<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 8-K
Amendment No. 2 to
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
November 23, 1999
------------------------------------------------
Date of Report (Date of Earliest Event Reported)
Exodus Communications, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 0-23795 77-0403076
- ------------------------ ------------------------ -----------------------------------
(State of incorporation) (Commission file number) (I.R.S. Employer Identification No)
</TABLE>
2831 Mission College Boulevard Santa Clara, California 95054
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(408) 346-2200
----------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
ITEM 5: OTHER EVENTS
On November 23, 1999, Exodus Communications, Inc. ("Exodus" or "Company")
announced that it had agreed to acquire Global Online Japan Co. Ltd., an
Internet solutions provider based in Tokyo. The transaction is expected to
close by the end of December 1999 and will be accounted for as a purchase.
On November 23, 1999, Exodus completed its acquisition of Service
Metrics, Inc. ("SMI" or "Service Metrics"), a leading provider of Internet
monitoring applications and services that measure the consistency,
availability and performance of Web sites. Exodus issued approximately 3.1
million shares of its Common Stock in exchange for all of the outstanding
shares of common stock of Service Metrics. In addition, Exodus assumed options
to purchase approximately 380,000 shares of Exodus Common Stock. This
transaction will be accounted for as a pooling-of-interests.
The acquisition of Service Metrics did not involve a significant amount of
assets. For the convenience of interested parties, Exodus is providing (i)
selected supplemental consolidated financial data, (ii) management's discussion
and analysis of financial condition and results of operations, (iii) audited
supplemental consolidated financial statements of Exodus as of December 31, 1997
and 1998 and for each of the years in the three-year period ended December 31,
1998, and (iv) unaudited supplemental consolidated financial statements of
Exodus as of September 30, 1999 and for the nine-month periods ended September
30, 1998 and 1999.
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the merger with SMI on November 23, 1999. The
consolidated financial statements have been restated for all periods presented
as if SMI and the Company had always been combined. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These supplemental
financial statements do not extend through the date of consummation; however,
they will become the historical consolidated financial statements of the
Company after financial statements covering the date of consummation of the
business combination are issued.
In recording the pooling-of-interests combination, the Company's consolidated
statement of operations for the year ended December 31, 1998 has been combined
with SMI's statement of operations for the period from May 19, 1998
("inception") through December 31, 1998. The Company's consolidated statements
of operations for the nine-month periods ended September 30, 1998 and 1999
have been combined with SMI's statements of operations for the period from
inception through September 30, 1998, and the nine-month period ended
September 30, 1999, respectively. The consolidated balance sheets of the
Company as of December 31, 1998 and September 30, 1999, have been combined
with the balance sheets of Service Metrics as of the same dates.
<PAGE>
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following selected supplemental consolidated financial data should be
read in conjunction with our supplemental consolidated financial statements
and notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this filing. The supplemental
consolidated financial statements have been prepared to give retroactive
effect to the merger with Service Metrics, Inc. on November 23, 1999. The
supplemental consolidated statement of operations data for each of the years
in the three-year period ended December 31, 1998, and the supplemental
consolidated balance sheet data as of December 31, 1997 and 1998, are derived
from supplemental consolidated financial statements that have been audited by
KPMG LLP, independent auditors, and are included elsewhere in this filing. The
supplemental consolidated statement of operations data for the nine-month
periods ended September 30, 1998 and September 30, 1999 and the supplemental
consolidated balance sheet data as of September 30, 1999 are derived from
supplemental unaudited condensed consolidated financial statements included
elsewhere in this filing. The supplemental consolidated statement of
operations data for the year ended December 31, 1995 and the supplemental
consolidated balance sheet data as of December 31, 1994, 1995 and 1996 are
derived from consolidated financial statements that have been audited by KPMG
LLP that are not included in this filing. The supplemental consolidated
statement of operations data for the year ended December 31, 1994 are derived
from unaudited consolidated financial statements that are not included in this
filing. The unaudited consolidated financial statements have been prepared on
substantially the same basis as the audited consolidated financial statements
and, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for these periods. Historical results are not necessarily
indicative of the results to be expected in the future, and results of interim
periods are not necessarily indicative of results for the entire year.
We are the successor to a Maryland corporation that was formed in August
1992 to provide computer consulting services. We began to offer Internet
connectivity services to enterprises in October 1994 and server hosting
services in late 1995. In August 1996, we opened our first dedicated Internet
Data Center and refocused our business strategy on providing Internet system
and network management solutions for enterprises with mission-critical Internet
operations.
In the following tables and in this document, "EBITDA" represents earnings
(loss) before net interest expense, income taxes, depreciation, amortization
(including amortization of deferred stock compensation) and other noncash
charges. EBITDA should not be used as an alternative to operating loss or net
cash provided by (used for) operating activities, investing activities or
financing activities, each as measured under generally accepted accounting
principles. In addition, EBITDA may not be comparable to other similarly titled
information from other companies. However, our management believes that EBITDA
is an additional meaningful measure of performance and liquidity. With respect
to the captions entitled "Deficiency of earnings available to cover fixed
charges" and "Ratio of earnings to fixed charges," earnings consist of income
(loss) before provision for income taxes plus fixed charges. Fixed charges
consist of interest charges and amortization of debt expense and discount or
premium related to indebtedness, whether expensed or capitalized, and that
portion of rental expense we believe to be representative of interest.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
------------------------------------ -------------------
Sept. 30, Sept. 30,
1995 1996 1997 1998 1998 1999
------- ------- -------- -------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Supplemental
Consolidated Statement
of Operations Data:
Total revenues.......... $ 1,408 $ 3,130 $ 12,408 $ 52,745 $ 31,638 $ 140,754
Costs and expenses:
Total cost of
revenues.............. 1,128 2,990 16,868 61,578 39,291 118,827
Marketing and sales.... 1,056 2,734 12,702 29,034 20,576 42,473
General and
administrative........ 427 1,056 5,983 16,058 9,664 25,548
Product development.... 70 444 1,647 3,507 2,389 5,641
Amortization of
intangibles........... -- -- -- 141 -- 4,674
Restructuring costs.... -- -- -- -- -- 923
------- ------- -------- -------- -------- ---------
Total costs and
expenses............ 2,681 7,224 37,200 110,318 71,920 198,086
------- ------- -------- -------- -------- ---------
Operating loss....... (1,273) (4,094) (24,792) (57,573) (40,282) (57,332)
Net interest expense... 38 39 506 9,743 5,110 20,044
------- ------- -------- -------- -------- ---------
Net loss............. (1,311) (4,133) (25,298) (67,316) (45,392) (77,376)
Cumulative dividends
and accretion on
redeemable
convertible preferred
stock................. -- -- (1,413) (2,014) (2,014) --
------- ------- -------- -------- -------- ---------
Net loss attributable to
common stockholders.... $(1,311) $(4,133) $(26,711) $(69,330) $(47,406) $ (77,376)
======= ======= ======== ======== ======== =========
Basic and diluted net
loss per share(1)...... $ (0.25) $ (0.54) $ (3.46) $ (1.10) $ (0.83) $ (0.93)
======= ======= ======== ======== ======== =========
Shares used in computing
basic and diluted net
loss per share(1)...... 5,262 7,656 7,714 62,905 57,044 82,987
======= ======= ======== ======== ======== =========
Supplemental
Consolidated Statement
of Cash Flows Data:
Net cash used for
operating activities... $ (461) $(3,116) $(15,518) $(47,312) $(31,568) $ (68,542)
Net cash used for
investing activities... (69) (3,877) (23,864) (92,757) (70,323) (235,134)
Net cash provided by
financing activities... 692 10,545 45,937 285,814 283,254 319,632
Other Data:
EBITDA.................. (1,208) (3,633) (20,274) (41,945) (29,592) (27,994)
Depreciation and
amortization........... 65 461 3,429 13,024 8,575 28,383
Capital expenditures.... 69 3,499 22,489 44,564 26,680 160,624
Deficiency of earnings
available to cover
fixed charges.......... (1,311) (4,133) (25,298) (67,316) (45,392) (77,376)
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31,
1994
--------------
(in thousands,
except ratio
and per
share data)
<S> <C>
Supplemental Consolidated Statement of Operations Data:
Total revenues................................................. $ 977
Operating income............................................... 143
Net income..................................................... 144
Basic and diluted net income per share......................... $0.04
Shares used in computing basic and diluted net income per
share......................................................... 4,000
Ratio of earnings to fixed charges............................. 26x
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
---- ------- ------- -------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Supplemental
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 1 $ 163 $ 3,715 $ 10,270 $156,015 $171,971
Restricted cash
equivalents and
investments............ -- -- 378 1,753 45,614 35,444
Working capital
(deficiency)........... 93 (1,170) 1,892 (3,707) 124,636 153,753
Total assets............ 320 840 8,289 40,973 298,798 684,825
Equipment loans, line of
credit facility,
capital lease
obligations,
convertible
subordinated notes and
senior notes, less
current portion........ -- 141 1,449 15,135 227,284 567,176
Total stockholders'
equity (deficit)....... 169 (1,140) (5,234) (30,600) 24,277 32,601
</TABLE>
- --------
(1) See Note 1 of Notes to supplemental consolidated financial statements for
our explanation of the determination of the number of shares used in
computing per share data.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with the supplemental consolidated financial
statements and the related notes included elsewhere in this filing. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements.
Overview
We are a leading provider of Internet system and network management
solutions and technology professional services for enterprises with mission-
critical Internet operations. Our solutions include Internet Data Centers,
network services, managed services and professional services that together
provide the high performance, scalability and expertise that enterprises need
to optimize Internet operations. We deliver our services from our
geographically distributed, state-of-the-art Internet Data Centers that are
connected through a high-performance Internet backbone network.
We are the successor to a Maryland corporation that was formed in August
1992 to provide computer-consulting services. We began offering server hosting
and Internet connectivity services in late 1995, opened our first dedicated
Internet Data Center in August 1996 and introduced managed services in 1997 and
professional services in 1998. We have derived most of our revenues from
customers for whom we provide these services. Most of our Internet Data Center
customers initially purchase a subset of our service offerings to address
specific departmental or enterprise Internet computing needs, and many of these
customers purchase additional services as the scale and complexity of their
Internet operations increase. We sell our services under contracts that
typically have minimum terms of one year. Customers pay monthly fees for the
services utilized, as well as one-time fees for installation, certain
professional services and for equipment they purchase from us.
We opened our first Internet Data Center in the Silicon Valley metropolitan
area in August 1996. Since that time, we have opened 14 additional domestic
Internet Data Centers in the metropolitan areas of New York (March 1997 and
September 1999), Silicon Valley (second site--August 1997; third site--June
1998; and fourth site June 1999), Seattle (September 1997 and June 1999), Los
Angeles (October 1997 and September 1999), Washington, D.C. (December 1997 and
May 1999), Boston (July 1998), Chicago (April 1999) and Austin, Texas (November
1999). In addition, we opened our first Internet Data Center outside of the
United States in London in June 1999. We plan to open four additional Internet
Data Centers and three server hosting sites by the end of 1999 or the first
month of 2000. The building of Internet Data Centers has required us to obtain
substantial equity and debt financing. See "Risk Factors--Our substantial
leverage and debt service obligations adversely affect our cash flow" and "--
Liquidity and Capital Resources" below.
In October 1998, we purchased the assets of Arca Systems, Inc. ("Arca"), a
provider of advanced network and system security consulting services. In
February 1999, we acquired American Information Systems, Inc. ("AIS"), a
regional provider of co-location, web hosting and professional services. In
July 1999, we acquired Cohesive Technology Solutions, Inc. ("Cohesive"), a
technology professional services organization with expertise in networking,
Internet-based applications and technology solutions. In November 1999, we
acquired Service Metrics, Inc. pursuant to which Service Metrics became our
wholly-owned subsidiary. Service Metrics is based in Boulder, Colorado and has
79 employees as of November 1999. In connection with the merger, we issued a
total of approximately 3.5 million shares of Exodus Common Stock and options
for Exodus Common Stock in exchange for all outstanding shares of Service
Metrics common stock and outstanding options we assumed in connection with the
merger. We will account for the Service Metrics merger as a pooling of
interests.
