<PAGE>
As filed with the Securities and Exchange Commission on August 19, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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EXODUS COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 4813 77-0403076
(State or Other Jurisdiction of
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer
Incoporation or Organization)r Identification No.)
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2831 Mission College Boulevard
Santa Clara, CA 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
Chief Executive Officer
2831 Mission College Boulevard
Santa Clara, CA 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:
Eileen Duffy Robinett, Esq.
Robert A. Freedman, Esq.
Tram T. Phi, Esq.
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
(650) 494-0600
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Approximate date of commencement of proposed sale of the securities to the
public: As promptly as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Maximum
Amount to Proposed Maximum Aggregate Amount of
Title of Each Class of be Registered Offering Price Offering Registration
Securities to be Registered (1) per Unit (1) Price (1) Fee
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<S> <C> <C> <C> <C>
11 1/4% Senior Notes due 2008.... $75,000,000 100% $75,000,000 $20,850
</TABLE>
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee, pursuant to Rule 457(f) under the Securities Act of 1933,
as amended.
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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 or until this Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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<PAGE>
PROSPECTUS
Exodus Communications, Inc.
Exchange Offer For All Outstanding 11 1/4% Senior Notes Due 2008
Originally Sold on June 22, 1999
Terms of Exchange Offer
Exchange Offer
We will exchange old notes originally sold on June 22, 1999 for new notes
that are registered under the Securities Act.
Exodus will receive no proceeds from the exchange offer.
Exchange Offer Expiration
, 1999 at 5:00 p.m., New York City time.
Old Notes
We issued and sold $75.0 million of 11 1/4% Senior Notes due 2008 on June
22, 1999.
If you tender your old notes in the exchange offer, interest will cease to
accrue before your new notes are issued. If you do not tender in the exchange
offer, your old notes will continue to be subject to the same terms and
restrictions except that we will not be required to register your old notes
under the Securities Act.
Exodus Communications, Inc.
2831 Mission College Boulevard, Santa Clara, California 95054, (408) 346-
2200.
New Notes
Identical to the old notes except that the new notes will be registered
under the Securities Act.
. Maturity: July 1, 2008.
. Change of Control: Holder can require us to purchase holder's notes at
101% of the principal amount.
. Interest: Paid every six months on January 1 and July 1, starting July
1, 1999.
. Escrow: We have set aside funds with an escrow agent sufficient to meet
interest payments through July 1, 2000.
. Redemption by Exodus: Anytime on or after July 1, 2003, except that
redemptions for a portion of the notes may be made at any time prior to
July 1, 2001 with the cash proceeds of specified capital stock sales.
. Ranking: The new notes will be general unsecured obligations, ranking:
. equally with all our senior unsecured indebtedness;
. senior to all our subordinated indebtedness; and
. junior to all our secured indebtedness and liabilities of our
subsidiaries.
Investment in the notes to be issued in the exchange offer involves risks.
See the risk factors section beginning on page 9.
This prospectus and the accompanying letter of transmittal are first being
mailed to holders of outstanding notes on or about , 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes or passed upon the adequacy
or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
----
<S> <C>
Documents Incorporated by Reference...................................... i
Prospectus Summary....................................................... 1
Risk Factors............................................................. 9
Disclosure Regarding Forward-Looking Statements.......................... 20
Use of Proceeds.......................................................... 21
Capitalization........................................................... 22
Selected Consolidated Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 32
Management............................................................... 43
The Exchange Offer....................................................... 46
Description of Notes..................................................... 55
Material United States Federal Income Tax Considerations................. 87
Plan of Distribution..................................................... 91
Legal Matters............................................................ 91
Experts.................................................................. 91
Available Information.................................................... 92
Index to Financial Statements and Schedule............................... F-1
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
This prospectus incorporates business and financial information about Exodus
that is not included in or delivered with this prospectus. We are incorporating
by reference in this prospectus the following documents which we filed with the
Commission:
. Our annual report on Form 10-K for the year ended December 31, 1998.
. Our quarterly reports on Form 10-Q for the quarters ended (1) March 31,
1999, as amended June 25, 1999, and (2) June 30, 1999.
. Our current reports on Form 8-K filed January 29, 1999, February 22,
1999, March 2, 1999, June 18, 1999 and August 10, 1999.
We are also incorporating by reference in this prospectus all reports and
other documents that we file after the date of this prospectus pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
prior to the termination of the offering of securities under this prospectus.
These reports and documents will be incorporated by reference in and considered
to be part of this prospectus as of the date of filing of the reports and
documents.
Any statement contained in this prospectus or in a document which is
incorporated by reference in this prospectus will be modified or superseded for
purposes of this prospectus to the extent that a statement in any document that
we file after the date of this prospectus that also is incorporated by
reference in this prospectus modifies or supersedes the prior statement. Any
statement so modified or superseded will not, except as so modified or
superseded, constitute a part of this prospectus.
This prospectus incorporates by reference documents which are not presented
in this prospectus or delivered to you with it. You may request, and we will
send to you, without charge, copies of these documents, other than exhibits to
these documents, which we will send to you for a reasonable fee. Requests
should be directed to:
Exodus Communications, Inc.
2831 Mission College Boulevard
Santa Clara, California 95054
Attn: Secretary
telephone: (408) 346-2200
In order to assure timely delivery of the requested materials before the
expiration of the exchange offer, any request should be made prior to ,
1999.
i
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights some information from this prospectus. It
may not contain all of the information that may be important to you. For a more
complete understanding of the exchange offer, we encourage you to read the
entire prospectus and the documents we have referred you to.
Exodus Communications, Inc.
Exodus is a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations. Our
solutions include Internet Data Centers, network services and managed services,
including professional services, which together provide the high performance,
scalability and expertise that enterprises need to optimize their 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 June
30, 1999, we had more than 1,300 customers, including installed and uninstalled
customers under contract, and managed over 11,000 customer servers. Our
customers represent a variety of industries, ranging from Internet-centric
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 Fortune 500 customers such as Applied Materials, Hewlett-
Packard Company and National Semiconductor Corporation.
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 virtually all Internet-centric
businesses and are becoming increasingly mission-critical for many mainstream
enterprises. In order to ensure the quality, reliability, availability and
redundancy of these mission-critical Internet operations, corporate IT
departments must make substantial investments in facilities, personnel,
equipment and networks that must be continuously upgraded to reflect changing
technologies and rapidly scale as the enterprise grows. Such a continuing
significant investment of resources is often an inefficient use of overall
resources and, as a result, a significant need exists for outsourcing
arrangements that can increase performance, provide continuous operation of
Internet solutions and reduce Internet operating expenses. We believe a
significant opportunity exists for a highly focused company to provide a
combination of server hosting, Internet connectivity and managed services that
will enable reliable, high performance of mission-critical Internet operations.
Exodus offers an integrated portfolio of solutions that 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 DS-3,
OC-3 and OC-12 lines, along with our public and private network peering
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 restore services, security services
and professional services. These services provide the foundation for high
performance, availability, scalability and reliability of customers' Internet
server operations. In addition, we integrate best-of-breed technologies from
leading vendors with our 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:
. extend our market leadership and position Exodus as the brand name and
leader in this market;
. focus on enhancing systems and network management and Internet
technology services;
1
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. accelerate our domestic expansion and begin to establish a global
presence;
. leverage our expertise to address new market opportunities such as e-
commerce; 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, a subcategory of
managed services, in 1998. We currently operate 12 domestic Internet Data
Centers located in seven metropolitan areas: Boston, Chicago, Los Angeles, New
York, San Francisco, Seattle and Washington, D.C. In addition, we opened our
first Internet Data Center outside of the United States in the London
metropolitan area in June 1999. Our Internet Data Centers consist of
approximately 697,000 gross square feet.
Recent Events
Acquisition of Cohesive Technology Solutions, Inc. On July 27, 1999, we
completed the acquisition of Cohesive Technology Solutions, Inc. ("Cohesive")
for approximately $115 million in cash, Exodus common stock and the assumption
of Cohesive options. Cohesive is a technology professional services
organization with expertise in networking, Web applications and technology
solutions. We expect to account for the purchase of Cohesive under the purchase
method of accounting and anticipate a significant portion of the purchase price
will be allocated to goodwill.
Stock Dividend. On July 21, 1999, our board of directors approved a two-for-
one common stock split, which was effected in the form of a stock dividend.
Stockholders of record on July 29, 1999 received one additional share for every
share held on that date. The shares were distributed on August 12, 1999. Unless
otherwise indicated, all share numbers in this prospectus have been adjusted
retroactively to reflect the two-for-one common stock split.
2
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The Exchange Offer
Securities Offered.......... $75.0 million principal amount of 11 1/4% Senior
Notes due 2008. The terms of the new notes and
the old notes are identical except for transfer
restrictions and registration rights relating to
the old notes that will not be applicable to the
new notes. The old notes, the new notes and our
$200.0 million principal amount of previously
registered 11 1/4% senior notes are referred to
collectively as the notes.
Issuance of Old Notes....... The old notes were issued on June 22, 1999 to
Goldman, Sachs & Co. which placed the old notes
with qualified institutional buyers and to buyers
in offshore transactions in reliance on
Regulation S under the Securities Act.
The Exchange Offer.......... We are offering to exchange $1,000 principal
amount of new notes for each $1,000 principal
amount of old notes. There are $75.0 million
aggregate principal amount of old notes
outstanding. The issuance of the new notes is
intended to satisfy our obligations contained in
the registration rights agreement we entered into
with Goldman, Sachs in connection with the
issuance of the old notes.
Conditions to the Exchange The exchange offer is not conditioned upon any
Offer....................... minimum principal amount of old notes being
tendered for exchange. However, the exchange
offer is subject to customary conditions, which
may be waived by us. See "The Exchange Offer--
Conditions to the Exchange Offer." Except for the
requirements of applicable federal and state
securities laws, there are no federal or state
regulatory requirements to be complied with or
obtained by us in connection with the exchange
offer.
Procedures for Tendering.... If you want to tender your old notes in the
exchange offer, you must complete and sign the
letter of transmittal according to the
instructions contained in this prospectus and the
letter of transmittal. You must then mail, fax or
hand deliver the letter of transmittal, together
with any other required documents, to the
exchange agent, either with the old notes to be
tendered or in compliance with the specified
procedures for guaranteed delivery of old notes.
You should allow sufficient time to ensure timely
delivery. Some brokers, dealers, commercial
banks, trust companies and other nominees may
also effect tenders by book-entry transfer. If
you own old notes registered in the name of a
broker, dealer, commercial bank, trust company or
other nominee, you are urged to contact that
person promptly if you wish to tender old notes
in the exchange offer. Letters of transmittal and
certificates representing the old notes should
not be sent to Exodus. These documents should
only be sent to the exchange agent. Questions
regarding how to tender and requests for
information should also be directed to the
exchange agent. See "The Exchange Offer--
Procedures for Tendering Old Notes."
3
<PAGE>
Expiration Date; The exchange offer will expire on the earlier of
Withdrawal.................. 5:00 p.m., New York City time on , 1999 or
the date when all old notes have been tendered,
or a later date and time to which it may be
extended. However, it may not be extended beyond
, 1999. We will accept for exchange any and
all old notes that are validly tendered in the
exchange offer prior to 5:00 p.m., New York City
time, on the expiration date. The tender of old
notes may be withdrawn at any time prior to the
expiration date. Any old note not accepted for
exchange for any reason will be returned without
expense to the tendering holder as promptly as
practicable after the expiration or termination
of the exchange offer. The new notes issued in
the exchange offer will be delivered promptly
following the expiration date. See "The Exchange
Offer--Terms of the Exchange Offer; Period for
Tendering Old Notes" and "--Withdrawals of
Tenders."
Guaranteed Delivery
Procedures.................. If you wish to tender your old notes and (1) your
old notes are not immediately available or (2)
you cannot deliver your old notes together with
the letter of transmittal to the exchange agent
prior to the expiration date, you may tender your
old notes according to the guaranteed delivery
procedures contained in the letter of
transmittal. See "The Exchange Offer--Procedures
for Tendering Old Notes--Guaranteed Delivery
Procedures."
Tax Considerations.......... For U.S. federal income tax purposes, the
exchange of old notes for new notes should not be
considered a sale or exchange or otherwise a
taxable event to the holders of notes. See
"Material United States Federal Income Tax
Considerations."
Use of Proceeds............. We will receive no proceeds from the exchange
offer.
Appraisal Rights............ Holders of old notes will not have dissenters'
rights or appraisal rights in connection with the
exchange offer.
Exchange Agent.............. Chase Manhattan Bank & Trust Company, National
Association is serving as exchange agent in
connection with the exchange offer.
Resales of New Notes........ Based on an interpretation by the Securities and
Exchange Commission set forth in no-action
letters issued to third parties, we believe that
you may resell or otherwise transfer new notes
issued in the exchange offer in exchange for old
notes without restrictions under the federal
securities laws. However, there are exceptions to
this general statement. You may not freely
transfer the new notes if:
. you are an affiliate of Exodus;
. you did not acquire the new notes in the
ordinary course of your business;
. you have engaged in, intend to engage in, or
have an arrangement or understanding with any
person to participate in the distribution of
the new notes; or
. you are a broker-dealer who acquired the old
notes directly from us.
4
<PAGE>
Any holder subject to any of the exceptions above
and each participating broker-dealer that
receives new notes for its own account in the
exchange offer in exchange for old notes that
were acquired as a result of market making, must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with the resale of the new notes.
Consequences of Not
Exchanging the Old Notes... If you do not tender your old notes or your old
notes are not properly tendered, the existing
transfer restrictions will continue to apply. The
old notes are currently eligible for sale
pursuant to Rule 144A through the PORTAL Market.
Because we anticipate that most holders will
elect to exchange old notes for new notes due to
the absence of restrictions on the resale of new
notes under the Securities Act in most cases, we
anticipate that the liquidity of the market for
any old notes remaining after the consummation of
the exchange offer may be substantially limited.
See "Risk Factors--There could be negative
consequences to you if you do not exchange your
old notes for new notes" and "The Exchange
Offer--Consequences of Failure to Exchange Old
Notes."
5
<PAGE>
Summary Description of the New Notes
The terms of the new notes and the old notes are identical in all respects,
except that the terms of the new notes do not include the transfer restrictions
and registration rights relating to the old notes. The old notes, the new notes
and our $200.0 million principal amount of previously registered 11 1/4% senior
notes are referred to collectively as the notes.
The new notes will bear interest from the most recent date to which interest
has been paid on the old notes. Accordingly, registered holders of new notes on
the relevant record date for the first interest payment date following the
completion of the exchange offer will receive interest accruing from the most
recent date on which interest has been paid. Old notes accepted for exchange
will cease to accrue interest from and after the date of completion of the
exchange offer. Holders of old notes whose old notes are accepted for exchange
will not receive any payment in respect of interest on the old notes otherwise
payable on any interest payment date that occurs on or after completion of the
exchange offer.
Maturity Date............... July 1, 2008.
Interest Payment Dates...... January 1 and July 1 of each year, commencing
July 1, 1999.
Escrow Proceeds............. We have deposited with an escrow agent an amount
of U.S. government securities and cash that,
together, with the proceeds from the investment
of these funds, will be sufficient to pay, when
due, the interest payments on the notes through
July 1, 2000, with any balance to be retained by
us. The notes are secured by a first priority
security interest in the escrow account. See
"Description of Notes--Disbursement of Funds;
Escrow Account."
Optional Redemption......... Except as described in this prospectus, the notes
will not be redeemable at our option prior to
July 1, 2003. The notes will be subject to
redemption, at our option, in whole or in part,
at any time on or after July 1, 2003 and prior to
maturity, but excluding the redemption date, upon
not less than 30 days' nor more than 60 days'
notice at the redemption prices set forth in this
prospectus plus accrued and unpaid interest and
liquidated damages (as described below), if any.
In addition, at any time prior to July 1, 2001,
we may redeem up to 35% of the aggregate
outstanding principal amount of the notes with
the net cash proceeds of one or more sales of
capital stock (as described below), other than
disqualified stock, at a redemption price equal
to 111.25% of the aggregate principal amount,
plus accrued and unpaid interest and liquidated
damages, if any, to the date of redemption;
provided that at least 65% of the original
principal amount of the notes remains outstanding
immediately following the redemption. In order to
effect the redemption, we must mail a notice of
redemption no later than 45 days after the
related sale of capital stock and must consummate
the redemption within 60 days of the closing of
the sale of capital stock.
Change of Control........... In the event of a change of control (as described
below), each holder shall have the right to
require that we purchase the notes at
6
<PAGE>
a price equal to 101% of the principal amount,
plus accrued and unpaid interest, and liquidated
damages, if any, to the date of purchase. See
"Risk Factors--We may not be able to effect
repurchase of the notes upon a Change of Control
in accordance with the terms of the indenture."
Ranking..................... The notes will be senior unsecured indebtedness
ranking equally with our existing and future
senior unsecured obligations and senior in right
of payment to all of our subordinated
indebtedness. The notes will be effectively
subordinated to all secured indebtedness and to
any liabilities of any of our subsidiaries,
including trade payables. As of June 30, 1999, we
had approximately $582.9 million of indebtedness
outstanding, $57.5 million of which was secured
indebtedness, and outstanding liabilities of our
subsidiaries were approximately $4.1 million. See
"Risk Factors--Our substantial leverage and debt
service obligations adversely affect our cash
flow."
Restrictive Covenants....... The indenture governing the notes contains
covenants that, among other things, limit our
ability to incur additional specific types of
debt, pay dividends, make distributions, make
specific types of investments or other restricted
payments, sell assets, enter into specified
transactions with affiliates, incur liens, engage
in mergers and consolidations and allow
restricted subsidiaries (as defined) to issue
capital stock and make guarantees. See
"Description of Notes."
7
<PAGE>
Summary Consolidated Financial Information
The following summary financial information should be read in conjunction
with our consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The summary consolidated financial
information for each of the years in the three-year period ended December 31,
1998 is derived from our consolidated financial statements that have been
audited by KPMG LLP, independent auditors. The summary consolidated financial
information as of June 30, 1999 and for the six months ended June 30, 1998 and
June 30, 1999 is derived from our unaudited condensed consolidated financial
statements for these periods. Historical results are not necessarily indicative
of the results to be expected in the future.
"EBITDA" represents earnings (loss) before net interest expenses, income
taxes, depreciation, amortization, including amortization of deferred stock
compensation, and other noncash charges. EBITDA should not be used as an
alternative to operating loss or net cash provided by (used for) operating
activities, investing activities or financing activities, each as measured
under generally accepted accounting principles. In addition, EBITDA may not be
comparable to other similarly titled information from other companies. However,
our management believes that EBITDA is an additional meaningful measure of
performance and liquidity. Earnings consist of income (loss) before provision
for income taxes plus fixed charges. Fixed charges consist of interest charges
and amortization of debt expense and discount or premium related to
indebtedness, whether expensed or capitalized and the portion of rental expense
that we believe to be representative of interest.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues.............. $ 3,130 $ 12,408 $ 52,738 $ 17,176 $ 72,586
Operating loss.............. (4,094) (24,792) (56,685) (26,289) (31,080)
Net loss.................... (4,133) (25,298) (66,442) (27,397) (43,065)
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) (29,411) (43,065)
Basic and diluted net loss
per share.................. $ (0.54) $ (3.46) $ (1.09) (0.64) (0.53)
Shares used in computing
basic and diluted net loss
per share.................. 7,656 7,714 62,574 45,841 81,693
Statement of Cash Flows
Data:
Net cash used for operating
activities................. $(3,116) $(15,518) $(46,498) $(16,427) $ (21,757)
Net cash used for investing
activities................. (3,877) (23,864) (92,746) (18,270) (106,142)
Net cash provided by
financing activities....... 10,545 45,937 279,865 85,147 307,613
Other Data:
EBITDA...................... $(3,633) $(20,274) $(41,125) $(20,062) $ (18,071)
Depreciation and
amortization............... 461 3,429 12,997 4,689 12,634
Capital expenditures........ 3,499 22,489 44,564 17,842 81,491
Deficiency of earnings
available to cover fixed
charges.................... (4,133) (25,298) (66,442) (27,397) (43,065)
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1999
----------------
(in thousands)
<S> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................................... $330,605
Restricted cash and cash equivalents......................... 43,436
Working capital.............................................. 286,389
Total assets................................................. 624,051
Current portion of equipment loans, line of credit facilities
and capital lease obligations............................... 19,027
Equipment loans, line of credit facilities and capital lease
obligations, less current portion........................... 38,507
Convertible subordinated notes............................... 250,000
Senior notes ................................................ 275,375
Total stockholders' deficit.................................. (15,470)
</TABLE>
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RISK FACTORS
Holders of old notes should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
prospectus before tendering their old notes in the exchange offer. The risk
factors set forth in this prospectus, other than "Risk Factors--There could be
negative consequences to you if you do not exchange your old notes for new
notes," are generally applicable to the old notes as well as the new notes.
There could be negative consequences to you if you do not exchange your old
notes for new notes
Any old notes tendered and exchanged in the exchange offer will reduce the
aggregate principal amount of old notes outstanding. Because we anticipate that
most holders will elect to exchange their old notes for new notes due to the
absence of most restrictions on the resale of new notes, we anticipate that the
liquidity of the market for any old notes remaining outstanding after the
exchange offer may be substantially limited. Following the consummation of the
exchange offer, holders who did not tender their old notes generally will not
have any further registration rights under the registration rights agreement,
and these old notes will continue to be subject to restrictions on transfer.
The old notes are currently eligible for sale under Rule 144A through the
PORTAL Market.
As a result of making the exchange offer, we will have fulfilled our
obligations under the registration rights agreement. Holders who do not tender
their old notes generally will not have any further registration rights or
rights to receive the liquidated damages specified in the registration rights
agreement for our failure to register the new notes.
The old notes that are not exchanged for new notes will remain restricted
securities. Accordingly, the old notes may be resold only:
. to Exodus or one of its subsidiaries;
. to a qualified institutional buyer;
. to an institutional accredited investor;
. to a party outside the United States under Regulation S under the
Securities Act;
. under an exemption from registration provided by Rule 144 under the
Securities Act; or
. under an effective registration statement.
Our short operating history and heavy losses make our business difficult to
evaluate
Our limited operating history makes evaluating our business operations and
our prospects difficult. We began offering server hosting and Internet
connectivity services in 1995 and opened our first dedicated Internet Data
Center in August 1996. Due to our short operating history, our business model
is still in an emerging state. We have incurred operating losses and negative
cash flows each quarter and year since 1995. Our accumulated deficit was
approximately $140.1 million at June 30, 1999. We anticipate making significant
investments in new Internet Data Centers and network infrastructure, product
development, sales and marketing programs and personnel. We believe that we
will continue to experience net losses on a quarterly and annual basis for the
foreseeable future. We may also use significant amounts of cash to acquire
complementary businesses, products, services or technologies. Although we have
experienced significant growth in revenues in recent periods, we do not believe
that this growth rate is necessarily indicative of future operating results. It
is possible that we may never achieve profitability on a quarterly or an annual
basis.
Our operating results have fluctuated widely and we expect this to continue
We have experienced significant fluctuations in our results of operations on
a quarterly and an annual basis. We expect to continue to experience
significant fluctuations due to a variety of factors, many of which are outside
of our control, including:
. demand for and market acceptance of our services;
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. reliable continuity of service and network availability;
. the ability to increase bandwidth as necessary, both on our network and
at our interconnection points with other networks;
. costs related to the acquisition of network capacity and arrangements
for interconnections with third-party networks;
. customer retention and satisfaction;
. capacity utilization of our Internet Data Centers;
. the timing, magnitude and integration of acquisitions of complementary
businesses and assets;
. the timing of customer installations;
. the provision of customer discounts and credits;
. the mix of services sold by us;
. the timing and success of marketing efforts and service introductions
by us and our competitors;
. the timing and magnitude of capital expenditures, including
construction costs relating to the expansion of operations;
. the timely expansion of existing Internet Data Centers and completion
of new Internet Data Centers;
. the introduction by third parties of new Internet and networking
technologies;
. changes in our pricing policies and those of our competitors; and
. fluctuations in bandwidth used by customers.
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to telecommunications, depreciation,
substantial interest expenses, real estate and personnel. Therefore, our
results of operations are particularly sensitive to fluctuations in revenues.
Furthermore, if we were to become unable to continue leveraging third-party
products in our services offerings, our product development costs could
increase significantly. Finally, many of our customers are in an emerging
stage, and there is the possibility that we will not be able to collect
receivables on a timely basis.
Our rapid expansion produces a significant strain on our business
The expansion of our network through the opening of additional Internet Data
Centers in geographically diverse locations is one of our key strategies. We
currently have 12 Internet Data Centers located in seven metropolitan areas of
the United States: Boston, Chicago, Los Angeles, New York, San Francisco,
Seattle and Washington, D.C. We also opened our first Internet Data Center
outside of the United States in the London metropolitan area in June 1999. We
plan to open six additional Internet Data Centers and three server hosting
sites in the second half of 1999. To expand successfully, we must be able to
assess markets, locate and secure new Internet Data Center sites, install
facilities and establish additional peering interconnections with Internet
service providers in a timely manner and at a reasonable cost. To manage this
expansion effectively, we must continue to improve our operational and
financial systems and expand, train and manage our employee base. Our inability
to establish additional Internet Data Centers or effectively manage our
expansion would have a material adverse effect upon our business.
We compete with much larger companies and there are few barriers to entry
Our market is intensely competitive. There are few substantial barriers to
entry, and we expect to face additional competition from existing competitors
and new market entrants in the future. The principal competitive factors in
this market include:
. Internet system engineering and other expertise;
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. 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 and regional ISPs;
. global, regional and local telecommunications companies and Regional
Bell Operating Companies;
. large 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.
Some of our competitors may be able to provide customers with additional
benefits in connection with their Internet system and network management
solutions, including reduced communications costs, which could reduce the
overall costs of their services relative to ours. We may not be able to offset
the effects of any price reductions. In addition, we believe our market is
likely to encounter consolidation in the near future, which could result in
increased price and other competition.
Our market is new and our services may not be generally accepted
The market for Internet system and network management solutions has only
recently begun to develop, is evolving rapidly and is characterized by an
increasing number of market entrants. This market may not prove to be viable
or, if it becomes viable, may not continue to grow. Our future growth depends
on the willingness of enterprises to outsource the system and network
management of their mission-critical Internet operations and our ability to
market our services in a cost-effective manner to a sufficiently large number
of customers. If this market fails to develop, or develops more slowly than
expected, or if our services do not achieve market acceptance, our business
would be adversely affected. In addition, in order to be successful we must be
able to differentiate ourselves from our competition through our service
offerings.
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The notes are effectively subordinated to our secured indebtedness and the
liabilities of our subsidiaries
The notes are effectively subordinated to our secured indebtedness to the
extent of the value of the assets securing the indebtedness. The notes are
effectively subordinated to all liabilities, including trade payables and lease
obligations, of our subsidiaries. Any right we may have to receive assets of
any of our subsidiaries upon liquidation or reorganization will be effectively
subordinated to the claims of that subsidiary's creditors, including trade
creditors. As of June 30, 1999, we had approximately $57.5 million of
outstanding secured debt and our subsidiaries had approximately $4.1 million of
liabilities. The indenture governing the notes contains limitations on our
ability and the ability of our subsidiaries to incur additional debt. However,
these limitations are subject to a number of exceptions, and there can be no
assurances that we will not incur significant additional debt in the future,
including debt to which the holders of the notes would be effectively
subordinated. See "Description of Notes--Covenants--Limitation on Debt."
Our substantial leverage and debt service obligations adversely affect our cash
flow
We have substantial amounts of outstanding indebtedness, primarily from our
senior notes and convertible notes. There is the possibility that we may be
unable to generate cash sufficient to pay the principal of, interest on and
other amounts due in respect of our indebtedness when due. As of June 30, 1999,
we had indebtedness of approximately $582.9 million and available borrowings of
up to an additional $1.2 million. We also expect to add additional equipment
loans and lease lines to finance capital expenditures for our Internet Data
Centers and may obtain additional long term debt, working capital lines of
credit and lease lines. 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 vis-a-vis less
leveraged competitors and competitors that have better access to
capital resources.
We are subject to restrictive covenants that limit our flexibility
Our senior notes and convertible notes contain various restrictions on our
ability to incur 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, the proceeds from the sale of convertible notes in March 1999
may be used only for limited purposes. Proceeds in the amount of $48.5 million
may be used for general corporate purposes. The remaining $193.8 million may be
used only to finance the purchase of assets or other businesses to be used in
our business.
We expect to expend substantial resources for leases of real estate,
significant improvements of facilities, purchase of complementary businesses,
assets and equipment, implementation of multiple telecommunications connections
and hiring of network, administrative, customer support and sales and marketing
personnel with the
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establishment of each new Internet Data Center. Moreover, we expect to make
significant investments in sales and marketing and the development of new
services as part of our expansion strategy. The failure to generate sufficient
cash flows or to raise sufficient funds may require us to delay or abandon some
or all of our development and expansion plans or otherwise forego market
opportunities, making it difficult for us to respond to competitive pressures.
It usually takes us at least six months to select the appropriate location
for a new Internet Data Center, construct the necessary facilities, install
equipment and telecommunications infrastructure, and hire operations and sales
personnel. Expenditures commence well before the Internet Data Center opens,
and it takes an extended period for us to approach break-even capacity
utilization. As a result, we expect that individual Internet Data Centers will
experience losses for in excess of one year from the time they are opened. We
experience further losses from sales personnel hired to test market our
services in markets where there is no Internet Data Center. Growth in the
number of our Internet Data Centers is likely to increase the amount and
duration of losses. In addition, if we do not attract customers to new Internet
Data Centers in a timely manner, or at all, our business would be materially
adversely affected.
We must manage growth effectively
We are experiencing, and expect to continue experiencing, rapid growth with
respect to the building of our Internet Data Centers and network
infrastructure, expansion of our service offerings, geographic expansion,
expansion of our customer base and increases in the number of employees. This
growth has placed, and if it continues, will place, a significant strain on our
financial, management, operational and other resources, including our ability
to ensure customer satisfaction. This expansion also requires significant time
commitment from our senior management and places a significant strain on their
ability to manage the existing business. In addition, we may be required to
manage multiple relationships with a growing number of third parties as we seek
to complement our service offerings. Our ability to manage our growth
effectively will require us to continue to expand operating and financial
procedures and controls, to replace or upgrade our operational, financial and
management information systems and to attract, train, motivate and retain key
employees. We have recently hired many key employees and officers, and as a
result, our entire management team has worked together for only a brief time.
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.
There are risks associated with acquisitions
In October 1998 we acquired the assets of Arca Systems, Inc., in February
1999 we acquired American Information Systems, Inc. and in July 1999 we
acquired Cohesive Technology Solutions, Inc. We continue to expend resources
integrating Cohesive 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. If we buy a
company, we could have difficulty in assimilating that company's technology,
personnel and operations. In addition, the key personnel of the acquired
company may decide not to work for us. These difficulties could disrupt our
ongoing business, distract our management and employees and increase our
expenses. In addition, future acquisitions by us may 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.
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,
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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 or local exchange carriers, to provide consistent
data communications capacity could result in interruptions in our services. Any
damage to or failure of our systems or service providers could result in
reductions in, or terminations of, services supplied to our customers, which
could have a material adverse effect on our business. In the past, we have
experienced interruptions in specific circuits within our network resulting
from events outside our control, which led to short-term degradation in the
level of performance of our network.
Customer satisfaction is critical to our success
Our customers demand a very high level of service. Our customer contracts
generally provide a limited service level warranty related to the continuous
availability of service on a 24 hours per day, seven days per week basis. This
warranty is generally limited to a credit consisting of free service for a
short period of time for disruptions in Internet transmission services. To
date, only a limited number of customers have been entitled to this warranty.
If we incur significant warranty obligations in connection with system
downtime, our liability insurance may not be adequate to cover these expenses.
As customers outsource more mission-critical operations to us, we may be
subject to increased liability claims and customer dissatisfaction if our
systems fail or our customers otherwise become unsatisfied.
Our ability to expand our network is unproven
To satisfy customer requirements, we must continue to expand and adapt our
network infrastructure. We are dependent on MCI WorldCom and Qwest and other
telecommunications providers for our 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, consumer demand
could shrink because of possible degradation of service. In addition, as we
upgrade our telecommunications infrastructure to increase bandwidth available
to our customers, we expect to encounter equipment or software incompatibility
which may cause delays in implementation.
We depend on network interconnections
We rely on a number of public and private network interconnections, commonly
referred to as peering relationships, to allow our customers to connect to
other networks. If our peering partners were to discontinue their support for
the peering relationships, our ability to exchange traffic would be
significantly constrained. Furthermore, our business will be adversely affected
if these peering partners do not add more bandwidth to accommodate increased
traffic. Many of the companies with which we maintain private peering
interconnections are our competitors. There is nothing to prevent any peering
partners, many of which are significantly larger than we are, from charging
high usage fees or denying access. In the future, private peering partners
could refuse to continue to interconnect directly with us, might impose
significant costs on us or limit our customers' access to their networks. 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 adversely affected.
Risks associated with international operations
A component of our strategy is to expand into international markets,
including Europe and Japan. We opened our first Internet Data Center outside of
the United States in the London metropolitan area in
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June 1999. Furthermore, we plan to open additional international server hosting
sites and/or Internet Data Centers in the second half of 1999. 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.
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 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 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
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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
adversely affected. 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 adversely affected. For example, we
have experienced performance problems, including previously unknown software
and firmware bugs, with routers and switches that have caused temporary
disruptions in and impairment of network performance. In addition, we expect to
depend for a time on third parties to deliver our services from and manage
certain international operations.
Government regulation and legal uncertainties may adversely affect our business
Laws and regulations directly applicable to communications and commerce over
the Internet are becoming more prevalent. The United States Congress has
recently considered Internet laws regarding children's privacy, copyrights,
taxation and the transmission of sexually explicit material. The European Union
also recently enacted its own privacy regulations. The law of the Internet,
however, remains largely unsettled, even in areas where there has been some
legislative action. It may take years to determine whether and how existing
laws such as those governing intellectual property, privacy, libel and taxation
apply to the Internet. In addition, the growth and development of the market
for online commerce may prompt calls for more stringent consumer protection
laws, both in the United States and abroad, that may impose additional burdens
on companies conducting business online. The adoption or modification of laws
or regulations relating to the Internet could adversely affect our business. We
provide services over the Internet in all states in the United States and in
many foreign countries, and we facilitate the activities of our customers in
these jurisdictions. As a result we may be required to qualify to do business,
or be subject to taxation, or be subject to other laws and regulations, in
these jurisdictions even if we do not have a physical presence or employees or
property in these jurisdictions. The application of these multiple sets of laws
and regulations is uncertain, but we could find that Exodus is subject to
regulation, taxation, enforcement or other liability in unexpected ways, which
could materially adversely affect our business.
There are risks involved with the information disseminated through our network
The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. The Child Online Protection Act of 1998
imposes criminal penalties and civil liability on anyone engaged in the
business of selling or transferring material that is harmful to minors, by
means of the World Wide Web, without restricting access to this type of
material by underage persons. Numerous states have adopted or are currently
considering similar types of legislation. The imposition upon us and other
Internet network providers of potential liability for information carried on or
disseminated through systems could require us to implement measures to reduce
exposure to liability, which may require the expenditure of substantial
resources, or to discontinue various service or product offerings. Further, the
costs of defending against any claims and potential adverse outcomes of these
claims could have a material adverse effect on our business. While we carry
professional liability insurance, it may not be adequate to compensate or may
not cover us in the event we become liable for information carried on or
disseminated through our networks.
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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.
We depend on our key personnel
Our success depends in significant part upon the continued services of our
key technical, sales and senior management personnel. Although some of our
executive officers participate in our executive employment policy, none of our
officers is a party to an employment agreement. Any officer or employee can
terminate his or her relationship at any time. 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.
We depend on the Internet and Internet infrastructure development
Our success will depend in large part on continued growth in the use of the
Internet. Critical issues concerning the commercial use of the Internet,
including security, reliability, cost, ease of access, quality of service and
necessary increases in bandwidth availability, remain unresolved and are likely
to affect the development of the market for our services. In addition, the rate
of development and adoption of the Internet has been slower outside of the
United States and the cost of bandwidth has been higher. The recent growth in
the use of the Internet has caused frequent periods of performance degradation,
requiring the upgrade of routers and switches, telecommunications links and
other components forming the infrastructure of the Internet by ISPs and other
organizations with links to the Internet. Any perceived degradation in the
performance of the Internet as a whole could undermine the benefits of our
services. Consequently, the emergence and growth of the market for our services
is dependent on improvements being made to the entire Internet infrastructure
to alleviate overloading and congestion.
