
constructed in compliance with applicable Laws, or if Sublessee fails to
deliver to Sublessor on or before December 31, 1998 written notice that the
Double Door can be so constructed, then Sublessor and Sublessee shall
cooperate in good faith and meet and confer as frequently as is necessary
to attempt to agree upon reasonable access to the Cafeteria by the
Sublessor Parties. As of the date of this Sublease, the parties contemplate
that such alternate access to the Cafeteria may be provided by constructing
a door in the panel of the exterior wall of the 2831 Building designated as
the "Alternate Access Panel" on the Floor Plan. In all events, such
alternate access shall be constructed and the Sublessor Parties shall be
able to use the same on or before July 1, 1999. During the Sublessor
Occupancy Period, the Sublessor Parties shall have access to the Cafeteria
through the "Cafeteria Door" as marked on the Floor Plan and through the
"Corridor Door" as marked on the Floor Plan (and through the Double Door if
the same is constructed during the Sublessor Occupancy Period). After the
Sublessor Occupancy Period, the Sublessor Parties shall access the
Cafeteria through the Cafeteria Door (or through the alternate access
described above, if applicable).
(ii) During the Sublessor Occupancy Period, Sublessor shall not
amend, extend or terminate the Cafeteria Contract without Sublessee's prior
written consent, which shall not be unreasonably withheld or delayed. In
addition, during the Sublessor Occupancy Period, Sublessee shall have the
right to review any and all aspects of the operation of the Cafeteria
(including, without limitation, the menu, pricing and hours of operation)
and to provide input regarding the same. Sublessor and Sublessee shall
cooperate in good faith and meet and confer regarding the operation of the
Cafeteria and the use thereof by the Sublessor Parties and the Sublessee
Parties, it being the goal of the parties with respect to the Cafeteria to
provide a convenient dining area with a variety of menu selections
desirable to each party's employees and at reasonable prices.
(iii) Commencing on July 1, 1999, and continuing throughout the
remainder of the Sublease Term, Sublessee shall be obligated to operate the
Cafeteria with a level of
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<PAGE>
service reasonably comparable to the services provided under the Cafeteria
Contract. Each such contractor and each such contract (including, without
limitation, amendments, extensions or termination thereof) shall be subject
to Sublessor's prior written consent, which shall not be unreasonably
withheld or delayed. At all times that Sublessee is responsible for
operating the Cafeteria, Sublessor shall have the same rights of approval
and input as Sublessee has pursuant to paragraph 1(h)(ii). Sublessee hereby
acknowledges that all equipment, fixtures and personal property relating to
the operation of the Cafeteria as of the Commencement Date are owned by
Sublessor. Sublessor shall permit each contractor operating the Cafeteria
to use such equipment, fixtures and personal property provided that the
contract with each such contractor appropriately reflects (in pricing and
otherwise) Sublessor's ownership of, and permission to use, the same. At
any time, Sublessee may terminate its obligation to operate the Cafeteria
by delivering to Sublessor written notice of such decision, in which event,
Sublessor may, at its option, resume the responsibility of operating the
Cafeteria. In addition, if the Cafeteria is not operated for five (5)
consecutive days, then Sublessor may deliver to Sublessee written notice
requesting that Sublessee cause such operations to resume. If Sublessee
does not cause such operations to resume within ten (10) days after
delivery of Sublessor's notice (or, if operations cannot reasonably be
resumed within ten (10) days, then within such additional time as is
reasonably necessary so long as Sublessee promptly commences and diligently
prosecutes to completion actions to correct the cause of the cessation of
Cafeteria operations), then Sublessor may, at its option, resume the
responsibility of operating the Cafeteria.
(iv) Each of Sublessor and Sublessee may, from time to time, hold
special events in the Cafeteria at times other than the then-current
regular operating hours of the Cafeteria on a "first come, first served"
basis. The manager of the contractor operating the Cafeteria shall
coordinate the scheduling and holding of any such event.
(v) At all times during the Sublease Term, the contractor operating
the Cafeteria shall record purchases by the Sublessor Parties and the
Sublessee Parties separately to permit periodic accounting of costs and
expenses incurred in the operation of the Cafeteria and reimbursement by
the applicable party of costs and expenses incurred by its officers,
directors, employees, contractors and invitees. The cost of food, payroll
and other employee expenses, direct expenses and the management fee payable
under the Cafeteria Contract for each calendar month shall be borne by
Sublessor and Sublessee in the same proportion as the proportion of sales
charged to each party's officers, directors, employees, contractors and
invitees during such month bears to the total of all sales during such
month. Following expiration of the Cafeteria Contract, the parties
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<PAGE>
shall negotiate in good faith and cooperate with each other to agree upon a
mutually acceptable allocation of costs to operate the Cafeteria. The party
which is then responsible for operating the Cafeteria shall, from time to
time, deliver to the other party invoices or cash register receipts (or
other reasonably satisfactory evidence) of the costs and expenses to
operate the Cafeteria, together with a reasonably detailed explanation of
the allocation of such costs and expenses between the parties. The other
party shall pay any such amount due within ten (10) days thereafter.
2. SUBLEASE TERM. The term of this Sublease (the "Sublease Term") will
------------- -------------
commence on Commencement Date and terminate on the earlier of (i) December 31,
2008 or (ii) the effective date of any termination under the Space Lease (such
earlier date being the "Termination Date"). If Sublessor receives from Landlord
----------------
written notice asserting any default by Sublessor under the Space Lease,
Sublessor shall promptly deliver a copy of such notice to Sublessee and
Sublessee may, at its option, cure any such alleged default during the
applicable cure period granted to Sublessor under the Space Lease.
[The remainder of this page intentionally left blank]
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<PAGE>
3. RENT.
----
(a) Monthly Rent. During the Sublease Term, Sublessee agrees to pay
------------
monthly rent (the "Monthly Rent") for the 2831 Building according to the
------------
following schedule:
Period Monthly Rent
------ ------------
10/1/98 - 12/31/98 $165,000
1/1/99 - 6/30/99 $247,500
7/1/99 - 9/30/99 $322,740
10/1/99 - 9/30/2000 $330,075
10/1/00 - 9/30/01 $337,410
10/1/01 - 9/30/02 $344,745
10/1/02 - 9/30/03 $352,080
10/1/03 - 9/30/04 $359,415
10/1/04 - 9/30/05 $366,750
10/1/05 - 9/30/06 $374,085
10/1/06 - 9/30/07 $381,420
10/1/07 - 9/30/08 $388,755
10/1/08 - 12/31/08 $396,090
(b) Additional Rent. In addition to Monthly Rent, Sublessee shall pay to
---------------
Sublessor (or to Landlord, as the case may be) the following amounts
(individually and collectively, "Additional Rent"):
---------------
(i) During the Sublessor Occupancy Period, thirty-seven and one-half
percent (37.5%) of (A) the Tenant's Allocable Share (as defined in the
Space Lease) of Common Area Cost (as defined in the Space Lease) charged by
Landlord and (B) all other amounts (including, without limitation,
utilities, insurance premiums and real property and possessory interest
taxes and assessments) payable by Sublessor to Landlord under the Space
Lease;
(ii) On and after July 1, 1999, fifty percent (50%) of (A) the
Tenant's Allocable Share of Common Area Cost charged by Landlord and (B)
all other amounts (including, without limitation, utilities, insurance
premiums and real property and possessory interest taxes and assessments)
payable by Sublessor to Landlord under the Space Lease; and
(iii) During the period beginning on the Commencement Date and ending
on December 31, 1998, seventy-five percent (75%) of all costs and expenses
incurred by Sublessor with respect to the 2831 Building pursuant to
contracts for elevator maintenance, HVAC maintenance, life safety systems
monitoring, recharging of fire extinguishers, landscape irrigation and the
like.
