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As filed with the Securities and Exchange Commission on May 21, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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EXODUS COMMUNICATIONS, INC.
(Exact name of the Registrant as specified in its charter)
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Delaware 77-0403076
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
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2831 Mission College Boulevard
Santa Clara, California 95054
(408) 346-2200
(Address and telephone number of the Registrant's principal executive offices)
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Richard S. Stoltz
Executive Vice President, Finance
Exodus Communications, Inc.
2831 Mission College Boulevard
Santa Clara, California 95054
(408) 346-2200
(Name, address and telephone number of the Registrant's agent for service)
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Copies to:
Horace L. Nash, Esq.
Robert A. Freedman, Esq.
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
(650) 494-0600
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Approximate date of commencement of proposed sale to the public: From time
to time after this registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Shares Amounts to be Offering Price Aggregate Registration
to be Registered Registered per Unit Offering Price Fee
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5% Convertible Subordinated Notes due
March 15, 2006...................... $250,000,000 100% $250,000,000 $69,500
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Common stock, $0.001 par value per
share............................... 5,473,150 (1) -- (2) -- (2) -- (2)
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(1) This number represents the number of shares of Common Stock that are
initially issuable upon conversion of the 5% Convertible Subordinated Notes
due March 15, 2006 (the "Notes") registered hereby. For purposes of
estimating the number of shares of Common Stock to be included in the
Registration Statement upon the conversion of the Notes, the Company
calculated the number of shares issuable upon conversion of the Notes based
on a conversion rate of 21.8926 shares per $1,000 principal amount of the
Notes. In addition to the shares set forth in the table, pursuant to Rule
416 under the Securities Act of 1933, as amended, the amount to be
registered includes an indeterminate number of shares of Common Stock
issuable upon conversion of the Notes, as this amount may be adjusted as a
result of stock splits, stock dividends and antidilution provisions.
(2) No additional consideration will be received for the Common Stock, and,
therefore, no registration fee is required pursuant to Rule 457(i).
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
files a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. The +
+selling security holders may not sell these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated May 21, 1999
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PROSPECTUS
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$250,000,000
EXODUS COMMUNICATIONS, INC.
5% Convertible Subordinated Notes Due March 15, 2006 and
5,473,150 Shares of Common Stock Issuable Upon Conversion of the Notes
Holders of our 5% Convertible Subordinated Notes due March 15, 2006 may offer
for sale the notes and the shares of our common stock into which the notes are
convertible at any time at market prices prevailing at the time of sale or at
privately negotiated prices. The selling holders may sell the notes or the
common stock directly to purchasers or through underwriters, broker-dealers or
agents, who may receive compensation in the form of discounts, concessions or
commissions.
The holders of the notes may convert the notes into shares of our common
stock at any time at a conversion rate of 21.8926 shares per $1,000 principal
amount of notes. Interest on the notes is payable on March 15 and September 15
of each year, commencing on September 15, 1999. After March 20, 2001, we may
redeem the notes, in whole or in part, at the redemption prices set forth in
the section entitled "Description of Notes--Optional Redemption." However, we
may not redeem the notes from March 20, 2001 through but excluding March 20,
2003 unless the closing price of our common stock is at least 140% of the
conversion price for a period of time.
In the event of a change in control of Exodus, as defined in the section
entitled "Description of Notes-- Change in Control," each holder of notes may
require us to repurchase the notes at 100% of the principal amount of the notes
plus accrued interest. At our option, we may repurchase the notes for cash or
common stock.
The notes are unsecured obligations that are subordinated in right of payment
to all of our existing and future senior indebtedness. See "Description of
Notes--Subordination."
Our common stock currently trades on the Nasdaq National Market under the
symbol "EXDS." The last reported sale price on May 20, 1999 was $85.4375 per
share.
Our 5% convertible subordinated notes are currently eligible for trading on
the PORTAL Market of the Nasdaq Stock Market.
Investing in our common stock or our convertible subordinated notes involves
a high degree of risk. Please carefully consider the "Risk Factors" beginning
on page 4 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
The date of this prospectus is , 1999
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In connection with this offering, no person is authorized to give any
information or to make any representations not contained in this prospectus. If
information is given or representations are made, you may not rely on that
information or representations as having been authorized by us. This prospectus
is neither an offer to sell nor a solicitation of an offer to buy any
securities other than those registered by this prospectus, nor is it an offer
to sell or a solicitation of an offer to buy securities where an offer or
solicitation would be unlawful. You may not imply from the delivery of this
prospectus, nor from any sale made under this prospectus, that our affairs are
unchanged since the date of this prospectus or that the information contained
in this prospectus is correct as of any time after the date of this prospectus.
TABLE OF CONTENTS
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The Company................................................................. 3
Recent Events............................................................... 3
Risk Factors................................................................ 4
Ratio of Earnings to Fixed Charges.......................................... 14
Where You Can Find More Information......................................... 14
Documents Incorporated by Reference......................................... 15
Use of Proceeds............................................................. 15
Selling Holders............................................................. 16
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Plan of Distribution........................................................ 19
Description of Notes........................................................ 21
Material United States Federal Income Tax Considerations.................... 32
Description of Senior Notes................................................. 35
Description of Capital Stock................................................ 37
Legal Matters............................................................... 39
Experts..................................................................... 39
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This prospectus contains forward-looking statements relating to future
events or financial results, including statements indicating that "we believe,"
"we expect" or "we anticipate" that various events may occur or various trends
may continue, and similar statements relating to future events or financial
results. These forward-looking statements are subject to material risks and
uncertainties as indicated under the caption "Risk Factors." Actual results
could vary materially as a result of a number of factors, including those set
forth in "Risk Factors" and elsewhere in this prospectus. We assume no
obligation to update the forward-looking information contained in this
prospectus.
Unless the context otherwise requires, the terms "we," "our," "us," "the
company" and "Exodus" refer to Exodus Communications, Inc., a Delaware
corporation.
All share numbers in this prospectus reflect the two-for-one stock split
effected by Exodus on April 12, 1999. The information incorporated by reference
into this prospectus, however, may not reflect the stock split.
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THE COMPANY
Exodus is a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations. Our
solutions include Internet Data Centers, network services and managed services,
which together provide the high performance, scalability and expertise that
enterprises need to optimize their Web operations. Exodus delivers its services
from geographically distributed, state-of-the-art Internet Data Centers that
are connected through a high performance dedicated and redundant backbone
network. Our tailored solutions are designed to integrate seamlessly with
existing enterprise systems architectures and to enable customers to outsource
the monitoring, administration and optimization of their equipment,
applications and overall Internet operations. As of March 31, 1999, we had more
than 1,000 customers, including installed and uninstalled customers under
contract and managed over 9,000 customer servers. Our customers represent a
variety of industries, ranging from Internet-centric companies such as Yahoo!,
Lycos, eBay Inc., Hotmail Corporation, a subsidiary of Microsoft Corporation,
Inktomi Corporation and GeoCities, to media companies such as MSNBC, USA Today
Information Network, SportsLine USA, Inc. and E-Online!, to Fortune 500
customers such as Applied Materials, Fujitsu and National Semiconductor
Corporation.
As Internet usage continues to grow rapidly, businesses are increasing the
breadth and depth of their Internet product and services offerings. These
Internet operations are mission-critical for virtually all Internet-centric
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 facilities, personnel,
equipment and networks that must be continuously upgraded to reflect changing
technologies and rapidly scale as the enterprise grows. Such a continuing
significant investment of resources is often an inefficient use of overall
resources and, as a result, a significant need exists for collaborative
outsourcing arrangements that can increase performance, provide continuous
operation of Internet solutions and reduce Internet operating expenses. We
believe a significant opportunity exists for a highly focused company to
provide a combination of server hosting, Internet connectivity and managed
services that will enable reliable, high performance of mission-critical
Internet operations.
Exodus offers an integrated portfolio of solutions that provide customers
with a scalable, secure and high performance platform for the development,
deployment and proactive management of mission-critical Internet operations.
Our server hosting and Internet connectivity services are offered through our
Internet Data Centers' national backbone network of multiple high speed clear
DS-3, OC-3 and OC-12 lines, along with our public and private network peering
interconnections. These services provide the foundation for high performance,
availability, scalability and reliability of customers' Web server operations.
We continue to upgrade our backbone in order to accommodate expected traffic
growth. Our managed services enable us to manage Internet operations jointly
with the customer and proactively and continuously. For example, these services
include performance monitoring, site management reports, security services and
data backup and restore services, integrating best-of-breed technologies from
leading vendors with our expertise and proprietary technology.
RECENT EVENTS
On April 21, 1999, we announced that we had entered into a definitive
agreement to acquire Cohesive Technology Solutions, Inc. for $100 million.
Cohesive is a technology professional services organization with expertise in
networking, web applications and technology solutions. We expect to close this
transaction, which is subject to regulatory review and approval, in the third
quarter of 1999.
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RISK FACTORS
Our Short Operating History and Heavy Losses Make Our Business Difficult to
Evaluate
Our limited operating history makes evaluating our business operations and
our prospects difficult. We began offering server hosting and Internet
connectivity services in 1995 and opened our first dedicated Internet Data
Center in August 1996. Due to our short operating history, our business model
is still in an emerging state. We have incurred operating losses and negative
cash flows each quarter and year since 1995. Our accumulated deficit was
approximately $119.0 million at March 31, 1999. We anticipate making
significant investments in new Internet Data Centers and network
infrastructure, product development, sales and marketing programs and
personnel. We believe that we will continue to experience net losses on a
quarterly and annual basis for the foreseeable future. We may also use
significant amounts of cash to acquire complementary businesses, products,
services or technologies. Although we have experienced significant growth in
revenues in recent periods, we do not believe that this growth rate is
necessarily indicative of future operating results. It is possible that we may
never achieve profitability on a quarterly or an annual basis.
Our Operating Results Have Fluctuated Widely and We Expect This to Continue
We have experienced significant fluctuations in our results of operations on
a quarterly and an annual basis. We expect to continue to experience
significant fluctuations due to a variety of factors, many of which are outside
of our control, including:
. demand for and market acceptance of our services;
. reliable continuity of service and network availability;
. the ability to increase bandwidth as necessary, both on our network and
at our interconnection points with other networks;
. costs related to the acquisition of network capacity and arrangements
for interconnections with third-party networks;
. customer retention and satisfaction;
. capacity utilization of our Internet Data Centers;
. the timing, magnitude and integration of acquisitions of complementary
businesses and assets;
. the timing of customer installations;
. the provision of customer discounts and credits;
. the mix of services sold by us;
. the timing and success of marketing efforts and service introductions by
us and our competitors;
. 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;
. the introduction by third parties of new Internet and networking
technologies;
. changes in our pricing policies and those of our competitors; and
. fluctuations in bandwidth used by customers.
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to telecommunications, depreciation,
substantial interest expenses, real estate and personnel. Therefore, our
results of operations are particularly sensitive to fluctuations in revenues.
Furthermore, if we were to become unable to continue leveraging third party
products in our services offerings, our product development costs could
increase significantly. Finally, many of our customers are in an emerging
stage, and there is the possibility that we will not be able to collect
receivables on a timely basis.
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Rapid Expansion Produces a Significant Strain on Our Business
The expansion of our network through the opening of additional Internet Data
Centers in geographically diverse locations is one of our key strategies. We
currently have eight Internet Data Centers located in six metropolitan areas:
Boston, San Francisco, New York, Los Angeles, Seattle and Washington, D.C., and
we have a server hosting facility in the London metropolitan area. We expect to
open additional Internet Data Centers in the Chicago, Seattle, Washington D.C.
and London metropolitan areas in the second quarter of 1999. We also expect to
open other data centers in the United States and server hosting facilities in
Europe and Japan in 1999. To successfully expand, we must be able to assess
markets, locate and secure new Internet Data Center sites, install facilities
and establish additional peering interconnections with Internet service
providers in a timely manner and at a reasonable cost. To manage this expansion
effectively, we must continue to improve our operational and financial systems
and expand, train and manage our employee base. Our inability to establish
additional Internet Data Centers or effectively manage our expansion would have
a material adverse effect upon our business.
We expect to expend substantial resources for leases of real estate,
significant improvements of facilities, purchase of complementary businesses,
assets and equipment, implementation of multiple telecommunications connections
and hiring of network, administrative, customer support and sales and marketing
personnel with the establishment of each new Internet Data Center. Moreover, we
expect to make significant investments in sales and marketing and the
development of new services as part of our expansion strategy. The failure to
generate sufficient cash flows or to raise sufficient funds may require us to
delay or abandon some or all of our development and expansion plans or
otherwise forego market opportunities, making it difficult for us to respond to
competitive pressures.
It usually takes us at least six months to select the appropriate location
for a new Internet Data Center, construct the necessary facilities, install
equipment and telecommunications infrastructure, and hire operations and sales
personnel. Expenditures commence well before the Internet Data Center opens,
and it takes an extended period for us to approach break-even capacity
utilization. As a result, we expect that individual Internet Data Centers will
experience losses for in excess of one year from the time they are opened. We
experience further losses from sales personnel hired to test market our
services in markets where there is no Internet Data Center. Growth in the
number of our Internet Data Centers is likely to increase the amount and
duration of losses. In addition, if we do not attract customers to new Internet
Data Centers in a timely manner, or at all, our business would be materially
adversely affected.
We Must Manage Growth Effectively
We are experiencing, and expect to continue experiencing, rapid growth with
respect to the building of our Internet Data Centers and network
infrastructure, expansion of our customer base and increase in the number of
employees. This growth has placed, and if it continues, will place, a
significant strain on our financial, management, operational and other
resources, including our ability to ensure customer satisfaction. This
expansion also requires significant time commitment from our senior management
and places a significant strain on their ability to manage the existing
business. In addition, we may be required to manage multiple relationships with
a growing number of third parties as we seek to complement our service
offerings. Our ability to manage our growth effectively will require us to
continue to expand operating and financial procedures and controls, to replace
or upgrade our operational, financial and management information systems and to
attract, train, motivate and retain key employees. We have recently hired many
key employees and officers, and as a result, our entire management team has
worked together for only a brief time. If our executives are unable to manage
growth effectively, our business could be materially adversely affected.
Risks Associated with Acquisitions
In October 1998 we acquired the assets of Arca Systems, Inc. and in February
1999 we acquired American Information Systems, Inc. We continue to expend
resources integrating these new businesses and the personnel hired in
connection with these acquisitions. In April 1999 we announced that we had
entered into a definitive agreement to acquire Cohesive Technology Solutions,
Inc. We believe that our future growth depends, in part,
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upon the acquisition of complementary businesses, products, services or
technologies. If we buy a company, we could have difficulty in assimilating
that company's technology, personnel and operations. In addition, the key
personnel of the acquired company may decide not to work for us. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses. In addition, future acquisitions by us 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.
Our Substantial Leverage and Debt Service Obligations Adversely Affect Our Cash
Flow
We have substantial amounts of outstanding indebtedness, primarily from our
senior notes and convertible notes. There is the possibility that we may be
unable to generate cash sufficient to pay the principal of, interest on and
other amounts due in respect of our indebtedness when due. As of March 31,
1999, we had indebtedness of approximately $487.7 million and available
borrowings of up to an additional $4.6 million. We also expect to add
additional equipment loans and lease lines to finance capital expenditures for
our Internet Data Centers and may obtain additional long term debt, working
capital lines of credit and lease lines. There can be no assurance that any
financing arrangements will be available.