<PAGE>
We intend to expand domestically and internationally. Prior to building an
Internet Data Center in a new geographic region, we employ various means to
evaluate the market opportunity in a given location, including market research
on Internet usage statistics, the pre-selling of services into the proposed
market and analysis of specific financial criteria. We typically require at
least six months to select the appropriate location for an Internet Data
Center, construct the necessary facilities, install equipment and
telecommunications infrastructure, and hire the operations and sales personnel
needed to conduct business at that site. Expenditures related to an Internet
Data Center commence well before the Internet Data Center opens, and it takes
an extended period to approach break-even capacity utilization at each site. As
a result, 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, and may never be an, Internet Data Center. As a
result, we expect to make investments in expanding our business rapidly into
new geographic regions which, while potentially increasing our revenues in the
long term, will lead to significant losses for the foreseeable future.
Since we began to offer server hosting and Internet connectivity services in
1995, we have experienced operating losses and negative cash flows from
operations in each fiscal quarter and year. As of September 30, 1999, we had an
accumulated deficit of approximately $175.3 million. The revenue and income
potential of our business and market is unproven, and our limited operating
history makes an evaluation of our prospects and us difficult. We intend to
invest in new Internet Data Centers and other sites, product development, and
sales and marketing programs. We therefore believe that we will continue to
experience net losses on a quarterly and annual basis for the foreseeable
future. As a company in the new and rapidly evolving market for Internet system
and network management solutions, we encounter risks, expenses and difficulties
that affect our business and prospects. There can be no assurance that we will
achieve profitability on a quarterly or an annual basis or that we will sustain
profitability.
<PAGE>
Results of Operations for the Years Ended December 31, 1996, 1997 and 1998 and
the Nine Months Ended September 30, 1998 and 1999
The following table sets forth certain statement of operations data as a
percentage of total revenues for the years ended December 31, 1996, 1997 and
1998 and the nine-month periods ended September 30, 1998 and 1999. The
information for the years ended December 31, 1996, 1997 and 1998 has been
derived from our supplemental audited consolidated financial statements included
in this filing. The information for the nine-month periods ended September 30,
1998 and 1999 has been derived from our supplemental unaudited condensed
consolidated financial statements included in this filing which, in management's
opinion, have been prepared on substantially the same basis as the supplemental
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information for the periods presented. This
information should be read in conjunction with the supplemental consolidated
financial statements and related notes included in this filing. The operating
results in any periods are not necessarily indicative of the results to be
expected for any future period.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
------------------------ ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Revenues:
Service revenues............ 78.4 % 93.4 % 94.4 %
Equipment revenues.......... 21.6 6.6 5.6
------ ------ ------
Total revenues............ 100.0 100.0 100.0 100.0 % 100.0 %
------ ------ ------ ------- ------
Costs and expenses:
Cost of service revenues.... 81.1 130.8 112.4
Cost of equipment revenues.. 14.4 5.2 4.4
------ ------ ------
Total cost of revenues.... 95.5 135.9 116.7 124.2 84.4
Marketing and sales......... 87.3 102.4 55.0 65.0 30.2
General and administrative.. 33.7 48.2 30.4 30.5 18.2
Product development......... 14.2 13.3 6.6 7.6 4.0
Amortization of
intangibles................ -- -- 0.3 -- 3.3
Restructuring costs......... -- -- -- -- 0.7
------ ------ ------ ------- ------
Total cost and expenses... 230.8 299.8 209.2 227.3 140.7
------ ------ ------ ------- ------
Operating loss............ (130.8) (199.8) (109.2) (127.3) (40.7)
Net interest expense.......... 1.2 4.1 18.5 16.2 14.2
------ ------ ------ ------- ------
Net loss.................. (132.0)% (203.9)% (127.6)% (143.5)% (55.0)%
====== ====== ====== ======= ======
</TABLE>
Revenues
Our revenues consist of (1) monthly fees from customer use of Internet Data
Center sites, network services and managed services, including professional
services and use of equipment and software provided by us, (2) revenues from
sales of third-party equipment to customers and (3) fees for installation and
certain professional services. Currently, substantially all of our revenue is
derived from services. Revenues, other than installation fees, equipment sales
to customers and certain professional services, are generally billed and
recognized ratably over the term of the contract, which is generally one year.
Installation fees are typically recognized at the time the installation occurs,
and equipment revenues are typically recognized when the equipment is delivered
to the customer or placed into service at an Internet Data Center. We sell
third-party equipment to our customers as an accommodation to facilitate their
purchase of services. One-time professional service fees are typically
recognized when the services are rendered.
<PAGE>
Our service revenues increased 372% from $2.5 million in 1996 to $11.6
million in 1997 and increased an additional 330% to $49.8 million in 1998. This
growth in service revenues was primarily the result of opening our Internet
Data Centers, increases in the number of new customers, substantially all of
which were Internet Data Center customers, and increases in revenues from
existing customers. Equipment revenues increased 21% from $676,000 in 1996 to
$820,000 in 1997 and 257% to $2.9 million in 1998.
Our revenues increased 345% to $140.8 million for the nine month period
ended September 30, 1999 from $31.6 million in the same period of the prior
year. This growth in revenues was the result of increases in the number of new
customers, substantially all of which were Internet Data Center customers,
increases in revenues from existing customers and revenue contributions from
Cohesive.
Cost of Revenues
Our cost of revenues is comprised of the costs for our backbone network and
local telecommunications loops, interconnections to other networks,
depreciation and amortization, salaries and benefits for our customer service
and operations personnel (customer service personnel, network engineers and
professional services personnel), rent, repairs and utilities related to our
Internet Data Centers and other sites and costs of third-party equipment sold
to customers.
Cost of service revenues increased from $2.5 million in 1996 to $16.2
million in 1997 and to $59.3 million in 1998. Our cost of service revenues as a
percentage of revenues increased from 81% in 1996 to 131% in 1997 and declined
to 112% in 1998. The increases in cost of service revenues in absolute dollars
were due to increased costs associated with the build-out and operation of our
increasing number of Internet Data Centers, including increased costs for our
redundant backbone network and local telecommunications loops, depreciation,
salaries and benefits for our customer service and operations personnel, and
rent. The increase in cost of service revenues as a percentage of revenues from
1996 to 1997 reflects the timing of investments in Internet Data Centers and
network infrastructure relative to the growth in associated revenue. The
decrease in cost of service revenues as a percentage of revenues from 1997 to
1998 resulted from revenues from new and existing Internet Data Centers
increasing faster than related costs of revenues. Costs for our redundant
backbone network and local telecommunications loops increased by approximately
$3.8 million from 1996 to 1997 and by approximately $15.2 million from 1997 to
1998. Depreciation increased by approximately $3.0 million from 1996 to 1997
and by approximately $8.4 million from 1997 to 1998. Salaries and benefits for
our customer service and operations personnel increased by approximately $3.5
million from 1996 to 1997 and by approximately $6.7 million from 1997 to 1998.
Rent expense increased by approximately $945,000 from 1996 to 1997 and by
approximately $3.1 million from 1997 to 1998. Cost of equipment revenues
increased from $452,000 in 1996 to $640,000 in 1997 and to $2.3 million in
1998. Cost of equipment revenue in absolute dollars varies primarily as a
result of equipment revenues and cost of equipment revenues as a percentage of
revenues varies due to the mix of equipment purchased by customers.
Cost of revenues increased 202% to $118.8 million for the nine month period
ended September 30, 1999 from $39.3 million in the same period of the prior
year. This increase in cost of revenues in absolute dollars was primarily the
result of costs associated with hiring additional employees, including
professional services employees hired in connection with our acquisition of
Cohesive, and consultants, increased traffic on our network and to other
networks, increased depreciation due to capital expenditures related to the
buildout and expansion of Internet Data Centers, increased rent, and increased
utilities and other costs related to the opening and expanding of Internet Data
Centers. Our cost of revenues as a percentage of revenues decreased to 84% for
the nine months ended September 30, 1999 from 124% for the same period of the
prior year. This decline was due primarily to an increase in revenue between
comparison periods. We expect that cost of revenues will continue to increase
in absolute dollars.
<PAGE>
Marketing and Sales
Our marketing and sales expenses are comprised of salaries, commissions and
benefits for our marketing and sales personnel, printing and advertising costs,
public relations costs, consultants' fees and travel and entertainment
expenses.
Our marketing and sales expenses increased from $2.7 million in 1996 to
$12.7 million in 1997 and to $29.0 million in 1998. These increases were
primarily the result of hiring additional marketing and sales personnel,
expanding marketing programs in connection with our expansion of our
operations, including the number and scope of our Internet system and network
management solutions, and in 1998, the charge of $525,000 associated with the
warrant for common stock issued to At Home Corporation. Salaries and benefits
for our sales and marketing personnel increased by approximately $6.1 million
from 1996 to 1997 and by approximately $10.5 million from 1997 to 1998, and
costs associated with tradeshows and advertising increased by approximately
$977,000 from 1996 to 1997 and approximately $114,000 from 1997 to 1998. The
increase in marketing and sales expenses as a percentage of revenues from 1996
to 1997 reflects the continued expansion of marketing and sales efforts prior
to the receipt of associated revenues. The decrease in marketing and sales as a
percentage of revenues from 1997 to 1998 was due to revenues growing faster
than marketing and sales expenses.
Our marketing and sales expenses increased 106% to $42.5 million for the
nine month period ended September 30, 1999 from $20.6 million in the same
period of the prior year. The increase in absolute dollars was primarily the
result of increased compensation and related expenses associated with hiring
additional marketing and sales personnel, including employees hired in
connection with our acquisition of Cohesive, and increased advertising
expenses. Our marketing and sales expense as a percentage of revenues decreased
to 30% for the nine months ended September 30, 1999 from 65% for the same
period of the prior year. This decline was primarily due to our significant
increase in revenue between comparison periods. We expect that marketing and
sales expense will continue to increase in absolute dollars.
General and Administrative
Our general and administrative expenses are primarily comprised of salaries
and benefits for our administrative and management information systems
personnel, consulting fees and recruiting fees.
Our general and administrative expenses increased from $1.1 million in 1996
to $6.0 million in 1997 and to $16.1 million in 1998. These increases were
primarily the result of increased compensation expenses associated with
additional hiring of general and administrative personnel, costs for
consultants and professional services providers, fees paid for recruiting and
amortization of deferred compensation. Salaries and benefits for general and
administrative personnel increased by approximately $2.0 million from 1996 to
1997 and by approximately $2.8 million from 1997 to 1998. Costs for consultants
and professional services providers increased by approximately $1.1 million
from 1996 to 1997 and by approximately $900,000 from 1997 to 1998. Recruiting
fees increased by approximately $968,000 from 1996 to 1997 and by approximately
$440,000 from 1997 to 1998. These increased expenses reflected our need for
additional general and administrative personnel to handle the expansion of our
operations. The amortization of deferred compensation included in general and
administrative expenses was $741,000 in 1997 and $597,000 in 1998, and there
was no such expense recorded in 1996. The increase in general and
administrative expenses as a percentage of revenues from 1996 to 1997 resulted
primarily from deferred compensation expenses in 1997. The decrease in general
and administrative expenses as a percentage of revenues from 1997 to 1998 was
due to revenues growing faster than general and administrative expenses.
Our general and administrative expenses increased 164% to $25.5 million for
the nine month period ended September 30, 1999 from $9.7 million in the same
period of the prior year. The
<PAGE>
increase in absolute dollars was primarily the result of increased compensation
expenses associated with additional hiring of general and administrative
personnel, including employees hired in connection with our acquisition of
Cohesive, increased rent and related expenses due to entering into additional
operating leases during the period, higher depreciation and increased
recruiting expenses. Our general and administrative expense as a percentage of
revenues decreased to 18% for the nine month period ended September 30, 1999
from 31% for the same period of the prior year. This decline was primarily due
to our significant increase in revenue between comparison periods. We expect
that general and administrative expense will continue to increase in absolute
dollars.
Product Development
Our product development expenses consist primarily of salaries and benefits
for our product development personnel and fees paid to consultants.
Our product development expenses increased from $444,000 in 1996 to $1.6
million in 1997 and to $3.5 million in 1998. Our product development expenses
grew between the comparison periods primarily because of the addition of
product development personnel to support our expanded service offerings. The
decrease in product development expenses as a percentage of revenues from 1996
to 1998 resulted from revenues growing faster than product development
expenses.