(c) Payments of Rent. Each payment of Monthly Rent shall be payable to
----------------
Sublessor on the first day of each month. Each payment of Additional Rent shall
be payable to Sublessor within ten (10) days after written invoice from
Sublessor. As used in this Sublease (and with respect to provisions of the
Space Lease
-8-
<PAGE>
which are incorporated herein by reference), the term "rent" shall mean Monthly
----
Rent, Additional Rent and all other amounts payable by Sublessee to Sublessor
hereunder (whether or not such other amounts are characterized herein as rent).
All Monthly Rent shall be payable without prior notice or demand, and all rent
shall be payable without any deductions or setoffs whatsoever. Without limiting
the generality of the immediately preceding sentence, Sublessee agrees that it
shall not offset against or deduct from rent any amount payable by Sublessor to
Sublessee under this Sublease; provided, however, if the parties mutually agree
(there being no obligation on either party to do so), costs of operating the
Cafeteria only may be offset or netted for administrative convenience.
Concurrently with Sublessee's execution of this Sublease, Sublessee shall pay to
Sublessor the amount of $165,000 as the Monthly Rent for the period commencing
on the Commencement Date and ending on October 31, 1998.
4. PERMITTED USE. Sublessee may not use the 2831 Building for any
-------------
purpose other than the purposes set forth in the Space Lease and any non-
permitted use shall automatically constitute an event of default hereunder.
5. COMPLIANCE WITH SPACE LEASE AND GROUND LEASES. All of the terms,
---------------------------------------------
provisions, covenants and conditions contained in the Ground Leases, and in the
Space Lease (other than paragraphs 1, 2, 4, 7, 37, 39 (captioned "Option to
Lease"), Exhibits B, C and D, and the provisions of the Space Lease which
conflict directly with the provisions of this Sublease), are hereby made a part
of this Sublease, and Sublessee agrees to comply fully and faithfully with each
and every obligation of the Ground Leases and the Space Lease, as the same may
be amended from time to time, in each case as fully and faithfully as if
Sublessee were the "Tenant" under and as defined in the Space Lease.
Notwithstanding the foregoing, Sublessee shall not have the right to make any
Alterations (as defined in the Space Lease) without obtaining the prior written
consent of Sublessor (which consent shall be given or withheld in accordance
with paragraph 10 of the Space Lease) and Landlord. Sublessee further covenants
and agrees not to do any act which will result in a violation of any term of the
Space Lease or the Ground Leases. Sublessor shall not be liable to Sublessee
for any default by Landlord under the Space Lease, or by any party under the
Ground Leases, and Sublessee agrees that performance by Sublessor of all of its
obligations hereunder are conditional upon due performance by Landlord of its
corresponding obligations under the Space Lease and upon due performance by each
party to the Ground Leases of its corresponding obligations under the Ground
Leases. Sublessor agrees that Sublessee shall be entitled to receive all
services and repairs to be provided by Landlord to Sublessor under the Space
Lease. Sublessee shall look solely to Landlord for all such services and
repairs and shall not, under any circumstances, seek nor require Sublessor to
perform any of such services or repairs, nor shall Sublessee make any claim upon
Sublessor for any damages which may arise by reason of Landlord's default under
the Space Lease. Sublessor shall cooperate with Sublessee in
-9-
<PAGE>
reasonable ways (so long as Sublessor does not incur any material out of pocket
costs in connection therewith) if Landlord fails to provide any such services or
repairs. Any condition resulting from a default by Landlord shall not constitute
as between Sublessor and Sublessee an eviction, actual or constructive, of
Sublessee and no such default shall excuse Sublessee from the performance or
observance of any of its obligations to be performed or observed under this
Sublease, or entitle Sublessee to receive any reduction in or abatement of the
rent provided for in this Sublease. In furtherance of the foregoing, Sublessee
hereby waives any cause of action and any right to bring any action against
Sublessor by reason of any act or omission of Landlord under the Space Lease.
6. 2831 BUILDING "AS IS". Sublessee represents that it has made a
---------------------
thorough examination and inspection of the 2831 Building and is familiar with
the condition of every part thereof. Sublessee agrees that it enters into this
Sublease without any representations or warranties by Sublessor, its agents,
representatives, employees or any other person as to the condition of the 2831
Building, and Sublessor shall not be liable for any defects, latent or
otherwise, in the 2831 Building. Sublessor agrees to deliver and Sublessee
agrees to accept the 2831 Building "as is", in its condition at the date of this
Sublease, ordinary wear excepted, and Sublessor shall not be required to make
any alterations, improvements, repairs or decorations to prepare the 2831
Building for Sublessee's occupancy; provided, however, prior to the Commencement
Date, Sublessor shall (i) remove its satellite dishes and antennas from the roof
of the 2831 Building (but not any cables, wires or the like associated
therewith), and (ii) cause the HVAC controls for the Buildings to be separated
so that HVAC for each Building is controlled independently. On the Termination
Date, or any earlier termination of this Sublease, Sublessee shall return the
2831 Building to Sublessor in the condition required under the Space Lease.
Sublessee further agrees that, during the Sublessor Occupancy Period, Sublessor
shall continue to use fixtures, cabling, wiring and equipment comprising the
security system of the 2831 Building, and upon expiration of the Sublessor
Occupancy Period, Sublessor shall remove the controller and computer for such
security system (but Sublessor shall not remove any other portion of the
security system) thereby rendering such system inoperable unless Sublessee
installs (at Sublessee's sole cost) a suitable replacement controller and
computer. To ensure that Sublessee's security system functions properly and
provides access by the Sublessor Parties to the 2831 Building as provided
herein, Sublessee shall promptly purchase such equipment as is necessary to
replace the equipment that Sublessor shall remove, and Sublessee shall install
the same as soon as possible (and in no event later than June 30, 1999).
7. SECURITY DEPOSIT. Concurrently with the execution of this Sublease,
----------------
Sublessee shall tender to Sublessor a security deposit in the amount of $396,090
as security for Sublessee's obligations hereunder. Sublessor shall not be
required to keep the security deposit separate from its general accounts. If
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<PAGE>
Sublessee defaults under this Sublease, Sublessor may use, apply or retain all
or any portion of the security deposit for (i) the payment of rent or other
charge in default, (ii) payment of any other sum that Sublessor becomes
obligated to pay as a result of Sublessee's default, or (iii) to compensate
Sublessor for any loss or damage which Sublessor may suffer thereby. Within ten
(10) days after written demand, Sublessee shall deposit with Sublessor cash in
an amount to restore the security deposit to its original amount. If there is
no uncured default by Sublessee under this Sublease, the security deposit shall
be returned, without interest, to Sublessee within thirty (30) days after
Sublessee has surrendered the 2831 Building as provided in this Sublease.