Risks associated with protection and enforcement of intellectual property
rights
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect proprietary
rights in our products and services. We have no patented technology that would
preclude or inhibit competitors from entering our market. Although we have
entered into confidentiality agreements with our employees, contractors,
suppliers, distributors and appropriate customers to limit access to and
disclosure of our proprietary information, these may prove insufficient to
prevent misappropriation of our technology or to deter independent third-party
development of similar technologies. In addition, the laws of various foreign
countries may not protect our products, services or intellectual property
rights to the same extent as do the laws of the United States.
In addition to licensing technologies from third parties, we are developing
and acquiring additional proprietary intellectual property. Third parties may
try to claim that our products or services infringe their intellectual
property. We expect that participants in our markets will be increasingly
subject to infringement claims. Any claim, whether meritorious or not, could be
time consuming, result in costly litigation, cause product installation delays
or require us to enter into royalty or licensing agreements. These royalty or
licensing agreements might not be available on terms acceptable to us or at
all.
Risks related to the Year 2000 problem
The Year 2000 problem stems from the use of a two digit date to represent
the year (e.g., 85 = 1985) in computer software and firmware. As a result, many
currently installed computer systems are not capable of distinguishing dates
beginning with the Year 2000 from dates prior to the Year 2000. As a result
computer systems or applications used by many companies in a wide variety of
industries may experience operating difficulties unless the systems or
applications are modified to process adequately information related to the date
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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 recent acquisition of Cohesive, we have expanded the
independent review of our Year 2000 assessment. The review will be completed in
the third quarter of 1999, with final Year 2000 compliance expected in the
third quarter of 1999.
We have determined that our Internet Data Center equipment is either
currently Year 2000 compliant or that a funded replacement/upgrade plan is in
place to resolve known issues. Likewise, based on the on-going assessment
relative to our current software service offerings, we believe that the current
versions of these products are either Year 2000 compliant or will not require
substantial effort or cost to make them Year 2000 compliant by the end of the
third quarter of 1999. We have reviewed, and continue to review, internal
management information and other systems in order to identify and modify those
products, services or systems that may not be Year 2000 compliant. We have
completed a preliminary 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 either Year
2000 compliant or will not require substantial effort or cost to make them Year
2000 compliant. We do not foresee any issues with internal IT and internal non-
IT systems being Year 2000 compliant by the end of the third quarter of 1999.
However, we may discover Year 2000 problems during our on-going assessment of
Cohesive's internal management information and other systems which we may be
unable to remediate by the end of the third quarter of 1999.
Our Year 2000 initiative also addresses vendor relationships (both IT and
non-IT) and their readiness/preparedness relating to Year 2000 issues. IT
vendors include software providers, hardware providers, service providers, off
the shelf software publishers and IT consultants. Non-IT providers include
electric power suppliers, vendors of uninterruptable power supplies and
generators, telecommunications service 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 will be developing contingency plans to address specific vendor/service
provider concerns. Our contingency plan will be completed by September 30,
1999.
Many of our customers maintain their Internet operations on servers which
maybe 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, to resolve Year 2000 issues,
other than unanticipated liabilities, should not exceed $900,000. We further
estimate that the time and effort required of our personnel to resolve Year
2000 issues will not be material.
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<PAGE>
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 management has broad discretion in the allocation of the proceeds of the
offering of the old notes
The net proceeds to us from the sale of the old notes, after deducting the
underwriting discount and offering expenses, was approximately $73.0 million.
Approximately $8.4 million of the net proceeds are being held in an escrow
account for the benefit of the holders of the notes to fund when due the
interest payments on the notes through July 1, 2000. We expect to use the
remaining net proceeds primarily (1) to fund expansion of our operations and
(2) for other general corporate purposes. Accordingly, our management retains
broad discretion as to the allocation of the proceeds from the sale of the old
notes. The failure of management to apply the funds effectively could harm our
business. See "Use of Proceeds."
We may not be able to effect repurchase of the notes upon a Change of Control
in accordance with the terms of the indenture
Upon the occurrence of a Change of Control (as defined elsewhere in this
prospectus), we may be required to purchase all or a portion of the notes at a
purchase price equal to 101% of the principal amount, plus accrued and unpaid
interest, if any, to the date of purchase. Prior to commencing such an Offer to
Purchase, we may be required to (1) repay in full all of our indebtedness that
would prohibit the repurchase of the notes or (2) obtain any consent required
to make the repurchase. If we are unable to repay all of this indebtedness or
are unable to obtain the necessary consents, we will be unable to offer to
purchase the notes. That failure would constitute an event of default under the
indenture. We may not have sufficient funds available at the time of any Change
of Control to repurchase the notes. The events that require a repurchase upon a
Change of Control under the indenture may also constitute events of default
under any of our indebtedness. See "Description of the Notes--Repurchase at the
Option of Holders."
In the event of our bankruptcy, you may not be able to foreclose upon the
escrow collateral
The right of the trustee under the indenture and the escrow agreement to
foreclose upon and sell escrow collateral held to pay interest on the notes
upon the occurrence of an event of default on the notes is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy or
reorganization case were to be commenced by or against us or one or more of our
subsidiaries. Under applicable bankruptcy law, secured creditors, such as the
holders of the notes with respect to the escrow collateral are prohibited from
foreclosing upon or disposing of a debtor's property without prior bankruptcy
court approval. See "Description of Notes--Disbursement of Funds; Escrow
Account."
There is no public market for the notes which may significantly impair the
liquidity of the notes
The old notes are eligible for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") Market. There is no existing
trading market for the new notes. Accordingly, we cannot be sure that any
market for the new notes will develop that the holders of the new notes will be
able to sell their notes or the prices at which any sales will be made. If a
market for the notes were to develop, the notes could trade at prices that may
be higher or lower than the exchange tender price of the old notes, as our
previously registered notes do. Prevailing market prices from time to time will
depend on many factors, including then existing interest rates, our operating
results and cash flow and the market for similar securities.
Consequently, even if a trading market develops for the new notes, there is
no assurance as to the liquidity of that market. We do not intend to apply for
listing or quotation of the new notes on any securities exchange or over-the-
counter market.
In addition, the liquidity of, and trading markets for, the notes may be
adversely affected by declines in the market for high-yield securities
generally. A decline may adversely affect liquidity and trading markets
independent of our financial performance or prospects.
19
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. When used in this prospectus, the words "anticipate," "believe,"
"estimate," "will," "may," "intend" and "expect" and similar expressions
generally identify forward-looking statements. Although we believe that our
plans, intentions and expectations reflected in the forward-looking statements
are reasonable, we cannot be sure that they will be achieved. Forward-looking
statements in this prospectus include those relating to the expansion of our
network through the opening of additional Internet Data Centers and the timing
of openings, the upgrading of our telecommunications infrastructure, our
planned introduction of various new products and services, the possibility of
acquiring complementary businesses, products, services and technologies and our
ability to make required payments on our current and future debt instruments.
Actual results, performance or achievements could differ materially from those
contemplated 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 in this prospectus 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 in this prospectus. 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.
20
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the new notes offered
in the exchange offer. In consideration for issuing the new notes, we will
receive in exchange old notes in like principal amount, the terms of which are
identical in all respects to the new notes except for transfer restrictions and
registration rights. The old notes surrendered in exchange for new notes will
be retired and cancelled and cannot be reissued. Accordingly, issuance of the
new notes will not result in any increase in our indebtedness.
The net proceeds from the sale of the old notes, after deducting the
underwriting discounts and offering expenses, was approximately $73.0 million.
We deposited into an escrow account an amount of U.S. government securities and
cash totaling approximately $8.4 million for the benefit of the holders of the
old notes and new notes to fund when due the interest payments on the old notes
and new notes through July 1, 2000. The remaining net proceeds will be used
primarily (1) to fund expansion of our operations and (2) for other general
corporate purposes. In the ordinary course of business, we evaluate potential
acquisitions of businesses, products, services and technologies. However, we
have no present understandings, commitments or agreements with respect to any
acquisition of any businesses, products, services or technologies. Pending
these uses, we will have invested the net proceeds in investment-grade, short-
term, interest-bearing securities. See "Risk Factors--Our management has broad
discretion in the allocation of the proceeds of the offering of the old notes"
and "--In the event of our bankruptcy, you may not be able to foreclose upon
the escrow collateral."
21
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents, restricted
cash and cash equivalents, debt and the capitalization of Exodus as of June 30,
1999.
This table should be read in conjunction with the consolidated financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
June 30, 1999
--------------
(in thousands)
<S> <C>
Cash and cash equivalents...................................... $ 330,605
Restricted cash, cash equivalents and investments.............. 43,436
Current portion of equipment loans, line of credit facilities
and capital lease obligations................................. 19,027
Debt (excluding current maturities):
Equipment loans and line of credit facilities................ 10,775
Capital lease obligations.................................... 27,732
Convertible subordinated notes............................... 250,000
Senior notes................................................. 275,375
Stockholders' deficit:
Preferred stock, $0.001 par value: 5,000,000 shares
authorized, no
shares issued or outstanding................................ --
Common stock, $0.001 par value: 300,000,000 shares
authorized,
82,850,616 shares issued and outstanding.................... 83
Additional paid-in capital................................... 125,236
Deferred stock compensation.................................. (705)
Accumulated deficit.......................................... (140,084)
---------
Total stockholders' deficit................................ (15,470)
---------
Total capitalization..................................... $ 548,412
=========
</TABLE>
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement
of operations data for each of the years in the three-year period ended
December 31, 1998, and the consolidated balance sheet data as of December 31,
1997 and 1998, are derived from consolidated financial statements that have
been audited by KPMG LLP, independent auditors, and are included elsewhere in
this prospectus. The consolidated statement of operations data for the six-
month periods ended June 30, 1998 and June 30, 1999 and the consolidated
balance sheet data as of June 30, 1999 are derived from unaudited condensed
consolidated financial statements included elsewhere in this prospectus. The
consolidated statement of operations data for the year ended December 31, 1995
and the consolidated balance sheet data as of December 31, 1994, 1995 and 1996
are derived from consolidated financial statements that have been audited by
KPMG LLP that are not included in this prospectus. The consolidated statement
of operations data for the year ended December 31, 1994 are derived from
unaudited consolidated financial statements that are not included in this
prospectus. The unaudited consolidated financial statements have been prepared
on substantially the same basis as the audited consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for these periods. Historical results
are not necessarily indicative of the results to be expected in the future, and
results of interim periods are not necessarily indicative of results for the
entire year.
We are the successor to a Maryland corporation that was formed in August
1992 to provide computer consulting services. We began to offer Internet
connectivity services to enterprises in October 1994 and server hosting
services in late 1995. In August 1996, we opened our first dedicated Internet
Data Center and refocused our business strategy on providing Internet system
and network management solutions for enterprises with mission-critical Internet
operations.
In the following tables and in this document, "EBITDA" represents earnings
(loss) before net interest expense, income taxes, depreciation, amortization
(including amortization of deferred stock compensation) and other noncash
charges. EBITDA should not be used as an alternative to operating loss or net
cash provided by (used for) operating activities, investing activities or
financing activities, each as measured under generally accepted accounting
principles. In addition, EBITDA may not be comparable to other similarly titled
information from other companies. However, our management believes that EBITDA
is an additional meaningful measure of performance and liquidity. With respect
to the captions entitled "Deficiency of earnings available to cover fixed
charges" and "Ratio of earnings to fixed charges," earnings consist of income
(loss) before provision for income taxes plus fixed charges. Fixed charges
consist of interest charges and amortization of debt expense and discount or
premium related to indebtedness, whether expensed or capitalized, and that
portion of rental expense we believe to be representative of interest.
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
------------------------------------ ------------------
June 30, June 30,
1995 1996 1997 1998 1998 1999
------- ------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenues.......... $ 1,408 $ 3,130 $ 12,408 $ 52,738 $ 17,176 $ 72,586
Cost and expenses:
Total cost of
revenues.............. 1,128 2,990 16,868 61,559 22,864 62,706
Marketing and sales.... 1,056 2,734 12,702 28,778 13,580 22,234
General and
administrative........ 427 1,056 5,983 15,865 5,657 15,890
Product development.... 70 444 1,647 3,221 1,364 2,836
------- ------- -------- -------- -------- --------
Total cost and
expenses.............. 2,681 7,224 37,200 109,423 43,465 103,666
------- ------- -------- -------- -------- --------
Operating loss......... (1,273) (4,094) (24,792) (56,685) (26,289) (31,080)
Net interest expense... 38 39 506 9,757 1,108 11,985
------- ------- -------- -------- -------- --------
Net loss............... (1,311) (4,133) (25,298) (66,442) (27,397) (43,065)
Cumulative dividends
and accretion on
redeemable convertible
preferred stock....... -- -- (1,413) (2,014) (2,014) --
------- ------- -------- -------- -------- --------
Net loss attributable to
common stockholders.... $(1,311) $(4,133) $(26,711) $(68,456) $(29,411) $(43,065)
======= ======= ======== ======== ======== ========
Basic and diluted net
loss per share(1)...... $ (0.25) $ (0.54) $ (3.46) $ (1.09) $ (0.64) $ (0.53)
======= ======= ======== ======== ======== ========
Shares used in computing
basic and diluted net
loss per share(1)...... 5,262 7,656 7,714 62,574 45,841 81,693
======= ======= ======== ======== ======== ========
Consolidated Statement
of Cash Flows Data:
Net cash used for
operating activities... $ (461) $(3,116) $(15,518) $(46,498) (16,427) (21,757)
Net cash used for
investing activities... (69) (3,877) (23,864) (92,746) (18,270) (106,142)
Net cash provided by
financing activities... 692 10,545 45,937 279,865 85,147 307,613
Other Data:
EBITDA.................. (1,208) (3,633) (20,274) (41,125) (20,062) (18,071)
Depreciation and
amortization........... 65 461 3,429 12,997 4,689 12,634
Capital expenditures.... 69 3,499 22,489 44,564 17,842 81,491
Deficiency of earnings
available to cover
fixed charges.......... (1,311) (4,133) (25,298) (66,442) (27,397) (43,065)
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1994
------------------
(in thousands,
except ratio and
per share data)
<S> <C>
Consolidated Statement of Operations Data:
Total revenues............................................. $ 977
Operating income........................................... 143
Net income ................................................ 144
Basic and diluted net income per share..................... $ 0.04
Shares used in computing basic and diluted net loss per
share..................................................... 4,000
Ratio of earnings to fixed charges......................... 26x
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
---- ------- ------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash
equivalents.............. $ 1 $ 163 $ 3,715 $ 10,270 $150,891 $330,605
Restricted cash
equivalents and
investments.............. -- -- 378 1,753 45,614 43,436
Working capital
(deficiency)............. 93 (1,170) 1,892 (3,707) 119,693 286,389
Total assets.............. 320 840 8,289 40,973 293,286 624,051
Equipment loans, line of
credit facilities,
capital lease
obligations, convertible
subordinated notes and
senior notes, less
current portion.......... -- 141 1,449 15,135 227,096 563,882
Total stockholders' equity
(deficit)................ 169 (1,140) (5,234) (30,600) 19,141 (15,470)
</TABLE>
- --------
(1) See Notes 1 and 9 of Notes to consolidated financial statements for our
explanation of the determination of the number of shares used in computing
per share data.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and our results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements. Factors that may cause a difference
include, but are not limited to, those set forth under "Risk Factors."
Overview
We are a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations. Our
solutions include Internet Data Centers, network services and managed services,
including professional services, that together provide the high performance,
scalability and expertise that enterprises need to optimize Internet
operations. We deliver our services from our geographically distributed, state-
of-the-art Internet Data Centers that are connected through a high-performance
Internet backbone network.
We are the successor to a Maryland corporation that was formed in August
1992 to provide computer consulting services. We began offering server hosting
and Internet connectivity services in late 1995, opened our first dedicated
Internet Data Center in August 1996 and introduced managed services in 1997 and
professional services, a subcategory of managed services, in 1998. We have
derived most of our revenues from customers for whom we provide these services.
Each of our Internet Data Center customers initially purchases a subset of our
service offerings to address specific departmental or enterprise Internet
computing needs, and some of these customers purchase additional services as
the scale and complexity of their Internet operations increase. We sell our
services under contracts that typically have minimum terms of one year.
Customers pay monthly fees for the services utilized, as well as one-time fees
for installation, certain professional services and equipment they purchase
from us.
We opened our first Internet Data Center in the San Francisco metropolitan
area in August 1996. Since that time, we have opened 11 additional domestic
Internet Data Centers in the metropolitan areas of New York (March 1997), San
Francisco (second site--August 1997; third site--June 1998 and fourth site--
June 1999), Seattle (September 1997 and June 1999), Los Angeles (October 1997),
Washington, D.C. (December 1997 and May 1999), Boston (July 1998) and Chicago
(April 1999). In addition, we opened our first Internet Data Center outside of
the United States in the London metropolitan area in June 1999. We plan to open
six additional Internet Data Centers and three server hosting sites in the
second half of 1999. The building of Internet Data Centers has required us to
obtain substantial equity and debt financing. See "Risk Factors--Our
substantial leverage and debt service obligations adversely affect our cash
flow" and "--Liquidity and Capital Resources."
In October 1998, we purchased the assets of Arca Systems, Inc. ("Arca"), a
provider of advanced network and system security consulting services. In
February 1999, we acquired American Information Systems, Inc. ("AIS"), a
regional provider of co-location, Web hosting and professional services. In
July 1999, we acquired Cohesive Technology Solutions, Inc. ("Cohesive"), a
technology professional services organization with expertise in networking, Web
applications and technology solutions.
We intend to expand domestically and internationally. Prior to building an
Internet Data Center in a new geographic region, we employ various means to
evaluate the market opportunity in a given location, including market research
on Internet usage statistics, the pre-selling of services into the proposed
market and analysis of specific financial criteria. We typically require at
least six months to select the appropriate location for an Internet Data
Center, construct the necessary facilities, install equipment and
telecommunications infrastructure, and hire the operations and sales personnel
needed to conduct business at that site. Expenditures related to an Internet
Data Center commence well before the Internet Data Center opens, and it takes
an extended period to approach break-even capacity utilization at each site. As
a result, we expect that individual Internet Data
25
<PAGE>
Centers will experience losses for an excess of one year from the time they are
opened. We experience further losses from sales personnel hired to test market
our services in markets where there is no, and may never be an, Internet Data
Center. As a result, we expect to make investments in expanding our business
rapidly into new geographic regions which, while potentially increasing our
revenues in the long term, will lead to significant losses for the foreseeable
future. See "Risk Factors--Rapid expansion produces a significant strain on our
business" for risks related to the foregoing forward-looking statements.
Since we began to offer server hosting and Internet connectivity services in
1995, we have experienced operating losses and negative cash flows from
operations in each quarterly and annual period. As of June 30, 1999, we had an
accumulated deficit of approximately $140.1 million. The revenue and income
potential of our business and market is unproven, and our limited operating
history makes an evaluation of our prospects and us difficult. We intend to
invest in new Internet Data Centers and other sites, product development, sales
and marketing programs, and therefore we believe that we will continue to
experience net losses on a quarterly and annual basis for the foreseeable
future. Companies, such as Exodus, in the new and rapidly evolving market for
Internet system and network management solutions encounter risks, expenses and
difficulties that affect their business and prospects. There can be no
assurance that we will ever achieve profitability on a quarterly or an annual
basis or will sustain profitability if achieved. See "Risk Factors--Our short
operating history and heavy losses make our business difficult to evaluate" for
risks related to the foregoing forward-looking statements.
Results of Operations for the Years Ended December 31, 1996, 1997 and 1998 and
the Six Months Ended June 30, 1998 and 1999
The following table sets forth certain statement of operations data as a
percentage of total revenues for the years ended December 31, 1996, 1997 and
1998 and the six-month periods ended June 30, 1998 and 1999. The information
for the years ended December 31, 1996, 1997 and 1998 has been derived from our
audited consolidated financial statements included in this prospectus. The
information for the six-month periods ended June 30, 1998 and 1999 has been
derived from our unaudited condensed consolidated financial statements included
in this prospectus which, in management's opinion, have been prepared on
substantially the same basis as the audited consolidated financial statements
and include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial information for the quarters
presented. This information should be read in conjunction with the consolidated
financial statements and related notes included in this prospectus. The
operating results in any quarter are not necessarily indicative of the results
to be expected for any future period.
<TABLE>
<CAPTION>
Six Months
Year Ended December Ended June
31, 30,
------------------------ --------------
1996 1997 1998 1998 1999
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Revenues:
Service revenues................. 78.4% 93.4% 94.4%
Equipment revenues............... 21.6 6.6 5.6
------ ------ ------ ------ -----
Total revenues................. 100.0 100.0 100.0 100.0% 100.0%
------ ------ ------ ------ -----
Costs and expenses:
Cost of service revenues......... 81.1 130.8 112.3
Cost of equipment revenues....... 14.4 5.1 4.4
------ ------ ------ ------ -----
Total cost of revenues......... 95.5 135.9 116.7 133.1 86.4
Marketing and sales.............. 87.3 102.4 54.6 79.1 30.6
General and administrative....... 33.8 48.2 30.1 33.0 21.9
Product development.............. 14.2 13.3 6.1 7.9 3.9
------ ------ ------ ------ -----
Total cost and expenses........ 230.8 299.8 207.5 253.1 142.8
------ ------ ------ ------ -----
Operating loss................. (130.8) (199.8) (107.5) (153.1) (42.8)
Net interest expense............... 1.2 4.1 18.5 6.4 16.5
------ ------ ------ ------ -----
Net loss....................... (132.0)% (203.9)% (126.0)% (159.5)% (59.3)%
====== ====== ====== ====== =====
</TABLE>
26
<PAGE>
Revenues
Our revenues consist of (1) monthly fees from customer use of Internet Data
Center sites, network services and managed services, including professional
services and use of equipment and software provided by us, (2) revenues from
sales of third-party equipment to customers and (3) fees for installation and
certain professional services. Currently, substantially all of our revenue is
derived from services. Revenues, other than installation fees, equipment sales
to customers and certain professional services, are generally billed and
recognized ratably over the term of the contract, which is generally one year.
Installation fees are typically recognized at the time the installation occurs,
and equipment revenues are typically recognized when the equipment is delivered
to the customer or placed into service at an Internet Data Center. We sell
third-party equipment to our customers as an accommodation to facilitate their
purchase of services. One-time professional service fees are typically
recognized when the services are rendered.
Our service revenues increased 372% from $2.5 million in 1996 to $11.6
million in 1997 and increased an additional 330% to $49.8 million in 1998. This
growth in service revenues was primarily the result of opening our Internet
Data Centers, increases in the number of new customers, substantially all of
which were Internet Data Center customers, and increases in revenues from
existing customers. Equipment revenues increased 21% from $676,000 in 1996 to
$820,000 in 1997 and 257% to $2.9 million in 1998.
Our revenues increased 323% to $72.6 million for the six months ended June
30, 1999 from $17.2 million in the same period of the prior year. This growth
in revenues was the result of increases in the number of new customers,
substantially all of which were Internet Data Center customers, increases in
revenues from existing customers and revenue contributions from Arca and AIS.
Cost of Revenues
Our cost of revenues is comprised of the costs for our backbone network and
local telecommunications loops, depreciation, salaries and benefits for our
customer service and operations personnel (customer service personnel, network
engineers and professional services personnel), rent, repairs and utilities
related to our Internet Data Centers and other sites and costs of third-party
equipment sold to customers.
Cost of service revenues increased from $2.5 million in 1996 to $16.2
million in 1997 and to $59.3 million in 1998. Our cost of service revenues as a
percentage of revenues increased from 81% in 1996 to 131% in 1997 and declined
to 112% in 1998. The increases in cost of service revenues in absolute dollars
were due to increased costs associated with the build-out and operation of our
increasing number of Internet Data Centers, including increased costs for our
redundant backbone network and local telecommunications loops, depreciation,
salaries and benefits for our customer service and operations personnel, and
rent. The increase in cost of service revenues as a percentage of revenues from
1996 to 1997 reflects the timing of investments in Internet Data Centers and
network infrastructure relative to the growth in associated revenue. The
decrease in cost of service revenue as a percentage of revenue from 1997 to
1998 resulted from revenues from new and existing Internet Data Centers
increasing faster than related costs of revenues. Costs for our redundant
backbone network and local telecommunications loops increased by approximately
$3.8 million from 1996 to 1997 and by approximately $15.2 million from 1997 to
1998. Depreciation increased by approximately $3.0 million from 1996 to 1997
and by approximately $8.4 million from 1997 to 1998. Salaries and benefits for
our customer service and operations personnel increased by approximately $3.5
million from 1996 to 1997 and by approximately $6.7 million from 1997 to 1998.
Rent expense increased by approximately $945,000 from 1996 to 1997 and by
approximately $3.1 million from 1997 to 1998. Cost of equipment revenues
increased from $452,000 in 1996 to $640,000 in 1997 and to $2.3 million in
1998. Cost of equipment revenue in absolute dollars varies primarily as a
result of equipment revenues and cost of equipment revenues as a percentage of
revenues varies due to the mix of equipment purchased by customers.
Cost of revenues increased 174% to $62.7 million for the six-month periods
ended June 30, 1999 from $22.9 million in the same period of the prior year.
These increases in cost of revenues in absolute dollars were primarily the
result of costs associated with hiring additional employees and consultants,
increased traffic on
27
<PAGE>
our network, depreciation due to capital expenditures, utilities and other
costs related to the opening and expanding of Internet Data Centers. Our cost
of revenues as a percentage of revenues decreased to 86% for the six months
ended June 30, 1999 from 133% for the same period of the prior year. This
decline was due primarily to our increase in revenue between comparison
periods. We expect that cost of revenues will continue to increase in absolute
dollars but will continue to decline as a percentage of total revenue as
existing costs are spread over more substantial operations.
Marketing and Sales
Our marketing and sales expenses are comprised of salaries, commissions and
benefits for our marketing and sales personnel, printing and advertising costs,
public relations costs, consultants' fees and travel and entertainment
expenses.
Our marketing and sales expenses increased from $2.7 million in 1996 to
$12.7 million in 1997 and to $28.8 million in 1998. These increases were
primarily the result of hiring additional marketing and sales personnel,
expanding marketing programs in connection with our expansion of our
operations, including the number and scope of our Internet system and network
management solutions, and in 1998, the charge of $525,000 associated with the
warrant for common stock issued to At Home Corporation. Salaries and benefits
for our sales and marketing personnel increased by approximately $6.1 million
from 1996 to 1997 and by approximately $10.4 million from 1997 to 1998, and
costs associated with tradeshows and advertising increased by approximately
$977,000 from 1996 to 1997 and approximately $114,000 from 1997 to 1998. The
increase in marketing and sales expenses as a percentage of revenues from 1996
to 1997 reflects the continued expansion of marketing and sales efforts prior
to the receipt of associated revenues. The decrease in marketing and sales as a
percentage of revenues from 1997 to 1998 was due to revenues growing faster
than marketing and sales expenses.
Our marketing and sales expenses increased 64% to $22.2 million for the six-
month period ended June 30, 1999 from $13.6 million in the same period of the
prior year. The increase in absolute dollars was primarily the result of
increased compensation and related expenses associated with hiring additional
marketing and sales personnel. Our marketing and sales expense as a percentage
of revenues decreased to 31% for the six months ended June 30, 1999 from 79%
for the same period of the prior year. This decline was primarily due to our
significant increase in revenue between comparison periods. We expect that
marketing and sales expense will continue to decrease as a percentage of total
revenue as existing costs are spread over more substantial operations.
General and Administrative
Our general and administrative expenses are primarily comprised of salaries
and benefits for our administrative and management information systems
personnel, consulting fees, recruiting fees and amortization of intangible
assets.
Our general and administrative expenses increased from $1.1 million in 1996
to $6.0 million in 1997 and to $15.9 million in 1998. These increases were
primarily the result of increased compensation expenses associated with
additional hiring of general and administrative personnel, costs for
consultants and professional services providers, fees paid for recruiting and
amortization of deferred compensation. Salaries and benefits for general and
administrative personnel increased by approximately $2.0 million from 1996 to
1997 and by approximately $2.6 million from 1997 to 1998. Costs for consultants
and professional services providers increased by approximately $1.1 million
from 1996 to 1997 and by approximately $900,000 from 1997 to 1998. Recruiting
fees increased by approximately $968,000 from 1996 to 1997 and by approximately
$440,000 from 1997 to 1998. These increased expenses reflected our need for
additional general and administrative personnel to handle the expansion of our
operations. The amortization of deferred compensation included in general and
administrative expenses was $741,000 in 1997 and $597,000 in 1998, and there
was no such expense recorded in 1996. See "--Stock Compensation Expense" below.
The increase in general and administrative expenses as a percentage of revenues
from 1996 to 1997 resulted primarily from deferred
28
<PAGE>
compensation expenses in 1997. The decrease in general and administrative
expenses as a percentage of revenues from 1997 to 1998 was due to revenues
growing faster than general and administrative expenses.
Our general and administrative expenses increased 181% to $15.9 million for
the six-month period ended June 30, 1999 from $5.7 million in the same period
of the prior year. The increase in absolute dollars was primarily the result of
increased compensation expenses associated with additional hiring of general
and administrative personnel and the amortization of intangible assets related
to the acquisitions of Arca and AIS. Our general and administrative expense as
a percentage of revenues decreased to 22% for the six month periods ended June
30, 1999 from 33% for the same period of the prior year. This decline was
primarily due to our significant increase in revenue between comparison
periods. We expect that general and administrative expense will continue to
decrease as a percentage of total revenue as existing costs are spread over
more substantial operations.
Product Development
Our product development expenses primarily consist of salaries and benefits
for our product development personnel and fees paid to consultants.
Our product development expenses increased from $444,000 in 1996 to $1.6
million in 1997 and to $3.2 million in 1998. Our product development expenses
grew between the comparison periods primarily because of the addition of
product development personnel to support our expanded service offerings. The
decrease in product development expenses as a percentage of revenues from 1996
to 1998 resulted from revenues growing faster than product development
expenses.
Our product development expenses increased 108% to $2.8 million for the six-
month period ended June 30, 1999 from $1.4 million in the same period of the
prior year. Our product development expenses grew primarily due to the addition
of product development personnel to support our expanded service offerings. Our
product development expense as a percentage of revenues decreased to 4% for the
six months ended June 30, 1999 from 8% for the same period of the prior year.
This decline was due to our significant increase in revenue between comparison
periods.
Net Interest Expense
Our net interest expense increased from $39,000 in 1996 to $506,000 in 1997
and to $9.8 million in 1998. The increase in net interest expense from 1996 to
1997 was primarily the result of substantially increased borrowings as we
entered into equipment loans and lease agreements to finance the construction
of our Internet Data Centers. The increase in net interest expense from 1997 to
1998 was primarily the result of interest expenses associated with our $200
million of senior notes which were issued July 1, 1998, substantially increased
borrowings as we entered into equipment loans and lease agreements to finance
the construction of our Internet Data Centers, and working capital lines of
credit to finance working capital for our operations.
Our net interest expense increased to $12.0 million for the six-month period
ended June 30, 1999, from $1.1 million for the same period of the prior year.
The increase in net interest expense was primarily the result of interest
expense associated with our senior notes issued July 1, 1998 and our $250
million convertible subordinated notes which were issued March 3, 1999.
We expect that net interest expense will continue to increase as we incur
additional interest related to our $75 million senior notes offering, which
occurred on June 22, 1999, enter into additional equipment leases and loans,
obtain additional borrowings and long term debt and experience reduced interest
income as a result of the decline in our cash reserves to fund working capital
and other uses.
Stock Compensation Expense
We had no stock compensation expense in 1996. During 1997, we recorded
deferred stock compensation of approximately $3.5 million in connection with
the grant of certain stock options from March through
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<PAGE>
December 1997. This amount is generally amortized over the 50-month vesting
period of these options. Of this amount, approximately $1.1 million was
amortized in 1997 and $1.3 million was amortized in 1998.
For the six months ended June 30, 1998, approximately $0.8 million was
amortized while approximately $0.4 million was amortized for the six months
ended June 30, 1999.
This amortization is being recorded in a manner consistent with FASB
Interpretation No. 28. See Note 5 of Notes to Consolidated Financial
Statements.
EBITDA
Our loss before interest, taxes, depreciation, amortization and other non-
cash charges ("EBITDA") was $3.6 million in 1996, $20.3 million in 1997 and
$41.1 million in 1998. The increases in the level of EBITDA losses between the
comparison periods were primarily due to increased expenditures needed to
support our growth in operations, including salaries and benefits for
additional employees, network costs, rent, utilities and other costs related to
the increase in the number of our Internet Data Centers as well as increased
marketing and sales expenses, consulting fees and professional services.
Our EBITDA was $18.1 million for the six-month period ended June 30, 1999
compared to $20.1 million for the same period of the prior year. The decrease
in the magnitude of EBITDA losses between the comparison period was primarily
due to the significant increases in revenue over this period along with
economies of scale experienced as a result of more substantial operations
offset in part by increased compensation costs associated with the hiring of
additional employees during that time period.
EBITDA should not be used as an alternative to operating loss or net cash
provided by (used for) operating activities, investing activities or financing
activities, each as measured under generally accepted accounting principles.
However, our management believes that EBITDA is an additional meaningful
measure of performance and liquidity.
Liquidity and Capital Resources
Since inception through June 30, 1999, we have financed our operations
primarily through private sales of preferred stock, our initial public offering
in March 1998, our senior notes offerings in July 1998 and June 1999, our
convertible subordinated notes offering in March 1999 and through various types
of equipment loans and lease lines and working capital lines of credit. At June
30, 1999, our principal sources of liquidity were $330.6 million in cash and
cash equivalents. As of that date, we also had equipment loans and lease lines
of credit under which we could borrow up to an additional aggregate of $1.2
million for purchases of equipment. As of June 30, 1999, our total bank
borrowings, equipment loans and lines of credit facilities, capital lease
obligations, senior notes and convertible subordinated notes were $582.9
million. See Notes 4 and 6 of Notes to Consolidated Financial Statements.
Since we began to offer server hosting services in 1995, we have had
significant negative cash flows from operating activities. Net cash used for
operating activities for the year ended December 31, 1996, 1997 and 1998 was
$3.1 million, $15.5 million and $46.5 million, respectively. Net cash used for
operating activities for the six months ended June 30, 1999 was $21.8 million.
Net cash used for operating activities in each of these periods was primarily
due to net losses and increases in accounts receivable, offset in part by
increases in accounts payable and accrued expenses and depreciation and
amortization.
Net cash used for investing activities for the year ended December 31, 1996,
1997 and 1998 was $3.9 million, $23.9 million and $92.7 million, respectively.
Net cash used for investing activities for the six months ended June 30, 1999
was $106.1 million. Net cash used for investing activities in each of these
periods was due primarily to capital expenditures for the continued
construction of Internet Data Centers, businesses acquired (see Note 2 of Notes
to Consolidated Financial Statements); in 1998, the investment of funds held in
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<PAGE>
escrow for interest payments on the senior notes and, in the six months ended
June 30, 1999, expenditures related to a telecommunication agreement in which
we entered.
Net cash provided by financing activities for the year ended December 31,
1996, 1997 and 1998 was $10.5 million, $45.9 million and $279.9 million,
respectively. Net cash provided by financing activities for the six months
ended June 30, 1999 was $307.6 million. Net cash provided by financing
activities in each of these periods was primarily due to the proceeds from
issuance of redeemable convertible preferred stock and warrants, the initial
public offering, issuances of $275 million of senior notes and $250 million of
convertible subordinated notes, and equipment loans and line of credit
facilities.
As of June 30, 1999, we had commitments under capital leases and under
noncancellable operating leases of $39.6 million and $116.5 million,
respectively, through 2010. We intend to make significant expenditures during
the next 12 months primarily for property and equipment, in particular
equipment and construction needed for existing and future Internet Data
Centers, as well as office equipment, computers and telephones. We expect to
finance these capital expenditures primarily through net proceeds from the
senior notes and convertible notes and existing and future equipment loans and
lease lines of credit. We believe our working capital and capital expenditure
requirements over the next 12 months can be met with existing cash and cash
equivalents and short-term investments, cash from sales of services and
proceeds from existing and future equipment financing lines of credit. We may
enter into additional equipment loans and capital leases. We may also seek to
raise additional funds through public or private financing, strategic
relationships or other arrangements. There can be no assurance that we will be
successful generating sufficient cash flows from operations or raising capital
in sufficient amounts on terms acceptable to us. See "Risk Factors--Rapid
expansion produces a significant strain on our business."
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we
do not currently hold any derivative instruments and do not engage in hedging
activities, we expect that the adoption of SFAS No. 133 will not have a
material impact on our financial position, results of operations or cash flows.
We will be required to implement SFAS No. 133 for the year ending December 31,
2001.
Quantitative and Qualitative Disclosures About Market Risk
We have limited exposure to financial market risks, including changes in
interest rates. The fair value of our investment portfolio or related income
would not be significantly impacted by a 100 basis point increase or decrease
in interest rates due mainly to the short-term nature of the major portion of
our investment portfolio. Our investment portfolio primarily consists of money
market funds, United States Treasury Notes, and certificates of deposit. An
increase or decrease in interest rates would not significantly increase or
decrease interest expense on debt obligations due to the fixed nature of our
debt obligations. We do not currently have any significant foreign operations
and thus are not currently materially exposed to foreign currency fluctuations.
