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As filed with the Securities and Exchange Commission on December 23, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EXODUS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C>
Delaware 77-0403076
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
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2831 Mission College Boulevard
Santa Clara, California 95054
(408) 346-2200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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Ellen M. Hancock
President and Chief Executive Officer
Exodus Communications, Inc.
2831 Mission College Boulevard
Santa Clara, California 95054
(408) 346-2200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Horace L. Nash, Esq.
Robert A. Freedman, Esq.
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
(650) 494-0600
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Approximate date of commencement of proposed sale to the public: From time
to time after this registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to be Registered Registered per Share(1) Offering Price Fee
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value per share(2)........ 6,713,086 $78.2188 $525,089,196 $138,624
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</TABLE>
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(1) Estimated as of December 21, 1999 pursuant to Rule 457(c) solely for the
purpose of calculating the registration fee, based on the average of the
high and low prices of the Registrant's common stock as reported by the
Nasdaq National Market on December 21, 1999.
(2) Associated with Exodus Common Stock are preferred stock purchase rights
which will not be exercisable or evidenced separately from the Common
Stock prior to the occurrence of specified triggering events.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
section 8(a), may determine.
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<PAGE>
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PROSPECTUS
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SUBJECT TO COMPLETION, DATED DECEMBER 23, 1999
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
EXODUS COMMUNICATIONS, INC.
Up to 6,713,086 Shares of Common Stock
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The 6,713,086 shares of common stock covered by this prospectus were
previously issued by Exodus in connection with its acquisition of Service
Metrics, Inc. and its acquisition of Global Online Japan Co., Ltd. These shares
may be offered and sold over time by the stockholders named in this prospectus
under the heading "Selling Stockholders," by their pledgees or donees, or by
other transferees that receive the ordinary shares in transfers other than
public sales.
The selling stockholders may sell their Exodus shares in the open market at
prevailing market prices, or in private transactions at negotiated prices. They
may sell the shares directly, or may sell them through underwriters, brokers or
dealers. Underwriters, brokers, or dealers may receive discounts, concessions
or commissions from the selling stockholders or from the purchaser, and this
compensation might be in excess of the compensation customary in the type of
transaction involved. See "Plan of Distribution."
We will not receive any of the proceeds from the sale of these shares.
Our common stock currently trades on the Nasdaq National Market under the
symbol "EXDS." The last reported sale price on December 22, 1999 was $87.50 per
share.
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Investing in our common stock involves a high degree of risk. Please
carefully consider the "Risk Factors" beginning on page 6 of this prospectus.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
The date of this prospectus is December , 1999
In connection with this offering, no person is authorized to give any
information or to make any representations not contained in this prospectus. If
information is given or representations are made, you may not rely on that
information or representations as having been authorized by us. This prospectus
is neither an offer to sell nor a solicitation of an offer to buy any
securities other than those registered by this prospectus, nor is it an offer
to sell or a solicitation of an offer to buy securities where an offer or
solicitation would be unlawful. You may not imply from the delivery of this
prospectus, nor from any sale made under this prospectus, that our affairs are
unchanged since the date of this prospectus or that the information contained
in this prospectus is correct as of any time after the date of this prospectus.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C> <C> <C>
Summary........................... 4 Plan of Distribution................. 22
Recent Events..................... 5 Legal Matters........................ 23
Risk Factors...................... 6 Experts.............................. 23
Use of Proceeds................... 17 Where You Can Find More Information.. 24
Dilution.......................... 18 Financial Statements................. F-1
Selling Stockholders.............. 19 Financial Statement Schedules........ S-1
</TABLE>
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This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this prospectus, the words "anticipate,"
"believe," "estimate," "will," "may," "intend" and "expect" and similar
expressions identify certain of such forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in such forward-
looking statements are reasonable, we can give no assurance that such plans,
intentions or expectations will be achieved. Actual results, performance or
achievements could differ materially from those contemplated, expressed or
implied by the forward-looking statements contained in this prospectus.
Important factors that could cause actual results to differ materially from our
forward-looking statements are set forth in this prospectus, including under
the heading "Risk Factors". These factors are not intended to represent a
complete list of the general or specific factors that may affect us. It should
be recognized that other factors, including general economic factors and
business strategies, may be significant, presently or in the future, and the
factors set forth herein may affect us to a greater extent than indicated. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements set
forth herein. Except as required by law, we undertake no obligation to update
any forward-looking statement, whether as a result of new information, future
events or otherwise.
Unless the context otherwise requires, the terms "we," "our," "us," "the
company" and "Exodus" refer to Exodus Communications, Inc., a Delaware
corporation.
Unless indicated otherwise, all share numbers in this prospectus reflect the
two-for-one stock split effected by Exodus on December 14, 1999. The
information incorporated by reference into this prospectus, however, may not
reflect the stock split.
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SUMMARY
Exodus is a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations. Our
solutions include Internet Data Centers, network services, managed services and
professional services, which together provide the high performance, scalability
and expertise that enterprises need to optimize their complex Internet
operations. Exodus delivers its services from geographically distributed,
state-of-the-art Internet Data Centers that are connected through a high
performance dedicated and redundant backbone network. Our tailored solutions
are designed to integrate with existing enterprise systems architectures and to
enable customers to outsource the monitoring, administration and optimization
of their equipment, applications and overall Internet operations. As of
September 30, 1999, we had more than 1,700 customers, including installed and
uninstalled customers under contract, and managed over 16,000 customer servers
worldwide. Our customers represent a variety of industries, ranging from
Internet companies such as Lycos, Inc., eBay Inc., MSN Hotmail (a subsidiary of
Microsoft Corporation), Yahoo!GeoCities and Inktomi Corporation, to media
companies such as MSNBC, USA Today Information Network, SportsLine USA, Inc.
and E-Online!, to major enterprise companies such as Applied Materials and
Storage Networks.
Because Internet usage is growing rapidly, businesses are increasing the
breadth and depth of their Internet product and services offerings. These
Internet operations are mission-critical for Internet-centric businesses and
are becoming increasingly mission-critical for many enterprises. In order to
ensure the quality, reliability, availability and redundancy of these mission-
critical Internet operations, corporate IT departments must make substantial
investments in facilities, personnel, equipment and networks which must be
continuously upgraded to reflect changing technologies and must rapidly scale
as the enterprise grows. This recurring and significant investment is an
inefficient use of resources and, as a result, a significant need exists for
outsourcing arrangements that can increase performance, provide continuous
operation of Internet solutions and reduce Internet operating expenses. We
believe a significant opportunity exists for a highly focused company to
provide a combination of server hosting, Internet connectivity and managed and
professional services that will enable reliable, high performance of mission-
critical Internet operations.
Exodus offers an integrated portfolio of solutions that provides customers
with a scalable, secure and high performance platform for the development,
deployment and proactive management of mission-critical Internet operations.
Our server hosting and Internet connectivity services are offered through our
Internet Data Centers' redundant backbone network of multiple high speed OC-3
and OC-12 lines, along with our public and private network interconnections. We
continue to upgrade our network in order to accommodate expected traffic
growth. Our managed services include performance monitoring, site management
reports, data backup and content delivery and management services, security
services and professional services. These services provide the foundation for
high performance, availability, scalability and reliability of customers'
Internet operations. In addition, we integrate best-of-breed technologies from
leading vendors with our industry expertise and proprietary technology.
Our objective is to become the leading provider of Internet system and
network management solutions for enterprises with mission-critical Internet
operations. To achieve this objective, we intend to:
. Position Exodus as the leader in this market;
. Focus on enhancing systems and network management, Internet technology
services and professional services;
.Accelerate our global expansion;
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.Leverage our expertise to address new market opportunities; and
.Continue to establish strategic relationships for distribution and
technology.
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
currently operate 15 domestic Internet Data Centers located in eight
metropolitan areas: Austin, Boston, Chicago, Los Angeles, New York, Seattle,
Silicon Valley and Washington, D.C. In June 1999 we opened our first Internet
Data Center outside of the United States in the London metropolitan area. In
December 1999, we acquired Global OnLine Japan Co., Ltd. of Tokyo, Japan, which
has an Internet Data Center located in Tokyo. Our Internet Data Centers consist
of approximately 1,150,000 gross square feet.
Recent Events
Acquisition of Service Metrics, Inc. In November 1999, we acquired Service
Metrics, Inc. Service Metrics is a leading provider of Internet monitoring
applications and services that measure the consistency, availability and
performance of Web sites. As a result, we issued approximately 7.0 million
shares of our common stock and common stock subject to options in exchange for
all of the outstanding shares of common stock of Service Metrics and shares of
Service Metrics common stock subject to outstanding options, representing an
aggregate consideration of approximately $280.0 million as of the signing of
the definitive agreement in October 1999. The transaction was accounted for as
a pooling-of-interests. We are registering 6,297,790 shares of our common stock
on the registration statement, of which this prospectus forms a part, in
connection with our acquisition of Service Metrics.
Acquisition of Global OnLine Japan Co., Ltd. On December 17, 1999, we
acquired Global OnLine Japan Co., Ltd., an Internet solutions provider based in
Tokyo. As a result, we issued approximately 415,000 shares of our common stock
in exchange for 85% of the outstanding shares of Global OnLine Japan. The
transaction will be accounted for as a purchase. We are registering 415,296
shares of our common stock on the registration statement, of which this
prospectus forms a part, in connection with our acquisition of Global OnLine
Japan.
Debt Offerings. In December 1999, we completed the following debt offerings:
$375.0 million of 10 3/4% senior notes due 2009, Euro 125.0 million of 10 3/4%
senior notes due 2009, and $500.0 million of 4 3/4% convertible subordinated
notes due July 15, 2008.
Stock Split. On November 19, 1999, we announced a two-for-one stock split in
the form of a stock dividend, which was paid on December 14, 1999 to holders of
record of our Common Stock as of November 30, 1999. Share and per share
information in this prospectus has been adjusted retroactively to reflect this
stock split.
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Our principal executive offices are located at 2831 Mission College Blvd.,
Santa Clara, California 95054. Our telephone number is (408) 346-2200.
5
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RISK FACTORS
You should carefully consider the following risks before making an
investment decision. You should carefully consider these risk factors, together
with all of the other information contained or incorporated by reference in
this prospectus, before you decide to purchase shares of our common stock.
These factors could cause our future results to differ materially from those
expressed or implied in forward-looking statements made by us. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem
immaterial may also harm our business. The trading price of our common stock
could decline due to any of these risks, and you may lose all or part of your
investment.
Our short operating history and heavy losses make our business difficult to
evaluate
Our limited operating history makes evaluating our business operations and
our prospects difficult. We began offering server hosting and Internet
connectivity services in 1995, opened our first dedicated Internet Data Center
in August 1996 and introduced managed services in 1997 and professional
services in 1998. Due to our short operating history, our business model is
still evolving. We have incurred operating losses and negative cash flows each
fiscal quarter and year since 1995. Our accumulated deficit was approximately
$175.3 million at September 30, 1999. We anticipate continuing to make
significant investments in new Internet Data Centers and network
infrastructure, product development, sales and marketing programs and
personnel. We believe that we will continue to experience net losses on a
quarterly and annual basis for the foreseeable future. We may also use
significant amounts of cash and/or equity to acquire complementary businesses,
products, services or technologies. Although we have experienced significant
growth in revenues in recent periods, this growth rate is not necessarily
indicative of future operating results. It is possible that we may never
achieve profitability on a quarterly or an annual basis.
Our operating results have fluctuated widely and we expect this to continue
We have experienced significant fluctuations in our results of operations on
a quarterly and an annual basis. We expect to continue to experience
significant fluctuations due to a variety of factors, many of which are outside
of our control, including:
. demand for and market acceptance of our services;
. reliable continuity of service and network availability;
. the ability to increase bandwidth as necessary, both on our network and
at our interconnection points with other networks;
. costs related to the acquisition of network capacity and arrangements for
interconnections with third-party networks;
. customer retention and satisfaction;
. capacity utilization of our Internet Data Centers;
. the timing, magnitude and integration of acquisitions of complementary
businesses and assets;
. the timing of customer installations;
. the provision of customer discounts and credits;
. the mix of services sold by us;
. the timing and success of marketing efforts and service introductions by
us and our competitors;
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. the timing and magnitude of capital expenditures, including construction
costs relating to the expansion of operations;
. the timing of expansion of existing Internet Data Centers and completion
of new Internet Data Centers;
. the introduction by third parties of new Internet and networking
technologies;
. changes in our pricing policies and those of our competitors; and
. fluctuations in bandwidth used by customers.
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to telecommunications, depreciation,
substantial interest expenses, real estate and personnel. Therefore, our
results of operations are particularly sensitive to fluctuations in revenues.
Furthermore, if we were to become unable to continue leveraging third-party
products in our services offerings, our product development costs could
increase significantly. Finally, many of our customers are emerging growth
companies which may have negative cash flows, and there is the possibility that
we will not be able to collect receivables on a timely basis.
Our rapid expansion produces a significant strain on our business and requires
us to expend substantial resources
The expansion of our network through the opening of additional Internet Data
Centers in geographically diverse locations is one of our key strategies. We
currently have 15 Internet Data Centers located in eight metropolitan areas of
the United States: Austin, Boston, Chicago, Los Angeles, New York, Seattle,
Silicon Valley and Washington, D.C. In June 1999, we opened our first Internet
Data Center outside of the United States in the London metropolitan area. In
December 1999, we acquired Global OnLine Japan Co., Ltd. of Tokyo, Japan, which
has an Internet Data Center located in Tokyo. To expand successfully, we must
be able to assess markets, locate and secure new Internet Data Center sites,
install telecommunications and Internet Data Center facilities and establish
additional peering interconnections with Internet service providers. To manage
this expansion effectively, we must continue to improve our operational and
financial systems and expand, train and manage our employee base. Our inability
to establish additional Internet Data Centers or effectively manage our
expansion would have a material adverse effect upon our business.
We expect to expend substantial resources for leases and/or the purchase of
real estate, significant improvements of facilities, purchase of complementary
businesses, assets and equipment, implementation of multiple telecommunications
connections and hiring of network, administrative, customer support and sales
and marketing personnel with the establishment of each new Internet Data
Center. Moreover, we expect to make significant investments in sales and
marketing and the development of new services as part of our expansion
strategy. The failure to generate sufficient cash flows or to raise sufficient
funds may require us to delay or abandon some or all of our development and
expansion plans or otherwise forego market opportunities, making it difficult
for us to generate additional revenue and to respond to competitive pressures.
In general, it takes us at least six months to select the appropriate
location for a new Internet Data Center, construct the necessary facilities,
install equipment and telecommunications infrastructure and hire operations and
sales personnel. Expenditures commence well before the Internet Data Center
opens, and it takes an extended period for us to approach break-even capacity
utilization. As a result, we expect that individual Internet Data Centers will
experience losses for in excess of one year from the time they are opened. We
incur further expenses from sales personnel hired to test market our services
in markets where there is no Internet Data Center. Growth in the
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number of our Internet Data Centers is likely to increase the amount and
duration of losses. In addition, if we do not attract customers to new Internet
Data Centers in a timely manner, or at all, our business would be materially
adversely affected.
We compete with much larger companies and there are few barriers to entry, and
if we cannot compete effectively, we will lose business
Our market is intensely competitive. There are few substantial barriers to
entry, and we expect to face additional competition from existing competitors
and new market entrants in the future. Many companies have announced recently
that they intend to begin providing and/or greatly expand their service
offerings that are competitive with our services. The principal competitive
factors in this market include:
. Internet system engineering and other expertise;
. customer service;
. network capability, reliability, quality of service and scalability;
. the variety of services offered;
. access to network resources, including circuits, equipment and
interconnection capacity to other networks;
. broad geographic presence;
. price;
. the ability to maintain and expand distribution channels;
. brand name;
. the timing of introductions of new services;
. network security; and
. financial resources.
There can be no assurance that we will have the resources or expertise to
compete successfully in the future. Our current and potential competitors in
the market include:
. providers of server hosting services;
. national, foreign and regional ISPs;
. global, regional and local telecommunications companies and Regional Bell
Operating Companies;
. IT outsourcing firms; and
. other technology services and products companies.
Many of our competitors have substantially greater resources, more
customers, longer operating histories, greater name recognition and more
established relationships in the industry. As a result, these competitors may
be able to develop and expand their network infrastructures and service
offerings more quickly, devote greater resources to the marketing and sale of
their products and adopt more aggressive pricing policies. In addition, these
competitors have entered and will likely continue to enter into business
relationships to provide additional services competitive with those we provide.
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Some of our competitors may be able to provide customers with additional
benefits in connection with their Internet system and network management
solutions, including reduced communications costs, which could reduce the
overall costs of their services relative to ours. We may not be able to offset
the effects of any price reductions. In addition, we believe our market is
likely to encounter consolidation in the near future, which could result in
increased prices and other competition.
Our market is new and our services may not be generally accepted by enterprises
looking to outsource their mission-critical Internet operations, which could
harm our operating results
The market for Internet system and network management solutions has only
recently begun to develop, is evolving rapidly and is characterized by an
increasing number of market entrants. This market may not prove to be viable
or, if it becomes viable, may not continue to grow. Our future growth depends
on the willingness of enterprises to outsource the system and network
management of their mission-critical Internet operations and our ability to
market our services in a cost-effective manner to a sufficiently large number
of customers. If this market fails to develop, or develops more slowly than
expected, or if our services do not achieve market acceptance, our business
would be adversely affected. In addition, in order to be successful we must be
able to differentiate ourselves from our competition through our service
offerings.
Our substantial leverage and debt service obligations adversely affect our cash
flow
We have substantial amounts of outstanding debt, primarily from our 11 1/4%
senior notes, 10 3/4% senior notes, 4 3/4% convertible subordinated notes and
5% convertible subordinated notes. There is the possibility that we may be
unable to generate cash sufficient to pay the principal of, interest on and
other amounts due in respect of, our debt when due. As of September 30, 1999,
we had debt of approximately $589.7 million and available borrowings of up to
an additional $1.2 million. In addition, in December 1999, we incurred
additional debt of $375.0 million aggregate principal amount of 10 3/4% senior
notes, Euro 125.0 million aggregate principal amount of 10 3/4% senior notes
and $500.0 million aggregate principal amount of 4 3/4% convertible
subordinated notes. We will also have the right to issue additional 10 3/4%
senior notes on or prior to December 8, 2000 in an aggregate principal amount
not to exceed $100.0 million. In addition, we also expect to add additional
equipment loans and lease lines to finance capital expenditures for our
Internet Data Centers, and to obtain additional long term debt, working capital
lines of credit and lease lines. We cannot be certain that any financing
arrangements will be available.