8. PARKING SPACES. During the Sublease Term, Sublessor agrees to make
--------------
available to Sublessee fifty percent (50%) of the automobile parking spaces at
the Buildings which have been allocated to Sublessor pursuant to the Space
Lease. Sublessor and Sublessee believe that, as of the date of this Sublease,
there are a total of one thousand forty (1,040) automobile parking spaces at the
Buildings. The Sublessor Parties and the Sublessee Parties may use the parking
spaces on a non-exclusive, unreserved basis, and subject to such rules and
regulations as may from time to time be promulgated by Landlord. Each party
agrees to request that its employees use the parking spaces which are nearest
that party's Building. Sublessor shall have no obligation to police, regulate,
or enforce any restrictions pertaining to, the use of parking spaces at the
Buildings.
9. SIGNS. As between Sublessor and Sublessee, the parties agree that
-----
Sublessor and Sublessee shall have equivalent rights with respect to signs on
and about the Buildings (i.e., Sublessor's sign rights with respect to the 2841
Building and Sublessee's sign rights with respect to the 2831 Building shall be
equivalent); provided, however, Sublessee acknowledges that all of its signs (i)
shall comply with all applicable Laws and (ii) must be approved by Landlord
pursuant to the Space Lease and Ground Lessor and Mission-West pursuant to the
Ground Leases. On or before the Commencement Date, Sublessor shall remove its
exterior signs from the 2831 Building and from the monument sign at the "North
Entrance" as depicted on the Site Plan; provided, however, Sublessor shall not
be obligated to alter or remove the "South Monument Sign" as depicted on the
Site Plan except as set forth below in this paragraph 9. Sublessor shall
cooperate with Sublessee in all reasonable respects to assist Sublessee in
obtaining equivalent sign rights so long as Sublessor does not incur any
material out of pocket costs in connection with such cooperation. Sublessor
acknowledges that Sublessee intends to seek approval for a monument sign to be
located to the east or northeast of the 2831 Building and which is comparable to
the South Monument Sign. If Sublessee has not obtained the right to install
such monument sign on or before September 30, 1999, then Sublessor agrees that
it shall remove the South Monument Sign and, thereafter, neither party shall
seek approval for any monument sign unless both parties will receive equivalent
rights to monument signs.
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<PAGE>
10. MAINTENANCE. During the period between the Commencement Date and
-----------
December 31, 1998, Sublessor shall maintain in full force all of Sublessor's
existing contracts (as distinguished from contracts entered into by Landlord)
with respect to maintenance of the 2831 Building, such as elevator maintenance,
HVAC maintenance, life safety systems monitoring, recharging of fire
extinguishers, landscape irrigation and the like (and Sublessee shall pay its
proportionate share thereof pursuant to paragraph 3(b)(iii)); provided, however,
Sublessee agrees that Sublessor shall terminate (as of the Commencement Date)
Sublessor's existing contracts for garbage and rubbish removal and for security
services (and Sublessee shall procure replacement contracts therefor on or
before the Commencement Date). Commencing on January 1, 1999 and continuing
throughout the remainder of the Sublease Term, Sublessee shall enter into and
maintain in full force service contracts covering the maintenance obligations
previously performed by Sublessor. During the period commencing on January 1,
1999 and ending on June 30, 1999, Sublessor shall pay to Sublessee twenty-five
percent (25%) of the costs incurred by Sublessee pursuant to such contracts,
which payments shall be made within ten (10) days after Sublessee delivers to
Sublessor invoices for the maintenance obligations incurred during such period.
During the Sublease Term, each party, at its own cost, shall procure janitorial
services for the portions of the 2831 Building occupied by such party.
Sublessee shall procure janitorial services for the Cafeteria, the cost of which
shall be borne equally by the parties, and Sublessor shall pay its half thereof
to Sublessee within ten (10) days of written request for payment.
11. UTILITIES. The parties acknowledge that the 2831 Building is
---------
separately metered with respect to electricity, gas and water. Prior to the
Commencement Date, the parties shall cause electricity for the Cafeteria to be
separately submetered (with each party bearing fifty percent (50%) of the costs
thereof), and thereafter each party shall bear fifty percent (50%) of the costs
for electricity used to operate the Cafeteria. Commencing on the Commencement
Date, Sublessee shall be responsible for establishing accounts with all utility
service providers with respect to the use and operation of the 2831 Building
(including, without limitation, entering into contracts for garbage collection
and security services). Sublessor shall pay to Sublessee twenty-five percent
(25%) of the bills for electricity consumed at the 2831 Building (excluding the
Cafeteria) during the Sublessor Occupancy Period, which payments shall be made
within ten (10) days after Sublessee delivers to Sublessor an invoice therefor.
In addition, during the Sublease Term (and so long as the Sublessor Parties have
the nonexclusive right to use the Cafeteria as provided in paragraph 1),
Sublessor shall pay to Sublessee forty percent (40%) of the bills for natural
gas consumed at the 2831 Building, which payment shall be made within ten (10)
days after Sublessee delivers to Sublessor an invoice therefor.
-12-
<PAGE>
12. PROHIBITION OF FURTHER ASSIGNMENTS OR SUBLETTING. This Sublease may
------------------------------------------------
not be amended, modified, extended or assigned by Sublessee, nor shall Sublessee
hypothecate or encumber its subleasehold estate or grant any security interest
therein to any other person or entity. Sublessee has disclosed to Sublessor
that Sublessee and Goldman, Sachs & Company ("Goldman Sachs") are entering into
-------------
a senior secured financing arrangement pursuant to which Goldman Sachs has
requested a security interest in this Sublease and Sublessee's subleasehold
estate. Sublessor agrees to review documents proposed by Goldman Sachs in
connection with any such request, but Sublessee agrees that (i) Sublessor has no
obligation to consent thereto or to execute any such document, and (ii) any such
request from Goldman Sachs also shall be subject to prior approval of Landlord
under the Space Lease, and Ground Lessor and Mission-West under the Ground
Leases. Sublessee shall have the right to further sublet the 2831 Building
subject to obtaining the prior written consent of (A) Sublessor, which may be
given or withheld in accordance with paragraph 29 of the Space Lease, (B)
Landlord in accordance with the Space Lease, and (C) Mission-West and Ground
Lessor in accordance with the Ground Leases.
13. INDEMNITIES.
-----------
(a) By Sublessor. Sublessor hereby agrees to indemnify, defend and hold
------------
harmless Sublessee and its officers, directors, shareholders, employees,
successors and assigns (such persons or entities other than Sublessee are
hereinafter collectively referred to as "Indemnitees") from and against all
-----------
claims, liabilities, losses, damages, costs and expenses (including, without
limitation, reasonable attorneys' fees) (collectively, "Claims") arising out of
------
or caused by: (i) any breach of this Sublease by Sublessor; (ii) the negligence
or intentional misconduct of Sublessor or its employees or contractors; (iii)
use of the Cafeteria by any of the Sublessor Parties; (iv) use of the 2831
Building by any of the Sublessor Parties during the Sublessor Occupancy Period;
or (v) use of the Common Area by any of the Sublessor Parties during the
Sublease Term.
(b) By Sublessee. Sublessee hereby agrees to indemnify, defend and hold
------------
harmless Sublessor and its Indemnitees from and against all Claims arising out
of or caused by: (i) any breach of this Sublease by Sublessee; (ii) the
negligence or intentional misconduct of Sublessee or its employees or
contractors; (iii) use of the Cafeteria by any of the Sublessee Parties; or (iv)
use of the 2831 Building or the Common Area by any of the Sublessee Parties
during the Sublease Term.