Our substantial leverage could have significant negative consequences,
including:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;
. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
. placing us at a possible competitive disadvantage vis-a-vis less
leveraged competitors and competitors that have better access to capital
resources.
We Are Subject to Restrictive Covenants That Limit Our Flexibility
Our senior notes and convertible notes contain various restrictions on our
ability to incur indebtedness, pay dividends or make other restricted payments,
sell assets, enter into affiliate transactions and take other actions.
Furthermore, some of our existing financing arrangements are, and future
financing arrangements are likely to be, secured by substantially all of our
assets. The existing financing arrangements require, and future financing
arrangements are likely to require, that we maintain specific financial ratios
and comply with covenants restricting our ability to incur indebtedness, pay
dividends or make other restricted payments, sell assets, enter into affiliate
transactions or take other actions.
In addition, the convertible notes proceeds may be used only for limited
purposes. Proceeds in the amount of $48.5 million may be used for general
corporate purposes. The remaining $194.5 million may be used only to finance
the purchase of assets or other businesses to be used in our business.
We Compete With Much Larger Companies and There Are Few Barriers to Entry
Our market is intensely competitive. There are few substantial barriers to
entry, and we expect to face additional competition from existing competitors
and new market entrants in the future. The principal competitive factors in
this market include:
. Internet system engineering and other expertise;
. customer service;
. network capability, reliability, quality of service and scalability;
. the variety of services offered;
. access to network resources, including circuits, equipment and
interconnection capacity to other networks;
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. broad geographic presence;
. price;
. the ability to maintain and expand distribution channels;
. brand name;
. the timing of introductions of new services;
. network security; and
. financial resources.
There can be no assurance that we will have the resources or expertise to
compete successfully in the future. Our current and potential competitors in
the market include:
. providers of server hosting services;
. national and regional ISPs;
. global, regional and local telecommunications companies and Regional
Bell Operating Companies; and
. large IT outsourcing firms.
Many of our competitors have substantially greater resources, more
customers, longer operating histories, greater name recognition and more
established relationships in the industry. As a result, these competitors may
be able to develop and expand their network infrastructures and service
offerings more quickly, devote greater resources to the marketing and sale of
their products and adopt more aggressive pricing policies. In addition, these
competitors have entered and will likely continue to enter into business
relationships to provide additional services competitive with those we provide.
Some of our 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 ours. We may not be able to offset
the effects of any price reductions. In addition, we believe our market is
likely to encounter consolidation in the near future, which could result in
increased price and other competition.
Our Market Is New and Our Services May Not Be Generally Accepted
The market for Internet system and network management solutions has only
recently begun to develop, is evolving rapidly and is characterized by an
increasing number of market entrants. This market may not prove to be viable
or, if it becomes viable, may not continue to grow. Our future growth depends
on the willingness of enterprises to outsource the system and network
management of their mission-critical Internet operations and our ability to
market our services in a cost-effective manner to a sufficiently large number
of customers. If this market fails to develop, or develops more slowly than
expected, or if our services do not achieve market acceptance, our business
would be materially and adversely affected. In addition, in order to be
successful we must be able to differentiate ourselves from our competition
through our service offerings.
System Failures Could Lead to Significant Costs
We must protect our network infrastructure and customers' equipment against
damage from human error, physical or electronic security breaches, power loss
and other facility failures, fire, earthquake, flood, telecommunications
failure, sabotage, vandalism and similar events. Despite precautions we have
taken, a natural disaster or other unanticipated problems at one or more of our
Internet Data Centers could result in interruptions in our services or
significant damage to customer equipment. In addition, failure of any of our
telecommunications providers, such as MCI WorldCom or Qwest Communications
Corporation, to provide consistent data communications capacity could result in
interruptions in our services. Any damage to or failure of our systems or
service providers could result in reductions in, or terminations of, services
supplied to our customers, which could have a material adverse effect on our
business. In the past, we have experienced
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interruptions in specific circuits within our network resulting from events
outside our control, which led to short-term degradation in the level of
performance of our network.
Customer Satisfaction is Critical to Our Success
Our customers demand a very high level of service. Our customer contracts
generally provide a limited service level warranty related to the continuous
availability of service on a 24 hours per day, seven days per week basis. This
warranty is generally limited to a credit consisting of free service for a
short period of time for disruptions in Internet transmission services. To
date, only a limited number of customers have been entitled to this warranty.
If we incur significant warranty obligations in connection with system
downtime, our liability insurance may not be adequate to cover these expenses.
As customers outsource more mission-critical operations to us, we may be
subject to increased liability claims and customer dissatisfaction should our
systems fail or our customers otherwise become unsatisfied.
Our Ability to Expand Our Network Is Unproven
To satisfy customer requirements, we must continue to expand and adapt our
network infrastructure. We are dependent on MCI WorldCom and Qwest and other
telecommunications providers for our backbone capacity, including our dedicated
clear channel network. The expansion and adaptation of our telecommunications
infrastructure will require substantial financial, operational and management
resources as we negotiate telecommunications capacity with network
infrastructure suppliers. Due to the limited deployment of our services to
date, our ability to connect and manage a substantially larger number of
customers at high transmission speeds is unknown. We have yet to prove our
network's ability to be scaled up to higher customer levels while maintaining
superior performance. Furthermore, it may be difficult for us to quickly
increase our network capacity in light of current necessary lead times within
the industry to purchase circuits and other critical items. If we fail to
achieve or maintain high capacity data transmission circuits, consumer demand
could shrink because of possible degradation of service. In addition, as we
upgrade our telecommunications infrastructure to increase bandwidth available
to our customers, we expect to encounter equipment or software incompatibility
which may cause delays in implementation.
We Depend on Network Interconnections
We rely on a number of public and private network interconnections, commonly
referred to as peering relationships, to allow our customers to connect to
other networks. If our peering partners were to discontinue their support for
the peering relationships, our ability to exchange traffic would be
significantly constrained. Furthermore, our business will be adversely affected
if these peering partners do not add more bandwidth to accommodate increased
traffic. Many of the companies with which we maintain private peering
interconnections are our competitors. There is nothing to prevent any peering
partners, many of which are significantly larger than us, from charging high
usage fees or denying access. In the future, private peering partners could
refuse to continue to interconnect directly with us, might impose significant
costs on us or limit our customers access to their networks. If we were unable
on a cost-effective basis to access alternative networks to exchange our
customers' traffic or if we were unable to pass through to our customers any
additional costs of utilizing these networks, our business could be materially
adversely affected.
Risks Associated with International Operations
A component of our strategy is to expand into international markets,
including Europe and Japan, and we currently have a server hosting site in the
London metropolitan area. We expect to open an Internet Data Center in the
London metropolitan area by the end of the second quarter of 1999 and server
hosting facilities in Europe and Japan by the end of 1999. In order to expand
international operations, we may 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. Thus, we will depend on
third parties to be successful in our international operations. In addition,
the rate of development and adoption of the Internet has been slower outside of
the United States, and
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the cost of bandwidth has been higher, which may adversely affect our ability
to expand operations and may increase our cost of operations internationally.
The risks inherent in conducting business internationally include:
. unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers;
. challenges in staffing and managing foreign operations;
. differences in technology standards;
. employment laws and practices in foreign countries;
. longer payment cycles and problems in collecting accounts receivable;
. political instability;
. fluctuations in currency exchange rates and imposition of currency
exchange controls; and
. potentially adverse tax consequences.
Rapid Technological Change and Evolving Industry Standards
Our future success will depend on our ability to offer services that
incorporate leading technology and address the increasingly sophisticated and
varied needs of our current and prospective customers. Our market is
characterized by rapidly changing and unproven technology, evolving industry
standards, changes in customer needs, emerging competition and frequent new
service introductions. Future advances in technology may not be beneficial to,
or compatible with, our business, and we may not be able to incorporate
advances on a cost-effective and timely basis. Moreover, technological advances
may have the effect of encouraging our current or future customers to rely on
in-house personnel and equipment to furnish the services we currently provide.
In addition, keeping pace with technological advances may require substantial
expenditures and lead time.
We believe that our ability to compete successfully is also dependent upon
the continued compatibility and interoperability of our services with products,
services and architectures offered by various vendors. Although we work with
various vendors in testing newly developed products, these products may not be
compatible with our infrastructure or adequate to address changing customer
needs. For instance, existing networking hardware may not be immediately
compatible with leading edge telecommunications infrastructure services, and
therefore may require us to make significant investments to achieve
compatibility. Although we intend to support emerging standards, industry
standards may not be established or we may not be able to timely conform to new
standards. Our failure to conform to a prevailing standard, or the failure of a
common standard to emerge, could have a material adverse effect on our
business.
System Security Risks Could Disrupt Our Services
The ability to provide secure transmissions of confidential information over
networks accessible to the public is a significant barrier to electronic
commerce and communications. A portion of our services rely on encryption and
authentication technology licensed from third parties. Despite a variety of
network security measures taken by us, we cannot assure that unauthorized
access, computer viruses, accidental or intentional actions and other
disruptions will not occur. Our Internet Data Centers have 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, inappropriate use of the network by third
parties could also jeopardize the security of confidential information, such as
customer and Exodus passwords as well as credit card and bank account numbers,
stored in our computer systems or those of our customers. This could result in
liability to us and the loss of existing customers or the deterrence of
potential customers. The costs required to eliminate computer viruses and
alleviate other security problems could be prohibitively expensive and the
efforts to address these problems could result in interruptions, delays or
cessation of service to our customers.
We Depend on Third-Party Equipment and Software Suppliers
We depend on vendors to supply key components of our telecommunications
infrastructure and system and network management solutions. Some of the
telecommunications services and networking equipment is
9
<PAGE>
available only from sole or limited sources. For instance, the routers,
switches and modems we use are currently supplied primarily by Cisco Systems,
Inc. We typically purchase or lease all of our components under purchase orders
placed from time to time. We do not carry significant inventories of components
and have no guaranteed supply arrangements with vendors. Our failure to obtain
required products or services on a timely basis and at an acceptable cost would
have a material adverse effect on our business. In addition, the failure of our
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 we use could have a material adverse effect
on our business. For example, we have experienced performance problems,
including previously unknown software and firmware bugs, with routers and
switches that have caused temporary disruptions in and impairment of network
performance. In addition, we expect to depend for a time on third parties to
deliver our services from and manage our international operations, including
our site in London.
Government Regulation and Legal Uncertainties May Adversely Affect Our Business
Laws and regulations directly applicable to communications and commerce over
the Internet are becoming more prevalent. The United States Congress has
recently considered Internet laws regarding children's privacy, copyrights,
taxation and the transmission of sexually explicit material. The European Union
also recently enacted its own privacy regulations. The law of the Internet,
however, remains largely unsettled, even in areas where there has been some
legislative action. It may take years to determine whether and how existing
laws such as those governing intellectual property, privacy, libel and taxation
apply to the Internet. In addition, the growth and development of the market
for online commerce may prompt calls for more stringent consumer protection
laws, both in the United States and abroad, that may impose additional burdens
on companies conducting business online. The adoption or modification of laws
or regulations relating to the Internet could adversely affect our business. We
provide services over the Internet in all states in the United States and in
many foreign countries, and we facilitate the activities of our customers in
these jurisdictions. As a result we may be required to qualify to do business,
or be subject to taxation, or be subject to other laws and regulations, in
these jurisdictions even if we do not have a physical presence or employees or
property in these jurisdictions. The application of these multiple sets of laws
and regulations is uncertain, but we could find that Exodus is subject to
regulation, taxation, enforcement or other liability in unexpected ways, which
could materially adversely affect our business.
There are Risks Involved with the Information Disseminated through Our 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. The Child Online Protection Act of 1998
imposes criminal penalties and civil liability on anyone engaged in the
business of selling or transferring material that is harmful to minors, by
means of the World Wide Web, without restricting access to this type of
material by underage persons. Numerous states have adopted or are currently
considering similar types of legislation. The imposition upon us and other
Internet network providers of potential liability for information carried on or
disseminated through systems could require us to implement measures to reduce
exposure to liability, which may require the expenditure of substantial
resources, or to discontinue various service or product offerings. Further, the
costs of defending against any claims and potential adverse outcomes of these
claims could have a material adverse effect on our business. While we carry
professional liability insurance, it may not be adequate to compensate or may
not cover us in the event we become liable for information carried on or
disseminated through our networks.
Some businesses, organizations and individuals have in the past sent
unsolicited commercial e-mails advertising sites hosted at our facilities to
massive numbers of people. This practice, known as "spamming," has led to some
complaints against us. In addition, some ISPs and other online services
companies could deny network access to us if we allow undesired content or
spamming to be transmitted through our networks. Although we prohibit customers
by contract from spamming, there can be no assurance that customers will not
engage in this practice, which could have a material adverse effect on our
business.
10
<PAGE>
We Depend on Our Key Personnel
Our success depends in significant part upon the continued services of our
key technical, sales and senior management personnel. Although some of our
executive officers participate in our executive employment policy, none of our
officers is a party to an employment agreement. Any officer or employee can
terminate his or her relationship at any time. The loss of the services of one
or more of our key employees or our failure to attract additional qualified
personnel could have a material adverse effect on our business. We do not carry
key-person life insurance for any of our employees.
We Depend on the Internet and Internet Infrastructure Development
Our 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 our services. 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. 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 our
services. Consequently, the emergence and growth of the market for our services
is dependent on improvements being made to the entire Internet infrastructure
to alleviate overloading and congestion.
Risks Associated with Protection and Enforcement of Intellectual Property
Rights
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect proprietary
rights in our products and services. We have no patented technology that would
preclude or inhibit competitors from entering our market. Although we have
entered into confidentiality agreements with our employees, contractors,
suppliers, distributors and appropriate customers to limit access to and
disclosure of our proprietary information, these may prove insufficient to
prevent misappropriation of our technology or to deter independent third-party
development of similar technologies. In addition, the laws of various foreign
countries may not protect our products, services or intellectual property
rights to the same extent as do the laws of the United States.
In addition to licensing technologies from third parties, we are developing
and acquiring additional proprietary intellectual property. Third parties may
try to claim that our products or services infringe their intellectual
property. We expect that participants in our markets will be increasingly
subject to infringement claims. Any claim, whether meritorious or not, could be
time consuming, result in costly litigation, cause product installation delays
or require us to enter into royalty or licensing agreements. These royalty or
licensing agreements might not be available on terms acceptable to us or at
all.
Risk Related to the Year 2000 Problem
The Year 2000 problem stems from the use of a two digit date to represent
the year (e.g., 85 = 1985) in computer software and firmware. As a result, many
currently installed computer systems are not capable of distinguishing dates
beginning with the year 2000 from dates prior to the year 2000. As a result,
computer systems or applications used by many companies in a wide variety of
industries may experience operating difficulties unless the systems or
applications are modified to process adequately information related to the date
change. 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 delays in or
cancellation of decisions to purchase products or product support, due to the
reallocation of resources to address Year 2000 issues or otherwise, our
business could be materially adversely affected.
