<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
July 27, 1999
------------------------------------------------
Date of Report (Date of Earliest Event Reported)
Exodus Communications, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 0-23795 77-0403076
- ----------------------- ----------------------- -----------------------------------
(State of incorporation) (Commission file number) (I.R.S. Employer Identification No.)
</TABLE>
2831 Mission College Boulevard
Santa Clara, California 95054
-----------------------------------------------------------
(Address of principal executive offices, including zip code)
(408) 346-2200
----------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS
On August 11, 1999, Exodus Communications, Inc. ("Exodus") filed a Form 8-K
to report its acquisition of Cohesive Technology Solutions, Inc. ("Cohesive").
Pursuant to Item 7 of Form 8-K, Exodus indicated that it would file certain
financial information no later than the date required by Item 7 of Form 8-K.
This Amendment No. 1 is filed to provide the required financial information.
(a) Financial Statements of Business Acquired.
-----------------------------------------
2
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Cohesive Technology Solutions, Inc. -- Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1998
Consolidated Statements of Operations for the years ended December 31,
1996 and 1997 and 1998
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998
Notes to Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999
Unaudited Condensed Consolidated Statement of Operations for the three
months ended March 31, 1998 and 1999
Unaudited Condensed Consolidated Statement of Cash Flows for the three
months ended March 31, 1998 and 1999
Notes to Unaudited Condensed Consolidated Financial Statements
<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)
<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.
<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.
<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 financial statements.
<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
Cash flows from operating activities: ----------- ----------- ------------
<S> <C> <C> <C>
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.
<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.
Restricted Cash--Restricted cash represents cash in escrow related to the
divestiture of the Company's software development group and Internet services
division.
<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
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.
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.
<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
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>
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.
<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
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 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
<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
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.
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.
<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
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 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>
<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 information regarding options outstanding as of December 31, 1998
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (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.
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.
<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
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>
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.
<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
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>
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.
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December March 31,
31, 1998* 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 3,580,000 $ 1,845,000
Accounts receivable, net of allowance for doubtful
accounts of $962,000 and $972,000, respectively... 7,561,000 10,633,000
Income tax receivable.............................. 1,984,000 1,997,000
Inventory.......................................... 422,000 198,000
Prepaid expenses................................... 758,000 683,000
----------- -----------
Total current assets............................. 14,305,000 15,356,000
Property and equipment, net.......................... 2,748,000 2,773,000
Other assets......................................... 60,000 109,000
Intangibles, net..................................... 26,454,000 24,263,000
----------- -----------
Total assets......................................... $43,567,000 $42,501,000
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit and current portion of
long-term obligations............................. $ 7,437,000 $ 8,030,000
Accounts payable................................... 2,316,000 3,437,000
Amounts due under acquisition agreements........... 6,896,000 5,697,000
Accruals and other current liabilities............. 3,547,000 4,243,000
----------- -----------
Total current liabilities........................ 20,196,000 21,407,000
Long-term obligations................................ 349,000 246,000
----------- -----------
Total liabilities................................ 20,545,000 21,653,000
----------- -----------
Commitments and contingencies........................ -- --
Redeemable preferred stock........................... 18,274,000 18,586,000
----------- -----------
Stockholders' equity:
Convertible preferred stock........................ 4,000,000 4,000,000
Common stock....................................... 139,000 140,000
Additional paid-in capital......................... 3,364,000 3,425,000
Accumulated deficit................................ (2,755,000) (5,303,000)
----------- -----------
Total stockholders' equity....................... 4,748,000 2,262,000
----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity................................ $43,567,000 $42,501,000
=========== ===========
</TABLE>
- --------
*Derived from audited consolidated financial statements.
See notes to consolidated condensed financial statements.