(c) Survival. Each party's obligations under this paragraph 13 shall
--------
survive the expiration or earlier termination of the Sublease Term with respect
to Claims arising or events occurring prior to the date of such expiration or
earlier termination.
14. BROKERS. After this Sublease is signed by Landlord,
-------
-13-
<PAGE>
Sublessor and Sublessee, Sublessor shall pay a real estate commission to The
Commercial Property Services Company ("CPS") as provided in a separate written
---
agreement between Sublessor and CPS for services rendered by CPS to Sublessor
and Sublessee in this transaction. Nothing contained in this Sublease shall
impose any obligation on Sublessor to pay a commission or fee to any party other
than CPS. Except for CPS, each of Sublessor and Sublessee represents and
warrants to the other that it has not dealt with any investment adviser, real
estate broker or finder, or incurred any liability for any commission or fee to
any investment adviser, real estate broker or finder, in connection with this
Sublease. Each of Sublessor and Sublessee hereby agrees to indemnify, defend and
hold harmless the other from any and all Claims arising out of a breach of each
party's representation and warranty set forth in the immediately preceding
sentence. Sublessor's and Sublessee's respective obligations under this
paragraph 14 shall survive the Termination Date.
15. GENERATOR INSTALLATION.
----------------------
(a) Right to Install. Sublessor hereby agrees that Sublessee may hereby
----------------
install, at Sublessee's sole expense, one (1) or more generators on, in or about
the 2831 Building. The above described generator(s) and all related wiring
equipment and cabling is referred to herein as the "Equipment." Sublessee's
---------
rights under this paragraph 15 shall be irrevocable during the Sublease Term.
(b) Plans and Specifications. Before installing any Equipment, Sublessee
------------------------
shall submit to Sublessor detailed plans and specifications for the generator(s)
and the cables and wires that Sublessee wishes to install, and Sublessee shall
not commence any construction, installation or operation of any Equipment until
the plans and specifications have been approved in writing by Sublessor (which
approval shall not be unreasonably withheld or delayed) and Landlord. Landlord
or Sublessor may require Sublessee to relocate the Equipment during the Sublease
Term.
(c) Compliance with Laws. Sublessee, at Sublessee's sole expense, shall
--------------------
comply with all applicable Laws regarding the installation, construction,
operation and maintenance of the Equipment.
(d) Removal. Upon the expiration or earlier termination of this Sublease,
-------
Sublessee shall remove all of the Equipment from their locations, raceways and
Building areas and restore the areas to their condition prior to such
installation, reasonable wear and tear excepted.
(e) Maintenance. Subject to the Landlord's rules and regulations, if any,
-----------
Sublessee shall have the right, at Sublessee's sole cost and expense, to enter
the 2831 Building during normal business hours and weekends and to construct,
install, operate and maintain the Equipment, until this Sublease terminates.
Sublessee may enter the 2831 Building and perform
-14-
<PAGE>
construction work therein in accordance with the plans and specifications
approved by Sublessor pursuant to paragraph 15(b). Sublessor agrees to deliver
to Sublessee copies of any such rules and regulations imposed by Landlord.
(f) No Sublessor Obligations. Sublessor shall have no obligation to
------------------------
design, install, construct, use, operate, maintain, repair, replace or remove
Sublessee's Equipment or to have any other responsibility or liability in
connection therewith or the operations thereof.
16. NOTICE. Any notice provided for herein shall be given in writing
------
(except as otherwise specifically provided herein) by certified or registered
mail, postage prepaid, return receipt requested, addressed, if to Sublessor, at
S3, Incorporated, 2841 Mission College Boulevard, Santa Clara, California 95054,
Attention: Facilities Manager, with a copy to Sublessor at the same address to
the attention of Legal Department. Prior to the Commencement Date, any such
notice to Sublessee shall be delivered to Exodus Communications, Inc., 2650 San
Tomas Expressway, Santa Clara, California 95051, Attention: Chief Financial
Officer, with a copy to Sublessee at the same address to the attention of
General Counsel. On and after the Commencement Date, Sublessee's address for
notice shall be at the 2381 Building, to the attention of the same parties
specified above. Notice hereunder shall be deemed given on the date of receipt
as set forth on the return receipt (or the date receipt is refused).
17. COUNTERPARTS; EFFECTIVENESS. This Sublease may be executed in
---------------------------
counterparts, each of which when executed an delivered shall be an original and
all of which when taken together shall constitute one and the same instrument.
This Sublease shall become effective upon its signature by the parties and its
approval in writing by Landlord.
IN WITNESS WHEREOF, Sublessor and Sublessee have executed this Sublease
Agreement as of the day and year first above written.
SUBLESSOR:
S3, INCORPORATED, a Delaware corporation
By: /s/ Walter D. Amaral
-------------------------------------
Title: Senior VP and CFO
-----------------------------------
By: /s/ Terry N. Holdt
-------------------------------------
-15-
<PAGE>
President and CEO
Title:___________________________________
SUBLESSEE:
EXODUS COMMUNICATIONS, INC., a Delaware
corporation
/s/ Richard S. Stoltz
By:______________________________________
CFO and COO
Title: __________________________________
/s/ Ellen M. Hancock
By: _______________________________
President
Title: ____________________________
The undersigned hereby approves and consents to the foregoing Sublease,
agrees to provide to Sublessee all services to be provided by Landlord under the
Space Lease, and agrees to perform for the benefit of Sublessee the obligations
of Landlord under the Space Lease with respect to the 2831 Building and the
Common Area.
Dated: September 4, 1998.
LANDLORD:
MISSION REAL ESTATE, L.P., a
California limited partnership
By SOBRATO INTERESTS III, a
California limited partnership,
its General Partner
By ___________________________
Title: _______________________
Attachment: Exhibit A - Space Lease
Exhibit B - Site Plan
Exhibit C - Floor Plan
-16-
<PAGE>
EXHIBIT "A"
SPACE LEASE
- - - - - - - - - - - - -
[DIAGRAM OF PREMISES]
<PAGE>
EXHIBIT "B"
SITE PLAN
- - - - - - - - - - - - -
[DIAGRAM OF PREMISES]
<PAGE>
EXHIBIT "C"
FLOOR PLAN
- - - - - - - - - - - - -
[DIAGRAM OF PREMISES]
<PAGE>
EXHIBIT 21.01
SUBSIDIARIES OF THE REGISTRANT
Percentage Owned
Name Jurisdiction of Incorporation By Exodus
- ---- ----------------------------- ----------------
EC Acquisitions
Corp. Delaware 100%
Exodus Internet Ltd. United Kingdom 100%
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Exodus Communications, Inc.
We consent to the use of our report included herein and to the references to
our firm under the headings "Experts," "Summary Financial Information" and
"Selected Financial Data" in the Prospectus.
/s/ KPMG Peat Marwick LLP
Mountain View, California
November 6, 1998
<PAGE>
EXHIBIT 99.01
LETTER OF TRANSMITTAL
EXODUS COMMUNICATIONS, INC.
OFFER TO EXCHANGE ITS
NEW 11 1/4% SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
11 1/4% SENIOR NOTES DUE 2008
PURSUANT TO THE PROSPECTUS
DATED , 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME ON , 1998 (UNLESS EXTENDED BY EXODUS COMMUNICATIONS,
INC. IN ITS SOLE DISCRETION) (SUCH TIME AND SUCH DATE, AND AS SUCH TIME AND
DATE MAY BE EXTENDED, THE "EXPIRATION DATE").