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<PAGE>
BUSINESS
The Company
Exodus is a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations. Our
solutions include Internet Data Centers, network services and managed services,
including professional services, which together provide the high performance,
scalability and expertise that enterprises need to optimize their 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 June
30, 1999, we had more than 1,300 customers, including installed and uninstalled
customers under contract, and managed over 11,000 customer servers. Our
customers represent a variety of industries, ranging from Internet-centric
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 Fortune 500 customers such as Applied Materials, Hewlett-
Packard Company and National Semiconductor Corporation.
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 virtually all Internet-centric
businesses and are becoming increasingly mission-critical for many mainstream
enterprises. In order to ensure the quality, reliability, availability and
redundancy of these mission-critical Internet operations, corporate IT
departments must make substantial investments in facilities, personnel,
equipment and networks that must be continuously upgraded to reflect changing
technologies and rapidly scale as the enterprise grows. Such a continuing
significant investment of resources is often an inefficient use of overall
resources and, as a result, a significant need exists for outsourcing
arrangements that can increase performance, provide continuous operation of
Internet solutions and reduce Internet operating expenses. We believe a
significant opportunity exists for a highly focused company to provide a
combination of server hosting, Internet connectivity and managed services that
will enable reliable, high performance of mission-critical Internet operations.
Exodus offers an integrated portfolio of solutions that provide customers
with a scalable, secure and high performance platform for the development,
deployment and proactive management of mission-critical Internet operations.
Our server hosting and Internet connectivity services are offered through our
Internet Data Centers' redundant backbone network of multiple high speed DS-3,
OC-3 and OC-12 lines, along with our public and private network peering
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 restore services, security services
and professional services. These services provide the foundation for high
performance, availability, scalability and reliability of customers' Internet
server operations. In addition, we integrate best-of-breed technologies from
leading vendors with our 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:
. extend our market leadership and position Exodus as the brand name and
leader in this market;
. focus on enhancing systems and network management and Internet
technology services;
. accelerate our domestic expansion and begin to establish a global
presence;
. leverage our expertise to address new market opportunities such as e-
commerce; and
. continue to establish strategic relationships for distribution and
technology.
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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, a subcategory of
managed services, in 1998. We currently operate 12 domestic Internet Data
Centers located in seven metropolitan areas: Boston, Chicago, Los Angeles, New
York, San Francisco, Seattle and Washington, D.C. In addition, we opened our
first Internet Data Center outside of the United States in London in June 1999.
Our Internet Data Centers consist of approximately 697,000 gross square feet.
We recently expanded our solutions and services by acquiring three providers
of Internet technologies, Arca, AIS and Cohesive. In October 1998, we purchased
Arca, a provider of advanced network and system security consulting services.
In February 1999, to accelerate our launch into the Chicago metropolitan area,
we acquired AIS, a regional provider of co-location, Web hosting and
professional services. In July 1999, we acquired Cohesive for approximately
$115 million in cash, Exodus common stock and the assumption of Cohesive
options. Cohesive is a technology professional services organization with
expertise in networking, Web applications and technology solutions.
Services
Exodus' Internet solutions and services are designed to provide enterprises
with the high performance, scalability and expertise they need to optimize
their mission-critical Internet operations. We create tailored solutions for
our customers based on their unique business and technical requirements, and
modify the services as the customers' needs evolve. Our service offerings
include server hosting from our Internet Data Centers, network services and
managed services, including professional services.
Internet Data Centers--Server Hosting Facilities
We deliver our services from geographically distributed, state-of-the-art
Internet Data Centers with uninterruptible power supply and back-up generators,
fire suppression, raised floors, HVAC, separate cooling zones, seismically
braced racks, 24x7 operations and high levels of physical security. In these
facilities, we support leading Internet hardware and software systems vendor
platforms, including those from Compaq Computer Corporation, Dell Computer
Corporation, Hewlett-Packard Company, IBM, Microsoft Corporation, Silicon
Graphics, Inc., Sun Microsystems, Inc. and The Santa Cruz Operation, Inc. This
multi-vendor flexibility enables the customer to retain complete control over
the technical solution and to integrate its Internet operations with its
existing IT technical architecture. Because mission-critical Internet
operations are typically very dynamic and often require immediate hardware and
software upgrades to maintain targeted service levels, customers have unlimited
24x7 access to the Internet Data Centers. Additional space and electrical power
can be added as needed, ensuring that the customer has access to additional
server hosting services.
Based upon their business and technical requirements, customers can select
from shared rack facilities within common cage areas, highly secure cabinets,
enclosed cage facilities or vaults. Our server hosting facilities generally
include dedicated electrical power circuits to ensure that each customer's
electrical power requirements are met.
The following chart summarizes the key features of our current server
hosting services:
<TABLE>
<CAPTION>
Service Description Benefits
- ------- ----------- --------
<S> <C> <C>
CyberRack . 19'' or 23" quarter, half or full rack . Entry-level service, providing
economical solution for
customers that do not need
dedicated environments
. Secured environment that is
shared by multiple customers
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Service Description Benefits
- ------- ----------- --------
<S> <C> <C>
CyberCabinet . 19'' or 23" full cabinet . Dedicated, locked cabinet
. A single rack with the
security of a dedicated
environment
. Dedicated power circuits
Virtual Data Center . 7' x 8' cage or customized to order . Dedicated, locked cage
. Flexibility in designing and
configuring Internet servers,
including space for multiple
racks and other customer
computing products
. Dedicated power circuits
ExodusVault . 8' x 8' or 8' x 12' vault or customized to order . Dedicated, enclosed security
area
. Additional security for
sensitive Internet
transactions by financial
institutions and on-line
merchants
. Biometric identification for
entry
and exit, motion and
temperature detectors,
cameras, high impact glass,
and secured data and
electrical lines
. Dedicated power circuits
</TABLE>
Network Services--Internet Connectivity
Exodus connects its Internet Data Centers through a high performance,
dedicated and redundant backbone network with multiple high speed DS-3, OC-3
and OC-12 lines, along with our public and private network peering
interconnections. Our network services are designed to deliver the scalability,
high availability and performance required for high-volume, mission-critical
Internet operations. Since our customers' mission-critical Internet operations
often experience network traffic spikes due to promotions or events, we have a
policy of providing sufficient excess network capacity for our customers.
To meet customers' requirements of near 100% availability, our network is
designed to minimize the likelihood of any single point of failure. Each
Internet Data Center has multiple physical fiber paths into the facility. We
maintain multiple network links from multiple vendors into each Internet Data
Center and regularly check that our fiber backbone is traversing physically
separated paths. Customers may also enhance their Internet site's availability
by physically duplicating their site at multiple Internet Data Centers, and
synchronizing applications and content through our private fiber backbone
network. This network architecture optimizes the availability of a customer's
site, even in the event of a link failure.
Our network services are also designed to consistently deliver low-latency
and peak network performance. During the second quarter of 1999, our network
exchanged a sustained 4.2 gigabits per second volume of traffic with the
Internet during peak periods. Our backbone engineering personnel continuously
monitor traffic patterns and congestion points throughout our network and at
our interconnection points, and dynamically reroute traffic flows to optimize
end-user response times. We also provide peak network performance by
maintaining a large number of direct public and private network peering
interconnections. Our network includes private peering interconnections with 48
national ISPs, as well as public peering interconnections with over 154 ISPs.
Managed Services
We provide managed services to our customers, including detailed monitoring,
reporting and management tools to control their hardware, network, software and
application environments. Through our system and network management framework,
a customer can manage mission-critical Internet operations housed at our
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<PAGE>
Internet Data Centers as well as at the customer's site. We believe this
provides an important advantage to enterprises seeking to outsource a portion
of their Internet operations and to link the management of the outsourced
operations with in-house operations. Our proactive service methodology focuses
on identifying and resolving potential problems before they ever affect an
Internet site's availability or performance. Our sophisticated Internet system
and network management solutions enable us to identify and to begin to resolve
hardware, software, network and application problems, frequently before the
customer is even aware that a problem exists. We offer the services summarized
in the following chart:
<TABLE>
<CAPTION>
Service Description Benefits
- ------- ----------- --------
<S> <C> <C>
Managed . A package of 24x7 monitoring . Real time monitoring,
Monitoring and management solutions for notification and reporting for
Services system and database server and database alarms and
applications that includes problems
SystemHealth, Database Health
and HeadsUp Site Monitoring
services
SystemHealth . 24x7 proactive monitoring of . Maximizes availability of
Monitoring Internet server process customers' mission-critical
Service . 24x7 rebooting of servers Internet operations by
. Monthly and daily reports identifying potential problems
available via the Web proactively
. An Exodus system . Allows customers to leverage
administrator that performs Exodus' systems expertise
problem resolution and .Offload problem resolution to
automated process restarts Exodus (optional)
(optional)
DatabaseHealth . 24x7 proactive monitoring of . Maximizes availability of
Monitoring SQL server processes customers' database resources
Service . Automated customer by identifying potential
notification of database problems proactively
problems . Offload problem resolution to
. Monthly and daily reports Exodus (optional)
available via the Web
. Exodus system administrator
who performs problem
resolution (optional)
. Automated process restarts
(optional)
Site . Bandwidth usage reports, . Assists in capacity planning
Management graphic and tabular statistics and management of network
Reports delivered to customers via the resources
Internet on an hourly, daily
and semi-monthly basis
Internet . Tape management services to . Maximizes the availability of
Disaster restore sites after a system customers' applications;
Recovery failure provides additional redundancy
.Distributed load balancing in the event of Internet site
services to seamlessly re- failure
route user traffic to an
alternate site in the event of
a failure
Internet . Assigned project manager . Assures a smooth transition to
Systems accountable for developing a an Exodus Internet Data Center
Integration migration plan, managing the along with ongoing support
site's installation and
providing ongoing account
support
. Exodus acts as value-added
reseller of Cisco and F5 Labs,
Inc. products, primarily
routers, hubs and switching
equipment, in connection with
server hosting services
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Service Description Benefits
- ------- ----------- --------
<S> <C> <C>
Data Vault . Fully-managed on site back-up . Maintains regular data back-up
and restore provided in and fast network restore
partnership with Sun capability for mission-
Microsystems, utilizing critical Internet sites
Veritas NetBackup solution and
DLT tape storage technology
Exodus SAFE . Full range of perimeter . Enhances site security and
(Secure firewall security, penetration integrity
Access testing, automated intrusion
from detection, site security
Exodus) auditing and consulting
services
. Potential intruders identified
and blocked from customer's
site
. Site's security probed and
tested 24x7 and audit reports
generated on potential
security risks
. Proactive agendas developed
before site integrity is
comprised
Exodus . Site requests intelligently . Increases availability and
MultiPath balanced across multiple performance for multi-server,
Site servers located within a mission-critical Internet
single Internet Data Center sites
Exodus . Intelligent routing services . Maximizes availability and
Multipath that geographically distribute performance for Internet sites
Net end-- user requests located across multiple
. Traffic routed based upon Internet Data Centers
server performance and . Optimizes end-user response
availability, Internet traffic time
patterns, and the geographic . Provides sophisticated
locations of the requesters Internet site redundancy
Caching . Deployment of Inktomi network . Provides customers with a
caching technology through our cost-effective option to
network of Internet Data geographically distribute
Centers that will facilitate their content, thereby
the distribution of customer enabling them to reach a wider
content range of their Internet end-
users
</TABLE>
We also offer professional services and, through the acquisition of Cohesive
Technology Solutions, Inc., have expanded these services to assist our
customers in planning their strategies for managing mission-critical Internet
operations, transitioning operations to our Internet Data Centers and managing
various aspects of their Internet operations. These services can be layered to
allow customers to outsource an increasing portion of the management of their
Internet operations.
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<PAGE>
Customers
We have established a diversified base of customers in a wide range of
industries, including finance, entertainment, high technology, education,
healthcare and publishing. As of June 30, 1999, we had over 1,300 customers
(including installed and uninstalled customers under contract). The following
is a representative list of our Internet Data Center customers. None of these
customers individually represented in excess of 10% of 1998 revenues or
revenues for the first half of 1999.
<TABLE>
<S> <C> <C>
Applied Materials FreeRealTime.com National Semiconductor
Beyond.com Fujitsu NextCard
Conde Net Yahoo!GeoCities Onsale
Cybercash Hewlett-Packard priceline.com
DoubleClick Inktomi SF Gate--The Chronicle
eBay Kelley Blue Book Publishing Company
Eidos Interactive Lycos Sony Online Ventures
E-Loan Macromedia SportsLine USA
eShare Technologies MSNBC Interactive News United Media
France Telecom North USA Today Information
America MSN Hotmail Network
</TABLE>
Sales and Marketing
Our sales and marketing objective is to achieve broad market penetration
within our target market of enterprises that depend upon the Internet for
mission-critical operations. As of June 30, 1999, we had 265 employees engaged
in sales and marketing.
We sell our services to enterprises directly through our sales force and
indirectly through our channel partners. We are actively seeking to increase
our sales and distribution capabilities and coverage in the United States and
to expand internationally as new Internet Data Centers are installed outside of
the United States, commencing with our Internet Data Center in London, England.
Currently, most of our sales are derived through the efforts of our direct
sales force.
Sales Force
Our sales force is organized into four distinct groups, consisting of field
sales, strategic accounts, channel sales and telesales, each of which is
further divided into geographical regions within the United States. There is
also a new sales organization in London that we began to staff in October 1998.
Systems engineers and project managers support our sales force, providing pre-
and post-sales support to ensure that customers' services are implemented
properly and efficiently.
Channel Program
Our channel program includes relationships with At Home Corporation,
Hewlett-Packard Company, Silicon Graphics, Inc. and Sun Microsystems, Inc. The
various levels of channel program partner participation are summarized below:
. Solutions Integrators play a sales representative role for us, and
receive a one-time payment, based on the monthly recurring charges from
opportunities brought into us. They are typically consultants,
independent Web developers, content developers, developers of small- to
medium-sized applications, and regional VARs.
. Alliance Partners market our services, and receive a monthly residual
income for opportunities introduced to us. Alliance Partners are
typically larger regional or national systems integrators, Web
developers, hardware and software resellers, consulting organizations
and ISPs.
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<PAGE>
. Technology Partners market software or hardware solutions, working
together with us to offer superior services and innovative products.
Through product promotions and bundled solutions, technology partners
can offer their customers new value-added services and greater pricing
incentives.
. Resellers market co-branded Exodus services. They commit to a certain
volume level to resell as part of their application or niche-focused
service offering to their customer base.
Marketing
Our marketing organization is responsible for product marketing management,
public relations and marketing communications. Product marketing management
includes defining the product roadmap and bringing to market the portfolio of
services and programs that will address customer needs. These activities
include product strategy and definition, pricing, competitive analysis, product
launches, channel program management and product lifecycle management. We
stimulate product demand through a broad range of marketing communications,
public relations, industry event sponsorship, as well as through our Web site.
Public relations focuses on cultivating industry analyst and media
relationships with the goal of securing broad media coverage and public
recognition of our leadership position in the market for Internet system and
network management solutions.
Customer Service
We offer superior customer service by understanding the technical
requirements and business objectives of our customers and by fulfilling their
needs proactively on an individual basis. Working closely with our customers,
we optimize the performance of our customers' Internet operations, avoid
downtime, resolve problems that may arise, and make appropriate adjustments in
services as customer needs change over time. In December 1998, to enhance our
customer service delivery and increase operating efficiencies 24x7, we launched
a centralized call center for our three San Francisco Internet Data Centers. We
intend to roll out a similar program to our other Internet Data Centers.
Partnering with our customers, we also solicit feedback to ensure that we
continue to offer the highest quality of service. We use advanced software
tools to aid in customer monitoring and service efforts. Many of our customer
service personnel have been specifically trained and certified by the vendors
of our software tools, including Sun Microsystems, Inc., Microsoft Corporation,
Oracle Corporation and Computer Associates.
We also provide customer service and technical support during the
installation phase, including a transition team and project management support.
Our customer service continues after installation, through customer advocacy
representatives who are responsible for resolving customer problems.
In addition, we provide system integration services between the customer's
Internet site and legacy systems. After installation, primary customer support
is coordinated through each Internet Data Center's Network Control Center.
These centers are operated 24x7 by engineers who monitor site and network
operations, and activate teams to solve problems that arise. To solve complex
problems, we draw on the collective expertise at all of our Internet Data
Centers, creating a nationwide engineering pool. Our customer service personnel
are also available to assist customers whose operations require specialized
procedures.
We employ network engineers and systems administrators who work with
customers to design and maintain their Internet operations. Our network
engineers and system administrators are trained specialists who support Windows
NT, Solaris, Linux and other UNIX platforms. They are also trained to support
Cisco routers and switches. They also serve as the second level of support for
customer issues that cannot be resolved by the Network Control Center. We also
employ a group of backbone engineers who are accountable for designing and
operating the dynamic network that connects our Internet Data Centers. This
group constantly monitors the network design and effectiveness to optimize
performance for customers, rerouting and redesigning traffic as conditions
require.
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<PAGE>
Our contracts with customers generally cover the provision of services by us
for a one-year period and may contain, among other things, various service
level warranties. These service agreements entered into prior to August 1997
typically included service level warranties which provided that, if we failed
to provide Internet Data Center services to a customer for more than 24
consecutive hours, a customer's account would be credited for the charges the
customer paid for services it did not receive during period affected. Between
August 1997 and July 1998, our service agreements typically included service
level warranties which provided that, if we fail to provide Internet Data
Center services to a customer for more than two consecutive hours, the
customer's account would be credited for one day of service and, if for more
than eight consecutive hours, one week of service, with each customer limited
to one credit per month. Since July 1998, our service agreements have typically
included service level warranties which provide that, if we fail to provide
Internet Data Center services to a customer for more than 15 minutes, the
customer's account would be credited for one day of service, up to a maximum of
seven days in any month. In addition, we provide additional credits for packet
loss and transmission latency. Certain customers have received more favorable
terms than those described above. To date, only a limited number of customers
have been entitled to these warranties to receive a credit for a period of free
service. As we did not open our first dedicated Internet Data Center until
August 1996, we have had Internet Data Center customers for only a short period
of time. Accordingly, we have had limited experience with customers continuing
to receive services after the initial term of their contract.
As of June 30, 1999, we had 364 employees dedicated to customer service,
professional services and network engineering.
Network Design
Our high performance server network is designed to provide the highest
possible availability and reliability for our customers' Internet operations.
The network comprises our eight Internet Data Centers that are interconnected
by a high-performance backbone network that is connected to the Internet
through public and private peering interconnections. Within each Internet Data
Center, a virtual LAN environment provides redundant, high-speed internal
connectivity.
Our Internet Data Centers are located near most of the major Internet
exchange points ("IXPs") and are connected to their local IXPs by multiple DS-3
or OC-3 lines, provisioned by Teleport Communications Group Inc., MFS
Communications Company, Inc., Brooks Fiber Properties, Inc. and the Regional
Bell Operating Companies. These links to the local exchange points, combined
with private exchanges with ISPs, connect the customers' traffic to the
Internet.
In order to provide a high level of redundancy, performance and capacity,
along with real-time content replication or caching across our Internet Data
Centers, we have multiple DS-3, OC-3 and OC-12 lines. We engineer our backbone
with a geographically diverse fiber path to provide high availability, even in
the event of a link failure. We regularly upgrade our network in order to
accommodate expected traffic growth. For customers with servers located at
multiple Internet Data Centers, we provide dynamic response time and load
balancing technologies for optimal routing of traffic.
Within each Internet Data Center, we deploy a virtual LAN environment to
increase reliability and performance and to provide customers with redundant
connectivity to our backbone and the Internet. DS-3, OC-3 and OC-12 lines are
strategically placed on different routers to avoid any single points of
failure. We also use a combination of public and private peering
interconnections to achieve fast and reliable delivery of content. We have
private peering interconnections with 48 national ISPs and public peering
interconnections with over 154 ISPs. We also have a presence at each of the
major U.S. IXPs.
We will continue to work with ISPs to establish direct private peering
interconnections at each of our Internet Data Centers, thus enhancing content
delivery. Our broad combination of private and public peering interconnections
provides customers with the reliability and redundancy that they need to ensure
their content reaches its intended destination. We seek to provide significant
unutilized network capacity for our LAN, WAN and public and private peering
links to allow for spikes in demand or line outages.
39
<PAGE>
Product Development
Our product development group is accountable for evaluating and integrating
best-of-breed technologies to enhance our service offerings that support the
customers' mission-critical Internet operations. We are also developing
proprietary technologies that will be integrated with these best-of-breed
technologies. We believe that establishing relationships with technology
leaders enables us to leverage these enterprises' research and development
expertise. These relationships enable us to gain quicker access to innovative
technologies and thus provide more creative value-added solutions for our
customers. For example, we have worked very closely with Computer Associates to
develop certain of our management services using Computer Associates' Unicenter
TNG technology. See "Risk Factors--We depend on third-party equipment and
software suppliers."
Our product development personnel have continued to develop strategic vendor
and technology relationships, such as the one with Computer Associates. Other
key partners include: Checkpoint Software Technologies Limited, Cisco Systems,
Inc., Raptor Systems, Inc. and Sun Microsystems, Inc. Additionally, we are
developing a caching service with Inktomi Corporation. To the extent that we
are unable to obtain the technology necessary to meet customers' needs from a
third party, we may develop the technology ourself. As of June 30, 1999, we
employed 45 persons in product development.
We incurred product development expenses of $444,000 in 1996, $1.6 million
in 1997, $3.2 million in 1998 and $2.8 million in the first six months of 1999.
Competition
Our market is intensely competitive. There are few substantial barriers to
entry, and we expect to face additional competition from existing competitors
and new market entrants in the future. The principal competitive factors in
this market include:
. Internet system engineering and other technical expertise;
. customer service;
. network capability, reliability, quality of service and scalability;
. the variety of services offered;
. access to network resources, including circuits and equipment;
. broad geographic presence;
. price;
. the ability to maintain and expand distribution channels;
. brand name;
. the timing of introductions of new services;
. network security; and
. financial resources.
There can be no assurance that we will have the resources or expertise to
compete successfully in the future. Our current and potential competitors in
the market include:
. providers of server hosting services;
. national and regional ISPs;
. global, regional and local telecommunications companies and Regional
Bell Operating Companies;
. large IT outsourcing firms; and
. other technology services and products companies.
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Many of our competitors have substantially greater resources, more
customers, longer operating histories, greater name recognition and more
established relationships in the industry. As a result, these competitors may
be able to develop and expand their network infrastructures and service
offerings more quickly, devote greater resources to the marketing and sale of
their products and adopt more aggressive pricing policies. In addition, these
competitors have entered and will likely continue to enter into business
relationships to provide additional services competitive with those we provide.
Some of our competitors may be able to provide customers with additional
benefits in connection with the Internet system and network management
solutions, including reduced communications costs, which could reduce the
overall costs of their services relative to ours. We may not be able to offset
the effects of any price reductions. In addition, we believe our market is
likely to encounter consolidation in the near future, which could result in
increased price and other competition.
41
<PAGE>
Employees
As of June 30, 1999, Exodus had 784 employees, including 265 employees in
sales and marketing, 45 employees in product development, 364 employees in
customer service, professional services and network engineering and 110
employees in finance and administration. We believe that our future success
will depend in part on our continued ability to attract, hire and retain
qualified personnel. The competition for personnel is intense, and there can be
no assurance that we will be able to identify, attract and retain personnel in
the future. None of our employees is represented by a labor union, and
management believes that our employee relations are good. See "Risk Factors--We
must manage growth effectively" and "--We depend on our key personnel."
Properties
Our executive offices are located in Santa Clara, California and consist of
approximately 147,000 square feet that are leased pursuant to an agreement that
expires in 2008. We lease the facilities for our current Internet Data Centers
in the following metropolitan areas and specific cities, which cover an
aggregate of approximately 697,000 gross square feet and expire in the years
indicated below:
<TABLE>
<CAPTION>
Lease
Metropolitan Area City and State Expiration
----------------- --------------- ----------
<S> <C> <C>
San Francisco..................................... Santa Clara, CA 2002
Santa Clara, CA 2007
Santa Clara, CA 2009
Santa Clara, CA 2009
New York.......................................... Jersey City, NJ 2007
Seattle........................................... Seattle, WA 2007
Seattle, WA 2009
Los Angeles....................................... Irvine, CA 2007
Washington, D.C. ................................. Herndon, VA 2004
Sterling, VA 2009
Boston............................................ Waltham, MA 2010
Chicago........................................... Oak Brook, IL 2010
London............................................ Park Royal, UK 2023
</TABLE>
Most of our leases provide for a renewal option upon the expiration of the
initial term. We currently maintain sales offices in unutilized space in our
Internet Data Centers. We intend to expand domestically and internationally. We
expect to open six additional Internet Data Centers and three server hosting
facilities in the second half of 1999. We have recently entered into leases for
the space needed for additional sites.
Legal Proceedings
We are not a party to any material legal proceedings.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
K.B. Chandrasekhar............. 39 Chairman of the Board of Directors
Ellen M. Hancock............... 56 Chief Executive Officer, President and Director
Richard S. Stoltz.............. 55 Executive Vice President, Finance, Chief
Operating Officer and Chief Financial Officer
Sam S. Mohamad................. 40 Executive Vice President, Worldwide Sales
James J. McInerney............. 46 Executive Vice President, Engineering
Herbert Dollahite.............. 47 Executive Vice President, Customer Services
and Support and Quality
William R. Yeack............... 41 Executive Vice President, Professional Services
Frederick W.W. Bolander(1)(2).. 37 Director
John R. Dougery(2)............. 59 Director
Mark Dubovoy(3)(4)............. 52 Director
Max D. Hopper(1)(4)............ 64 Director
Peter A. Howley(1)............. 59 Director
Daniel C. Lynch(3)............. 58 Director
Thadeus J. Mocarski(3)(4)...... 37 Director
Naomi O. Seligman.............. 66 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Finance Committee
(4) Member of the Corporate Governance Committee
Each director will hold office until the next Annual Meeting of Stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal. Each officer serves at the discretion of the Board of
Directors.
K.B. Chandrasekhar, a co-founder of Exodus, has served as our Chairman of
the Board of Directors since Exodus' incorporation in California in February
1995, as President from the incorporation until March 1998 and as Chief
Executive Officer from the incorporation until September 1998. From 1992 to May
1995, he served as President and a director of Fouress, Inc., a network
software design and development firm and Exodus' predecessor, which he co-
founded. Mr. Chandrasekhar holds a B.S. degree in physics from Madras
University and a B.Tech. degree in electronics and communications from the
Madras Institute of Technology.
Ellen M. Hancock has served as our President since March 1998 and our Chief
Executive Officer since September 1998 and has been a director since April
1998. She also served as the acting Vice President, Marketing from July 1998 to
October 1998. From July 1996 to July 1997, she served as Executive Vice
President for Research and Development and Chief Technology Officer of Apple
Computer, Inc. From September 1995 to May 1996, Mrs. Hancock served as an
Executive Vice President and Chief Operating Officer of National Semiconductor
Corporation. From 1966 to February 1995, she served in various staff,
managerial and executive positions at International Business Machines
Corporation, most recently as Senior Vice President and Group Executive. Mrs.
Hancock is also a director of Colgate-Palmolive Company and Aetna Inc. She
holds a B.A. degree in mathematics from The College of New Rochelle and an M.A.
degree in mathematics from Fordham University.
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<PAGE>
Richard S. Stoltz, a co-founder of Exodus, has served as our Executive Vice
President, Finance since December 1998, and our Chief Operating Officer and
Chief Financial Officer since October 1995 and was a director from January 1996
to October 1996. From February 1994 to September 1995, he was an independent
consultant specializing in financial and management information system issues.
From 1992 to January 1994, Mr. Stoltz served as Vice President of Finance,
Treasurer and Chief Financial Officer of Radius Inc., a computer hardware
company. Mr. Stoltz holds a B.S.B.A. degree in marketing and an M.B.A. degree
from The American University.
Sam S. Mohamad has served as our Executive Vice President, Worldwide Sales
of Exodus since December 1998 and as Vice President, Worldwide Sales of Exodus
from February 1997 to December 1998. From March 1996 to January 1997, he served
as Vice President of Sales and Marketing of Genuity, Inc., a provider of data
center products and services. From 1987 to February 1996, Mr. Mohamad held
various positions at Oracle Corporation, most recently as Vice President of
Direct Sales and Marketing.
James J. McInerney has served as our Executive Vice President, Engineering
since February 1999 and served as our Vice President, Engineering from October
1998 to February 1999. From November 1995 to October 1998, he served as Vice
President of Software Engineering at Synopsys, Inc., a provider of software
tools for electronic design automation. From 1974 to October 1995, Mr.
McInerney served in various research, managerial and executive positions at
International Business Machines Corporation, most recently as Director,
Intelligent Communication Services. He holds B.S. and M.S. degrees in
mathematics from Polytechnic University in New York.
Herbert Dollahite has served as our Executive Vice President, Customer
Services and Support and Quality since November 1998, and served as our Vice
President, Quality from June 1998 to November 1998. From August 1994 to June
1998, he served as Senior Engineer/Scientist II, Senior Manager, Central
Quality, Director, Integration Quality, and Senior Director, Global Quality
Engineering of Apple Computer, Inc. Dr. Dollahite holds a B.S. degree in
Engineering from Cornell University, an M.B.A. degree from University of
Virginia, and a Ph.D. degree in Computer Science from University of Alabama-
Huntsville.
William R. Yeack has served as our Executive Vice President, Professional
Services since August 1999. Mr. Yeack has served as General Manager, North
America and Corporate Vice President of Marketing for Synon, Inc. from 1996 to
August 1999. From 1994 to 1996, Mr. Yeack was President of Tandem Services
Company and Director of Tandem Computers. Mr. Yeack holds B.S.B.A. and M.B.A.
degrees from Ohio State University.
Frederick W. W. Bolander has served as a director of Exodus since October
1996. He has been a Managing Director of Gabriel Venture Partners, LLC, a
venture capital firm under formation since January 1999. From October 1994 to
December 1998 he was associated with Apex Investment Partners, a venture
capital firm, where he held various capacities and retired as a general
partner. From May 1993 to September 1993, he was a consultant to the African
Communications Group, a venture capital and project management firm, and from
September 1985 to September 1992, Mr. Bolander held the position of Manager for
AT&T Corporation. Mr. Bolander is also a director of Concord Communications,
Inc. Mr. Bolander holds B.S. and M.S. degrees in electrical engineering from
the University of Michigan and an M.B.A. degree from Harvard University.
John R. Dougery has served as a director of Exodus since February 1996. He
has been President of Dougery Ventures, a venture capital firm, since January
1998. Prior to that time he was a general partner of Dougery & Wilder, a
venture capital firm, from 1981 to December 1997. Mr. Dougery is also a
director of Printronix, Inc. Mr. Dougery holds an A.B. degree in mathematics
from the University of California, Berkeley and an M.B.A. degree from Stanford
University.
Mark Dubovoy has served as a director of Exodus since October 1996. He was a
founder and has served as a general partner of Information Technology Ventures
since September 1994. Prior to that time, he was a
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<PAGE>
general partner of Grace/Horn Ventures from 1991 to August 1994. Mr. Dubovoy
holds a B.S. degree in physics from the National University of Mexico and M.A.
and Ph.D. degrees in physics from the University of California, Berkeley.
Max D. Hopper has served as a director of Exodus since January 1998. Mr.
Hopper has been the Chief Executive Officer of Max D. Hopper Associates, Inc.,
an IS management consulting firm, since January 1995. From 1985 to January
1995, he served in various positions at American Airlines, a subsidiary of AMR
Corporation, most recently as Senior Vice President, Information Systems and
Chairman of the SABRE Group. Mr. Hopper is also a director of Gartner Group,
Inc., USData Corporation, VTEL Corporation, Worldtalk Corporation, Metrocall,
Inc., Payless Cashways, Inc. and United Stationers, Inc. From April 1996 to
August 1997, he served as a director of BBN Corporation. From March 1995 to
February 1998, he served as a director of Centura Software Corporation. From
August 1994 to February 1998, he served as a director of Computer Language
Research, Inc. He holds a B.S. degree in mathematics from the University of
Houston.
Peter A. Howley has served as a director of Exodus since September 1996.
Since April 1999, Mr. Howley has served as the Chief Executive Officer of
IPWireless, Inc. From May 1994 to April 1999, Mr. Howley was a private
consultant. From 1985 until April 1994, he served as Chairman of the Board,
Chief Executive Officer and President of Centex Telemanagement, Inc., a
telecommunications management company, which was acquired. Mr. Howley is also a
director of FaxSAV, Inc. and WorldPort Communications, Inc. Mr. Howley holds a
B.I.E. degree and an M.B.A. degree from New York University.
Daniel C. Lynch has served as director of Exodus since January 1998. Mr.
Lynch has been the owner of Lynch Enterprises, a venture capital firm, since
August 1993. From April 1994 to August 1996, he was a director of UUNet
Technologies, Inc., an Internet service provider. From 1991 to August 1993, he
was the Chairman of the Board of Interop, a conference and trade show company,
which he founded and which is now a division of ZD Comdex Forums. Mr. Lynch is
a director of Cybercash, Inc., which he founded. He holds a B.S. degree in
mathematics from Loyola Marymount University and an M.A. degree in mathematics
from the University of California, Los Angeles.
Thadeus J. Mocarski has served as a director of Exodus since June 1997. Mr.
Mocarski has been an officer of various entities affiliated with Fleet Equity
Partners since January 1994. Prior to joining Fleet Equity Partners, Mr.
Mocarski was an attorney with the law firm of Edwards & Angell from 1989 to
January 1994. Mr. Mocarski holds a B.A. degree in economics and government from
Colby College and a J.D. degree from the Washington College of Law.
Naomi O. Seligman has served as a director of Exodus since July 1999. Ms.
Seligman has been a senior partner of the Research Board since 1971. Ms.
Seligman holds a B.A. degree in economics from Vassar College and an M.B.A.
degree from the London School of Economics.
45
<PAGE>
THE EXCHANGE OFFER
Terms of the Exchange Offer; Period for Tendering Old Notes
The old notes were sold by us on June 22, 1999 to Goldman, Sachs & Co.
pursuant to a purchase agreement dated June 17, 1999 between us and Goldman,
Sachs. As set forth in this prospectus and in the accompanying letter of
transmittal, we will accept for exchange any and all old notes that are
properly tendered on or prior to the expiration date and not withdrawn as
permitted below. The term "expiration date" means 5:00 p.m., New York City
time, on , 1999; provided, however, that if we extend the period of time
for which the exchange offer is open, the term "expiration date" means the
latest time and date to which the exchange offer is extended.
As of the date of this prospectus, $75.0 million aggregate principal amount
of the old notes was outstanding. This prospectus, together with the letter of
transmittal, is first being sent on or about the date set forth on the cover
page to all holders of old notes at the addresses set forth in the security
register maintained by the trustee. Our obligation to accept old notes for
exchange is subject to conditions as set forth under "--Conditions to the
Exchange Offer" below.
We expressly reserve the right, at any time or from time to time, to extend
the period of time during which the exchange offer is open, and thereby delay
acceptance for exchange of any old notes, by mailing written notice of an
extension to the holders of old notes as described below. During any extension,
all old notes previously tendered will remain subject to the exchange offer and
may be accepted for exchange by us. Any old notes not accepted for exchange for
any reason will be returned without expense to the tendering holder as promptly
as practicable after the expiration or termination of the exchange offer.
Old notes tendered in the exchange offer must be $1,000 in principal amount
or any integral multiple of $1,000.
We will mail written notice of any extension, amendment, non-acceptance or
termination to the holders of the old notes as promptly as practicable. This
notice will be mailed to the holders of record of the old notes no later than
9:00 a.m. New York City time, on the next business day after the previously
scheduled expiration date or other event giving rise to the notice requirement.
Registration Covenant; Exchange Offer
Under the registration rights agreement between us and Goldman, Sachs, we
have agreed to file with the Commission the exchange offer registration
statement on the appropriate form under the Securities Act with respect to the
new notes. Upon the effectiveness of the exchange offer registration statement,
we will offer to the holders of the old notes who are able to make required
representations the opportunity to exchange their old notes for new notes.
Alternatively, we will file with the Commission a shelf registration statement
to cover resales of transfer restricted securities (as defined below) by the
holders of old notes who satisfy specific conditions relating to the provision
of information in connection with the shelf registration statement if:
. we are not permitted to consummate the exchange offer because it is not
permitted by applicable law or Commission policy; or
. any holder of old notes notifies us prior to the 20th day following
consummation of the exchange offer that:
. it is prohibited by law or Commission policy from participating in
the exchange offer;
. it may not resell the new notes acquired by it in the exchange offer
to the public without delivering a prospectus and the prospectus
contained in the exchange offer registration statement is not
appropriate or available for resales; or
. it is a broker-dealer and owns old notes acquired directly from us
or one of our affiliates.