11
<PAGE>
We recognize the need to ensure our operations will not be adversely
impacted by Year 2000 issues. We have put into place a comprehensive Year 2000
Risk Management initiative that is adequately funded, staffed and managed. This
initiative's scope covers both our information technology (IT) systems and non-
IT systems and addresses all areas of the Year 2000 issues as defined by the
Information Technology Association of America (ITAA). Our internal inventory
audit was completed in January 1999. We plan to have an independent review of
our Year 2000 assessment completed in the second quarter of 1999, with final
Year 2000 compliance expected in the third quarter of 1999.
We have determined that our Internet Data Center equipment is either
currently Year 2000 compliant or that a funded replacement/upgrade plan is in
place to resolve known issues. Likewise, based on the on-going assessment
relative to our current software service offerings, we believe that the current
versions of these products are either Year 2000 compliant or will not require
substantial effort or cost to make them Year 2000 compliant by the end of the
third quarter of 1999. We have reviewed, and continue to review, 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 our
assessment to date, we believe that internal management information and other
systems are either Year 2000 compliant or will not require substantial effort
of cost to make them Year 2000 compliant. We do not foresee any issues with
internal IT and internal non-IT systems being Year 2000 compliant by the end of
the third quarter of 1999.
Our Year 2000 initiative also addresses vendor relationships (both IT and
non-IT) and their readiness/preparedness relating to Year 2000 issues. IT
vendors include software providers, hardware providers, service providers, off
the shelf software publishers and IT consultants. Non-IT providers include
electric power suppliers, vendors of uninterruptable power supplies and
generators, telecommunications service and equipment providers, business
partners, facilities maintainers and other non-IT service contractors. In the
event that third parties cannot provide us with products, services of systems
that are Year 2000 compliant on a timely basis, our business could be
materially adversely affected. To date, we have not discovered nor do we
anticipate any material Year 2000 issues with vendors and service providers.
Evaluation of vendor Year 2000 preparedness is an on-going process. As our Year
2000 evaluation does not evaluate our vendors' vendors nor our vendors'
customer base viability issues, we will be developing contingency plans to
address specific vendor/service provider concerns. Our contingency plan shall
be completed by September 30, 1999.
Many of our customers maintain their Internet operations on servers, which
may be impacted by Year 2000 complications. The failure of our customers to
ensure that their servers are Year 2000 compliant could have a material adverse
effect on our customers, which in turn could have a material adverse effect on
our business, if our customers are forced to cease or interrupt Internet
operations or experience malfunctions related to their equipment.
We have established procedures for evaluating and managing the risks and
costs associated with this problem. Funding and execution for this initiative
is within our existing business units and operating budgets and is not viewed
as material. Based on our current assessment, we believe the costs, excluding
employee personnel time and effort to resolve Year 2000 issues, other than
unanticipated liabilities, should not exceed $500,000. We further estimate that
the time and effort required of our personnel to resolve Year 2000 issues will
not be material.
While we believe our Year 2000 initiative to be prudent, properly funded and
staffed and well-managed, there can be no assurance that we will identify and
remedy all Year 2000 problems in a timely fashion, that any remedial efforts in
this regard will not involve significant time and expense, or that such
problems will not have a material adverse effect on our business.
The Notes are Subordinated to Other Debt
The notes are unsecured and subordinated in right of payment to all of our
existing and future senior indebtedness, as defined in the indenture governing
the notes. As a result, in the event of bankruptcy,
12
<PAGE>
liquidation or reorganization or upon acceleration of the notes due to an event
of default, as defined below and in specific other events, our assets will be
available to pay obligations on the notes only after all senior indebtedness
has been paid in full in cash or other payment satisfactory to the holders of
senior indebtedness. There may not be sufficient assets remaining to pay
amounts due on any or all of the notes then outstanding. The notes are also
effectively subordinated to the liabilities, including trade payables, of our
subsidiaries. The indenture governing the notes does not prohibit or limit the
incurrence of senior indebtedness or the incurrence of other indebtedness and
other liabilities by us or our subsidiaries. The incurrence of additional
indebtedness and other liabilities by us or our subsidiaries could adversely
affect our ability to pay obligations on the notes. As of March 31, 1999, we
had approximately $237.7 million of indebtedness outstanding that would have
constituted senior indebtedness. As of March 31, 1999, our subsidiaries had no
material indebtedness or other liabilities. We anticipate that from time to
time we will incur additional indebtedness, including senior indebtedness. See
"Description of Notes--Subordination of Notes."
Limitations on Redemption of Notes Upon Change of Control
Upon a change of control, as defined below, each holder of notes has rights,
at the holder's option, to require us to redeem all or a portion of the
holder's notes. Although the indenture allows us, subject to satisfaction of
conditions, to pay the redemption price in shares of common stock, if a change
of control were to occur, we may not have sufficient funds to pay the
redemption price for all notes tendered by holders. Our indenture relating to
our senior notes may prohibit the payment of the redemption price while the
senior notes are outstanding. Any future credit agreements or other agreements
relating to other indebtedness, including other senior indebtedness, to which
we become a party may contain similar restrictions and provisions. In the event
a change of control occurs at a time when we are prohibited from purchasing or
redeeming notes, we could seek the consent of lenders to the purchase of notes
or could attempt to refinance the borrowings that contain this prohibition. If
we do not obtain a consent or repay these borrowings, we would remain
prohibited from purchasing or redeeming notes. Our failure to redeem tendered
notes would constitute an event of default under the indenture, which might
constitute a default under the terms of other indebtedness that we may enter
into from time to time. In these circumstances, the subordination provisions in
the indenture would likely restrict payments to the holders of notes. The term
"change of control" is limited to specified transactions and may not include
other events that might adversely affect our financial condition. In addition,
the requirement that we offer to repurchase the notes upon a change of control
does not necessarily afford holders of the notes protection in the event of a
highly leveraged transaction, reorganization, merger or similar transaction
involving us. See "Description of Notes--Redemption at Option of Holders."
Absence of Public Market for the Notes and Restrictions on Resale
There is no public trading market for the notes. Although the initial
purchasers of the notes have advised us that they currently intend to make a
market in the notes, they are not obligated to do so and may discontinue their
market making at any time without notice. In addition, their market making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act. Accordingly, there can be no assurance that any market for the
notes will develop or, if one does develop, that it will be maintained. If an
active market for the notes fails to develop or be sustained, the trading price
of their notes could be materially adversely affected. We do not intend to
apply for listing of the notes on any securities exchange.
Volatility of Our Stock Price
The market price of our common stock has fluctuated in the past and is
likely to continue to fluctuate. In addition, the securities markets,
particularly with respect to Internet stocks, have experienced significant
price and volume fluctuations.
13
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------------------- ------------------
1995 1996 1997 1998 1998 1999
-------- -------------- --------- --------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Deficiency of earnings
available to cover
fixed charges......... $(1,311) $(4,133) $(25,298) $(66,442) $(13,321) $(22,164)
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1994
-----------------
<S> <C> <C> <C>
Ratio of earnings to fixed charges.................... 26 x
</TABLE>
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 or rental expense we believe to be
representative of interest.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the Securities
and Exchange Commission. You may inspect the documents we file with the SEC and
copy them, at prescribed rates, at the public reference facilities maintained
by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. You
may obtain information on the operation of the public reference facilities by
calling the SEC at 1-800-SEC-0330. You may also read our filings at the SEC's
Web site at http://www.sec.gov.
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act with respect to the notes and common stock offered by this
prospectus. This prospectus does not contain all of the information set forth
in the registration statement. We have omitted parts of the registration
statement as permitted by the rules and regulations of the SEC. Statements
contained in this prospectus as to the contents of any contract or other
document are not necessarily complete. You should refer to the copy of each
contract or document filed as an exhibit to the registration statement for
complete information. Copies of the registration statement, including exhibits,
may be inspected without charge at the SEC's public reference facilities or Web
site.
The SEC allows us to incorporate by reference into this prospectus
information that we file with the SEC. This means that we can disclose
important information to you by referring you to those documents. The
information we incorporate by reference is considered as part of this
prospectus, and later information we file with the SEC will automatically
update and supersede this information. We will furnish without charge to each
person to whom a copy of this prospectus is delivered, upon written or oral
request, a copy of any and all of the information that has been incorporated by
reference into this prospectus other than exhibits to these documents, unless
the exhibits are specifically incorporated by reference in the prospectus as
well. Requests for copies should be directed to 2831 Mission College Boulevard,
Santa Clara, California 95054, Attention: Adam W. Wegner, General Counsel,
telephone: (408) 346-2200.
14
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents that we have filed with the SEC are incorporated by
reference into this prospectus:
. our annual report on Form 10-K for the year ended December 31, 1998;
. our quarterly report of Form 10-Q for the quarter ended March 31, 1999;
. our current reports on Form 8-K filed January 29, 1999, February 22,
1999 and March 2, 1999;
. the description of our common stock on Form 8-A filed on February 13,
1998 and the description of our preferred stock purchase rights on Form
8-A filed on January 29, 1999; and
. all other information that we file with the SEC pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this prospectus and prior to the termination of this offering.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the notes or common stock
by the selling security holders.
15
<PAGE>
SELLING HOLDERS
The notes were originally issued by Exodus and sold by the initial
purchasers in a transaction exempt from the registration requirements of the
Securities Act to persons reasonably believed by the initial purchasers to be
qualified institutional buyers or other institutional accredited investors.
Selling holders, including their transferees, pledgees or donees or their
successors, may from time to time offer and sell pursuant to this prospectus
any or all of the notes and common stock into which the notes are convertible.
The following table sets forth information, as of May 13, 1999, with respect
to the selling holders and the principal amounts of notes beneficially owned by
each selling holder that may be offered under this prospectus. The information
is based on information provided by or on behalf of the selling holders. The
selling holders may offer all, some or none of the notes or common stock into
which the notes are convertible. Because the selling holders may offer all or
some portion of the notes or the common stock, no estimate can be given as to
the amount of the notes or the common stock that will be held by the selling
holders upon termination of any sales. In addition, the selling holders
identified below may have sold, transferred or otherwise disposed of all or a
portion of their notes since the date on which they provided the information
regarding their notes in transactions exempt from the registration requirements
of the Securities Act. No selling holder named in the table below beneficially
owns one percent or more of our common stock assuming conversion of a selling
holder's notes, except that Goldman Sachs & Co. beneficially owned 1.0% before
the offering and Janus Capital Corporation owned 1.8% before the offering
assuming the conversion of their notes.
<TABLE>
<CAPTION>
Principal Amount Common Common
Of Notes Stock Stock Owned
Beneficially Owned Prior Common After
Owned And to the Stock Completion of
Name Offered Offering(1)(2) Offered (2) the Offering
- ---- ---------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Advantus Capital Management, Inc. ....... $ 800,000 17,514 17,514 --
AIG/National Union Fire Insurance........ 390,000 8,538 8,538 --
AIM Balanced Fund........................ 4,000,000 87,570 87,570 --
Aim VI Balanced Fund..................... 60,000 1,313 1,313 --
Alexandra Global Investment Fund I
Ltd. ................................... 3,000,000 65,677 65,677 --
Allstate Insurance Company............... 1,000,000 21,892 21,892 --
Argent Classic Convertible Arbitrage Fund
(Bermuda) L.P. ........................ 5,750,000 125,882 125,882 --
Argent Classic Convertible Arbitrage Fund
L.P. ................................... 4,250,000 93,043 93,043 --
Aristeia International, Ltd. ............ 2,060,000 45,098 45,098 --
Aristeia Trading, L.L.C. ................ 1,440,000 31,525 31,525 --
Arkansas Teachers Retirement............. 1,882,000 41,201 41,201 --
Associated Electric & Gas Insurance
Services Limited........................ 200,000 4,378 4,378 --
BancBoston Robertson Stephens Inc........ 1,129,000 24,716 24,716 --
Baptist Health of South Florida.......... 151,000 3,305 3,305 --
BNP Arbitraye SNC........................ 1,050,000 32,587(3) 22,987 9,600
Boston Museum of Fine Arts............... 105,000 2,298 2,298 --
Boulder Capital Inc. .................... 6,750,000 147,775 147,775 --
Boulder II Limited....................... 1,000,000 21,892 21,892 --
Calamos Growth and Income Fund........... 400,000 8,757 8,757 --
CPR (USA) Inc............................ 550,000 12,040 12,040 --
Deutsche Bank Securities................. 6,916,000 151,409 151,409 --
Dunham & Associates III.................. 89,000 1,948 1,948 --
Engineers Joint Pension Fund............. 285,000 6,239 6,239 --
Equity Portfolio......................... 6,000,000 131,355 131,355 --
Family Service Life Insurance Co. ....... 400,000 8,757 8,757 --
Fidelity Financial Trust: Fidelity
Covertible Securities Fund.............. 4,000,000 87,570 87,570 --
Forest Alternative Strategies Fund II
L.P. Series A 5 M....................... 125,000 2,736 2,736 --
Forest Alternative Strategies Fund II LP
Series A 5 I............................ 345,000 7,552 7,552 --
Forest Fulcrum Fund L.P. ................ 6,900,000 151,058 151,058 --
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Principal Amount Common Common
Of Notes Stock Stock Owned
Beneficially Owned Prior Common After
Owned And to the Stock Completion of
Name Offered Offering(1)(2) Offered (2) the Offering
- ---- ---------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Forest Global
Convertible Fund Series
A 5.................... $ 9,700,000 212,358 212,358 --
Guardian Life Insurance
Co. of America......... 7,800,000 170,762 170,762 --
The Guardian Master
Pension Trust.......... 300,000 6,567 6,567 --
Goldman, Sachs and Co... 19,773,000 432,882 432,882 --
Halliburton Company
Employee Benefit Plan.. 200,000 4,378 4,378 --
HBK Cayman L.P. ........ 2,165,000 47,397 47,397 --
HBK Offshore Fund
Ltd. .................. 4,335,000 94,904 94,904 --
Highbridge
International, LLC .... 6,968,000 152,547 152,547 --
ICI American Holdings
Trust.................. 395,000 8,647 8,647 --
Janus Capital
Corporation............ 34,000,000 744,348 744,348 --
JMG Convertible
Investments, L.P. ..... 7,950,000 174,046 174,046 --
Julius Baer Securities.. 550,000 12,040 12,040 --
Kentfield Trading,
Ltd ................... 7,309,000 160,013 160,013 --
LibertyView Plus Fund... 450,000 9,851 9,851 --
Lipper Convertibles
Series II, L.P. ....... 1,500,000 32,838 32,838 --
Lipper Offshore
Convertibles, L.P. .... 2,000,000 43,785 43,785 --
LLT Limited............. 180,000 3,940 3,940 --
Marsico Growth & Income
Fund................... 3,618,000 79,207 79,207 --
McMahan Securities
Company, L.P. ......... 1,000,000 21,892 21,892 --
Medici Partners, L.P. .. 600,000 13,135 13,135 --
Michael Angelo, L.P. ... 2,000,000 43,785 43,785 --
Millennium Trading Co.,
L.P. .................. 1,000,000 21,892 21,892 --
Nalco Chemical Company.. 200,000 4,378 4,378 --
Nations Marsico Annuity
Growth & Income........ 145,000 3,174 3,174 --
Nations Marsico Growth &
Income Fund............ 1,237,000 27,081 27,081 --
Nicholas Applegate
Convertible Fund....... 2,930,000 64,145 64,145 --
Onex Industrial Partners
Limited................ 5,750,000 125,882 125,882 --
Pell Rudman Trust Co.,
NA..................... 975,000 37,370(4) 21,345 16,025
R2 Investments, LDC..... 6,250,000 136,828 136,828 --
Ralphael, L.P. ......... 1,500,000 32,838 32,838 --
Ramius Fund Ltd. ....... 3,450,000 75,529 75,529 --
Ramius, L.P. ........... 3,600,000 78,813 78,813 --
RCG Baldwin, L.P. ...... 1,800,000 39,406 39,406 --
Salomon Smith Barney
Inc. .................. 725,000 15,872 15,872 --
San Diego City
Retirement............. 797,000 17,448 17,448 --
San Diego County
Convertible............ 2,099,000 45,952 45,952 --
Southern Farm Bureau
Life Insurance-FRIC.... 550,000 12,040 12,040 --
Starvest Combined
Portfolio.............. 565,000 12,369 12,369 --
State of Delaware PERS.. 900,000 19,703 19,703 --
State of Oregon Equity.. 4,495,000 98,407 98,407 --
Triarc Companies Inc. .. 600,000 13,135 13,135 --
Tribech Investments
L.L.C. ................ 17,000,000 372,174 372,174 --
Triton Capital
Investments, Ltd. ..... 9,800,000 214,547 214,547 --
Wake Forest University.. 717,000 15,696 15,696 --
Zeneca Holdings Trust... 395,000 8,647 8,647 --
Any other holder of
notes or future
transferee from any
holder (5)(6).......... 8,700,000 190,502 190,502 --
------------ --------- --------- ------
Total............... $250,000,000 5,498,775 5,473,150 25,625
============ ========= ========= ======
</TABLE>
17
<PAGE>
- --------
(1) Includes common stock into which the notes are convertible.