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Revenues:
Service revenues............................ $ 5,070,000 $ 8,930,000
Product revenues............................ 3,545,000 2,785,000
-------------- --------------
Total revenues............................ 8,615,000 11,715,000
Cost of Revenues:
Costs of service revenues................... 2,625,000 5,884,000
Costs of product revenues................... 3,182,000 2,384,000
-------------- --------------
Total cost of revenues.................... 5,807,000 8,268,000
-------------- --------------
Gross profit.................................. 2,808,000 3,447,000
-------------- --------------
Operating expenses:
Sales and marketing......................... 1,351,000 1,329,000
General and administrative.................. 2,063,000 1,922,000
Amortization of intangibles................. 1,308,000 2,191,000
Acquisition related charges................. 1,837,000 --
-------------- --------------
Total operating expenses.................. 6,559,000 5,442,000
-------------- --------------
Operating loss................................ (3,751,000) (1,995,000)
-------------- --------------
Interest income (expense), net................ 246,000 (241,000)
-------------- --------------
Loss before income taxes...................... (3,505,000) (2,236,000)
Benefit from income taxes..................... 413,000 --
-------------- --------------
Net loss...................................... (3,092,000) (2,236,000)
Dividends and accretion on redeemable
preferred stock.............................. (156,000) (312,000)
-------------- --------------
Net loss applicable to common stockholders.... $ (3,248,000) $ (2,548,000)
============== ==============
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(3,092,000) $(2,236,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 1,374,000 2,433,000
Stock compensation expense....................... -- 13,000
Interest income on restricted cash............... (1,000) --
Changes in assets and liabilities, net of effect
of acquisitions:
Accounts receivable............................ (1,379,000) (3,072,000)
Income taxes receivable........................ (2,419,000) (13,000)
Inventory...................................... 40,000 224,000
Prepaid expenses............................... 131,000 75,000
Other assets................................... (10,000) (49,000)
Accounts payables.............................. 139,000 1,121,000
Amounts due under acquisition agreements....... 642,000 --
Accruals and other current liabilities......... 562,000 696,000
----------- -----------
Net cash used by operating activities........ (4,013,000) (808,000)
----------- -----------
Cash flows from investing activities:
Purchase of short-term investments................. 2,815,000 --
Acquisitions, net of cash acquired................. (1,539,000) --
Repayment of acquisition obligations............... (700,000) (1,199,000)
Purchase of property and equipment................. (291,000) (267,000)
Proceeds from divestitures......................... 2,000,000 --
----------- -----------
Net cash provided by (used for) investing
activities.................................. 2,285,000 (1,466,000)
----------- -----------
Cash flows from financing activities:
Proceeds on line of credit......................... 154,000 502,000
Repayments of long-term obligations................ -- (12,000)
Issuance of common stock........................... 70,000 49,000
----------- -----------
Net cash provided by financing activities.... 224,000 539,000
----------- -----------
Net decrease in cash................................. (1,504,000) (1,735,000)
Cash and cash equivalents--beginning of period....... 3,217,000 3,580,000
----------- -----------
Cash and cash equivalents--end of period............. $ 1,713,000 $ 1,845,000
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by 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. Line of Credit
At March 31, 1999, the Company was not in compliance with its line of credit
covenants. The Company has obtained a waiver from the bank with respect to the
covenant violations.
4. 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.
5. 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 $100.0 million at that date. 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.
******
<PAGE>
(b) Pro Forma Financial Information.
-------------------------------
Unaudited pro forma combined condensed balance
sheet as of March 31, 1999
Unaudited pro forma combined condensed statement of
operations for year ended December 31, 1998
Unaudited pro forma combined condensed statement of
operations for the three-months ended March 31, 1999
Notes to unaudited pro forma combined condensed financial statements
<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 financial position or results of operations for future periods
or the results of operations or financial position 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 historical consolidated financial
statements and related notes thereto of Exodus, included in its registration
statement on Form S-4, filed on August 19, 1999, as amended, and Cohesive,
included elsewhere in this filing.
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 respective historical audited and unaudited
consolidated financial statements and related notes of Exodus and Cohesive. The
pro forma adjustments are preliminary and based on management's estimates of the
value of the tangible and intangible assets acquired. In addition, management is
in the process of assessing and formulating its integration plans, which may
include employee separations, employee relocations, and other restructuring
actions and has not yet determined the costs, if any, of these plans.