Our product development expenses increased 136% to $5.6 million for the nine
month period ended September 30, 1999 from $2.4 million in the same period of
the prior year. Our product development expenses grew primarily due to the
addition of product development personnel to support our expanded service
offerings. Our product development expense as a percentage of revenues
decreased to 4% for the nine months ended September 30, 1999 from 8% for the
same period of the prior year. This decline was due to our significant increase
in revenue between comparison periods. We expect that product development
expenses will continue to increase in absolute dollars.
Amortization of Intangibles
As part of our strategy to grow through acquisitions of complementary
businesses, we acquired the assets of Arca in October 1998, AIS in February
1999 and Cohesive in July 1999. In connection with those acquisitions, we have
recorded intangible assets related to goodwill, customer lists and workforce in
place. Amortization related to those intangibles was $4.7 million for the nine
month period ended September 30, 1999. These intangibles are being amortized on
a straight-line basis generally over 5 to 10 years.
Restructuring Costs
In August 1999, we announced plans to consolidate seven professional
services practice offices of Cohesive, which we acquired on July 27, 1999. We
determined that consolidation of these offices would maximize efficiencies of
the combined companies. This action is expected to be completed by December 31,
1999. In connection with the consolidation of these facilities, we recorded a
restructuring charge of $923,000 for the nine month period ended September 30,
1999. This charge includes approximately $689,000 for lease termination and
other related office closure costs and $234,000 in severance and other employee
benefits.
Net Interest Expense
Our net interest expense increased from $39,000 in 1996 to $506,000 in 1997
and to $9.7 million in 1998. The increase in net interest expense from 1996 to
1997 was primarily the result
<PAGE>
of substantially increased borrowings as we entered into equipment loans and
lease agreements to finance the construction of our Internet Data Centers. The
increase in net interest expense from 1997 to 1998 was primarily the result of
interest expenses associated with our $200 million of senior notes which were
issued July 1, 1998, substantially increased borrowings as we entered into
equipment loans and lease agreements to finance the construction of our
Internet Data Centers, and working capital lines of credit to finance working
capital for our operations.
Our net interest expense increased to $20.0 million for the nine month
period ended September 30, 1999 from $5.1 million for the same period of the
prior year. The increase in net interest expense was primarily the result of
interest expense associated with our senior notes issued July 1, 1998 and June
22, 1999, and our convertible subordinated notes issued March 3, 1999.
We expect that net interest expense will continue to increase as we enter
into additional equipment leases and loans, obtain additional borrowings and
long term debt and experience reduced interest income as a result of the
decline in our cash reserves to fund working capital and other uses.
EBITDA
Our loss before interest, taxes, depreciation, amortization and other non-
cash charges ("EBITDA") was $3.6 million in 1996, $20.3 million in 1997 and
$41.9 million in 1998. The increases in the level of EBITDA losses between the
comparison periods were primarily due to increased expenditures needed to
support our growth in operations, including salaries and benefits for
additional employees, network costs, rent, utilities and other costs related to
the increase in the number of our Internet Data Centers as well as increased
marketing and sales expenses, consulting fees and professional services.
EBITDA loss was $28.0 million for the nine month period ended September 30,
1999 compared to $29.6 million for the same period of the prior year. The
decrease in the magnitude of EBITDA losses between the comparison periods was
primarily due to the significant increases in revenue over these periods offset
in part by increased compensation costs associated with the hiring of
additional employees during those time periods.
Although EBITDA should not be used as an alternative to operating loss or
net cash provided by (used for) operating activities, investing activities or
financing activities, each as measured under generally accepted accounting
principles, our management believes that EBITDA is an additional meaningful
measure of performance and liquidity.
Liquidity and Capital Resources
From inception through September 30, 1999, we have financed our operations
primarily through private sales of preferred stock, our initial public offering
of common stock in March 1998, our senior notes offerings in July 1998 and June
1999, our convertible subordinated notes offering in March 1999 and through
various types of equipment loans and lease lines and working capital lines of
credit. At September 30, 1999, our principal source of liquidity was
approximately $172 million in cash and cash equivalents. As of that date, we
also had equipment loans and lease lines of credit under which we could borrow
up to an additional aggregate of $1.2 million for purchases of equipment. As of
September 30, 1999, our total bank borrowings, equipment loans and lines of
credit facilities, capital lease obligations and senior and convertible notes
were $589.7 million. See Notes 4 and 6 of Notes to Supplemental Consolidated
Financial Statements.
Since we began to offer server-hosting services in 1995, we have had
significant negative cash flows from operating activities. Net cash used for
operating activities for the nine months ended
<PAGE>
September 30, 1999 was $68.5 million, primarily due to net losses and increases
in accounts receivable and prepaid expenses and other assets, offset in part by
increases in accounts payable and depreciation and amortization. This compares
to net cash used for operating activities for the nine months ended September
30, 1998 of $31.6 million which was primarily due to net losses and an increase
in accounts receivable, offset in part by increases in accounts payable and
accrued interest payable and depreciation and amortization.
Net cash used for investing activities for the nine months ended September
30, 1999 was $235.1 million primarily due to capital expenditures for the
continued construction of Internet Data Centers and the acquisitions of AIS and
Cohesive. This compares to net cash used for investing activities for the nine
months ended September 30, 1998 of $70.3 million which was due to capital
expenditures for the construction of Internet Data Centers and an increase in
restricted cash equivalents and investments.
Net cash provided by financing activities for the nine month period ended
September 30, 1999 was $319.6 million, primarily due to the proceeds from our
issuance of $250.0 million of 5% Convertible Subordinated Notes and our
additional $75.0 million offering of 11 1/4% Senior Notes in June 1999. This
compares to net cash provided by financing activities for the nine months ended
September 30, 1998 of $283.3 million which was primarily due to our initial
public offering of common stock in March 1998 and our original $200.0 million
senior notes offering in July 1998.
As of September 30, 1999, we had commitments under capital leases and under
noncancellable operating leases of $47.0 million and $260.3 million,
respectively, through 2012. In addition, in August 1999 we entered into
capacity purchase agreements with Global Crossing. The agreements provide for a
total potential outlay of approximately $105.0 million for fiber capacity and
related maintenance covering approximately 25 years. As of September 30, 1999
we had expended $7.0 million.
We intend to make significant expenditures during the next 12 months
primarily for property and equipment, in particular equipment and construction
needed for existing and future Internet Data Centers, as well as office
equipment, computers and telephones. We expect to finance such capital
expenditures primarily through the remaining net proceeds from the 11 1/4%
Senior Notes and 5% Convertible Subordinated Notes, existing and future
equipment loans and lease lines of credit, and issuances of additional debt and
other financing activities. We believe our working capital and capital
expenditure requirements over the next 12 months can be met with existing cash
and cash equivalents and short-term investments, cash from sales of services
and proceeds from debt financings and existing and future equipment financing
lines of credit. We may enter into additional equipment loans and capital
leases. We may also seek to raise additional funds through public or private
financing, strategic relationships or other arrangements. There can be no
assurance that we will be successful in generating sufficient cash flows from
operations or raising capital in sufficient amounts on terms acceptable to us.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes methods for accounting for derivative financial instruments and
hedging activities related to those instruments, as well as other hedging
activities. Because we do not currently hold any derivative instruments and do
not engage in hedging activities, we expect that the adoption of SFAS No. 133
will not have a material impact on our financial position, results of
operations or cash flows. We will be required to implement SFAS No. 133 for the
year ending December 31, 2001.
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our exposure to market rate risk for changes in interest
rates relates primarily to our investment portfolio. We do not use derivative
financial instruments in our investment portfolio. We place our investments with
high quality issuers and, by policy, limit the amount of risk by investing
primarily in money market funds, United States Treasury Notes and certificates
of deposit. An increase or decrease in interest rates would not significantly
increase or decrease interest expense on debt obligations due to the fixed
nature of our debt obligations. We do not currently have any significant foreign
operations and thus are not currently materially exposed to foreign currency
fluctuations.
<PAGE>
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Exodus Communications, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Exodus Communications, Inc. and subsidiaries (the Company) as of December 31,
1997 and 1998, and the related supplemental consolidated statements of
operations, stockholders' (deficit) equity and cash flows for each of the years
in the three-year period ended December 31, 1998. In connection with our audits
of the supplemental consolidated financial statements, we have also audited the
supplemental financial statement schedule. These supplemental consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
supplemental consolidated financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of the Company and Service Metrics, Inc. on November 23, 1999,
which has been accounted for as a pooling of interests as described in Note 2
to the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These supplemental
consolidated financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of the Company after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Exodus Communications, Inc. and subsidiaries as of December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles applicable after financial statements are issued
for a period which includes the date of consummation of the business
combination. Also, in our opinion, the related supplemental financial statement
schedule, when considered in relation to the supplemental consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Mountain View, California
November 23, 1999
<PAGE>
EXODUS COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------ September 30,
1997 1998 1999
-------- -------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................... $ 10,270 $156,015 $ 171,971
Accounts receivable, net of allowance for
doubtful accounts of $691, $1,821, and
$5,251 as of December 31, 1997 and 1998,
and September 30, 1999, respectively....... 1,837 9,653 47,858
Prepaid expenses and other current assets... 1,377 6,205 18,972
-------- -------- ---------
Total current assets...................... 13,484 171,873 238,801
Property and equipment, net.................. 25,170 68,572 245,392
Restricted cash equivalents and investments.. 1,753 45,614 35,444
Intangibles and other assets................. 566 12,739 165,188
-------- -------- ---------
$ 40,973 $298,798 $ 684,825
======== ======== =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
- ---------------------------------------------
Current liabilities:
Bank borrowings............................. $ 3,000 $ -- $ --
Current portion of equipment loans and line
of credit facilities....................... 3,777 14,367 7,722
Current portion of capital lease
obligations................................ 1,143 5,223 14,817
Accounts payable............................ 6,252 9,208 34,141
Accrued expenses............................ 3,019 6,876 20,294
Accrued interest payable.................... -- 11,563 8,074
-------- -------- ---------
Total current liabilities................. 17,191 47,237 85,048
Equipment loans and line of credit
facilities, less current portion............ 12,693 15,695 9,600
Capital lease obligations, less current
portion..................................... 2,442 11,589 32,201
Convertible subordinated notes............... -- -- 250,000
Senior notes................................. -- 200,000 275,375
-------- -------- ---------
Total liabilities......................... 32,326 274,521 652,224
-------- -------- ---------
Redeemable convertible preferred stock and
warrants, $0.001 par value: 74,960,124, no
shares, and no shares authorized as of