46
<PAGE>
We will use our best efforts to cause the applicable registration statement
to be declared effective as promptly as possible by the Commission. "Transfer
restricted securities" means each old note until the earliest of:
. the date on which the old note has been exchanged by a person other than
a broker-dealer for a new note in the exchange offer;
. following the exchange by a broker-dealer in the exchange offer of an
old note for a new note, the date on which the new note is sold to a
purchaser who receives from the broker-dealer on or prior to the date of
the sale, a copy of the prospectus contained in the exchange offer
registration statement;
. the date on which the old note has been effectively registered under the
Securities Act and disposed of in accordance with the shelf registration
statement; or
. the date on which the old note is distributed to the public pursuant to
Rule 144 under the Securities Act.
The registration rights agreement provides that:
. we will file an exchange offer registration statement with the
Commission on or prior to 60 days after June 22, 1999, which is the date
of original issuance of the old notes;
. we will use our best efforts to have the exchange offer registration
statement declared effective by the Commission on or prior to 150 days
after June 22, 1999;
. unless the exchange offer would not be permitted by applicable law or
Commission policy, we will commence the exchange offer and use our best
efforts to issue, on or prior to 30 business days after the date on
which the exchange offer registration statement was declared effective
by the Commission, new notes in exchange for all old notes tendered in
the exchange offer; and
. if obligated to file the shelf registration statement, we will use our
best efforts to file the shelf registration statement with the
Commission on or prior to 45 days after the filing obligation arises,
but in no event less than 60 days after June 22, 1999, and to cause the
shelf registration to be declared effective by the Commission on or
prior to 90 days after this obligation arises, but in no event less than
150 days after June 22, 1999.
If a registration default (as defined below) occurs, then we will pay
liquidated damages to each holder of transfer restricted securities, with
respect to the first 90-day period immediately following the occurrence of the
first registration default in an amount equal to $0.05 per week the
registration default continues per $1,000 principal amount of transfer
restricted securities held by the holder. The amount of the liquidated damages
will increase by an additional $0.05 per week the registration default
continues per $1,000 principal amount of transfer restricted securities with
respect to each subsequent 90-day period until all registration defaults have
been cured, up to a maximum amount of liquidated damages for all registration
defaults of $0.25 per week per $1,000 principal amount of transfer restricted
securities. All accrued liquidated damages will be paid by us on each interest
payment date to the holders of the old notes by wire transfer of immediately
available funds or by federal funds check and to holders of certificated
securities by wire transfer to the accounts specified by them or by mailing
checks to their registered addresses if no accounts have been specified.
Following the cure of all registration defaults, the accrual of liquidated
damages will cease.
A "registration default" means the occurrence of one of the following
events:
. we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for the
filing;
. any of the registration statements is not declared effective by the
Commission on or prior to the date specified for the effectiveness;
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<PAGE>
. we fail to complete the exchange offer within 30 business days of the
date of effectiveness of the exchange offer registration statement; or
. the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales (except in specified circumstances) of
transfer restricted securities during the period specified in the
registration rights agreement.
This summary of the provisions of the registration rights agreement is not
complete and is subject to, and is qualified by reference to, all provisions of
the registration rights agreement. A copy of this agreement is filed as an
exhibit to the registration statement of which this prospectus is a part.
Interest on Exchange Notes
Each new note will bear interest from the most recent date to which interest
has been paid or duly provided for on the old note surrendered in exchange for
a new note. Holders of the old notes whose old notes are accepted for exchange
will not receive accrued interest on the old notes for any period from and
after the last interest payment date to which interest has been paid or duly
provided for on the old notes prior to the original issue date of the new
notes. These holders will be deemed to have waived the right to receive any
interest on the old notes accrued from and after that interest payment date.
Interest on the notes is payable semi-annually in arrears on each January 1 and
July 1.
Procedures for Tendering Old Notes
To tender in the exchange offer, a holder must complete, sign and date the
letter of transmittal, or a facsimile of the letter of transmittal, have the
signatures guaranteed if required by the letter of transmittal, and mail or
otherwise deliver the letter of transmittal or a facsimile, together with the
old notes and any other required documents, to the exchange agent. The exchange
agent must receive these documents at the address set forth below prior to 5:00
p.m., New York City time, on the expiration date. Delivery of the old notes may
be made by book-entry transfer in accordance with the procedures described
below. Confirmation of book-entry transfers must be received by the exchange
agent prior to the expiration date.
By executing the letter of transmittal, each holder will make to us the
representations set forth below in the third paragraph under the heading "--
Resale of New Notes."
The tender by a holder and the acceptance by us will constitute an agreement
between the holder and us in accordance with the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal.
The method of delivery of old notes and the letter of transmittal and all
other required documents to the exchange agent is at the election and risk of
the holder. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the exchange agent before the expiration date. No
letter of transmittal or notes should be sent to us. Holders may request their
respective brokers, dealers, commercial banks, trust companies or nominees to
effect the above transactions for them.
Any beneficial owner whose old notes are registered in the name of a broker-
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf.
Signatures on the letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an eligible institution (as defined below)
unless the old notes tendered:
. are signed by the registered holder, unless the holder has completed the
box entitled "special exchange instructions" or "special delivery
instructions" on the letter of transmittal; or
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<PAGE>
. are tendered for the account of an eligible institution.
In the event that signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, the guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States, or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act (an "eligible institution").
If the letter of transmittal is signed by a person other than the registered
holder of any old notes listed on the letter of transmittal, the old notes must
be endorsed or accompanied by a properly completed bond power, signed by the
registered holder as the registered holder's name appears on the old notes,
with the signature guaranteed by an eligible institution.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, the
persons should so indicate when signing. Unless waived by us, evidence
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance of tendered old notes and withdrawal of tendered old notes
will be determined by us in our sole discretion. This determination will be
final and binding. We reserve the absolute right to reject any and all old
notes not properly tendered or any old notes our acceptance of which would, in
the opinion of our counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with
tenders of old notes must be cured within the time period we determine.
Although we intend to notify holders of defects or irregularities with respect
to tenders of old notes, none of Exodus, the exchange agent or any other person
will incur any liability for failure to give this notification. Tenders of old
notes will not be deemed to have been made until defects or irregularities have
been cured or waived. Any old notes received by the exchange agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the exchange agent to the tendering
holders, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
Tender of Existing Notes Held Through DTC
The exchange agent and DTC have confirmed that the exchange offer is
eligible for ATOP, the DTC Automated Tender Offer Program. Accordingly, DTC
participants may electronically transmit their acceptance of the exchange offer
by causing DTC to transfer old notes to the exchange agent in accordance with
DTC's ATOP procedures for transfer. DTC will then send an agent's message to
the exchange agent.
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, which
states that:
. DTC has received an expressed acknowledgment from a participant in DTC
that is tendering old notes which are the subject of the book-entry
confirmation;
. the participant has received and agrees to be bound by the terms of the
applicable letter of transmittal or, in the case of an agent's message
relating to guaranteed delivery, the participant has received and agrees
to be bound by the applicable notice of guaranteed delivery; and
. we may enforce the agreement against the participant.
Book-Entry Delivery Procedures
Within two business days after the date of this prospectus, the exchange
agent will establish accounts with respect to the old notes at DTC (the "book-
entry transfer facility") for purposes of the exchange offer. Any
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financial institution that is a participant in the book-entry transfer facility
systems may make book-entry delivery of the old notes by causing DTC to
transfer old notes into the exchange agent's account at the book-entry transfer
facility in accordance with the book-entry transfer facility's procedures for
transfers. Timely book-entry delivery of old notes pursuant to the exchange
offer, however, requires receipt of a book-entry confirmation prior to the
expiration date. In addition, the letter of transmittal, or a mutually signed
facsimile, together with any required signature guarantees and any other
required documents, or an agent's message in connection with a book-entry
transfer, must, in any case, be delivered or transmitted to and received by the
exchange agent at its address set forth under "--Exchange Agent" below prior to
the expiration date to receive new notes for tendered old notes. Alternatively,
the guaranteed delivery procedure described below must be complied with. Tender
will not be considered made until the documents are received by the exchange
agent. Delivery of documents to the book-entry transfer facility does not
constitute delivery to the exchange agent.
Guaranteed Delivery Procedures
Holders who wish to tender their old notes and (1) whose old notes are not
immediately available, (2) who cannot deliver their old notes, the letter of
transmittal or any other required documents to the exchange agent or (3) who
cannot complete the procedures for book-entry transfer, prior to the expiration
date, may effect a tender if:
. the tender is made through an eligible institution;
. prior to the expiration date, the exchange agent receives from the
eligible institution a properly completed and duly executed notice of
guaranteed delivery (by facsimile transmission, mail or hand delivery):
. setting forth the name and address of the holder;
. setting forth the certificate number(s) of the old notes and the
principal amount of old notes tendered, stating that the tender is
being made; and
. guaranteeing that, within three New York Stock Exchange trading days
after the expiration date, the letter of transmittal (or facsimile),
together with the certificate(s) representing the old notes (or a
confirmation of book-entry transfer of the old notes into the
exchange agent's account at DTC) and any other documents required by
the letter of transmittal, will be deposited by the eligible
institution with the exchange agent; and
. a properly completed and executed letter of transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered old
notes in proper form for transfer (or a confirmation of book-entry
transfer of the old notes into the exchange agent's account at DTC) and
all other documents required by the letter of transmittal, are received
by the exchange agent within three New York Stock Exchange trading days
after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
Withdrawals of Tenders
Except as otherwise provided in this prospectus, tenders of old notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date.
To withdraw a tender of old notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the exchange
agent at the address set forth below prior to 5:00 p.m., New York City time, on
the expiration date. Any notice of withdrawal must:
. specify the name of the person having deposited the old notes to be
withdrawn (the "depositor");
. identify the old notes to be withdrawn, including the certificate
number(s) and principal amount of the old notes, or, in the case of old
notes transferred by book-entry transfer, the name and number of the
account at DTC to be credited;
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. be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the old notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee register the
transfer of the old notes into the name of the person withdrawing the
tender; and
. specify the name in which any of the old notes are to be registered, if
different from that of the depositor.
All questions as to the validity, form and eligibility, including time or
receipt, of the notices will be determined by us. Our determination will be
final and binding on all parties. Any old notes so withdrawn will be deemed not
to have been validly tendered for purposes of the exchange offer and no new
notes will be issued in exchange unless the old notes so withdrawn are validly
retendered. Any old notes which have been tendered but which are not accepted
for exchange will be returned to their holder without cost to the holder as
soon as practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn old notes may be retendered by following one
of the procedures described above under "--Procedures for Tendering Old Notes"
at any time prior to the expiration date.
Conditions to the Exchange Offer
Notwithstanding any other terms of the exchange offer, we will not be
required to accept for exchange, or exchange new notes for, any old notes, and
may terminate the exchange offer before the acceptance of the old notes if, in
our sole judgment, the exchange offer would violate any law, statute, rule or
regulation or an interpretation thereof of the Staff of the Commission. If we
determine in our sole discretion that this condition is not satisfied, we may:
. refuse to accept any old notes and return all tendered old notes to the
tendering holders;
. extend the exchange offer and retain all old notes tendered prior to the
expiration date, subject, however, to the rights of holders to withdraw
the old notes (see "--Withdrawals of Tenders"); or
. waive the unsatisfied conditions with respect to the exchange offer and
accept all validly tendered old notes which have not been withdrawn. If
the waiver constitutes a material change to the exchange offer, we will
promptly disclose the waiver by means of a prospectus supplement that
will be distributed to the registered holders, and we will extend the
exchange offer for a period of five to ten business days, depending upon
the significance of the waiver and the manner of disclosure to the
registered holders, if the exchange offer would otherwise expire during
that five-to-ten business-day period.
Exchange Agent
Chase Manhattan Bank & Trust Company, National Association has been
appointed as the exchange agent for the exchange offer. All executed letters of
transmittal should be directed to the exchange agent at the address set forth
below. Questions and requests for assistance, requests for additional copies of
this prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery should be directed to the exchange agent, addressed as
follows:
By mail or by hand:
Chase Manhattan Bank & Trust Company, National Association, Exchange Agent
Suite 2725
101 California Street
San Francisco, California 94111
By Facsimile:
(415) 693-8850
Confirm Facsimile by Telephone:
(415) 954-9581
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Delivery of the letter of transmittal to an address other than as set forth
above or transmission of instructions via facsimile other than as set forth
above does not constitute a valid delivery of the letter of transmittal.
Fees and Expenses
We will not make any payment to brokers, dealers or others soliciting
acceptances of the exchange offer.
Transfer Taxes
Holders who tender their old notes for exchange will generally be obligated
to pay any transfer tax in connection with the exchange. However, holders who
instruct us to register new notes in the name of a person other than the
registered tendering holder, or request that old notes not tendered or not
accepted in the exchange offer be returned to a person other than the
registered tendering holder, will be responsible for the payment of any
applicable transfer tax.
Accounting Treatment
The new notes will be recorded at the same carrying value as the old notes.
This is the aggregate principal amount of the old notes, as reflected in our
accounting records on the date of exchange. Accordingly, no gain or loss for
accounting purposes will be recognized in connection with the exchange offer.
The expenses of the exchange offer will be amortized over the term of the new
notes.
Appraisal Rights
Holders of old notes will not have dissenters' rights or appraisal rights
in connection with the exchange offer.
Resale of New Notes
The new notes are being offered to satisfy our obligations contained in the
registration rights agreement. We are making the exchange offer in reliance on
the position of the Staff of the Commission as set forth in the Exxon Capital
No-Action Letter, the Morgan Stanley No-Action Letter, the Shearman & Sterling
No-Action Letter, and other interpretive letters addressed to third parties in
other transactions. However, we have not sought our own interpretive letter
addressing these matters and there can be no assurance that the Staff would
make a similar determination with respect to the exchange offer as it has in
those interpretive letters to third parties. Based on these interpretations by
the Staff, and subject to the two immediately following sentences, we believe
that new notes issued pursuant to this exchange offer in exchange for old
notes may be offered for resale, resold and otherwise transferred by holders,
other than a holder who is a broker-dealer, without further compliance with
the registration and prospectus delivery requirements of the Securities Act,
provided that:
. the new notes are acquired in the ordinary course of the holder's
business; and
. the holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of
the Securities Act) of the new notes.
However, any holder who:
. is an "affiliate" of us, within the meaning of Rule 405 under the
Securities Act;
. does not acquire new notes in the ordinary course of its business;
. intends to participate in the exchange offer for the purpose of
distributing new notes; or
. is a broker-dealer who purchased old notes directly from us,
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will not be able to rely on the interpretations of the Staff set forth in the
above-mentioned interpretive letters; will not be permitted or entitled to
tender old notes in the exchange offer; and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any sale or other transfer of old notes unless the sale is made pursuant to an
exemption from those requirements.
In addition, as described below, if any broker-dealer holds old notes
acquired for its own account as a result of market-making or other trading
activities and exchanges the old notes for new notes (a "participating broker-
dealer"), then the participating broker-dealer may be deemed to be a statutory
"underwriter" within the meaning of the Securities Act and must deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resales of new notes. See "Plan of Distribution."
Each holder who wishes to exchange old notes for new notes in the exchange
offer will be required to represent that:
. it is not an affiliate of us;
. any new notes to be received by it are being acquired in the ordinary
course of its business; and
. it has no arrangement or understanding with any person to participate in
a distribution, within the meaning of the Securities Act, of new notes.
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must:
. acknowledge that it acquired the old notes for its own account as a
result of market-making activities or other trading activities, and not
directly from us, and
. must agree that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of new notes.
The letter of transmittal states that by so acknowledging and by delivering
a prospectus, a participating broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. Based on the
position taken by the Staff in the interpretive letters referred to above, we
believe that participating broker-dealers may fulfill their prospectus delivery
requirements with respect to the new notes received upon exchange of old notes
with a prospectus meeting the requirements of the Securities Act, which may be
the prospectus prepared for an exchange offer so long as it contains a
description of the plan of distribution with respect to the resale of new
notes. Accordingly, this prospectus, as it may be amended or supplemented from
time to time, may be used by a participating broker-dealer during the period
referred to below in connection with the resales of new notes received in
exchange for old notes where the old notes were acquired by the participating
broker-dealer for its own account as a result of market-making or other trading
activities.
Subject to provisions set forth in the registration rights agreement, we
shall use our best efforts to:
. keep the exchange offer registration statement continuously effective,
supplemented and amended to the extent necessary to ensure that it is
available for sales of new notes by participating broker-dealers; and
. ensure that the exchange offer registration statement conforms with the
requirements of the Securities Act and the policies, rules and
regulations of the Commission as announced from time to time, for a
period ending upon the earlier of 180 days after the exchange offer has
been completed or at the time the participating broker-dealers no longer
own any transfer restricted securities. See "Plan of Distribution."
Any participating broker-dealer who is an affiliate of us may not rely on
the interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
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Each participating broker-dealer who surrenders old notes pursuant to the
exchange offer will be deemed to have agreed, by execution of the letter of
transmittal, that, upon receipt of notice from us of the occurrence of any
event or the discovery of any fact which makes any statement contained or
incorporated by reference in this prospectus untrue in any material respect or
which causes this prospectus to omit to state a material fact necessary in
order to make the statements contained or incorporated by reference herein, in
light of the circumstances under which they were made, not misleading or of the
occurrence of other events specified in the registration rights agreement, the
participating broker-dealer will suspend the sale of new notes pursuant to this
prospectus until we have amended or supplemented this prospectus to correct the
misstatement or omission and have furnished copies of the amended or
supplemented prospectus to the participating broker-dealer or we have given
notice that the sale of the new notes may be resumed, as the case may be.
Consequences of Failure to Exchange Old Notes
Any old notes tendered and exchanged in the exchange offer will reduce the
aggregate principal amount of old notes outstanding. Following the consummation
of the exchange offer, holders who did not tender their old notes generally
will not have any further registration rights under the registration rights
agreement, and these old notes will continue to be subject to restrictions on
transfer. Accordingly, the liquidity of the market for the old notes could be
adversely affected. The old notes are currently eligible for sale under Rule
144A through the PORTAL Market. Because we anticipate that most holders will
elect to exchange their old notes for new notes due to the absence of most
restrictions on the resale of new notes, anticipate that the liquidity of the
market for any old notes remaining outstanding after the exchange offer may be
substantially limited.
As a result of the making of the exchange offer, we will have fulfilled our
obligations under the registration rights agreement, and holders who do not
tender their old notes generally will not have any further registration rights
or rights to receive liquidated damages specified in the registration rights
agreement for our failure to register the new notes.
The old notes that are not exchanged for new notes will remain restricted
securities. Accordingly, the old notes may be resold only:
. to Exodus or one of its subsidiaries;
. to a qualified institutional buyer;
. to an institutional accredited investor;
. to a party outside the United States under Regulation S under the
Securities Act;
. under an exemption from registration provided by Rule 144 under the
Securities Act; or
. under an effective registration statement.
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DESCRIPTION OF NOTES
General
The old notes were and the new notes will be issued under an indenture dated
July 1, 1998 between us and Chase Manhattan Bank and Trust Company, National
Association, as trustee and escrow agent under which we have previously issued
$200.0 million of principal amount of 11 1/4% Senior Notes due 2008 (the
"original notes"). The term "notes" refers to the old notes, the new notes and
the original notes. The statements under this caption relating to the notes and
the indenture are summaries and are not complete. In addition, they are subject
to, and are qualified in their entirety by reference to, all the provisions of
the indenture, including the definitions of various terms in the indenture. The
indenture is by its terms subject to and governed by the Trust Indenture Act of
1939. Where reference is made to particular provisions of the indenture or to
defined terms not defined in this prospectus, the provisions or defined terms
are incorporated by reference to this prospectus. Copies of the indenture and
the registration rights agreement referred to below are available for review at
the corporate office of the trustee and may also be obtained from us upon
request.
The notes:
. are our senior unsecured obligations;
. rank equally in right of payment with all of our existing and future
senior unsecured debt, including the original notes; and
. are senior in right of payment to all of our existing and future
subordinated debt, if any, including our 5% Convertible Subordinated
Notes due March 15, 2006 in an aggregate outstanding principal amount of
$250.0 million.
The notes are effectively subordinated to:
. our secured indebtedness to the extent of the value of the assets
securing the indebtedness; and
. all debt and other liabilities, including trade payables and lease
obligations, of our subsidiaries. Any right that we have to receive
assets of any of our subsidiaries upon their liquidation or
reorganization, and the consequent right of the holders of the notes to
participate in those assets, will be effectively subordinated to the
claims of that subsidiary's creditors, including trade creditors, except
to the extent that we are recognized as a creditor of the subsidiary, in
which case our claims would still be subordinate to any security in the
assets of the subsidiary and any debt of the subsidiary senior to that
held by us. See "Risk Factors--The notes are effectively subordinated to
our secured indebtedness and the liabilities of our subsidiaries."
As of June 30, 1999, we had approximately $57.5 million of indebtedness to
which holders of notes would have been effectively subordinated. As of June 30,
1999, the aggregate amount of liabilities of our subsidiaries was approximately
$4.1 million. The indenture contains limitations on our ability and the ability
of our subsidiaries to incur additional indebtedness. However, these
limitations are subject to a number of exceptions, and we and our subsidiaries
may incur significant additional indebtedness in the future, including
indebtedness to which the holders of the notes would be effectively
subordinated.
Under various circumstances, we will be able to designate current or future
subsidiaries as Unrestricted Subsidiaries, which will not be subject to many of
the restrictive covenants discussed in the indenture.
The notes are not entitled to any security, except as described under "--
Disbursement of Funds; Escrow Account" and are not entitled to the benefit of
any guarantees except under the circumstances described under "--Covenants--
Limitation on Guarantees of Issuer Debt by Restricted Subsidiaries."
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Principal, Interest and Maturity
The notes will mature on July 1, 2008 and will be limited to $275.0 million.
Each note bears interest at 11 1/4% per annum from June 22, 1999 or from the
most recent interest payment date to which interest has been paid, payable
semiannually on January 1 and July 1 of each year, commencing July 1, 1999, to
the person in whose name the note, or any predecessor note, is registered at
the close of business on the December 15 and June 15 immediately preceding the
interest payment date, except in the case of the payment of interest due on the
notes on July 1, 1999, in which case the record date was June 22, 1999.
Interest is computed on the basis of a 360-day year comprising 12 30-day
months.
We have agreed to file and cause to become effective a registration
statement relating to an exchange offer for the old notes, or, in lieu thereof,
to file and cause to become effective a resale shelf registration for the old
notes. If the exchange offer or shelf registration statement is not filed or is
not declared effective, or if the exchange offer is not consummated, within the
time periods set forth in the registration rights agreement, special interest
will accrue and be payable on the old notes. See "Registration Covenant;
Exchange Offer" above.
Principal, premium, if any, interest and liquidated damages, if any, on the
notes will be payable, and the notes may be presented for registration of
transfer and exchange, at the office or agency of the exchange agent maintained
for that purpose in the Borough of Manhattan, The City of New York. However, at
our option, payment of interest on the notes may be made by check mailed to the
address of the person entitled thereto as it appears in the Note Register.
Until otherwise designated by us, that office or agency will be the corporate
trust office of the trustee, as paying agent and registrar.
No service charge will be made for any registration of transfer or exchange
of notes, but we may require payment of a sum sufficient to cover any related
tax or other governmental charge.
Disbursement of Funds; Escrow Account
Concurrently with the consummation of the offering of the old notes, we
deposited with the escrow agent approximately $8.4 million of the net proceeds
from the offering of the old notes in an escrow account held by the escrow
agent for the benefit of the holders in accordance with an escrow agreement
entered into between us and the escrow agent. The escrow agreement provides,
among other things, that funds may be disbursed from the escrow account for
interest payments we make on the notes. The escrow agent has been instructed to
cause all funds in the escrow account to be invested, pending disbursement, in
U.S. government securities and cash. The funds in the escrow account will be
sufficient to pay, when due, the interest payments on the notes coming due
through July 1, 2000. In connection with the offering of the original notes, we
deposited with the escrow agent funds sufficient to cover the interest payments
on the original notes due on these dates. The escrow amounts deposited with the
escrow agent for the old notes and the original notes is cross-collateralized.
Under the escrow agreement, we have granted to the escrow agent, for the
benefit of the holders, a first priority and exclusive security interest in the
escrow account and its proceeds as collateral for the escrow. The escrow
agreement provides that the escrow agent may foreclose on the escrow account
upon acceleration of the maturity of the notes. Under the terms of the
indenture, the proceeds of the escrow account will be applied, first, to
amounts owing to the escrow agent in respect of fees and expenses of the escrow
agent, and second, to our obligations to the holders under the notes and the
indenture. The ability of holders to realize upon the escrow account may be
subject to bankruptcy law limitations in the event of our bankruptcy.
Upon payment in full of the scheduled semi-annual interest payments through
July 1, 2000, if no Default has occurred and is continuing, the collateral in
the escrow account, if any then remaining, will be released to us.
Form, Denomination, Book-Entry Procedures and Transfer
The old notes were offered and sold to qualified institutional buyers in
reliance on Rule 144A of the Securities Act. Old notes were also offered and
sold in offshore transactions in reliance on Regulation S of the Securities
Act.
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The new notes initially will be represented by one or more notes in
registered, global form without interest coupons (collectively, the "new global
notes"). The new global notes will be deposited upon issuance with the trustee
as custodian for DTC in New York, New York, and registered in the name of DTC
or its nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below.
The original notes are currently represented by global notes and the
procedures described in this section currently apply to the original notes.
Except as set forth below, the new global notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the new global notes may not be exchanged for
new notes in certificated form except in the limited circumstances described
below. See "--Exchanges of Book-Entry Notes for Certificated New Notes." In
addition, the transfer of beneficial interests in the new global notes will be
subject to the applicable rules and procedures of DTC and its direct or
indirect participants, which may change from time to time.
Initially, the trustee will act as paying agent and registrar. The new notes
may be presented for registration of transfer and exchange at the offices of
the registrar.
Depository Procedures
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the
"participants") and to facilitate the clearance and settlement of transactions
in those securities between participants through electronic book-entry changes
in accounts of its participants. The participants include securities brokers
and dealers, including Goldman, Sachs, banks, trust companies, clearing
corporations and other organizations. Access to DTC's system is also available
to other entities such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly (collectively, the "indirect participants"). Persons who
are not participants may beneficially own securities held by or on behalf of
DTC only through the participants or the indirect participants. The ownership
interest and transfer of ownership interest of each actual purchaser of each
security held by or on behalf of DTC are recorded on the records of the
participants and indirect participants.
DTC has also advised us that pursuant to procedures established by it:
. upon deposit of the new global notes, DTC will credit the accounts of
participants with portions of the principal amount of the new global
notes; and
. ownership of interests in the new global notes will be shown on, and the
transfer of ownership will be effected only through, records maintained
by DTC, with respect to the participants, or by the participants and the
indirect participants, with respect to other owners of beneficial
interests in the new global notes.
Holders of the new global notes may hold their interests in these notes
directly through DTC, if they are participants in the system, or indirectly
through organizations, including Euroclear and Cedel, which are participants in
the system. Euroclear and Cedel will hold interests in the new global notes on
behalf of their participants through customers' securities accounts in their
names on the books of their depositaries, which are Morgan Guaranty Trust
Company of New York, Brussels office, as operator of Euroclear, and Citibank
N.A., as operator of Cedel. The depositaries, in turn, will hold interests in
the new global notes in customers' securities accounts in the depositaries'
names on the books of DTC. All interests in a new global note, including those
held through Euroclear or Cedel, will be subject to the procedures and
requirements of DTC. Those interests held through Euroclear or Cedel will also
be subject to the procedures and requirements of these systems.
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The laws of some states require that specified persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer beneficial interests in a new global note to these persons
may be limited to that extent. DTC can act only on behalf of participants,
which in turn act on behalf of indirect participants and banks. As a result,
the ability of a person having beneficial interests in a new global note to
pledge their interests to persons or entities that do not participate in the
DTC system, or otherwise take actions in respect of their interests, may be
affected by the lack of a physical certificate evidencing these interests. For
other restrictions on the transferability of the notes, see "--Exchanges of
Book-Entry Notes for Certificated Notes."
Except as described below, owners of interests in the new global notes will
not have new notes registered in their names, will not receive physical
delivery of new notes in certificated form and will not be considered the
registered owners or holders under the indenture for any purpose.
Payments of the principal, premiums and liquidated damages, and interest on
a new global note registered in the name of DTC or its nominee will be payable
by the trustee to DTC or its nominee in its capacity as the registered holder
under the indenture. Under the terms of the indenture, we and the trustee will
treat the persons in whose names the new notes, including the new global notes,
are registered as the owners for the purpose of receiving payments and for any
and all other purposes whatsoever. Consequently, none of Exodus, the trustee
nor any agent of Exodus or the trustee has or will have any responsibility or
liability for:
. any aspect of DTC's records or any participant's or indirect
participant's records relating to or payments made on account of
beneficial ownership interests in the new global notes, or for
maintaining, supervising or reviewing any of DTC's records or any
participant's or indirect participant's records relating to the
beneficial ownership interests in the new global notes, or
. any other matter relating to the actions and practices of DTC or any of
its participants or indirect participants.
DTC has advised us that its current practice, upon receipt of any payment in
respect of securities such as the new notes is to credit the accounts of the
relevant participants with the payment on the payment date, in amounts
proportionate to their respective holdings in principal amount of beneficial
interest in the relevant security as shown on the records of DTC unless DTC has
reason to believe it will not receive payment on the payment date. Payments by
the participants and the indirect participants to the beneficial owners of new
notes will be governed by standing instructions and customary practices and
will be the responsibility of the participants or the indirect participants and
will not be the responsibility of DTC, the trustee or Exodus. Neither Exodus
nor the trustee will be liable for any delay by DTC or any of its participants
in identifying the beneficial owners of the new notes, and Exodus and the
trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee as the registered owner of the new notes
for all purposes.
Except for trades involving Euroclear and Cedel participants, interests in
the new global notes will trade in DTC's settlement system. Therefore,
secondary market trading activity in these interests will settle in immediately
available funds, subject in all cases to the rules and procedures of DTC and
its participants.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear and Cedel will be effected in the ordinary way in
accordance with their rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the new
notes described herein, cross-market transfers between the participants in DTC,
on the one hand, and Euroclear or Cedel participants, on the other hand, will
be effected through DTC in accordance with DTC's rules on behalf of Euroclear
or Cedel, as the case may be, by its respective depositary. However, these
cross-market transactions will require delivery of instructions to Euroclear or
Cedel, as the case may be, by the counterparty in that system in accordance
with
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the rules and procedures and within the established deadlines (Brussels time)
of that system. Euroclear or Cedel, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf
by delivering or receiving interests in the relevant new global note in DTC,
and making or receiving payment in accordance with normal procedures for same-
day funds settlement applicable to DTC. Euroclear participants and Cedel
participants may not deliver instructions directly to the depositaries for
Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a new global note from a
participant in DTC will be credited, and any crediting will be reported to the
relevant Euroclear or Cedel participant, during the securities settlement
processing day immediately following the settlement date of DTC. This must be a
business day for Euroclear and Cedel. DTC has advised us that cash received in
Euroclear or Cedel as a result of sales of interests in a new global note by or
through a Euroclear or Cedel participant to a participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedel cash account only as of the business day for
Euroclear or Cedel following DTC's settlement date.
DTC has advised us that it will take any action permitted to be taken by a
holder of new notes:
. only at the direction of one or more participants to whose account with
DTC interests in the new global notes are credited; and
. only in respect of the portion of the aggregate principal amount of the
new notes as to which the participants have given direction;
However, if there is an Event of Default (as defined below) under the new
notes, DTC reserves the right to exchange the new global notes for legended new
notes in certificated form, and to distribute the new notes to its
participants.
The information in this section concerning DTC, Euroclear and Cedel and
their book entry systems has been obtained from sources that we believe to be
reliable, but we take no responsibility for its accuracy.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the new global notes among participants in
DTC, Euroclear and Cedel, they are under no obligation to perform or to
continue to perform these procedures. These procedures may be discontinued at
any time. Neither Exodus nor the trustee will have any responsibility for the
performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
Exchanges of Book-Entry Notes for Certificated New Notes
A new global note is exchangeable for definitive new notes in registered
certificated form if:
. DTC notifies us that it is unwilling or unable to continue as depositary
for the new global note and we then fail to appoint a successor
depository within 90 days of the notice, or if DTC has ceased to be a
clearing agency registered under the Exchange Act;
. we, at our option, notify the trustee in writing that we elect to cause
the issuance of the new notes in certificated form; or
. there shall have occurred and be continuing a Default or an Event of
Default with respect to the new notes.
In all cases, certificated new notes delivered in exchange for any new
global note or beneficial interests in any new global note will be registered
in the names, and issued in any approved denominations, requested by or on
behalf of the depositary, in accordance with its customary procedures.
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Optional Redemption
Except as described below, the notes will not be redeemable at our option
prior to July 1, 2003.
The notes are subject to redemption, at our option, in whole or in part, at
any time on or after July 1, 2003 and prior to maturity, upon not less than 30
nor more than 60 days' notice. The notice must be mailed to each holder of
notes to be redeemed at each holder's address appearing in the Note Register.
The notes are redeemable in amounts of $1,000 or an integral multiple of
$1,000. Redemption would be made at the following prices, expressed as
percentages of the principal amount if redeemed during the 12-month period
beginning July 1 of the years indicated below. Holders will also receive
accrued and unpaid interest and liquidated damages, if any, to but excluding
the redemption date, subject to the right of holders of record on the
immediately preceding record date to receive interest due on an interest
payment date that is on or prior to the redemption date.
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2003.............................................................. 105.625%
2004.............................................................. 103.750%
2005.............................................................. 101.875%
2006 and thereafter............................................... 100.000%
</TABLE>
In addition, at any time prior to July 1, 2001, we may redeem up to 35% of
the aggregate outstanding principal amount of the notes with the Net Cash
Proceeds of one or more sales of Capital Stock, other than Disqualified Stock,
at a redemption price equal to 111.25% of the aggregate principal amount of the
notes, plus accrued and unpaid interest thereon and liquidated damages, if any,
to the date of redemption. However, at least 65% of the original principal
amount of the notes must remain outstanding immediately following the
redemption. In order to effect the foregoing redemption, we must mail a notice
of redemption no later than 45 days after the related sale of Capital Stock and
must consummate the redemption within 60 days of the closing of the sale of
Capital Stock.
If less than all the notes are to be redeemed, selection of notes for
redemption will be made by the trustee, in compliance with the requirements of
the principal national securities exchange, if any, on which the notes are
listed, or, if the notes are not so listed, on a pro rata basis, by lot or in a
manner as it shall deem fair and appropriate. However, after the redemption in
part, all notes must be in amounts of $1,000 or integral multiples of $1,000.
Notices of redemption may not be conditional. If any note is to be redeemed in
part only, the notice of redemption that relates to the note must state the
portion of the principal amount of the note to be redeemed. A note in principal
amount equal to the unredeemed portion will be issued in the name of the holder
upon cancellation of the redeemed note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of them called for redemption and, unless
we default in the payment of the redemption price, notes or portions of them
called for redemption will no longer be deemed outstanding.
Sinking Fund
The notes are not entitled to the benefit of any sinking fund.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs at any time, then each holder of notes has the
right to require that we purchase the holder's notes at a purchase price in
cash, in an amount equal to 101% of the principal amount of the notes or
portion of the notes, plus accrued and unpaid interest and liquidated damages,
if any, to the date of purchase. The holders may require that we purchase their
notes in whole or in part in integral multiples of $1,000. Any purchase would
be made pursuant to the Offer to Purchase and in accordance with the other
procedures set forth in the indenture. Within 30 days following the Change of
Control, we will mail an Offer to
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Purchase to each holder describing the transaction or transactions that
constitute the Change of Control and offering to purchase notes on the date
specified. We will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent these
laws and regulations are applicable in connection with the purchase of the
notes under the Offer to Purchase.
In the event a Change of Control occurs at a time when we are prohibited
from purchasing the notes, due to provisions of other debt agreements or
otherwise, we could seek the consent of our lenders to the purchase of notes or
could attempt to refinance the borrowings that contain this prohibition. If we
do not obtain a consent or repay borrowings, we will remain prohibited from
purchasing notes. In this case, our failure to purchase tendered notes would
constitute an Event of Default under the indenture, which could, in turn,
constitute a default under the terms of other debt agreements. See "Risk
Factors--We may not be able to effect repurchase of the notes upon a Change of
Control in accordance with the terms of the indenture."