The actual adjustments may differ materially from those presented in these
pro forma financial statements. A change in the pro forma adjustments would
result in a reallocation of the purchase price affecting the value assigned to
the long-term tangible and intangible assets or, in some circumstances, result
in a charge to the statement of operations. The effect of these changes on the
statement of operations will depend on the nature and amounts of the assets and
liabilities adjusted. See note 1(c) to the pro forma combined condensed
financial statements.
The unaudited pro forma combined condensed balance sheet assumes that the
merger took place on March 31, 1999, and combined Exodus' unaudited March 31,
1999 consolidated balance sheet with Cohesive's unaudited March 31, 1999
consolidated balance sheet. The pro forma combined condensed statements of
operations assume the merger took place as of January 1, 1998 and combines
Exodus' audited consolidated statement of operations for the year ended December
31, 1998 and unaudited consolidated statement of operations for the three months
ended March 31, 1999, with Cohesive's audited statement of operations for the
year ended December 31, 1998 and unaudited statement of operations for the three
months ended March 31, 1999, respectively.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(In thousands)
March 31, 1999
--------------------------------------------------------
Historical Pro forma
------------------------ ----------------------------
<S> <C> <C> <C> <C>
Exodus Cohesive Adjustments Combined
---------- ---------- ----------- ----------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 323,642 $ 1,845 $ (13,287) (a) $
(41,713) (c) 270,487
Accounts receivable.............................. 16,277 10,633 26,910
Income taxes receivable.......................... - 1,997 (1,997) (b) -
Prepaid expenses and other current assets........ 6,727 881 7,608
---------- ---------- --------- ---------
Total current assets.......................... 346,646 15,356 (56,997) 305,005
Property and equipment, net......................... 101,793 2,773 104,566
Restriced cash equivalents and investments.......... 36,292 - 36,292
Goodwill and other intangible assets, net........... 23,223 24,263 (24,263) (c)
107,125 (c) 130,348
Other assets........................................ 18,338 109 18,447
---------- ---------- --------- ----------
$ 526,292 $ 42,501 $ 25,865 $ 594,658
========== ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of equipment loans and
line of credit facilities...................... $ 6,804 $ 8,030 $ (7,590) (a) $ 7,244
Current portion of capital lease obligations..... 5,950 - 5,950
Accounts payable................................. 24,504 3,437 27,941
Accrued expenses................................. 7,623 4,243 11,866
Accrued interest payable......................... 6,949 - 6,949
Amounts due under acquisition agreements......... - 5,697 (5,697) (a) -
---------- ---------- --------- ----------
Total current liabilities..................... 51,830 21,407 (13,287) 59,950
---------- ---------- --------- ----------
Equipment loans and line of credit facilities,
less current portion............................. 12,864 246 13,110
Capital lease obligations, less current portion..... 12,111 - 12,111
Convertible subordinated notes...................... 250,000 - 250,000
Senior notes........................................ 200,000 - 200,000
---------- ---------- --------- ----------
Total liabilities.............................. 526,805 21,653 (13,287) 535,171
---------- ---------- --------- ----------
Reedemable preferred stock.......................... - 18,586 (18,586) (c) -
Stockholders' equity (deficit):
Preferred stock.................................. - 4,000 (4,000) (c) -
Common stock..................................... 82 140 (139) (c) 83
Additional paid-in capital....................... 119,479 3,425 56,574 (c) 179,478
Deferred stock compensation...................... (891) - (891)
Accumulated deficit.............................. (119,183) (5,303) (1,997) (b)
7,300 (c) (119,183)
---------- ---------- --------- ----------
Total stockholders' equity (deficit) (513) 2,262 57,738 59,487
---------- ---------- --------- ----------
$ 526,292 $ 42,501 $ 25,865 $ 594,658
========== ========== ========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
Year ended December 31, 1998
--------------------------------------------------------
Historical Pro forma
------------------------ -----------------------------
<S> <C> <C> <C> <C>
Exodus Cohesive Adjustments Combined
---------- ---------- ----------- ----------