Our substantial leverage could have significant negative consequences,
including:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;
. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
. placing us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.
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We are subject to restrictive covenants in our note indentures that limit our
flexibility in managing our business
Our senior notes and convertible subordinated notes contain various
restrictions on our ability to incur debt, pay dividends or make other
restricted payments, sell assets, enter into affiliate transactions and take
other actions. Furthermore, our existing financing arrangements are, and future
financing arrangements are likely to be, secured by substantially all of our
assets. The existing financing arrangements require, and future financing
arrangements are likely to require, that we maintain specific financial ratios
and comply with covenants restricting our ability to incur debt, pay dividends
or make other restricted payments, sell assets, enter into affiliate
transactions or take other actions.
In addition, a number of instruments evidencing our debt restrict the manner
in which this debt and debt incurred in the future may be used.
We must manage growth effectively by expanding operating and financial
procedures, controls and systems, or our business will be harmed
We are experiencing, and expect to continue experiencing, rapid growth with
respect to the building of our Internet Data Centers and network
infrastructure, expansion of our service offerings, geographic expansion,
expansion of our customer base and increases in the number of employees. This
growth has placed, and we expect it to continue to place, a significant strain
on our financial, management, operational and other resources, including our
ability to ensure customer satisfaction. This expansion also requires
significant time commitment from our senior management and places a significant
strain on their ability to manage the existing business. In addition, we are
required to manage multiple relationships with a growing number of third
parties as we seek to complement our service offerings. Our ability to manage
our growth effectively will require us to continue to expand operating and
financial procedures and controls, to replace or upgrade our operational,
financial and management information systems and to attract, train, motivate
and retain key employees. We have recently hired many key employees and
officers, and as a result, our entire management team has worked together for
only a brief time. In addition, we intend to hire additional senior management
personnel to support our growth and expansion of our business. If our
executives are unable to manage growth effectively, our business could be
materially adversely affected.
We may experience difficulty in integrating our acquisitions which could harm
our operating results
In October 1998 we acquired the assets of Arca Systems, Inc., in February
1999 we acquired American Information Systems, Inc., in July 1999 we acquired
Cohesive Technology Solutions, Inc., in November 1999 we acquired Service
Metrics, Inc., and in December 1999 we acquired Global Online Japan Co., Ltd.
We continue to expend resources integrating Cohesive and Service Metrics and
the personnel hired in connection with acquisitions. As we acquire additional
companies, we may incur expenses to, among other things, remediate Year 2000
problems relating to these acquired companies.
We believe that our future growth depends, in part, upon the acquisition of
complementary businesses, products, services or technologies. After purchasing
a company, we could have difficulty in assimilating that company's technology,
personnel and operations. In addition, the key personnel of the acquired
company may decide not to work for us. These difficulties could disrupt our
ongoing business, distract our management and employees and increase our
expenses. In addition, future acquisitions by us may require us to incur
additional debt, result in large one-time write-offs or create goodwill or
other intangible assets that could result in amortization expenses.
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System failures could lead to significant costs
We must protect our network infrastructure and customers' equipment against
damage from human error, physical or electronic security breaches, power loss
and other facility failures, fire, earthquake, flood, telecommunications
failure, sabotage, vandalism and similar events. Despite precautions we have
taken, a natural disaster or other unanticipated problems at one or more of our
Internet Data Centers could result in interruptions in our services or
significant damage to customer equipment. In addition, failure of any of our
telecommunications providers, such as MCI WorldCom, Qwest Communications
Corporation and Global Crossing, to provide consistent data communications
capacity, and local exchange carriers to provide interconnection agreements,
could result in interruptions in our services. Any damage to or failure of our
systems or service providers could result in reductions in, or terminations of,
services supplied to our customers, which could have a material adverse effect
on our business. In the past, we have experienced interruptions in specific
circuits within our network resulting from events outside our control, which
led to short-term degradation in the level of performance of our network.
Customer satisfaction with our services is critical to our success
Our customers demand a very high level of service. Our customer contracts
generally provide a limited service level commitment related to the continuous
availability of service on a 24 hours per day, seven days per week basis. This
commitment is generally limited to a credit consisting of free service for a
short period of time for disruptions in Internet transmission services. To
date, only a limited number of customers have been entitled to this credit. If
we incur significant service level commitment obligations in connection with
system downtime, our liability insurance may not be adequate to cover these
expenses. As customers outsource more mission-critical operations to us, we are
subject to increased liability claims and customer dissatisfaction if our
systems fail or our customers otherwise become unsatisfied.
Our ability to expand our network is unproven and will require substantial
financial, operational and managerial resources
To satisfy customer requirements, we must continue to expand and adapt our
network infrastructure. We are dependent on MCI WorldCom, Qwest, Global
Crossing and other telecommunications providers for our network capacity,
including our dedicated clear channel network. The expansion and adaptation of
our telecommunications infrastructure will require substantial financial,
operational and management resources as we negotiate telecommunications
capacity with network infrastructure suppliers. Due to the limited deployment
of our services to date, our ability to connect and manage a substantially
larger number of customers at high transmission speeds is unknown. We have yet
to prove our network's ability to be scaled up to higher customer levels while
maintaining superior performance. Furthermore, it may be difficult for us to
increase quickly our network capacity in light of current necessary lead times
within the industry to purchase circuits and other critical items. If we fail
to achieve or maintain high capacity data transmission circuits, customer
demand could diminish because of possible degradation of service. In addition,
as we upgrade our telecommunications infrastructure to increase bandwidth
available to our customers, we expect to encounter equipment or software
incompatibility which may cause delays in implementation.
We depend on network interconnections provided by third parties that may raise
their fees or deny access
We rely on a number of public and private network interconnections to allow
our customers to connect to other networks. If the networks with which we
interconnect were to discontinue their interconnections, our ability to
exchange traffic would be significantly constrained. Furthermore, our business
will be harmed if these networks do not add more bandwidth to accommodate
increased
11
<PAGE>
traffic. Many of the companies with which we maintain interconnections are our
competitors. There is nothing to prevent any networks, many of which are
significantly larger than we are, from charging high usage fees or denying
access. In the future, networks could refuse to continue to interconnect
directly with us, might impose significant costs on us or limit our customers'
access to their networks. In this event, we may not be able on a cost-effective
basis to access alternative networks to exchange our customers' traffic. In
addition, we may not be able to pass through to our customers any additional
costs of utilizing these networks. In these cases, our business could be
harmed.
Difficulties presented by international economic, political, legal, accounting
and business factors could harm our business in international markets
A component of our strategy is to expand into international markets. We
opened our first Internet Data Center outside of the United States in the
London metropolitan area in June 1999 and acquired an Internet Data Center in
Tokyo through our acquisition of Global OnLine Japan Co., Ltd. In order to
expand our international operations, we may enter into joint ventures or
outsourcing agreements with third parties, acquire rights to high-bandwidth
transmission capability, acquire complementary businesses or operations, or
establish and maintain new operations outside of the United States. Thus, we
may depend on third parties to be successful in our international operations.
In addition, the rate of development and adoption of the Internet has been
slower outside of the United States, and the cost of bandwidth has been higher,
which may adversely affect our ability to expand operations and may increase
our cost of operations internationally. The risks inherent in conducting
business internationally include:
. unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers;
. challenges in staffing and managing foreign operations;
. differences in technology standards;
. employment laws and practices in foreign countries;
. longer payment cycles and problems in collecting accounts receivable;
. political instability;
. fluctuations in currency exchange rates and imposition of currency
exchange controls; and
. potentially adverse tax consequences.
We might not be successful in our attempts to keep up with rapid technological
change and evolving industry standards
Our future success will depend on our ability to offer services that
incorporate leading technology and address the increasingly sophisticated and
varied needs of our current and prospective customers. Our market is
characterized by rapidly changing and unproven technology, evolving industry
standards, changes in customer needs, emerging competition and frequent new
service introductions. Future advances in technology may not be beneficial to,
or compatible with, our business. In addition, we may not be able to
incorporate advances on a cost-effective and timely basis. Moreover,
technological advances may have the effect of encouraging our current or future
customers to rely on in-house personnel and equipment to furnish the services
we currently provide. In addition, keeping pace with technological advances may
require substantial expenditures and lead time.
We believe that our ability to compete successfully is also dependent upon
the continued compatibility and interoperability of our services with products,
services and architectures offered by
12
<PAGE>
various vendors. Although we work with various vendors in testing newly
developed products, these products may not be compatible with our
infrastructure or adequate to address changing customer needs. For instance,
existing networking hardware may not be immediately compatible with leading
edge telecommunications infrastructure services. This incompatibility would
require us to make significant investments to achieve compatibility. Although
we intend to support emerging standards, industry standards may not be
established or we may not be able to timely conform to new standards. Our
failure to conform to a prevailing standard, or the failure of a common
standard to emerge, could have a material adverse effect on our business.
System security risks could disrupt our services
The ability to provide secure transmissions of confidential information over
networks accessible to the public is a significant barrier to electronic
commerce and communications. A portion of our services rely on encryption and
authentication technology licensed from third parties. Despite a variety of
network security measures taken by us, we cannot assure that unauthorized
access, computer viruses, accidental or intentional actions and other
disruptions will not occur. Our Internet Data Centers have experienced and may
in the future experience delays or interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees of Exodus or others. Furthermore, inappropriate use of the network by
third parties could also jeopardize the security of confidential information,
such as customer and Exodus passwords as well as credit card and bank account
numbers, stored in our computer systems or those of our customers. As a result,
we could become liable to others and lose existing or potential customers. The
costs required to eliminate computer viruses and alleviate other security
problems could be prohibitively expensive. In addition, the efforts to address
these problems could result in interruptions, delays or cessation of service to
our customers.
We depend on third-party equipment and software suppliers
We depend on vendors to supply key components of our telecommunications
infrastructure and system and network management solutions. Some of the
telecommunications services and networking equipment is available only from
sole or limited sources. For instance, the routers, switches and modems we use
are currently supplied primarily by Cisco Systems, Inc. We typically purchase
or lease all of our components under purchase orders placed from time to time.
We do not carry significant inventories of components and have no guaranteed
supply arrangements with vendors. If we are unable to obtain required products
or services on a timely basis and at an acceptable cost, our business would be
harmed. In addition, if our sole or limited source suppliers do not provide
products or components that comply with evolving Internet and
telecommunications standards or that interoperate with other products or
components we use, our business would be harmed. For example, we have
experienced performance problems, including previously unknown software and
firmware bugs, with routers and switches that have caused temporary disruptions
in and impairment of network performance. In addition, we expect to depend for
a time on third parties to deliver and manage our services from certain
international operations.
Government regulation and legal uncertainties may harm our business
Laws and regulations directly applicable to communications and commerce over
the Internet are becoming more prevalent. The United States Congress has
recently considered enacting Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union also recently enacted its own privacy regulations. The law of
the Internet, however, remains largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply to the Internet. In addition, the growth and
13
<PAGE>
development of the market for online commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad, that
may impose additional burdens on companies conducting business online. The
adoption or modification of laws or regulations relating to the Internet could
adversely affect our business. We provide services over the Internet in all
states in the United States and in many foreign countries, and we facilitate
the activities of our customers in these jurisdictions. As a result we may be
required to qualify to do business, or be subject to taxation, or be subject to
other laws and regulations, in these jurisdictions even if we do not have a
physical presence or employees or property in these jurisdictions. The
application of these multiple sets of laws and regulations is uncertain, but we
could find that Exodus is subject to regulation, taxation, enforcement or other
liability in unexpected ways, which could materially adversely affect our
business.
We could be held liable for the information disseminated through our network
The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. The Child Online Protection Act of 1998
imposes criminal penalties and civil liability on anyone engaged in the
business of selling or transferring material that is harmful to minors, by
means of the World Wide Web, without restricting access to this type of
material by underage persons. Numerous states have adopted or are currently
considering similar types of legislation. The imposition upon us and other
Internet network providers of potential liability for information carried on or
disseminated through systems could require us to implement measures to reduce
exposure to liability, which may require the expenditure of substantial
resources, or to discontinue various service or product offerings. Further, the
costs of defending against any claims and potential adverse outcomes of these
claims could have a material adverse effect on our business. While we carry
professional liability insurance, it may not be adequate to compensate or may
not cover us in the event we become liable for information carried on or
disseminated through our networks.
Some businesses, organizations and individuals have in the past sent
unsolicited commercial e-mail messages advertising sites hosted at our
facilities to a massive number of people. This practice, known as "spamming,"
has led to some complaints against us. In addition, some ISPs and other online
services companies could deny network access to us if we allow undesired
content or spamming to be transmitted through our networks. Although we
prohibit customers by contract from spamming, we cannot be sure that customers
will not engage in this practice, which could have a material adverse effect on
our business.
Our future success depends on our key personnel
Our success depends in significant part upon the continued services of our
key technical, sales and senior management personnel. Any officer or employee
can terminate his or her relationship at any time. If we lose the services of
one or more of our key employees or are unable to attract additional qualified
personnel, our business would be adversely affected. We do not carry key-person
life insurance for any of our employees.
If Internet and Internet infrastructure development do not continue to grow,
our business will be harmed
Our success depends in large part on continued growth in the use of the
Internet. Critical issues concerning the commercial use of the Internet,
including security, reliability, cost, ease of access, quality of service and
necessary increases in bandwidth availability, remain unresolved and are likely
to affect the development of the market for our services. In addition, the rate
of development and adoption of the Internet has been slower outside of the
United States and the cost of bandwidth has
14
<PAGE>
been higher. The recent growth in the use of the Internet has caused frequent
periods of performance degradation, requiring the upgrade of routers and
switches, telecommunications links and other components forming the
infrastructure of the Internet by ISPs and other organizations with links to
the Internet. Any perceived degradation in the performance of the Internet as a
whole could undermine the benefits of our services. Consequently, the emergence
and growth of the market for our services is dependent on improvements being
made to the entire Internet infrastructure to alleviate overloading and
congestion.
We face risks associated with protection and enforcement of intellectual
property rights
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect proprietary
rights in our products and services. We have no patented technology that would
preclude or inhibit competitors from entering our market. Although we have
entered into confidentiality agreements with our employees, contractors,
suppliers, distributors and appropriate customers to limit access to and
disclosure of our proprietary information, these may prove insufficient to
prevent misappropriation of our technology or to deter independent third-party
development of similar technologies. In addition, the laws of various foreign
countries may not protect our products, services or intellectual property
rights to the same extent as do the laws of the United States.
In addition to licensing technologies from third parties, we are developing
and acquiring additional proprietary intellectual property. Third parties may
try to claim that our products or services infringe their intellectual
property. We expect that participants in our markets will be increasingly
subject to infringement claims. Any claim, whether meritorious or not, could be
time consuming, result in costly litigation, cause product installation delays
or require us to enter into royalty or licensing agreements. These royalty or
licensing agreements might not be available on terms acceptable to us or at
all.
Potential risks related to the Year 2000 problem might harm our business
The Year 2000 problem stems from the use of a two digit date to represent
the year (for example, 85 = 1985) in computer software and firmware. As a
result, many currently installed computer systems are not capable of
distinguishing dates beginning with the Year 2000 from dates prior to the Year
2000. As a result, computer systems or applications used by many companies in a
wide variety of industries may experience operating difficulties unless the
systems or applications are modified to process adequately information related
to the date change. Significant uncertainty exists in the software and other
industries concerning the scope and magnitude of problems associated with the
century change. To the extent Year 2000 issues cause significant delay in, or
cancellation of decisions to purchase products or product support, due to the
reallocation of resources to address Year 2000 issues or otherwise, our
business could be materially adversely affected.
We recognize the need to ensure our operations will not be adversely
impacted by Year 2000 issues. We have put into place a comprehensive Year 2000
Risk Management initiative that is adequately funded, staffed and managed. This
initiative's scope covers both our IT systems and non-IT systems and addresses
all areas of the Year 2000 issues as defined by the Information Technology
Association of America (ITAA). Our internal inventory audit was completed
January 1999. Due to our acquisition of Cohesive, we expanded the independent
review of our Year 2000 assessment. The review was completed in the third
quarter of 1999. Due to our recent acquisition of Service Metrics, Inc., we
performed an independent review of their Year 2000 program. The review was
completed in December 1999. On December 17, 1999, we acquired Global OnLine
Japan Co., Ltd. We believe that their internal management information systems
and other systems are Year 2000 compliant. We continue to evaluate their
program and expect that they are or will be compliant by December 31, 1999.
15
<PAGE>
We have determined that our Internet Data Center equipment is currently Year
2000 compliant. We will continue to monitor vendors and suppliers for the
remainder of the year. Likewise, based on the on-going assessment relative to
our current software service offerings, we believe that the current versions of
these products are Year 2000 compliant. We have reviewed, and continue to
review, internal management information and other systems in order to identify
and modify those products, services or systems to ensure that they remain Year
2000 compliant. We have completed the assessment of the Year 2000 compliance of
Cohesive's internal management information and other systems. Based on our
assessment to date, we believe that our internal management information and
other systems and Cohesive's internal management information and other systems
are Year 2000 compliant. We do not foresee any significant issues with internal
IT and internal non-IT systems remaining Year 2000 compliant throughout the
remainder of the year.
Our Year 2000 initiative also addresses vendor relationships (both IT and
non-IT) and their readiness/preparedness relating to Year 2000 issues. IT
vendors include software providers, hardware providers, service providers, off
the shelf software publishers and IT consultants. Non-IT providers include
electric power suppliers, vendors of uninterruptible power supplies and
generators, telecommunications service providers, business partners, facilities
maintainers and other non-IT service contractors. In the event that third
parties cannot provide us with products, services or systems that are Year 2000
compliant on a timely basis, our business could be materially adversely
affected. To date, we have not discovered nor do we anticipate any material
issues with vendors and service providers. Evaluation of vendor Year 2000
preparedness is an on-going process. As our Year 2000 evaluation does not
evaluate our vendors' vendors nor our vendors' customer base viability issues,
we have put in place contingency plans. To minimize our risk, effective
November 15, 1999 through January 4, 2000, we have instituted a freeze on the
introduction of new technology, new software versions and new configurations.
During this period, we will utilize only hardware currently approved for
production.
Many of our customers maintain their Internet operations on servers which
may be impacted by Year 2000 complications. The failure of our customers to
ensure that their servers are Year 2000 compliant could have a material adverse
effect on our customers, which in turn could have a material adverse effect on
our business, if our customers are forced to cease or interrupt Internet
operations or experience malfunctions related to their equipment.