December 31, 1997 and 1998, and September
30, 1999 respectively; 34,117,371, no
shares, and no shares issued and outstanding
as of December 31, 1997 and 1998, and
September 30, 1999, respectively; aggregate
liquidation preference of $39,640 as of
December 31, 1997........................... 39,247 -- --
-------- -------- ---------
Commitments and contingencies
Stockholders' (deficit) equity:
Preferred stock, $0.001 par value: no
shares, 5,000,000 shares authorized as of
December 31, 1997 and 1998, and September
30, 1999 and no shares issued or
outstanding as of December 31, 1997 and
1998, and September 30, 1999............... -- -- --
Convertible preferred stock of Service
Metrics, Inc.; no shares, 1,553,158, and
2,585,777 shares issued and outstanding as
of December 31, 1997 and 1998, and
September 30, 1999, respectively;
aggregate liquidation preference of $0,
$6,000, and $15,500 as of December 31,
1997 and 1998, and September 30, 1999,
respectively. ............................. -- 5,961 15,437
Common stock, $0.001 par value: 53,281,579,
50,000,000, and 300,000,000 shares
authorized as of December 31, 1997 and
1998, and September 30 1999, respectively;
8,269,012, 80,835,466, and 85,042,171
shares issued and outstanding as of
December 31, 1997 and 1998, and September
30, 1999, respectively..................... 8 81 85
Additional paid-in capital.................. 2,502 117,208 195,251
Notes receivable from stockholders.......... (140) -- --
Deferred stock compensation................. (2,393) (1,080) (2,903)
Accumulated deficit......................... (30,577) (97,893) (175,269)
-------- -------- ---------
Total stockholders' (deficit) equity...... (30,600) 24,277 32,601
-------- -------- ---------
$ 40,973 $298,798 $ 684,825
======== ======== =========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
EXODUS COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Service revenues............ $ 2,454 $ 11,588 $ 49,815
Equipment revenues.......... 676 820 2,930
------- -------- -------- -------- --------
Total revenues............ 3,130 12,408 52,745 $ 31,638 $140,754
------- -------- -------- -------- --------
Costs and expenses:
Cost of service revenues.... 2,538 16,228 59,280
Cost of equipment revenues.. 452 640 2,298
------- -------- -------- -------- --------
Total cost of revenue..... 2,990 16,868 61,578 39,291 118,827
------- -------- -------- -------- --------
Marketing and sales......... 2,734 12,702 29,034 20,576 42,473
General and administrative.. 1,056 5,983 16,058 9,664 25,548
Product development......... 444 1,647 3,507 2,389 5,641
Amortization of
intangibles................ -- -- 141 -- 4,674
Restructuring costs......... -- -- -- -- 923
------- -------- -------- -------- --------
Total expenses............ 4,234 20,332 48,740 32,629 79,259
------- -------- -------- -------- --------
Total costs and expenses.. 7,224 37,200 110,318 71,920 198,086
------- -------- -------- -------- --------
Operating loss............ (4,094) (24,792) (57,573) (40,282) (57,332)
Interest income............... 68 193 7,157 4,028 10,561
Interest expense.............. (107) (699) (16,900) (9,138) (30,605)
------- -------- -------- -------- --------
Net loss.................. (4,133) (25,298) (67,316) (45,392) (77,376)
Cumulative dividends and
accretion on redeemable
convertible preferred stock.. -- (1,413) (2,014) (2,014) --
------- -------- -------- -------- --------
Net loss attributable to
common stockholders.......... $(4,133) $(26,711) $(69,330) $(47,406) $(77,376)
======= ======== ======== ======== ========
Basic and diluted net loss per
share........................ $ (0.54) $ (3.46) $ (1.10) $ (0.83) $ (0.93)
======= ======== ======== ======== ========
Shares used in computing basic
and diluted net loss per
share........................ 7,656 7,714 62,904 57,044 82,987
======= ======== ======== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
EXODUS COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred
Stock of
Services Notes Total
Metrics, Inc. Common Stock Additional Receivable Deferred Stockholders'
------------- -------------- Paid-In from Stock Accumulated (Deficit)
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity
------ ------ ------ ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
December 31, 1995...... -- $ -- 7,284 $ 7 $ 194 $(195) $ -- $ (1,146) $ (1,140)
Issuance of common
stock.................. -- -- 536 1 31 -- -- -- 32
Issuance of common stock
in connection with
stock purchase plan and
exercise of stock
options................ -- -- 64 -- 4 (3) -- -- 1
Repurchase of common
stock.................. -- -- (100) -- (6) 6 -- -- --
Repayment of notes
receivable from
stockholders........... -- -- -- -- -- 6 -- -- 6
Net loss................ -- -- -- -- -- -- -- (4,133) (4,133)
----- ----- ------ --- ------- ----- ------ --------- --------
Balances as of December
31, 1996............... -- -- 7,784 8 223 (186) -- (5,279) (5,234)
Issuance of common stock
in connection with
exercise of stock
options and warrants... -- -- 689 -- 222 -- -- -- 222
Repurchase of common
stock.................. -- -- (204) -- (12) 12 -- -- --
Repayment of notes
receivable from
stockholders........... -- -- -- -- -- 34 -- -- 34
Deferred stock
compensation related to
stock option grants.... -- -- -- -- 3,482 -- (3,482) -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 1,089 -- 1,089
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock.................. -- -- -- -- (750) -- -- -- (750)
Accretion on Series C
and D redeemable
convertible preferred
stock.................. -- -- -- -- (663) -- -- -- (663)
Net loss................ -- -- -- -- -- -- -- (25,298) (25,298)
----- ----- ------ --- ------- ----- ------ --------- --------
Balances as of December
31, 1997............... -- -- 8,269 8 2,502 (140) (2,393) (30,577) (30,600)
Issuance of common stock
in connection with
employee stock purchase
plan and exercise of
stock options and
warrants............... -- -- 3,351 3 2,290 -- -- -- 2,293
Issuance of common stock
in conjunction with
initial public
offering, net of
offering costs
of $7,062.............. -- -- 20,500 21 69,797 -- -- -- 69,818
Issuance of common stock
to an officer for
cash................... -- -- 200 -- 450 -- -- -- 450
Issuance of common stock
and common stock
warrants............... -- -- -- -- 786 -- -- -- 786
Issuance of Service
Metrics, Inc.
convertible preferred
stock.................. 1,553 5,961 -- -- -- -- -- -- 5,961
Issuance of Service
Metrics, Inc. common
stock to founders...... -- -- 566 1 8 -- -- -- 9
Repayment of notes
receivable from
stockholders........... -- -- -- -- -- 140 -- -- 140
</TABLE>
(continued)
<PAGE>
EXODUS COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY--
(Continued)
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred
Stock of
Services Notes Total
Metrics, Inc. Common Stock Additional Receivable Deferred Stockholders'
-------------- ------------- Paid-In from Stock Accumulated (Deficit)
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity
------ ------- ------ ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Conversion of redeemable
convertible preferred
stock into common
stock.................. -- $ -- 47,949 $48 $ 43,389 $ -- $ -- $ -- $ 43,437
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 1,313 -- 1,313
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock.................. -- -- -- -- (462) -- -- -- (462)
Accretion on Series C
and D redeemable
convertible preferred
stock.................. -- -- -- -- (1,552) -- -- -- (1,552)
Net loss................ -- -- -- -- -- -- -- (67,316) (67,316)
----- ------- ------ --- -------- ---- ------- --------- --------
Balances as of December
31, 1998............... 1,553 5,961 80,835 81 117,208 -- (1,080) (97,893) 24,277
Issuance of common stock
in connection with
employee stock purchase
plan and exercise of
stock options and
warrants (unaudited)... -- -- 3,407 3 14,004 -- -- -- 14,007
Issuance of common stock
and assumption of
options in connection
with the acquisition of
Cohesive Technology
Solutions, Inc.
(unaudited)............ -- -- 800 1 61,261 -- -- -- 61,262
Issuance of Service
Metrics, Inc.
convertible preferred
stock (unaudited)...... 1,033 9,476 -- -- -- -- -- -- 9,476
Deferred stock
compensation related to
Service Metrics, Inc.
stock option grants
(unaudited)............ -- -- -- -- 2,778 -- (2,778) -- --
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- -- -- -- 955 -- 955
Net loss (unaudited).... -- -- -- -- -- -- -- (77,376) (77,376)
----- ------- ------ --- -------- ---- ------- --------- --------
Balances as of September
30, 1999 (unaudited)... 2,586 $15,437 85,042 $85 $195,251 $ -- $(2,903) $(175,269) $ 32,601
===== ======= ====== === ======== ==== ======= ========= ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
EXODUS COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(4,133) $(25,298) $(67,316) $(45,392) $ (77,376)
Adjustments to
reconcile net loss to
net cash used for
operating activities:
Depreciation and
amortization........ 461 3,429 13,024 8,575 28,383
Loss on disposal of
property and
equipment........... -- -- 464 248 --
Noncash common stock
and warrant
expense............. -- -- 786 786 --
Amortization of
deferred stock
compensation........ -- 1,089 1,354 1,081 955
Amortization of debt
issuance costs...... -- -- 846 274 1,063
Interest accretion on
restricted cash
equivalents and
investments......... -- -- (1,088) (580) (1,068)
Changes in operating
assets and
liabilities:
Accounts
receivable........ (265) (1,316) (8,306) (7,127) (28,272)
Prepaid expenses
and other assets.. (189) (748) (4,193) (3,970) (17,516)
Accounts payable... 671 5,089 2,791 4,981 22,980
Accrued expenses... 339 2,237 2,763 3,806 5,798
Accrued interest
payable........... -- -- 11,563 5,750 (3,489)
------- -------- -------- -------- ---------
Net cash used for
operating
activities....... (3,116) (15,518) (47,312) (31,568) (68,542)
------- -------- -------- -------- ---------
Cash flows from
investing activities:
Capital expenditures... (3,499) (22,489) (44,564) (26,680) (160,624)
Proceeds from sale of
property and
equipment............. -- -- 245 -- --
Businesses acquired,
net of cash received.. -- -- (5,654) -- (70,398)
Release of restricted
cash and investments.. -- -- -- -- 24,938
Increase in restricted
cash equivalents and
investments........... (378) (1,375) (42,773) (43,562) (13,413)
Other assets........... -- -- (11) (81) (15,637)
------- -------- -------- -------- ---------
Net cash used for
investing
activities....... (3,877) (23,864) (92,757) (70,323) (235,134)
------- -------- -------- -------- ---------
Cash flows from
financing activities:
Proceeds from issuance
of redeemable
convertible preferred
stock and warrants.... 9,409 23,320 2,176 2,176 --
Proceeds from issuance
of Service Metrics,
Inc. convertible
preferred stock....... -- -- 5,961 982 9,477
Proceeds from issuance
of common stock, net.. 32 222 72,530 71,362 14,006
Proceeds from issuance
of bridge financing
convertible notes..... -- 3,975 -- -- --
Repayment of notes
receivable from
stockholders.......... 7 34 140 90 --
Bank borrowings, net... (100) 3,000 (3,000) (3,000) --
Proceeds from sale-
leaseback
transactions.......... 552 932 4,035 4,190 776
Payments on capital
leases obligations.... (154) (720) (3,020) (1,689) (6,468)
Proceeds from equipment
loans and line of
credit facilities..... 1,296 16,480 18,611 18,611 --
Repayment of equipment
loans and line of
credit facilities..... (497) (1,306) (5,019) (3,468) (13,529)
Proceeds from
convertible
subordinated notes,
net................... -- -- -- -- 242,124
Proceeds from senior
notes, net of
discounts and offering
costs................. -- -- 193,400 194,000 73,246
------- -------- -------- -------- ---------
Net cash provided
by financing
activities....... 10,545 45,937 285,814 283,254 319,632
------- -------- -------- -------- ---------
Net increase in cash and
cash equivalents....... 3,552 6,555 145,745 181,363 15,956
Cash and cash
equivalents at
beginning of period.... 163 3,715 10,270 10,270 156,015
------- -------- -------- -------- ---------
Cash and cash
equivalents at end of
period................. $ 3,715 $ 10,270 $156,015 $191,633 $ 171,971
======= ======== ======== ======== =========
Supplemental disclosures
of cash flow
information:
Cash paid--interest.... $ -- $ 699 $ 4,923 $ 2,923 $ 34,010
======= ======== ======== ======== =========
Noncash investing and
financing activities:
Assets recorded under
capital leases...... $ 27 $ 2,700 $ 12,001 $ 6,848 $ 35,897
======= ======== ======== ======== =========
Conversion of note
payable to
stockholder to
preferred stock..... $ 200 $ -- $ -- $ -- $ --
======= ======== ======== ======== =========
Cumulative dividends
and accretion on
Series C and D
redeemable
convertible
preferred stock..... $ -- $ 1,413 $ 2,014 $ 2,014 $ --
======= ======== ======== ======== =========
Deferred compensation
on grants of stock
options............. $ -- $ 3,482 $ -- $ -- $ 2,778
======= ======== ======== ======== =========
Warrants issued for
financing
commitments......... $ -- $ 730 $ -- $ -- $ --
======= ======== ======== ======== =========
Conversion of bridge
financing
convertible notes to
redeemable
convertible
preferred stock..... $ -- $ 3,975 $ -- $ -- $ --
======= ======== ======== ======== =========
Conversion of
redeemable
convertible
preferred stock to
common stock........ $ -- $ -- $ 43,437 $ 43,437 $ --
======= ======== ======== ======== =========
Issuance of common
stock and assumption
of options in
connection with the
acquisition of
Cohesive Technology
Solutions, Inc...... $ -- $ -- $ -- $ -- $ 61,262
======= ======== ======== ======== =========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
(1) Summary of the Company and Significant Accounting Policies
The Company
Exodus Communications, Inc. ("Exodus" or "the Company") is a leading
provider of Internet system and network management solutions and technology
professional services for enterprises with mission-critical Internet
operations.