The Change of Control provisions described above will be applicable whether
or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holders of the notes to require that we
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
We will not be required to make an Offer to Purchase upon a Change of
Control if a third party:
. makes the Offer to Purchase in the manner, at the times and otherwise in
compliance with the requirements set forth in the indenture applicable
to the Offer to Purchase; and
. purchases all notes validly tendered and not withdrawn under the Offer
to Purchase.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of our assets and the assets of our Subsidiaries taken as a whole. There is no
precise established definition of the phrase "substantially all" under
applicable law. Accordingly, the ability of a holder of notes to require us to
repurchase the notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of our assets and the assets of our
Subsidiaries taken as a whole to another person or group may be uncertain.
Covenants
The indenture contains the following covenants:
Limitation on Debt
We will not, and will not permit any of our Restricted Subsidiaries to,
Incur any Debt, other than the notes and Debt existing on the original issuance
date of the original notes; provided that we may Incur Debt if, after giving
effect to the Incurrence of Debt and the receipt and application of the
proceeds, the Consolidated Debt to EBITDA Ratio would be greater than zero and
less than 6:1.
However, the following Debt may be Incurred, each item to be given
independent effect:
(1) Permitted Senior Bank Debt;
(2) Debt owed:
. to us evidenced by a promissory note; or
. to any Restricted Subsidiary; provided that any event which results
in any Restricted Subsidiary ceasing to be a Restricted Subsidiary
or any subsequent transfer of Debt, other than to us or another
Restricted Subsidiary, is deemed, in each case, to constitute the
Incurrence of Debt not permitted by this clause (2);
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(3) Debt or the Debt of any Restricted Subsidiary:
. in respect of performance, surety or appeal bonds or letters of
credit in the ordinary course of business;
. under Permitted Interest Rate or Currency Protection Agreements; or
. arising under, or arising from, agreements providing for
indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds
or performance bonds securing any of our obligations Incurred in
connection with the disposition of any business, assets or
Restricted Subsidiary other than Guarantees of Debt Incurred by any
person acquiring all or any portion of the business, assets or
Restricted Subsidiary for the purpose of financing an acquisition,
in a principal amount not to exceed the gross proceeds actually
received by us or any Restricted Subsidiary in connection with the
disposition;
(4) Debt which is exchanged for or the proceeds of which are used to
refinance or refund, or any extension or renewal of (each a
"refinancing"):
. the notes;
. Debt incurred pursuant to clauses (3), (5), (6), (7) and (9) of this
paragraph and this clause (4), in each case in an aggregate
principal amount not to exceed the principal amount of the Debt so
refinanced, together with any accrued interest and any premium and
other payment required to be made with respect to the Debt being
refinanced or refunded, and any fees, costs, expenses, underwriting
discounts or commissions and other payments paid or payable with
respect to the Debt incurred pursuant to this clause (4); provided,
however, that:
. Debt, the proceeds of which are used to refinance the notes, or
Debt which is equal with or subordinate in right of payment to
the notes, shall only be permitted if (x) in the case of any
refinancing of the notes or Debt which is equal to the notes, the
refinancing Debt is Incurred by us and made equal to the notes or
subordinated to the notes, and (y) in the case of any refinancing
of Debt which is subordinated to the notes, the refinancing Debt
is Incurred by us and is subordinated to the notes in a manner
that is at least as favorable to the holders as that of the Debt
refinanced;
. the refinancing Debt by its terms, or by the terms of any
agreement or instrument pursuant to which Debt is issued, does
not have a final maturity prior to the final maturity of the Debt
being refinanced and has an Average Life longer than the Average
Life of the Debt being refinanced; and
. in the case of any refinancing of Debt Incurred by us, the
refinancing of Debt may be Incurred only by us, and in the case
of any refinancing of Debt Incurred by a Restricted Subsidiary,
the refinancing of Debt may be Incurred only by the Restricted
Subsidiary or by us;
(5) Acquisition Debt or Acquisition Debt of any Restricted Subsidiary;
(6) the original notes and the new notes issued in the exchange offer
issued under the indenture;
(7) Debt not to exceed, at any time outstanding, two times the Net Cash
Proceeds received by us after the original issue date of the original
notes from the issuance and sale of our Capital Stock, other than
Disqualified Stock, to a person that is not our Subsidiary, to the
extent that Net Cash Proceeds have not been used pursuant to the third
clause of clause (4) of the first paragraph or clauses (3), (4) or (6)
of the second paragraph of the "Limitation on Restricted Payments"
covenant described below to make a Restricted Payment; provided that
the Debt does not have a final maturity prior to the final maturity of
the notes and has an Average Life longer than the Average Life of the
notes;
(8) Existing Debt;
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(9) Debt or the Debt of any Restricted Subsidiary Incurred to finance the
purchase or other acquisition of any property, inventory, asset or
business directly or indirectly, by us or any Restricted Subsidiary
used in, or to be used in, the System and Network Management Business;
(10) Subordinated Debt not to exceed $300.0 million in principal
outstanding at any time; and
(11) our other Debt or other debt of any Restricted Subsidiary not to
exceed $50.0 million at any one time outstanding.
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the types of Debt
described in the above clauses, or is permitted in part under the first
paragraph of this covenant and in part under one or more of the above clauses,
we, in our sole discretion, shall classify, and from time to time may
reclassify, the item of Debt.
For purposes of determining any particular amount of Debt under this
covenant, Guarantees, Liens or obligations with respect to letters of credit
supporting Debt otherwise included in the determination of the particular
amount will not be included.
Limitation on Our Guarantees of Our Debt by Restricted Subsidiaries
We may not permit any Restricted Subsidiary, directly or indirectly, to
Guarantee, assume or in any other manner become liable for the payment of any
of our Debt, other than our Debt:
. Incurred pursuant to clauses (1), (3), (5), (9) or (11) of the second
paragraph of "Limitation on Debt;" or
. refinanced pursuant to clause (4) of the second paragraph of "Limitation
on Debt" of Debt originally incurred under clause (3), (5) or (9) of the
second paragraph of "Limitation on Debt," that is equal with or
subordinate in right of payment to the notes unless:
. the Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture providing for a Guarantee of payment of the
notes and the original notes by the Restricted Subsidiary and, with
respect to any Guarantee of our Debt that is subordinate in right of
payment to the notes, the Guarantee shall be subordinated to the
Restricted Subsidiary's Guarantee with respect to the notes at least
to the same extent as the Debt is subordinated to the notes; and
. the Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against
us or any other Restricted Subsidiary as a result of any payment by
a Restricted Subsidiary under its Guarantee until the notes have
been paid in full.
However, any Guarantee by a Restricted Subsidiary may provide by its terms
that it shall be automatically and unconditionally released and discharged
upon:
. any sale, exchange or transfer, to any person who is not one of our
Affiliates, of all of our Capital Stock and the Capital Stock of each
Restricted Subsidiary in, or all or substantially all of the assets of,
the Restricted Subsidiary, which sale, exchange or transfer is not
prohibited by the indenture; or
. the release or discharge of the Guarantee which resulted in the creation
of the Restricted Subsidiary's Guarantee with respect to the notes,
except a discharge or release by or as a result of payment under a
Guarantee.
Limitation on Restricted Payments
We will not, and will not permit any Restricted Subsidiary directly or
indirectly to:
(1) declare or pay any dividend or make any distribution on or with respect
to its Capital Stock to persons other than us or any of our Restricted
Subsidiaries, other than:
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. dividends or distributions payable solely in shares of its Capital
Stock, other than Disqualified Stock, or in options, warrants or
other rights to acquire shares of Capital Stock;
. pro rata dividends or distributions on common stock of Restricted
Subsidiaries held by minority stockholders; or
. dividends in respect of Disqualified Stock;
(2) purchase, redeem, retire or otherwise acquire for value any shares of
our Capital Stock or the Capital Stock of an Unrestricted Subsidiary
including options, warrants or other rights to acquire shares of
Capital Stock, held by any person, or any shares of Capital Stock of a
Restricted Subsidiary, including options, warrants or other rights to
acquire shares of Capital Stock, held by any person other than us or
one of our Wholly Owned Restricted Subsidiaries;
(3) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of our Debt that is subordinated in right of
payment to the notes; or
(4) make any Investment, other than a Permitted Investment, in any person
(the payments or any other actions described in clauses (1) through (4)
above being collectively "Restricted Payments") if, at the time of, and
after giving effect to, the proposed Restricted Payment:
. a Default or Event of Default shall have occurred and be continuing;
. we could not Incur at least $1.00 of Debt under the first paragraph
of the "Limitation on Debt" covenant; or
. the aggregate amount of all Restricted Payments, the amount, if
other than in cash, to be determined in good faith by the board of
directors, whose determination shall be conclusive and evidenced by
a board resolution, made after the date of original issuance of the
original notes shall exceed the sum of:
. cumulative Consolidated EBITDA since the date of original
issuance of the original notes through the last day of the last
full fiscal quarter ending immediately preceding the date of the
Restricted Payment for which quarterly or annual financial
statements are available; minus
. 1.5 times our cumulative Consolidated Interest Expense since the
date of original issuance of the original notes through the last
day of the last full fiscal quarter ending immediately preceding
the date of the Restricted Payment for which quarterly or annual
financial statements are available, plus
. the aggregate Net Cash Proceeds received by us after the original
issuance date of the original notes from the issuance and sale
permitted by the indenture of our Capital Stock, other than
Disqualified Stock, to a person who is not one of our
Subsidiaries, including an issuance or sale permitted by the
indenture of our Debt for cash subsequent to the original
issuance date of the original notes upon the conversion of Debt
into our Capital Stock, other than Disqualified Stock, or from
the issuance to a person who is not one of our Subsidiaries of
any options, warrants or other rights to acquire our Capital
Stock, in each case, exclusive of any Disqualified Stock or any
options, warrants or other rights that are redeemable at the
option of the holder, or are required to be redeemed, prior to
the stated final maturity date of the notes, in each case except
to the extent Net Cash Proceeds are used to Incur Debt pursuant
to clause (7) of the second paragraph under the "Limitation on
Debt" covenant, plus
. an amount equal to the net reduction in Investments, other than
reductions in Permitted Investments, in any person resulting from
payments of interest on Debt, dividends, repayments of loans or
advances, or other transfers of assets, in each case to us or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale
of any Investment except, in each case, to the extent any payment
or proceeds are included in the calculation of Consolidated
EBITDA, or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries, not to exceed, in each case, the amount
of Investments previously made by us or any Restricted Subsidiary
in a person or Unrestricted Subsidiary.
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The provision above shall not be violated by reason of:
(1) the payment of any dividend within 60 days after the date of
declaration thereof if, at the date of declaration, the payment would
comply with the paragraph above;
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Debt that is subordinated in right of payment
to the notes including premium, if any, and accrued and unpaid
interest, with the proceeds of, Debt Incurred under clause (4) of the
second paragraph of the "Limitation on Debt" covenant;
(3) the repurchase, redemption or other acquisition of our Capital Stock or
the Capital Stock of one of our Subsidiaries, or options, warrants or
other rights to acquire the Capital Stock, in exchange for, including
upon exercise of a conversion right, or out of the proceeds of a
capital contribution or a substantially concurrent offering of, shares
of our Capital Stock, other than Disqualified Stock, or options,
warrants or other rights to acquire the Capital Stock;
(4) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of our Debt which
is subordinated in right of payment to the notes in exchange for, or
out of the proceeds of, a capital contribution or a substantially
concurrent offering of, shares of the our Capital Stock, other than
Disqualified Stock, or options, warrants or other rights to acquire
Capital Stock;
(5) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation,
merger or transfer of assets that complies with the provisions of the
indenture applicable to mergers, consolidations and transfers of all or
substantially all of our property and assets, and payments of cash
instead of fractional shares;
(6) Investments in any person; provided that the aggregate amount of
Investments made pursuant to this clause (6) does not exceed the sum
of:
. $50.0 million, plus
. the amount of Net Cash Proceeds received by us after the original
issuance date of the original notes from the sale of our Capital
Stock, other than Disqualified Stock, to a person who is not our
Subsidiary, except to the extent the Net Cash Proceeds are used to
Incur Debt pursuant to clause (7) of the second paragraph of the
"Limitation on Debt" covenant or to make Restricted Payments
pursuant to the third clause of clause (4) of the first paragraph,
or clauses (3) or (4) of this paragraph, of this "Limitation on
Restricted Payments" covenant, plus
. the net reduction in Investments made pursuant to this clause (6)
resulting from distributions on or repayments of the Investments or
from the Net Cash Proceeds from the sale of any the Investment,
except in each case to the extent any payment or proceeds is
included in the calculation of Consolidated EBITDA, or from a person
becoming a Restricted Subsidiary; provided that the net reduction in
any Investment shall not exceed the amount of the Investment;
(7) Investments acquired in exchange for our Capital Stock, other than
Disqualified Stock;
(8) the purchase, redemption or other acquisition or retirement of our
common stock or any option or other right to acquire shares of our
common stock:
. if the common stock, option or other right was issued pursuant to a
plan or arrangement approved by our board of directors, and the
purchase, redemption or other acquisition or retirement occurs in
accordance with the terms of a plan or arrangement, from our former
employees and the former employees of our Subsidiaries or their
estates or is from our employee and the price paid by us to the
employee is equal to the exercise or purchase price paid by the
employee; and
. from our employees or the employees of our Subsidiaries in an amount
not to exceed $5.0 million in any fiscal year; provided that amounts
not paid for any purchase, redemption or
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other acquisition or retirement in any fiscal year may be accumulated
and paid in any subsequent fiscal year;
(9) additional Restricted Payments not to exceed $50.0 million in the
aggregate; or
(10) the acquisition of our Capital Stock by us in connection with the
cashless exercise of any options, warrants or similar rights issued by
us.
Each Restricted Payment permitted pursuant to the preceding paragraph,
other than the Restricted Payment referred to in clause (2) thereof and an
exchange of Capital Stock for Capital Stock or Debt referred to in clause (3)
or (4) thereof, and the Net Cash Proceeds from any issuance of Capital Stock
referred to in clauses (3), (4) and (6), shall be included in calculating
whether the conditions of the third clause of clause (4) of the first
paragraph of this "Limitation on Restricted Payments" covenant have been met
with respect to any subsequent Restricted Payments. In the event the proceeds
of an issuance of our Capital Stock are used for the redemption, repurchase or
other acquisition of the notes, or Debt that is equal with the notes, then the
Net Cash Proceeds of the issuance shall be included in the third clause of
clause (4) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent the proceeds are not used for redemption,
repurchase or other acquisition of Debt.
Limitation on Asset Sales
We will not, and will not permit any Restricted Subsidiary to, consummate
an Asset Sale unless:
. we or the Restricted Subsidiary, as the case may be, receive
consideration at the time of the Asset Sale at least equal to the fair
market value of the assets sold or otherwise disposed of, as evidenced
by a resolution of the board of directors; and
. at least 75% of the consideration received by us or the Restricted
Subsidiary, as the case may be, from the Asset Sale shall be cash or
other Qualified Consideration.
We or any Restricted Subsidiary may, within 365 days of the Asset Sale,
invest the Net Cash Proceeds:
. in property or assets used, or to be used, in the System and Network
Management Business, or in a company engaged primarily in the System and
Network Management Business, if and to the extent otherwise permitted
under the indenture; or
. to repay our Secured Debt or the Secured Debt of any Restricted
Subsidiary.
The amount of the Net Cash Proceeds not used or invested within 365 days of
the Asset Sale in the manner described in the foregoing clauses shall
constitute "Excess Proceeds."
In the event that Excess Proceeds exceed $10.0 million, we shall make an
Offer to Purchase that amount of notes equal to the amount of Excess Proceeds
at a price equal to 100% of the principal amount of the notes to be purchased,
plus accrued and unpaid interest and liquidated damages, if any, to the date
of purchase and, to the extent required by the terms of the notes, our other
Debt that is equal with the notes or Debt of a Restricted Subsidiary. Each
Offer to Purchase shall be mailed within 30 days following the date that we
shall become obligated to purchase notes with any Excess Proceeds. Following
the completion of an Offer to Purchase, the amount of Excess Proceeds shall be
deemed to be reset at zero and, to the extent there are any remaining Excess
Proceeds we may use Excess Proceeds for any use which is not otherwise
prohibited by the indenture.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations to the extent the laws and
regulations are applicable in connection with the purchase of notes pursuant
to the Offer to Purchase.
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Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
We may not, and may not permit any Restricted Subsidiary to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any Restricted Subsidiary to:
. pay dividends, in cash or otherwise, or make any other distributions in
respect of its Capital Stock owned by us or any other Restricted
Subsidiary or pay any Debt or other obligation owed to us or any other
Restricted Subsidiary;
. make loans or advances to us or any other Restricted Subsidiary; or
. transfer any of its property or assets to us or any other Restricted
Subsidiary.
However, we may, and may permit any Restricted Subsidiary to, suffer to
exist any the encumbrance or restriction:
. pursuant to any agreement in effect on the date of original issuance of
the original notes, and any amendments, extensions, refinancings,
renewals or replacements of agreements, provided that the amendments,
encumbrances and restrictions in any extensions, refinancings, renewals
or replacements are no less favorable in any material respect to the
holders, than those encumbrances or restrictions that are then in effect
and that are being extended, refinanced, renewed or replaced;
. existing under or by reason of applicable law;
. existing in connection with any Permitted Senior Bank Debt or any Debt
incurred pursuant to clause (5) of the second paragraph of "Limitations
on Debt;"
. pursuant to an agreement existing prior to the date on which the person
became a Restricted Subsidiary and not Incurred in anticipation of
becoming a Restricted Subsidiary, which encumbrance or restriction is
not applicable to any person, or the properties or assets of any person,
other than the person so acquired;
. pursuant to an agreement entered into in connection with Debt Incurred
under clause (4) of the second paragraph of the "Limitation on Debt"
covenant; provided, however, that the provisions contained in any
agreement related to an encumbrance or restriction are no more
restrictive in any material respect than the provisions contained in the
agreement the subject of the refinancing clause (4) of the second
paragraph of the "Limitation on Debt" covenant;
. restrictions contained in any agreement relating to a Lien of a
Restricted Subsidiary or us otherwise permitted under the indenture, but
only to the extent the restrictions restrict the transfer of the
property subject to the Lien;
. customary nonassignment provisions entered into in the ordinary course
of business in leases, licenses and other contracts to the extent the
provisions restrict the transfer, sublicensing or any license or
subletting of any lease or the assignment of rights under any such
contract;
. any restriction with respect to a Restricted Subsidiary imposed pursuant
to an agreement which has been entered into for the sale or disposition
of all or substantially all of the Capital Stock or assets of the
Restricted Subsidiary; provided that consummation of the transaction
would not result in an Event of Default or an event that, with the
passing of time or the giving of notice or both, would constitute an
Event of Default, that the restriction terminates if the transaction is
closed or abandoned and that the closing or abandonment of the
transaction occurs within one year of the date the agreement was entered
into;
. any restriction imposed pursuant to contracts for the sale of assets
with respect to the transfer of the assets to be sold pursuant to the
contract;
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. arising or agreed to in the ordinary course of business, not relating to
any Debt, and that do not, individually, or in the aggregate, detract
from the value of our property or assets or the property or assets of
any Restricted Subsidiary in any manner material to us or any Restricted
Subsidiary; or
. the encumbrance or restriction is contained in the terms of any
agreement pursuant to which the Debt was issued if:
. the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant
contained in the Debt or agreement,
. the encumbrance or restriction is not materially more
disadvantageous to the holders of the notes than is customary in
comparable financings, and
. we determine that any encumbrance or restriction will not materially
affect our ability to make principal or interest payments on the
notes.
Limitation on Liens
We may not, and may not permit any Restricted Subsidiary to, Incur or suffer
to exist any Lien, on or with respect to any property or assets now owned or
hereafter acquired to secure any Debt without making, or causing the Restricted
Subsidiary to make, effective provision for securing the notes:
. equally and ratably with Debt as to such property or assets for so long
as the Debt will be so secured or;
. in the event the Debt is our Debt which is subordinate in right of
payment to the notes, prior to this Debt as to such property or assets
for so long as this Debt will be so secured.
The foregoing restrictions shall not apply to:
. Liens in existence on the date of original issuance of the original
notes;
. Liens securing only the notes and any Lien in favor of the trustee for
the benefit of the holders arising under the provisions in the indenture
or the escrow agreement;
. Liens granted by a Restricted Subsidiary in favor of us or any
Restricted Subsidiary;
. Liens to secure Permitted Senior Bank Debt;
. Liens securing Purchase Money Secured Debt;
. Liens on property existing immediately prior to the time of its
acquisition, and not Incurred in anticipation of the financing of the
acquisition;
. Liens on property of a person existing at the time the person becomes a
Restricted Subsidiary and not incurred in anticipation of becoming a
Restricted Subsidiary;
. any interest in or title of a lessor to any property subject to a
Capital Lease Obligation which is permitted under the indenture; or
. Liens to secure Debt Incurred pursuant to clause (4) of the second
paragraph of the "Limitation on Debt" covenant; provided that the Lien
does not extend to any property other than the property securing the
Debt being refinanced pursuant to clause (4) of the second paragraph of
the "Limitation on Debt" covenant.
Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries
We will not sell, and will not permit any Restricted Subsidiary, directly or
indirectly, to issue or sell, any shares of Capital Stock of a Restricted
Subsidiary, including options, warrants or other rights to purchase shares of
Capital Stock, except:
. to us or a Wholly Owned Restricted Subsidiary;
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. issuances of director's qualifying shares or sales to foreign nationals
of shares of Capital Stock of foreign Restricted Subsidiaries, to the
extent required by applicable law;
. if, immediately after giving effect to an issuance or sale, the
Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in any person remaining after giving effect to the
issuance or sale would have been permitted to be made under the
"Limitation on Restricted Payments" covenant if made on the date of the
issuance or sale; or
. issuances or sales of common stock of a Restricted Subsidiary.
Transactions with Affiliates and Related Persons
We may not, and may not permit any Restricted Subsidiary to, enter into any
transaction, or series of related transactions, not in the ordinary course of
business with our Affiliates or Related Persons, other than us or a Wholly
Owned Restricted Subsidiary, involving aggregate consideration in excess of
$5.0 million, including any Investment, either directly or indirectly, unless
the transaction is on terms no less favorable to us or the Restricted
Subsidiary than those that could be obtained in a comparable arm's-length
transaction with an entity that is not an Affiliate or Related Person and is in
our best interests or the best interests of the Restricted Subsidiary. For any
transaction, or series of related transactions, that involves less than or
equal to $10.0 million, our Chief Executive Officer, President or Chief
Operating Officer shall determine that the transaction satisfies the above
criteria and shall evidence a determination by an Officer's Certificate filed
with the trustee. For any transaction that involves in excess of $10.0 million:
. a majority of the disinterested members of the board of directors shall
determine that the transaction satisfies the above criteria; or
. we shall obtain a written opinion of a nationally recognized investment
banking or appraisal firm stating that the transaction is fair to us or
the Restricted Subsidiary.
The limitation above does not apply, and shall not apply, to:
. any transaction solely between us and any Restricted Subsidiary or
solely between any Restricted Subsidiaries;
. the payment of reasonable and customary regular fees to our directors
who are not our employees;
. any payments or other transactions pursuant to any tax-sharing agreement
between us and any other person with which we file a consolidated tax
return or with which we are part of a consolidated group for tax
purposes;
. licensing or sublicensing or the use of any intellectual property by us
or any Restricted Subsidiary to us or any Restricted Subsidiary;
. any transaction entered into for the purpose of granting or altering
registration rights with respect to any of our Capital Stock;
. any Restricted Payments not prohibited by the "Limitation on Restricted
Payments" covenant; or
. compensation, severance and employee benefit arrangements with our or
any Restricted Subsidiary's officers, directors or employees, including
under any stock option or stock incentive plans, in the ordinary course
of business.
Limitation on Sale-Leaseback Transactions
We will not, and will not permit any Restricted Subsidiary to, enter into
any sale-leaseback transaction involving any of our assets or properties,
whether now owned or hereafter acquired, whereby we or a Restricted Subsidiary
sell or transfer the assets or properties and then or thereafter lease the
assets or properties or any part thereof or any other assets or properties that
we or the Restricted Subsidiary, as the case may be, intend to use for
substantially the same purpose or purposes as the assets or properties sold or
transferred.
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The above restriction does not apply to any sale-leaseback transaction if:
. the lease is for a period, including renewal rights, of not in excess of
three years;
. the sale-leaseback transaction is consummated within 180 days after the
purchase of the assets subject to the transaction;
. the transaction is solely between us and any Wholly Owned Restricted
Subsidiary or solely between Wholly Owned Restricted Subsidiaries; or
. we or the Restricted Subsidiary, within 12 months after the sale or
transfer of any assets or properties is completed, apply an amount no
less than the Net Cash Proceeds received from the sale in accordance
with second paragraph of "--Limitation on Asset Sales."
Provision of Financial Information
Whether or not we are required to be subject to Section 13(a) or 15(d) of
the Exchange Act, we shall file with the Commission the annual reports,
quarterly reports and other documents which we would have been required to file
with the Commission pursuant to Section 13(a) or 15(d) or any successor
provision if we were so required. These documents must be filed with the
Commission on or prior to the respective dates (each a "Required Filing Date",
collectively, the "Required Filing Dates") by which we would have been required
so to file the documents if we were so required. We shall also in any event:
. within 15 days of each Required Filing Date (1) transmit by mail to all
holders, as their names and addresses appear in the Note Register,
without cost to the holders, and (2) file with the trustee, copies of
the annual reports, quarterly reports and other documents which we file
with the Commission pursuant to Section 13(a) or 15(d) or any successor
provision or would have been required to file with the Commission
pursuant to Section 13(a) or 15(d) or any successor provisions if we
were required to be subject to these Sections; and
. if filing these documents by us with the Commission is not permitted
under the Exchange Act, promptly upon written request supply copies of
these documents to any prospective holder.
Unrestricted Subsidiaries
We may designate any of our Subsidiaries to be an "Unrestricted Subsidiary"
as provided below in which event the Subsidiary and each other person that is
then, or thereafter becomes, a Subsidiary of the Subsidiary will be deemed to
be an Unrestricted Subsidiary. "Unrestricted Subsidiary" means:
. any Subsidiary designated as such by the Board of Directors as set forth
below where (1) no default with respect to any Debt of the Subsidiary or
any Subsidiary of the Subsidiary, including any right which the holders
thereof may have to take enforcement action against the Subsidiary,
would permit, upon notice, lapse of time or both, any holder of any
other Debt in a principal amount in excess of $10.0 million of us and
our Subsidiaries, other than another Unrestricted Subsidiary, to declare
a default on the other Debt or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity and (2) we
could make a Restricted Payment in an amount equal to the greater of the
fair market value and book value of the Subsidiary pursuant to
"Limitation on Restricted Payments" and the amount is thereafter treated
as a Restricted Payment for the purpose of calculating the aggregate
amount available for Restricted Payments thereunder; and
. any Subsidiary of an Unrestricted Subsidiary.
The board of directors may not designate a Subsidiary to be an Unrestricted
Subsidiary if the Subsidiary owns any Capital Stock of, or owns or holds any
Lien on any property of, any of our other Subsidiaries which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary. The board of directors may designate any Unrestricted Subsidiary a
Restricted Subsidiary and shall be deemed to have made
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this designation if at that time the condition set forth in the item listed
under in the definition of "Unrestricted Subsidiary" shall cease to be true.
Mergers, Consolidations and Certain Sales of Assets
We may not, in a single transaction or a series of related transactions, (1)
consolidate or merge with or into any other person or permit any other person
to consolidate or merge with or into us or (2) directly or indirectly transfer,
sell, lease or otherwise dispose of all or substantially all of its assets,
unless:
. in a transaction in which we do not survive or in which we sell, lease
or otherwise dispose of all or substantially all of our assets, the
successor entity to us shall be organized and validly existing under the
laws of the United States of America, any State thereof or the District
of Columbia, and shall expressly assume, by a supplemental indenture
executed and delivered to the trustee in form satisfactory to the
trustee, all of our obligations under the indenture;
. immediately before and after giving effect to the transaction and
treating any Debt which becomes our obligation or an obligation of a
Restricted Subsidiary as a result of the transaction as having been
Incurred by us or the Restricted Subsidiary at the time of the
transaction, no Event of Default or event that with the passing of time
or the giving of notice, or both, would constitute an Event of Default
shall have occurred and be continuing;
. except in the case of any such consolidation or merger of us with or
into, or any such transfer, sale, lease or other disposition of assets
to, a Wholly Owned Restricted Subsidiary, immediately after giving
effect to the transaction, our Consolidated Net Worth, or the
Consolidated Net Worth of any other successor entity to us, is equal to
or greater than our immediately prior to the transaction; and
. except in the case of any consolidation or merger of us with or into, or
any such transfer, sale, lease or other disposition of assets to, a
Wholly Owned Restricted Subsidiary, immediately after giving effect to
the transaction and treating any Debt which becomes our obligation or
the obligation of a Restricted Subsidiary as a result of the transaction
as having been Incurred us or the Restricted Subsidiary at the time of
the transaction, we, including any successor entity to us, could Incur
at least $1.00 of additional Debt pursuant to the provisions of the
indenture described in the first paragraph under "Limitation on Debt"
above.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
indenture. Reference is made to the indenture for the full definition of all
such terms, as well as any other terms used in this prospectus for which no
definition is provided.
"Acquisition Debt" means Debt of a person existing at the time the person
becomes a Restricted Subsidiary or assumed in connection with an Asset
Acquisition, and not Incurred in connection with, or in anticipation of, the
person becoming a Restricted Subsidiary or an Asset Acquisition.
"Affiliate" of any person means any other person directly or indirectly
controlling or controlled by or under direct or indirect common control with
the person. For the purposes of this definition, "control" when used with
respect to any person means the power to direct the management and policies of
the person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means an acquisition by us or any of our Restricted
Subsidiaries of the property and assets of any person other than us or any of
our Restricted Subsidiaries that constitute substantially all of a division or
line of business of the person; provided that the property and assets acquired
are to be used in the System and Network Management Business.
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"Asset Sale" by any person means any transfer, conveyance, sale, lease,
license or other disposition by such person or any of its Restricted
Subsidiaries, including a consolidation or merger or other sale of the
Restricted Subsidiary with, into or to another person in a transaction in which
the Restricted Subsidiary ceases to be a Restricted Subsidiary, (collectively a
"transfer") of:
. shares of Capital Stock, other than directors' qualifying shares, or
other ownership interests of a Restricted Subsidiary of a person;
. all or substantially all of the assets of a person or any of its
Restricted Subsidiaries; or
. any other property, assets or rights, including intellectual property
rights, of a person or any of its Restricted Subsidiaries outside of the
ordinary course of business; provided that "Asset Sale" shall not
include:
. any transfer of all or substantially all of our assets in a
transaction that is made in compliance with the requirements of
provisions of the indenture described under "--Mergers,
Consolidations and Certain Sales of Assets,"
. any transfer by us to any Wholly Owned Restricted Subsidiary or by
any Wholly Owned Restricted Subsidiary to any other Wholly Owned
Subsidiary or to us in a manner that does not otherwise violate the
terms of the indenture,
. transfers made in compliance with the requirements of provisions of
the indenture described under "Limitation on Restricted Payments,"
. transfers constituting the granting of a Permitted Lien,
. exchanges of equipment used in the System and Network Management
Business for other equipment to be used in the System and Network
Management Business; provided any exchange for equipment with a fair
market value in excess of $2.0 million must be approved by our board
of directors, and
. transfers of assets, property or other rights, including
intellectual property rights, with a fair market value of less than
$2.0 million.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (1) the sum of the products of (a)
the number of years from the date of determination to the dates of each
successive scheduled principal payment of the debt security and (b) the amount
of the principal payment, by (2) the sum of all of the principal payments.
"Capital Lease Obligation" of any person means the obligation to pay rent or
other payment amounts under a lease of, or other Debt arrangements conveying
the right to use, real or personal property of a person which is required to be
classified and accounted for as a capital lease or a liability on the face of a
balance sheet of a person in accordance with GAAP. The principal amount of the
obligation shall be the capitalized amount thereof that would appear on the
face of a balance sheet of a person in accordance with GAAP.
"Capital Stock" of any person means any and all shares, interests,
participations or other equivalents, however designated, of corporate stock or
other equity participations, including partnership interests, whether general
or limited, of such person.
"Cash Equivalents" means:
. securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof,
provided that the full faith and credit of the United States is pledged
in support thereof, having maturities of six months from the date of
acquisition;
. certificates of deposit with maturities of not more than six months or
less from the date of acquisition, bankers' acceptances with maturities
not exceeding six months and overnight bank deposits, in each
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case with any domestic commercial bank having capital and surplus in
excess of $500.0 million and a Thompson Bank Watch Rating of "B" or
better;
. repurchase obligations with a term of not more than seven days for
underlying securities of the types described in the first two clauses
above entered into with any financial institution meeting the
qualifications specified in the second clause above;
. commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group and in each
case maturing within six months after the date of acquisition; and
. money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in the foregoing clauses of this
definition.
"Change of Control" means the occurrence of one or more of the following
events:
. any sale, lease, exchange or other transfer, in one transaction or a
series of related transactions, of all or substantially all of the
assets of ours and our Subsidiaries, taken as a whole, to any person or
group of related persons, as defined in Section 13(d) of the Exchange
Act (a "Group");
. the approval by the holders of our Capital Stock of any plan or proposal
for our liquidation or dissolution, whether or not otherwise in
compliance with the provisions of the applicable indenture;
. any person or Group, other than Fleet National Bank or any of its
Affiliates, shall become the owner, directly or indirectly, beneficially
or of record, of shares representing more than 50% of the aggregate
ordinary voting power represented by our issued and outstanding Voting
Stock or any successor to all or substantially all of its assets; or
. during any period of two consecutive years, individuals who at the
beginning of the period constituted our board of directors, together
with any new directors whose election to the board of directors or whose
nomination for election by our stockholders was approved by a vote of a
majority of the directors then still in office who were either directors
at the beginning of this period or whose election or nomination for
election was previously so approved, cease for any reason to constitute
a majority of the board of directors then in office.
"Common stock" of any person means Capital Stock of a person that does not
rank prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of
such person, to shares of Capital Stock of any other class of the person.
"Consolidated Debt to EBITDA Ratio" means the ratio of:
. the total consolidated Debt as of the date of calculation (the
"Determination Date") to
. four times the Consolidated EBITDA for the latest fiscal quarter for
which financial information is available immediately preceding the
Determination Date (the "Measurement Period").
For purposes of calculating Consolidated EBITDA for the Measurement Period
immediately prior to the relevant Determination Date:
. any person that is a Restricted Subsidiary on the Determination Date, or
would become a Restricted Subsidiary on the Determination Date in
connection with the transaction that requires the determination of the
Consolidated EBITDA, will be deemed to have been a Restricted Subsidiary
at all times during the Measurement Period;
. any person that is not a Restricted Subsidiary on the Determination
Date, or would cease to be a Restricted Subsidiary on the Determination
Date in connection with the transaction that requires the determination
of the Consolidated EBITDA, will be deemed not to have been a Restricted
Subsidiary at any time during the Measurement Period; and
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. if we or any Restricted Subsidiary shall have in any manner (1) acquired
through an acquisition or the commencement of activities constituting
the operating business or (2) disposed of by an Asset Sale or the
termination or discontinuance of activities constituting such operating
business any operating business during the Measurement Period or after
the end of the period and on or prior to the Determination Date, the
calculation will be made on a pro forma basis in accordance with GAAP as
if, in the case of an acquisition or the commencement of activities
constituting such operating business, all transactions had been
consummated prior to the first day of the Measurement Period, it being
understood that in calculating Consolidated EBITDA the exclusions set
forth in the definition of Consolidated Net Income shall apply to any
person acquired as if it were a Restricted Subsidiary.
"Consolidated EBITDA" means, with respect to any period, Consolidated Net
Income for the period increased, without duplication, to the extent deducted in
calculating the Consolidated Net Income, by:
. Consolidated Income Tax Expense for the period;
. Consolidated Interest Expense for the period without regard to the
proviso therein; and
. depreciation, amortization and any other non-cash items for the period,
less any non-cash items to the extent they increase Consolidated Net
Income, including the partial or entire reversal of reserves taken in
prior periods, for the period, for us and any Restricted Subsidiary,
including, without limitation, amortization of capitalized debt issuance
costs for the period,
all of the foregoing determined on a consolidated basis for us and our
Restricted Subsidiaries in accordance with GAAP; provided that, if any
Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated
EBITDA shall be reduced, to the extent not otherwise reduced in accordance with
GAAP, by an amount equal to:
. the amount of Consolidated EBITDA attributable to such Restricted
Subsidiary, multiplied by
. the percentage ownership interest in a Restricted Subsidiary not owned
on the last day of a period by us or any of our Restricted Subsidiaries.