(2) Assumes a conversion rate of 21.8926 shares per $1,000 principal amount of
notes and a cash payment in lieu of any fractional interest.
(3) Includes an additional 9,600 shares of our common stock held by BNP
Arbitraye SNC.
(4) Includes an additional 16,025 shares of our common stock held by Pell
Rudman Trust Co., N.A.
(5) Information concerning other selling holders of notes will be set forth in
prospectus supplements from time to time, if required.
(6) Assumes that any other holders of notes or any future transferee from any
holder does not beneficially own any common stock other than common stock
into which the notes are convertible at the conversion rate of 21.8926
shares per $1,000 principal amount of notes.
None of the selling holders nor any of their affiliates, officers, directors
or principal equity holders has held any position or office or has had any
material relationship with Exodus within the past three years, except that
Goldman, Sachs & Co. and BancBoston Robertson Stephens Inc. were initial
purchasers in connection with the offer and sale of the notes in March 1999. In
addition, Goldman, Sachs & Co. was an initial purchaser in connection with the
offer and sale of our senior notes in June 1998 and was the lead underwriter
for our initial public offering of common stock in March 1998. The selling
holders purchased all of the notes from Exodus in a private transaction on
March 3, 1999. All of the notes were "restricted securities" under the
Securities Act prior to this registration.
Information concerning the selling holders may change from time to time and
any changed information will be set forth in supplements to this prospectus if
and when necessary. In addition, the conversion rate, and therefore, the number
of shares of common stock issuable upon conversion of the notes, is subject to
adjustment under certain circumstances. Accordingly, the aggregate principal
amount of notes and the number of shares of common stock into which the notes
are convertible may increase or decrease.
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<PAGE>
PLAN OF DISTRIBUTION
The selling holders and their successors, including their transferees,
pledgees or donees or their successors, may sell the notes and the common stock
into which the notes are convertible directly to purchasers or through
underwriters, broker-dealers or agents, who may receive compensation in the
form of discounts, concessions or commissions from the selling holders or the
purchasers. These discounts, concessions or commissions as to any particular
underwriter, broker-dealer or agent may be in excess of those customary in the
types of transactions involved.
The notes and the common stock into which the notes are convertible may be
sold in one or more transactions at fixed prices, at prevailing market prices
at the time of sale, at prices related to the prevailing market prices, at
varying prices determined at the time of sale, or at negotiated prices. These
sales may be effected in transactions, which may involve crosses or block
transactions:
. on any national securities exchange or U.S. inter-dealer system of a
registered national securities association on which the notes or the
common stock may be listed or quoted at the time of sale;
. in the over-the-counter market;
. in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
. through the writing of options, whether the options are listed on an
options exchange or otherwise; or
. through the settlement of short sales.
In connection with the sale of the notes and the common stock into which the
notes are convertible or otherwise, the selling holders may enter into hedging
transactions with broker-dealers or other financial institutions, which may in
turn engage in short sales of the notes or the common stock into which the
notes are convertible in the course of hedging the positions they assume. The
selling holders may also sell the notes or the common stock into which the
notes are convertible short and deliver these securities to close out their
short positions, or loan or pledge the notes or the common stock into which the
notes are convertible to broker-dealers that in turn may sell these securities.
The aggregate proceeds to the selling holders from the sale of the notes or
common stock into which the notes are convertible offered by them will be the
purchase price of the notes or common stock less discounts and commissions, if
any. Each of the selling holders reserves the right to accept and, together
with their agents from time to time, to reject, in whole or in part, any
proposed purchase of notes or common stock to be made directly or through
agents. Exodus will not receive any of the proceeds from this offering.
Exodus' outstanding common stock is listed for trading on the Nasdaq
National Market. We do not intend to list the notes for trading on any national
securities exchange or on the Nasdaq National Market and can give no assurance
about the development of any trading market for the notes.
In order to comply with the securities laws of some states, if applicable,
the notes and common stock into which the notes are convertible may be sold in
these jurisdictions only through registered or licensed brokers or dealers. In
addition, in some states the notes and common stock into which the notes are
convertible may not be sold unless they have been registered or qualified for
sale or an exemption from registration or qualification requirements is
available and is complied with.
The selling holders and any underwriters, broker-dealers or agents that
participate in the sale of the notes and common stock into which the notes are
convertible may be "underwriters" within the meaning of Section 2(11) of the
Securities Act. Any discounts, commissions, concessions or profit they earn on
any resale of the shares may be underwriting discounts and commissions under
the Securities Act. Selling holders who are "underwriters" within the meaning
of Section 2(11) of the Securities Act will be subject to the prospectus
19
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delivery requirements of the Securities Act. The selling holders have
acknowledged that they understand their obligations to comply with the
provisions of the Exchange Act and the rules thereunder relating to stock
manipulation, particularly Regulation M.
In addition, any securities covered by this prospectus which qualify for
sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under
Rule 144 or Rule 144A rather than pursuant to this prospectus. A selling holder
may not sell any notes or common stock described in this prospectus and may not
transfer, devise or gift these securities by other means not described in this
prospectus.
To the extent required, the specific notes or common stock to be sold, the
names of the selling holders, the respective purchase prices and public
offering prices, the names of any agent, dealer or underwriter, and any
applicable commissions or discounts with respect to a particular offer will be
set forth in an accompanying prospectus supplement or, if appropriate, a post-
effective amendment to the registration statement of which this prospectus is a
part.
Exodus entered into a registration rights agreement for the benefit of
holders of the notes to register their notes and common stock under applicable
federal and state securities laws under specific circumstances and at specific
times. The registration rights agreement provides for cross-indemnification of
the selling holders and Exodus and their respective directors, officers and
controlling persons against specific liabilities in connection with the offer
and sale of the notes and the common stock, including liabilities under the
Securities Act. Exodus will pay substantially all of the expenses incurred by
the selling holders of Exodus incident to the offering and sale of the notes
and the common stock.
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<PAGE>
DESCRIPTION OF NOTES
The notes were issued under an indenture dated as of March 1, 1999 between
Exodus and Chase Manhattan Bank and Trust Company, National Association, as
trustee. You may request a copy of the indenture from the trustee at its
offices in New York City. References in this section to "us" or "Exodus" are
solely to Exodus Communications, Inc. and not our subsidiaries. This section
summarizes the provisions of the notes and the indenture and the related
registration rights agreement. You should refer to these documents for more
detailed information.
General
We issued $250,000,000 aggregate principal amount of the notes. The notes
are unsecured subordinated obligations of Exodus. The notes will mature on
March 15, 2006, when they will be payable at a price of 100% of the principal
amount. The notes bear interest beginning on March 3, 1999 at an annual rate of
5%, payable semiannually on March 15 and September 15 of each year, commencing
on September 15, 1999. Interest payable per $1,000 principal amount of notes
for the period from March 3, 1999 to September 15, 1999 will be $26.67.
The notes are currently convertible into our common stock initially at the
conversion rate of 21.8926 shares per $1,000 principal amount, subject to
adjustment upon the occurrence of the specified events described below under
"Conversion Rights," at any time until the maturity date, unless previously
redeemed or repurchased.
Global Note; Book-Entry System
Notes held by qualified institutional buyers are evidenced by a global note
and were deposited with the trustee as custodian for the Depository Trust
Company, or DTC, and registered in the name of Cede & Co., as nominee of DTC.
Except as set forth below, record ownership of the global note may be
transferred, in whole or in part, only to another nominee of DTC or to a
successor of DTC or its nominee.
If a qualified institutional buyer is a participant in DTC, it may hold its
interest in the global note directly through DTC or indirectly through
organizations that are participants. Qualified institutional buyers who are not
participants may beneficially own interests in the global note held by DTC only
through participants in DTC or various banks, brokers, dealers, trust companies
and other parties that clear through or maintain a custodial relationship with
a participant. Transfers between participants will be effected in the ordinary
way in accordance with DTC's rules and will be settled in same-day funds. The
laws of some states require that specified persons take physical delivery of
securities in definitive form. Consequently, the ability to transfer beneficial
interests in the global note to these persons may be limited.
We will pay interest on and principal of and the redemption or repurchase
price of the global note, as well as any payment of liquidated damages, as
described below, to Cede, the nominee for DTC, as the registered owner of the
global note, by wire transfer of immediately available funds on each relevant
payment date. We and the trustee have no responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the global note.
DTC has informed us that its practice is to credit participants' accounts on
the payment date with payments in amounts proportionate to their beneficial
interests in the global note, unless it has reason to believe that it will not
receive payment. Only the DTC participants are responsible for payments to
owners of beneficial interests held through them.
Redemption notices shall be sent to Cede. If less than all the notes are
being redeemed, DTC's practice is to determine by lot the amount of the
holdings of each participant in the issue to be redeemed.
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Neither DTC nor Cede will consent or vote with respect to the notes. Under
its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date. The omnibus proxy assigns Cede's consenting or
voting rights to those participants to whose accounts to which the notes are
credited on the record date are identified in a listing attached to the omnibus
proxy.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants, a person or entity having a beneficial
interest in the global note may be unable to pledge its interest to persons or
entities that do not participate in the DTC book-entry system, and other
actions related to their interest may be affected, due to the lack of a
physical certificate evidencing their interest.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more participants to whose
account with DTC interests in the global note are credited. DTC will only take
action in respect of the portion of the principal amount of the notes
represented by the global note as to which the participant or participants has
or have given direction.
DTC has advised us that it is a limited purpose trust company organized
under the laws of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code, as amended, and
a "clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participants and
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include other organizations.
Various participants or their representatives, together with other entities,
own DTC. Indirect access to the DTC system is available to other entities such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant.
Although DTC has agreed to the above procedures in order to facilitate
transfers of beneficial ownership interests in the global note among
participants, it has no obligation to perform or continue to perform these
procedures.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that we believe to be reliable, but we take no
responsibility for the accuracy of this information. We are not responsible for
the performance by DTC or its participants or indirect participants of their
obligations under the rules and procedures governing their operations,
including maintaining, supervising or reviewing the records relating to, or
payments made on account of, beneficial ownership interests in the global note.
The trustee is also not responsible for this performance.
So long as DTC is the registered owner of the global note, DTC will be
considered the sole legal owner or holder of the notes represented by the
global note. Except as set forth below, owners of beneficial interests in a
global note will not be entitled to have notes represented by the global note
registered in their names, will not receive or be entitled to receive physical
delivery of notes in definitive form and will not be considered the legal
owners or holder of the notes under the indenture. Accordingly, each person
owning a beneficial interest in the global note must rely on the procedures of
DTC and, if that person is not a participant, those of the participant through
which that person owns its interests, in order to exercise any rights of a
holder under the indenture or the holder's note.
A global note is exchangeable for definitive notes in registered
certificated form if:
. DTC notifies us that it is unwilling or unable to continue as depositary
for our global note and we fail to appoint a successor depository within
90 days of that notice, or DTC has ceased to be a clearing agency
registered under the Exchange Act;
. we notify the trustee in writing that we desire the issuance of the
notes in certificated form; or
. there shall have occurred and be continuing a default or an event of
default with respect to the notes.
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In all cases, certificated notes delivered in exchange for any global note will
be registered in the names, and issued in any approved denominations, required
by or on behalf of the depositary.
Conversion Rights
You may convert any portion of a note, in multiples of $1,000, into shares
of our common stock at any time until the maturity date, unless previously
redeemed or repurchased, at a conversion rate of 21.8926 shares of common stock
per $1,000 principal amount of notes. This is equivalent to an approximate
conversion price of $45.68 per share of common stock. This conversion rate is
subject to adjustment upon specific events as described below. The right to
convert a note called for redemption or delivered for repurchase will terminate
at the close of business on the business day immediately preceding the
redemption date or the repurchase date, as the case may be.
You may convert a note by delivering the note to the corporate trust office
of the trustee in New York City, accompanied by a duly signed and completed
notice of conversion. You may obtain this conversion notice at the office of
the trustee.
As promptly as practicable on or after the conversion date, we will issue
and deliver to the trustee a certificate or certificates for the number of full
shares of common stock issuable upon conversion, together with a cash payment
instead of any fraction of a share. The shares of common stock issuable upon
conversion of the notes will be fully paid and nonassessable and will rank
equal to the other shares of our common stock outstanding. If a note is
surrendered for conversion on or after a record date for interest payments, but
before the next interest payment date, and we have not called the note for
redemption on a redemption date during the period beginning on the record date
and ending on the third business day after the interest payment date, the note
must be accompanied by payment equal to the interest payable on the next
interest payment date. In the case of any note which has been converted after
any record date for interest payments but before the next succeeding interest
payment date, interest will be payable on that interest payment date
notwithstanding a conversion, and the interest shall be paid to the holder of
the converted note on the record date. If you surrender a note for conversion
on a date that is not after a record date and on or after an interest payment
date, you will not receive any interest for the period from the prior interest
payment date to the date of conversion or for any later period. No other
payment or adjustment for interest, or for any dividends in respect of common
stock, will be made upon conversion. Holders of common stock issued upon
conversion will not be entitled to receive any dividends payable to holders of
common stock as of any record time or date before the close of business on the
conversion date.