The accompanying supplemental consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the merger with Service Metrics, Inc. ("SMI" or
"Service Metrics") on November 23, 1999. The consolidated financial statements
have been restated for all periods presented as if SMI and the Company had
always been combined. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling-of-
interests method in financial statements that do not include the date of
consummation. These supplemental financial statements do not extend through the
date of consummation; however, they will become the historical consolidated
financial statements of the Company after financial statements covering the date
of consummation of the business combination are issued.
In recording the pooling-of-interests combination, the Company's
consolidated statement of operations for the year ended December 31, 1998 has
been combined with SMI's statement of operations for the period from May 19,
1998 ("inception") through December 31, 1998. The Company's consolidated
statements of operations for the nine-month periods ended September 30, 1998
and 1999 have been combined with SMI's statements of operations for the period
from inception through September 30, 1998, and the nine-month period ended
September 30, 1999, respectively. The consolidated balance sheets of the
Company as of December 31, 1998 and September 30, 1999, have been combined with
the balance sheets of Service Metrics as of the same dates.
Service Metrics, which was incorporated in May 1998, is a leading provider
of Internet monitoring applications and services that measure the consistency,
availability and performance of Web sites. SMI is based in Boulder, Colorado,
and has 79 employees as of November 1999.
In connection with the merger, the former shareholders and option holders of
SMI common stock received shares and options of Exodus common stock at the rate
of approximately 0.126 shares of Exodus common stock for each share of SMI
common stock. The Company issued a total of approximately 3,100,000 shares of
Exodus common stock in exchange for all outstanding shares of SMI common stock
and reserved approximately 380,000 shares of common stock for issuance upon the
exercise of SMI options the Company assumed pursuant to the merger agreement.
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
As SMI was incorporated in May 1998, supplemental results of operations for
the periods ended December 31, 1996 and 1997 are the same as Exodus' results of
operations. The results of operations previously reported by the separate
companies and the combined amounts presented in the supplemental consolidated
financial statements are summarized below.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
Year Ended ------------------
1998 1998 1999
---------- -------- --------
<S> <C> <C> <C>
Net revenues:
Exodus...................................... $ 52,738 $ 31,638 $140,186
Service Metrics............................. 7 -- 568
-------- -------- --------
Combined.................................... $ 52,745 $ 31,638 $140,754
======== ======== ========
Net loss:
Exodus...................................... $(66,442) $(45,057) $(71,880)
Service Metrics............................. (874) (335) (5,496)
-------- -------- --------
Combined.................................... $(67,316) $(45,392) $(77,376)
======== ======== ========
</TABLE>
Use of Estimates
The preparation of supplemental consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the supplemental consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition
The Company's revenues consist of (i) monthly fees from customer use of
Internet Data Center sites, network services, managed services, and
professional services and use of equipment and software provided by the
Company, (ii) revenues from sales of third-party equipment to customers and
(iii) fees for installation and certain professional services. Currently,
substantially all of the Company's revenue is derived from services. Revenues
(other than installation fees, equipment sales to customers and certain
professional services) are generally billed and recognized ratably over the
term of the contract, which is generally one year. Installation fees are
typically recognized at the time the installation occurs, and equipment
revenues are typically recognized when the equipment is delivered to the
customer or placed into service at an Internet Data Center. The Company sells
third-party equipment to its customers as an accommodation to facilitate their
purchase of services. One-time professional service fees are typically
recognized when services are rendered.
Cash Equivalents and Investments
Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less. As of September 30, 1999, cash equivalents
consisted principally of money market funds at four financial institutions.
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
The Company classifies its investments as "held-to-maturity." As of
September 30, 1999, such investments consisted of U.S. Treasury Notes and are
recorded at amortized cost.
The components of restricted cash equivalents and investments are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
U.S. treasury notes:
Due within one year........................... $10,733 $29,528
Due after one year through two years.......... 20,594 --
Money market funds.............................. 11,049 --
Cash collateral related to leases............... 3,238 5,916
------- -------
Total restricted cash equivalents and
investments.................................... $45,614 $35,444
======= =======
</TABLE>
See Notes 4 and 6 for additional information regarding restricted cash
equivalents and investments.
Financial Instruments and Concentration of Credit Risk
The carrying value of the Company's financial instruments, including cash
and cash equivalents, investments, accounts receivable, bank borrowings and
debt approximates fair market value. Financial instruments that potentially
expose the Company to a concentration of credit risk principally consist of
cash and cash equivalents, investments and accounts receivable.
The Company's customer base is primarily composed of businesses throughout
the United States. The Company performs ongoing credit evaluations of its
customers and maintains reserves for potential losses.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-
line basis over their respective estimated useful lives, which are generally
three to five years. Equipment recorded under capital leases and leasehold
improvements are amortized using the straight-line method over the shorter of
the respective lease term or estimated useful life of the asset.
Software Development Costs
The Company capitalizes software development costs incurred to develop
certain of the Company's collaborative system management services that are
included in the Company's co-location services in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed. Costs are
capitalized after technological feasibility is achieved; generally upon the
development of a working model. To date, software development costs
capitalizable under SFAS No. 86 have not been material.
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be recovered.
Stock-Based Compensation
The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans. Expense associated with stock-based
compensation is being amortized consistent with the method described in
Financial Accounting Standards Board (FASB) Interpretation No. 28 over the
vesting period of the individual options.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company evaluates its long-lived assets, including goodwill and certain
identifiable intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets or intangibles
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Unaudited Interim Financial Statements
The accompanying unaudited supplemental consolidated interim financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. In the opinion of management, the
accompanying unaudited supplemental consolidated financial statements have been
prepared on the same basis as the audited supplemental consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the Company's financial
position as of September 30, 1999, and the results of its operations and its
cash flows for the nine-month periods ended September 30, 1998 and 1999.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are comprised primarily of amounts
recorded in business acquisitions and are included in intangibles and other
assets on the accompanying supplemental consolidated balance sheets. The
goodwill and other intangible amounts related to the acquisitions are being
amortized on a straight-line basis over periods generally ranging from 5 to 10
years (see Note 2).
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
Net Loss Per Share
Basic and diluted net loss per share has been computed by dividing the net
loss attributable to holders of common stock by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per
share does not include the effect of the following common equivalent shares as
the effect of their inclusion is antidilutive during each period (in
thousands):
<TABLE>
<CAPTION>
Nine Months
Years Ended December Ended
31, September 30,
--------------------- -------------
1996 1997 1998 1998 1999
------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options........ 1,168 6,836 19,297 13,405 25,970
Shares issuable pursuant to warrants to
purchase common stock and redeemable
convertible preferred stock............... 2,548 11,252 724 1,068 253
Shares of redeemable convertible preferred
stock and convertible preferred stock of
SMI on an "as if converted" basis......... 62,148 136,468 1,553 543 2,586
Shares of convertible subordinated notes on
an "as if converted" basis................ -- -- -- -- 10,946
</TABLE>
Comprehensive Loss
There are no differences between consolidated net loss and comprehensive
loss for any period presented.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
(2) Business Combinations
On October 2, 1998, the Company purchased substantially all of the assets,
including customer agreements, and assumed certain liabilities of Arca Systems,
Inc. ("Arca"), a wholly owned subsidiary of Cyberguard Corporation. Arca, which
has been in business for more than 10 years, is a provider of advanced network
and system security consulting services and designs and develops security
technology solutions for complex and sensitive information systems. Arca
operates as a wholly owned subsidiary of the Company. Total consideration paid,
including direct acquisition costs, aggregated approximately $5,800,000. The
acquisition was accounted for as a purchase and the results of Arca have been
included from the acquisition date. The excess of the purchase price over the
fair value of tangible net assets acquired amounted to approximately $5,000,000
and was attributed primarily to workforce in place ($2,500,000) and goodwill
($2,400,000). These amounts are generally being amortized on a straight-line
basis over 10 years.
On February 1, 1999, the Company purchased all of the capital stock of
American Information Systems, Inc ("AIS"). AIS provides co-location services as
well as professional services. Total
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
consideration paid, including direct acquisition costs, aggregated
approximately $20,500,000. The acquisition was accounted for as a purchase with
the results of AIS included from the acquisition date. The excess of the
purchase price over the fair value of tangible net assets acquired amounted to
approximately $18,700,000 and was attributed primarily to goodwill
($15,000,000), customer lists ($3,200,000) and assembled workforce ($500,000).
These amounts are being amortized on a straight-line basis over periods ranging
from 5 to 7 years.
On July 27, 1999, the Company completed its acquisition of Cohesive
Technology Solutions, Inc. ("Cohesive"). Cohesive offers a variety of services
including network design and development, Internet-based and application
development and information technology strategy and project management.
Pursuant to the terms of the Agreement and Plan of Reorganization, each share
of Cohesive common stock was converted into the right to receive 0.02622 shares
of Exodus common stock and $1.338 in cash; each share of Cohesive Series A
preferred stock was converted into the right to receive $122.337 in cash; each
share of Cohesive Series B preferred stock was converted into the right to
receive $115.965 in cash; each share of Cohesive Series C preferred stock was
converted into the right to receive $5.00 in cash; and each share of Cohesive
Series D preferred stock, which automatically converted into Cohesive common
stock immediately prior to the merger, was converted into the right to receive
0.02622 shares of Exodus common stock and approximately $6.655 in cash. In
addition, the Company assumed each issued and outstanding option to purchase
shares of Cohesive common stock which was converted into an option to purchase
Exodus common stock using an exchange ratio of 0.03651.
Pursuant to the exchange ratios applied in the acquisition, the Company
issued 800,398 shares of Exodus common stock and paid approximately $50,000,000
in cash and assumed options to purchase a total of 204,356 shares of Exodus
common stock for a total purchase price of approximately $112,000,000. Of the
cash consideration, $10,000,000 was deposited in an escrow account to secure
and collateralize the indemnification obligations of Cohesive stockholders to
Exodus and certain affiliates of Exodus. The acquisition was accounted for as a
purchase with the results of Cohesive included from the acquisition date. The
excess of the purchase price over the fair value of tangible net assets
acquired amounted to approximately $107,900,000 and was attributed primarily to
goodwill ($69,300,000), customer lists ($32,300,000) and workforce in place
($6,300,000). These amounts are being amortized on a straight-line basis over
periods ranging from 5 to 8 years.
The following summary, prepared on an unaudited pro forma basis, combines
the Company's supplemental consolidated results of operations with Arca's,
AIS', and Cohesive's results of operations, as if Arca, AIS, and Cohesive had
been acquired as of January 1, 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended
------------------ September 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Revenues................................. $ 41,004 $103,774 $169,945
Net loss attributable to holders of
common stock............................ $(24,009) $(87,022) $(87,215)
Basic and diluted net loss per share..... $ (2.82) $ (1.37) $ (1.04)
Shares used in pro forma per share
calculation............................. 8,514 63,704 83,594
</TABLE>
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined operations.
In November 1999, the Company agreed to acquire Global OnLine Japan Co.,
Ltd., an Internet solutions provider based in Tokyo. The transaction is
expected to close by the end of December 1999 and will be accounted for as a
purchase.
(3) Financial Statement Components
Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Data centers and related equipment........... $16,316 $43,959 $150,239
Furniture, fixtures, computer equipment and
other....................................... 12,815 33,179 94,892
Construction in progress..................... -- 8,497 40,576
------- ------- --------
29,131 85,635 285,707
Less accumulated depreciation and
amortization................................ 3,961 17,063 40,315
------- ------- --------
$25,170 $68,572 $245,392
======= ======= ========
</TABLE>
Computer and other equipment and certain data center infrastructure are
recorded under capital leases that aggregated $4,492,000, $20,528,000, and
$56,425,000 as of December 31, 1997 and 1998, and September 30, 1999,
respectively. Accumulated amortization on the assets recorded under capital
leases aggregated $722,000, $4,452,000, and $12,621,000 as of December 31, 1997
and 1998, and September 30, 1999, respectively.