Revenues $ 52,738 $ 41,708 $ $ 94,446
---------- ---------- -----------
Costs and expenses:
Cost of revenues................................. 61,559 28,324 89,883
Marketing and sales.............................. 28,778 5,672 34,450
General and administrative....................... 15,723 10,219 25,942
Product development.............................. 3,221 - 3,221
Amortization of goodwill and other
intangible assets............................. 142 6,734 (6,734) (d)
14,444 (d) 14,586
Acquisition related charges...................... - 4,463 4,463
---------- ---------- ------------- -----------
Total costs and expenses...................... 109,423 55,412 7,710 172,545
---------- ---------- ------------- -----------
Operating loss................................. (56,685) (13,704) (7,710) (78,099)
Interest (expense) income, net...................... (9,757) 352 (2,750) (e) (12,155)
---------- ---------- ------------- -----------
Loss from continuing operations before taxes... (66,442) (13,352) (10,460) (90,254)
Income tax benefit.................................. - 2,555 2,555
---------- ---------- ------------- -----------
Loss from continuing operations................ (66,442) (10,797) (10,460) (87,699)
Cumulative dividends and accretion on
redeemable preferred stock..................... (2,014) (800) 800 (f) (2,014)
---------- ---------- ------------- -----------
Loss from continuing operations
attributable to common stockholders......... $ (68,456) $ (11,597) $ (9,660) $ (89,713)
========== ========== ============= ===========
Basic and diluted loss per share from
continuing operations....................... $ (1.09) $ $ (1.40)
========== ===========
Shares used to compute basic and diluted
loss per share from continuing operations... 62,574 1,487 (g) 64,061
========== ============= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
Three months ended March 31, 1999
--------------------------------------------------------
Historical Pro forma
----------------------- -----------------------------
<S> <C> <C> <C> <C>
Exodus Cohesive Adjustments Combined
---------- ---------- ----------- ----------
Revenues............................................ $ 30,087 $ 11,715 $ $ 41,802
---------- ---------- ----------
Costs and expenses:
Cost of revenues................................. 28,110 8,268 36,378
Marketing and sales.............................. 10,264 1,329 11,593
General and administrative....................... 6,442 1,922 8,364
Product development.............................. 1,285 - 1,285
Amortization of goodwill and other intangible assets 613 2,191 (2,191) (d)
3,611 (d) 4,224
--------- ---------- ------------- ----------
Total costs and expenses...................... 46,714 13,710 1,420 61,844
--------- ---------- ------------- ----------
Operating loss................................. (16,627) (1,995) (1,420) (20,042)
Interest expense, net............................... (5,537) (241) (688) (e) (6,466)
--------- ---------- ------------- ----------
Loss from continuing operations................ (22,164) (2,236) (2,108) (26,508)
Cumulative dividends and accretion on
redeemable preferred stock...................... - (312) 312 (f) -
--------- ---------- ------------- ----------
Loss from continuing operations
attributable to common stockholders........ $ (22,164) $ (2,548) $ (1,796) $ (26,508)
========= ========== ============= ==========
Basic and diluted loss per share from
continuing operations...................... $ (0.27) $ $ (0.32)
========= ==========
Shares used to compute basic and diluted
loss per share from continuing operations.. 81,051 1,487 (g) 82,538
========= ============= ==========
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(1) Unaudited Pro Forma Combined Condensed Balance Sheet
On July 27, 1999, Exodus acquired all of the outstanding capital stock of
Cohesive in exchange for approximately $50 million in cash and 800,398 shares of
Exodus common stock. In addition, Exodus issued options to purchase a total of
approximately 204,330 shares of Exodus common stock in exchange for all issued
and outstanding Cohesive options.
The pro forma combined condensed balance sheet as of March 31, 1999, gives
effect to the merger as if it had occurred on March 31, 1999.
The following adjustments have been reflected in the unaudited pro forma
combined condensed balance sheet:
(a) To allocate a portion of the cash consideration to the payment of
indebtedness and amounts due under acquisition agreements of Cohesive
pursuant to the merger agreement.
(b) To exclude income tax receivable by Cohesive from the net assets
acquired pursuant to the merger agreement.