If you desire to accept the Exchange Offer (as defined below), this Letter
of Transmittal should be completed, signed, and submitted to:
CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION
Exchange Agent
BY MAIL, OVERNIGHT DELIVERY OR HAND:
Chase Manhattan Bank and Trust Company, National Association
101 California Street
Suite 2725
San Francisco, CA 94111
Attn: Cecil Bobey
(Exodus Communications Inc., 11 1/4% Senior Notes due 2008)
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
415-954-9581
FACSIMILE TRANSMISSIONS:
415-693-8850
(Originals of all documents sent by facsimile should be sent promptly by
hand, overnight courier or registered or certified mail.)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER
OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
<PAGE>
This Letter of Transmittal is to be completed by holders of Old Notes (as
defined below) either if Old Notes are to be forwarded herewith or if tenders
of Old Notes are to be made by book-entry transfer to an account maintained by
Chase Manhattan Bank and Trust Company, National Association (the "Exchange
Agent") at The Depository Trust Company ("DTC") pursuant to the procedures set
forth in "The Exchange Offer--Procedures for Tendering Old Notes" in the
Prospectus.
Holders of Old Notes whose certificates (the "Certificates") for such Old
Notes are not immediately available or who cannot deliver their Certificates
and all other required documents to the Exchange Agent on or prior to the
Expiration Date or who cannot complete the procedures for book-entry transfer
on a timely basis, must tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer--Procedures for Tendering
Old Notes" in the Prospectus. See Instruction 1 hereto. DELIVERY OF DOCUMENTS
TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
2
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Exodus Communications, Inc., a Delaware
corporation (the "Company"), the aggregate principal amount of the Company's
11 1/4% Senior Notes due 2008 (the "Old Notes") described in Box 1 below, in
exchange for a like aggregate principal amount of the Company's new 11 1/4%
Senior Notes due 2008 (the "New Notes") which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), upon the terms and
subject to the conditions set forth in the Prospectus dated , 1998 (as the
same may be amended or supplemented from time to time, the "Prospectus"),
receipt of which is acknowledged, and in this Letter of Transmittal (which,
together with the Prospectus, constitutes the "Exchange Offer").
Subject to, and effective upon, the acceptance for exchange of all or any
portion of the Old Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Old Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
Chase Manhattan Bank and Trust Company, National Association as the Exchange
Agent (the "Exchange Agent") as its agent and attorney-in-fact (with full
knowledge that the Exchange Agent is also acting as agent of the Company in
connection with the Exchange Offer) with respect to the tendered Old Notes,
with full power of substitution (such power of attorney being deemed to be an
irrevocable power coupled with an interest), subject only to the right of
withdrawal described in the Prospectus, to (i) deliver Certificates for Old
Notes to the Company together with all accompanying evidences of transfer and
authenticity to, or upon the order of, the Company, upon receipt by the
Exchange Agent, as the undersigned's agent, of the New Notes to be issued in
exchange for such Old Notes, (ii) present Certificates for such Old Notes for
transfer, and to transfer the Old Notes on the books of the Company, and (iii)
receive for the account of the Company all benefits and otherwise exercise all
rights of beneficial ownership of such Old Notes, all in accordance with the
terms and conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE OLD
NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE
COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND
CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE OLD
NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES. THE
UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS
DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE TO
COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE OLD NOTES TENDERED
HEREBY, AND THE UNDERSIGNED WILL COMPLY WITH ITS OBLIGATIONS UNDER THE
REGISTRATION RIGHTS AGREEMENT. THE UNDERSIGNED HAS READ AND AGREES TO ALL OF
THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Old Notes
tendered hereby should be printed in Box 1 below, if they are not already set
forth below, as they appear on the Certificates representing such Old Notes.
The Certificate number(s) and the Old Notes that the undersigned wishes to
tender should be indicated in the appropriate box below.
If any tendered Old Notes are not exchanged pursuant to the Exchange Offer
for any reason, or if Certificates are submitted for more Old Notes than are
tendered or accepted for exchange, Certificates for such nonexchanged or
nontendered Old Notes will be returned (or, in the case of Old Notes tendered
by book-entry transfer, such Old Notes will be credited to an account
maintained at DTC), without expense to the tendering holder, promptly
following the expiration or termination of the Exchange Offer.
3
<PAGE>
The undersigned understands that tenders of Old Notes pursuant to any one of
the procedures described in "The Exchange Offer-Procedures for Tendering Old
Notes" in the Prospectus and in the instructions hereto will, upon the
Company's acceptance for exchange of such tendered Old Notes, constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer. The undersigned recognizes
that, under certain circumstances set forth in the Prospectus, the Company may
not be required to accept for exchange any of the Old Notes tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions" below (Box 7), the undersigned hereby directs that the New Notes
be issued in the name(s) of the undersigned or, in the case of a book-entry
transfer of Old Notes, that such New Notes be credited to the account
indicated below maintained at DTC. If applicable, substitute Certificates
representing Old Notes not exchanged or not accepted for exchange will be
issued to the undersigned or, in the case of a book-entry transfer of Old
Notes, will be credited to the account indicated below maintained at DTC.
Similarly, unless otherwise indicated under "Special Delivery Instructions"
(Box 8), please deliver New Notes to the undersigned at the address shown
below the undersigned's signature.
BY TENDERING OLD NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (i) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE COMPANY, (ii) ANY NEW NOTES TO BE RECEIVED BY THE
UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS, (iii)
THE UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO
PARTICIPATE IN A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF
NEW NOTES TO BE RECEIVED IN THE EXCHANGE OFFER, AND (iv) IF THE UNDERSIGNED IS
NOT A BROKER- DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND DOES NOT INTEND
TO ENGAGE IN, A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF
SUCH NEW NOTES. BY TENDERING OLD NOTES PURSUANT TO THE EXCHANGE OFFER AND
EXECUTING THIS LETTER OF TRANSMITTAL, A HOLDER OF OLD NOTES WHICH IS A BROKER-
DEALER REPRESENTS AND AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS
ISSUED BY THE STAFF OF THE DIVISION OF CORPORATION FINANCE OF THE SECURITIES
AND EXCHANGE COMMISSION TO THIRD PARTIES, THAT SUCH OLD NOTES WERE ACQUIRED BY
SUCH BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES
OR OTHER TRADING ACTIVITIES (SUCH A BROKER-DEALER WHICH IS TENDERING OLD NOTES
IS HEREIN REFERRED TO AS A "PARTICIPATING BROKER-DEALER") AND IT WILL DELIVER
THE PROSPECTUS (AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING THE
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SUCH NEW
NOTES (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH
PARTICIPATING BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT IS AN
"UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM
TIME TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER IN CONNECTION WITH
RESALES OF NEW NOTES RECEIVED IN EXCHANGE FOR OLD NOTES, WHERE SUCH OLD NOTES
WERE ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN ACCOUNT AS A
RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES, FOR A PERIOD
ENDING 180 DAYS AFTER THE EXCHANGE OFFER HAS BEEN COMPLETED, OR IF EARLIER,
WHEN ALL SUCH PARTICIPATING BROKER-DEALERS NO LONGER OWN ANY TRANSFER
RESTRICTED SECURITIES. IN THAT REGARD, EACH PARTICIPATING BROKER-DEALER, BY
TENDERING SUCH OLD NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, AGREES
THAT, UPON RECEIPT OF NOTICE FROM THE COMPANY OF THE OCCURRENCE OF ANY EVENT
OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT CONTAINED OR
INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY MATERIAL RESPECT OR
4
<PAGE>
WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A MATERIAL FACT NECESSARY IN
ORDER TO MAKE THE STATEMENTS CONTAINED THEREIN, IN LIGHT OF THE CIRCUMSTANCES
UNDER WHICH THEY WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF CERTAIN
OTHER EVENTS SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT, SUCH
PARTICIPATING BROKER-DEALER WILL SUSPEND THE SALE OF NEW NOTES PURSUANT TO THE
PROSPECTUS UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO
CORRECT SUCH MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED
OR SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY
HAS GIVEN NOTICE THAT THE SALE OF THE NEW NOTES MAY BE RESUMED, AS THE CASE
MAY BE.