A holder delivering a note for conversion will not be required to pay any
taxes or duties in respect of the issue or delivery of common stock on
conversion. However, if the common stock will be issued or delivered in a name
other than that of the holder of the note, the holder will be required to pay
any tax or duty which may be payable in respect of the transfer. Certificates
representing shares of common stock will not be issued or delivered unless all
taxes and duties, if any, payable by the holder have been paid.
We will adjust the conversion rate of the notes if we:
. issue dividends or other distributions, payable in common stock on
shares of our common stock;
. issue to all holders of our common stock rights to subscribe for or
purchase common stock at less than the then current market price;
. subdivide, combine or reclassify our common stock;
. distribute to all holders of common stock evidences of our indebtedness,
shares of capital stock, cash or assets, including securities, but
excluding:
. those dividends and rights, and distributions referred to above;
. dividends and distributions paid exclusively in cash;
. distributions upon mergers or consolidations resulting in a
reclassification, conversion, exchange or cancellation of our
common stock;
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. pay a cash dividend or distribution to the holders of our common stock,
if, when aggregated with all other all-cash distributions and cash and
consideration payable through a tender offer by us, or a subsidiary,
made during the prior 12 months for which an adjustment to the
conversion rate was not made, the dividend, distribution or repurchase
exceeds 10% of our market capitalization.
. complete a tender offer for our common stock which involves aggregate
consideration that together with (a) cash and other consideration
payable in a tender offer by us, or a subsidiary for our common stock
expiring within the 12 months preceding the expiration of that tender
offer for which no adjustment was made and (b) the amount of any all-
cash distributions referred to in the bullet point immediately above to
all holders of our common stock within the 12 months preceding the
expiration of that tender offer for which no adjustment was made,
exceeds 10% of our market capitalization on the expiration of the tender
offer.
We are not required to adjust the conversion rate until the cumulative
adjustments amount to 1.0% or more of the conversion rate. We will give notice
by mail of any adjustments.
If we are consolidated or merged with another entity that results in the
reclassification, conversion, exchange or cancellation of our common stock, or
if we sell or transfer all or substantially all of our assets, each note will
automatically become convertible only into the consideration receivable upon
this event by the holders of our common stock.
If we make a distribution of property to our stockholders which would be
taxable to them as a dividend for United States federal income tax purposes and
the number of shares into which notes are convertible is increased, the
increase may be deemed for federal income tax purposes to be the payment of a
taxable dividend to holders of notes.
Subordination
All payments on the notes are subordinated to the prior payment in full of
all our senior indebtedness. Senior indebtedness includes indebtedness
evidenced by a credit or loan agreement, note, bond or other written
obligation, all obligations for money borrowed and specified types of leases.
The principal amount of outstanding senior indebtedness was approximately
$237.7 million at March 31, 1999. The indenture does not limit our ability or
our subsidiaries' ability to incur senior indebtedness or any other
indebtedness. Our obligations under the notes will be effectively subordinated
to all liabilities of our subsidiaries.
In addition, the subordination provisions of the indenture prevent us from
making any payments on the notes if:
. we fail to pay any amounts due on any designated senior debt, as defined
in the indenture, beyond the applicable grace period; or
. any other event of default occurs and is continuing under any designated
senior debt that permits its holders to accelerate the maturity of that
debt, and the trustee receives a payment blockage notice of the default
from us, from a holder of the designated senior debt or from other
persons permitted to give notice under the indenture.
We may resume making payments on the notes once a payment default on the
designated senior debt is cured or waived.
We may also resume making payments on the notes following a nonpayment
default on the designated senior debt on the earlier of the date on which the
default is cured or waived or 179 days after the date on which the payment
blockage notice is received. No new payment blockage period may be commenced
unless:
. 365 days have passed since the trustee's receipt of the prior payment
blockage notice; and
. all scheduled payments of principal, premium, if any, and interest on
the notes that have come due have been paid in full in cash.
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As a result of the subordination provisions, in the event of our
dissolution, winding up, liquidation, reorganization, bankruptcy, insolvency,
receivership or other similar proceedings, holders of the notes may receive
less than other creditors on a ratable basis.
In addition, the notes are structurally subordinated to all indebtedness and
other liabilities of our subsidiaries.
Optional Redemption
We may not redeem the notes prior to March 20, 2001. We may redeem the notes
on and after March 20, 2001, at our option, in whole or in part, upon not less
than 30 nor more than 60 days notice to each holder, at the prices set forth
below. However, we may not redeem the notes on or after March 20, 2001 and
before March 20, 2003 unless the last reported bid price for our common stock
equals or exceeds 140% of the conversion price for at least 20 trading days
within a period of 30 consecutive trading days ending within five trading days
of the call for redemption.
The redemption price, expressed as a percentage of principal amount, is as
follows for the 12-month periods beginning on March 20 of the years indicated
below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2001........................................................... 103.57%
2002........................................................... 102.86
2003........................................................... 102.14
2004........................................................... 101.43
2005........................................................... 100.71
</TABLE>
and thereafter is equal to 100% of the principal amount, in each case together
with accrued interest to the date of redemption.
Payment
The principal of notes will be payable in U.S. dollars, when the notes are
surrendered at the corporate trust office of the trustee in New York City.
Payment will be made by check drawn on a bank in New York City, or, if
requested by holders with more than $2,000,000 of notes, by transfer to an
account maintained by the holder with a bank in New York City. Interest
payments on each note will be made to the person in whose name the note is
registered at the close of business on the February 15 or the August 15
preceding the relevant interest payment date. Interest payments are payable in
U.S. dollars and made by a check drawn on a bank in New York City mailed to the
holder at the holder's registered address. In addition, if requested by a
holder with more than $2,000,000 of notes, interest payments may be made by
transfer to an account maintained by the holder with a bank in New York City.
No transfer to an account will be made unless the trustee has received written
wire instructions at least 15 days prior to the relevant payment date.
Payments on any global note registered in the name of DTC or its nominee
will be payable by the trustee to DTC or its nominee. The trustee will not have
any responsibility or liability for the actions and practices of DTC or any of
its participants or indirect participants.
Any payment on the notes due on any day which is not a business day may be
made on the next business day.
We have initially appointed the trustee as paying agent and conversion
agent. We may at any time terminate the appointment of any paying agent or
conversion agent and appoint additional or other paying agents and conversion
agents. Notice of any termination or appointment and of any change in the
office through which any paying agent or conversion agent will act will be
given in accordance with "--Notices" below.
All moneys deposited by us with the trustee or any paying agent for any
payment on any notes which remain unclaimed at the end of two years after
payment has become due will be repaid to us, and the holder of the note must
then look only to us for payment.
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Repurchase at Option of Holders Upon a Change in Control
If a change in control, as defined below, occurs, we must mail holders of
notes a notice within 30 days of the change in control describing the
transaction or transactions that constitute the change of control and offering
to purchase notes on the date specified in the notice. If a change in control
occurs, each holder of notes may require us to purchase the holder's notes in
integral multiples of $1,000. We will repurchase the notes for an amount of
cash equal to 100% of the principal amount plus accrued and unpaid interest, if
any, to the date of purchase.
Instead of repurchasing notes for cash, we may, at our option, deliver to
holders of notes shares of our common stock valued at 95% of the average of the
closing bid prices for the five trading days immediately preceding and
including the third day prior to the repurchase date. However, payment may not
be made in our common stock unless we satisfy specific conditions with respect
to the payment prior to the repurchase date.
A change in control means:
1. the acquisition by any person, including any group deemed to be a
"person" under Section 13(d)(3) of the Exchange Act, of beneficial
ownership, directly or indirectly, through a purchase, merger or other
acquisition transaction or series of transactions, of shares of our
capital stock entitling the person to exercise 50% or more of the total
voting power of all shares of our capital stock entitled to vote
generally in elections of directors, other than an acquisition of
capital stock by us, any subsidiary of us or any of our employee benefit
plans; or
2. any consolidation or merger of us with or into, any other person, any
merger of another person into us, or any conveyance, sale, transfer or
lease of all or substantially all of our assets to another person, other
than:
. a transaction which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of our
capital stock and where the holders of our common stock immediately
prior to the transaction have the entitlement to exercise, directly
or indirectly, 50% or more of the total voting power of all shares
of our capital stock entitled to vote generally in the election of
directors of the continuing or surviving corporation immediately
after the transaction; and
. any merger which is effected solely to change our jurisdiction of
incorporation and results in a reclassification, conversion or
exchange of outstanding shares of common stock only into shares of
common stock;
A change in control is not deemed to have occurred if:
. the closing bid price per share of our common stock for any five trading
days within the period of 10 consecutive trading days ending immediately
after the later of the change in control or the public announcement of
the change in control, in the case of a change in control under the
first bullet point above, or the period of 10 consecutive trading days
ending immediately before the change in control, in the case of a change
in control under the second bullet point above, shall equal or exceed
105% of the conversion price of the notes in effect on each of these
trading days; or
. all of the consideration, excluding cash payments for fractional shares
and cash payments made pursuant to dissenters' appraisal rights, in a
merger or consolidation constituting the change of control consists of
shares of common stock traded on a national securities exchange or on
the Nasdaq National Market or will be so traded immediately following
the change of control.
In connection with any purchase offer, we will comply with the provisions of
Rule 13e-4, 14e-1 and any other tender offer rules under the Exchange Act which
may then be applicable.
The change in control feature of the notes would not necessarily afford
holders protection in the event of highly leveraged or other transactions
involving us that may adversely affect holders.
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Our ability to repurchase notes upon the occurrence of a change in control
is subject to limitations. We may not have the financial resources, or may not
be able to arrange financing, to pay the repurchase price for all the notes
that might be delivered seeking to exercise the repurchase right. Moreover,
although we may elect to pay the repurchase price for the notes using shares of
our common stock, our ability to repurchase notes may be limited or prohibited
by the terms of borrowing arrangements, including the indenture governing our
11 1/4% senior notes due 2008 and other senior indebtedness. If we fail to
repurchase the notes when required following a change in control this would
result in an event of default under the indenture and our other senior
indebtedness. A default may, in turn, cause a default under our senior
indebtedness. In addition, the occurrence of a change in control could result
in an event of default under the terms of the indenture governing our 11 1/4%
senior notes due 2008 or under the terms of our other senior indebtedness. As a
result, any repurchase of the notes would, absent a waiver, be prohibited under
the subordination provisions of the indenture until the senior indebtedness is
paid in full. In addition, our repurchase of notes as a result of the
occurrence of a change in control may be prohibited or limited by, or create an
event of default under, the terms of agreements related to borrowings which we
may enter into from time to time, including agreements relating to senior
indebtedness. See "--Subordination."
Covenant Regarding Use of Proceeds
We will use the net proceeds of the sale of the notes, other than up to
$48.475 million, to finance the purchase or other acquisition of any property,
inventory, asset or business directly or indirectly, by us or any Restricted
Subsidiary used in, or to be used in, the System and Network Management
Business, or for other purposes as may be permitted by the indenture for our 11
1/4% senior note due 2008. "Restricted Subsidiary" shall mean any subsidiary
that has not been designated an "Unrestricted Subsidiary" pursuant to the
indenture for our 11 1/4% senior notes due 2008. "System and Network Management
Business" means:
. server and other hardware hosting;
. connectivity, data networking, telecommunications or content for
computer or data networks or systems;
. management of computer or data networks or systems;
. 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
. businesses reasonably related, complementary or incidental to the items
listed above.
Mergers and Sales of Assets by Exodus
We may not consolidate with or merge into any other entity or convey,
transfer, sell or lease our properties and assets substantially as an entirety
to any entity unless:
. the surviving entity or the person to which our properties and assets
are so conveyed, transferred, sold or leased shall be a corporation,
limited liability company, partnership or trust organized under the laws
of the United States, any state or the District of Columbia and, if
other than us, shall expressly assume the payment of the notes and the
performance of our other covenants under the indenture; and
. immediately after giving effect to this transaction, no event of
default, and no event that, after notice or lapse of time or both, would
become an event of default, shall have occurred and be continuing.
Events of Default
The following are events of default under the indenture:
(1) failure to pay principal of or premium, if any, on any note when due,
whether or not the payment is prohibited by the subordination
provisions of the notes and the indenture;
(2) failure to pay any interest, including any liquidated damages, on any
note when due, continuing for 30 days, whether or not the payment is
prohibited by the subordination provisions of the notes and the
indenture;
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(3) failure to provide an offer to purchase in the event of a change in
control whether or not the offer to purchase is prohibited by the
subordination provisions of the notes and the indenture;
(4) failure to perform any of our other covenants in the indenture,
continuing for 60 days after written notice as provided in the
indenture;
(5) any default by us or any significant subsidiary, in payment with
respect to amounts in excess of $10.0 million due under any other
indebtedness if the default shall have continued after any applicable
grace period and, if not already matured at its final maturity, the
holder of the indebtedness shall have the right to accelerate the
indebtedness;
(6) any event of default as defined in any of our other indebtedness in
excess of $10.0 million shall have occurred and the indebtedness, if
not already matured at its final maturity, shall have been accelerated;
and
(7) specified events of bankruptcy, insolvency or reorganization with
respect to us or any significant subsidiary.
Generally, the trustee will be under no obligation to exercise any of its
rights under the indenture, unless holders shall have offered reasonable
indemnity to the trustee. Upon providing 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 as specified in clause number 7 above,
occurs and is continuing, either the trustee or the holders of at least 25% in
aggregate principal amount of the outstanding notes may, subject to the
subordination provisions of the indenture, accelerate the maturity of all
notes. However, after acceleration, but before a judgment or decree based on
acceleration, the holders of a majority in aggregate principal amount of
outstanding notes may rescind and annul the acceleration if all events of
default, other than the non-payment of principal of the notes which have become
due solely by declaration of acceleration, have been cured or waived as
provided in the indenture. If an event of default as specified in clause number
7 above occurs and is continuing, then the principal of, and accrued interest
on, all the notes shall automatically become immediately due and payable
without any declaration or other act on the part of the holders of the notes or
the trustee.
No holder of any note will have any right to institute any proceeding with
respect to the indenture or for any remedy under the indenture, unless:
. the holder shall have previously given to the trustee written notice of
a continuing event of default; and
. 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 the 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 the request and shall have failed to
institute the proceeding within 60 days.
However, these limitations do not apply to a suit instituted by a holder of a
note for the enforcement of payment on the note on or after the due dates
expressed in the note or of the right to convert the note in accordance with
the indenture.
Meetings, Modification and Waiver
The indenture contains provision for convening meetings of the holders of
notes to consider matters affecting their interests.
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Limited modifications of the indenture may be made without obtaining the
consent of the holders of the notes. Other modifications and amendments of the
indenture may be made, and various past defaults by us may be waived, either:
. with the written consent of the holders of not less than a majority in
aggregate principal amount of the notes at the time outstanding; or
. by the adoption of a resolution, at a meeting of holders of the notes at
which a quorum is present, by the holders of at least 66 2/3% in
aggregate principal amount of the notes represented at the meeting.