We have established procedures for evaluating and managing the risks and
costs associated with the Year 2000 problem. Funding and execution for this
initiative is within our existing business units and operating budgets and is
not viewed as material. Based on our current assessment, we believe the costs,
excluding employee personnel time and effort and unanticipated liabilities, to
resolve Year 2000 issues should not exceed $900,000, of which we have incurred
approximately $650,000 through September 30, 1999. We further estimate that the
time and effort required of our personnel to resolve Year 2000 issues will not
be material.
While we believe our Year 2000 initiative to be prudent, properly funded and
staffed and well-managed, there can be no assurance that we will identify and
remedy all Year 2000 problems in a timely fashion, that any remedial efforts in
this regard will not involve significant time and expense, or that these
problems will not have a material adverse effect on our business.
Our stock price has been volatile in the past and is likely to continue to be
volatile
The market price of our common stock has been volatile in the past and is
likely to continue to be volatile. In addition, the securities markets in
general, and Internet stocks in particular, have experienced significant price
volatility and accordingly the trading price of our common stock is likely to
be affected by this activity.
16
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sales of our common stock by the
selling stockholders under this prospectus.
17
<PAGE>
DILUTION
As of September 30, 1999, our net tangible book value was a deficit of
approximately $132.6 million, or a deficit of $0.78 per share of common stock,
which does not include a $15.5 million aggregate liquidation preference related
to convertible preferred stock of Service Metrics as of September 30, 1999. The
deficit in net tangible book value per share represents the amount of our total
tangible assets less total liabilities, divided by 170,084,342 shares of common
stock outstanding at September 30, 1999. Dilution in net tangible book value
per share represents the difference between the amount per share paid by
purchasers of shares of our common stock in this offering and the net tangible
book value per share of our common stock immediately following this offering.
We will not receive any proceeds from the sale of the common stock by the
selling stockholders under this prospectus and the shares offered under this
prospectus are already outstanding. Accordingly, the amount of our total
tangible assets, total liabilities and shares of common stock outstanding will
not change as a result of the sale of any of the shares offered under this
prospectus. Therefore, our net tangible book value and net tangible book value
per share immediately following this offering will remain unchanged from the
numbers set forth above, assuming that no additional shares of common stock are
issued after the date of this prospectus.
Assuming that the shares offered under this prospectus are sold at a price
of $36.03, the closing price of our common stock on September 30, 1999, new
purchasers of the shares will experience an immediate dilution of $36.81 per
share. The following table illustrates the per share dilution:
<TABLE>
<S> <C>
Assumed offering price per share..................................... $36.03
Net tangible book value per share after this offering................ (0.78)
------
Dilution per share to new purchasers................................. $36.81
======
</TABLE>
Please note that the last sale price of our common stock on December 21,
1999 was $80.06. Accordingly, assuming that the shares offered under this
prospectus are sold at that price and that our net tangible book value per
share has not changed since September 30, 1999, new purchasers of the shares
will experience an immediate dilution of $80.84 per share.
The above discussion and table assume no exercise of any stock options or
warrants for common stock outstanding as of September 30, 1999 or conversion
into common stock of redeemable convertible preferred stock, convertible
preferred stock or convertible subordinated notes outstanding as of September
30, 1999. If any of these options or warrants are exercised or if any of these
convertible securities are converted into common stock, there may be further
dilution to new purchasers. Please see Note 1 to the Notes to Supplemental
Consolidated Financial Statements included herein.
18
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the shares
beneficially owned by the selling stockholders named below as of December 21,
1999, the shares that may be offered and sold from time to time by the selling
stockholders pursuant to this prospectus, assuming each selling stockholder
sells all of the shares offered in this prospectus, and the nature of any
position, office or other material relationship which each selling stockholder
has had with Exodus or any of its predecessors or affiliates within the past
three years. The selling stockholders named below, together with any pledgee or
donee of any named stockholders, and any person who may purchase shares offered
hereby from any named stockholders in a private transaction in which they are
assigned the stockholders' rights to registration of their shares, are referred
to in this prospectus as the "selling stockholders."
Except as indicated below, the shares that may be offered and sold pursuant
to this prospectus represent all of the shares beneficially owned by each named
selling stockholder as of December 21, 1999. All of these shares were acquired
by the selling stockholders in connection with our acquisitions of Service
Metrics, Inc. and Global OnLine Japan Co., Ltd. Because the selling
stockholders may offer from time to time all or some of their shares under this
prospectus, no assurances can be given as to the actual number of shares that
will be sold by any selling stockholder or that will be held by the selling
stockholder after completion of the sales. Information concerning the selling
stockholders may change from time to time and any changed information will be
set forth in supplements to this prospectus if and when necessary.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that consider shares to be beneficially
owned by any person who has voting or investment power with respect to the
shares. Common stock subject to options that are currently exercisable or
exercisable within 60 days after December 21, 1999 are considered to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of a person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person. Based upon the 171,802,447 outstanding shares of common stock
as of December 21, 1999, and assuming each selling stockholder sells all of the
shares offered in this prospectus, no selling stockholder will own one percent
or more of our outstanding shares of common stock after the completion of this
offering.
<TABLE>
<CAPTION>
Shares owned
Shares owned Shares after
Name before offering offered offering
- ---- --------------- --------- ------------
<S> <C> <C> <C>
Fidelity Investors II Limited
Partnership(1)........................ 18,689,926 728,950 17,960,976
SOFTBANK Technology Ventures IV
L.P.(2)............................... 1,766,352 1,766,352 --
Pacific Technology Ventures U.S.A.
L.P.(3)............................... 1,096,664 1,096,664 --
Pequot Venture Partners LP(4).......... 704,192 704,192 --
Nexus Capital Partners I L.P.(5)....... 643,458 643,458 --
Thomas K. Higley(6).................... 503,160 503,160 --
Niel Robertson......................... 251,580 251,580 --
Rajat Bhargava(7)...................... 226,422 226,422 --
Global OnLine Japan Ninnikumiai(8)..... 138,438 138,438 --
Lion Investments Limited............... 133,944 133,944 --
Roger J. Boisvert(9)................... 133,434 133,434 --
Richard Terry Duryea(10)............... 75,474 75,474 --
Nexus Partners, LLC(5)................. 60,732 60,732 --
J.H. Whitney III, L.P.(11)............. 40,586 40,586 --
Rizwan Virk............................ 36,164 36,164 --
SOFTBANK Technology Advisors Fund
L.P.(2)............................... 34,502 34,502 --
Yuji Suzuki(12)........................ 32,802 32,802 --
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Shares owned
Shares owned Shares after
Name before offering offered offering
- ---- --------------- --------- ------------
<S> <C> <C> <C>
W. Donald Jones(13).................... 16,772 16,772 --
Yoshio Hattori(14)..................... 13,899 13,899 --
Charles R. Olson(15)................... 11,119 11,119 --
Donald Sefton.......................... 9,812 9,812 --
V.M. Baines(8)......................... 9,451 9,451 --
Robert Rudelius(16).................... 9,783 7,783 2,000
Paul Hardy............................. 6,891 6,671 220
Yuriko Hiraguri(17).................... 6,671 6,671 --
Holly K. Hamann........................ 4,402 4,402 --
Christopher J. Phelan(18).............. 3,335 3,335 --
Webber Family Trust dated 1/6/89....... 2,732 2,732 --
Intensity Channels, Inc................ 2,008 2,008 --
Stephen Wolfe.......................... 1,667 1,667 --
Peter Boardman......................... 1,111 1,111 --
Steven Davis........................... 1,111 1,111 --
Peter R. Evans(19)..................... 1,111 1,111 --
Timothy Lee Romero..................... 1,111 1,111 --
Whitney Strategic Partners III,
L.P.(11).............................. 1,111 1,111 --
A-TEN Associates....................... 555 555 --
Yeri Choi Coyner....................... 555 555 --
Rie Kawaguchi(20)...................... 555 555 --
Timothy Marrable....................... 555 555 --
Megumi Saito........................... 555 555 --
Katsuomi Taira(21)..................... 555 555 --
Peter Tasker........................... 555 555 --
Alan DiPietro.......................... 470 470 --
---------- --------- ----------
Totals............................... 24,676,282 6,713,086 17,963,196
</TABLE>
- --------
(1) Prior to the acquisition of SMI by Exodus, Fidelity Investors II Limited
Partnership held approximately 11.6% of the fully-diluted common shares of
SMI. In addition, based upon a Schedule 13G filed with the Commission on
March 10, 1999, FMR Corp., an affiliate of Fidelity Investors II Limited
Partnership, is the beneficial owner of 17,960,976 shares of Exodus common
stock, constituting approximately 10.5% of the outstanding shares of Exodus
common stock.
(2) Prior to the acquisition of Service Metrics, Inc. ("SMI") by Exodus,
SOFTBANK Technology Ventures IV L.P. and SOFTBANK Technology Advisors Fund
L.P. together held approximately 28.6% of the fully-diluted common shares
of SMI and Brad Feld, a representative of these partnerships, served as a
director of SMI.
(3) Prior to the acquisition of SMI by Exodus, Pacific Technology Ventures
U.S.A. L.P. held approximately 17.4% of the fully-diluted common shares of
SMI and Patrick Kenealy, a representative of this partnership, served as a
director of SMI.
(4) Prior to the acquisition of SMI by Exodus, Pequot Venture Partners LP held
approximately 11.2% of the fully-diluted common shares of SMI.
(5) Prior to the acquisition of SMI by Exodus, Nexus Capital Partners I, L.P.
and Nexus Partners, LLC together held approximately 11.2% of the fully-
diluted common shares of SMI and Will Weathersby, a representative of these
partnerships, served as a director of SMI.
(6) Thomas Higley is the vice president, Service Metrics of Exodus and
president of SMI. Prior to the acquisition of SMI by Exodus, Mr. Higley was
a director, president, treasurer and secretary of SMI.
20
<PAGE>
(7)Prior to the acquisition of SMI by Exodus, Rajat Bhargava was a director of
SMI.
(8) Prior to the acquisition of Global OnLine Japan Co., Ltd ("GOL") by
Exodus, Global OnLine Japan Ninnikumiai held approximately 33.3% of the
common shares of GOL and V.M. Baines and Steve Quaiver, representatives of
this entity, served as directors of GOL.
(9) Roger Boisvert is the representative director and president of GOL. Prior
to the acquisition of GOL by Exodus, Mr. Boisvert held approximately 32.1%
of the common shares of GOL and served as a director of GOL.
(10) Prior to the acquisition of SMI by Exodus, Richard Terry Duryea was a
director of SMI.
(11) Prior to the acquisition of GOL by Exodus, J.H. Whitney III, L.P. and
Whitney Strategic Partners III, L.P. together held approximately 10.0% of
the common shares of GOL and Paul Slawson, a representative of these
partnerships, served as a director of GOL.
(12) Prior to the acquisition of GOL by Exodus, Yuji Suzuki held approximately
7.9% of the common shares of GOL, and previously held in excess of 10% of
the common shares of GOL, and served as chairman of GOL.
(13) Prior to the acquisition of SMI by Exodus, W. Donald Jones was vice
president and chief financial officer of SMI.
(14) Prior to the acquisition of GOL by Exodus, Yoshio Hattori served as a
director of GOL.
(15) Prior to the acquisition of GOL by Exodus, Charles Olson was the chief
financial officer of GOL.
(16) Robert Rudelius is an officer and majority owner of a company that is a
party to an alliance partner agreement with Exodus.
(17) Prior to the acquisition of GOL by Exodus, Yurika Hiraguri served as a
director of GOL and was vice president of administration of GOL.
(18) Prior to the acquisition of GOL by Exodus, Christopher J. Phelan was the
chief operating officer of GOL.
(19) Prior to the acquisition of GOL by Exodus, Peter R. Evans was the network
manager of GOL.
(20) Prior to the acquisition of GOL by Exodus, Rie Kawaguchi was the chief
accountant of GOL.
(21) Prior to the acquisition of GOL by Exodus, Katsuomi Taira was the director
of corporate sales of GOL.
21
<PAGE>
PLAN OF DISTRIBUTION
The selling stockholders and their successors, including their transferees,
pledgees or donees or their successors, may sell the common stock offered under
this prospectus directly to purchasers or through underwriters, broker-dealers
or agents, who may receive compensation in the form of discounts, concessions
or commissions from the selling stockholders or the purchasers. These
discounts, concessions or commissions as to any particular underwriter, broker-
dealer or agent may be in excess of those customary in the types of
transactions involved. Neither Exodus nor the selling stockholders can
presently estimate the amount of this compensation.
The common stock offered under this prospectus may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at prices related to the prevailing market prices, at varying prices determined
at the time of sale, or at negotiated prices. These sales may be effected in
transactions, which may involve crosses or block transactions:
. on any national securities exchange or U.S. inter-dealer system of a
registered national securities association on which the common stock may
be listed or quoted at the time of sale;
. in the over-the-counter market;
. in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
. through the writing of options, whether the options are listed on an
options exchange or otherwise; or
. through the settlement of short sales.
In connection with the sale of the common stock, the selling stockholders
may enter into hedging transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the common stock in
the course of hedging the positions they assume. The selling stockholders may
also sell the common stock short and deliver these securities to close out
their short positions, or loan or pledge the common stock to broker-dealers
that in turn may sell these securities.
The aggregate proceeds to the selling stockholders from the sale of the
common stock offered by them will be the purchase price of the common stock
less discounts and commissions, if any. Each of the selling stockholders
reserves the right to accept and, together with their agents from time to time,
to reject, in whole or in part, any proposed purchase of common stock to be
made directly or through agents. Exodus will not receive any of the proceeds
from this offering.
Exodus' outstanding common stock is listed for trading on the Nasdaq
National Market.
The selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock may be "underwriters" within the
meaning of Section 2(11) of the Securities Act. Any discounts, commissions,
concessions or profit they earn on any resale of the shares may be underwriting
discounts and commissions under the Securities Act. Selling stockholders who
are "underwriters" within the meaning of Section 2(11) of the Securities Act
will be subject to the prospectus delivery requirements of the Securities Act.
In addition, any securities covered by this prospectus which qualify for
sale pursuant to Rule 144 of the Securities Act may be sold under Rule 144
rather than pursuant to this prospectus. A selling stockholder may not sell any
common stock described in this prospectus and may not transfer, devise or gift
these securities by other means not described in this prospectus.
22
<PAGE>
To the extent required, the specific common stock to be sold, the names of
the selling stockholders, the respective purchase prices and public offering
prices, the names of any agent, dealer or underwriter, and any applicable
commissions or discounts with respect to a particular offer will be set forth
in an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement of which this prospectus is a part.
This prospectus also may be used, with Exodus' consent, by donees or pledgees
of the selling stockholders, or by other persons acquiring shares and who wish
to offer and sell shares under circumstances requiring or making desirable its
use.
In order to comply with the securities laws of some states, if applicable,
the common stock may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the common stock may
not be sold unless they have been registered or qualified for sale or an
exemption from registration or qualification requirements is available and is
complied with.
The common stock offered under this prospectus was originally issued to
former stockholders of Service Metrics, Inc. and Global OnLine Japan Co., Ltd.
in connection with the acquisitions of these companies pursuant to exemptions
from the registration requirements of the Securities Act provided by Section
4(2) thereof and/or Regulation D promulgated thereunder. In connection with the
acquisitions of Service Metrics, Inc. and Global OnLine Japan Co., Ltd., Exodus
agreed to register the shares of common stock offered under this prospectus
under the Securities Act. Exodus and the selling stockholders have agreed to
indemnify each other, and their respective controlling persons, against
specific liabilities, including liabilities arising under the Securities Act
and Exchange Act, in connection with the offer and sale of the shares. In
addition, the selling stockholders may indemnify brokers, dealers, agents or
underwriters that participate in transactions involving sales of the shares
against specific liabilities, including liabilities arising under the
Securities Act and/or Exchange Act. Exodus will pay substantially all of the
expenses incident to this offering of the shares by the selling stockholders to
the public other than commissions and discounts of underwriters, brokers,
dealers or agents.
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will provide Exodus with an
opinion as to legal matters in connection with the common stock.
EXPERTS
Our consolidated financial statements and related schedule as of December
31, 1997 and 1998, and for each of the years in the three-year period ended
December 31,1998, have been included in this registration statement in reliance
on the report of KPMG LLP, independent auditors, appearing elsewhere in this
registration statement, and upon the authority of said firm as experts in
auditing and accounting.
Our supplemental consolidated financial statements and related schedule as
of December 31, 1997 and 1998, and for each of the years in the three-year
period ended December 31,1998, have been included in this registration
statement in reliance on the report of KPMG LLP, independent auditors,
appearing elsewhere in this registration statement, and upon the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Cohesive Technology Solutions, Inc.
as of December 31, 1997 and 1998 and for each of the years in the three-year
period ended December 31, 1998 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in auditing and accounting.
23
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
The following documents we have filed with the Commission are incorporated
into this prospectus by reference:
. our annual report on Form 10-K for the fiscal year ended December 31,
1998 filed with the Commission on February 22, 1999;
. our quarterly report on Form 10-Q for the quarter ended March 31, 1999
filed with the Commission on May 17, 1999, as amended by a Form 10-Q/A
filed with the Commission on June 25, 1999;
. our quarterly report on Form 10-Q for the quarter ended June 30, 1999
filed with the Commission on August 13, 1999;
. our quarterly report on Form 10-Q for the quarter ended September 30,
1999 filed with the Commission on November 12, 1999;
. our current reports on Form 8-K filed with the Commission on January 29,
1999, February 22, 1999, March 2, 1999, June 18, 1999, August 11, 1999,
as amended on October 12, 1999 and November 29, 1999, November 29, 1999
(two reports), and December 3, 1999;
. the description of our common stock contained in our registration
statement on Form 8-A filed with the Commission on February 13, 1998
under Section 12(g) of the Exchange Act, including any amendment or
report filed for the purpose of updating such description;
. the description of our preferred stock purchase rights contained in our
registration statement on Form 8-A filed with the Commission on January
29, 1999 under Section 12(g) of the Exchange Act, as amended by a Form 8-
A/A filed with the Commission on November 29, 1999, including any
amendment or report filed for the purpose of updating such description;
and
. all documents subsequently filed by us pursuant to Sections 13(a), 13(c),
14 and 15(d) of the Exchange Act after the date of this prospectus and
before the termination of this offering.
To the extent that any statement in this prospectus is inconsistent with any
statement that is incorporated by reference, the statement in this prospectus
shall control. The incorporated statement shall not be deemed, except as
modified or superseded, to constitute a part of this prospectus or the
registration statement.