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Accrued payroll and related expenses............. $1,183 $2,956 $10,146
Other............................................ 1,836 3,920 10,148
------ ------ -------
$3,019 $6,876 $20,294
====== ====== =======
</TABLE>
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
(4) Bank Borrowings and Debt
A summary of equipment loans and line of credit facilities follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
$1,800,000 equipment line of credit facility;
effective interest rate of 16.4%; principal and
interest due April 2000 through September 2000;
collateralized by equipment.................... $ 1,393 $ 981 $ 583
$3,000,000 equipment line of credit facility-
April 1997; effective interest rate of 12.9%;
principal and interest due monthly through July
2001; collateralized by equipment.............. 2,756 2,080 1,448
$6,500,000 equipment line of credit facility;
effective interest rate of 15.9%; principal and
interest due monthly through July 2001;
collateralized by equipment.................... 6,312 4,842 3,523
$3,000,000 equipment line of credit facility-
August 1997; effective interest rate of 16.2%;
principal and interest due monthly through May
2001; collateralized by equipment.............. 2,787 2,192 1,617
$5,000,000 equipment line of credit facility;
effective interest rate of 16.2%; principal and
interest due monthly through September 2001;
collateralized by equipment.................... 3,044 3,084 2,322
$10,000,000 equipment line of credit facility;
effective interest rate of 13.8%; principal and
interest due monthly through August 2002;
collateralized by equipment.................... -- 8,883 7,329
$8,000,000 line of credit facility; interest
rate of 12.8%; principal and interest due March
1999; collateralized by all of the Company's
assets......................................... -- 8,000 --
Other........................................... 178 -- 500
------- ------- -------
16,470 30,062 17,322
Less current portion............................ 3,777 14,367 7,722
------- ------- -------
Equipment loans and line of credit facilities,
less current portion........................... $12,693 $15,695 $ 9,600
======= ======= =======
</TABLE>
As of December 31, 1998, aggregate maturities for outstanding equipment
loans and line of credit facilities, for fiscal 1999, 2000, 2001 and 2002 were
$14,367,000, $7,342,000, $5,943,000 and $2,410,000, respectively.
On July 1, 1998, the Company issued $200,000,000 of 11 1/4% Senior Notes
("Original Senior Notes") due 2008 for aggregate net proceeds of approximately
$193,400,000 (net of discounts to the initial purchasers and offering
expenses). Interest is payable semiannually on January 1 and July 1 of each
year commencing January 1, 1999. As of December 31, 1998, restricted cash
equivalents and investments include approximately $42,400,000 deposited with an
escrow agent that will be used to pay the first four semiannual interest
payments when due. Interest payments of $11,250,000 were made in January and
July 1999. Subject to significant exceptions, the Original Senior Notes
indenture restricts, among other things, the Company's ability to incur
additional indebtedness and the use of proceeds therefrom, pay dividends, make
certain other restricted payments, incur certain liens to secure indebtedness
or engage in merger transactions.
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
On March 3, 1999, the Company issued $250,000,000 of 5% Convertible
Subordinated Notes due March 15, 2006 (the "Convertible Notes") for aggregate
net proceeds of approximately $242,100,000 (net of offering expenses). Proceeds
from the sale of the Convertible Notes may be used only for limited purposes.
Proceeds in the amount of $48,500,000 may be used for general corporate
purposes. The remaining $193,600,000 may be used only to finance the purchase
of assets or other businesses to be used in the Company's business.
The Convertible Notes are convertible into the Company's common stock at a
conversion rate of 43.7852 shares per $1,000 principal amount of Convertible
Notes, subject to adjustment in certain events and at each holder's option. The
Convertible Notes will not be subject to redemption prior to March 20, 2001,
and generally will be redeemable on or after that date at the option of the
Company, at the redemption prices set forth in the indenture to the Convertible
Notes ("Convertible Notes Indenture"), subject to certain provisions. In the
event of a Change in Control (as defined in the Convertible Notes Indenture),
each holder of the Convertible Notes has the right, subject to certain
conditions and restrictions, to require the Company to repurchase all or any
part of the holder's Convertible Notes at a repurchase price of 100% of the
principal amount, plus accrued interest of the Convertible Notes being
repurchased. Interest on the Convertible Notes is payable on March 15 and
September 15 of each year, commencing on September 15, 1999. Accordingly, the
Company made its first interest payment in the amount of approximately
$6,700,000 on September 15, 1999. The Convertible Notes are unsecured
obligations of the Company and are subordinated to all existing and future
Senior Indebtedness (as defined in the Convertible Notes Indenture) and
effectively subordinated to all indebtedness and other liabilities of the
Company's subsidiaries.
On June 22, 1999, the Company issued an additional $75,000,000 of Senior
Notes due 2008 ("Additional Senior Notes") at 100.50% plus accrued interest, if
any, from June 22, 1999, for aggregate net proceeds of approximately
$73,200,000 (net of offering expenses). The Company issued the Additional
Senior Notes under the indenture dated July 1, 1998 under which it previously
issued the Original Senior Notes discussed above. The Additional Senior Notes
will be subject to substantially the same terms and conditions as the Original
Senior Notes. Interest is payable semi-annually on January 1 and July 1 of each
year commencing July 1, 1999. Concurrent with the closing of the offering, the
Company deposited approximately $8,400,000 with an escrow agent that would be
sufficient to pay when due the first three interest payments. An interest
payment of approximately $211,000 was made on July 1, 1999 representing
interest from June 22, 1999 to July 1, 1999.
On July 22, 1999, the Company amended its revolving line of credit agreement
with a financial institution, increasing the total commitment amount from
$7,000,000 to $10,000,000. Pursuant to the terms of the new amendment, the line
of credit can be used for working capital requirements, foreign exchange
forward contracts, and letters of credit. The amount available for working
capital borrowings is limited to $4,000,000. In addition, total foreign
exchange contracts at any one time cannot exceed 10 times the amount of the
foreign exchange sublimit, which is a maximum of $1,000,000. The line of credit
will expire in July 2000 and is subject to certain covenants.
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
(5) Redeemable Convertible Preferred Stock and Stockholders' (Deficit) Equity
Redeemable Convertible Preferred Stock and Warrants
In February and March 1996, the Company issued 7,798,483 shares of Series A
redeemable convertible preferred stock at $0.413 per share. In October 1996, the
Company issued 7,738,095 shares of Series B redeemable convertible preferred
stock at $0.84 per share. In March and June 1997, the Company received a total
of approximately $3,975,000 in cash in exchange for bridge financing convertible
promissory notes. In June 1997, the Company issued 15,789,868 shares of Series C
redeemable convertible preferred stock for $1.362 per share in exchange for
approximately $17,500,000 in cash and the conversion of the bridge financing
notes. In December 1997, the Company issued 2,631,579 shares of Series D
redeemable convertible preferred stock at $2.85 per share for aggregate cash
proceeds of $7,500,000.
In 1996, in connection with various financing arrangements, the Company
issued warrants to purchase an aggregate of 68,628 shares of the Company's
common stock at prices ranging from $0.60 to $0.67 per share. Also in 1996, in
connection with various lease agreements and other matters, the Company issued
warrants to purchase 329,167 shares of the Company's Series B1 redeemable
convertible preferred stock at $0.84 per share.
In March and June 1997, in connection with the bridge financing convertible
promissory notes discussed above, the Company issued warrants to purchase
198,697 shares of the Company's Series B redeemable convertible preferred stock
at $0.84 per share. In April 1997, in connection with the $3,000,000 equipment
line of credit, the Company issued warrants to purchase 196,429 shares of the
Company's Series B1 redeemable convertible preferred stock at $0.84 per share.
In June 1997, in connection with the issuance of the Company's Series C
redeemable convertible preferred stock, the Company issued warrants to purchase
1,579,011 shares of the Company's Series C redeemable convertible preferred
stock at $1.362 per share. In August and September 1997, in connection with the
$3,000,000 and the $6,500,000 equipment lines of credit, the Company issued
warrants to purchase a total of 271,598 shares of the Company's Series C1
redeemable convertible preferred stock at $1.362 per share. In December 1997,
in connection with the $8,000,000 line of credit facility and the $5,000,000
equipment line of credit, the Company issued warrants to purchase 247,826 and
125,000 shares, respectively, of the Company's Series D1 redeemable convertible
preferred stock at $2.85 per share.
In March 1998, in connection with a strategic alliance, the Company issued
warrants to purchase an aggregate of 240,000 shares of the Company's common
stock at a price of $3.75 per share.
The fair value of all warrant issuances, calculated using the Black-Scholes
option pricing model, with the following assumptions: dividends--none; expected
life--contractual term; risk-free interest rate of 5.7% to 6.7%; volatility of
60%, was not material except as follows:
. The 1,579,011 warrants issued in connection with the sale of the Series C
redeemable convertible preferred stock for which the fair value was
determined to be $1,200,000. This amount was recorded as a reduction in
the carrying value of the Series C redeemable convertible preferred stock
and recorded as the carrying value of the Series C warrants.
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
. The 247,826 and 125,000 warrants issued in connection with the $8,000,000
line of credit facility and $5,000,000 equipment line of credit,
respectively, for which the values were determined to be $530,000 and
$200,000, respectively. These amounts are being amortized on a straight-
line basis through the commitment periods of the credit facilities.
. The 240,000 warrants issued in connection with the strategic alliance for
which the value was determined to be $525,000. This amount was recorded
as marketing and sales expense in the accompanying supplemental
consolidated statement of operations for the year ended December 31,
1998.
Redeemable convertible preferred stock and related warrants issued and
outstanding as of December 31, 1997 was as follows:
<TABLE>
<CAPTION>
Redeemable Convertible
Preferred Stock Warrants
----------------------- ----------------------
Shares Issued and Carrying Issued and Carrying
Series Designated Outstanding Value Outstanding Value
------ ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
A................. 7,798,483 7,798,483 $ 3,168,000 -- $ --
A1................ 7,798,483 -- -- -- --
B................. 8,600,000 7,775,930 6,473,000 160,862 --
B1................ 8,600,000 65,524 55,000 466,072 --
C................. 17,850,000 15,845,855 20,333,000 1,523,024 1,242,000
C1................ 17,850,000 -- -- 271,598 --
D................. 3,231,579 2,631,579 7,246,000 -- --
D1................ 3,231,579 -- -- 372,826 730,000
---------- ---------- ----------- --------- ----------
74,960,124 34,117,371 $37,275,000 2,794,382 $1,972,000
========== ========== =========== ========= ==========
</TABLE>
As of December 31, 1997 and 1998, the Company has 74,652 and 724,340
warrants to purchase common stock outstanding, respectively.
Convertible Preferred Stock of Service Metrics, Inc.
In May 1998, SMI issued 540,936 shares of Series A convertible preferred
stock for approximately $1,000,000 in cash. In December 1998, SMI issued
1,012,222 shares of Series B convertible preferred stock for approximately
$5,000,000 in cash. In January 1999, SMI issued an additional 303,667 shares of
Series B convertible preferred stock for approximately $1,500,000 in cash. In
July 1999, SMI issued 728,953 shares of Series C convertible preferred stock
for approximately $8,000,000 in cash.
The Series A, B, and C convertible preferred stock ("SMI Preferred Stock")
was convertible, at the option of the holder, into common stock of SMI based on
formulas specified in the preferred stock agreements. The SMI Preferred Stock
would automatically convert into common stock upon the closing of an initial
public offering of SMI, where the net cash proceeds were at least $15,000,000
and the public offering price would be at least $2.50 per share. The holders of
the SMI Preferred Stock were entitled to receive dividends at the rate of $0.16
for Series A, $0.48 for Series B, and $1.10 for Series C, when and if declared
by the Board of Directors. These dividends were
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
noncumulative. Holders of the SMI preferred stock were entitled to vote upon any
matter submitted to the stockholders for a vote and have one vote for each full
share of common stock into which their SMI Preferred Stock would be converted at
the date of the vote. The SMI Preferred Stock had liquidation privileges
generally equal to the SMI Preferred Stock purchase price per share plus any
declared but unpaid dividends and was in preference to shares of common stock.
In connection with the merger between Exodus and SMI on November 23, 1999,
all of the SMI preferred shareholders converted their SMI Preferred Stock into
SMI common stock which was converted into Exodus Common Stock based on a
specified exchange ratio.
Initial Public Offering
On March 24, 1998, the Company completed its initial public offering ("IPO")
of 20,500,000 shares of its common stock. Net proceeds to the Company, after
deducting underwriting discounts and commissions and offering expenses,
aggregated approximately $69,800,000. At the closing of the IPO, all redeemable
convertible preferred stock was converted to common stock and all warrants to
purchase redeemable convertible preferred stock were converted to warrants to
purchase common stock on a one-for-three basis. In connection with the IPO,
certain warrant holders exercised their warrants to purchase redeemable
convertible preferred stock (which converted into common stock), which resulted
in additional proceeds of $1,842,000.