However, the consent of the holder of each outstanding note affected is
required to approve modifications or amendments of the notes that would:
. change the stated maturity of the principal of, or any installment of
interest on, any note;
. reduce the principal amount of, or the premium, if any, or interest on,
any note;
. reduce the amount payable upon a redemption or mandatory repurchase;
. modify the provisions with respect to the repurchase right of the
holders in a manner adverse to the holders;
. change the place or currency of payment on any note;
. impair the right to institute suit for the enforcement of any payment on
any note;
. modify our obligation to maintain an office or agency in New York City;
. except as otherwise permitted or contemplated by specified provisions in
the indenture, adversely affect the right of holders to convert any of
the notes or to require us to repurchase any note other than as provided
in the indenture;
. modify the subordination provisions in a manner adverse to the holders
of the notes;
. reduce the above-stated percentage of outstanding notes necessary to
modify or amend the indenture;
. reduce the percentage of aggregate principal amount of outstanding notes
necessary for waiver;
. reduce the percentage in aggregate principal amount of outstanding notes
required for the adoption of a resolution or the quorum required at any
meeting of holders of notes; or
. modify our obligation to deliver information required under Rule 144A to
permit resales of notes and common stock issuable upon conversion of the
notes in the event we cease to be subject to reporting requirements
under the United States securities laws.
The quorum at any meeting called to adopt a resolution will be persons
holding or representing a majority in aggregate principal amount of the notes
at the time outstanding and, at any reconvened meeting adjourned for lack of a
quorum, 25% of the aggregate principal amount.
The holders of a majority in aggregate principal amount of the outstanding
notes may waive compliance by us with various restrictive provisions of the
indenture by written consent or by the adoption of a resolution at a meeting.
The holders of a majority in aggregate principal amount of the outstanding
notes also may waive any past default under the indenture, except a default in
the payment of principal, premium, if any, or interest, by written consent.
Registration Rights
We have entered into a registration rights agreement with the initial
purchasers of the notes. Under this agreement we must, at our own expense:
. file with the SEC, within 90 days after the date of original issuance of
the notes, a shelf registration statement covering resales of the notes
and the common stock issuable on conversion of the notes;
. use all reasonable efforts to cause the shelf registration statement to
be declared effective under the Securities Act within 180 days after the
date of original issuance of the notes; and
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. use all reasonable efforts to keep effective the shelf registration
statement until two years after the date it is declared effective or, if
earlier, until there are no outstanding unregistered notes or common
stock issuable on conversion of the notes.
We are permitted to suspend the use of the prospectus which is part of the
shelf registration statement during periods of time, not to exceed an aggregate
of 45 days in any 90-day period, or an aggregate of 90 days in any 365-day
period, under specific circumstances relating to pending corporate
developments, public filings with the SEC and other events.
We will provide to each holder copies of the prospectus that is a part of
the shelf registration statement, notify each holder when the shelf
registration statement has become effective and take other actions as are
required to permit public resales of the notes and the common stock issuable on
conversion of the notes.
If the shelf registration statement ceases to be effective, or the holders
are otherwise prevented or restricted by us from effecting sales while the
shelf registration statement is supposed to be effective, for more than 45 days
during any 90 day period, or for more than 90 days during any 12-month period
then, in either case, the interest rate borne by the notes will increase by an
additional 0.5% per annum until the time the failure is cured.
A holder who elects to sell any securities pursuant to the shelf
registration statement:
. will be required to be named as a selling security holder in the related
prospectus;
. may be required to deliver a prospectus to purchasers;
. may be subject to civil liability provisions under the Securities Act in
connection with the sales; and
. will be bound by the provisions of the registration rights agreement
which are applicable to a holder making the election, including
indemnification provisions.
We have mailed a notice and questionnaire to the holders of the notes.
Unless a holder has returned a completed and signed notice and questionnaire to
us by the deadline for response set forth in the notice, that holder is not
entitled to:
. be named as a selling security holder in the shelf registration
statement as of the effective time of the shelf registration statement;
and
. use the prospectus forming a part of the shelf registration statement
for offers and resales of notes or common stock at any time.
We will, upon the request of any holder of securities that has not
previously elected to have their securities included, as promptly as reasonably
practicable, send a notice and questionnaire to the holder. We will not be
required to name that holder as a selling securityholder in the shelf
registration statement until that holder has returned a completed and signed
notice and questionnaire to us. Following our receipt of the notice and
questionnaire, we will as promptly as practicable include the securities listed
in the notice and questionnaire in the shelf registration statement, if not
previously included.
Title
Exodus, the trustee, any paying agent and any conversion agent may treat the
registered owner of any note as the absolute owner for the purpose of making
payment and for all other purposes.
Notices
Notice to holders of the notes will be given by mail to the addresses of the
holders as they appear in the security register. These notices will be deemed
to have been given on the date of mailing.
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Replacement of Notes
We will replace notes that become mutilated, destroyed, stolen or lost at
the expense of the holder upon delivery to the trustee of the mutilated notes
or evidence of the loss, theft or destruction of the note satisfactory to us
and the trustee. If a note is lost, stolen or destroyed, indemnity satisfactory
to the trustee and us may be required at the expense of the holder before a
replacement note will be issued.
Governing Law
The indenture and the notes are governed by and construed in accordance with
the laws of the State of New York.
The Trustee
In case an event of default shall occur and shall not be cured, the trustee
will be required to use the degree of care of a prudent person in the conduct
of his own affairs in the exercise of its powers. The trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request of any of the holders of notes, unless they shall have offered to the
trustee reasonable security or indemnity.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of material U.S. federal income tax
considerations relevant to holders of the notes and common stock into which the
notes may be converted. This discussion is based upon the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury Regulations, Internal Revenue
Service 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, and we have not obtained, nor do we intend to
obtain, a ruling from the IRS with respect to the U.S. federal income tax
consequences of acquiring or holding notes or common stock. 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 organizations, foreign persons and persons holding notes
or common stock as part of a hedging or conversion transaction or straddle or
persons deemed to sell notes or common stock 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. In addition, this discussion is limited to persons who
will hold the notes and common stock as "capital assets" within the meaning of
Section 1221 of the Code.
All prospective 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 and the common stock.
Interest
Stated interest on the notes will generally be includable in a 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 holder's
regular method of accounting.
Market Discount
The market discount rules discussed below will apply, subject to a de
minimis exception, if the stated redemption price at maturity of the note
exceeds a holder's tax basis in the note immediately after the holder's
acquisition of the note.
If a note has market discount, then some or all of any gain realized upon a
subsequent disposition (including a sale or a taxable exchange) or redemption
at maturity of the note may be treated as ordinary income.
The amount of market discount treated as having accrued will be determined
either on a ratable basis, or if a holder so elects, on a constant interest
method. Upon any subsequent disposition (including a gift or redemption at
maturity) of the note (other than in connection with certain nonrecognition
transactions but not including conversion of the note), the lesser of the gain
on the disposition (or appreciation in the case of a gift) or the portion of
the market discount that accrued while the note was held will be treated as
ordinary interest income at the time of disposition.
In lieu of including accrued market discount in income at the time of
disposition, a holder may elect to include market discount in income currently.
Unless a holder so elects, the holder may be required to defer a portion of any
interest expense that may otherwise be deductible on any indebtedness incurred
or maintained to purchase or carry such note until the holder disposes of the
note. The election to include market discount in income currently, once made,
is irrevocable and applies to all market discount obligations acquired on or
after the first day of the first taxable year to which the election applies and
may not be revoked without the consent of the IRS.
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A Department of Treasury legislative proposal would require accrual basis
taxpayers to include market discount in income as it accrues. The holder's
yield for purposes of determining and accruing market discount would be limited
to the greater of (1) the original yield-to-maturity of the debt instrument
plus 5 percentage points, or (2) the applicable Federal rate at the time the
holder acquired the debt instrument plus 5 percentage points. The proposal
would be effective for debt instruments acquired on or after the date of
enactment.
Bond Premium
Generally, the holder of a note has bond premium, if the holder's basis in
the note (reduced by, in the case of a convertible note, the value attributable
to the conversion feature of the note) exceeds the stated redemption price at
maturity of the note. Pursuant to Treasury Regulations, the value of the
conversion feature may be determined under any reasonable method. If the
taxpayer so elects, an allocable portion of the bond premium can be used to
offset interest income on the bond.
Conversion of Notes Into Common Stock
A holder generally will not recognize any income, gain or loss upon
conversion of a note into common stock except to the extent the common stock is
considered attributable to accrued interest not previously included in income
(which is taxable as ordinary income). Cash received in lieu of a fractional
share of common stock should generally be treated as a payment in exchange for
such fractional share rather than as a dividend. Gain or loss recognized on the
receipt of cash paid in lieu of such fractional share generally will equal the
difference between the amount of cash received and the amount of tax basis
allocable to the fractional share. The adjusted basis of shares of common stock
received on conversion will equal the adjusted basis of the Note converted
(reduced by the portion of adjusted basis allocated to any fractional share of
common stock exchanged for cash). The holding period of the common stock
received on conversion will generally include the period during which the
converted notes were held prior to conversion. However, a holder's tax basis in
shares of common stock considered attributable to accrued interest as described
above, generally will equal the amount of such accrued interest included in
income, and the holding period for such shares shall begin as of the date of
the conversion.
The conversion price of the notes is subject to adjustment under certain
circumstances. Section 305 of the Code and the Treasury Regulations issued
thereunder may treat the holders of the notes as having received a constructive
distribution, resulting in ordinary income (subject to a possible dividends
received deduction in the case of corporate holders) to the extent of Exodus'
current and/or accumulated earnings and profits, if, and to the extent that
certain adjustments in the conversion price, which may occur in limited
circumstances (particularly an adjustment to reflect a taxable dividend to
holders of common stock), increase the proportionate interest of a holder of
notes in the fully diluted common stock, whether or not such holder ever
exercises its conversion privilege. Moreover, if there is not a full adjustment
to the conversion ratio of the notes to reflect a stock dividend or other event
increasing the proportionate interest of the holders of outstanding common
stock in the assets or earnings and profits of Exodus, then such increase in
the proportionate interest of the holders of the common stock generally will be
treated as a distribution to such holders, taxable as ordinary income (subject
to a possible dividends received deduction in the case of corporate holders) to
the extent of Exodus' current and/or accumulated earnings and profits.
Therefore, holders may recognize income in the event of a deemed distribution
even though they may not receive any cash or property.
Sale, Exchange or Retirement of the Notes
Each holder generally will recognize gain or loss upon the sale, exchange,
redemption, retirement or other disposition of 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. Any such gain or loss recognized on the sale,
exchange, redemption, retirement or other disposition of a note will generally
be capital gain or loss and will
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generally be long-term capital gain or loss if the note has been held or deemed
held for more than 12 months at the time of the sale or exchange. Generally,
the long term capital gains rate for individuals is 20%. Capital gain that is
not long term capital gain is taxed at ordinary income rates. A holder's
initial basis in a note will be the amount paid therefor.
The Common Stock
Distributions, if any, paid on the common stock after a conversion, to the
extent made from current and/or accumulated earnings and profits of Exodus, as
determined for U.S. federal income tax purposes, will be included in a holder's
income as ordinary income (subject to a possible dividends received deduction
in the case of corporate holders) as they are paid. Gain or loss realized on
the sale or exchange of common stock will equal the difference between the
amount realized on such sale or exchange and the holder's adjusted tax basis in
such common stock. Such gain or loss will generally be long-term capital gain
or loss if the holder has held or is deemed to have held the common stock for
more than 12 months. Generally, the long term capital gains rate for
individuals is 20%. Capital gain that is not long term capital gain is taxed at
ordinary income rates.
Information Reporting and Backup Withholding
A holder of notes or common stock may be subject to "backup withholding" at
a rate of 31% with respect to certain "reportable payments," including interest
payments, dividend payments and, under certain circumstances, principal
payments on the notes. These backup withholding rules apply if the 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) the IRS provides
notification that the holder has furnished us with an incorrect TIN, (iii)
fails to report properly interest or dividends, or (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties
of perjury, that the TIN furnished is the correct number and that such holder
is not subject to backup withholding. Any amount withheld from a payment to a
holder under the backup withholding rules is creditable against the 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.
Exodus will report to the holders of notes and common stock 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.
THE PRECEDING DISCUSSION OF MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO PARTICULAR
TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES AND
THE COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE LAWS.
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DESCRIPTION OF SENIOR NOTES
The Senior Notes
In July 1998, we issued $200 million of 11 1/4% senior notes due 2008 under
an indenture between us and Chase Manhattan Bank and Trust Company, National
Association, as trustee.
Principal, Maturity and Interest
The senior notes are unsecured obligations, and mature on July 1, 2008.
Interest on the senior notes accrues at the rate of 11 1/4% per year, payable
semi-annually on January 1 and July 1 of each year, commencing January 1, 1999.
We have placed in escrow enough cash to meet the requirement of the first four
interest payments due on the senior notes.
Optional Redemption
The senior notes will be redeemable at our option, in whole or in part, at
any time or from time to time, on or after July 1, 2003 at the following
redemption prices, expressed in percentages of principal amount, plus accrued
and unpaid interest, if any, to the redemption date, if redeemed during the 12-
month period commencing July 1 of the years set forth below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2003............................................................ 105.625%
2005............................................................ 103.750%
2005............................................................ 101.875%
2006............................................................ 100.000%
</TABLE>
In addition, at any time prior to July 1, 2001, we may redeem up to 35% of
the aggregate principal amount of the senior notes with the net proceeds of one
or more sales of common stock or other specific types of preferred stock at a
redemption price of 111.25%, plus accrued and unpaid interest. However, at
least 65% of the original principal amount of the senior notes initially issued
must remain outstanding following a redemption.
Change of Control
Upon a change of control, as defined in the indenture governing the senior
notes, we would be required to make an offer to purchase the senior notes at a
purchase price equal to 101% of the principal amount, plus accrued and unpaid
interest, if any. We may not have sufficient funds available at the time of any
change of control to make any required debt repayment, including repurchases of
the senior notes. The definition of change of control in the senior note
indenture differs in a number of respects from the definition of change of
control in the indenture for the 5% convertible subordinate notes.
Ranking
The indebtedness evidenced by the senior notes ranks equally in right of
payment with all or our existing and future unsubordinated indebtedness and
senior in right of payment to all of our existing and future subordinated
indebtedness, including the 5% convertible subordinated notes.
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Covenants
The senior notes indenture restricts our ability to:
. incur additional indebtedness and the use of proceeds in connection with
incurring additional indebtedness;
. pay dividends or make other specified restricted payments;
. incur specific types of liens to secure indebtedness; or
. engage in merger transactions.
There are significant "carve-outs" and exceptions to these covenants.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock,
$0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par
value per share. As of May 11, 1999, there were outstanding 41,150,011 shares
of common stock held of record by approximately 392 stockholders, warrants to
purchase 133,332 shares of common stock and outstanding options to purchase
10,534,468 shares of common stock. No shares of preferred stock are
outstanding.
At our annual meeting of stockholders to be held on June 2, 1999, our
stockholders will vote on a proposal to increase the number of authorized
shares of our common stock from 100,000,000 to 300,000,000.
Common Stock
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of our common stock
are entitled to receive dividends out of assets legally available when and in
amounts as our board may from time to time determine. Each stockholder is
entitled to one vote for each share of common stock held on all matters
submitted to a vote of stockholders. Cumulative voting for the election of
directors is not provided for in our certificate of incorporation, which means
that the holders of a majority of the shares voted can elect all of the
directors then standing for election. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption. Upon our
liquidation, dissolution or winding-up, the assets legally available for
distribution to stockholders are distributable ratably among the holders of the
common stock and any participating preferred stock outstanding at that time
after payment of liquidation preferences, if any, on any outstanding preferred
stock and payment of other claims of creditors.