Each New Note will bear interest from the most recent date to which interest
has been paid or duly provided for on the Old Note surrendered in exchange for
such New Note or, if no such interest has been paid or duly provided for on
such Old Note, from July 1, 1998. Holders of the Old Notes whose Old Notes are
accepted for exchange will not receive accrued interest on such Old Notes for
any period from and after the last Interest Payment Date to which interest has
been paid or duly provided for on such Old Notes prior to the original issue
date of the New Notes or, if no such interest has been paid or duly provided
for, will not receive any accrued interest on such Old Notes, and will be
deemed to have waived the right to receive any interest on such Old Notes
accrued from and after such Interest Payment Date or, if no such interest has
been paid or duly provided for, from and after July 1, 1998.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except
pursuant to the withdrawal rights set forth in the Prospectus, this tender is
irrevocable.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING
THE BOXES BELOW AND FOLLOW THE INSTRUCTIONS BEGINNING ON PAGE 10 HEREOF.
5
<PAGE>
ALL TENDERING HOLDERS COMPLETE THIS BOX 1:
BOX 1
DESCRIPTION OF OLD NOTES TENDERED
(ATTACH ADDITIONAL SIGNED PAGES, IF NECESSARY)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
IF BLANK, PLEASE PRINT NAME(S) AND ADDRESS(ES)
OF REGISTERED HOLDER(S), EXACTLY AS NAME(S) CERTIFICATE NUMBER(S) PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF
APPEAR(S) ON OLD NOTE CERTIFICATE(S): OF OLD NOTES* OLD NOTES OLD NOTES TENDERED**
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
TOTAL PRINCIPAL TOTAL PRINCIPAL
AMOUNT $ AMOUNT TENDERED $
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders.
** Old Notes may be tendered in whole or in part in denominations of $1,000
and integral multiples thereof. All Old Notes held shall be deemed
tendered unless a lesser number is specified in this column. See
Instruction 4.
BOX 2
BOOK-ENTRY TRANSFER
(SEE INSTRUCTION 1 BELOW)
- --------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND
COMPLETE THE FOLLOWING:
Name of Tendering Institution ________________________________________________
DTC Account Number ___________________________________________________________
Transaction Code Number ______________________________________________________
6
<PAGE>
BOX 3
NOTICE OF GUARANTEED DELIVERY
(SEE INSTRUCTION 1 BELOW)
- --------------------------------------------------------------------------------
[_] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY
IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name of Registered Holders(s) ________________________________________________
Window Ticket Number (if any) ________________________________________________
Date of Execution of Notice of Guaranteed Delivery ___________________________
Name of Institution which Guaranteed Delivery ________________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer: _________________
Name of Tendering Institution ________________________________________________
DTC Account Number ___________________________________________________________
Transaction Code Number ______________________________________________________
BOX 4
RETURN OF NON-EXCHANGED OLD NOTES TENDERED BY BOOK-ENTRY TRANSFER
(SEE INSTRUCTIONS 4 AND 6 BELOW)
- --------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OLD NOTES
ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE.
BOX 5
PARTICIPATING BROKER-DEALER
- --------------------------------------------------------------------------------
[_] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER")
[_] CHECK HERE IF YOU WISH TO RECEIVE TEN ADDITIONAL COPIES OF THE PROSPECTUS
AND TEN COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name: ________________________________________________________________________
Address: _____________________________________________________________________
7
<PAGE>
BOX 6
TENDERING HOLDER SIGNATURE
- --------------------------------------------------------------------------------
Holder(s) Sign Here __________________________________________________________
(SEE INSTRUCTIONS 2, 5 AND 6 BELOW)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 IN BOX 9 BELOW)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Old Notes hereby tendered or on a security position
listing, or by a person(s) authorized to become the registered holder(s) by
endorsements and documents transmitted herewith (including such opinions of
counsel, certifications and other information as may be required by the
Company or the Trustee for the Old Notes to comply with the restrictions on
transfer applicable to the Old Notes). If signature is by an attorney-in-
fact, executor, administrator, trustee, guardian, officer of a corporation or
another acting in a fiduciary capacity or representative capacity, please set
forth the signer's full title. See Instruction 5 below.
______________________________
(Signature(s) of Holder(s))
Date ________________ , 1998
Name(s) ______________________________________________________________________
(Please Print)
Address ______________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number _______________________________________________
(Tax Identification or Social Security Number(s)) ____________________________
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1, 2 AND 5 BELOW)
______________________________
Authorized Signature
Name _________________________________________________________________________
(Please Print)
Date _________________, 1998
Capacity or Title ____________________________________________________________
Name of Firm _________________________________________________________________
Address ______________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number _______________________________________________
8
<PAGE>
BOX 7 BOX 8
SPECIAL EXCHANGE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6 (SEE INSTRUCTIONS 1, 5 AND 6
BELOW) BELOW)
To be completed ONLY if the New To be completed ONLY if New
Notes are to be issued in the Notes are to be sent to someone
name of someone other than the other than the registered holder
registered holder of the Old of the Old Notes whose name(s)
Notes whose name(s) appear(s) appear(s) above, or to such reg-
above. istered holder(s) at an address
other than that shown above.
Issue New Notes to:
Mail New Notes to:
Name _____________________________ Name______________________________
(Please Print) (Please Print)
Address __________________________ Address __________________________
__________________________________ __________________________________
(Include Zip Code) (Include Zip Code)
__________________________________ __________________________________
(Tax Identification or Social (Tax Identification or Social
Security Number) Security Number)
9
<PAGE>
BOX 9
SUBSTITUTE FORM W-9
TO BE COMPLETED BY ALL TENDERING SECURITYHOLDERS
(SEE INSTRUCTION 9 BELOW)
SIGN THIS SUBSTITUTE FORM W-9 IN ADDITION TO THE SIGNATURE(S) REQUIRED IN BOX
6
PAYER'S NAME: CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION
- -------------------------------------------------------------------------------
PART I--Please provide your TIN:
SUBSTITUTE TIN (either your social
FORM W-9 security number or employer
identification number) in
the box to the right and
certify by signing and
dating below.
----------------------
--------------------------------------------------------
DEPARTMENT OF PART II--Awaiting TIN [_]
THE TREASURY SIGN THIS FORM AND THE CERTIFICATION OF AWAITING
INTERNAL TAXPAYER IDENTIFICATION NUMBER BELOW.
REVENUE --------------------------------------------------------
SERVICE PART III--EXEMPT [_]
See enclosed Guidelines for additional information
and SIGN THIS FORM.