Stock Purchase and Stock Option Plans
During 1995, the Company adopted a Stock Purchase Plan under which 1,466,668
shares of common stock were authorized. Awards totaling 429,472 shares of
common stock were granted to individuals through 1996, at a price of $0.06 per
share, the estimated fair market value of the shares on the date of the award.
No awards were granted during the years ended December 31, 1997 and 1998.
Generally, the shares are subject to a 50-month vesting period. As of December
31, 1998, 17,204 shares remained unvested. Unvested shares are subject to
repurchase, at the Company's option, at the original purchase price upon a
participant's termination. Of the shares granted, 185,204 had been repurchased
by the Company as of December 31, 1998.
In January 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved a total of 2,400,000 shares of the Company's
common stock for issuance thereunder. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions at a purchase
price of 85% of the lower of the fair market value of the common stock on the
first day of the offering period or on the last day of the purchase period.
During 1998, 218,264 shares were issued under the Purchase Plan at a weighted-
average purchase price of $3.34 per share.
In January 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan"), which served as the successor to the Company's 1995 Stock Option
Plan (the "1995 Plan"). Options granted under the 1995 Plan before its
termination continue to remain outstanding in accordance with their terms, but
no further options may be granted under the 1995 Plan. Options granted under
the 1995 Plan were granted with exercise prices not less than fair market value
at the date of grant as determined by the Board of Directors, generally vested
12% after 6 months from the date of grant
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
and 2% per month thereafter, and generally are exercisable for a term of 10
years after the date of grant. Under the 1997 Plan, the Company reserved
8,800,000 shares of its common stock for issuance to employees and consultants
to be granted as either incentive or nonqualified stock options. Options granted
under the 1997 Plan generally vest 12% after 6 months from the date of grant and
2% per month thereafter and are generally exercisable for a term of 10 years
after the date of grant.
In January 1998, the Company adopted the 1998 Equity Incentive Plan (the
"1998 Plan"). On the effective date of the Company's IPO, the 1998 Plan became
effective as the successor to the 1997 Plan. The Company has reserved 6,000,000
shares of common stock for issuance under the 1998 Plan in addition to the
shares that remain from the 1997 Plan. The 1998 Plan permits the grant of
either incentive or nonqualified stock options. Options granted under the 1998
Plan will have a maximum term of 10 years and generally will vest over 50
months. The 1998 Plan will terminate in January 2008.
On June 2, 1999, the Company's stockholders approved an amendment to the
Company's 1998 Equity Incentive Plan to increase the number of shares of common
stock reserved for issuance thereunder by 4,000,000 shares, from 6,000,000
shares to 10,000,000 shares.
In January 1998, the Company adopted the 1998 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 800,000 shares of the Company's
common stock for issuance thereunder. Each nonemployee director who is or
becomes a member of the Board of Directors on or after the effective date of
the Company's IPO, with certain limited exceptions, will initially be granted
an option for 40,000 shares of the Company's common stock and, thereafter, an
option to purchase an additional 10,000 shares of the Company's common stock
annually. Initial options granted under the Directors Plan will vest as to 33
1/3% of the shares on each annual anniversary of the date of grant. Annual
grants will vest 25% on each annual anniversary of the date of grant. The
exercise price of the options granted under the Directors Plan will be at the
fair market value of the Company's common stock on the date of grant.
In January 1998, the Company granted stock options to purchase 1,333,336
shares of common stock to an officer of the Company, of which half have an
exercise price of $2.25 per share and vest 100% after 3 years and half have an
exercise price of $4.50 per share and vest 100% after 5 years. The stock
options accelerate and become fully vested if the Company is acquired or sells
all or substantially all of its assets.
In March 1998, the Company granted a stock option to an officer of the
Company to purchase 2,887,924 shares of common stock with an exercise price of
$2.25 per share (fair market value on the date of grant) that vests as to 12%
of such shares in September 1998 and vests as to an additional 2% per month
thereafter.
In January 1999, the Company adopted the 1999 Stock Option Plan (the "1999
Plan"). Under the 1999 Plan, the Company has reserved 8,000,000 shares of
common stock for issuance to employees, consultants, and to be used for
acquisitions, to be granted as nonqualified stock options. Options granted
under the 1999 Plan generally will vest over 50 months and are generally
exercisable for a term of 10 years from the date of grant.
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
Service Metrics, Inc. Stock Option Plan
In July 1998, the SMI Board of Directors adopted the 1998 Stock Option Plan.
Under the Plan, officers, employees and certain other individuals could be
granted options and rights to purchase shares of common stock. Options granted
could be either incentive stock options or non-statutory stock options. SMI had
reserved 512,624 shares of common stock for issuance of stock options. As
of December 31, 1998, 359,841 shares were available for future grant. Depending
on the type of option, the exercise price could not be less than the fair
market value per common share on the date of grant or as determined by the
Board of Directors. Options were exercisable over periods determined by the
Board of Directors, not to exceed 10 years, and generally were to vest ratably
over 4 years. In the event of the termination of the optionee's relationship
with SMI, vested options yet to be exercised would remain exercisable for such
period of time ending on the earlier of 3 months after termination or the
expiration of the term of the option, or as determined by the Board of
Directors.
In connection with the merger between Exodus and SMI on November 23, 1999,
all of the SMI stock options were assumed by Exodus and converted into Exodus
stock options based on a specified exchange ratio.
Fair Value Disclosures
The Company uses the intrinsic value method in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for any of its stock options because the exercise price of each
option equaled or exceeded the fair value of the underlying common stock as of
the grant date for each stock option, except for stock options granted by the
Company from March 1997 through December 1997 and stock options granted by SMI
from January 1999 to September 1999. With respect to the stock options granted
by the Company from March to December 1997, the Company recorded deferred stock
compensation of $3,482,000 for the difference at the grant date between the
exercise price and the fair value of the common stock underlying the options.
With respect to the stock options granted by SMI from January 1999 to September
1999, SMI recorded deferred stock compensation of $2,778,000. These amounts are
being amortized consistent with the method described in FASB Interpretation No.
28 over the vesting period of the individual options, generally 48 to 50
months. Had compensation cost been determined in accordance with SFAS No. 123
for all of the Company's and SMI's stock-based compensation plans, net loss
attributable to holders of common stock and net loss per share would have been
changed to the amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Net loss applicable to holders of common
stock:
As reported................................ $(4,133) $(26,711) $(69,330)
Pro forma.................................. $(4,133) $(26,711) $(77,009)
Basic and diluted net loss per share:
As reported................................ $ (0.54) $ (3.46) $ (1.10)
Pro forma.................................. $ (0.54) $ (3.46) $ (1.22)
</TABLE>
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
The fair value of each stock option is estimated on the date of grant using
the minimum value method prior to the IPO and the Black-Scholes option pricing
model after the IPO, with no expected dividends and the following weighted-
average assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Expected life............................... 2.55 years 2.59 years 3.09 years
Risk-free interest rate..................... 6.28% 5.81% 4.98%
Volatility.................................. -- -- 80.00%
</TABLE>
The fair value of purchase rights granted under the Purchase Plan is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for grants in 1998: no expected
dividends, expected volatility of 80%, risk-free interest rate of 5.26%, and
expected life of 1.33 years. The weighted-average fair value of purchase rights
granted under the Purchase Plan during 1998 was $2.49 per share.
A summary of the Company's stock option plans including SMI is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 500,332 $0.06 1,168,132 $0.06 6,837,144 $0.19
Granted................. 898,936 0.07 6,447,200 0.21 15,797,187 5.67
Forfeited............... (211,400) 0.06 (423,440) 0.16 (1,155,876) 2.05
Exercised............... (19,736) 0.06 (354,748) 0.08 (2,183,516) 0.66
--------- --------- ----------
Outstanding at end of
year................... 1,168,132 0.06 6,837,144 0.19 19,294,939 4.51
--------- --------- ----------
Exercisable at end of
year................... 322,668 0.06 895,800 0.11 1,538,360 1.22
========= ========= ==========
Weighted-average fair
value of options
granted during the year
at market.............. 898,936 0.01 1,333,068 0.01 14,280,400 3.14
Weighted-average fair
value of options
granted during the year
at less than market ... -- -- 5,114,132 0.58 183,457 1.55
Weighted-average fair
value of options
granted during the year
at greater than
market................. -- -- -- -- 1,333,336 1.06
</TABLE>
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Exercise Prices Shares Life Price Shares Price
--------------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.06 to 0.19.............. 4,394,927 8.51 years $0.13 996,344 $0.12
$0.94 to 2.25.............. 4,680,308 9.13 2.07 413,068 1.82
$3.75 to 6.06.............. 4,964,840 9.64 5.34 41,272 4.96
$7.67 to 10.00............. 5,254,864 9.84 9.50 87,676 9.00
---------- ---------
19,294,939 9.31 4.51 1,538,360 1.22
========== =========
</TABLE>
Stockholder Rights Plan
In January 1999, the Company adopted a Stockholder Rights Plan ("the Rights
Plan"). The Rights Plan is designed to protect the long-term value of the
Company for its stockholders during any future unsolicited acquisition attempt.
In connection with the Rights Plan, the Company declared a dividend of one
preferred share purchase right for each share of the Company's common stock
outstanding on February 11, 1999 ("Record Date") and further directed the
issuance of one such right with respect to each share of the Company's common
stock that is issued after the Record Date, except in certain circumstances.
On June 2, 1999, stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized number of
shares of common stock issuable by the Company from 100,000,000 to 300,000,000.
Stock Splits
On April 12, 1999, the Company completed a two-for-one stock split
accomplished in the form of a stock dividend. On August 12, 1999, the Company
completed a second two-for-one stock split accomplished in the form of a stock
dividend. Share and per share amounts in the accompanying supplemental
consolidated financial statements reflect both two-for-one stock splits
retroactively.
On November 19, 1999, the Company announced a two-for-one stock split,
payable December 14, 1999 to holders of common stock of record as of November
30, 1999. Share and per share information in the accompanying supplemental
consolidated financial statements does not reflect this stock split.
(6) Commitments and Contingencies
Leases
The Company has entered into a number of operating leases for its facilities.
The leases expire from 1999 through 2010. As of December 31, 1998, the Company
had collateralized letters of credit aggregating $3,238,000 for these leases.
The related funds are included in restricted cash equivalents and investments on
the accompanying supplemental consolidated balance sheet. The Company also
leases certain data center infrastructure and equipment under capital leases.
Certain of these capital leases were entered into as sales-leaseback
transactions. No gain or loss was
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
recorded in any such transaction due to the short holding period from the time
the assets were purchased until the time of the sale-leaseback. Future minimum
lease payments as of December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
<S> <C> <C>
1999....................................................... $ 6,470 $ 9,206
2000....................................................... 6,720 9,892
2001....................................................... 6,009 9,964
2002....................................................... 676 9,508
2003....................................................... -- 9,271
Thereafter................................................. -- 43,994
------- -------
Total minimum lease payments............................... 19,875 $91,835
=======
Less amount representing imputed interest.................. 3,063
-------
Present value of minimum lease payments.................... 16,812
Less current portion....................................... 5,223
-------
Capital lease obligations, less current portion............ $11,589
=======
</TABLE>
The Company's rent expense was $248,000, $1,764,000, $5,583,000, $3,389,000
and $11,143,000 for the years ended December 31, 1996, 1997 and 1998, and the
nine months ended September 30, 1998 and 1999, respectively.
Telecommunications Agreements
In September 1997, the Company entered into an agreement to obtain
telecommunications services for a period of 60 months with a minimum commitment
of $230,000 per month. In January 1999, this original agreement was replaced
with a new agreement for a period of 60 months with a minimum commitment of
$1,000,000 per month.
In July 1998, the Company entered into an agreement to obtain
telecommunications services for a period of 36 months with a minimum commitment
of approximately $500,000 per month.
In August 1999 the Company entered into capacity purchase agreements. The
agreements provide for a total potential outlay of approximately $105,000,000
for fiber capacity and related maintenance covering approximately 25 years.