Preferred Stock
Our board is authorized, subject to limitations prescribed by Delaware law,
to provide for the issuance of shares of preferred stock in one or more series,
to establish from time to time the number of shares to be included in each
series, to fix the powers, designations, preferences and rights of the shares
of each wholly unissued series and designate any qualifications, limitations or
restrictions and to increase or decrease the number of shares of any series,
but not below the number of shares of the series then outstanding, without any
further vote or action by the stockholders. The issuance of preferred stock
with voting or conversion rights could adversely affect the voting power or
other rights of the holders of common stock and may have the effect of
delaying, deferring or preventing a change in control of us. We have no current
plan to issue any shares of preferred stock.
Warrants
As of May 11, 1999, we had outstanding warrants to purchase 133,332 shares
of common stock at a weighted average per share exercise price of $7.18. A
warrant for 120,000 shares of common stock will expire in April 2007 and a
warrant for 13,332 shares of common stock will expire in December 2007.
Anti-Takeover Provisions
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prohibits a publicly-held Delaware
corporation from entering into a "business combination" with any "interested
stockholder" for a three-year period after the date of the transaction in which
the person became an interested stockholder unless the business combination is
approved in a prescribed manner. A "business combination" includes a merger,
asset sale or transaction resulting in a financial benefit to an interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years prior, did own, 15% or
more of Exodus' voting capital stock. Our certificate of incorporation and
bylaws do not exclude us from the restrictions imposed under Section 203. The
provisions of
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Section 203 may encourage companies interested in acquiring us to negotiate in
advance with our board since the stockholder approval requirement would be
avoided if a majority of the directors then in office approve either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder. These provisions may have the effect of
deterring hostile takeovers or delaying changes in control of Exodus, which
could depress the market price of our Common Stock and which could deprive the
stockholders of opportunities to realize a premium on shares of the Common
Stock held by them.
Charter and Bylaw Provisions
Our certificate of incorporation and bylaws contain provisions that could
discourage potential takeover attempts and make more difficult attempts by
stockholders to change management. For instance, our certificate of
incorporation provides that stockholders may not take action by written consent
but may only act at a stockholders' meeting, and that special meetings of our
stockholders may only be called by the Chairman of the board or a majority of
the board.
Stockholder Rights Plan
In January 1999, we adopted a stockholder rights plan. The plan is designed
to protect the long-term value of Exodus for our stockholders during any future
unsolicited acquisition attempt. In connection with the plan, we declared a
dividend of one preferred share purchase right for each share of our common
stock outstanding on February 11, 1999 and further directed the issuance of one
right with respect to each share of our common stock that is issued after
February 11, 1999, except in specified circumstances. The rights will expire on
January 27, 2009. The rights are initially attached to our common stock and
will not trade separately. If a person or a group acquires 15% or more of our
common stock (an "Acquiring Person"), or announces an intention to make a
tender offer for our common stock the consummation of which would result in a
person or group becoming an Acquiring Person, then the rights will be
distributed (the "Distribution Date") and will thereafter trade separately from
the common stock. Upon the Distribution Date, each right may be exercised for
1/100th of a share of a newly-designated Series A Junior Participating
Preferred Stock at an exercise price of $350. The preferred stock has been
structured so that the value of 1/100th of a share of the preferred stock will
approximate the value of one share of common stock. Upon a person becoming an
Acquiring Person, holders of the rights (other than the Acquiring Person) will
have the right to acquire shares of our common stock at a substantially
discounted price, in lieu of the preferred stock. Additionally, if after the
Distribution Date, we are acquired in a merger or other business combination,
or 50% or more of our assets are sold in a transaction with an Acquiring
Person, the holders of rights (other than the Acquiring Person) will have the
right to receive shares of common stock of the acquiring corporation at a
substantially discounted price. After a person has become an Acquiring Person,
our board of directors may, at its option, require the exchange of outstanding
rights (other than those held by the Acquiring Person) for common stock at an
exchange ratio of one share of common stock per right. The board also has the
right to redeem outstanding rights at any time prior to the Distribution Date
(or later in specified circumstances) at a price of $0.001 per right. The terms
of the rights, including the period to redeem the rights, may be amended by the
board in specified circumstances.
Registration Rights
Holders of approximately 3,322,222 shares of our common stock have rights to
require us to register those shares under the Securities Act. Subject to
limitations, if requested by the holders of these shares, we must file a
registration statement covering all securities requested to be included by all
holders with registration rights. In addition, if we propose to register any of
our shares of common stock under the Securities Act other than in connection
with an employee benefit plan or corporate acquisitions, mergers or
reorganizations, the holders of stock with registration rights may require us
to include all or a portion of their shares in the registration, subject to
rights of any managing underwriter to limit the number of shares in any
offering.
Further, holders of common stock with registration rights may require us to
register all or any portion of their common stock on Form S-3, subject to
various conditions and limitations. We may be required to effect up to two
registrations per year.
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All expenses incurred in connection with the registrations, other than
underwriters' discounts and commissions, will be borne by us, except that the
holders of common stock with registration rights will bear the expenses of any
Form S-3 registrations after the first registration. The registration rights
expire in March 2005. In addition, no holder of common stock will be entitled
to registration rights if and so long as the holder can sell all of its shares
in compliance with Rule 144 of the Securities Act during any 90-day period.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is Boston EquiServe
Limited Partnership.
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will provide Exodus with an
opinion as to legal matters in connection with the notes and the common stock.
Winthrop, Stimson, Putnam & Roberts, New York, New York, will provide an
opinion as to legal matters related to the laws of the State of New York in
connection with the notes.
EXPERTS
The consolidated financial statements and related schedule of Exodus as of
December 31, 1997 and 1998, and for each of the years in the three-year period
ended December 31, 1998 have been incorporated by reference herein and in the
Registration Statement in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
39
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXODUS COMMUNICATIONS, INC.
U.S. $250,000,000
5% Convertible Subordinated Notes
Due March 15, 2006
and
5,473,150 Shares of Common Stock
Issuable Upon Conversion of the Notes
----------------
PROSPECTUS
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses payable by the
Registrant in connection with the sale and distribution of the securities being
registered hereby. Normal commission expenses and brokerage fees are payable
individually by the selling stockholders. All amounts are estimated except the
Securities and Exchange Commission registration fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 69,500
Nasdaq National Market filing fee................................ 17,500
Accounting fees and expenses..................................... 10,000
Legal fees and expenses.......................................... 50,000
Miscellaneous.................................................... 53,000
--------
Total........................................................ $200,000
========
</TABLE>
ITEM 15. Indemnification of Directors and Officers.
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, indemnity 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 indemnify; 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
II-1
<PAGE>
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
indemnification 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 for indemnification is unavailable, such contribution to be
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 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, maintains director and officer liability insurance.
In addition, Thadeus Mocarski, a director of the Registrant, is indemnified
in certain circumstances by Fleet Financial Group, Inc.
ITEM 16. Exhibits.
The following exhibits are filed herewith or incorporated by reference
herein:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
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).
3.02 Certificate of Designations specifying the terms of the Series A
Junior Participating Preferred Stock of the Registrant, as filed with
the Delaware Secretary of State on January 28, 1999 (Incorporated by
reference from Exhibit 3.02 to the Registrant's Registration Statement
on Form 8-A filed with the Commission on January 29, 1999).
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
3.03 Registrant's Bylaws. (Incorporated by reference from Exhibit 3.06 to the
Registrant's Registration Statement on Form S-1 declared effective on
March 18, 1998).
3.04 Amendment to Registrant's Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit 3.04 to Registrant's Quarterly
report on Form 10-Q for the quarter ended March 31, 1999 (the March 1999
Form 10-Q")).
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 Note for Registrant's 5% Convertible Subordinated Notes due
March 15, 2006 (Incorporated by reference from Exhibit 4.05 to the March
1999 Form 10-Q).
4.03 Indenture between Exodus Communications, Inc. as Issuer and Chase
Manhattan Bank and Trust Company, National Association, as Trustee dated
March 1, 1999. (Incorporated by reference from Exhibit 4.06 to the March
1999 Form 10-Q).
4.04 Rights Agreement dated January 27, 1999 between Registrant and
BankBoston, N.A., as Rights Agent (Incorporated by reference from
Exhibit 4.04 to the 1999 Form 8-A).
4.05 Purchase Agreement among the Registrant and Goldman Sachs & Co.,
BancBoston Robertson Stephens Inc., BT Alex.Brown Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation and Hambrecht &
Quist LLC dated February 25, 1999 (Incorporated by reference from
Exhibit 10.54 to the March 1999 Form 10-Q).
4.06 Registration Rights Agreement among the Registrant and Goldman Sachs &
Co., BancBoston Robertson Stephens Inc., BT Alex.Brown Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation and Hambrecht &
Quist LLC dated March 1, 1999. (Incorporated by reference from Exhibit
10.55 to the March 1999 Form 10-Q).
5.01 Opinion of Fenwick & West LLP.
5.02 Opinion of Winthrop, Stimson, Putnam & Roberts.
12.01 Statement regarding Computation of Ratios.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of Winthrop, Stimson, Putnam & Roberts (included in Exhibit
5.02).
23.03 Consent of KPMG LLP, independent auditors.
24.01 Power of Attorney (see page II-5).
25.01 Statement of Eligibility of Trustee.
</TABLE>
II-3
<PAGE>
ITEM 17. Undertakings.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement 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.
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 provisions described under Item 15 above, 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 Securities Act and will be governed by the final adjudication
of such issue.
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;
(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 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; and (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; provided, however, that (i) and (ii) do not apply
if the information required to be included in a post-effective amendment
thereby is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in the registration
statement.
(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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Santa Clara, State of California, on this 20th day of May 1999.
EXODUS COMMUNICATIONS, INC.
By: /s/ Richard S. Stoltz
-----------------------------------
Richard S. Stoltz
Executive Vice President,
Finance,
Chief Operating Officer and Chief
Financial Officer
POWER OF ATTORNEY
Each individual whose signature appears below constitutes and appoints Ellen
M. Hancock and Richard S. Stoltz, and each of them, his true and lawful
attorneys-in-fact and agents, each with the power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration
statement, and to sign any registration statement for the same offering covered
by this registration statement that is to be effective upon filing pursuant to
Rule 415 promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
Principal Executive Officer:
<S> <C> <C>
/s/ Ellen M. Hancock President and Chief May 20, 1999
____________________________________ Executive Officer and
Ellen M. Hancock Director
Principal Financial Officer and
Principal Accounting Officer:
/s/ Richard S. Stoltz Executive Vice President, May 20, 1999
____________________________________ Finance Chief Operating
Richard S. Stoltz Officer and
Chief Financial Officer
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
Additional Directors:
<S> <C> <C>
/s/ K.B. Chandrasekhar Chairman of the Board of May 20, 1999
____________________________________ Directors
K.B. Chandrasekhar
/s/ Frederick W.W. Bolander Director May 20, 1999
____________________________________
Frederick W.W. Bolander
/s/ John R. Dougery Director May 20, 1999
____________________________________
John R. Dougery
/s/ Mark Dubovoy Director May 20, 1999
____________________________________
Mark Dubovoy
/s/ Max D. Hopper Director May 20, 1999
____________________________________
Max D. Hopper
/s/ Peter A. Howley Director May 20, 1999
____________________________________
Peter A. Howley
/s/ Daniel C. Lynch Director May 20, 1999
____________________________________
Daniel C. Lynch
/s/ Thadeus J. Mocarski Director May 20, 1999
____________________________________
Thadeus J. Mocarski
/s/ Kanwal S. Rekhi Director May 20, 1999
____________________________________
Kanwal S. Rekhi
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
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).
3.02 Certificate of Designations specifying the terms of the Series A
Junior Participating Preferred Stock of the Registrant, as filed with
the Delaware Secretary of State on January 28, 1999 (Incorporated by
reference from Exhibit 3.02 to the Registrant's Registration Statement
on Form 8-A filed with the Commission on January 29, 1999).
3.03 Registrant's Bylaws. (Incorporated by reference from Exhibit 3.06 to
the Registrant's Registration Statement on Form S-1 declared effective
on March 18, 1998).
3.04 Amendment to Registrant's Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit 3.04 to Registrant's Quarterly
report on Form 10-Q for the quarter ended March 31, 1999 (the March
1999 Form 10-Q")).
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 Note for Registrant's 5% Convertible Subordinated Notes due
March 15, 2006 (Incorporated by reference from Exhibit 4.05 to the
March 1999 Form 10-Q).
4.03 Indenture between Exodus Communications, Inc. as Issuer and Chase
Manhattan Bank and Trust Company, National Association, as Trustee
dated March 1, 1999. (Incorporated by reference from Exhibit 4.06 to
the March 1999 Form 10-Q).
4.04 Rights Agreement dated January 27, 1999 between Registrant and
BankBoston, N.A., as Rights Agent (Incorporated by reference from
Exhibit 4.04 to the 1999 Form 8-A).
4.05 Purchase Agreement among the Registrant and Goldman Sachs & Co.,
BancBoston Robertson Stephens Inc., BT Alex.Brown Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation and Hambrecht &
Quist LLC dated February 25, 1999 (Incorporated by reference from
Exhibit 10.54 to the March 1999 Form 10-Q).
4.06 Registration Rights Agreement among the Registrant and Goldman Sachs &
Co., BancBoston Robertson Stephens Inc., BT Alex.Brown Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation and Hambrecht &
Quist LLC dated March 1, 1999. (Incorporated by reference from Exhibit
10.55 to the March 1999 Form 10-Q).
5.01 Opinion of Fenwick & West LLP.
5.02 Opinion of Winthrop, Stimson, Putnam & Roberts.
12.01 Statement regarding Computation of Ratios.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of Winthrop, Stimson, Putnam & Robert (included in Exhibit
5.02).
23.03 Consent of KPMG LLP, independent auditors.
24.01 Power of Attorney (see page II-5).
25.01 Statement of Eligibility of Trustee.
</TABLE>
<PAGE>
[FENWICK & WEST LLP LETTERHEAD]
EXHIBIT 5.01
May 19, 1999
Exodus Communications, Inc.
2831 Mission College Boulevard
Santa Clara, CA 95054
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-3
(the "Registration Statement") to be filed by you with the Securities and
Exchange Commission (the "Commission") on or about May 21, 1999 in connection
with the registration under the Securities Act of 1933, as amended, of (i) an
aggregate of 5,473,150 shares of your Common Stock (the "Stock") issuable upon
conversion of $250,000,000 aggregate principal amount of your 5% Convertible
Subordinated Notes due March 15, 2006 (the "Registrable Notes"), which
Registrable Notes are convertible into such Stock at a conversion rate of
21.8926 shares of Stock per $1,000 principal amount of Registrable Notes,
subject to adjustment in certain circumstances, and (ii) the Registrable Notes,
all of which Stock and Registrable Notes are being sold by the Selling
Securityholders that may be specified in the Registration Statement and the
prospectuses associated therewith from time to time.