Because we are subject to the informational requirements of the Exchange
Act, we file reports and other information with the Commission. Reports,
registration statements, proxy and information statements and other information
that we have filed can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain copies of this material from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at rates prescribed by the Commission. The public may obtain information
on the operation of the Public Reference Room by calling the Commission at 1-
800-SEC-0330. The Commission also maintains a World Wide Web site that contains
reports, proxy and information statements and other information that is filed
electronically with the Commission. This web site can be accessed at
http://www.sec.gov.
We have filed with the Commission a registration statement on Form S-3 under
the Securities Act with respect to the common stock offered under this
prospectus. This prospectus does not contain all of the information in the
registration statement, parts of which we have omitted, as allowed under the
rules and regulations of the Commission. You should refer to the registration
statement for further information with respect to us and our common stock.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete and, in
24
<PAGE>
each instance, we refer you to the copy of each contract or document filed as
an exhibit to the registration statement. Copies of the registration statement,
including exhibits, may be inspected without charge at the Commission's
principal office in Washington, D.C., and you may obtain copies from this
office upon payment of the fees prescribed by the Commission.
We will furnish without charge to each person to whom a copy of this
prospectus is delivered, upon written or oral request, a copy of the
information that has been incorporated by reference into this prospectus
(except exhibits, unless they are specifically incorporated by reference into
this prospectus). You should direct any requests for copies to Exodus
Communications, Inc., 2831 Mission College Boulevard, Santa Clara, California
95054, Attention: Adam W. Wegner, General Counsel, telephone: (408) 346-2200.
25
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
EXODUS COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
Supplemental Consolidated Financial Statements: ----
<S> <C>
Independent Auditors' Report.............................................. F-2
Supplemental Consolidated Balance Sheets.................................. F-3
Supplemental Consolidated Statements of Operations........................ F-4
Supplemental Consolidated Statements of Stockholders' (Deficit) Equity.... F-5
Supplemental Consolidated Statements of Cash Flows........................ F-7
Notes to Supplemental Consolidated Financial Statements................... F-8
<CAPTION>
Historical Consolidated Financial Statements:
<S> <C>
Independent Auditors' Report.............................................. F-28
Consolidated Balance Sheets............................................... F-29
Consolidated Statements of Operations..................................... F-30
Consolidated Statements of Stockholders' (Deficit) Equity................. F-31
Consolidated Statements of Cash Flows..................................... F-32
Notes to Consolidated Financial Statements................................ F-33
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
Independent Auditors' Report.............................................. F-52
Consolidated Balance Sheets............................................... F-53
Consolidated Statements of Operations..................................... F-54
Consolidated Statements of Stockholders' Equity........................... F-55
Consolidated Statements of Cash Flows..................................... F-56
Notes to Consolidated Financial Statements................................ F-57
Condensed Consolidated Balance Sheets..................................... F-67
Condensed Consolidated Statements of Operations........................... F-68
Condensed Consolidated Statements of Cash Flows........................... F-69
Notes to Unaudited Condensed Consolidated Financial Statements............ F-70
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Financial Statements............... F-71
Unaudited Pro Forma Combined Condensed Statement of Operations............ F-72
Notes to Unaudited Pro Forma Combined Condensed Financial Statements...... F-74
FINANCIAL STATEMENT SCHEDULES
Supplemental Schedule II--Valuation and Qualifying Accounts............... S-1
Schedule II--Valuation and Qualifying Accounts............................ S-2
</TABLE>
F-1
<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 as listed in the index on page F-1.
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 and related supplemental
financial statement schedule 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, except as to Note
9,
which is as of December 14, 1999
F-2
<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 and 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;
16,538,024, 161,670,932, and
170,084,342 shares issued and outstanding as
of December 31, 1997 and 1998, and September
30, 1999, respectively....................... 17 162 170
Additional paid-in capital.................... 2,493 117,127 195,166
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.
F-3
<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........................ $ (0.27) $ (1.73) $ (0.55) $ (0.42) $ (0.47)
======= ======== ======== ======== ========
Shares used in computing basic
and diluted net loss per
share........................ 15,312 15,428 125,808 114,088 165,974
======= ======== ======== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-4
<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............... -- $ -- 14,568 $15 $ 186 $(195) $ -- $ (1,146) $ (1,140)
Issuance of common
stock.................. -- -- 1,072 1 31 -- -- -- 32
Issuance of common stock
in connection with
stock purchase plan and
exercise of stock
options................ -- -- 128 -- 4 (3) -- -- 1
Repurchase of common
stock.................. -- -- (200) -- (6) 6 -- -- --
Repayment of notes
receivable from
stockholders........... -- -- -- -- -- 6 -- -- 6
Net loss................ -- -- -- -- -- -- -- (4,133) (4,133)
----- ------ ------ --- ------ ----- ------- -------- --------
Balances as of December
31, 1996............... -- -- 15,568 16 215 (186) -- (5,279) (5,234)
Issuance of common stock
in connection with
exercise of stock
options and warrants... -- -- 1,378 1 221 -- -- -- 222
Repurchase of common
stock.................. -- -- (408) -- (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............... -- -- 16,538 17 2,493 (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............... -- -- 6,703 7 2,286 -- -- -- 2,293
Issuance of common stock
in conjunction with
initial public
offering, net of
offering costs of
$7,062................. -- -- 41,000 41 69,777 -- -- -- 69,818
Issuance of common stock
to an officer for
cash................... -- -- 400 -- 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...... -- -- 1,132 1 8 -- -- -- 9
Repayment of notes
receivable from
stockholders........... -- -- -- -- -- 140 -- -- 140
</TABLE>
(continued)
F-5
<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.................. -- $ -- 95,898 $ 96 $ 43,341 $ -- $ -- $ -- $ 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 5,961 161,671 162 117,127 -- (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)... -- -- 6,813 7 14,000 -- -- -- 14,007
Issuance of common stock
and assumption of
options in connection
with the acquisition of
Cohesive Technology
Solutions, Inc.
(unaudited)............ -- -- 1,600 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 $15,437 170,084 $170 $195,166 $ -- $(2,903) $(175,269) $ 32,601
===== ======= ======= ==== ======== ===== ======= ========= ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-6
<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.
F-7
<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 had 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 0.252 shares of Exodus common stock for each share of SMI
common stock. The Company issued a total of approximately 6,200,000 shares of
Exodus common stock in exchange for all outstanding shares of SMI common stock
and reserved approximately 760,000 shares of common stock for issuance upon the
exercise of SMI options the Company assumed pursuant to the merger agreement.
F-8
<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,
1999
Year ------------------
Ended 1998 1998
-------- -------- --------
<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.
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.
F-9
<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 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.
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
F-10
<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)
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).
F-11
<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>
Years Ended December Nine Months Ended
31, September 30,
---------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options... 2,336 13,672 38,594 26,810 51,940
Shares issuable pursuant to warrants
to purchase common stock and
redeemable convertible preferred
stock................................ 5,096 22,504 1,448 2,136 506
Shares of redeemable convertible
preferred stock and convertible
preferred stock of SMI on an "as if
converted" basis..................... 124,296 272,936 3,106 1,086 5,172
Shares of convertible subordinated
notes on an "as if converted" basis.. -- -- -- -- 21,892
</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
F-12
<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 0.10488 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
0.10488 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 0.14604.
Pursuant to the exchange ratios applied in the acquisition, the Company
issued 1,600,796 shares of Exodus common stock and paid approximately
$50,000,000 in cash and assumed options to purchase a total of 408,712 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 Nine Months
December 31, Ended Ended
------------------ September 30, September 30,
1997 1998 1998 1999
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................... $ 41,004 $103,774 $ 69,208 $169,945
Net loss attributable to
holders of common stock... $(24,009) $(87,022) $(62,892) $(87,215)
Basic and diluted net loss
per share................. $ (1.41) $ (0.68) $ (0.54) $ (0.52)
Shares used in pro forma
per share calculation .... 17,028 127,408 115,688 167,188
</TABLE>
F-13
<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 $ 9,074
Other............................................ 1,836 3,920 11,220
------ ------ -------
$3,019 $6,876 $20,294
====== ====== =======
</TABLE>
F-14
<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% 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.
F-15
<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 87.5704 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.
(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
F-16
<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)
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 137,256 shares of the Company's
common stock at prices ranging from $0.30 to $0.34 per share. Also in 1996, in
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 480,000 shares of the Company's common
stock at a price of $1.88 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.
. 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 480,000 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.
F-17
<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)
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 149,304 and 1,448,680
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 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.
F-18
<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)
Initial Public Offering
On March 24, 1998, the Company completed its initial public offering ("IPO")
of 41,000,000 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 2,933,336
shares of common stock were authorized. Awards totaling 858,944 shares of
common stock were granted to individuals through 1996, at a price of $0.03 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, 34,408 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, 370,408 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 4,800,000 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, 436,528 shares were issued under the Purchase Plan at a weighted-
average purchase price of $1.67 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 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 17,600,000 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.
F-19
<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)
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
12,000,000 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 8,000,000 shares, from 12,000,000
shares to 20,000,000 shares.
In January 1998, the Company adopted the 1998 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 1,600,000 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 331/3 % 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 2,666,672
shares of common stock to an officer of the Company, of which half have an
exercise price of $1.13 per share and vest 100% after 3 years and half have an
exercise price of $2.25 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 5,775,848 shares of common stock with an exercise price of
$1.13 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 16,000,000 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.
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
F-20
<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)
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 ............................... $ (0.27) $ (1.73) $ (0.55)
Pro forma ................................. $ (0.27) $ (1.73) $ (0.61)
</TABLE>
F-21
<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 $1.25 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................ 1,000,664 $0.03 2,336,264 $0.03 13,674,288 $0.10
Granted................. 1,797,872 0.04 12,894,400 0.11 31,594,374 2.84
Forfeited............... (422,800) 0.03 (846,880) 0.08 (2,311,752) 1.03
Exercised............... (39,472) 0.03 (709,496) 0.04 (4,367,032) 0.33
--------- ---------- ----------
Outstanding at end of
year .................. 2,336,264 0.03 13,674,288 0.10 38,589,878 2.26
--------- ---------- ----------
Exercisable at end of
year................... 645,336 0.03 1,791,600 0.06 3,076,720 0.61
========= ========== ==========
Weighted-average fair
value of options
granted during the year
at market.............. 1,797,872 0.01 2,666,136 0.01 28,560,800 1.57
Weighted-average fair
value of options
granted during the year
at less than market.... -- -- 10,228,264 0.29 366,914 0.78
Weighted-average fair
value of options
granted during the year
at greater than
market ................ -- -- -- -- 2,666,672 0.53
</TABLE>
F-22
<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>
$0.03 to 0.10.............. 8,789,854 8.51 years $0.07 1,992,688 $0.06
$0.47 to 1.13.............. 9,360,616 9.13 1.04 826,136 0.91
$1.88 to 3.03.............. 9,929,680 9.64 2.67 82,544 2.48
$3.84 to 5.00.............. 10,509,728 9.84 4.75 175,352 4.50
---------- ---------
38,589,878 9.31 2.26 3,076,720 0.61
========== =========
</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 and August 12, 1999, the Company completed two-for-one
stock splits accomplished in the form of stock dividends. Share and per share
amounts in the accompanying supplemental consolidated financial statements
reflect both two-for-one stock splits retroactively.
F-23
<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)
(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 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.
F-24
<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)
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.
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>
F-25
<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 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.
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.
F-26
<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)
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>
<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.
(9) Stock Split
On December 14, 1999, the Company completed a 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 this
two-for-one stock split retroactively.
F-27
<PAGE>
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Exodus Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Exodus
Communications, Inc. and subsidiaries (the Company) as of December 31, 1997 and
1998, and the related consolidated statements of operations, stockholders'
(deficit) equity, and cash flows for each of the years in the three-year period
ended December 31, 1998. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement schedule as
listed in the index on page F-1. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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.
In our opinion, the 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. Also, in our opinion, the related financial
statement schedule, when considered in relation to the consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Mountain View, California
January 26, 1999, except as to Note 9,
which is as of November 23, 1999, and
except as to Note 10, which is as of
December 14, 1999
F-28
<PAGE>
EXODUS COMMUNICATIONS, INC.
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 $150,891 $ 164,215
Accounts receivable, net of allowance for
doubtful accounts of $691, $1,821, and
$5,240 as of December 31, 1997 and 1998,
and September 30, 1999, respectively....... 1,837 9,648 47,449
Prepaid expenses and other current assets... 1,377 6,203 18,235
-------- -------- ---------
Total current assets...................... 13,484 166,742 229,899
Property and equipment, net.................. 25,170 68,306 241,180
Restricted cash equivalents and investments.. 1,753 45,614 35,444
Intangibles and other assets................. 566 12,624 164,873
-------- -------- ---------
$ 40,973 $293,286 $ 671,396
======== ======== =========
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 5,140 14,131
Accounts payable............................ 6,252 9,208 32,897
Accrued expenses............................ 3,019 6,771 19,757
Accrued interest payable.................... -- 11,563 8,074
-------- -------- ---------
Total current liabilities................. 17,191 47,049 82,581
Equipment loans and line of credit
facilities, less current portion............ 12,693 15,695 9,600
Capital lease obligations, less current
portion..................................... 2,442 11,401 30,772
Convertible subordinated notes............... -- -- 250,000
Senior notes................................. -- 200,000 275,375
-------- -------- ---------
Total liabilities......................... 32,326 274,145 648,328
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 and 5,000,000
shares authorized as of December 31, 1997
and 1998, and September 30, 1999,
respectively; and no shares issued or
outstanding as of December 31, 1997 and
1998, and September 30, 1999 .............. -- -- --
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; 16,538,024, 160,538,816, and
168,981,250 shares issued and outstanding
as of December 31, 1997 and 1998, and
September 30, 1999, respectively .......... 17 161 169
Additional paid-in capital................... 2,493 117,079 192,339
Notes receivable from stockholders........... (140) -- --
Deferred stock compensation.................. (2,393) (1,080) (541)
Accumulated deficit.......................... (30,577) (97,019) (168,899)
-------- -------- ---------
Total stockholders' (deficit) equity...... (30,600) 19,141 23,068
-------- -------- ---------
$ 40,973 $293,286 $ 671,396
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
EXODUS COMMUNICATIONS, INC.
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 $ 49,808
Equipment revenues.......... 676 820 2,930
------- -------- -------- -------- --------
Total revenues............ 3,130 12,408 52,738 $ 31,638 $140,186
------- -------- -------- -------- --------
Costs and expenses:
Cost of service revenues.... 2,538 16,228 59,261
Cost of equipment revenues.. 452 640 2,298
------- -------- -------- -------- --------
Total cost of revenue..... 2,990 16,868 61,559 39,291 117,775
Marketing and sales......... 2,734 12,702 28,778 20,467 39,523
General and administrative.. 1,056 5,983 15,724 9,518 24,396
Product development......... 444 1,647 3,221 2,299 4,610
Amortization of
intangibles................ -- -- 141 -- 4,674
Restructuring costs......... -- -- -- -- 923
------- -------- -------- -------- --------
Total expenses............ 4,234 20,332 47,864 32,284 74,126
------- -------- -------- -------- --------
Total costs and expenses.. 7,224 37,200 109,423 71,575 191,901
------- -------- -------- -------- --------
Operating loss............ (4,094) (24,792) (56,685) (39,937) (51,715)
Interest income............... 68 193 7,137 4,016 10,353
Interest expense.............. (107) (699) (16,894) (9,136) (30,518)
------- -------- -------- -------- --------
Net loss.................. (4,133) (25,298) (66,442) (45,057) (71,880)
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) $(68,456) $(47,071) $(71,880)
======= ======== ======== ======== ========
Basic and diluted net loss per
share........................ $ (0.27) $ (1.73) $ (0.55) $ (0.41) $ (0.44)
======= ======== ======== ======== ========
Shares used in computing basic
and diluted net loss per
share ....................... 15,312 15,428 125,148 113,584 164,854
======= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(in thousands)
<TABLE>
<CAPTION>
Notes Total
Common Stock Additional Receivable Deferred Stockholders'
--------------- Paid-In from Stock Accumulated (Deficit)
Shares Amount Capital Stockholders Compensation Deficit Equity
------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of December
31, 1995................ 14,568 $ 15 $ 186 $(195) $ -- $ (1,146) $ (1,140)
Issuance of common
stock................... 1,072 1 31 -- -- -- 32
Issuance of common stock
in connection with stock
purchase plan and
exercise of stock
options................. 128 -- 4 (3) -- -- 1
Repurchase of common
stock................... (200) -- (6) 6 -- -- --
Repayment of notes
receivable from
stockholders............ -- -- -- 6 -- -- 6
Net loss................ -- -- -- -- -- (4,133) (4,133)
------- ---- -------- ----- ------- --------- --------
Balances as of December
31, 1996................ 15,568 16 215 (186) -- (5,279) (5,234)
Issuance of common stock
in connection with
exercise of stock
options and warrants.... 1,378 1 221 -- -- -- 222
Repurchase of common
stock................... (408) -- (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................ 16,538 17 2,493 (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................ 6,703 7 2,246 -- -- -- 2,253
Issuance of common stock
in conjunction with
initial public offering,
net of offering costs of
$7,062.................. 41,000 41 69,777 -- -- -- 69,818
Issuance of common stock
to an officer for cash.. 400 -- 450 -- -- -- 450
Issuance of common stock
and common stock
warrants................ -- -- 786 -- -- -- 786
Repayment of notes
receivable from
stockholders............ -- -- -- 140 -- -- 140
Conversion of redeemable
convertible preferred
stock into common
stock................... 95,898 96 43,341 -- -- -- 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................ -- -- -- -- -- (66,442) (66,442)
------- ---- -------- ----- ------- --------- --------
Balances as of December
31, 1998................ 160,539 161 117,079 -- (1,080) (97,019) 19,141
Issuance of common stock
in connection with
employee stock purchase
plan and exercise of
stock options and
warrants (unaudited).... 6,842 7 13,999 -- -- -- 14,006
Issuance of common stock
and assumption of
options in connection
with the acquisition of
Cohesive Technology
Solutions, Inc.......... 1,600 1 61,261 -- -- -- 61,262
Amortization of deferred
stock compensation
(unaudited)............. -- -- -- -- 539 -- 539
Net loss (unaudited).... -- -- -- -- -- (71,880) (71,880)
------- ---- -------- ----- ------- --------- --------
Balances as of September
30, 1999 (unaudited).... 168,981 $169 $192,339 $ -- $ (541) $(168,899) $ 23,068
======= ==== ======== ===== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
EXODUS COMMUNICATIONS, INC.