(c) To record cash paid and common stock and options issued to common and
preferred stockholders of Cohesive, and record applicable purchase
accounting entries.
Under purchase accounting, the total purchase price will be allocated
to Cohesive's assets and liabilities based on their relative fair
values. Allocations are subject to valuations as of the date of the
consummation of the merger. The amounts and components of the estimated
purchase price along with the preliminary allocation of the estimated
purchase price to assets purchased are as follows (in thousands):
<TABLE>
<S> <C>
Cash $ 51,000
Common stock 50,000
Fair value of Cohesive stock options assumed 10,000
Transaction costs 4,000
--------
Total purchase price $115,000
========
Book value of net tangible assets of Cohesive
after adjustment (a) and (b) above $ 7,875
Workforce in place 6,342
Customer lists 32,325
Goodwill 68,458
--------
Net assets acquired $115,000
========
</TABLE>
The actual allocation of the purchase price will depend upon the
composition of Cohesive's net assets on the closing date and Exodus'
evaluation of the fair value of the net assets as of the date
indicated. Consequently, the actual allocation of the purchase price
could differ from that presented above.
(2) Unaudited Pro Forma Combined Condensed Statements of Operations
The pro forma combined condensed statements of operations give effect to
the merger as if it had occurred at the beginning of the period presented.
The following adjustments have been reflected in the unaudited pro forma
combined condensed statements of operations:
<PAGE>
(d) 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>
<CAPTION>
<S> <C>
Workforce in place 5 years
Customer lists 7 years
Goodwill 8 years
</TABLE>
The ultimate lives assigned will be determined at the date
of acquisition based on the facts and circumstances existing at that
date.
(e) 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.
(f) To remove Cohesive's historical cumulative dividends and accretion on
redeemable preferred stock which are settled in cash at the date of the
merger.
(g) To reflect the estimated shares to be issued as consideration for the
merger based on the closing price of Exodus common stock of $33.625 per
share.
(c) Exhibits
--------
The following exhibits are filed herewith:
2.01 Agreement and Plan of Reorganization by and among Registrant,
Cohesive Technology Solutions, Inc. and Marley Acquisition Corp.
dated April 22, 1999. (Included in Appendix A to the prospectus
forming a part of the Registration Statement on Form S-4 (File No.
333-79655) and incorporated herein by reference.)
2.02 Amendment to Agreement and Plan of Reorganization by and among
Registrant, Cohesive Technology Solutions, Inc. and Marley
Acquisition Corp. dated May 28, 1999. (Included in Appendix A to the
prospectus forming a part of the Registration Statement on Form S-4
(File No. 333-79655) and incorporated herein by reference.)
23.01 Consent of Deloitte & Touche LLP, Independent Auditors.
99.01 Press Release dated July 28, 1999.*
*Previously filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: October 12, 1999
EXODUS COMMUNICATIONS, INC.
By: /s/ Richard S. Stoltz
---------------------------------------
Richard S. Stoltz
Executive Vice President, Finance, Chief
Financial Officer and Chief Operating Officer
<PAGE>
Exhibit Index
-------------
Number Description
------ -----------
2.01 Agreement and Plan of Reorganization by and among Registrant,
Cohesive Technology Solutions, Inc. and Marley Acquisition Corp.
dated April 22, 1999. (Included in Appendix A to the prospectus
forming a part of the Registration Statement on Form S-4 (File No.
333-79655) and incorporated herein by reference.)
2.02 Amendment to Agreement and Plan of Reorganization by and among
Registrant, Cohesive Technology Solutions, Inc. and Marley
Acquisition Corp. dated May 28, 1999. (Included in Appendix A to
the prospectus forming a part of the Registration Statement on Form
S-4 (File No. 333-79655) and incorporated herein by reference.)
23.01 Consent of Deloitte & Touche LLP, Independent Auditors.
99.01 Press Release dated July 28, 1999.*
*Previously filed.
<PAGE>
Exhibit 23.01
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement Nos.
33-48273, 33-72525, 33-85325 and 33-83179 of Exodus Communications, Inc. on
Form S-8 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.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
October 11, 1999