"Consolidated Income Tax Expense" for any period means the consolidated
provision for our income taxes and the income taxes of our Restricted
Subsidiaries for the period calculated on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means for any period the consolidated
interest expense included in our consolidated income statement and the
consolidated income statement of our Restricted Subsidiaries, without deduction
of interest income, for a period calculated on a consolidated basis in
accordance with GAAP, including without limitation or duplication, or, to the
extent not so included, with the addition of:
. the amortization of Debt discounts;
. any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities;
. fees, net of any amounts received, with respect to any Interest Rate or
Currency Protection Agreement;
. interest on Debt guaranteed by us and our Restricted Subsidiaries, to
the extent paid by us or any Restricted Subsidiary; and
. the portion of any Capital Lease Obligation allocable to interest
expense; provided that, if any Restricted Subsidiary is not a Wholly
Owned Restricted Subsidiary, Consolidated Interest Expense shall be
reduced, to the extent not otherwise reduced in accordance with GAAP, by
an amount equal to:
. the amount of Consolidated Interest Expense attributable to the
Restricted Subsidiary, multiplied by
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. the percentage ownership interest in the Restricted Subsidiary not
owned on the last day of the period by us or any of our Restricted
Subsidiaries.
"Consolidated Net Income" for any period means our consolidated net income
or loss of and the consolidated net income of our Restricted Subsidiaries for
a period determined on a consolidated basis in accordance with GAAP; provided
that there shall be excluded therefrom:
. the net income or loss of any person acquired by us or any of our
Restricted Subsidiaries in a pooling-of-interests transaction for any
period prior to the date of the transaction;
. the net income or loss of any person that is not our Restricted
Subsidiary except to the extent of the amount of dividends or other
distributions actually paid to us or our Restricted Subsidiary by the
person during the period;
. gains or losses on Asset Sales by us or our Restricted Subsidiaries;
. all extraordinary gains and extraordinary losses;
. the cumulative effect of changes in accounting principles; and
. the tax effect of any of the items described in the foregoing clauses.
"Consolidated Net Worth" of any person means the consolidated stockholders'
equity of such person, determined on a consolidated basis in accordance with
GAAP, less amounts attributable to Disqualified Stock of such person; provided
that, with respect to us, adjustments following the date of the indenture to
our accounting books and records in accordance with Accounting Principles
Board Opinions Nos. 16 and 17, or successor opinions thereto, or otherwise
resulting from the acquisition of control of us by another person shall not be
given effect.
"Debt" means, without duplication, with respect to any person, whether
recourse is to all or a portion of the assets of the person and whether or not
contingent:
. every obligation of the person for money borrowed;
. every obligation of the person evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
. every reimbursement obligation of the person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the
account of the person, including reimbursement obligations with respect
thereto, but excluding obligations with respect to trade letters of
credit securing obligations entered into in the ordinary course of
business to the extent the letters of credit are not drawn upon or, if
drawn upon, to the extent the drawing is reimbursed no later than the
third business day following receipt by the person of a demand for
reimbursement;
. every obligation of the person issued or assumed as the deferred
purchase price of property or services, including securities repurchase
agreements;
. every Capital Lease Obligation of the person;
. all Disqualified Stock issued by the person;
. if the person is a Restricted Subsidiary, all preferred stock issued by
the person;
. every obligation under Interest Rate or Currency Protection Agreements
of the person; and
. every obligation of the type referred to in the foregoing clauses of
another person and all dividends of another person the payment of which,
in either case, the person has Guaranteed or is responsible or liable,
directly or indirectly, as obligor, Guarantor or otherwise.
The "amount" or "principal amount" of Debt at any time of determination as
used herein represented by:
. any contingent Debt, shall be the maximum principal amount thereof;
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. any Debt issued at a price that is less than the principal amount at
maturity thereof, shall be the amount of the liability in respect
thereof determined in accordance with GAAP;
. any Disqualified Stock, shall be the maximum fixed redemption or
repurchase price in respect thereof; and
. any preferred stock, shall be the maximum voluntary or involuntary
liquidation preference plus accrued and unpaid dividends in respect
thereof, in each case as of such time of determination.
In no event shall "Debt" include any trade payable or accrued expenses
arising in the ordinary course of business.
"Disqualified Stock" of any person means any Capital Stock of the person
that by its terms, or by the terms of any security into which it is
convertible, or for which it is exchangeable, at the option of the holder
thereof, or otherwise matures or is required to be redeemed, pursuant to any
sinking fund obligation or otherwise, but other than as a result of the death
or disability of the holder thereof or the termination of the employment with
us of the holder thereof, or is convertible into or exchangeable for Debt or is
redeemable at the option of the holder thereof, in whole or in part, at any
time prior to the final maturity of the notes; provided, however, that any
Capital Stock which would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require us or a Restricted
Subsidiary to repurchase or redeem the Capital Stock upon the occurrence of an
"Asset Sale" or a "Change of Control" occurring prior to the final maturity
date of the notes shall not constitute Disqualified Stock if the provisions
applicable to the Capital Stock are no more favorable to the holders of the
stock than the corresponding provisions applicable to the notes contained in
the indenture and the provisions applicable to the Capital Stock specifically
provide that we and our Restricted Subsidiaries will not repurchase or redeem
any of the stock pursuant to the provisions prior to the repurchase of such
notes as are required to be repurchased pursuant to the indenture upon an Asset
Sale or a Change of Control.
"Existing Debt" shall mean our Debt and the Debt of Restricted Subsidiaries
in existence on the original issue date of the original notes.
"GAAP" means generally accepted accounting principles in the United States
which are in effect on the date of original issuance of the original notes,
consistently applied.
"Guarantee" by any person means any obligation, contingent or otherwise, of
the person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other person (the "primary obligor") in any manner, whether
directly or indirectly, and including, without limitation, any obligation of
the person to:
. purchase or pay or advance or supply funds for the purchase or payment
of the Debt or to purchase or to advance or supply funds for the
purchase of any security for the payment of the Debt;
. purchase property, securities or services for the purpose of assuring
the holder of the Debt of the payment of the Debt; or
. maintain working capital, equity capital or other financial statement
condition or liquidity of the primary obligor so as to enable the
primary obligor to pay the Debt, and "Guaranteed," "Guaranteeing" and
"Guarantor" shall have meanings correlative to the foregoing; provided,
however, that the Guaranty by any person shall not include endorsements
by the person for collection or deposit, in either case, in the ordinary
course of business.
"Incur" means, with respect to any Debt or other obligation of any person,
to create, issue, incur, by conversion, exchange or otherwise, assume,
Guarantee or otherwise become liable in respect of the Debt or other obligation
including by acquisition of Restricted Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any of the Debt or other obligation
on the balance sheet of the person, and "Incurrence," "Incurred," "Incurrable"
and "Incurring" shall have meanings correlative to the foregoing; provided,
however, that a change in GAAP that results in an obligation of the person that
exists at such time becoming Debt shall not be deemed an Incurrence of the
Debt.
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"Interest Rate or Currency Protection Agreement" of any person means any
forward contract, futures contract, swap, option or other financial agreement
or arrangement, including, without limitation, caps, floors, collars and
similar agreements, relating to, or the value of which is dependent upon,
interest rates or currency exchange rates or indices.
"Internal Revenue Code" means the Internal Revenue Code of 1986 and any
successor thereto.
"Investment" by any person means any direct or indirect loan, advance or
other extension of credit or capital contribution, by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise, to, or purchase or acquisition of
Capital Stock, bonds, notes, debentures or other securities or evidence of Debt
issued by, any other person, including any payment on a Guarantee of any
obligation of such other person.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement, other than any easement not materially
impairing usefulness or marketability, encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such property or assets, including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing.
"Material Restricted Subsidiary" means, at any date of determination, any
Restricted Subsidiary that represents more than 10% of our total consolidated
assets at the end of the most recent fiscal quarter for which financial
information is available, or more than 10% of our consolidated net sales or
consolidated operating income for the most recent four quarters for which
financial information is available.
"Net Cash Proceeds" means:
. with respect to any Asset Sale by any person, cash or Cash Equivalents
received, including by way of sale or discounting of a note, installment
receivable or other receivable, but excluding any other consideration
received in the form of assumption of Debt or other obligations relating
to the properties or assets, therefrom by the person, net of:
. all legal, title and recording tax expenses, commissions and other
fees and expenses Incurred and all federal, state, foreign and local
taxes required to be accrued as a liability as a consequence of the
Asset Sale;
. all payments made by the person or its Restricted Subsidiaries on
any Debt which is secured by the assets in accordance with the terms
of any Lien upon or with respect to the assets or which must by the
terms of such Lien, or in order to obtain a necessary consent to the
Asset Sale or by applicable law, be repaid out of the proceeds from
the Asset Sale;
. all distributions and other payments made to minority interest
holders in Restricted Subsidiaries of the person or joint ventures
as a result of the Asset Sale; and
. appropriate amounts to be provided by the person or any Restricted
Subsidiary thereof, as the case may be, as a reserve in accordance
with GAAP against any liabilities associated with such assets and
retained by the person or any Restricted Subsidiary thereof, as the
case may be, after the Asset Sale, including, without limitation,
liabilities under any indemnification obligations and severance and
other employee termination costs associated with the Asset Sale, in
each case as determined by the board of directors, in its reasonable
good faith judgment evidenced by a resolution of the board of
directors filed with the trustee; provided, however, that any
reduction in the reserve within 12 months following the consummation
of the Asset Sale will be treated for all purposes of the indenture
and the notes and the original notes as a new Asset Sale at the time
of the reduction with Net Cash Proceeds equal to the amount of the
reduction; and
. with respect to the issuance or sale of Capital Stock, or options,
warrants or rights to purchase Capital Stock, or debt securities or
Disqualified Stock that has been converted into or exchanged for Capital
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Stock, the proceeds of the issuance or sale in the form of cash or Cash
Equivalents, including payments in respect of deferred payment
obligations, net of attorney's fees, accountant's fees and brokerage,
consultation, underwriting and other fees and expenses actually incurred
in connection with the issuance or sale, conversion or exchange and net
of any Consolidated Interest Expense attributable to any debt securities
paid to the holders thereof prior to the conversion or exchange and net
of taxes paid or payable as a result thereof.
"Note Register" shall mean the note registry maintained by the registrar.
"Offer to Purchase" means a written offer (the "offer") sent by us by first
class mail, postage prepaid, to each holder at his address appearing in the
Note Register on the date of the offer offering to purchase up to the principal
amount of notes specified in such offer at the purchase price specified in such
offer, as determined pursuant to the indenture. Unless otherwise required by
applicable law, the offer shall specify an expiration date (the "offer
expiration date") of the Offer to Purchase which shall be, subject to any
contrary requirements of applicable law, not less than 30 days or more than 60
days after the date of such offer and a settlement date (the "purchase date")
for purchase of notes within five business days after the offer expiration
date. We shall notify the trustee at least 15 business days, or such shorter
period as is acceptable to the trustee, prior to the mailing of the offer of
our obligation to make an offer to purchase, and the offer shall be mailed by
us or, at our request, by the trustee in the name and at our expense. The offer
shall contain information concerning our business and the business of our
Restricted Subsidiaries which we in good faith believe will enable such holders
to make an informed decision with respect to the Offer to Purchase, which at a
minimum will include:
. the most recent annual and quarterly financial statements and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" contained in the documents required to be filed with the
trustee pursuant to the indenture, which requirements may be satisfied
by delivery of the documents together with the offer;
. a description of material developments in our business subsequent to the
date of the latest of such financial statements referred to in the
foregoing clause, including a description of the events requiring us to
make the Offer to Purchase;
. if applicable, appropriate pro forma financial information concerning
the Offer to Purchase and the events requiring us to make the Offer to
Purchase; and
. any other information required by applicable law to be included therein.
The offer shall contain all instructions and materials necessary to enable
such holders to tender notes pursuant to the Offer to Purchase. The offer shall
also state:
. the section of the indenture pursuant to which the Offer to Purchase is
being made;
. the offer expiration date and the purchase date;
. the aggregate principal amount of the outstanding notes offered to be
purchased by us pursuant to the Offer to Purchase, including, if less
than 100%, the manner by which such has been determined pursuant to the
Section of the indenture requiring the Offer to Purchase (the "purchase
amount");
. the purchase price to be paid by us for each $1,000 aggregate principal
amount of notes accepted for payment, as specified pursuant to the
indenture (the "purchase price");
. that the holder may tender all or any portion of the notes registered in
the name of the holder and that any portion of a note tendered must be
tendered in an integral of $1,000 principal amount;
. the place or places where notes are to be surrendered for tender
pursuant to the Offer to Purchase;
. that interest on any notes not tendered or tendered but not purchased by
us pursuant to the Offer to Purchase will continue to accrue;
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. that on the purchase date the purchase price will become due and payable
upon each note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after
the purchase date;
. that each holder electing to tender a note pursuant to the Offer to
Purchase will be required to surrender the note at the place or places
specified in the Offer prior to the close of business on the offer
expiration date, the note being, if we or the trustee so require, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to us and the trustee duly executed by, the holder thereof
or his attorney duly authorized in writing;
. that holders will be entitled to withdraw all or any portion of notes
tendered if we or their paying agent receive, not later than the close
of business on the offer expiration date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the
principal amount of the note the holder tendered, the certificate number
of the note the holder tendered and a statement that such holder is
withdrawing all or a portion of his tender;
. that (1) if notes in an aggregate principal amount less than or equal to
the purchase amount are duly tendered and not withdrawn pursuant to the
Offer to Purchase, we shall purchase all the notes and (2) if notes in
an aggregate principal amount in excess of the purchase amount are
tendered and not withdrawn pursuant to the Offer to Purchase, we shall
purchase notes having an aggregate principal amount equal to the
purchase amount on a pro rata basis, with adjustments as may be deemed
appropriate so that only notes in denominations of $1,000 or integral
multiples thereof shall be purchased; and
. that in the case of any holder whose note is purchased only in part, we
shall execute, and the trustee shall authenticate and deliver to the
holder of the note without service charge, a new note or notes of any
authorized denomination as requested by, the holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of
the note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with
the offer for such Offer to Purchase.
"Permitted Interest Rate or Currency Protection Agreement" of any person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions that is designed to protect the person against
fluctuations in interest rates or currency exchange rates with respect to Debt
Incurred and which shall have a notional amount no greater than the payments
due with respect to the Debt being hedged thereby and not for purposes of
speculation.
"Permitted Investment" means:
. an Investment in us or a Wholly Owned Restricted Subsidiary or a person
which will, upon the making of the Investment, become a Wholly Owned
Restricted Subsidiary or be merged or consolidated with or into or
transfer or convey all or substantially all its assets to, us or a
Wholly Owned Restricted Subsidiary; provided that the person's primary
business or the assets to be transferred or conveyed are related,
ancillary or complementary to the System and Network Management
Business;
. Cash Equivalents;
. payroll, travel, relocation and similar advances to cover matters that
are expected at the time of the advances ultimately to be treated as
expenses in accordance with GAAP;
. stock, obligations or securities received (1) in satisfaction of
judgments or (2) in connection with the sale or disposition of a person,
assets or business;
. Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and worker's compensation, performance and
other similar deposits;
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. Permitted Interest Rate or Currency Agreements;
. Strategic Investments;
. loans or advances to ours officer or employees or officers or employees
of any Restricted Subsidiary, other than loans or advances made pursuant
to the next clause below, that do not in the aggregate exceed $10.0
million at any time outstanding;
. accounts receivable in the ordinary course of business and Investments
obtained in exchange or settlement of accounts receivable for which we
have determined that collection is not likely; and
. loans or advances to persons who own Debt or Capital Stock, other than
any of our Affiliates or any Restricted Subsidiary, of any person if the
loans or advances are made as part of, or in connection with, a
transaction pursuant to which the person becomes our Restricted
Subsidiary or the Restricted Subsidiary of our Restricted Subsidiary or
substantially all of the assets of the person are acquired by us or any
Restricted Subsidiary, in an aggregate amount not to exceed 20% of the
total consideration paid in connection with such acquisition.
"Permitted Lien" means any Lien on ours assets or the assets of any
Restricted Subsidiary permitted under the "Limitation on Liens" covenant.
"Permitted Senior Bank Debt" means Debt Incurred by us or any Restricted
Subsidiary pursuant to the Senior Loan Facility (as defined in the indenture),
or one or more other senior commercial term loan and/or revolving credit
facilities, including any letter of credit subfacility, entered into
principally with commercial banks and/or other financial institutions typically
party to commercial loan agreements, and any replacement, extension, renewal,
refinancing or refunding thereof; provided that the aggregate principal amount
of all Permitted Senior Bank Debt, at any one time outstanding, shall not
exceed $100.0 million plus 85% of our consolidated net accounts receivable.
"Preferred stock" of any person means Capital Stock of such person of any
class or classes, however designated, that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such person, to shares of Capital
Stock of any other class of such person.
"Purchase Money Secured Debt" of any person means Debt of the person secured
by a Lien on real or personal property of the person which Debt:
. constitutes all or a part of the purchase price or construction cost of
the property; or
. is Incurred prior to, at the time of or within 180 days after the
acquisition or substantial completion of the property for the purpose of
financing all or any part of the purchase price or construction cost
thereof; provided, however, that:
. the Debt so incurred does not exceed 100% of the purchase price or
construction cost of the property and related expenses,
. the Lien does not extend to or cover any property other than the
item of property and any improvements on the item and proceeds
thereof,
. the purchase price or construction cost for the property is or
should be included in "addition to property, plant and equipment" in
accordance with GAAP, and
. the purchase or construction of the property is not part of any
acquisition of a person or business unit or line of business.
"Qualified Consideration" shall mean:
. cash;
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. Cash Equivalents;
. assets that are used or useful in the System and Network Management
Business;
. any securities or other obligations that are converted into or exchanged
for cash or Cash Equivalents within six months after an Asset Sale; or
. our liabilities or the liabilities of a Restricted Subsidiary assumed by
the transferee, or its designee, such that we or the Restricted
Subsidiary have no further liability therefor, the amount of the
liability to be determined in accordance with GAAP.
"Related person" of any person means any other person directly or indirectly
owning:
. 5% or more of the outstanding common stock of the person or, in the case
of a person that is not a corporation, 5% or more of the equity interest
in the person; or
. 5% or more of the combined voting power of the Voting Stock of the
person.
"Restricted Subsidiary" means any of our Subsidiaries, whether existing on
or after the date of the indenture, unless the Subsidiary is an Unrestricted
Subsidiary.
"Secured Debt" means Permitted Senior Bank Debt, Purchase Money Secured Debt
and other Debt secured by a Permitted Lien.
"Strategic Investment" means an Investment in any person, other than our
Unrestricted Subsidiary, whose primary business is related, ancillary or
complementary to the System and Network Management Business, and the Investment
is determined by our board of directors to promote or significantly benefit our
businesses and the businesses of our Restricted Subsidiaries on the date of the
Investment.
"Subordinated Debt" means our Debt as to which the payment of principal of,
and premium, if any, and interest and other payment obligations in respect of
the Debt shall be subordinate to the prior payment in full of the notes to at
least the following extent:
. no payments of principal of or premium, if any, or interest on, or
otherwise due in respect of the Debt, may be permitted for so long as
any default in the payment of principal or premium, if any, or interest
on the notes exists;
. in the event that any other default that with the passing of time or the
giving of notice, or both, would constitute an Event of Default with
respect to the notes, upon notice by 25% or more in principal amount of
the notes to the trustee, the trustee shall have the right to give
notice to us and the holders of the Debt, or trustees or agents
therefor, of a payment blockage, and thereafter no payments of principal
of or premium, if any, or interest on or otherwise due in respect of the
Debt may be made for a period of 179 days from the date of the notice;
and
. the Debt may not:
. provide for payments of principal of the Debt at its maturity or by
way of a sinking fund applicable thereto or by way of any mandatory
redemption, defeasance, retirement or repurchase thereof by us,
including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any
retirement required by virtue of acceleration of the Debt upon an
event of default thereunder, in each case prior to the final
maturity date of the notes; or
. permit redemption or other retirement, including pursuant to an
Offer to Purchase made by us, of the other Debt at the option of the
holder thereof prior to the final maturity date of the notes, other
than a redemption or other retirement at the option of the holder of
the Debt, including pursuant to an Offer to Purchase made by us,
which is conditioned upon a change of control of us pursuant to
provisions substantially similar to those described under "Change of
Control,"
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and which shall provide that the Debt will not be repurchased
pursuant to these provisions prior to our repurchase of the notes
required to be repurchased by us pursuant to the provisions described
under "Change of Control"; provided, however, that any Debt which
would constitute
Subordinated Debt but for provisions thereof giving holders thereof
the right to require us or a Restricted Subsidiary to repurchase or
redeem the Subordinated Debt upon the occurrence of an Asset Sale
occurring prior to the final maturity of the notes shall constitute
Subordinated Debt if the provisions applicable to the Subordinated
Debt are no more favorable to the holders of the Debt than the
provisions applicable to the notes and original notes contained in
the covenant described under "Limitation on Asset Sales" and the
provisions applicable to the Debt specifically provide that we and
our Restricted Subsidiaries will not repurchase or redeem any of the
Debt pursuant to these provisions prior to the repurchase of the
notes as are required to be repurchased pursuant to the covenant
described under "Limitation on Asset Sales."
"Subsidiary" of any person means:
. a corporation more than 50% of the combined voting power of the
outstanding Voting Stock of which is owned, directly or indirectly, by
the person or by one or more other Subsidiaries of the person or by the
person and one or more Restricted Subsidiaries thereof; or
. any other person, other than a corporation, in which the person, or one
or more other Subsidiaries of the person or the person and one or more
other Subsidiaries thereof, directly or indirectly, has the power to
direct the policies, management and affairs thereof.
"System and Network Management Business" means:
. server and other hardware hosting;
. connectivity, data networking, telecommunications or content for
computer or data networks or systems;
. management of computer or data networks or systems;
. technology services, equipment sales or leasing or software licensing
for computer or data networks or systems, including Internet Protocol
and any successor protocol(s) based networks; and
. businesses reasonably related, complementary or incidental thereto.
"U.S. government securities" means securities that are direct obligations
of the United States of America, direct obligations of the Federal Home Loan
Mortgage Corporation, direct obligations of the Federal National Mortgage
Association, securities which the timely payment of whose principal and
interest is unconditionally guaranteed by the full faith and credit of the
United States of America, trust receipts or other evidence of a direct claim
upon the instruments described above and money market mutual funds that invest
solely in these securities.
"Voting Stock" of any person means Capital Stock of a person which
ordinarily has voting power for the election of directors, or persons
performing similar functions, at a person, whether at all times or only so
long as no senior class of securities has voting power by reason of any
contingency.
"Wholly Owned Restricted Subsidiary" of any person means a Restricted
Subsidiary of a person all of the outstanding Capital Stock or other ownership
interests of which, other than directors' qualifying shares, shall at the time
be owned by the person or by one or more Wholly Owned Restricted Subsidiaries
of the person or by the person and one or more Wholly Owned Restricted
Subsidiaries of such person.
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Events of Default
The following will be "Events of Default" under the indenture:
. failure to pay principal of or premium, if any, on any note when due
upon acceleration, optional or mandatory redemption, required repurchase
or otherwise;
. failure to pay interest on any note when due, and such default continues
for a period of 30 days;
. default in the payment of principal and interest on notes required to be
purchased pursuant to an Offer to Purchase as described under "Change of
Control" and "Asset Sales" when due and payable;
. failure to perform or comply with the provisions described under
"Merger, Consolidation and Certain Sales of Assets;"
. failure to perform any other of our covenants or agreements under the
indenture or the notes and such failure continues for 60 days after
written notice to us by the trustee or holders of at least 25% in
aggregate principal amount of outstanding notes;
. (1) any default by us or any Material Restricted Subsidiary in the
payment of the principal, premium, if any, or interest has occurred with
respect to amounts in excess of $10.0 million under any agreement,
indenture or instrument evidencing Debt when the same shall become due
and payable in full and the default shall have continued after any
applicable grace period and shall not have been cured or waived and, if
not already matured at its final maturity in accordance with its terms,
the holders of the Debt shall have the right to accelerate the Debt, or
(2) any event of default as defined in any of our agreements, indentures
or instruments or any agreements, indentures or instruments of any
Restricted Subsidiary evidencing Debt in excess of $10.0 million shall
have occurred and the Debt thereunder, if not already matured at its
final maturity in accordance with its terms, shall have been
accelerated;
. the rendering of a final judgment or judgments against us or any
Material Restricted Subsidiary in an amount in excess of $10.0 million
which remains undischarged or unstayed for a period of 60 days after the
date on which the right to appeal has expired;
. events of bankruptcy, insolvency or reorganization affecting us or any
Material Restricted Subsidiary; and
. we shall challenge the Lien on the escrow account under the escrow
agreement prior to the time that the escrow account is to be released to
us or the escrow agreement becomes, or we assert that the escrow
agreement is, invalid or unenforceable, otherwise than in accordance
with its terms.
Subject to the provisions of the indenture relating to the duties of the
trustee in case an Event of Default shall occur and be continuing, the trustee
will be under no obligation to exercise any of its rights or powers under the
indenture at the request or direction of any of the holders, unless the holders
shall have offered to the trustee reasonable indemnity. Subject to provisions
for the indemnification of the trustee, the holders of a majority in aggregate
principal amount of the outstanding notes will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the trustee or exercising any trust or power conferred on the trustee.
If an Event of Default, other than events of bankruptcy, insolvency or
reorganization affecting us or any Material Restricted Subsidiary, shall occur
and be continuing, either the trustee or the holders of at least 25% in
aggregate principal amount of the outstanding notes may accelerate the maturity
of all notes; provided, however, that after the acceleration, but before a
judgment or decree based on acceleration, the holders of a majority in
aggregate principal amount of outstanding notes may, under various
circumstances, rescind and annul the acceleration if all Events of Default,
other than the nonpayment of accelerated principal, have been cured or waived
as provided in the indenture. If an event of bankruptcy, insolvency or
reorganization affecting us or any Material Restricted Subsidiary occurs, the
principal of and any accrued interest on the notes then
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outstanding will ipso facto become immediately due and payable without any
declaration or other act on the part of the trustee or any holder. For
information as to waiver of defaults, see "Modification and Waiver."
No holder of any note will have any right to institute any proceeding with
respect to the indenture or for any remedy thereunder, unless the holder shall
have previously given to the trustee written notice of a continuing Event of
Default and unless also the holders of at least 25% in aggregate principal
amount of the outstanding notes shall have made written request, and offered
reasonable indemnity, to the trustee to institute such proceeding as trustee,
and the trustee shall not have received from the holders of a majority in
aggregate principal amount of the outstanding notes a direction inconsistent
with the request and shall have failed to institute a proceeding within 60
days. However, these limitations do not apply to a suit instituted by a holder
of a note for enforcement of payment of the principal of and premium, if any,
or interest on such note on or after the respective due dates expressed in the
note.
We are required to furnish to the trustee annually a statement as to the
performance by us of our obligations under the indenture and as to any default
in such performance.
Satisfaction and Discharge of the Indenture
The indenture will cease to be of further effect as to all outstanding
notes, except as to:
. rights of registration of transfer and exchange and our right of
optional redemption;
. substitution of apparently mutilated, defaced, destroyed, lost or stolen
notes;
. rights of holders to receive payment of principal and interest on the
notes;
. rights, obligations and immunities of the trustee under the indenture;
and
. rights of the holders of the notes as beneficiaries of the indenture
with respect to any property deposited with the trustee payable to all
or any of them if:
. we will have paid or caused to be paid the principal of and interest
on the notes as and when they will have become due and payable; or
. all outstanding notes, except lost, stolen or destroyed notes which
have been replaced or paid, have been delivered to the trustee for
cancellation.
Defeasance
At our option, if applicable:
(1) we will be discharged from any and all obligations in respect of the
outstanding notes; or
(2) we may omit to comply with various restrictive covenants, and this
omission shall not be deemed to be an Event of Default under the
indenture, the notes,
in either case (1) or (2) upon irrevocable deposit with the trustee, in trust,
of money and/or U.S. government obligations which will provide money in an
amount sufficient, in the opinion of a nationally recognized firm of
independent certified public accountants, to pay the principal of and premium,
if any, and each installment of interest if any, on the outstanding notes.
With respect to clause (2), the obligations under the indenture other than
with respect to these covenants and the Events of Default other than the Events
of Default relating to these covenants above shall remain in full force and
effect. A trust may only be established if, among other things:
. with respect to clause (1), we have received from, or there has been
published by, the Internal Revenue Service a ruling or there has been a
change in law, which in the opinion of counsel provides that holders of
the notes will not recognize gain or loss for U.S. federal income tax
purposes as a
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result of the deposit, defeasance and discharge and will be subject to
U.S. federal income tax on the same amount, in the same manner and at
the same times as would have been the case if the deposit, defeasance
and discharge had not occurred; or, with respect to clause (2), we have
delivered to the trustee an opinion of counsel to the effect that the
holders of the notes will not recognize gain or loss for U.S. federal
income tax purposes as a result of the deposit and defeasance and will
be subject to U.S. federal income tax on the same amount, in the same
manner and at the same times as would have been the case if the deposit
and defeasance had not occurred;
. the deposit, defeasance and discharge will not result in a breach or
violation of, or constitute a default under, any agreement or instrument
to which we or any Restricted Subsidiary are a party or by which we and
any Restricted Subsidiary are bound;
. no Event of Default or event that with the passing of time or the giving
of notice, or both, shall constitute an Event of Default, shall have
occurred and be continuing;
. we have delivered to the trustee an opinion of counsel to the effect
that the deposit shall not cause the trustee or the trust so created to
be subject to the Investment Company Act of 1940; and
. other customary conditions precedent are satisfied.
Modification and Waiver
Modifications and amendments of the indenture may be made by us and the
trustee with the consent of the holders of a majority in aggregate principal
amount of the outstanding notes; provided, however, that no modification or
amendment may, without the consent of the holder of each outstanding note or
original note affected thereby:
. change the stated maturity of the principal of, or any installment of
interest on, any note;
. reduce the principal amount of, or premium or interest on, any note;
. change the place or currency of payment of principal of, or premium or
interest on, any note;
. impair the right to institute suit for the enforcement of any payment on
or with respect to any note;
. reduce the above-stated percentage of outstanding notes necessary to
modify or amend the indenture;
. reduce the percentage of aggregate principal amount of outstanding notes
necessary for waiver of compliance with provisions of the indenture or
for waiver of defaults;
. modify any provisions of the indenture relating to the modification and
amendment of the indenture or the waiver of past defaults or covenants,
except as otherwise specified; or
. following the mailing of any Offer to Purchase, modify any Offer to
Purchase for the notes required under the "Limitation on Asset Sales"
and the "Change of Control" covenants contained in the indenture in a
manner materially adverse to the holders thereof.
However, without the consent of any holder, we and the trustee may amend or
supplement the indenture or the notes to cure any ambiguity, defect or
inconsistency; provided that this action does not adversely affect the
interests of the holders of the notes in any material respect, to provide for
the assumption of our obligations to holders of notes in the case of a merger
or consolidation, to secure the notes, to add to our covenants for the
benefits of the holders or to comply with requirements of the Commission in
order to effect or maintain the qualification of the indenture under the Trust
Indenture Act.
The holders of a majority in aggregate principal amount of the outstanding
notes, on behalf of all holders of notes, may waive compliance by us with
restrictive provisions of the indenture. Subject to rights of the trustee, as
provided in the indenture, the holders of a majority in aggregate principal
amount of the outstanding notes, on behalf of all holders of notes, may waive
any past default under the indenture, except a default in the
85
<PAGE>
payment of principal, premium or interest or a default arising from failure to
purchase any note tendered pursuant to an Offer to Purchase.
Governing Law
The indenture, the old notes and the original notes are, and the new notes
will be, governed by the laws of the State of New York.
The Trustee
The indenture provides that, except during the continuance of an Event of
Default, the trustee will perform only such duties as are specifically set
forth in the indenture. During the existence of an Event of Default, the
trustee will exercise such rights and powers vested in it under the indenture
and use the same degree of care and skill in its exercise as a prudent person
would exercise under the circumstances in the conduct of such persons own
affairs.
The indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the trustee, should it
become our creditor, to obtain payment of claims in certain cases or to realize
on certain property received by it in respect of any such claim as security or
otherwise. The trustee is permitted to engage in other transactions with us or
any Affiliate, provided, however, that if it acquires any conflicting interest,
as defined in the indenture or in the Trust Indenture Act, it must eliminate
the conflict or resign.
86
<PAGE>
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of material U.S. federal income
considerations relevant to holders of the notes including material U.S. federal
income tax consequences of the exchange of old notes for new notes pursuant to
the exchange offer. This discussion is based upon the Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations, Internal Revenue Service
("IRS") rulings and judicial decisions now in effect, all of which are subject
to change, possibly with retroactive effect, or different interpretations.
There can be no assurance that the IRS will not challenge one or more of the
tax consequences described herein, and we have not obtained, nor does it intend
to obtain, a ruling from the IRS with respect to the U.S. federal income tax,
state tax, local tax, foreign tax or other tax consequences of acquiring or
holding notes. This discussion does not purport to deal with all aspects of
U.S. federal income taxation that may be relevant to a particular holder in
light of the holder's circumstances (for example, persons subject to the
alternative minimum tax provisions of the Code). Also, it is not intended to be
wholly applicable to all categories of investors, some of which, such as
dealers in securities, banks, insurance companies, tax-exempt (employment,
charitable or other) organizations, and persons holding notes as part of a
hedging or conversion transaction or straddle or persons deemed to sell notes
under the constructive sale provisions of the Code, may be subject to special
rules. The discussion also does not discuss any aspect of state, local or
foreign law, or U.S. federal estate and gift tax law. This discussion is
limited to purchasers of notes who hold the notes as "capital assets" within
the meaning of Section 1221 of the Code.
All purchasers of the notes are advised to consult their own tax advisors
regarding the federal, state, local and foreign tax consequences of the
purchase, ownership and disposition of the notes.
U.S. Holders
As used herein, the term "U.S. Holder" means the beneficial holder of a note
that for United States federal income tax purposes is:
. a citizen or resident (as defined in Section 7701 (b) of the Code) of
the United States;
. a corporation, partnership or other entity formed under the laws of the
United States or any political subdivision thereof;
. an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
. a trust which is subject to the supervision of a court within the United
States and the control of a United States person as described in Section
7701(a)(30) of the Code.
A "Non-U.S. Holder" is any holder other than a U.S. Holder.
Interest
Stated interest on the notes will generally be includable in a U.S. Holder's
gross income and taxable as ordinary income for U.S. federal income tax
purposes at the time it is paid or accrued in accordance with the U.S. Holder's
regular method of accounting.
Sale, Exchange or Redemption
Each U.S. Holder generally will recognize capital gain or loss upon the
sale, exchange, redemption or other disposition of the notes measured by the
difference, if any, between:
. the amount of cash and the fair market value of any property received,
except to the extent that such cash or other property is attributable to
the payment of accrued interest not previously included in income, which
amount will be taxable as ordinary income; and
. such holder's adjusted tax basis in the notes;
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<PAGE>
Capital gain recognized by an individual U.S. Holder generally will be
subject to a maximum United States Federal income tax rate of:
. 39.6% if the U.S. Holder held the asset for not more than one year
before the disposition; or
. 20% if the U.S. Holder held the asset for more than 12 months before the
disposition.
A holder's initial tax basis in a note will be the amount paid therefor.
The exchange of the old notes for the new notes pursuant to the exchange
offer should not be treated as an "exchange" for federal income tax purposes
because the new notes should not differ materially in either kind or extent
from the old notes and because the exchange will occur by operation of the
terms of the old notes. A U.S. Holder's adjusted tax basis in the new notes
should be the same as such Holder's adjusted tax basis in the old notes. A U.S.
Holder's holding period for the new notes received pursuant to the exchange
offer should include its holding period for the old notes surrendered therefor.
Information Reporting and Backup Withholding
A U.S. Holder of notes may be subject to "backup withholding" at a rate of
31% with respect to "reportable payments," including interest payments, and,
under various circumstances, principal payments on the notes and proceeds from
the sale, exchange or redemption of the notes. These backup withholding rules
apply if the U.S. Holder, among other things:
. fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of perjury
within a reasonable time after the request therefor;
. furnishes a TIN as to which the IRS provides notification that it is an
incorrect TIN;
. fails to report properly interest; or
. under various circumstances, fails to provide a certified statement,
signed under penalties of perjury, that the TIN furnished is correct and
that such U.S. Holder is not subject to backup withholding.
A U.S. Holder who does not provide us with its correct TIN also may be
subject to penalties imposed by the IRS. Any amount withheld from a payment to
a U.S. Holder under the backup withholding rules is creditable against the U.S.
Holder's federal income tax liability, provided that the required information
is furnished to the IRS. Backup withholding will not apply, however, with
respect to payments made to certain holders, including corporations, tax-exempt
organizations and certain foreign persons, provided their exemptions from
backup withholding are properly established.
We will report to the U.S. Holders of notes and to the IRS the amount of any
"reportable payments" for each calendar year and the amount of tax withheld, if
any, with respect to such payments.