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) $(66,442) $(45,057) $(71,880)
Adjustments to reconcile net
loss to net cash used for
operating activities:
Depreciation and
amortization............. 461 3,429 12,997 8,568 28,045
Loss on disposal of
property and equipment... -- -- 464 248 --
Noncash common stock and
warrant expense.......... -- -- 786 786 --
Amortization of deferred
stock compensation....... -- 1,089 1,313 1,081 539
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) (8,301) (7,117) (27,865)
Prepaid expenses and
other assets........... (189) (748) (4,086) (3,970) (16,812)
Accounts payable........ 671 5,089 2,791 4,981 21,735
Accrued expenses........ 339 2,237 2,659 3,790 5,366
Accrued interest
payable................ -- -- 11,563 5,750 (3,489)
------- -------- -------- -------- --------
Net cash used for
operating activities.. (3,116) (15,518) (46,498) (31,246) (64,366)
------- -------- -------- -------- --------
Cash flows from investing
activities:
Capital expenditures........ (3,499) (22,489) (44,564) (26,523) (157,703)
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................ -- -- -- -- (15,405)
------- -------- -------- -------- --------
Net cash used for
investing activities.. (3,877) (23,864) (92,746) (70,085) (231,981)
------- -------- -------- -------- --------
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
common stock, net.......... 32 222 72,521 71,353 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 4,035 --
Payments on capital leases
obligations................ (154) (720) (2,999) (1,689) (6,176)
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 45,937 279,865 282,108 309,671
------- -------- -------- -------- --------
Net increase in cash and cash
equivalents................. 3,552 6,555 140,621 180,777 13,324
Cash and cash equivalents at
beginning of period......... 163 3,715 10,270 10,270 150,891
------- -------- -------- -------- --------
Cash and cash equivalents at
end of period............... $ 3,715 $ 10,270 $150,891 $191,047 $164,215
======= ======== ======== ======== ========
Supplemental disclosures of
cash flow information:
Cash paid--interest......... $ -- $ 699 $ 4,917 $ 2,921 $ 33,910
======= ======== ======== ======== ========
Non cash investing and
financing activities:
Assets recorded under
capital leases............. $ 27 $ 2,700 $ 11,709 $ 6,691 $ 34,538
======= ======== ======== ======== ========
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 $ -- $ -- $ --
======= ======== ======== ======== ========
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 consolidated financial statements.
F-32
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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 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.
Use of Estimates
The preparation of 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 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 three financial institutions.
The Company classifies its investments as "held-to-maturity." As of
September 30, 1999 such investments consisted of United States Treasury Notes
and are recorded at amortized cost.
F-33
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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 components of restricted cash equivalents and investments are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
United States 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 systems management services that are
included in the Company's co-location services in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed. Costs are
capitalized after technological feasibility is achieved; generally upon the
development of a working model. To date, software development costs
capitalizable under SFAS No. 86 have not been material.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the
F-34
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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)
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 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 consolidated financial statements have been prepared on the same
basis as the audited 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 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).
F-35
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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 common stockholders 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
Year Ended December Ended
31, September 30,
---------------------- -------------
1996 1997 1998 1998 1999
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options... 2,336 13,672 38,288 26,760 51,282
Shares issuable pursuant to warrants
to purchase common and redeemable
convertible preferred stock.......... 5,096 22,504 1,448 2,136 506
Shares of redeemable convertible
preferred stock on an "as if
converted" basis..................... 124,296 272,936 -- -- --
Shares of convertible subordinated
notes on an "as if converted" basis.. -- -- -- -- 21,892
</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 ten 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 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
F-36
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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)
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 0.10488 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
0.10488 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 0.14604.
Pursuant to the exchange ratios applied in the acquisition, the Company
issued 1,600,796 shares of Exodus common stock and paid approximately
$50,000,000 in cash and assumed options to purchase a total of 408,712 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 consolidated results of operations with Arca's, AIS', and
Cohesive's results of operations, as if Arca, AIS, and Cohesive had been
consummated as of January 1, 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended Nine Months Nine Months
December 31, Ended Ended
------------------ September 30, September 30,
1997 1998 1998 1999
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................... $ 41,004 $103,767 $ 69,208 $169,377
Net loss attributable to
common stockholders....... $(24,009) $(86,148) $(62,557) $(81,719)
Basic and diluted net loss
per share................. $ (1.41) $ (0.68) $ (0.54) $ (0.49)
Shares used in pro forma
per share calculation..... 17,028 126,748 115,184 166,068
</TABLE>
F-37
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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.
(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 32,887 90,319
Construction in progress..................... -- 8,497 40,576
------- ------- --------
29,131 85,343 281,134
Less accumulated depreciation and
amortization................................ 3,961 17,037 39,954
------- ------- --------
$25,170 $68,306 $241,180
======= ======= ========
</TABLE>
Computer equipment and certain data center infrastructure are recorded under
capital leases that aggregated $4,492,000, $20,236,000, and $54,774,000 as of
December 31, 1997 and 1998, and September 30, 1999, respectively. Accumulated
amortization on the assets recorded under capital leases aggregated $722,000,
$4,426,000, and $12,260,000 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 $ 8,940
Other............................................ 1,836 3,815 10,817
------ ------ -------
$3,019 $6,771 $19,757
====== ====== =======
</TABLE>
F-38
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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
F-39
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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)
initial purchasers and offering expenses). Interest is payable semi annually 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.
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 87.5704 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
F-40
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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)
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 ten 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.
(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 137,256 shares of the Company's
common stock at prices ranging from $0.30 to $0.34 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 480,000 shares of the Company's common
stock at a price of $1.88 per share.
F-41
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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 all warrant issuances, calculated using the Black-Scholes
option pricing model, with the following assumptions: dividends--none; expected
life--contractual term; risk-free interest rates of 5.7% to 6.7%; volatility--
60%, was not material except as follows:
. The 1,579,011 warrants issued in connection with the sale of the Series C
redeemable convertible preferred stock for which the fair value was
determined to be $1,200,000. This amount was recorded as a reduction in
the carrying value of the Series C redeemable convertible preferred stock
and recorded as the carrying value of the Series C warrants.
. 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 480,000 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 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 149,304 and 1,448,680
warrants to purchase common stock outstanding, respectively.
Initial Public Offering
On March 24, 1998, the Company completed its initial public offering ("IPO")
of 41,000,000 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.
F-42
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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)
Stock Purchase and Stock Option Plans
During 1995, the Company adopted a Stock Purchase Plan under which 2,933,336
shares of common stock were authorized. Awards totaling 858,944 shares of
common stock were granted to individuals through 1996, at a price of $0.03 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, 34,408 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, 370,408 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 4,800,000 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, 436,528 shares were issued under the Purchase Plan at a weighted-
average purchase price of $1.67 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 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 17,600,000 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
12,000,000 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 8,000,000 shares, from 12,000,000
shares to 20,000,000 shares.
In January 1998, the Company adopted the 1998 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 1,600,000 shares of the
Company's common stock for issuance
F-43
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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)
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 2,666,672
shares of common stock to an officer of the Company, of which half have an
exercise price of $1.13 per share and vest 100% after 3 years and half have an
exercise price of $2.25 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 5,775,848 shares of common stock with an exercise price of
$1.13 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 16,000,000 shares of
common stock for issuance to employees, and 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.
F-44
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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)
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. 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. This amount is being amortized consistent with the
method described in FASB Interpretation No. 28 over the vesting period of the
individual options, generally 50 months. Had compensation cost been determined
in accordance with SFAS No. 123 for all of the Company's stock-based
compensation plans, net loss attributable to common stockholders and net loss
per share would have been changed to the amounts indicated below (in thousands,
except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported.................................. $(4,133) $(26,711) $(68,456)
Pro forma.................................... $(4,133) $(26,711) $(76,134)
Basic and diluted net loss per share:
As reported.................................. $ (0.27) $ (1.73) $ (0.55)
Pro forma.................................... $ (0.27) $ (1.73) $ (0.61)
</TABLE>
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>
Year 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 $1.25 per share.
F-45
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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)
A summary of the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
Year 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................ 1,000,664 $0.03 2,336,264 $0.03 13,674,288 $0.10
Granted................. 1,797,872 0.04 12,894,400 0.11 31,288,808 2.86
Forfeited............... (422,800) 0.03 (846,880) 0.08 (2,311,752) 1.03
Exercised............... (39,472) 0.03 (709,496) 0.04 (4,367,032) 0.33
--------- ---------- ----------
Outstanding at end of
year................... 2,336,264 0.03 13,674,288 0.10 38,284,312 2.27
--------- ---------- ----------
Exercisable at end of
year................... 645,336 0.03 1,791,600 0.06 3,076,720 0.61
========= ========== ==========
Weighted average fair
value of options
granted during the year
at market.............. 1,797,872 0.01 2,666,136 0.01 28,560,800 1.57
Weighted average fair
value of options
granted during the year
at less than market.... -- -- 10,228,264 0.29 61,336 4.24
Weighted average fair
value of options
granted during the year
at greater than
market................. -- -- -- -- 2,666,672 0.53
</TABLE>
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
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Shares Life Price Shares Price
------------------------ ---------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.03 to 0.10 8,484,288 8.47 years $0.07 1,992,688 $0.06
$0.47 to 1.13........... 9,360,616 9.13 1.04 826,136 0.91
$1.88 to 3.03........... 9,929,680 9.64 2.67 82,544 2.48
$3.84 to 5.00........... 10,509,728 9.84 4.75 175,352 4.50
---------- ---------
38,284,312 9.31 2.27 3,076,720 0.61
========== =========
</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
F-46
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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)
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 and August 12, 1999, the Company completed two-for-one
stock splits accomplished in the form of stock dividends. Share and per share
amounts in the accompanying consolidated financial statements reflect both two-
for-one stock splits retroactively.
(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 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 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.................................................... $ 6,354 $ 9,065
2000.................................................... 6,604 9,726
2001.................................................... 5,920 9,803
2002.................................................... 676 9,325
2003.................................................... -- 9,176
Thereafter.............................................. -- 43,994
------- -------
Total minimum lease payments............................ 19,554 $91,089
=======
Less amount representing imputed interest............... 3,013
-------
Present value of minimum lease payments................. 16,541
Less current portion.................................... 5,140
-------
Capital lease obligations, less current portion......... $11,401
=======
</TABLE>
The Company's rent expense was $248,000, $1,764,000, $5,554,000, $3,376,000
and $11,007,000 for the years ended December 31, 1996, 1997 and 1998, and the
nine months ended September 30, 1998 and 1999, respectively.
F-47
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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)
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.
Contingencies
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes that it has adequate legal defenses
and that the ultimate outcome of these actions will not have a material effect
on the Company's financial position and results of operations.
(7) Income Taxes
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>
Year Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Expected income tax benefit..................... $(1,405) $(8,602) $(22,591)
Permanent differences........................... 2 15 81
Net operating loss not benefited................ 1,403 8,587 22,510
------- ------- --------
Actual income tax expense (benefit)............. $ -- $ -- $ --
======= ======= ========
</TABLE>
F-48
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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 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 $ 34,807
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 39,836
Less valuation allowance............................... (11,708) (39,836)
-------- --------
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 California purposes of $94,087,000 and $48,316,000,
respectively. The difference between the federal and California net operating
loss carryforward is due to the 50% limitation of net operating loss
carryforwards for California purposes. The federal net operating loss
carryforward will expire from 2011 through 2018. The California net operating
loss carryforward will expire from 2001 through 2003.
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
$28,128,000 for the years ended December 31, 1997 and 1998, respectively.
Federal and California tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift in the
ownership of the Company, 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,
F-49
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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 believes these Internet Data Centers represent one reportable
segment under the aggregation criteria of Statement of Financial Accounting
Standards ("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
Year Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Internet Data Centers.... $ 3,130 $ 12,408 $ 52,256 $ 31,423 $119,082
------- -------- -------- -------- --------
Professional services.... -- -- 482 215 21,104
------- -------- -------- -------- --------
Total revenues......... $ 3,130 $ 12,408 $ 52,738 $ 31,638 $140,186
======= ======== ======== ======== ========
Operating profit (loss):
Internet Data Centers.... * $ (1,243) $ (604) $ (2,859) $ 28,783
Professional services.... * -- (351) 17 1,880
Corporate areas.......... * (23,549) (55,730) (37,095) (82,378)
------- -------- -------- -------- --------
Total operating loss... $(4,094) $(24,792) $(56,685) $(39,937) $(51,715)
======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Total assets:
Internet Data Centers....................... * $ 52,459 $196,404
Professional services....................... * 212 3,011
Corporate assets............................ * 240,615 471,981
------- -------- --------
Total assets.............................. $40,973 $293,286 $671,396
======= ======== ========
</TABLE>
- --------
* Information is not available.
(9) Subsequent Events
On November 23, 1999, the Company closed a merger with Service Metrics, Inc.
("SMI") pursuant to which Service Metrics became its wholly owned subsidiary.
SMI, 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.
F-50
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO 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)
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 0.252 shares of Exodus common stock for each share of SMI
common stock. The Company issued a total of approximately 6,200,000 shares of
Exodus Common Stock in exchange for all outstanding shares of SMI common stock
and reserved approximately 760,000 shares of Exodus Common Stock for issuance
upon the exercise of SMI options the Company assumed pursuant to the merger
agreement.
SMI's revenues for the period ended December 31, 1998 and the nine months
ended 1998 are not considered material. SMI's revenues for the nine months
ended 1999 were approximately $568,000. SMI's net losses for the period ended
December 31, 1998 and the nine months ended September 30, 1998 and 1999 were
approximately $874,000, $335,000, and $5,496,000, respectively.
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.
(10) Stock Split
On December 14, 1999, the Company completed a two-for-one stock split
accomplished in the form of a stock dividend. Share and per share amounts in
the accompanying consolidated financial statements reflect this two-for-one
stock split retroactively.
F-51
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of
Cohesive Technology Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Cohesive
Technology Solutions, Inc. (formerly Cohesive Network Systems, Inc.) and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Cohesive Technology Solutions,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
April 8, 1999
(April 21, 1999 as to Note 10)
F-52
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 3,217,000 $ 3,580,000
Restricted cash..................................... 5,130,000 --
Short-term investments.............................. 15,784,000 --
Accounts receivable, net of allowance for doubtful
accounts of $250,000 and $962,000 in 1997 and 1998,
respectively....................................... 4,038,000 7,561,000
Income tax receivable............................... -- 1,984,000
Other receivables................................... 109,000 --
Inventory........................................... 393,000 422,000
Prepaid expenses.................................... 294,000 758,000
----------- -----------
Total current assets............................... 28,965,000 14,305,000
Property and equipment, net........................... 1,241,000 2,748,000
Other assets.......................................... 108,000 60,000
Intangibles, net...................................... 5,816,000 26,454,000
----------- -----------
Total.............................................. $36,130,000 $43,567,000
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Revolving lines of credit........................... $ 515,000 $ 6,997,000
Accounts payable.................................... 1,058,000 2,316,000
Amounts due under acquisition agreements............ 3,815,000 6,896,000
Accrued payroll and related expenses................ 1,026,000 2,224,000
Other accrued liabilities........................... 495,000 1,047,000
Income taxes payable................................ 2,125,000 --
Deferred revenue.................................... 719,000 276,000
Deferred gain....................................... 1,050,000 --
Current portion of long-term obligations (Note 2)... -- 440,000
----------- -----------
Total current liabilities.......................... 10,803,000 20,196,000
Long-term obligations (Note 2)........................ -- 349,000
----------- -----------
Total liabilities.................................. 10,803,000 20,545,000
----------- -----------
Commitments and contingencies (Notes 3 and 9)......... -- --
Redeemable preferred stock:
Preferred stock, $1.00 par value; 196,800 shares
authorized: Series A, 120,000 shares designated;
shares outstanding: 60,570 in 1997 and 1998........ 6,743,000 7,166,000
Series B, 76,800 shares designated; shares
outstanding: 28,800 in 1997 and 1998............... 3,000,000 3,202,000
Convertible Series D preferred stock, $1.00 par
value, none in 1997, 900,000 shares authorized,
designated and outstanding in 1998................. -- 7,906,000
Total redeemable preferred stock................... 9,743,000 18,274,000
Stockholders' equity:
Convertible Series C preferred stock, $1.00 par
value, 800,000 shares authorized, designated and
outstanding in 1997 and 1998....................... 4,000,000 4,000,000
Common stock $0.01 par value per share; 21,000,000
shares authorized; shares outstanding: 13,519,919
in 1997 and 13,902,769 in 1998..................... 135,000 139,000
Additional paid-in capital.......................... 3,169,000 3,364,000
Retained earnings (accumulated deficit)............. 8,280,000 (2,755,000)
----------- -----------
Total stockholders' equity......................... 15,584,000 4,748,000
----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity.............................. $36,130,000 $43,567,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-53
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Service revenues.................... $ 3,494,000 $ 8,463,000 $ 26,328,000
Product revenues.................... 9,298,000 11,957,000 15,380,000
----------- ------------ ------------
Total revenues.................... 12,792,000 20,420,000 41,708,000
Costs of revenues:
Costs of service revenues........... 2,292,000 5,489,000 15,291,000
Costs of product revenues........... 6,693,000 9,577,000 13,033,000
----------- ------------ ------------
Total cost of revenues............ 8,985,000 15,066,000 28,324,000
----------- ------------ ------------
Gross profit...................... 3,807,000 5,354,000 13,384,000
----------- ------------ ------------
Operating expenses:
Sales and marketing................. 2,285,000 5,100,000 5,672,000
General and administrative.......... 4,229,000 6,528,000 10,219,000
Research and development............ 566,000 1,308,000 --
Amortization of intangibles......... 869,000 1,583,000 6,734,000
Acquisition related charges......... 964,000 1,917,000 4,463,000
----------- ------------ ------------
Total operating expenses............ 8,913,000 16,436,000 27,088,000
----------- ------------ ------------
Operating loss.................... (5,106,000) (11,082,000) (13,704,000)
----------- ------------ ------------
Other income (expense):
Gain on divestiture................. -- 37,966,000 --
Interest income, net................ 71,000 579,000 354,000
Other expense, net.................. -- -- (2,000)
----------- ------------ ------------
Total other income................ 71,000 38,545,000 352,000
----------- ------------ ------------
Income (loss) from continuing
operations before income taxes....... (5,035,000) 27,463,000 (13,352,000)
Provision for (benefit from) income
taxes................................ -- 11,450,000 (2,555,000)
----------- ------------ ------------
Income (loss) from continuing
operations........................... (5,035,000) 16,013,000 (10,797,000)
Loss from discontinued operations..... (135,000) (136,000) --
Gain on divestiture of discontinued
operations (Less income taxes of
$1,412,000 in 1997 and $380,000
in 1998)............................. -- 2,523,000 562,000
----------- ------------ ------------
Net income (loss)..................... (5,170,000) 18,400,000 (10,235,000)
Preferred dividends................... (639,000) (827,000) (625,000)
Accretion on preferred stock.......... -- -- (175,000)
----------- ------------ ------------
Net income (loss) applicable to common
stockholders......................... $(5,809,000) $ 17,573,000 $(11,035,000)
=========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-54
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Series C Convertible
Preferred Stock Common Stock Additional Retained
-------------------- -------------------- Paid In Earnings
Shares Amount Shares Amount Capital (Deficit) Total
-------------------- ---------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1996................... -- $ -- 10,700,031 $107,000 $ 805,000 $ (3,484,000) $ (2,572,000)
Exercise of options..... 129,850 1,000 12,000 13,000
Preferred dividends..... (639,000) (639,000)
Net loss................ (5,170,000) (5,170,000)
-------- ----------- ---------- -------- ---------- ------------ ------------
Balances, December 31,
1996................... -- -- 10,829,881 108,000 817,000 (9,293,000) (8,368,000)
Exercise of options..... 770,038 8,000 135,000 143,000
Sale of common stock.... 1,920,000 19,000 1,901,000 1,920,000
Issuance of preferred
stock.................. 800,000 4,000,000 4,000,000
Compensatory stock
arrangements (Note 3).. 316,000 316,000
Preferred dividends..... (827,000) (827,000)
Net income.............. 18,400,000 18,400,000
-------- ----------- ---------- -------- ---------- ------------ ------------
Balances, December 31,
1997................... 800,000 4,000,000 13,519,919 135,000 3,169,000 8,280,000 15,584,000
Repurchase of common
stock.................. (250,000) (3,000) (747,000) (750,000)
Exercise of options..... 632,850 7,000 352,000 359,000
Compensatory stock
arrangements (Note 6).. 590,000 590,000
Accretion on preferred
stock.................. (175,000) (175,000)
Preferred dividends..... (625,000) (625,000)
Net loss................ (10,235,000) (10,235,000)
-------- ----------- ---------- -------- ---------- ------------ ------------
Balances, December 31,
1998................... 800,000 $ 4,000,000 13,902,769 $139,000 $3,364,000 $ (2,755,000) $ 4,748,000
======== =========== ========== ======== ========== ============ ============
</TABLE>
See notes to consolidated condensed financial statements.