PAYER'S REQUEST
FOR TAXPAYER --------------------------------------------------------
IDENTIFICATION Certification--Under penalties of
NUMBER (TIN) perjury, I certify that:
AND CERTIFICATION (1) The number shown on this form is my correct
taxpayer identification number (or I am waiting for
a number to be issued to me); and
(2) I am not subject to backup withholding because
(i) I am exempt from backup withholding, or (ii) I
have not been notified by the Internal Revenue
Service (IRS) that I am subject to backup
withholding as a result of a failure to report all
interest or dividends, or (iii) the IRS has
notified me that I am no longer subject to backup
withholding.
(3) Any other information provided on this form is
true and correct.
-------------------------------------------------------
Certification Instructions--You must cross out item
(iii) in Part (2) above if you have been notified by
the IRS that you are subject to backup withholding
because of underreporting interest or dividends on
your tax return and you are no longer subject to
backup withholding.
Signature: _______________________ Date: __________
- -------------------------------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART 2 OF THE SUBSTITUTE FORM W-9
- -------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of payment, 31% of all payments made to me on account of the Exchange
Notes shall be retained until I provide a taxpayer identification number to
the Exchange Agent and that, if I do not provide my taxpayer identification
number within 60 days, such retained amounts shall be remitted to the
Internal Revenue Service as backup withholding and 31% of all reportable
payments made to me thereafter will be withheld and remitted to the Internal
Revenue Service until I provide a taxpayer identification number.
Signature: ___________________________________________________________________
Date: ________________________________________________________________________
- -------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
FOR ADDITIONAL INFORMATION.
10
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
GENERAL
Please do not send Certificates for Old Notes directly to the Company. Your
Old Note Certificates, together with your signed and completed Letter of
Transmittal and any required supporting documents should be mailed in the
enclosed addressed envelope, or otherwise delivered, to the Exchange Agent, at
either of the addresses indicated on the first page hereof. THE METHOD OF
DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER AND THE
DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES
This Letter of Transmittal is to be completed if either (a) Certificates are
to be forwarded herewith or (b) tenders are to be made pursuant to the
procedures for tender by book-entry transfer set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus. Certificates, or
timely confirmation of a book-entry transfer of such Old Notes into the
Exchange Agent's account at DTC, as well as this Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth
herein on or prior to 5:00 p.m., New York City time, on the Expiration Date.
Old Notes may be tendered in whole or in part in the principal amount of
$1,000 and integral multiples of $1,000.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter
of Transmittal and all other required documents to the Exchange Agent on or
prior to the Expiration Date or (iii) who cannot complete the procedures for
delivery by book-entry transfer on a timely basis, may tender their Old Notes
by properly completing and duly executing a Notice of Guaranteed Delivery
pursuant to the guaranteed delivery procedures set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus and by completing
Box 3 hereof. Pursuant to such procedures: (i) such tender must be made by or
through an Eligible Institution (as defined below); (ii) a properly completed
and duly executed Notice of Guaranteed Delivery, substantially in the form
made available by the Company, must be received by the Exchange Agent on or
prior to the Expiration Date; and (iii) the Certificates (or a book-entry
confirmation (as defined in the Prospectus)) representing all tendered Old
Notes, in proper form for transfer, together with a Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent within three New York
Stock Exchange trading days after the date of execution of such Notice of
Guaranteed Delivery, all as provided in "The Exchange Offer--Procedures for
Tendering Old Notes" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Old Notes to be
properly tendered pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior to the
Expiration Date. As used herein, "Eligible Institution" means a firm or other
entity identified in Rule 17Ad-15 under the Exchange Act as "an eligible
guarantor institution," including (as such terms are defined therein) (i) a
bank; (ii) a broker, dealer, municipal securities broker or dealer or
government securities broker or dealer; (iii) a credit union; (iv) a national
securities exchange, registered securities association or clearing agency; or
(v) a savings association, that is a participant in the Securities Transfer
Agents Medallion Program, the New York Stock Exchange Medallion Signature
Program or the Stock Exchanges Medallion Program.
11
<PAGE>
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance
of such tender.
2. GUARANTEE OF SIGNATURES
No signature guarantee on this Letter of Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder (which
term, for purposes of this document, shall include any participant in DTC
whose name appears on a security position listing as the owner of the Old
Notes) of Old Notes tendered herewith, unless such holder(s) has completed
either the box entitled "Special Exchange Instructions" (Box 7) or the box
entitled "Special Delivery Instructions" (Box 8) above, or
(ii) such Old Notes are tendered for the account of a firm that is an
Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal (Box 6). See Instruction 5.
3. INADEQUATE SPACE
If the space provided in the box captioned "Description of Old Notes" is
inadequate, the Certificate number(s) and/or the principal amount of Old Notes
and any other required information should be listed on a separate signed
schedule which should be attached to this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS
Tenders of Old Notes will be accepted only in the principal amount of $1,000
and integral multiples thereof. If less than all the Old Notes evidenced by
any Certificate submitted are to be tendered, fill in the principal amount of
Old Notes which are to be tendered in Box 1 under the column "Principal Amount
of Old Notes Tendered". In such case, new Certificate(s) for the remainder of
the Old Notes that were evidenced by your Existing Certificate(s) will only be
sent to the holder of the Old Notes, promptly after the Expiration Date. All
Old Notes represented by Certificates delivered to the Exchange Agent will be
deemed to have been tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date. In order for a withdrawal to
be effective on or prior to that time, a written, telegraphic, telex or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its address set forth above or in the Prospectus on or
prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Old Notes to be withdrawn, the aggregate
principal amount of Old Notes to be withdrawn, and (if Certificates for such
Old Notes have been tendered) the name of the registered holder of the Old
Notes as set forth on the Certificate for the Old Notes, if different from
that of the person who tendered such Old Notes. If Certificates for the Old
Notes have been delivered or otherwise identified to the Exchange Agent, then
prior to the physical release of such Certificates for the Old Notes, the
tendering holder must submit the serial numbers shown on the particular
Certificates for the Old Notes to be withdrawn and the signature on the notice
of withdrawal must be guaranteed by an Eligible Institution, except in the
case of Old Notes tendered for the account of an Eligible Institution. If Old
Notes have been tendered pursuant to the procedures for book-entry transfer
set forth in "The Exchange Offer--Procedures for Tendering Old Notes," the
notice of withdrawal must specify the name and number of the account at DTC to
be credited with the withdrawal of Old Notes, in which case a notice of
withdrawal will be effective if delivered to the Exchange Agent by written,
telegraphic, telex or facsimile transmission. Withdrawals of tenders of Old
Notes may not be rescinded. Old Notes properly withdrawn will not be deemed
validly tendered for purposes of the Exchange Offer, but may be retendered at
any subsequent time on or prior to the Expiration Date by following any of the
procedures described in the Prospectus under "The Exchange Offer--Procedures
for Tendering Old Notes."