Non-U.S. Holders
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Non-U.S. Holder. Non-U.S. Holders should consult
their own tax advisors concerning the state, local, foreign and other tax
consequences of the purchase, ownership and disposition of the notes.
For purposes of U.S. federal income tax on interest discussed below, a Non-
U.S. Holder (as defined above) includes a non-resident fiduciary of an estate
or trust. For purposes of the following discussion, interest and gain on the
sale, exchange or other disposition of a note will be considered to be "U.S.
trade or business income" if such income or gain is:
. effectively connected with the conduct of a trade or business within the
U.S. of such Non-U.S. Holder; or
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<PAGE>
. in the case of certain residents of certain countries which have an
income tax treaty in force with the U.S., attributable to a permanent
establishment or, in the case of an individual, a fixed base, in the
United States as such terms are defined in the applicable treaty.
Stated Interest
Generally any interest paid to a Non-U.S. Holder of a note that is not U.S.
trade or business income will not be subject to U.S. federal income tax if the
interest qualifies as "portfolio interest." Generally interest on the notes
will qualify as portfolio interest if:
. the Non-U.S. Holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of our stock entitled
to vote and is not a "controlled foreign corporation" with respect to
which we are a "related person" within the meaning of the appropriate
provisions of the Code;
. the Non-U.S. Holder, under penalty of perjury, certifies in general that
the Non-U.S. Holder is not a U.S. person and such certificate provides
the Non-U.S. Holder's name and address;
. the Non-U.S. Holder is not a bank receiving interest on an extension of
credit made pursuant to a loan agreement made in the ordinary course of
its trade or business; and
. the notes are in registered form.
The gross amount of payments of interest to a Non-U.S. Holder that do not
qualify for the portfolio interest exemption and that are not U.S. trade or
business income will be subject to U.S. federal income tax at the rate of 30%,
unless a U.S. income tax treaty applies to reduce or eliminate such tax.
Interest payments that are considered as U.S. trade or business income will be
taxed at regular U.S. income tax rates rather than the 30% gross rate. In the
case of a Non-U.S. Holder that is a corporation, such U.S. trade or business
income may also be subject to the branch profits tax (which is generally
imposed on a foreign corporation on the actual or deemed repatriation from the
United States of earnings and profits attributable to U.S. trade or business
income) at a 30% rate unless a U.S. income tax treaty applies to reduce or
eliminate such tax. To claim the benefit of a tax treaty or to claim exemption
from withholding because the income is U.S. trade or business income, the Non-
U.S. Holder must provide a properly executed IRS Form 1001 or IRS Form 4224 (or
such successor forms as the IRS designates), as applicable, prior to the
payment of interest. Under recently issued U.S. Treasury Regulations that will
generally be effective on and after January 1, 2001 (the "Withholding
Regulations"), the required Forms 1001 and 4224 will be replaced by a new Form
W-8. Under the Withholding Regulations, a Non-U.S. Holder may under certain
circumstances be required to obtain a U.S. taxpayer identification number and
make certain certifications to us. Special procedures are provided in the
Withholding Regulations for payments through qualified intermediaries.
Investors should consult their tax advisors regarding the effect, if any, of
the Withholding Regulations.
Sale, Exchange or Redemption of Notes
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a note generally will not be subject to U.S. federal income tax,
unless:
. such gain is U.S. trade or business income;
. subject to exceptions, the Non-U.S. Holder is an individual who holds
the note as a capital asset and is present in the United States for 183
days or more in the taxable year of the disposition; or
. the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S.
tax law applicable to certain U.S. expatriates, including certain former
citizens or residents of the United States.
The exchange of the old notes for the new notes pursuant to the exchange
offer should not be treated as an "exchange" for federal income tax purposes
because the new notes should not differ materially in either kind
89
<PAGE>
or extent from the old notes and because the exchange will occur by operation
of the terms of the old notes. A U.S. Holder's adjusted tax basis in the new
notes should be the same as such Holder's adjusted tax basis in the old notes.
A U.S. Holder's holding period for the new notes received pursuant to the
exchange offer should include its holding period for the old notes surrendered
therefor.
Information Reporting and Backup Withholding
We must report annually to the IRS and to each Non-U.S. Holder any interest
that is subject to withholding, or that is exempt from U.S. withholding tax
pursuant to a tax treaty, or interest that is exempt from U.S. tax under the
portfolio interest exception or because it is U.S. trade or business income.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities of the
country in which the Non-U.S. Holder resides. Under various circumstances, we
will have to report to the IRS payments of principal.
Generally, information reporting and backup withholding of United States
federal income tax at a rate of 31% may apply to payments made by us or our
agents to Non-U.S. Holders if the payee fails to make the appropriate
certification that the holder is a non-U.S. person or if we or our paying agent
have actual knowledge that the payee is a United States person.
The payment of the proceeds from the disposition of notes to or through a
United States office of a United States or foreign broker will be subject to
information reporting and backup withholding unless the owner provides
certification as to its Non-U.S. Holder status under penalty of perjury or
otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a U.S. person or that the conditions of any
other exemption are not, in fact, satisfied. The proceeds of the disposition by
a Non-U.S. Holder of the notes to or through a foreign office of a broker will
generally not be subject to backup withholding. However, if such broker is a
U.S. person, a controlled foreign corporation for United States tax purposes,
or a foreign person 50% or more of whose gross income from all sources for
certain periods is effectively connected with a United States trade or
business, information reporting will apply unless such broker has documentary
evidence in its files of the Non-U.S. Holder's foreign status and has no actual
knowledge to the contrary or unless the Non-U.S. Holder otherwise establishes
an exemption. Both backup withholding and information reporting will apply to
the proceeds of such dispositions if the broker has actual knowledge that the
payee is a U.S. Holder. The Withholding Regulations alter the foregoing rules
in certain respects. Investors should consult their tax advisors regarding the
effect, if any, of the Withholding Regulations.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures for claiming such refund or credit are followed.
The preceding discussion of material United States federal income
consequences is for general information only and is not tax advice.
Accordingly, each investor should consult its own tax advisers as to particular
U.S. federal, state, local, foreign and other tax consequences to it of
purchasing, holding and disposing of our notes, including the applicability and
effect of any state, local or foreign tax laws, and of any proposed changes in
applicable laws.
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PLAN OF DISTRIBUTION
We will receive no proceeds in connection with the exchange offer.
Each broker-dealer that receives new notes for its own account in connection
with the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of new notes. This prospectus, as it may be amended
or supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes where the old
notes were acquired as a result of market-making activities or other trading
activities. We have agreed that for a period ending upon the earlier of (1) 180
days after the exchange offer has been completed and (2) the date on which
broker-dealers no longer own any Transfer Restricted Securities, we will make
available and provide promptly upon reasonable request this prospectus as
amended or supplemented, in a form meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale.
New notes received by broker-dealers for their own account in the exchange
offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the new notes or a combination of these methods of resale, at market prices
prevailing at the time of resale, at prices related to prevailing market prices
or negotiated prices. Any resale may be made directly to purchasers or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any broker-dealer and/or the purchasers of any new notes. Any
broker-dealer that resells new notes that were received by it for its own
account in the exchange offer and any broker or dealer that participates in a
distribution of new notes may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any profit on any such resale of new notes
and any commissions or concessions received by these persons may be deemed to
be underwriting compensation under the Securities Act. The letter of
transmittal states that by acknowledging that it will deliver, and by
delivering, a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. We have agreed to
indemnify broker-dealers against various liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
The validity of the notes offered by this prospectus will be passed upon on
behalf of Exodus by Fenwick & West LLP, Palo Alto, California, and Debevoise &
Plimpton, New York City, New York.
EXPERTS
The consolidated financial statements of Exodus as of December 31, 1997 and
1998, and for each of the years in the three-year period ended December 31,
1998, have been included in the prospectus in reliance on the report of KPMG
LLP, independent auditors, appearing elsewhere in this prospectus, and upon the
authority of said firm as experts in auditing and accounting.
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AVAILABLE INFORMATION
We are currently subject to the informational requirements of the Exchange
Act, and file reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at:
Room 1024 Suite 1400 13th Floor
450 Fifth Street, N.W. Northwest Atrium Center Seven World Trade Center
Judiciary Plaza 500 West Madison Street New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
Copies of material can be obtained at prescribed rates from the Public
Reference Section of the Commission at:
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission. The address of the site is
http://www.sec.gov. Our common stock is quoted for trading on the Nasdaq
National Market and reports, proxy statements and other information concerning
us also may be inspected at the offices of the National Association of
Securities Dealers at 9513 Key West Avenue, Rockville, Maryland 20850.
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EXODUS COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<S> <C>
Report of KPMG LLP, Independent Auditors................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30,
1999 (unaudited).......................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999
(unaudited)............................................................... F-4
Consolidated Statements of Stockholders' (Deficit) Equity for the years
ended December 31, 1996, 1997 and 1998 and the six months ended June 30,
1999 (unaudited) ......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999
(unaudited) .............................................................. F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
<TABLE>
<S> <C>
Schedule II-Valuation and Qualifying Accounts............................... S-1
</TABLE>
F-1
<PAGE>
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Exodus Communications, Inc.:
We have audited the consolidated financial statements of Exodus
Communications, Inc. and subsidiaries (the Company) as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule 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 August 12, 1999
F-2
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, June 30,
------------------ ----------
1997 1998 1999
-------- -------- ----------
Assets (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 10,270 $150,891 $ 330,605
Accounts receivable, net of allowance for
doubtful accounts of $691, $1,821, and $4,183
as of December 31, 1997 and 1998, and June 30,
1999, respectively.............................. 1,837 11,174 24,984
Prepaid expenses and other current assets........ 1,377 4,677 6,439
-------- -------- ---------
Total current assets........................... 13,484 166,742 362,028
Property and equipment, net....................... 25,170 68,306 166,214
Restricted cash equivalents and investments....... 1,753 45,614 43,436
Other assets...................................... 566 12,624 52,373
-------- -------- ---------
$ 40,973 $293,286 $ 624,051
======== ======== =========
<CAPTION>
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' (Deficit) Equity
<S> <C> <C> <C>
Current liabilities:
Bank borrowings.................................. $ 3,000 $ -- $ --
Current portion of equipment loans and line of
credit facilities............................... 3,777 14,367 7,164
Current portion of capital lease obligations..... 1,143 5,140 11,863
Accounts payable................................. 6,252 9,208 22,758
Accrued expenses................................. 3,019 6,771 17,974
Accrued interest payable......................... -- 11,563 15,880
-------- -------- ---------
Total current liabilities...................... 17,191 47,049 75,639
Equipment loans and line of credit facilities,
less current portion............................. 12,693 15,695 10,775
Capital lease obligations, less current portion... 2,442 11,401 27,732
Convertible subordinated notes.................... -- -- 250,000
Senior notes...................................... -- 200,000 275,375
-------- -------- ---------
Total liabilities.............................. 32,326 274,145 639,521
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 June 30, 1999,
respectively; 34,117,371, no shares, and no
shares issued and outstanding as of December 31,
1997 and 1998, and June 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 and 5,000,000 shares authorized as of
December 31, 1997 and 1998, and June 30, 1999,
respectively; and no shares issued or
outstanding as of December 31, 1997 and 1998,
and June 30, 1999, respectively................. -- -- --
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 June 30,
1999, respectively; 8,269,012, 80,269,408, and
82,850,616 shares issued and outstanding as of
December 31, 1997 and 1998, and June 30, 1999,
respectively.................................... 8 80 83
Additional paid-in capital........................ 2,502 117,160 125,236
Notes receivable from stockholders................ (140) -- --
Deferred stock compensation....................... (2,393) (1,080) (705)
Accumulated deficit............................... (30,577) (97,019) (140,084)
-------- -------- ---------
Total stockholders' (deficit) equity........... (30,600) 19,141 (15,470)
-------- -------- ---------
$ 40,973 $293,286 $ 624,051
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 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 17,176 72,586
------- -------- -------- -------- --------
Costs and expenses:
Cost of service revenues.... 2,538 16,228 59,261
Cost of equipment revenues.. 452 640 2,298
------- -------- --------
Total costs of revenues... 2,990 16,868 61,559 22,864 62,706
------- -------- -------- -------- --------
Marketing and sales......... 2,734 12,702 28,778 13,580 22,234
General and administrative.. 1,056 5,983 15,865 5,657 15,890
Product development......... 444 1,647 3,221 1,364 2,836
------- -------- -------- -------- --------
Total expenses............ 4,234 20,332 47,864 20,601 40,960
------- -------- -------- -------- --------
Total costs and expenses.. 7,224 37,200 109,423 43,465 103,666
------- -------- -------- -------- --------
Operating loss............ (4,094) (24,792) (56,685) (26,289) (31,080)
Interest income............... 68 193 7,137 931 6,870
Interest expense.............. (107) (699) (16,894) (2,039) (18,855)
------- -------- -------- -------- --------
Net loss.................. (4,133) (25,298) (66,442) (27,397) (43,065)
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) $(29,411) $(43,065)
======= ======== ======== ======== ========
Basic and diluted net loss per
share........................ $ (0.54) $ (3.46) $ (1.09) $ (0.64) $ (0.53)
======= ======== ======== ======== ========
Shares used in computing basic
and diluted net
loss per share............... 7,656 7,714 62,574 45,841 81,693
======= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<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............... 7,284 $ 7 $ 194 $(195) $ -- $ (1,146) $ (1,140)
Issuance of common
stock.................. 536 1 31 -- -- -- 32
Issuance of common stock
in connection with
stock purchase plan and
exercise of stock
options................ 64 -- 4 (3) -- -- 1
Repurchase of common
stock.................. (100) -- (6) 6 -- -- --
Repayment of notes
receivable from
stockholders........... -- -- -- 6 -- -- 6
Net loss................ -- -- -- -- -- (4,133) (4,133)
------ ---- -------- ----- ------- --------- --------
Balances as of December
31, 1996............... 7,784 8 223 (186) -- (5,279) (5,234)
Issuance of common stock
in connection with
exercise of stock
options and warrants... 689 -- 222 -- -- -- 222
Repurchase of common
stock.................. (204) -- (12) 12 -- -- --
Repayment of notes
receivable from
stockholders........... -- -- -- 34 -- -- 34
Deferred stock
compensation related to
stock option grants.... -- -- 3,482 -- (3,482) -- --
Amortization of deferred
stock compensation..... -- -- -- -- 1,089 -- 1,089
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock.................. -- -- (750) -- -- -- (750)
Accretion on Series C
and D redeemable
convertible preferred
stock.................. -- -- (663) -- -- -- (663)
Net loss................ -- -- -- -- -- (25,298) (25,298)
------ ---- -------- ----- ------- --------- --------
Balances as of December
31, 1997............... 8,269 8 2,502 (140) (2,393) (30,577) (30,600)
Issuance of common stock
in connection with
employee stock purchase
plan and exercise of
stock options and
warrants............... 3,351 3 2,250 -- -- -- 2,253
Issuance of common stock
in conjunction with
initial public
offering, net of
offering costs of
$7,062................. 20,500 21 69,797 -- -- -- 69,818
Issuance of common stock
to an officer for
cash................... 200 -- 450 -- -- -- 450
Issuance of common stock
and common stock
warrants............... -- -- 786 -- -- -- 786
Repayment of notes
receivable from
stockholders........... -- -- -- 140 -- -- 140
Conversion of redeemable
convertible preferred
stock into common
stock.................. 47,949 48 43,389 -- -- -- 43,437
Amortization of deferred
stock compensation..... -- -- -- -- 1,313 -- 1,313
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock.................. -- -- (462) -- -- -- (462)
Accretion on Series C
and D redeemable
convertible preferred
stock.................. -- -- (1,552) -- -- -- (1,552)
Net loss................ -- -- -- -- -- (66,442) (66,442)
------ ---- -------- ----- ------- --------- --------
Balances as of December
31, 1998............... 80,269 80 117,160 -- (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)... 2,582 3 8,076 -- -- -- 8,079
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- -- 375 -- 375
Net loss (unaudited).... -- -- -- -- -- (43,065) (43,065)
------ ---- -------- ----- ------- --------- --------
Balances as of June 30,
1999 (unaudited)....... 82,851 $ 83 $125,236 $ -- $ (705) $(140,084) $(15,470)
====== ==== ======== ===== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 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) (27,397) (43,065)
Adjustments to reconcile net
loss to net cash used for
operating activities:
Depreciation and
amortization............... 461 3,429 12,997 4,689 12,634
Loss on disposal of
property and equipment..... -- -- 464 248 --
Noncash common stock and
warrant expense............ -- -- 786 786 --
Amortization of deferred
stock compensation......... -- 1,089 1,313 752 375
Amortization of debt
issuance costs............. -- -- 846 198 425
Interest accretion on
restricted cash
equivalents and
investments................ -- -- (1,088) -- (1,139)
Changes in operating assets
and liabilities:
Accounts receivable........ (265) (1,316) (8,301) (2,547) (12,835)
Prepaid expenses and other
assets.................... (189) (748) (4,086) (905) (6,689)
Accounts payable........... 671 5,089 2,791 4,892 13,121
Accrued expenses........... 339 2,237 2,659 2,857 11,099
Accrued interest payable... -- -- 11,563 -- 4,317
-------- --------- -------- ------- --------
Net cash used for
operating activities..... (3,116) (15,518) (46,498) (16,427) (21,757)
-------- --------- -------- ------- --------
Cash flows from investing
activities:
Capital expenditures........ (3,499) (22,489) (44,564) (17,842) (81,491)
Proceeds from sale of
property and equipment..... -- -- 245 -- --
Business acquired, net of
cash received.............. -- -- (5,654) -- (20,009)
Release (increase) of
restricted cash and
investments................ (378) (1,375) (42,773) (185) 3,325
Other assets................ -- -- -- (243) (7,967)
-------- --------- -------- ------- --------
Net cash used for
investing activities..... (3,877) (23,864) (92,746) (18,270) (106,142)
-------- --------- -------- ------- --------
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 70,460 8,079
Proceeds from issuance of
bridge financing
convertible notes.......... -- 3,975 -- -- --
Repayment of notes
receivable from
stockholders............... 7 34 140 87 --
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) (895) (3,861)
Proceeds from equipment
loans and line of credit
facilities................. 1,296 16,480 18,611 14,448 --
Repayment of equipment loans
and line of credit
facilities................. (497) (1,306) (5,019) (2,164) (12,280)
Proceeds from convertible
subordinated notes, net.... -- -- -- -- 242,250
Proceeds from senior notes,
net of discounts and
offering costs............. -- -- 193,400 -- 73,425
-------- --------- -------- ------- --------
Net cash provided by
financing activities..... 10,545 45,937 279,865 85,147 307,613
-------- --------- -------- ------- --------
Net increase in cash and cash
equivalents................. 3,552 6,555 140,621 50,450 179,714
Cash and cash equivalents at
beginning of year........... 163 3,715 10,270 10,270 150,891
-------- --------- -------- ------- --------
Cash and cash equivalents at
end of year................. $ 3,715 $ 10,270 $150,891 60,720 330,605
======== ========= ======== ======= ========
Supplemental disclosures of
cash flow information:
Cash paid--interest......... $ -- $ 699 $ 4,917 1,016 14,423
======== ========= ======== ======= ========
Noncash investing and
financing activities:
Assets recorded under
capital leases............. $ 27 $ 2,700 $ 11,709 6,007 26,915
======== ========= ======== ======= ========
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 $43,576 $ --
======== ========= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 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 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 and managed services, including
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 June 30, 1999, cash equivalents consisted
principally of money market funds at two financial institutions.
The Company classifies its investments as "held-to-maturity." As of June 30,
1999 such investments consisted of United States Treasury Notes and are
recorded at amortized cost.
The components of restricted cash equivalents and investments are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
United States Treasury
Notes:
Due within one year..... $10,733 $29,389
Due after one year
through two years...... 20,594 --
Money market funds........ 11,049 11,391
Cash collateral related to
leases................... 3,238 2,656
------- -------
Total restricted cash
equivalents and
investments.............. $45,614 $43,436
======= =======
</TABLE>
See Notes 4 and 6 for additional information regarding restricted cash
equivalents and investments.
F-7
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 is unaudited)
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 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.
F-8
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 30, 1998
and 1999 is unaudited)
Unaudited Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, the accompanying
unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
Company's financial position as of June 30, 1999, and the results of its
operations and its cash flows for the six-month periods ended June 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 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).
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>
Six Months
Year Ended December 31, Ended June 30,
------------------------ ---------------
1996 1997 1998 1998 1999
------- -------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options.. 1,168 6,836 19,144 13,036 21,591
Shares issuable pursuant to warrants
to purchase common and redeemable
convertible preferred stock......... 2,548 11,252 724 988 266
Shares of redeemable convertible
preferred stock on an "as if
converted" basis.................... 62,148 136,468 -- -- --
Shares of convertible subordinated
notes on an "as if converted"
basis............................... -- -- -- -- 10,946
</TABLE>
Comprehensive Loss
There are no differences between consolidated net loss and comprehensive
loss for any period presented.
(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.
F-9
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 is unaudited)
On February 1, 1999, the Company purchased all of the Capital Stock of
American Information Systems, Inc ("AIS"). AIS provides collocation 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 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.
The following summary, prepared on an unaudited pro forma basis, combines
the Company's consolidated results of operations with Arca's and AIS' results
of operations, as if Arca and AIS had been acquired as of the beginning of the
periods presented (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
------------------ --------------
1997 1998 1998
-------- -------- --------------
<S> <C> <C> <C>
Revenues................................ $ 16,643 $ 61,951 $ 22,196
Net loss attributable to common
stockholders........................... $(27,297) $(71,837) $(31,296)
Basic and diluted net loss per share.... $ (3.54) $ (1.15) $ (0.68)
Shares used in pro forma per share
computation............................ 7,714 62,574 45,841
</TABLE>
Pro forma financial information for the six-month period ended June 30, 1999
giving effect to the acquisition of AIS is not presented as it would not have
differed materially from the Company's consolidated results from operations
during that period.
The pro forma results are not necessarily indicative of what would have
occurred if the above 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, June 30,
--------------- -----------
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Data centers and related equipment............. $16,316 $43,959 $ 92,436
Furniture, fixtures, computer equipment and
other......................................... 12,815 32,887 61,953
Construction in progress....................... -- 8,497 40,579
------- ------- --------
29,131 85,343 194,968
Less accumulated depreciation and
amortization.................................. 3,961 17,037 28,754
------- ------- --------
$25,170 $68,306 $166,214
======= ======= ========
</TABLE>
Computer equipment and certain data center infrastructure are recorded under
capital leases that aggregated $4,492,000, $20,236,000, and $47,151,000 as of
December 31, 1997 and 1998, and June 30, 1999, respectively. Accumulated
amortization on the assets recorded under capital leases aggregated $722,000,
$4,426,000, and $8,629,000 as of December 31, 1997 and 1998, and June 30, 1999,
respectively.
F-10
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 is unaudited)
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
------------- -----------
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Accrued payroll and related expenses............... $1,183 $2,956 11,847
Other.............................................. 1,836 3,815 6,127
------ ------ ------
$3,019 $6,771 17,974
====== ====== ======
</TABLE>
(4) Bank Borrowings and Debt
A summary of equipment loans and line of credit facilities follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------- June 30,
1997 1998 1999
------- ------- -----------
(Unaudited)
<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 $ 981 667
$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 1,580
$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 3,801
$3,000,000 equipment line of credit facility--
August 1997; effective interest rate if 16.2%;
principal and interest due monthly through May
2001; collateralized by equipment................. 2,787 2,192 1,738
$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 2,483
$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 7,653
$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 -- 17
------- ------- ------
$16,470 $30,062 17,939
Less current portion............................... 3,777 14,367 7,164
------- ------- ------
Equipment loans and line of credit facilities, less
current portion................................... $12,693 $15,695 10,775
======= ======= ======
</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.
F-11
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 is unaudited)
The Company has a $7,000,000 bank line of credit bearing interest at the
bank's prime rate. As of June 30, 1999, no amount was outstanding under the
line of credit. The line of credit expires in August 1999.
On July 1, 1998, the Company issued $200,000,000 of 11 1/4% senior notes due
2008 for aggregate net proceeds of approximately $193,400,000 (net of discounts
to the 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. An interest payment
of $11,250,000 was made in January 1999. Subject to significant exceptions, the
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 (the "Convertible Notes") due 2006 for aggregate net
proceeds of approximately $242,300,000 (net of offering expenses). The
Convertible Notes are convertible into the Company's common stock at a
conversion rate of 43.7852 shares per $1,000 principal amount of Convertible
Notes, subject to adjustment in certain events and at each holder's option. The
Convertible Notes will not be subject to redemption prior to March 20, 2001,
and generally will be redeemable on or after that date at the option of the
Company, at the redemption prices set forth in the indenture to the Convertible
Notes ("Convertible Notes indenture"), subject to certain provisions. In the
event of a Change in Control (as defined in the Convertible Notes Indenture),
each holder of the Convertible Notes has the right, subject to certain
conditions and restrictions, to require the Company to repurchase all or any
part of the holder's Convertible Notes at a repurchase price of 100% of the
principal amount, plus accrued interest of the Convertible Notes being
repurchased. Interest on the Convertible Notes is payable on March 15 and
September 15 of each year, commencing on September 15, 1999. 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 $75,000,000 of 11 1/4% senior notes due
2008 at 100.50% plus accrued interest, if any, from June 22, 1999, for
aggregate net proceeds of approximately $73,400,000 (net of offering expenses).
The Company issued these senior notes under the Indenture dated July 1, 1998
under which it previously issued the $200,000,000 senior notes due 2008 (the
"Original Notes"). These senior notes will be subject to substantially the same
terms and conditions as the Original Notes. Interest is payable semi-annually
on January 1 and July 1 of each year commencing July 1, 1999. Concurrently 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.
(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
F-12
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 is unaudited)
June 1997, the Company issued 15,789,868 shares of Series C redeemable
convertible preferred stock for $1.362 per share in exchange for approximately
$17,500,000 in cash and the conversion of the bridge financing notes. In
December 1997, the Company issued 2,631,579 shares of Series D redeemable
convertible preferred stock at $2.85 per share for aggregate cash proceeds of
$7,500,000.
In 1996, in connection with various financing arrangements, the Company
issued warrants to purchase an aggregate of 68,628 shares of the Company's
common stock at prices ranging from $0.60 to $0.67 per share. Also in 1996, in
connection with various lease agreements and other matters, the Company issued
warrants to purchase 329,167 shares of the Company's Series B1 redeemable
convertible preferred stock at $0.84 per share.
In March and June 1997, in connection with the bridge financing convertible
promissory notes discussed above, the Company issued warrants to purchase
198,697 shares of the Company's Series B redeemable convertible preferred stock
at $0.84 per share. In April 1997, in connection with the $3,000,000 equipment
line of credit, the Company issued warrants to purchase 196,429 shares of the
Company's Series B1 redeemable convertible preferred stock at $0.84 per share.
In June 1997, in connection with the issuance of the Company's Series C
redeemable convertible preferred stock, the Company issued warrants to purchase
1,579,011 shares of the Company's Series C redeemable convertible preferred
stock at $1.362 per share. In August and September 1997, in connection with the
$3,000,000 and the $6,500,000 equipment lines of credit, the Company issued
warrants to purchase a total of 271,598 shares of the Company's Series C1
redeemable convertible preferred stock at $1.362 per share. In December 1997,
in connection with the $8,000,000 line of credit facility and the $5,000,000
equipment line of credit, the Company issued warrants to purchase 247,826 and
125,000 shares, respectively, of the Company's Series D1 redeemable convertible
preferred stock at $2.85 per share.
In March 1998, in connection with a strategic alliance, the Company issued
warrants to purchase an aggregate of 240,000 shares of the Company's common
stock at a price of $3.75 per share.
The fair value of all warrant issuances, calculated using the Black-Scholes
option pricing module, with the following assumptions: dividends--none;
expected life--contractual term; risk-free interest rates--5.7% to 6.7%;
volatility--60%, was not material except as follows:
. The 1,579,011 warrants issued in connection with the sale of the Series
C redeemable convertible preferred stock for which the fair value was
determined to be $1,200,000. This amount was recorded as a reduction in
the carrying value of the Series C redeemable convertible preferred
stock and recorded as the carrying value of the Series C warrants.
. The 247,826 and 125,000 warrants issued in connection with the
$8,000,000 line of credit facility and $5,000,000 equipment line of
credit, respectively, for which the values were determined to be
$530,000 and $200,000, respectively. These amounts will be amortized on
a straight-line basis through the commitment periods of the credit
facilities.
. The 240,000 warrants issued in connection with the strategic alliance
for which the value was determined to be $525,000. This amount was
recorded as marketing and sales expense in the accompanying consolidated
statement of operations for the year ended December 31, 1998.
F-13
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 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 74,652 and 724,340
warrants to purchase common stock outstanding, respectively.
Initial Public Offering
On March 24, 1998, the Company completed its initial public offering ("IPO")
of 20,500,000 shares of its common stock. Net proceeds to the Company, after
deducting underwriting discounts and commissions and offering expenses,
aggregated approximately $69,800,000. At the closing of the IPO, all redeemable
convertible preferred stock was converted to common stock and all warrants to
purchase redeemable convertible preferred stock were converted to warrants to
purchase common stock on a one-for-three basis. In connection with the IPO,
certain warrant holders exercised their warrants to purchase redeemable
convertible preferred stock (which converted into common stock), which resulted
in additional proceeds of $1,842,000.
Stock Purchase And Stock Option Plans
During 1995, the Company adopted a Stock Purchase Plan under which 1,466,668
shares of common stock were authorized. Awards totaling 429,472 shares of
common stock were granted to individuals through 1996, at a price of $0.06 per
share, the estimated fair market value of the shares on the date of the award.
No awards were granted during the years ended December 31, 1997 and 1998.
Generally, the shares are subject to a 50-month vesting period. As of December
31, 1998, 17,204 shares remained unvested. Unvested shares are subject to
repurchase, at the Company's option, at the original purchase price upon a
participant's termination. Of the shares granted, 185,204 had been repurchased
by the Company as of December 31, 1998.
In January 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved a total of 2,400,000 shares of the Company's
common stock for issuance thereunder. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions at a purchase
price of 85% of the lower of the fair market value of the common stock on the
first day of the offering period or on the last day of the purchase period.
During 1998, 218,264 shares were issued under the Purchase Plan at a weighted-
average purchase price of $3.34 per share.
F-14
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 is unaudited)
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 six months from the date of grant and 2% per month thereafter, and
generally are exercisable for a term of ten years after the date of grant.
Under the 1997 Plan, the Company reserved 8,800,000 shares of its common stock
for issuance to employees and consultants to be granted as either incentive or
nonqualified stock options. Options granted under the 1997 Plan generally vest
12% after six months from the date of grant and 2% per month thereafter and are
generally exercisable for a term of ten years after the date of grant.
In January 1998, the Company adopted the 1998 Equity Incentive Plan (the
"1998 Plan"). On the effective date of the Company's IPO, the 1998 Plan became
effective as the successor to the 1997 Plan. The Company has reserved 6,000,000
shares of common stock for issuance under the 1998 Plan in addition to the
shares that remain from the 1997 Plan. The 1998 Plan permits the grant of
either incentive or nonqualified stock options. Options granted under the 1998
Plan will have a maximum term of ten years and generally will vest over 50
months. The 1998 Plan will terminate in January 2008.
On June 2, 1999, the Company's stockholders approved an amendment to the
Company's 1998 Equity Incentive Plan to increase the number of shares of Common
Stock reserved for issuance thereunder by 4,000,000 shares, from 6,000,000
shares to 10,000,000 shares.
In January 1998, the Company adopted the 1998 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 800,000 shares of the Company's
common stock for issuance thereunder. Each nonemployee director who is or
becomes a member of the Board of Directors on or after the effective date of
the Company's IPO, with certain limited exceptions, will initially be granted
an option for 40,000 shares of the Company's common stock and, thereafter, an
option to purchase an additional 10,000 shares of the Company's common stock
annually. Initial options granted under the Directors Plan will vest as to 33
1/3% of the shares on each annual anniversary of the date of grant. Annual
grants will vest 25% on each annual anniversary of the date of grant. The
exercise price of the options granted under the Directors Plan will be at the
fair market value of the Company's common stock on the date of grant.
In January 1998, the Company granted stock options to purchase 1,333,336
shares of common stock to an officer of the Company, of which half have an
exercise price of $2.25 per share and vest 100% after three years and half have
an exercise price of $4.50 per share and vest 100% after five years. The stock
options accelerate and become fully vested if the Company is acquired or sells
all or substantially all of its assets.
In March 1998, the Company granted a stock option to an officer of the
Company to purchase 2,887,924 shares of common stock with an exercise price of
$2.25 per share (fair market value on the date of grant) that vests as to 12%
of such shares in September 1998 and vests as to an additional 2% per month
thereafter.
In January 1999, the Company adopted the 1999 Stock Option Plan ("the 1999
Plan"). Under the 1999 Plan, the Company has reserved 8,000,000 shares of
common stock for issuance to employees, consultants, and to be used for
acquisitions, to be granted as nonqualified stock options. Options granted
under the 1999 Plan generally will vest over 50 months and are generally
exercisable for a term of ten years from the date of grant.
F-15
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 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 from
March through December 1997. With respect to the stock options granted from
March to December 1997, the Company recorded deferred stock compensation of
$3,482,000 for the difference at the grant date between the exercise price and
the fair value of the common stock underlying the options. This amount is being
amortized consistent with the method described in FASB Interpretation No. 28
over the vesting period of the individual options, generally 50 months. Had
compensation cost been determined in accordance with SFAS No. 123 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.................................. $ (0.54) $ (3.46) $ (1.10)
Pro forma.................................... $ (0.54) $ (3.46) $ (1.22)
</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 $2.49 per share.
F-16
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 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................ 500,332 $ 0.06 1,168,132 $ 0.06 6,837,144 $ 0.19
Granted................. 898,936 0.07 6,447,200 0.21 15,644,404 5.72
Forfeited............... (211,400) 0.06 (423,440) 0.16 (1,155,876) 2.05
Exercised............... (19,736) 0.06 (354,748) 0.08 (2,183,516) 0.66
--------- --------- ----------
Outstanding at end of
year................... 1,168,132 0.06 6,837,144 0.19 19,142,156 4.53
--------- --------- ----------
Exercisable at end of
year................... 322,668 0.06 895,800 0.11 1,538,360 1.22
========= ========= ==========
Weighted average fair
value of options
granted during the year
at market.............. 898,936 0.01 1,333,068 0.01 14,280,404 3.14
Weighted average fair
value of options
granted during the year
at less than market.... -- -- 5,114,132 0.58 30,668 8.47
Weighted average fair
value of options
granted during the year
at greater than
market................. -- -- -- -- 1,333,336 1.06
</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 Number Average
Range of Number of Contractual Exercise of Exercise
Exercise Prices Shares Life Price Shares Price
- --------------- ---------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.06 to 0.19.............. 4,242,144 8.47 years $0.13 996,344 $0.12
$0.94 to 2.25.............. 4,680,308 9.13 2.07 413,068 1.82
$3.75 to 6.06.............. 4,964,840 9.64 5.34 41,272 4.96
$7.67 to 10.00............. 5,254,864 9.84 9.50 87,676 9.00
---------- ---------
19,142,156 9.31 4.53 1,538,360 1.22
========== =========
</TABLE>
Stockholder Rights Plan
In January 1999, the Company adopted a Stockholder Rights Plan ("the Rights
Plan"). The Rights Plan is designed to protect the long-term value of the
Company for its stockholders during any future unsolicited acquisition
attempt. In connection with the Rights Plan, the Company declared a dividend
of one preferred share purchase right for each share of the Company's common
stock outstanding on February 11, 1999 ("Record Date") and further directed
the issuance of one such right with respect to each share of the Company's
common stock that is issued after the Record Date, except in certain
circumstances.
On June 2, 1999, stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized number of
shares of Common Stock issuable by the Company from 100,000,000 to
300,000,000.
F-17
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 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 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, $2,069,000
and $6,088,000 for the years ended December 31, 1996, 1997 and 1998, and the
six months ended June 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.
Royalty Agreement
In April 1997, the Company entered into an agreement with a software company
under which the Company licensed certain software for a royalty based on 1% of
the Company's gross revenues. Royalty expenses related to this agreement have
not been significant to date.
F-18
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 is unaudited)
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>
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.
F-19
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 is unaudited)
Gross deferred tax assets as of December 31, 1998 include approximately
$3,430,000 relating to the exercise of stock options, which will be credited to
equity when realized.