F-55
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................... $(5,170,000) $ 18,400,000 $(10,235,000)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation and amortization....... 1,033,000 1,893,000 7,034,000
Stock compensation expense.......... -- 281,000 590,000
Loss on disposal of property and
equipment.......................... -- 25,000 598,000
Interest income on restricted cash.. -- (80,000) (44,000)
Gain on divestiture................. -- (37,966,000) --
Results of discontinued operations
and gain on disposal............... 135,000 (2,387,000) (562,000)
Change in assets and liabilities, net
of effect of acquisitions and
divestitures:
Accounts receivable................. (692,000) (190,000) (1,317,000)
Other receivables................... (72,000) (64,000) 125,000
Inventory........................... (267,000) 311,000 (29,000)
Prepaid expenses.................... (166,000) (70,000) (449,000)
Other assets........................ (37,000) 17,000 105,000
Accounts payable.................... (43,000) (334,000) 942,000
Income taxes........................ 100,000 492,000 (4,341,000)
Amounts due under acquisition
agreements......................... 964,000 -- --
Accrued payroll and related
expenses........................... 467,000 424,000 586,000
Accrued liabilities................. 337,000 239,000 (2,159,000)
Other current liabilities........... 177,000 328,000 (452,000)
----------- ------------ ------------
Net cash used by continuing
operating activities............. (3,234,000) (18,681,000) (9,608,000)
Net cash used by discontinued
operations....................... (168,000) (72,000) --
----------- ------------ ------------
Net cash used by operating
activities....................... (3,402,000) (18,753,000) (9,608,000)
----------- ------------ ------------
Cash flows from investing activities:
Sale (purchase) of short-term
investments........................ -- (15,784,000) 15,784,000
Acquisitions, net of cash acquired.. (1,312,000) (4,507,000) (11,928,000)
Repayment of acquisition
obligations, net................... -- -- (3,556,000)
Purchases of property and
equipment.......................... (860,000) (745,000) (1,338,000)
Proceeds from divestitures.......... -- 34,210,000 4,124,000
Proceeds from sale of discontinued
operations......................... -- 4,830,000 942,000
Investing activities of discontinued
operations......................... (344,000) (260,000) --
----------- ------------ ------------
Net cash provided by (used by)
investing activities............. (2,516,000) 17,744,000 4,028,000
----------- ------------ ------------
Cash flows from financing activities:
Proceeds (repayments) on line of
credit, net........................ 110,000 (193,000) 6,482,000
Proceeds from issuance of common
stock.............................. 13,000 2,063,000 211,000
Proceeds from issuance of preferred
stock.............................. 4,420,000 6,880,000 --
Repurchase of common stock.......... -- -- (750,000)
Redemption of preferred stock....... -- (7,003,000) --
Financing activities of discontinued
operations......................... 512,000 226,000 --
----------- ------------ ------------
Net cash provided by financing
activities....................... 5,055,000 1,973,000 5,943,000
----------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... (863,000) 964,000 363,000
Cash and cash equivalents, beginning
of year............................. 3,116,000 2,253,000 3,217,000
----------- ------------ ------------
Cash and cash equivalents, end of
year................................ $ 2,253,000 $ 3,217,000 $ 3,580,000
=========== ============ ============
Non-cash investing and financing
activities:
Purchase of software under deferred
payment arrangement (Note 2)....... $ -- $ -- $ 769,000
Preferred stock issued in
acquisition (Note 3)............... -- -- 7,731,000
Tax benefit on stock option
exercises.......................... -- -- 148,000
Supplemental cash flow information:
Interest paid....................... $ -- $ 107,000 $ 96,000
Income taxes paid................... -- 10,862,000 1,787,000
</TABLE>
See notes to consolidated financial statements.
F-56
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1997 and 1998
1. Business and Significant Accounting Policies
Business--The Company was incorporated in California in 1993 under the name
Global Internet Access Services, Inc. and reincorporated in Delaware in 1994,
subsequently changing its name to Cohesive Network Systems, Inc. During
September 1998, the Company merged with Business Technologies, Inc. and changed
its name to Cohesive Technology Solutions, Inc. Cohesive Technology Solutions,
Inc. and its wholly-owned subsidiaries (collectively, the "Company") are
primarily in the business of providing information technology related
consulting services to mid-tier customers and divisions of large corporations.
The Company has core competencies in the areas of business consulting,
application development and network integration.
The Company has incurred a net loss of $10,235,000 for the year ended
December 31, 1998. In addition, the Company has a negative working capital of
$5,891,000 and an accumulated deficit of $2,755,000 as of December 31, 1998.
Approximately $3 million of the Company's preferred stock is redeemable in
September 1999 while another $10.4 million is redeemable in January 2000. The
Company believes, to the extent existing resources and anticipated revenues are
insufficient to fund the Company's planned activities, that additional debt or
equity financing will be available from its majority stockholder. This
stockholder has indicated that to the extent that the Company is otherwise
unable to meets it obligation to repay its existing credit line at maturity in
December 1999, it will make an investment in debt or equity securities of the
Company in an amount sufficient to permit the Company to meet such obligation
up to a maximum of $15 million. In addition, the stockholder has agreed, to the
extent that the Company may not have capital legally available for the payment
of redemption amounts otherwise due in January 2000 in respect to preferred
stock held by the stockholder, to extend the redemption date of such preferred
stock until at least May 2000.
Consolidation--The consolidated financial statements include the accounts of
Cohesive Technology Solutions, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk--Financial instruments that potentially
subject the Company to concentrations of credit risk consist of cash
equivalents and accounts receivable. The Company invests its excess cash in
money market accounts and highly liquid government securities. The Company's
accounts receivable are generally derived from sales to customers in the United
States which require information technology and networking services. The
Company maintains reserves for potential credit losses.
Fair Value of Financial Instruments--As of December 31, 1997 and 1998, the
carrying amounts of cash and cash equivalents, accounts receivable and
borrowings under the Company's credit agreements approximate their respective
fair values.
Cash and Cash Equivalents--Cash equivalents are short-term, highly liquid
cash investments with an original maturity of less than 90 days.
F-57
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
Restricted Cash--Restricted cash represents cash in escrow related to the
divestiture of the Company's software development group and Internet services
division.
Short-Term Investments--While the Company's practice is to hold securities
to maturity, the Company has classified all securities as available-for-sale
securities, as the sale of such securities may be required prior to maturity to
implement management strategies. The carrying value of securities is adjusted
to fair market value, with unrealized gains and losses, net of deferred taxes,
being excluded from earnings and reported as a separate component of
stockholders' equity. Cost is based on the specific identification method for
purposes of computing realized gains or losses. At December 31, 1997, the
difference between fair value and amortized cost was not significant.
Inventory--Inventory consists primarily of computer hardware held for resale
and spare parts, and is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Property and Equipment--Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets, which are generally two to five
years.
Intangibles--Intangibles resulting from the acquisition of technology
service businesses are estimated by management to be primarily associated with
the acquired workforce and technological know-how. As a result of the limited
operating history of the entities acquired, the rapid technological changes
occurring in the industry and the intense competition for qualified engineering
professionals, recorded intangibles are amortized on the straight-line basis
over the estimated periods of benefit, generally two to seven years. At
December 31, 1997 and 1998, accumulated amortization was $2,493,000 and
$9,227,000, respectively.
At each balance sheet date, the Company assesses the value of recorded
intangibles for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows in relation to its net investment in each
subsidiary. Since inception, the Company has not recorded any provisions for
possible impairment of intangible assets.
Revenue Recognition--Revenue from services is recognized upon performance.
Revenue from hardware and software sales is recognized upon shipment.
Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Income Taxes--Deferred tax liabilities are recognized for future taxable
amounts and deferred tax assets are recognized for future deductions net of a
valuation allowance to reduce net deferred tax assets to amounts that are more
likely than not to be realized.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year presentation. Other than the reclassification of
redeemable preferred stock, these reclassifications had no effect on total
stockholders' equity or net income (loss). Redeemable preferred stock has been
reclassified from stockholders' equity to mezzanine equity to comply with SEC
reporting requirements.
F-58
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
Recently Issued Accounting Standards--In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," which requires an enterprise to report,
by major components and as a single total, the change in its net assets during
the period from nonowner sources. The Company adopted SFAS No. 130 in 1998. The
Company's comprehensive income is the same as its net income (loss).
In 1998, the AICPA issued a Statement of Position (SOP 98-1), which requires
companies to capitalize the costs incurred to develop and install software for
internal use. The Company adopted SOP 98-1 in 1998. Adoption of this statement
did not impact the Company's financial position, results of operations or cash
flows.
2. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Computer and office equipment........................ $1,595,000 $2,877,000
Software............................................. 135,000 968,000
Furniture and fixtures............................... 223,000 389,000
Vehicles............................................. 73,000 91,000
Leasehold improvements............................... 52,000 86,000
---------- ----------
2,078,000 4,411,000
Accumulated depreciation and amortization............ (837,000) (1,663,000)
---------- ----------
Property and equipment, net.......................... $1,241,000 $2,748,000
========== ==========
</TABLE>
During 1998, the Company spent approximately $789,000 to purchase, install
and implement new back office systems software. Of this amount, approximately
$440,000 and $349,000 is payable in 1999 and 2000, respectively.
3. Acquisitions and Divestitures
During the years ended December 31, 1996, 1997 and 1998, the Company made
the following acquisitions:
<TABLE>
<CAPTION>
Total
Acquisition Purchase
Company Date Price
------- ----------- -----------
<S> <C> <C>
Forte Computer Services, Inc........................ 4/2/96 $ 2,020,000
The Leftbank Operations, Inc........................ 4/10/97 1,300,000
R&D Networking, Inc................................. 8/28/97 3,600,000
Computer Lanscapes, Inc............................. 12/19/97 4,770,000
Napier Corporation.................................. 1/28/98 3,500,000
I. Consulting Corporation........................... 3/19/98 717,000
Integrated Office Solutions, Inc.................... 7/1/98 6,000,000
Business Technologies, Inc.......................... 9/18/98 16,731,000
-----------
Total............................................. $38,638,000
===========
</TABLE>
F-59
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
The total purchase prices above consist of (i) nonrefundable cash payments
due on closing of the acquisition (approximately $18.1 million), (ii) 900,000
shares of Convertible Redeemable Series D preferred stock issued to the former
shareholders of Business Technologies, Inc. (valued at $7.7 million) and (iii)
probable amounts to be paid in cash to the former owners of the acquired
companies upon the attainment of certain performance criteria (the "Cash
Earnouts") (approximately $12.8 million). Of the Cash Earnouts, $9.3 million
were allocated to original purchase price as the performance criteria were
considered probable of occurring as of the acquisition date. The remaining of
Cash Earnouts were contingent upon continued employment and were recorded as
Acquisition Related Charges during the employment periods. As of December 31,
1998, no additional amounts are contingent upon continued employment.
During 1996, 1997 and 1998, the Company recognized Acquisition Related
Charges comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Signing and retention bonuses............... $ -- $ 500,000 $1,818,000
Cash earnouts contingent upon continued
employment................................. 964,000 1,417,000 1,696,000
Reorganization expenses (primarily severance
and relocation costs)...................... -- -- 949,000
-------- ---------- ----------
$964,000 $1,917,000 $4,463,000
======== ========== ==========
</TABLE>
As of December 31, 1998, accrued liabilities included $283,000 of unpaid
Acquisition Related Charges that will be paid in 1999.
The acquisitions have been accounted for in accordance with the purchase
method of accounting and the accompanying consolidated financial statements
reflect the purchase price allocated to assets acquired and liabilities assumed
based upon their fair values as of the acquisition date. The $34.5 million
excess of the cash purchase price over the fair value of the net identifiable
assets has been allocated to intangibles. The Company's results of operations
include those of the acquired companies from their respective dates of
acquisition.
On July 25, 1997, the Company sold a portion of its software development
group to an unrelated third party for $40 million. As of December 31, 1997, all
of the proceeds except $4 million were available for operations. The remaining
amount was placed in escrow. During 1998, this entire amount and the related
accrued interest of $124,000 were released from escrow. In connection with this
sale, the vesting of options held by employees of the software development
division were accelerated by one year. This resulted in the Company recognizing
$281,000 in stock compensation expense during fiscal 1997. The Company recorded
a gain of $38 million during 1997 related to this sale.
On November 26, 1997, the Company sold its Internet services division to an
unrelated third party for $6 million. As of December 31, 1997, all of the
proceeds except $1,050,000 were available for operations. The $1,050,000 amount
was placed in escrow at the time of the sale and was recorded as a deferred
gain at December 31, 1997. Of this amount, $942,000 was released to the Company
and recognized as a gain on divestiture during 1998. The remaining $108,000 was
released to the third party purchaser. In connection with this sale, the
vesting of options held by
F-60
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
employees of the Internet services division were accelerated by one year. This
resulted in the Company recognizing $35,000 in stock compensation expense
during fiscal 1997. The Company recorded gains of $3.9 million and $0.9 million
during 1997 and 1998, respectively, related to this sale.
The operating results of the Internet services division have been segregated
from continuing operations and reported as discontinued operations in the
accompanying statement of operations. Revenues for the discontinued operations
were $3,721,000 and $3,805,000 for 1996 and 1997, respectively.
4. Lines of Credit
The Company has a revolving line of credit from a bank that provides for
borrowings up to $15 million through December 31, 1999. Borrowings under the
line are secured by substantially all of the Company's assets and bear interest
at varying rates based upon the bank's prime or LIBOR rate on the date of
borrowing. In addition, the line of credit restricts the payment by the Company
of cash dividends or distributions on its common stock. The agreements require,
among other things, that the Company satisfy certain financial covenants. As of
December 31, 1998, the Company was in compliance with such covenants.
As of December 31, 1997, the Company had two revolving lines of credit from
banks, which provided for borrowings up to $1,000,000 each through June 2,
1998, and July 1, 1998. All outstanding amounts were fully paid during 1998 and
the lines of credit were not renewed.
5. Redeemable Preferred Stock
Preferred Stock
Holders of Series A and B preferred stock are entitled to annual dividends
at the rate of $7 per share when and if declared by the Board of Directors.
Such dividends for Series A and B preferred stock shall be cumulative and shall
accrue on each share of preferred stock from the date of original issuance of
such share. Dividends for Series A and B are payable in preference and priority
to convertible Series C and D preferred stock.
In the event of a liquidation, dissolution or winding up of the Company, the
Series A and B preferred stockholders are entitled to a liquidation preference
of $100 per share plus all accrued but unpaid dividends. Upon payment of the
liquidation preference (aggregating $10,368,000 at December 31, 1998), the
remaining proceeds will be allocated to the convertible Series C and Series D
preferred stockholders.
The Company may redeem Series A and B preferred stock at any time.
Redemption is mandatory (1) on January 31, 2000 or (2) in the event of the
closing of a firm underwritten offering meeting certain criteria, if earlier.
The redemption price shall be equal to $100 per share plus all accrued but
unpaid dividends.
The holders of Series A and B preferred stock are not entitled to vote on
any matter to be voted on by the stockholders of the Company, except
liquidation, dissolution, winding up, consolidation or merger of the Company,
or sale of all or substantially all of the Company's assets, requires approval
of two-thirds of the Series A and B preferred stock voting as a single class.
Series A and B preferred stock is not convertible into common stock.
F-61
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
Convertible Series D Preferred Stock
Holders of redeemable convertible Series D preferred stock have the right to
require redemption of the Series D shares at a price of $10 per share plus all
declared but unpaid dividends. As of September 18, 1999, 2000 and 2001, the
redemption rights will apply to 300,000, 600,000 and 900,000 Series D shares,
respectively. The redemption rights expire as to all shares that have not been
redeemed as of September 19, 2002. The carrying value of the Series D preferred
stock is being accreted to its redemption price over the redemption period.
In the event of a liquidation, dissolution or winding up of the Company,
Series D preferred stockholders are entitled to a liquidation preference of $10
per share plus any declared and unpaid dividends. Upon payment of the Series D
liquidation preference (aggregating $9 million at December 31, 1998), the
remaining proceeds will be allocated to the preferred Series C, preferred
Series D and common stockholders on an as converted basis.
Each share of Series D preferred stock is convertible into one share of
common stock at the option of the holder, subject to adjustment for certain
dilutive issuances. Conversion of the Series D preferred stock is mandatory in
the event of the closing of a firm underwritten public offering under the
Securities Act of 1993.