Royalty Agreement
In April 1997, the Company entered into an agreement with a software company
under which the Company licensed certain software for a royalty based on 1% of
the Company's gross revenues. Royalty expenses related to this agreement have
not been significant to date.
In March 1999, this agreement was replaced with a new agreement that
obligates the Company to make certain future payments for the use of the
software license. These payments are not expected to have a material effect on
the consolidated financial statements.
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
Contingencies
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes that it has adequate legal defenses
and that the ultimate outcome of these actions will not have a material effect
on the Company's consolidated financial position and results of operations.
(7) Income Taxes
The following table reconciles the expected corporate federal income tax
expense (benefit) (computed by multiplying the Company's loss before taxes by
34%) to the Company's actual income tax expense (benefit) (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Expected income tax benefit..................... $(1,405) $(8,602) $(22,895)
Permanent differences........................... 2 15 81
Net operating loss not benefited................ 1,403 8,587 22,814
------- ------- --------
Actual income tax expense (benefit)........... $ -- $ -- $ --
======= ======= ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1997 and
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $10,941 $35,137
Difference between book and tax depreciation............. -- 2,284
Reserves and accruals.................................... 195 1,234
Research and experimentation credit carryforwards........ 113 548
Deferred compensation.................................... 437 957
Other.................................................... 41 6
------- -------
Total gross deferred tax assets........................ 11,727 40,166
Less valuation allowance................................... 11,708 40,166
------- -------
19 --
Deferred tax liabilities:
Difference between book and tax depreciation............. (19) --
------- -------
Net deferred tax assets................................ $ -- $ --
======= =======
</TABLE>
As of December 31, 1998, the Company has a net operating loss carryforward
for federal and state purposes of $94,961,000 and $48,753,000, respectively. The
difference between the federal and state net operating loss carryforward is due
to the 50% limitation of net operating loss carryforwards for state purposes.
The federal net operating loss carryforward will expire from 2011 through 2018.
The state net operating loss carryforward will expire from 2001 through 2003.
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
Gross deferred tax assets as of December 31, 1998 include approximately
$3,430,000 relating to the exercise of stock options, which will be credited to
equity when realized.
The net change in the valuation allowance was an increase of $9,654,000 and
$28,458,000 for the years ended December 31, 1997 and 1998, respectively.
Federal and state tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift in the
ownership of the Company, which constitutes an "ownership change" as defined by
Internal Revenue Code, Section 382. The Company has not determined if an
ownership change, as defined, has occurred. The Company plans to compute exact
limitations upon realization of taxable earnings and associated utilization of
the net operating loss carryforwards.
(8) Segment Information
The Company operates a number of Internet Data Centers throughout the United
States and one in Europe. The Company establishes these Internet Data Centers
using a consistent investment and operating model. As a result, the expected
long-term economic characteristics and financial performance are similar. In
particular, each data center provides the same Internet related services to a
similar type of customer who may locate its servers in multiple Internet Data
Centers. As a result, the Company believes these Internet Data Centers
represent one reportable segment under the aggregation criteria of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information.
Internet Data Center operations primarily include services such as server
infrastructure support, Internet connectivity, and managed services.
With the acquisition of Cohesive on July 27, 1999, management began
reviewing financial information and business performance and allocating
resources based on both Internet Data Center operations and by professional
services, given Cohesive's expertise in networking, Internet-based applications
and technology solutions. As a result, the Company identified professional
services as an additional reportable segment. Professional services primarily
include services such as network design and development, Internet-based and
application development, and information technology strategy.
Financial information for the Company's reportable segments is presented
below:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Internet Data Centers........ $ 3,130 $ 12,408 $ 52,263 $ 31,423 $119,650
Professional services........ -- -- 482 215 21,104
------- -------- -------- -------- --------
Total revenues............. $ 3,130 $ 12,408 $ 52,745 $ 31,638 $140,754
======= ======== ======== ======== ========
Operating profit (loss):
Internet Data Centers........ $ * $ (1,243) $ (1,492) $ (3,204) $ 23,166
Professional services........ * -- (351) 17 1,880
Corporate areas.............. * (23,549) (55,730) (37,095) (82,378)
------- -------- -------- -------- --------
Total operating loss....... $(4,094) $(24,792) $(57,573) $(40,282) $(57,332)
======= ======== ======== ======== ========
</TABLE>
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
---------------- -------------
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Total assets:
Internet Data Centers.......................... $ * $ 52,725 $200,616
Professional services.......................... * 212 3,011
Corporate assets............................... * 245,861 481,198
------- -------- --------
Total assets................................. $40,973 $298,798 $684,825
======= ======== ========
</TABLE>
- --------
*Information is not available.
<PAGE>
EXODUS COMMUNICATIONS, INC.
SUPPLEMENTAL SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance
Beginning at End of
Classification of Year Additions Deductions Year
- -------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996....... $ -- $ 15 $ -- $ 15
Year ended December 31, 1997....... 15 742 (66) 691
Year ended December 31, 1998....... 691 1,410 (280) 1,821
</TABLE>
<PAGE>
ITEM 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
23.01 Consent of KPMG, LLP, Independent Auditors
99.01 Press Release dated November 23, 1999, regarding acquisition
of Global OnLine
99.02 Press Release dated November 23, 1999, regarding acquisition
of Service Metrics
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 24, 1999
EXODUS COMMUNICATIONS, INC.
By: /s/ Ellen M. Hancock
----------------------------------------------
Ellen M. Hancock
Chief Executive Officer and President Officer
<PAGE>
EXHIBIT INDEX
Number Description
23.01 Consent of KPMG, LLP, Independent Auditors
99.01 Press Release dated November 23, 1999, regarding acquisition
of Global OnLine
99.02 Press Release dated November 23, 1999, regarding acquisition
of Service Metrics
<PAGE>
Exhibit 23.01
CONSENT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors
Exodus Communications, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-48273, 333-72525, 333-85325 and 333-83179) on Form S-8 and the registration
statement (No. 333-79059) on Form S-3 and the registration statements (No.
333-62413 and 333-85583) on Form S-4 of Exodus Communications, Inc. of our
report dated November 23, 1999, relating to the supplemental consolidated
balance sheets of Exodus Communications, Inc. and subsidiaries as of December
31, 1997 and 1998, and the related supplemental 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 related schedule, which
report appears in the November 29, 1999, Current Report on Form 8-K of Exodus
Communications, Inc.
/s/ KPMG LLP
Mountain View, California
November 23, 1999
<PAGE>
Exhibit 99.01
EXODUS TO ACQUIRE GLOBAL ONLINE OF JAPAN
Accelerates Entry into the Japanese Market
November 23, 1999 -
Exodus Communications(TM), Inc. (NASDAQ: EXDS), a leader in complex Internet
hosting and managed services, today announced it has entered into a definitive
agreement to acquire Global OnLine Japan Co., Ltd. (GOL) of Tokyo, Japan. GOL is
one of Japan's longest established and most innovative Internet solutions
providers. The acquisition of GOL enables Exodus to accelerate its entry into
the Japanese market and expand its managed service offerings and international
customer base.
GOL provides Internet access and a range of services, including Internet
hosting, comprehensive web design and e-commerce solutions. GOL has an extensive
network within Japan that includes network exchange points with 38 Japanese
ISPs.
Roger J. Boisvert, President and CEO of GOL, will become President and
Representative Director of Exodus Communications, K.K., a Japanese subsidiary of
Exodus that will be the successor to GOL. "The GOL team is excited to join the
Exodus international family," said Mr. Boisvert. "We intend to continue to
provide our clients with the high-quality service they are accustomed to, while
expanding our capabilities to provide the complex web hosting solutions Exodus
is known for. Our customers will benefit from Exodus' Internet expertise,
worldwide backbone, advanced network infrastructure, managed service offerings
and world-class customer service."
"We are pleased to welcome the Global OnLine team to Exodus. GOL is a proven
leader in the Japanese Internet market," said Ellen M. Hancock, President and
CEO of Exodus. "The addition of GOL enables us to expand quickly into the
Japanese marketplace and significantly enhance our position as a worldwide
leader in the complex Web hosting market."
GOL brings a team of more than 70 bilingual Internet application, network
engineering, and customer service professionals to Exodus. Exodus plans to
accelerate its entry into Japan by utilizing GOL's considerable expertise and
knowledge of the Japanese marketplace. In September, Exodus secured $105 million
international network capacity, partially to support its Japanese expansion
plans.
<PAGE>
"The acquisition of GOL is the first step in establishing Exodus as the leading
provider of complex web hosting services in the Asia Pacific region," said Bob
Weingarten, General Manager for Exodus Asia Pacific."This region is increasingly
important to our existing customer base and emerging as a base for high-growth
Internet companies."
Subject to normal and customary closing conditions, the transaction is expected
to close by the end of December 1999. Exodus expects to account for the
acquisition as a purchase.
About Global OnLine
GOL is one of Japan's benchmark Internet Service Providers. Headquartered in
Shinjuku, Tokyo, GOL offers a comprehensive range of Internet services backed by
superior technical support. Roger J. Boisvert, President and CEO of GOL,
established the first government authorized commercial Internet Service Provider
in Japan in 1993. He went on to found GOL in 1994 and subsequently obtained
financing from a number of investors including J.H. Whitney & Co., Stamford,
Conn. Services include leased line services, system integration services,
Intranet solutions, SOHO solutions, complex Web development, hosting services
and e-commerce solutions.
About Exodus Communications
Exodus Communications is a leading provider of Internet system, network
management solutions and technology professional services for enterprises with
mission-critical Internet operations. Exodus manages Internet Web sites and its
network infrastructure from 16 Internet Data Centers (IDCs) located in the
United States and Europe. Exodus currently has IDCs located in the Austin,
Boston, Chicago, London, Los Angeles (2), New York (2), Seattle (2), Silicon
Valley (4) and Washington, D.C. (2) metropolitan areas. Exodus has announced the
planned addition of three additional IDCs and three international server hosting
sites by the end of 1999, bringing the total number of Exodus sites to 22
worldwide. More information on Exodus can be found at http://www.exodus.net
---------------------
<PAGE>
Exhibit 99.02
EXODUS COMPLETES ACQUISITION OF SERVICE METRICS, INC.
Acquisition Enables Exodus to Offer a Platform to Measure the Consistency,
Performance and Availability of Customers' Web Sites
November 23, 1999 -
Exodus Communications(TM), Inc. (NASDAQ: EXDS), a leader in complex Internet
hosting and managed services, today announced it has completed the acquisition
of Service Metrics(SM), Inc.
Exodus(TM), the pioneer in Internet Data Centers (IDCs), continues to offer new
services designed to meet the needs of customers with mission-critical Internet
operations, especially business-to-business and business-to-consumer e-commerce
companies, as well as application service providers (ASPs) and Internet service
providers (ISPs). Exodus plans to leverage Service Metrics' expertise in the
monitoring and measurement of mission-critical Internet operations to empower
customers to make informed Web site decisions and strengthen branding. The
combination of Service Metrics and Exodus extends the company's leadership in
the complex Web hosting market.
"We are delighted to welcome the Service Metrics team to Exodus," said Ellen M.
Hancock, president and CEO of Exodus. "Through the acquisition of Service
Metrics and its platform of in-depth performance analysis services, we believe
Exodus offers its customers an industry-leading suite of managed and
professional services."
Service Metrics' network of data collection agents is located on multiple
provider networks in North and South America, Europe, and the Far East. The
combination of 16 Exodus facilities worldwide and this network of data
collection agents will help position Exodus and Service Metrics to meet
customers' growing demands for performance measurement and optimization.
Service Metrics will be a wholly owned subsidiary of Exodus Communications and
continue to operate from its Colorado location.
About Exodus Communications
Exodus Communications is a leading provider of Internet system, network
management solutions and technology professional services for enterprises with
mission-critical Internet operations. Exodus manages Internet Web sites and its
network infrastructure
<PAGE>
from 16 Internet Data Centers (IDCs) located in the United States and Europe.
Exodus currently has IDCs located in the Austin, Boston, Chicago, London, Los
Angeles (2), New York (2), Seattle (2), Silicon Valley (4) and Washington, D.C.
(2) metropolitan areas. Exodus has announced the planned addition of three
additional IDCs and three international server hosting sites by the end of 1999,
bringing the total number of Exodus sites to 22 worldwide. More information on
Exodus can be found at http://www.exodus.net
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