12
<PAGE>
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all
parties. Neither the Company, any affiliates or assigns of the Company, the
Exchange Agent nor any other person shall be under any duty to give any
notification of any irregularities in any notice of withdrawal or incur any
liability for failure to give such notification. Any Old Notes which have been
tendered but which are withdrawn will be returned to the holder thereof
without cost to such holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS
If this Letter of Transmittal is signed by the registered holder(s) of the
Old Notes tendered hereby, the signature(s) must correspond exactly with the
name(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different name(s) on several
Certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing and, unless waived by the
Company, must submit proper evidence satisfactory to the Company, in its sole
discretion, of such persons' authority to so act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Old Notes listed and transmitted hereby, no endorsement(s) of Certificate(s)
or separate bond power(s) are required unless New Notes are to be issued in
the name of a person other than the registered holder(s). However, if New
Notes are to be issued in the name of a person other than the registered
holder(s), signature(s) on such Certificate(s) or bond power(s) must be
guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Old Notes listed, the certificates must be endorsed
or accompanied by appropriate bond powers, signed exactly as the name or names
of the registered owner(s) appear(s) on the Certificates, and also must be
accompanied by such opinions of counsel, certifications and other information
as the Company or the Trustee for the Old Notes may require in accordance with
the restrictions on transfer applicable to the Old Notes. Signatures on such
Certificates or bond powers must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
If New Notes are to be issued in the name of a person other than the signer
of this Letter of Transmittal, or if New Notes are to be sent to someone other
than the signer of this Letter of Transmittal or to an address other than that
shown above, the appropriate boxes on this Letter of Transmittal should be
completed (Box 7 and 8). Certificates for Old Notes not exchanged will be
returned by mail or, if tendered by book-entry transfer, by crediting the
account indicated above maintained at DTC. See Instruction 4.
7. DETERMINATION OF VALIDITY
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Old Notes, which determination shall
be final and binding on all parties. The Company reserves the absolute right
to reject any and all tenders determined by it not to be in proper form or the
acceptance of which, or exchange for, may, in the view of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
13
<PAGE>
applicable law, to waive any of the conditions of the Exchange Offer set forth
in the Prospectus under "The Exchange Offer-Certain Conditions to the Exchange
Offer" or any conditions or irregularity in any tender of Old Notes of any
particular holder whether or not similar conditions or irregularities are
waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will
be final and binding. No tender of Old Notes will be deemed to have been
validly made until all irregularities with respect to such tender have been
cured or waived. Neither the Company, any affiliates or assigns of the
Company, the Exchange Agent, nor any other person shall be under any duty to
give notification of any irregularities in tenders or incur any liability for
failure to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES
Questions and requests for assistance may be directed to the Exchange Agent
at its address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange
Agent.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9
For U.S. Federal income tax purposes, holders are required, unless an
exemption applies, to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on Substitute Form W-9 of this Letter
of Transmittal (Box 9) and certify, under penalties of perjury, that such
number is correct and he or she is not subject to backup withholding. If the
Exchange Agent is not provided with the correct TIN, the Internal Revenue
Service (the "IRS") may subject the holder or other payee to a $50 penalty. In
addition, payments to such holders or other payees with respect to Old Notes
exchanged pursuant to the Exchange Offer, or with respect to New Notes
following the Exchange Offer, may be subject to 31% backup withholding.
The box in Part 2 of the Substitute Form W-9 (Box 9) may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or
intends to apply for a TIN in the near future. If the box in Part 2 is
checked, the holder or other payee must also complete the Certificate of
Awaiting Taxpayer Identification Number below Substitute Form W-9 in order to
avoid backup withholding. Notwithstanding that the box in Part 2 is checked
and the Certificate of Awaiting Taxpayer Identification Number is completed,
the Exchange Agent will withhold 31% of all payments made prior to the time a
properly certified TIN is provided to the Exchange Agent.
The holder is required to give the Exchange Agent the TIN (i.e., social
security number or employer identification number) of the registered owner of
the Old Notes or of the last transferee appearing on the transfers attached
to, or endorsed on, the Old Notes. If the Old Notes are registered in more
than one name or are not in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below and check the box in Part 3 of
Box 9 for "exempt", to avoid possible erroneous backup withholding. A foreign
person may qualify as an exempt recipient by submitting a properly completed
IRS Form W-8, signed under penalties of perjury, attesting to that holder's
exempt status. Please consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional guidance
on which holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather, the
U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
14
<PAGE>
10. LOST, DESTROYED OR STOLEN CERTIFICATES
If any Certificate(s) representing Old Notes have been lost, destroyed or
stolen, the holder should promptly notify the Exchange Agent. The holder will
then be instructed as to the steps that must be taken in order to replace the
Certificate(s). This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen
Certificate(s) have been followed.
11. SECURITY TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith. If, however, New Notes are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if a transfer tax is imposed
for any reason other than the exchange of Old Notes in connection with the
Exchange Offer, then the amount of any such transfer tax (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
15
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN--The Taxpayer Identification Number for most individuals is their
social security number. Refer to the following chart to determine the
appropriate number:
- -------------------------------------- --------------------------------------
<TABLE>
<CAPTION>
GIVE THE
SOCIAL SECURITY
FOR THIS TYPE OF ACCOUNT: NUMBER OF--
- --------------------------------------------
<S> <C>
1. individual The individual
2. Two or more individuals The actual owner
(joint account) of the account
or, if combined
funds, the first
individual on
the account(1)
3. Custodian account of a The minor(2)
minor (Uniform Gift to
Minors Act)
4.a The usual revocable The grantor-
savings trust (grantor trustee(1)
is also trustee)
b So-called trust account The actual
that is not a legal or owner(1)
valid trust under State
law
5. Sole proprietorship The owner(3)
- --------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GIVE THE EMPLOYER
IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF--
----
<S> <C>
6. Sole proprietorship The owner(3)
7. A valid trust, estate Legal entity(4)
or pension trust
8. Corporate The corporation
9. Association, club, The organization
religious, charitable,
educational or other
tax-exempt
organization
10. Partnership The partnership
11. A broker or registered The broker or
nominee nominee
12. Account with the The public
Department of entity
Agriculture
----
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. You may also enter your business name or
"doing business as" name. You may use either your Social Security number
or your employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
B. EXEMPT PAYEES--The following lists exempt payees. If you are exempt, you
must nonetheless complete the form and provide your TIN in order to establish
that you are exempt. Check the box in Part 3 of the form, sign and date the
form.
For this purpose, Exempt Payees include: (1) A corporation; (2) An
organization exempt from tax under section 501(a), or an individual retirement
plan (IRA) or a custodial account under section 403(b)(7); (3) The United
States or any of its agencies or instrumentalities; (4) A state, the District
of Columbia, a possession of the United States, or any of their political
subdivisions or instrumentalities; (5) A foreign government or any of its
political subdivisions, agencies or instrumentalities; (6) An international
organization or any of its agencies or instrumentalities; (7) A foreign
central bank of issue; (8) A dealer in securities or commodities required to
register in the U.S. or a possession of the U.S.; (9) A real estate investment
trust; (10) An entity or person registered at all times during the tax year
under the Investment Company Act of 1940; (11) A common trust fund operated by
a bank under section 584(a); (12) A financial institution.
C. OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, application for a Social Security Number, or Form
SS-4, Application for Employer Identification Number, at the local office of
the Social Security Administration or the Internal Revenue Service and apply
for a number.
D. PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payers who must report the
payments to the IRS. The IRS uses the numbers for identification purposes.
Payers must be
16
<PAGE>
given the numbers whether or not payees are required to file tax returns.
Payers must generally withhold 31% of taxable interest, dividend, and certain
other payments to a payee who does not furnish a taxpayer identification
number. Certain penalties may also apply.
E. PENALTIES
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If you
fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments. If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an
under-payment attributable to that failure unless there is clear and
convincing evidence to the contrary.
(3) Civil Penalty for False Information with Respect to Withholding. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information. Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
17