The holders of Series D preferred stock are entitled to one vote for each
share of common stock into which the preferred stock is convertible.
6. Stockholders' Equity
Convertible Series C Preferred Stock
Holders of convertible Series C preferred stock are entitled to
noncumulative annual dividends of $0.50 per share, when and if declared, and
are payable in preference to any dividends on Series D preferred stock or
common stock.
In the event of a liquidation, dissolution or winding up of the Company,
Series C preferred stockholders are entitled to a liquidation preference of $5
per share plus any declared and unpaid dividends. Upon payment of the
liquidation preference (aggregating $4,000,000 at December 31, 1998), the
remaining proceeds will be allocated to the Series D preferred stockholders.
Each share of Series C preferred stock is convertible into one share of
common stock at the option of the holder, subject to adjustment for certain
dilutive issuances. Conversion of the Series C preferred stock is mandatory in
the event of the closing of a firm underwritten public offering under the
Securities Act of 1933, at a price of at least $5 per share and at an aggregate
gross offering price of not less than $10,000,000, or upon the consent of the
stockholders holding a majority of the outstanding Series C preferred stock.
The holders of Series C preferred stock are entitled to one vote for each
share of common stock into which the preferred stock is convertible.
Stock Option Plans
The Company has stock option plans (the "Plans") under which officers,
employees, directors and consultants may be granted options to purchase shares
of the Company's common stock. At
F-62
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
December 31, 1998, 5,560,000 shares of the Company's common stock have been
reserved for issuance under the Plans. The Plans permit incentive and
nonqualified stock options to be granted at an exercise price not less than the
fair market value on the date of grant with terms of up to ten years. Options
generally vest over a four-year period.
A summary of option activity under the Plans is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balances, January 1, 1996 (192,675 shares
exercisable at a weighted average price of $0.10).. 1,523,100 $0.12
Granted........................................... 933,500 0.32
Exercised......................................... (129,850) 0.13
Canceled.......................................... (328,925) 0.17
---------
Outstanding, December 31, 1996 (405,750 shares
exercisable at a weighted average price of $0.10) 1,997,825 0.21
Granted........................................... 1,409,850 1.14
Exercised......................................... (770,038) 0.18
Canceled.......................................... (567,637) 0.49
---------
Outstanding, December 31, 1997 (294,625 shares
exercisable at a weighted average price of $0.20).. 2,070,000 0.77
Granted........................................... 2,769,333 2.58
Exercised......................................... (632,850) 0.34
Canceled.......................................... (668,595) 1.82
---------
Outstanding, December 31, 1998...................... 3,537,888 $2.07
=========
</TABLE>
Additional information regarding options outstanding as of December 31, 1998
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Prices
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10 - $0.11............ 237,500 6.6 $0.10 181,250 $0.10
0.35 - 1.00............ 502,950 7.8 0.55 205,550 0.48
1.75 - 2.00............ 1,242,923 9.0 1.90 136,125 1.77
3.00.................... 1,554,515 9.6 3.00 -- --
--------- -------
$0.10 - $3.00............ 3,537,888 8.9 $2.07 522,925 $0.69
========= =======
</TABLE>
At December 31, 1998, 714,443 shares were available for future grants under
the Plans.
During 1998, in connection with the resignation of certain officers and
employees, the Company accelerated the vesting of options to purchase 244,000
shares of the Company's common stock. The Company recorded an associated
$590,000 charge to compensation expense.
F-63
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income (loss) had the Company adopted the fair
value method since the Company's inception. Under SFAS No. 123, the fair value
of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values.
The Company's calculations were made using the minimum value method with the
following weighted average assumptions: expected life, one year following
vesting; risk free interest rate of 6%; and no dividends during the expected
term. The Company's calculations are based on a multiple award valuation
approach, and forfeitures are recognized as they occur. If the computed minimum
values of the Company's stock-based awards to employees had been amortized to
expense over the vesting period of the awards as specified under SFAS No. 123,
net income (loss) available to common stockholders would have been
$(5,226,000), $18,065,000 and $(10,562,000) in 1996, 1997 and 1998,
respectively. The estimated weighted-average minimum value per option as of the
grant date for the awards granted for the years ended December 31, 1996, 1997
and 1998 were $0.06, $0.24 and $0.47, respectively.
7. Income Taxes
The provision for (benefit from) income taxes on continuing operations
consists of:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal.............................. $ -- $ 9,124,000 $(2,513,000)
State................................ -- 2,326,000 (42,000)
----------- ----------- -----------
Total current income taxes............. -- 11,450,000 (2,555,000)
Deferred:
Federal.............................. 1,322,000 746,000 786,000
State................................ 125,000 48,000 291,000
----------- ----------- -----------
Total deferred income taxes............ 1,447,000 794,000 1,077,000
Valuation allowance.................... (1,447,000) (794,000) (1,077,000)
----------- ----------- -----------
Provision for (benefit from) income
taxes................................. $ -- $11,450,000 $(2,555,000)
=========== =========== ===========
</TABLE>
F-64
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
Deferred income tax assets are comprised of:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deductible intangibles................................ $ 833,000 $ 1,968,000
Net operating losses.................................. -- 139,000
Deferred gain......................................... 461,000 113,000
Other................................................. 150,000 301,000
----------- -----------
Total................................................. 1,444,000 2,521,000
Valuation allowance................................... (1,444,000) (2,521,000)
----------- -----------
Total net deferred income tax assets.................. $ -- $ --
=========== ===========
</TABLE>
The Company has net operating loss carryforwards of approximately $2.3
million for state income tax purposes, which will expire in 2003. The Company
has deferred tax assets of approximately $1,444,000 and $2,521,000 as of
December 31, 1997 and 1998, respectively, resulting primarily from basis
differences in intangibles and other items. However, because realization of
these benefits depends on the generation of future taxable income, which is
subject to uncertainty, the Company has placed a full valuation allowance
against the deferred tax assets.
The Tax Reform Act of 1986 and California Conformity Act of 1987 impose
substantial restrictions on the utilization of net operating losses in the
event of an "ownership change" as defined in the Internal Revenue Code. Any
such ownership change could significantly limit the Company's ability to
utilize its tax carryforwards.
8. Employee Benefit Plan
The Company has a qualified employee salary savings plan (401(k) plan). The
401(k) plan allows the Company to make discretionary contributions of a
certain percentage of employees' contributions to the 401(k) plan. The Company
made no contributions during 1996 and 1997 and the Company made a $12,000
contribution during 1998.
9. Commitments and Contingencies
The Company leases its facilities under various operating leases that
extend through February 2003. Rental expense for the Company's facilities was
$356,000, $530,000 and $987,000, for 1996, 1997 and 1998, respectively.
Future minimum operating lease payments at December 31, 1998 are
approximately as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999........................................................... $ 802,000
2000........................................................... 595,000
2001........................................................... 428,000
2002........................................................... 67,000
2003........................................................... 10,000
----------
Total minimum lease payments................................... $1,902,000
==========
</TABLE>
F-65
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
The Company is party to various litigation arising in the normal course of
its operations. In the opinion of management, the ultimate liability for these
matters, if any, will not have a material adverse effect on the Company's
financial position or results of operations.
10. Subsequent Events
On April 21, 1999, the Company entered into a definitive agreement to be
acquired by Exodus Communications, Inc. (Exodus) for cash and common stock
valued at approximately $100 million. The acquisition is expected to close in
mid-1999, subject to regulatory review and approval. Upon closing of the
acquisition, the Company will exchange all outstanding preferred and common
stock for cash and shares of Exodus common stock at that date.
F-66
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998* 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 3,580,000 $ 1,558,000
Accounts receivable, net of allowance for doubtful
accounts of $962,000 and $1,098,000, respectively.... 7,561,000 10,300,000
Income tax receivable................................. 1,984,000 1,953,000
Inventory............................................. 422,000 129,000
Prepaid expenses...................................... 758,000 568,000
----------- -----------
Total current assets................................ 14,305,000 14,508,000
Property and equipment, net............................. 2,748,000 2,790,000
Other assets............................................ 60,000 147,000
Intangibles, net........................................ 26,454,000 22,179,000
----------- -----------
Total assets........................................ $43,567,000 $39,624,000
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit and current portion of long-
term obligations..................................... $ 7,437,000 $ 9,680,000
Accounts payable...................................... 2,316,000 3,006,000
Amounts due under acquisition agreements.............. 6,896,000 4,371,000
Accruals and other current liabilities................ 3,547,000 4,057,000
----------- -----------
Total current liabilities........................... 20,196,000 21,114,000
Long-term obligations................................... 349,000 141,000
----------- -----------
Total liabilities................................... 20,545,000 21,255,000
----------- -----------
Commitments and contingencies........................... -- --
Redeemable preferred stock.............................. 18,274,000 18,919,000
----------- -----------
Stockholders' equity:
Convertible preferred stock........................... 4,000,000 4,000,000
Common stock.......................................... 139,000 140,000
Additional paid-in capital............................ 3,364,000 3,448,000
Accumulated deficit................................... (2,755,000) (8,138,000)
----------- -----------
Total stockholders' equity (deficit)................ 4,748,000 (550,000)
----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit)..................... $43,567,000 $39,624,000
=========== ===========
</TABLE>
- --------
* Derived from audited consolidated financial statements included elsewhere in
this registration statement.
See notes to consolidated condensed financial statements.
F-67
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June
30,
------------------------
1998 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Revenues:
Service revenues.................................. $10,762,000 $19,124,000
Product revenues.................................. 10,470,000 6,965,000
----------- -----------
Total revenues.................................. 21,232,000 26,089,000
Cost of revenues:
Costs of service revenues......................... 5,879,000 12,583,000
Costs of product revenues......................... 8,927,000 6,031,000
----------- -----------
Total cost of revenues.......................... 14,806,000 18,614,000
----------- -----------
Gross profit........................................ 6,426,000 7,475,000
----------- -----------
Operating expenses:
Sales and marketing............................... 2,712,000 3,064,000
General and administrative........................ 4,307,000 4,349,000
Amortization of intangibles....................... 2,710,000 4,300,000
Acquisition related charges....................... 2,425,000 --
----------- -----------
Total operating expenses........................ 12,154,000 11,713,000
----------- -----------
Operating loss...................................... (5,728,000) (4,238,000)
----------- -----------
Interest income (expense), net...................... 418,000 (495,000)
----------- -----------
Loss before income taxes............................ (5,310,000) (4,733,000)
Benefit from income taxes........................... 413,000 --
----------- -----------
Net loss............................................ (4,897,000) (4,733,000)
Dividends and accretion on redeemable preferred
stock.............................................. (311,000) (645,000)
----------- -----------
Net loss applicable to common stockholders.......... $(5,208,000) $(5,378,000)
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
F-68
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June
30,
------------------------
1998 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(4,897,000) $(4,733,000)
Adjustments to reconcile net income to net cash used
by operating activities:
Loss on disposal of properties and equipment....... -- 52,000
Depreciation and amortization...................... 3,026,000 4,715,000
Stock compensation expense......................... -- 13,000
Interest income on restricted cash................. (40,000) --
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable............................... (1,992,000) (2,739,000)
Income taxes payable, net......................... (1,857,000) 31,000
Inventory......................................... 116,000 293,000
Prepaid expenses.................................. 7,000 190,000
Other assets...................................... 223,000 (87,000)
Accounts payables................................. 1,734,000 685,000
Amounts due under acquisition agreements.......... 2,138,000 (1,080,000)
Accruals and other current liabilities............ (2,522,000) 510,00
----------- -----------
Net cash used by operating activities............ (4,064,000) (2,150,000)
----------- -----------
Cash flows from investing activities:
Sales of short-term investments.................... 5,346,000 --
Acquisitions, net of cash received................. (1,538,000) --
Repayment of acquisition obligations............... (900,000) (1,470,000)
Purchase of property and equipment................. (975,000) (509,000)
Proceeds from divestitures......................... 2,000,000 --
----------- -----------
Net cash provided by (used for) investing
activities...................................... 3,933,000 (1,979,000)
----------- -----------
Cash flows from financing activities:
Proceeds from line of credit........................ -- 2,900,000
Repayment on line of credit......................... (503,000) (597,000)
Repayments of long-term obligations................. -- (268,000)
Issuance of common stock............................ 132,000 72,000
----------- -----------
Net cash (used for) provided by financing
activities...................................... (371,000) 2,107,000
----------- -----------
Net decrease in cash................................. (502,000) (2,022,000)
Cash and cash equivalents--beginning of period....... 3,217,000 3,580,000
----------- -----------
Cash and cash equivalents--end of period............. $ 2,715,000 $ 1,558,000
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
F-69
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by Cohesive Technology Solutions, Inc. (the "Company") and do not
include all of the disclosures normally required by generally accepted
accounting principles. The unaudited financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results of
operations for the periods, have been included. Results of operations for the
interim periods are not necessarily indicative of results for the full year.
(2) Inventory
Inventory consists primarily of computer hardware held for sale and spare
parts, and is stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
(3) Litigation
The Company is party to various litigation arising in the normal course of
its operations. In the opinion of management, the ultimate liability for these
matters, if any, will not have a material adverse effect on the Company's
financial position or results of operations.
(4) Subsequent Events
On July 27, 1999, the Company was acquired by Exodus Communications, Inc.
("Exodus") for a total purchase price valued at approximately $112,000,000. The
Company's shareholders received 1,600,796 shares of Exodus Common Stock and
approximately $50,000,000 in cash. In addition, option holders of Cohesive
common stock received a total of 408,712 shares of Exodus Common Stock in the
form of Exodus stock options.
F-70
<PAGE>
EXODUS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
are presented for illustrative purposes only and are not necessarily indicative
of the combined results of operations for future periods or the results of
operations that actually would have been realized had Exodus and Cohesive been
a combined company during the specified periods. The unaudited pro forma
combined condensed financial statements, including the related notes, are
qualified in their entirety by reference to, and should be read in conjunction
with, the supplemental consolidated financial statements and related notes
thereto of Exodus and the historical consolidated financial statements and
related notes thereto of Cohesive, included elsewhere in this registration
statement.
The following unaudited pro forma combined condensed financial statements
give effect to the merger between Exodus and Cohesive using the purchase method
of accounting. The pro forma combined condensed financial statements are based
on the audited and unaudited supplemental consolidated financial statements and
related notes of Exodus and the audited and unaudited historical consolidated
financial statements and related notes of Cohesive. The pro forma adjustments
are based on management's estimates of the value of the tangible and intangible
assets acquired. In addition, management is continuing to assess its
integration plans, which may result in further costs.
The pro forma combined condensed statements of operations assume the merger
took place as of January 1, 1998 and combine Exodus' audited supplemental
consolidated statement of operations for the year ended December 31, 1998 and
unaudited supplemental consolidated statement of operations for the nine months
ended September 30, 1999, with Cohesive's audited historical statement of
operations for the year ended December 31, 1998 and unaudited historical
statement of operations for the seven-month period ended July 27, 1999,
respectively.
A pro forma condensed balance sheet as of September 30, 1999 has not been
presented since the merger has already been reflected in such balance sheet.
F-71
<PAGE>
EXODUS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------------------
Supplemental Historical Pro forma
------------ ---------- -----------------------
Exodus Cohesive Adjustments Combined
------------ ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues....................... $ 52,745 $ 41,708 $ $ 94,453
Costs and expenses:
Cost of revenues............. 61,578 28,324 89,902
Marketing and sales.......... 29,034 5,672 34,706
General and administrative... 16,058 10,219 26,277
Product development.......... 3,507 -- 3,507
Amortization of goodwill and
other intangible assets..... 141 6,734 (6,734)(a)
14,549 (a) 14,690
Acquisition related charges.. -- 4,463 4,463
-------- -------- -------- --------
Total costs and expenses... 110,318 55,412 7,815 173,545
-------- -------- -------- --------
Operating loss............. (57,573) (13,704) (7,815) (79,092)
Interest (expense) income ,
net........................... (9,743) 352 (2,510)(b) (11,901)
-------- -------- -------- --------
Loss from continuing
operations before taxes... (67,316) (13,352) (10,325) (90,993)
Income tax benefit............. -- (2,555) (2,555)
-------- -------- -------- --------
Loss from continuing
operations................ (67,316) (10,797) (10,325) (88,438)
Cumulative dividends and
accretion on redeemable
preferred stock............... (2,014) (800) 800 (c) (2,014)
-------- -------- -------- --------
Loss from continuing
operations attributable to
common stockholders....... $(69,330) $(11,597) $ (9,525) $(90,452)
======== ======== ======== ========
Basic and diluted loss per
share from continuing
operations.................... $ (0.55) $ (0.71)
======== ========
Shares used to compute basic
and diluted loss per share
from continuing operations.... 125,808 1,600 (d) 127,408
======== ======== ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
F-72
<PAGE>
EXODUS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
----------------------------------------------
Supplemental Historical Pro forma
------------ ---------- ----------------------
Exodus Cohesive Adjustments Combined
------------ ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues....................... $140,754 $29,191 $ $169,945
Costs and expenses:
Cost of revenues............. 118,827 20,896 139,723
Marketing and sales.......... 42,473 3,594 46,067
General and administrative... 25,548 5,223 30,771
Product development.......... 5,641 -- 5,641
Amortization of goodwill and
other intangible assets..... 4,674 4,994 (4,994)(a)
8,486 (a) 13,160
Restructuring costs.......... 923 -- 923
-------- ------- ------- --------
Total costs and expenses... 198,086 34,707 3,492 236,285
-------- ------- ------- --------
Operating loss............. (57,332) (5,516) (3,492) (66,340)
Interest expense, net........ (20,044) (565) (1,464)(b) (22,073)
-------- ------- ------- --------
Loss from continuing
operations before taxes... (77,376) (6,081) (4,956) (88,413)
Income tax benefit........... -- (450) (450)
-------- ------- ------- --------
Loss from continuing
operations................ (77,376) (5,631) (4,956) (87,963)
Cumulative dividends and
accretion on redeemable
preferred stock............... -- (738) 738 (c) --
-------- ------- ------- --------
Loss from continuing
operations attributable to
common stockholders....... $(77,376) $(6,369) $(4,218) $(87,963)
======== ======= ======= ========
Basic and diluted loss per
share from continuing
operations.................... $ (0.47) $ (0.52)
======== ========
Shares used to compute basic
and diluted loss per share
from continuing operations.... 165,974 1,600 (d) 167,574
======== ======= ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
F-73
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
On July 27, 1999, Exodus acquired all of the outstanding capital stock of
Cohesive in exchange for approximately $50 million in cash and 1,600,796 shares
of Exodus common stock. In addition, Exodus issued options to purchase a total
of 408,712 shares of Exodus common stock in exchange for all issued and
outstanding Cohesive options.