In rendering this opinion, we have examined the following:
(1) your registration statements on Form 8-A filed with the Commission
on February 13, 1998 and January 29, 1999;
(2) your Annual Report on Form 10-K for the year ended December 31,
1998;
(3) your Quarterly Report on Form 10-Q for the quarter ended March 31,
1999;
(4) your Current Reports on Form 8-K filed with the Commission on
January 29, 1999, February 22, 1999 and March 2, 1999;
(5) the Registration Statement, together with the exhibits filed as a
part thereof or incorporated by reference therein;
(6) the Prospectuses prepared in connection with the Registration
Statement;
(7) 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;
(8) summary reports from you confirming the number of shares of your
capital stock outstanding as of May 19, 1999 and the number of options,
warrants and any other rights to acquire shares of your capital stock
outstanding as of May 19, 1999;
(9) oral verification from your transfer agent of the number of
outstanding shares of your common stock as of May 19, 1999;
(10) a Management Certificate addressed to us and dated of even date
herewith executed by you containing certain factual and other
representations; and
(11) the opinion of Winthrop, Stimson, Putnam & Roberts (the "Winthrop
Opinion") of even date herewith with respect to matters governed by the
laws of the State of New York.
We have also confirmed the continued effectiveness of your registration
under the Securities Exchange Act of 1934, as amended, by telephone call to the
offices of the Commission and have confirmed your eligibility to use Form S-3.
<PAGE>
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 and completeness of all documents
submitted to us as originals, the conformity to originals and completeness of
all documents submitted to us as copies, the legal capacity of all natural
persons executing the same, the lack of any undisclosed termination,
modification, waiver or amendment to any document reviewed by us, and the due
authorization, execution and delivery of all documents where due authorization,
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 and have assumed the current
accuracy and completeness of the information obtained from public officials and
records referred to above. We have made no independent investigation or other
attempt to verify the accuracy of any information set forth in such documents 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.
In rendering this opinion, we have also assumed that, at the time of any
issuance of any shares of Stock pursuant to the Registration Statement, the
number of shares of Stock so issued will not exceed that number of shares of
Stock obtained by subtracting from the number of shares of Stock then
authorized under your Certificate of Incorporation: (a) the number of shares of
Stock that are then issued and (b) the number of shares of Stock that are then
reserved for issuance pursuant to your then outstanding commitments or
obligations.
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 State of California and,
without reference to case law or secondary sources, the existing Delaware
General Corporation Law. In rendering the opinion expressed in clause (i)(B)
below relating to matters governed by the laws of the State of New York, we
have relied solely on the Winthrop Opinion.
You have informed us that you intend to issue the Stock from time to time on
a delayed or continuous basis. This opinion is limited to the laws, including
the rules and regulations, as in effect on the date hereof. We are basing this
opinion on our understanding that, prior to issuing any Stock, you will advise
us in writing of the terms thereof and other information material thereto, will
afford us an opportunity to review the operative documents pursuant to which
such Stock is to be issued (including the Registration Statement, the Prospectus
and the applicable Prospectus Supplement, as then in effect) and will file such
supplement or amendment to this opinion (if any) as we may reasonably consider
necessary or appropriate with respect to such Stock. However, we undertake no
responsibility to monitor your future compliance with applicable laws, rules or
regulations of the Commission or other governmental body. We also assume you
will timely file any and all supplements to the Registration Statement and
Prospectus as are necessary to comply with applicable laws in effect from time
to time.
Based upon the foregoing, it is our opinion that (i) the Convertible Notes
are (A) validly issued and (B) are binding obligations of the Company (except
as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer and other similar laws of general application
relating to or affecting creditors' rights, by general principles of equity
(regardless of whether considered in a proceeding at law or in equity),
including without limitation, the availability or unavailability of equitable
remedies, and by an implied covenant of good faith and fair dealing, and the
effect of California and federal laws relating to usury or permissible rates of
interest for loans, forebearances or the use of money), and (ii) upon
completion of the proceedings being taken or contemplated by us, upon
conversion of the Convertible Notes in accordance with their terms, the up to
5,473,150 shares of Stock that may be sold by the Selling Stockholders pursuant
to the Registration Statement, when issued and sold in the manner referred to
in the Registration Statement pursuant to the Prospectus, will be validly
issued, fully paid and nonassessable.
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 and the Prospectus constituting a part thereof.
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 the your use as an exhibit to the Registration
Statement for the purpose of the above sale of the Stock and is not to be
relied upon for any other purpose.
Very truly yours,
/s/ FENWICK & WEST LLP
2
<PAGE>
Exhibit 5.02
Winthrop, Stimson, Putnam & Roberts
One Battery Park Plaza
New York, New York 10004
(212) 858-1000
Fax: (212) 858-1500
May 19, 1999
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
Re: Exodus Communications, Inc.
$250,000,000 aggregate principal amount of
5% Convertible Subordinated Notes due March 15, 2006
Ladies and Gentlemen:
Exodus Communications, Inc., a Delaware corporation (the "Company"), has
filed with the Securities and Exchange Commission a registration statement on
Form S-3 (the "Registration Statement") under the Securities Act of 1933 (the
"Securities Act") with respect to $250,000,000 aggregate principal amount of the
Company's 5% Convertible Subordinated Notes due March 15, 2006 (the "Notes") and
the shares of common stock of the Company issuable upon conversion of the Notes.
The Notes were issued pursuant to an Indenture dated as of March 1, 1999 between
the Company and Chase Manhattan Bank and Trust Company, National Association as
Trustee (the "Indenture").
In giving this opinion, we have examined copies of the Indenture, the Notes
and such other documents and have made such other inquiries and investigations
of law as we have deemed necessary or appropriate as a basis for the opinion
hereinafter expressed. In such examination, we have assumed the genuineness of
all signatures, the authenticity of all documents submitted to us as original
documents, the conformity with the original document of all documents
submitted to us as certified or photostatic copies and the lack of any
undisclosed termination, modification, waiver or amendment to any document
reviewed by us.
We are members of the bar of the State of New York, and do not express any
opinion herein as to matters governed by any law other than the law of the State
of New York.
Based upon the foregoing and the assumption that the Notes have been duly
authorized, executed and delivered by the Company and duly authenticated by the
Trustee and subject to the qualifications set forth herein, we are of the
opinion that the Notes constitute valid and binding
<PAGE>
obligations of the Company, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and other similar
laws of general application relating to or affecting creditors' rights, by
general principles of equity (regardless of whether considered in a proceeding
at law or in equity), including, without limitation, the availability or
unavailability of equitable remedies, and by an implied covenant of good faith
and fair dealing.
We express no opinion as to the shares of common stock of the Company
issuable upon conversion of the Notes.
This opinion is delivered to you solely for your use in connection with the
Registration Statement and may not be used or relied upon by you for any other
purpose or by any other person without our prior written consent.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name under the heading "Legal Matters" in the
prospectus included in the Registration Statement. In giving this consent, we
do not hereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act or the rules and regulations of
the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Winthrop, Stimson, Putnam & Roberts
<PAGE>
Exhibit 12.01
Exhibit 12.01 - Statement Re: Computation of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Three months
Year Ended December 31, ended March 31,
------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- -------- ------- -------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense including amortization
of debt expense $ - $ 38 $ 107 $ 699 $ 17,740 $ 1,103 $ 8,663
Assumed interest element included
in rent expense 6 17 50 353 1,111 166 537
--------- -------- ------- -------- -------- --------- --------
Total fixed charges $ 6 $ 55 $ 157 $ 1,052 $ 18,851 $ 1,269 $ 9,200
Earnings (loss):
Net income (loss) $ 144 $ (1,311) $(4,133) $(25,298) $(66,442) $ (13,321) $(22,164)
Fixed charges per above 6 55 157 1,052 18,851 1,269 9,200
--------- -------- ------- -------- -------- --------- --------
Total earnings (loss) $ 150 $ (1,256) $(3,976) $(24,246) $(47,591) $ (12,052) $(12,964)
Ratio of earnings to fixed charges 25 X - - - - - -
========= ======== ======= ======== ======== ========= ========
Deficiency of earnings available to cover
fixed charges $ - $ (1,311) $(4,133) $(25,298) $(66,442) $ (13,321) $(22,164)
========= ======== ======= ======== ======== ========= ========
</TABLE>
<PAGE>
EXHIBIT 23.03
CONSENT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors
Exodus Communications, Inc.:
We consent to incorporation by reference herein of our report dated January
26, 1999, relating to the consolidated balance sheets of Exodus Communications,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' (deficit) equity, and cash
flows for each of the years in the three-year period ended December 31, 1998,
and the related financial statement schedule, which report appears in the
December 31,1998, annual report on Form 10-K of Exodus Communications, Inc. We
also consent to the reference to our firm under the heading "Experts" in the
registration statement.
/s/ KPMG LLP
Mountain View, California
May 19, 1999
<PAGE>
Exhibit 25.01
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM T-1
Statement of Eligibility and Qualification Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
_______________________
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(B)(2)____
_________________________
CHASE MANHATTAN BANK AND TRUST COMPANY,
NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
95-4655078
(I.R.S. Employer Identification No.)
Suite 2725
101 California Street, San Francisco, California
(Address of principal executive offices)
94111
(Zip Code)
__________________
EXODUS COMMUNICATIONS, INC.
(Exact name of Obligor as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
77-0403076
(I.R.S. Employer Identification No.)
2650 San Tomas Expressway
Santa Clara, California
(Address of principal executive offices)
95051
(Zip Code)
________________________________
5% Convertible Subordinated Notes Due March 15, 2006
(Title of Indenture securities)
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency, Washington, D.C. Board of Governors
of the Federal Reserve System, Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the Obligor is an affiliate of the trustee, describe each such
affiliation.
None.
ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES
(a) Title of securities outstanding under each such other
indenture. $200,000,000 11 1/4% Senior Notes Due 2008 issued
under Indenture dated as of July 1, 1998
ITEM 16. LIST OF EXHIBITS.
List below all exhibits filed as part of this statement of eligibility.
Exhibit 1. Articles of Association of the Trustee as Now in Effect (see
Exhibit 1 to Form T-1 filed in connection with Registration
Statement No. 333-41329 which is incorporated by reference).
Exhibit 2. Certificate of Authority of the Trustee to Commence Business
(see Exhibit 2 to Form T-1 filed in connection with
Registration Statement No. 333-41329, which is incorporated
by reference).
Exhibit 3. Authorization of the Trustee to Exercise Corporate Trust
Powers (contained in Exhibit 2).
Exhibit 4. Existing By-Laws of the Trustee (see Exhibit 4 to Form T-1
filed in connection with Registration Statement No. 333-
41329, which is incorporated by reference).
Exhibit 5. Not Applicable
Exhibit 6. The consent of the Trustee required by Section 321 (b) of
the Act (see Exhibit 6 to Form T-1 filed in connection with
Registration Statement No. 333-41329, which is incorporated
by reference).
Exhibit 7. A copy of the latest report of condition of the Trustee,
published pursuant to law or the requirements of its
supervising or examining authority.
Exhibit 8. Not Applicable
Exhibit 9. Not Applicable
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, Chase Manhattan Bank and Trust Company, National Association, has duly
caused this statement of eligibility and qualification to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of San
Francisco, and State of California, on the 7th day of May, 1999.
CHASE MANHATTAN BANK AND TRUST
COMPANY, NATIONAL ASSOCIATION
By /s/ Cecil D. Bobey
-------------------------
Cecil D. Bobey
Assistant Vice President
<PAGE>
EXHIBIT 7. Report of Condition of the Trustee.
- --------------------------------------------------------------------------------
CONSOLIDATED REPORT OF CONDITION OF Chase Manhattan Bank and Trust Company, N.A.
--------------------------------------------
(Legal Title)
LOCATED AT 1800 Century Park East, Ste. 400 Los Angeles, CA 94111
---------------------------------------------------------------------
(Street) (City) (State) (Zip)
AS OF CLOSE OF BUSINESS ON March 31, 1999
-----------------------------------
================================================================================
================================================================================
ASSETS DOLLAR AMOUNTS IN THOUSANDS
<TABLE>
<S> <C>
1. Cash and balances due from
a. Noninterest-bearing balances and currency and coin (1,2) 2,305
b. Interest bearing balances (3) 0
2. Securities
a. Held-to-maturity securities (from Schedule RC-B, column A) 0
b. Available-for-sale securities (from Schedule RC-B, column D) 1,102
3. Federal Funds sold (4) and securities purchased agreements to resell 64,250
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income (from Schedule RC-C) 162
b. LESS: Allowance for loan and lease losses 0
c. LESS: Allocated transfer risk reserve 0
d. Loans and leases, net of unearned income, allowance, and
reserve (item 4.a minus 4.b and 4.c) 162
5. Trading assets 0
6. Premises and fixed assets (including capitalized leases) 280
7. Other real estate owned (from Schedule RC-M) 0
8. Investments in unconsolidated subsidiaries and associated companies
(From Schedule RC-M) 0
9. Customers liability to this bank on acceptances outstanding 0
10. Intangible assets (from Schedule RC-M) 1,292
11. Other assets (from Schedule RC-F) 2,111
12a. TOTAL ASSETS 71,502
</TABLE>
(1) includes cash items in process of collection and unposted debits.
(2) The amount reported in this item must be greater than or equal to the sum
of Schedule RC-M, items 3.a and 3.b
(3) includes time certificates of deposit not held for trading.
(4) Report "term federal funds sold" in Schedule RC, item 4.a "Loans and
leases, net of unearned income" and in Schedule RC-C, part 1.
4
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
13. Deposits:
a. In domestic offices (sum of totals of columns A and C from
Schedule RC-E) 41,121
(1) Noninterest-bearing 6,008
(2) Interest-bearing 35,113
b. In foreign offices, Edge and Agreement subsidiaries, and IBF'
(1) Noninterest-bearing
(2) Interest-bearing
14. Federal funds purchased (2) and securities sold under agreements to
repurchase 0
15. a. Demand notes issued to the U.S. Treasury 0
b. Trading liabilities 0
16. Other borrowed money (includes mortgage indebtedness and obligations
under capitalized leases):
a. With a remaining maturity of one year or less 0
b. With a remaining maturity of more than one year through three years 0
c. With a remaining maturity of more than three years 0
17. Not applicable
18. Bank's liability on acceptances executed and outstanding 0
19. Subordinated notes and Debentures (3) 0
20. Other liabilities (from Schedule RC-G) 5,058
21. Total liabilities (sum of items 13 through 20) 46,179
22. Not applicable
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus 0
24. Common stock-- 600
25. Surplus (exclude all surplus related to preferred stock) 12,590
26. a. Undivided profits and capital reserves 12,133
b. Net unrealized holding gains (losses) on available-for-sale securities 0
27. Cumulative foreign currency translation adjustments
28. a. Total equity capital (sum of items 23 through 27) 25,323
29. Total liabilities, equity capital, and losses deferred pursuant to 12 U.S.C.
1823 (j) (sum of items 21 and 28.c) 71,502
</TABLE>
MEMORANDUM
To be reported only with the March Report of Condition
1. Indicate in the box at the right the number of the statement below
that best describes The most comprehensive level of auditing work
performed for the bank by independent external auditors as of any date
during 1998
5