Under purchase accounting, the total purchase price was allocated to
Cohesive's assets and liabilities based on their relative fair values. The
amounts and components of the purchase price along with the allocation of the
purchase price to assets acquired were as follows (in thousands):
<TABLE>
<S> <C>
Cash............................................................... $ 46,500
Common stock....................................................... 52,000
Fair value of Cohesive stock options assumed....................... 9,300
Transaction costs.................................................. 3,700
--------
Total purchase price............................................. $111,500
========
Book value of net tangible assets of Cohesive...................... $ 3,500
Workforce in place................................................. 6,300
Customer lists..................................................... 32,300
Goodwill........................................................... 69,400
--------
Net assets acquired.............................................. $111,500
========
</TABLE>
The pro forma combined condensed statements of operations give effect to the
merger as if it had occurred at January 1, 1998. Cohesive's historical
statement of operations data for the nine months ended September 30, 1999
reflects its operating activity for the period January 1, 1999 through July 27,
1999, as Exodus acquired Cohesive on July 27, 1999.
The following adjustments have been reflected in the unaudited pro forma
combined condensed statements of operations:
(a) Adjustment to remove the amortization of historical goodwill and
other intangible assets previously recorded by Cohesive and to record the
amortization of goodwill and intangible assets resulting from the
allocation of the Cohesive purchase price. The pro forma adjustment assumes
goodwill and other intangible assets will be amortized on a straight-line
basis over the following estimated lives:
<TABLE>
<S> <C>
Workforce in place................................................. 5 years
Customer lists..................................................... 7 years
Goodwill........................................................... 8 years
</TABLE>
(b) To eliminate interest income earned by Exodus on cash paid at the
date of the merger assuming a 5% interest rate which approximates the
Company's actual rate of return during the periods presented.
(c) To remove Cohesive's historical cumulative dividends and accretion
on redeemable preferred stock which are settled in cash at the date of the
merger.
(d) To reflect the shares issued as consideration for the merger.
F-74
<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>
S-1
<PAGE>
EXODUS COMMUNICATIONS, INC.
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>
S-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXODUS COMMUNICATIONS, INC.
--------------
PROSPECTUS
--------------
December , 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses payable by the
Registrant in connection with the sale and distribution of the securities being
registered hereby. Normal commission expenses and brokerage fees are payable
individually by the selling stockholders. All amounts are estimated except the
Securities and Exchange Commission registration fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $138,624
Nasdaq National Market filing fees................................. 26,000
Accounting fees and expenses....................................... 10,000
Legal fees and expenses............................................ 20,000
Printing and engraving expenses.................................... 5,000
Miscellaneous...................................................... 25,376
--------
Total............................................................ $225,000
========
</TABLE>
ITEM 15. Indemnification of Directors and Officers.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the Bylaws of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and executive officers to the fullest extent permitted
by the Delaware General Corporation Law; (ii) the Registrant may, in its
discretion, indemnity other officers, employees and agents as set forth in the
Delaware General Corporation Law; (iii) upon receipt of an undertaking to repay
such advances if indemnification is determined to be unavailable, the
Registrant is required to advance expenses, as incurred, to its directors and
executive officers to the fullest extent permitted by the Delaware General
Corporation Law in connection with a proceeding (except if a determination is
reasonably and promptly made by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to the proceeding or, in
certain circumstances, by independent legal counsel in a written opinion that
the facts known to the decision-making party demonstrate clearly and
convincingly that such person acted in bad faith or in a manner that such
person did not believe to be in, or not opposed to, the best interests of the
corporation); (iv) the rights conferred in the Bylaws are not exclusive and the
Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees and agents; (v) the Registrant may not
retroactively amend the Bylaw provisions relating to indemnify; and (vi) to the
fullest extent permitted by the Delaware General Corporation Law, a director or
executive officer will be deemed to have acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the Registrant and, with respect to any criminal action or proceeding, to have
had no reasonable cause to believe that his or her conduct was unlawful if his
or her action is based on the records or books of account of the corporation or
on information supplied to him or her by officers of the corporation in the
course of their duties or on the advice of legal counsel for the corporation or
on information or records given or reports made to the corporation by
independent certified public accountants or appraisers or other experts.
II-1
<PAGE>
The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers. The indemnification agreements
provide that directors and executive officers will be indemnified and held
harmless to the fullest possible extent permitted by law including against all
expenses (including attorneys' fees), judgments, fines and settlement amounts
paid or reasonably incurred by them in any action, suit or proceeding,
including any derivative action by or in the right of the Registrant, on
account of their services as directors, officers, employees or agents of the
Registrant or as directors, officers, employees or agents of any other company
or enterprise when they are serving in such capacities at the request of the
Registrant. The Registrant will not be obligated pursuant to the agreements to
indemnify or advance expenses to an indemnified party with respect to
proceedings or claims (i) initiated or brought voluntarily by the indemnified
party and not by way of defense, except with respect to a proceeding to
establish or enforce a right to indemnification under the indemnification
agreements or any other agreement or insurance policy or under the Registrant's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
indemnification, or authorized by the Board of Directors or as otherwise
required under Delaware statute or law, regardless of whether the indemnified
party is ultimately determined to be entitled to such indemnification, (ii) for
expenses and the payment of profits arising from the purchase and sale by the
indemnified party of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934 or any similar successor statute or (iii) if a final
decision by a court having jurisdiction in the matter shall determine that such
indemnification is not lawful.
The indemnification agreement also provides for contribution in certain
situations in which the Registrant and a director or executive officer are
jointly liable for indemnification is unavailable, such contribution to be
based on the relative benefits received and the relative fault of the
Registrant and the director or executive officer. No contribution is allowed to
a person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) from any person who was not found guilty
of such fraudulent misrepresentation.
The indemnification agreement requires a director or executive officer to
reimburse the Registrant for all expenses advanced only to the extent it is
ultimately determined that the director or executive officer is not entitled,
under Delaware law, the Bylaws, the indemnification agreement or otherwise, to
be indemnified for such expenses. The indemnification agreement provides that
it is not exclusive of any rights a director or executive officer may have
under the Certificate of Incorporation, Bylaws, other agreements, any majority-
in-interest vote of the stockholders or vote of disinterested directors,
Delaware law or otherwise.
The indemnification provision in the Bylaws, and the form of indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's executive officers and directors for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act").
As authorized by the Registrant's Bylaws, the Registrant, with approval by
the Board, maintains director and officer liability insurance.
In addition, Thadeus Mocarski, a director of the Registrant, is indemnified
in certain circumstances by Fleet Financial Group, Inc.
II-2
<PAGE>
ITEM 16. Exhibits.
The following exhibits are filed herewith or incorporated by reference
herein:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
3.01 Registrant's Restated Certificate of Incorporation, as amended
(incorporated herein by reference to Exhibit 4.01 of the
Registrant's Registration Statement on Form S-8 filed with the
Commission on July 19, 1999).
3.02 Certificate of Designations specifying the terms of the Series A
Junior Participating Preferred Stock of the Registrant, as filed
with the Delaware Secretary of State on January 28, 1999
(incorporated herein by reference to Exhibit 3.02 of the
Registrant's Registration Statement on Form 8-A filed with the
Commission on January 29, 1999).
3.03 Registrant's Bylaws (incorporated herein by reference to Exhibit
3.06 of the Registrant's Registration Statement on Form S-1,
Registration No. 333-44469, declared effective by the Commission
on March 18, 1998 (the "Form S-1")).
4.01 Form of Specimen Certificate for Registrant's Common Stock.
(Incorporated by reference from Exhibit to the Form S-1).
4.02 Rights Agreement, dated January 27, 1999, between Registrant and
BankBoston, N.A., as Rights Agent (incorporated herein by
reference to Exhibit 4.04 of the Registrant's Registration
Statement on Form 8-A filed with the Commission on January 29,
1999).
4.03 Amendment to Rights Agreement dated October 20, 1999 between
Registrant and BankBoston, N.A., as Rights Agent (incorporated
herein by reference to Exhibit 4.05 of the Registrant's Amended
Registration Statement on Form 8-A filed with the Commission on
November 29, 1999).
5.01 Opinion of Fenwick & West LLP.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG LLP, independent auditors.
23.03 Consent of Deloitte & Touche LLP, independent auditors.
24.01 Power of Attorney (see page II-5).
</TABLE>
ITEM 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and (iii) to include any material information with respect to
the plan of distribution not previously disclosed in the registration
II-3
<PAGE>
statement or any material change to such information in the registration
statement; provided, however, that (i) and (ii) do not apply if the
information required to be included in a post-effective amendment thereby
is contained in periodic reports filed with or furnished to the Commission
by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange
Act that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; and (2) For the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Clara, State of California, on this 23rd day
of December.
EXODUS COMMUNICATIONS, INC.
/s/ Richard S. Stoltz
By: _________________________________
Richard S. Stoltz
Executive Vice President, Finance,
Chief Financial Officer and Chief
Operating Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Ellen M. Hancock and Richard S. Stoltz,
and each of them, his or her true and lawful attorneys-in-fact and agents with
full power of substitution, for him or her and in his or her name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement on Form S-3, and to
sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule 415
promulgated under the Securities Act of 1933, and all post-effective amendments
thereto, and to file the same with all exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his,
her or their substitute or substitutes, may lawfully do or cause to be done or
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Principal Executive Officer:
/s/ Ellen M. Hancock President, Chief Executive December 23, 1999
____________________________________ Officer and Director
Ellen M. Hancock
Principal Financial Officer and
Principal Accounting Oficer:
/s/ Richard S. Stoltz Executive Vice President, December 23, 1999
____________________________________ Finance, Chief Financial
Richard S. Stoltz Officer and Chief Operating
Officer
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Additional Directors:
/s/ K.B. Chandrasekhar Chairman of the Board of December 23, 1999
____________________________________ Directors
K.B. Chandrasekhar
/s/ Frederick W.W. Bolander Director December 23, 1999
____________________________________
Frederick W.W. Bolander
/s/ Mark Dubovoy Director December 23, 1999
____________________________________
Mark Dubovoy
/s/ John R. Dougery Director December 23, 1999
____________________________________
John R. Dougery
/s/ Max D. Hopper Director December 23, 1999
____________________________________
Max D. Hopper
/s/ Peter A. Howley Director December 23, 1999
____________________________________
Peter A. Howley
/s/ Daniel C. Lynch Director December 23, 1999
____________________________________
Daniel C. Lynch
/s/ Thadeus Mocarski Director December 23, 1999
____________________________________
Thadeus Mocarski
/s/ Naomi Seligman Director December 23, 1999
____________________________________
Naomi Seligman
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
3.01 Registrant's Restated Certificate of Incorporation, as amended
(incorporated herein by reference to Exhibit 4.01 of the
Registrant's Registration Statement on Form S-8 filed with the
Commission on July 19, 1999).
3.02 Certificate of Designations specifying the terms of the Series A
Junior Participating Preferred Stock of the Registrant, as filed
with the Delaware Secretary of State on January 28, 1999
(incorporated herein by reference to Exhibit 3.02 of the
Registrant's Registration Statement on Form 8-A filed with the
Commission on January 29, 1999).
3.03 Registrant's Bylaws (incorporated herein by reference to Exhibit
3.06 of the Registrant's Registration Statement on Form S-1,
Registration No. 333-44469, declared effective by the Commission
on March 18, 1998 (the "Form S-1")).
4.01 Form of Specimen Certificate for Registrant's Common Stock.
(Incorporated by reference from Exhibit to the Form S-1).
4.02 Rights Agreement, dated January 27, 1999, between Registrant and
BankBoston, N.A., as Rights Agent (incorporated herein by
reference to Exhibit 4.04 of the Registrant's Registration
Statement on Form 8-A filed with the Commission on January 29,
1999).
4.03 Amendment to Rights Agreement dated October 20, 1999 between
Registrant and BankBoston, N.A., as Rights Agent (incorporated
herein by reference to Exhibit 4.05 of the Registrant's Amended
Registration Statement on Form 8-A filed with the Commission on
November 29, 1999).
5.01 Opinion of Fenwick & West LLP.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG LLP, independent auditors.
23.03 Consent of Deloitte & Touche LLP, independent auditors.
24.01 Power of Attorney (see page II-5).
</TABLE>
<PAGE>
Exhibit 5.01
[Letterhead of Fenwick & West LLP]
December 22, 1999
Exodus Communications, Inc.
2831 Mission College Boulevard
Santa Clara, CA 95054
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-3
(the "Registration Statement") to be filed by you with the Securities and
Exchange Commission (the "Commission") on or about December 23, 1999 in
connection with the registration under the Securities Act of 1933, as amended,
of an aggregate of 6,713,086 shares of your Common Stock (the "Stock"), all of
which will be sold by certain selling stockholders (the "Selling Stockholders").
In rendering this opinion, we have examined the following:
(1) your registration statement on Form 8-A filed with the Commission on
February 13, 1998 and your registration statement on Form 8-A filed
with the Commission on January 29, 1999, as amended by a Form 8-A/A
filed with the Commission on November 29, 1999;
(2) your annual report on Form 10-K for the fiscal year ended December 31,
1998 filed with the Commission on February 22, 1999;
(3) your quarterly report on Form 10-Q for the quarter ended March 31,
1999 filed with the Commission on May 17, 1999, as amended by a Form
10-Q/A filed with the Commission on June 25, 1999, your quarterly
report on Form 10-Q for the quarter ended June 30, 1999 filed with the
Commission on August 13, 1999, and your quarterly report on Form 10-Q
for the quarter ended September 30, 1999 filed with the Commission on
November 12, 1999;
(4) your current reports on Form 8-K filed with the Commission on January
29, 1999, February 22, 1999, March 2, 1999, June 18, 1999, August 11,
1999 (as amended on October 12, 1999 and November 29, 1999), November
29, 1999 (two reports), and December 3, 1999;
(5) the Registration Statement, together with the exhibits filed as a part
thereof or incorporated by reference therein;
(6) the prospectus prepared in connection with the Registration Statement
(the "Prospectus");
<PAGE>
Exodus Communications, Inc.
December 22, 1999
Page 2
(7) the Agreement and Plan of Reorganization dated as of October 26, 1999,
among you, Service Metrics, Inc. and Sweet Acquisition Corp. and the
Stock Purchase Agreement dated as of November 20, 1999, among you and
the shareholders of Global OnLine Japan Co., Ltd.
(8) copies provided to us of the minutes of meetings and actions by
written consent of the stockholders and Board of Directors that are
relevant to the issuance of the Stock to the Selling Stockholders and
the registration of the Stock pursuant to the Registration Statement
that are contained in your minute books and the minute books of your
predecessor, Exodus Communications, Inc., a California corporation,
which are maintained by you;
(9) a certificate from your transfer agent dated December 22, 1999
regarding the number of shares outstanding, and a list prepared by you
identifying all outstanding options, warrants and other rights to
acquire your capital stock; and
(10) a Management Certificate addressed to us and dated of even date
herewith executed by you containing certain factual and other
representations.
We have also confirmed the continued effectiveness of your registration on
Form 8-A filed on February 13, 1998 under the Securities Exchange Act of 1934,
as amended, by telephone call to the offices of the Commission and have
confirmed your eligibility to use Form S-3.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity and completeness of all documents submitted
to us as originals or copies of originals, the conformity to originals and
completeness of all documents submitted to us as copies, the legal capacity of
all natural persons executing the same, the lack of any undisclosed termination,
modification, waiver or amendment to any documents reviewed by us and the due
authorization, execution and delivery of all documents where due authorization,
execution and delivery are prerequisites to the effectiveness thereof.
As to matters of fact relevant to this opinion, we have relied solely upon
our examination of the documents referred to above and have assumed the current
accuracy and completeness of the information obtained from records referred to
above. We have made no independent investigation or other attempt to verify the
accuracy of any of such information or to determine the existence or non-
existence of any other factual matters; however, we are not aware of any facts
-------
that would cause us to believe that the opinion expressed herein is not
accurate.
We are admitted to practice law in the State of California, and we express
no opinion herein with respect to the application or effect of the laws of any
jurisdiction other than the existing laws of the State of California and the
existing Delaware General Corporation Law.
In connection with our opinion expressed below, we have assumed that, at or
prior to the time of the delivery of any shares of Stock, the Registration
Statement will have become effective under the Securities Act of 1933, as
amended, that the registration will apply to such shares of Stock and will not
have been modified or rescinded and that there will not have occurred any change
in law affecting the validity or enforceability of such shares of Stock. We
also assume you will timely file any and all supplements to the Registration
Statement and Prospectus as are necessary to comply with applicable laws, rules
or regulations of the Commission or any other governmental body. However, we
take no
<PAGE>
Exodus Communications, Inc.
December 22, 1999
Page 3
responsibility to monitor your future compliance with applicable laws, rules or
regulations of the Commission or any other governmental body.
Based upon the foregoing, it is our opinion that the up to 6,713,086 shares
of Stock to be sold by the Selling Stockholders pursuant to the Registration
Statement are validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us, if any, in the
Registration Statement, the prospectus constituting a part thereof and any
amendments thereto.
This opinion speaks only as of its date and we assume no obligation to
update this opinion should circumstances change after the date hereof.
Very truly yours,
/s/ Fenwick & West LLP
<PAGE>
EXHIBIT 23.02
CONSENT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors
Exodus Communications, Inc.:
We consent to the use, in the registration statement on Form S-3 dated on
or about December 23, 1999, of our report dated January 26, 1999, except as to
Note 9, which is as of November 23, 1999, and except as to Note 10, which is
as of December 14, 1999, relating to the consolidated balance sheets of Exodus
Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and
the related consolidated statements of operations, stockholders' (deficit)
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998, and the related financial statement schedule. We also
consent to the use in the registration statement of our report dated November
23, 1999, except as to Note 9, which is as of December 14, 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 the related supplemental financial statement schedule.
We also consent to the references to our firm under the heading "Experts" in
the registration statement.
/s/ KPMG LLP
Mountain View, California
December 23, 1999
<PAGE>
EXHIBIT 23.03
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
The Board of Directors
Exodus Communications, Inc.:
We consent to the use in this Registration Statement of Exodus
Communications, Inc. on Form S-3, of our report dated April 8, 1999 (April 21,
1999 as to Note 10) relating to the consolidated financial statements of
Cohesive Technology Solutions, Inc. as of December 31, 1997 and 1998 and for
each of the three years in the period ended December 31, 1998, appearing
elsewhere in this Registration Statement, and to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
December 21, 1999