The net change in the valuation allowance was an increase of $9,654,000 and
$28,128,000 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, 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. The Internet Data Center Segment
revenues equal the Company's consolidated revenues. A reconciliation between
the Internet Data Center Segment operating (loss) profit and total assets and
the Company's consolidated operating loss and total assets is as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating (loss) profit:
Internet Data Centers....... $ * $ (1,243) $ (955) $ (2,830) $ 15,339
Operating loss: Corporate
areas....................... * (23,549) (55,730) (23,459) (46,419)
------- -------- -------- -------- --------
Total operating loss..... $(4,094) $(24,792) $(56,685) $(26,289) $(31,080)
======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------- June 30,
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Total assets: Internet Data Centers.................. $ * $ 52,459 $116,669
Total assets: Corporate areas........................ * 240,827 507,382
------- -------- --------
Total assets..................................... $40,973 $293,286 $624,051
======= ======== ========
</TABLE>
- --------
* Information is not available.
(9) Stock Split
On April 12, 1999, the Company completed a two-for-one stock split
accomplished in the form of a stock dividend. Share and per share amounts
reflect the two-for-one stock split retroactively.
F-20
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999
(Information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 is unaudited)
On July 21, 1999, the Company's Board of Directors approved a two-for-one
Common Stock split, which was effected in the form of a stock dividend.
Stockholders of record on July 29, 1999 (the record date) received one
additional share for every share held on that date. The shares were distributed
on August 12, 1999. All share numbers in these consolidated financial
statements and notes thereto for all periods presented have been adjusted to
reflect the two-for-one common stock split retroactively.
(10) Subsequent Events--Unaudited
On July 27, 1999, the Company completed its acquisition of Cohesive
Technology Solutions, Inc. ("Cohesive") for approximately $115,000,000 in cash
and common stock of the Company and the assumption of Cohesive options.
Cohesive is a technology professional services organization with expertise in
networking, web applications and technology solutions. The Company expects to
account for the purchase of Cohesive under the purchase method of accounting
and anticipates a significant portion of the purchase price will be allocated
to goodwill.
The Company's $7,000,000 bank line of credit bearing interest at the bank's
prime rate expired in early August 1999. The Company is currently negotiating
with the bank an extension of the term of the line of credit as well as a
potential increase in the amount available for borrowing.
F-21
<PAGE>
EXODUS COMMUNICATIONS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance
Beginning at End of
of Year Additions Deductions Year
Classification ---------- --------- ---------- ---------
<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>
$75,000,000
EXODUS COMMUNICATIONS, INC.
Exchange Offer For All Outstanding
11 1/4% Senior Notes Due 2008
Originally Sold on
June 22, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the Bylaws of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and executive officers to the fullest extent permitted
by the Delaware General Corporation Law; (ii) the Registrant may, in its
discretion, indemnify other officers, employees and agents as set forth in the
Delaware General Corporation Law; (iii) upon receipt of an undertaking to repay
such advances if indemnification is determined to be unavailable, the
Registrant is required to advance expenses, as incurred, to its directors and
executive officers to the fullest extent permitted by the Delaware General
Corporation Law in connection with a proceeding (except if a determination is
reasonably and promptly made by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to the proceeding or, in
certain circumstances, by independent legal counsel in a written opinion that
the facts known to the decision-making party demonstrate clearly and
convincingly that such person acted in bad faith or in a manner that such
person did not believe to be in, or not opposed to, the best interests of the
corporation); (iv) the rights conferred in the Bylaws are not exclusive and the
Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees and agents; (v) the Registrant may not
retroactively amend the Bylaw provisions relating to indemnity; and (vi) to the
fullest extent permitted by the Delaware General Corporation Law, a director or
executive officer will be deemed to have acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the Registrant and, with respect to any criminal action or proceeding, to have
had no reasonable cause to believe that his or her conduct was unlawful if his
or her action is based on the records or books of account of the corporation or
on information supplied to him or her by officers of the corporation in the
course of their duties or on the advice of legal counsel for the corporation or
on information or records given or reports made to the corporation by
independent certified public accountants or appraisers or other experts.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers. The indemnification agreements
provide that directors and executive officers will be indemnified and held
harmless to the fullest possible extent permitted by law including against all
expenses (including attorneys' fees), judgments, fines and settlement amounts
paid or reasonably incurred by them in any action, suit or proceeding,
including any derivative action by or in the right of the Registrant, on
account of their services as directors, officers, employees or agents of the
Registrant or as directors, officers, employees or agents of any other company
or enterprise when they are serving in such capacities at the request of the
Registrant. The Registrant will not be obligated pursuant to the agreements to
indemnify or advance expenses to an indemnified party with respect to
proceedings or claims (i) initiated or brought voluntarily by the indemnified
party and not by way of defense, except with respect to a proceeding to
establish or enforce a right to indemnify under the indemnification agreements
or any other agreement or insurance policy or under the Registrant's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
indemnification, or authorized by the Board of Directors or as otherwise
required under Delaware statute or law, regardless of whether the indemnified
party is ultimately determined to be entitled to such indemnification, (ii) for
expenses and the payment of profits arising from the purchase and sale by the
indemnified paved and the relative fault of the Registrant and the director or
executive officer. No contribution is allowed to a person found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act of 1933) from any person who was not found guilty of such
fraudulent misrepresentation.
II-1
<PAGE>
The indemnification agreement requires a director or executive officer to
reimburse the Registrant for all expenses advanced only to the extent it is
ultimately determined that the director or executive officer is not entitled,
under Delaware law, the Bylaws, the indemnification agreement or otherwise, to
be indemnified for such expenses. The form of indemnification agreement
provides that it is not exclusive of any rights a director or executive officer
may have under the Certificate of Incorporation, Bylaws, other agreements, any
majority-in-interest vote of the stockholders or vote of disinterested
directors, Delaware law or otherwise.
The indemnification provision in the Bylaws, and the form of indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's executive officers and directors for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act").
As authorized by the Registrant's Bylaws, the Registrant, with approval by
the Board, expects to purchase director and officer liability insurance.
In addition, Mr. Mocarski is indemnified in certain circumstances by Fleet
Financial Group, Inc.
See also the undertakings set out in response to Item 22.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Document Exhibit Number
-------- --------------
<S> <C>
Registrant's Restated Certificate of Incorporation............... 3.01
Registrant's Bylaws.............................................. 3.03
Form of Indemnification Agreement................................ 10.08
</TABLE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
2.01 Agreement and Plan of Merger between Fouress, Inc. and Registrant
dated April 26, 1995. (Incorporated by reference to Exhibit 2.01 from
the Registrant's Registration Statement on Form S-1 (file No. 333-
44469), as amended, declared effective by the Securities and Exchange
Commission on March 18, 1998 (the "Form S-1").
2.02 Form of Agreement and Plan of Merger by and between Registrant and
Exodus. (Incorporated by reference from Exhibit 2.02 to the Form S-1).
2.03 Agreement and Plan of Reorganization by and among Registrant, Cohesive
Technology Solutions, Inc. and Marley Acquisition Corp. dated April
22, 1999. (Incorporated by reference from Exhibit 2.03 to the
Registrant's Registration Statement on Form S-4 (File No. 333-79655)
declared effective by the SEC on June 28, 1999 (the "June 1999 Form S-
4")).
2.04 Amendment to Agreement and Plan of Reorganization by and among
Registrant, Cohesive Technology Solutions, Inc. and Marley Acquisition
Corp. dated May 28, 1999. (Incorporated by reference from Exhibit 2.04
to the June 1999 Form S-4).
3.01 Registrant's Restated Certificate of Incorporation. (Incorporated by
reference from Exhibit 3.07 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999 (the "June 1999 Form 10-Q")).
3.02 Certificate of Designations specifying the terms of the Series A
Junior Participating Preferred Stock of Registrant, as filed with the
Delaware Secretary of State on January 28, 1999. (Incorporated by
reference from Exhibit 3.02 to Registrant's Registration Statement on
Form 8-A filed with the Commission on January 29, 1999 (the "1999 Form
8-A")).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
3.03 Registrant's Bylaws. (Incorporated by reference from Exhibit 3.06 to
the Form S-1).
4.01 Form of Specimen Certificate for Registrant's Common Stock.
(Incorporated by reference from Exhibit 4.01 to the Form S-1).
4.02 Form of 11 1/4% Senior Note from 1998 Senior Note Offering.
(Incorporated by reference from Exhibit 4.02 to Registrant's
Registration Statement on Form S-4 (file No. 333-62413) declared
effective by the SEC on November 9, 1998 (the "November 1998 Form S-
4")).
4.03 Indenture between Exodus Communications, Inc. as Issuer and Chase
Manhattan Bank and Trust Company, National Association, as Trustee
dated July 1, 1998. (Incorporated by reference from Exhibit 10.30 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (the "June 1998 Form 10 Q")).
4.04 Rights Agreement dated January 27, 1999 between Registrant and
BankBoston, N.A., as Rights Agent. (Incorporated by reference from
Exhibit 4.04 to the 1999 Form 8-A).
4.05 Form of Note for Registrant's 5% Convertible Subordinated Notes.
(Incorporated by reference from Exhibit 4.05 to the March 1999 Form
10-Q).
4.06 Indenture between Registrant as Issuer and Chase Manhattan Bank and
Trust Company, National Association as Trustee dated March 1, 1999.
(Incorporated by reference from Exhibit 4.06 to the March 1999 Form
10-Q).
4.07 First Supplemental Indenture dated June 22, 1999 amending Indenture
between Registrant and Chase Manhattan Bank and Trust Company,
National Association, as Trustee dated July 1, 1998. (Incorporated by
reference from Exhibit 10.66 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 (the "June 1999 Form 10-
Q")).
4.08 Form of 11 1/4% Senior Note from 1999 Senior Note Offering.
(Incorporated by reference from Exhibit 10.67 to the June 1999 Form
10-Q).
5.01+ Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
5.02+ Opinion of Debevoise & Plimpton regarding legality of the securities
being registered.
10.01 Amended and Restated Investors Rights Agreement, dated as of June 25,
1997 between the Registrant and certain investors, as amended December
15, 1997. (Incorporated by reference from Exhibit 10.01 to the Form S-
1).
10.02 Registrant's 1995 Stock Option Plan and related forms of agreements.
(Incorporated by reference from Exhibit 10.02 to the Form S-1).
10.03 Registrant's 1995 Stock Purchase Plan and related forms of agreements.
(Incorporated by reference from Exhibit 10.03 to the Form S-1).
10.04 Registrant's 1997 Equity Incentive Plan and related forms of
agreements. (Incorporated by reference from Exhibit 10.04 to the Form
S-1).
10.05 Registrant's 1998 Equity Incentive Plan and related forms of
agreements, as amended June 2, 1999. (Incorporated by reference from
Exhibit 4.03 to the Registrant's Registration Statement on Form S-8
(File No. 333-83179 ) filed with the SEC on July 19, 1999).
10.06 Registrant's 1998 Directors Stock Option Plan and related forms of
agreements. (Incorporated by reference from Exhibit 10.06 to the Form
S-1).
10.07 Registrant's 1998 Employee Stock Purchase Plan. (Incorporated by
reference from Exhibit 10.07 to the Form S-1).
10.08 Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers, as amended. (Incorporated by
reference from Exhibit 10.08 to the Form S-1).
10.09 Facility Lease between Washcop Associates Limited Partnership and the
Registrant dated April 18, 1996. (Incorporated by reference from
Exhibit 10.09 to the Form S-1).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.10 Facility Lease between Cal-Harbor II & III Urban Renewal Associates
and Registrant dated December 30, 1996, as amended April 29, 1997 and
January 27, 1998. (Incorporated by reference from Exhibit 10.10 to the
Form S-1).
10.11 Facility Lease between McCandless-San Tomas N. 2 and Registrant dated
April 18, 1997. (Incorporated by reference from Exhibit 10.11 to the
Form S-1).
10.12 Facility Lease between Sabey Corporation and Registrant dated April
24,1997. (Incorporated by reference from exihibit 10.12 to Form S-1).
10.13 Facility Lease between The Manufacturers Life Insurance Company and
Registrant dated June 27, 1997. (Incorporated by reference from
Exhibit 10.13 to the Form S-1).
10.14 Facility Lease between JBG/Spring Park Limited Partnership and
Registrant dated June 30, 1997. (Incorporated by reference from
Exhibit 10.14 to the Form S-1).
10.15 [Reserved.]
10.16 Software License and Marketing Agreement between Computer Associates
International, Inc. and the Registrant dated April 1997. (Incorporated
by reference from Exhibit 10.16 to the Form S-1).
10.17 Form of Executive Employment Policy to be entered into between the
Registrant and certain officers. (Incorporated by reference from
Exhibit 10.17 to the Form S-1).
10.18 Equipment Lease Line of Credit between Transamerica Business Credit
Corporation and Registrant dated August 28, 1997. (Incorporated by
reference from Exhibit 10.18 to the Form S-1).
10.19 Loan and Security Agreement between Silicon Valley Bank and Registrant
dated June 14, 1996, as amended on March 25, 1997, June 13, 1997,
November 24, 1997 and December 8, 1997. (Incorporated by reference
from Exhibit 10.19 to the Form S-1).
10.20 Loan and Security Agreement among MMC/GATX Partnership No. 1,
Transamerica Business Credit Corporation and Registrant dated December
31, 1997. (Incorporated by reference from Exhibit 10.20 to the Form S-
1).
10.21 Equipment Lease Line of Credit between Venture Lending & Leasing II,
Inc. and Registrant dated December 23, 1997. (Incorporated by
reference from Exhibit 10.21 to the Form S-1).
10.22 Equipment Lease Line of Credit Commitment ("Commitment Letter) between
Finova Technology Finance, Inc. ("Finova") and Registrant dated
December 17, 1997; Master Lease Agreement ("Master Lease") between
Finova and Registrant dated December 19, 1997; and Modification to
Commitment Letter and Master Lease between Finova and Registrant dated
February 6, 1998. (Incorporated by reference from Exhibit 10.22 to the
Form S-1).
10.23 Sublease Agreement dated January 12, 1998 between Amdahl Corporation
and Registrant. (Incorporated by reference from Exhibit 10.23 to the
Form S-1).
10.24 Nonqualified Stock Option Agreements between Registrant and K.B.
Chandrasekhar dated January 27, 1998. (Incorporated by reference from
Exhibit 10.24 to the Form S-1).
10.25 Form of Nonqualified Stock Option Agreement between Registrant and
Ellen M. Hancock dated March 10, 1998. (Incorporated by reference from
Exhibit 10.25 to the Form S-1).
10.26 Form of Agreement used to sell stock to certain directors and an
officer of the Registrant. (Incorporated by reference from Exhibit
10.26 to the Form S-1).
10.27 Facility Lease between 600 Winter Street, L.L.C. and Registrant, dated
as of December 23, 1997. (Incorporated by reference from Exhibit 10.27
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 (the "March 1998 Form 10-Q"). Certain exhibits to
this agreement have been omitted from this filing and will be
furnished supplementally to the Securities and Exchange Commission
upon request.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.28 Amendment to Loan and Security Agreement between Silicon Valley Bank
and Registrant dated June 14, 1996. (Incorporated by reference from
Exhibit 10.28 to the March 1998 Form 10-Q).
10.29 First Amendment to Loan and Security Agreement, dated as of February
20, 1998, by and between the Registrant and MMC/GATX Partnership No. 1
and Transamerica Business Credit Corporation. (Incorporated by
reference from Exhibit 10.29 to the amendment on Form 10-Q/A amending
the March 1998 Form 10-Q).
10.30 Exchange and Registration Rights Agreement among Exodus
Communications, Inc., Goldman, Sachs & Co., Donaldson Lufkin &
Jenrette Securities Corporation, BT Alex. Brown Incorporated and
NationsBanc Montgomery Securities LLC dated July 1, 1998.
(Incorporated by reference from Exhibit 10.31 to the June 1998 Form
10-Q).
10.31 Escrow Agreement among Chase Manhattan Bank and Trust Company,
National Association, as escrow agent, Chase Manhattan Bank and Trust
Company, National Association, as trustee, and Exodus Communications,
Inc., dated July 1, 1998. (Incorporated by reference from Exhibit
10.32 to the June 1998 Form 10-Q).
10.32 Purchase Agreement among Exodus Communications, Inc., Goldman, Sachs &
Co., Donaldson Lufkin & Jenrette Securities Corporation, BT Alex.
Brown Incorporated and NationsBanc Montgomery Securities LLC, dated
June 26, 1998. (Incorporated by reference from Exhibit 10.33 to the
June 1998 Form 10-Q).
10.33 Form of Notice of Debt Offering and Waiver of Registration Rights
among the Company and certain holders of stock of the Company.
(Incorporated by reference from Exhibit 10.34 to the June 1998 Form
10-Q).
10.34 Amended and Restated Master Loan and Security Agreement between Exodus
Communications, Inc. and Transamerica Business Credit Corporation
dated June 30, 1998. (Incorporated by reference from Exhibit 10.35 to
the June 1998 Form 10-Q).
10.35 Agreement between Cisco Systems Capital Corporation and Exodus
Communications, Inc., dated June 1, 1998. (Incorporated by reference
from Exhibit 10.36 to the June 1998 Form 10-Q).
10.36* Qwest Communications Private Line Service Agreement Business Services,
between Qwest Communications Corporation and the Registrant, dated as
of July 17, 1998. (Incorporated by reference from Exhibit 10.37 to the
June 1998 Form 10-Q).
10.37 Consent and Second Amendment to the Second Amended and Restated
Investors' Rights Agreement. (Incorporated by reference from Exhibit
10.37 to the November 1998 Form S-4).
10.38 Lease Agreement dated August 31, 1998 between Reynolds Metals
Development Company and Registrant. (Incorporated by reference from
Exhibit 10.38 to the November 1998 Form S-4).
10.39 Building Lease dated September 22, 1998 between Centerpoint Properties
Trust and Registrant. (Incorporated by reference from Exhibit 10.39 to
the November 1998 Form S-4).
10.40 Sublease Agreement dated September 4, 1998 between S3, Incorporated
and Registrant. (Incorporated by reference from Exhibit 10.40 to the
Form S-4).
10.41 Registrant's 1999 Stock Option Plan and related forms of agreements.
(Incorporated by reference to Exhibit 4.04 to Registrant's
Registration Statement on Form S-8 (File No. 333-72525), filed with
the SEC on February 17, 1999 (the "February 1999 Form S-8")).
10.42 Form of Non-Plan Stock Option Agreement for option granted to James J.
McInerney. (Incorporated by reference to Exhibit 4.06 to the February
1999 Form S-8).
10.43 Form of Non-Plan Stock Option Agreement for option granted to Susan R.
Farber. (Incorporated by reference from Exhibit 4.07 to the February
1999 Form S-8).
10.44 Offer Letter dated September 30, 1998 between Registrant and Susan
Farber. (Incorporated by reference from Exhibit 10.44 to Annual Report
on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-
K")).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.45 Agreement for Lease dated December 24, 1998 among Helios (Park Royal)
Limited, Lloyds Bank PLC, Exodus Internet Limited, and Registrant.
Certain exhibits to this agreement have been omitted from this filing
and will be furnished supplementally to the Securities and Exchange
Commission upon request. (Incorporated by reference from Exhibit 10.45
to the 1998 Form 10-K).
10.46 First Amendment to Lease Agreement dated January 1999 between Washcop
Associated Limited Partnership and Registrant. (Incorporated by
reference from Exhibit 10.46 to the 1998 Form 10-K).
10.47 First Amendment of Lease dated December 4, 1998 between David A. Sabey
and Sandra L. Sabey and Registrant. (Incorporated by reference from
Exhibit 10.47 to the 1998 Form 10-K).
10.48* Worldcom Data Services (Revenue Plan) effective February 1, 1999
between Worldcom Technologies, Inc. and Registrant. (Incorporated by
reference from Exhibit 10.48 to the March 1999 Form 10-Q).
10.49 Building Lease dated January 29, 1999 between Registrant and G&I
Walsh. (Incorporated by reference from Exhibit 10.49 to the March 1999
Form 10-Q).
10.50 Building Lease dated January 29, 1999 between Registrant and Talus
Corporation. (Incorporated by reference from Exhibit 10.50 to the
March 1999 Form 10-Q).
10.51* Capacity Sales Agreement effective February 23, 1999 between MFS
Cableco (Bermuda) Limited and Registrant. (Incorporated by reference
from Exhibit 10.51 to the March 1999 Form 10-Q).
10.52 Building Lease dated March 26, 1999 between Registrant and Lincoln-
RECP CM-ES OPCO, LLC. (Incorporated by reference from Exhibit 10.52 to
the March 1999 Form 10-Q).
10.53 First Amendment to Lease Agreement dated April 4, 1999 between
Registrant and Amdahl Corporation. (Incorporated by reference from
Exhibit 10.53 to the March 1999 Form 10-Q).
10.54 Purchase Agreement dated February 25, 1999 among Registrant, Goldman,
Sachs & Co., BancBoston Robertson Stephens Inc., BT Alex. Brown
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation and
Hambrecht & Quist LLC. (Incorporated by reference from Exhibit 10.54
to the March 1999 Form 10-Q).
10.55 Registration Rights Agreement dated March 1, 1999 among Registrant,
Goldman, Sachs & Co., BancBoston Robertson Stephens Inc., BT Alex.
Brown Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and Hambrecht & Quist LLC. (Incorporated by reference from
Exhibit 10.55 to the March 1999 Form 10-Q).
10.56* Worldcom Capacity Access Service Agreement effective March 1, 1999
between Worldcom Technologies, Inc. and Registrant. (Incorporated by
reference from Exhibit 10.56 to the March 1999 Form 10-Q).
10.57 Agreement to lease dated June 18, 1999 and associated exhibits between
Helios Limited, Lloyds Bank PLC, Exodus Internet Limited and
Registrant (Incorporated by reference from Exhibit 10.57 to the June
1999 Form 10-Q).
10.58 Building lease dated June 8, 1999 between Talus and Registrant.
(Incorporated by reference from Exhibit 10.58 to the June 1999 Form
10-Q).
10.59 Building lease dated June 4, 1999 between G&I Walsh and Registrant.
(Incorporated by reference from Exhibit 10.59 to the June 1999 Form
10-Q).
10.60 Building lease dated June 30, 1999 between Cameron Road Corporate
Park, Ltd. and Registrant. (Incorporated by reference from Exhibit
10.60 to the June 1999 Form 10-Q).
10.61 Building lease dated June 7, 1999 between 100 TCD Associates Limited
Partnership and TW Conroy 2 LLC and Registrant. (Incorporated by
reference from Exhibit 10.61 to the June 1999 Form 10-Q).
10.62 Building lease dated April 30, 1999 between Reynolds Metals
Development Company and Registrant. (Incorporated by reference from
Exhibit 10.62 to the June 1999 Form 10-Q).
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S>
10.63 Loan modification agreement dated May 6, 1999 between Silicon Valley
Bank and Registrant. (Incorporated by reference from Exhibit 10.63 to
the June 1999 Form 10-Q).
10.64 Purchase agreement dated June 17, 1999 between Goldmap, Sachs & Co. and
Registrant. (Incorporated by reference from Exhibit 10.64 to the June
1999 Form 10-Q).
10.65 Exchange and registration rights agreement dated June 22, 1999 among
Goldman, Sachs & Co. and Registrant. (Incorporated by reference from
Exhibit 10.65 to the June 1999 Form 10-Q).
12.01 Statement regarding Computation of Ratios.
21.01 Subsidiaries of the Registrant. (Incorporated by reference from Exhibit
21.01 to the June 1999 Form S-4).
23.01+ Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG LLP, independent auditors.
24.01 Power of Attorney. (See page II-9).
25.01 Statement of Eligibility of Trustee.
27.01 Financial Data Schedule. (Incorporated by reference from Exhibit 27.01
to the June 1999 Form 10-Q.)
99.01 Form of Letter of Transmittal.
99.02 Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
* Confidential treatment has been granted for certain portions of this
document pursuant to an application for confidential treatment sent to the
Securities and Exchange Commission. Such portions have been redacted and
marked with a triple asterisk. The non-redacted version of this document has
been sent to the Securities and Exchange Commission.
+ To be filed by amendment.
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(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.
II-7
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(e) 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 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this registration
statement shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on the 19th day of August, 1999.
Exodus Communications, Inc.
By: /s/ Ellen M. Hancock
-----------------------------------
Ellen M. Hancock
Chief Executive Officer and
President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Ellen M.
Hancock and Richard S. Stoltz, jointly and severally, his or her true and
lawful attorneys-in-fact, each with the power of substitution, for him or her
in any and all capacities, to sign amendments to this Registration Statement on
Form S-4, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact, or his or her
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Principal Executive Officer:
/s/ Ellen M. Hancock Chief Executive Officer, August 19, 1999
____________________________________ President and Director
Ellen M. Hancock
Principal Financial Officer and
Principal Accounting Officer:
/s/ Richard S. Stoltz Executive Vice President, August 19, 1999
____________________________________ Finance, Chief Operating
Richard S. Stoltz Officer and Chief Financial
Officer
Additional Directors:
/s/ K. B. Chandrasekhar Chairman of the Board of August 19, 1999
____________________________________ Directors
K. B. Chandrasekhar
Director
____________________________________
Frederick W. W. Bolander
/s/ Mark Dubovoy Director August 19, 1999
____________________________________
Mark Dubovoy
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John R. Dougery Director August 19, 1999
____________________________________
John R. Dougery
Director
____________________________________
Max D. Hopper
/s/ Peter A. Howley Director August 19, 1999
____________________________________
Peter A. Howley
/s/ Daniel C. Lynch Director August 19, 1999
____________________________________
Daniel C. Lynch
/s/ Thadeus Mocarski Director August 19, 1999
____________________________________
Thadeus Mocarski
/s/ Naomi O. Seligman Director August 19, 1999
____________________________________
Naomi O. Seligman
</TABLE>
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
5.01+ Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
5.02+ Opinion of Debevoise & Plimpton regarding legality of the securities
being registered.
12.01 Statement regarding Computation of Ratios.
23.01+ Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG LLP, independent auditors.
24.01 Power of Attorney. (See page II-9).
25.01 Statement of Eligibility of Trustee.
99.01 Form of Letter of Transmittal.
99.02 Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
+ To be filed by amendment.
<PAGE>
EXHIBIT 12.01
Exhibit 12.01 - Statement Re: Computation of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------- ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense, including amortization
of debt expense $ - $ 38 $ 107 $ 699 $ 17,740
Assumed interest element included
in rent expense 6 17 50 353 1,111
------------ ------------ ----------- ----------- -----------
Total fixed charges $ 6 $ 55 $ 157 $ 1,052 $ 18,851
Earnings (loss):
Net income (loss) $ 144 $ (1,311) $ (4,133) $ (25,298) $ (66,442)
Fixed charges per above 6 55 157 1,052 18,851
------------ ------------ ----------- ----------- -----------
Total earnings (loss) $ 150 $ (1,256) $ (3,976) $ (24,246) $ (47,591)
Ratio of earnings to fixed charges 26 X - - - -
============ ============ =========== =========== ===========
Deficiency of earnings available to cover
fixed charges $ - $ (1,311) $ (4,133) $ (25,298) $ (66,442)
============ ============ =========== =========== ===========
<CAPTION>
Six months
ended June 30,
------------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Fixed charges:
Interest expense, including amortization
of debt expense $ 2,039 $ 18,855
Assumed interest element included
in rent expense 414 1,218
----------- -------------
Total fixed charges $ 2,453 $ 20,073
Earnings (loss):
Net income (loss) $ (27,397) $ (43,065)
Fixed charges per above 2,453 20,073
----------- -------------
Total earnings (loss) $ (24,944) $ (22,992)
Ratio of earnings to fixed charges - -
=========== =============
Deficiency of earnings available to cover
fixed charges $ (27,397) $ (43,065)
=========== =============
</TABLE>
<PAGE>
Exhibit 23.02
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Exodus Communications, Inc.:
We consent to the use of our report included herein and the references to
our firm under the headings "Experts," "Summary Consolidated Financial
Information" and "Selected Consolidated Financial Data" in the Prospectus.
KPMG LLP
Mountain View, California
August 16, 1999
<PAGE>
EXHIBIT 25.01
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM T-1
Statement of Eligibility and Qualification Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
_______________________
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(B)(2)____
_________________________
CHASE MANHATTAN BANK AND TRUST COMPANY,
NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
95-4655078
(I.R.S. Employer Identification No.)
Suite 2725
101 California Street, San Francisco, California
(Address of principal executive offices)
94111
(Zip Code)
__________________
EXODUS COMMUNICATIONS, INC.
(Exact name of Obligor as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
77-0403076
(I.R.S. Employer Identification No.)
2831 Mission College Boulevard
Santa Clara, California
(Address of principal executive offices)
95054
(Zip Code)
________________________________
11 1/4% Senior Notes due 2008
(Title of Indenture securities)
1
<PAGE>
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Comptroller of the Currency, Washington, D.C.
Board of Governors of the Federal Reserve System, Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with Obligor.
If the Obligor is an affiliate of the trustee, describe each such
affiliation.
None.
Item 4. Trusteeships under Other Indentures
(a) Title of securities outstanding under each such other indenture.
$200,000,000 11 1/4% Senior Notes Due 2008 issued under Indenture
dated as of July 1, 1998
$250,000,000 5% Convertible Subordinated Notes Due March 15, 2006
issued under Indenture dated as of March 1. 1999
Item 16. List of Exhibits.
List below all exhibits filed as part of this statement of eligibility.
Exhibit 1. Articles of Association of the Trustee as Now in Effect (see
Exhibit 1 to Form T-1 filed in connection with Registration
Statement No. 333-41329 which is incorporated by reference).
Exhibit 2. Certificate of Authority of the Trustee to Commence Business
(see Exhibit 2 to Form T-1 filed in connection with
Registration Statement No. 333-41329, which is incorporated by
reference).
Exhibit 3. Authorization of the Trustee to Exercise Corporate Trust
Powers (contained in Exhibit 2).
Exhibit 4. Existing By-Laws of the Trustee (see Exhibit 4 to Form T-1
filed in connection with Registration Statement No. 333-41329,
which is incorporated by reference).
Exhibit 5. Not Applicable
Exhibit 6. The consent of the Trustee required by Section 321 (b) of the
Act (see Exhibit 6 to Form T-1 filed in connection with
Registration Statement No. 333-41329, which is incorporated by
reference).
2
<PAGE>
Exhibit 7. A copy of the latest report of condition of the Trustee,
published pursuant to law or the requirements of its
supervising or examining authority.
Exhibit 8. Not Applicable
Exhibit 9. Not Applicable
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, Chase Manhattan Bank and Trust Company, National Association, has duly
caused this statement of eligibility and qualification to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of San
Francisco, and State of California, on the 18th day of August, 1999.
CHASE MANHATTAN BANK AND TRUST
COMPANY, NATIONAL ASSOCIATION
By /s/ Cecil D. Bobey
-------------------
Cecil D. Bobey
Assistant Vice President
3
<PAGE>
Exhibit 7. Report of Condition of the Trustee.
================================================================================
Consolidated Report of Condition of Chase Manhattan Bank and Trust Company,
---------------------------------------
N.A.
- ----
(Legal Title)
Located at 1800 Century Park East, Ste. 400 Los Angeles, CA 94111
------------------------------------------------------
(Street) (City) (State) (Zip)
as of close of business on June 30, 1999
-------------------
================================================================================
================================================================================
ASSETS DOLLAR AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
<S> <C> <C>
1. Cash and balances due from
a. Noninterest-bearing balances and currency and coin (1,2) 1,910
b. Interest bearing balances (3) 0
2. Securities
a. Held-to-maturity securities (from Schedule RC-B, column A) 0
b. Available-for-sale securities (from Schedule RC-B, column D) 1,266
3. Federal Funds sold (4) and securities purchased agreements to resell 60,200
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income (from Schedule RC-C) 50
b. LESS: Allowance for loan and lease losses 0
c. LESS: Allocated transfer risk reserve 0
d. Loans and leases, net of unearned income, allowance, and
reserve (item 4.a minus 4.b and 4.c) 50
5. Trading assets 0
6. Premises and fixed assets (including capitalized leases) 233
7. Other real estate owned (from Schedule RC-M) 0
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M) 0
9. Customers liability to this bank on acceptances outstanding 0
10. Intangible assets (from Schedule RC-M) 1,203
11. Other assets (from Schedule RC-F) 2,064
12a. TOTAL ASSETS 66,926
</TABLE>
(1) includes cash items in process of collection and unposted debits.
(2) The amount reported in this item must be greater than or equal to the sum
of Schedule RC-M, items 3.a and 3.b
(3) includes time certificates of deposit not held for trading.
(4) Report "term federal funds sold" in Schedule RC, item 4.a "Loans and
leases, net of unearnedincome" and in Schedule RC-C, part 1.
4
<PAGE>
LIABILITIES
<TABLE>
<CAPTION>
<S> <C>
13. Deposits:
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E) 37,379
(1) Noninterest-bearing 5,680
(2) Interest-bearing 31,699
b. In foreign offices, Edge and Agreement subsidiaries, and IBF'
(1) Noninterest-bearing
(2) Interest-bearing
14. Federal funds purchased (2) and securities sold under agreements to
repurchase 0
15. a. Demand notes issued to the U.S. Treasury 0
b. Trading liabilities 0
16. Other borrowed money (includes mortgage indebtedness and obligations
under capitalized leases):
a. With a remaining maturity of one year or less 0
b. With a remaining maturity of more than one year through three years 0
c. With a remaining maturity of more than three years 0
17. Not applicable
18. Bank's liability on acceptances executed and outstanding 0
19. Subordinated notes and Debentures (3) 0
20. Other liabilities (from Schedule RC-G) 4,218
21. Total liabilities (sum of items 13 through 20) 41,597
22. Not applicable
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus 0
24. Common stock-- 600
25. Surplus (exclude all surplus related to preferred stock) 12,590
26. a. Undivided profits and capital reserves 12,139
b. Net unrealized holding gains (losses) on available-for-sale securities 0
27. Cumulative foreign currency translation adjustments
28. a. Total equity capital (sum of items 23 through 27) 25,329
29. Total liabilities, equity capital, and losses deferred pursuant to 12 U.S.C.
1823 (j) (sum of items 21 and 28.c) 66,926
</TABLE>
Memorandum
To be reported only with the March Report of Condition
1. Indicate in the box at the right the number of the statement below that
best describes The most comprehensive level of auditing work performed for
the bank by independent external auditors as of any date during 1998 2
5
<PAGE>
Exhibit 99.01
LETTER OF TRANSMITTAL
EXODUS COMMUNICATIONS, INC.
OFFER TO EXCHANGE ITS
NEW 11 1/4% SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
11 1/4% SENIOR NOTES DUE 2008
PURSUANT TO THE PROSPECTUS
DATED ______________, 1999
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME ON ______________, 1999 (UNLESS EXTENDED BY EXODUS COMMUNICATIONS,
INC. IN ITS SOLE DISCRETION) (SUCH TIME AND SUCH DATE, AND AS SUCH TIME AND DATE
MAY BE EXTENDED, THE "EXPIRATION DATE").
If you desire to accept the Exchange Offer (as defined below), this Letter
of Transmittal should be completed, signed, and submitted to:
CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION
Exchange Agent
BY MAIL, OVERNIGHT DELIVERY OR HAND:
Chase Manhattan Bank and Trust Company, National Association
101 California Street
Suite 2725
San Francisco, CA 94111
Attn: Cecil Bobey
(Exodus Communications Inc., 11 1/4% Senior Notes due 2008)
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
415-954-9581
FACSIMILE TRANSMISSIONS:
415-693-8850
(Originals of all documents sent by facsimile should be sent promptly by
hand, overnight courier or registered or certified mail.)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
<PAGE>
This Letter of Transmittal is to be completed by holders of Old Notes (as
defined below) either if Old Notes are to be forwarded herewith or if tenders of
Old Notes are to be made by book-entry transfer to an account maintained by
Chase Manhattan Bank and Trust Company, National Association (the "Exchange
Agent") at The Depository Trust Company ("DTC") pursuant to the procedures set
forth in "The Exchange Offer--Procedures for Tendering Old Notes" in the
Prospectus.
Holders of Old Notes whose certificates (the "Certificates") for such Old
Notes are not immediately available or who cannot deliver their Certificates and
all other required documents to the Exchange Agent on or prior to the Expiration
Date or who cannot complete the procedures for book-entry transfer on a timely
basis, must tender their Old Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--Procedures for Tendering Old Notes"
in the Prospectus. See Instruction 1 hereto. DELIVERY OF DOCUMENTS TO DTC DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
2
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Exodus Communications, Inc., a Delaware
corporation (the "Company"), the aggregate principal amount of the Company's 11
1/4% Senior Notes due 2008 (the "Old Notes") described in Box 1 below, in
exchange for a like aggregate principal amount of the Company's new 11 1/4%
Senior Notes due 2008 (the "New Notes") which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), upon the terms and
subject to the conditions set forth in the Prospectus dated ___________, 1999
(as the same may be amended or supplemented from time to time, the
"Prospectus"), receipt of which is acknowledged, and in this Letter of
Transmittal (which, together with the Prospectus, constitutes the "Exchange
Offer").
Subject to, and effective upon, the acceptance for exchange of all or any
portion of the Old Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Old Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
Chase Manhattan Bank and Trust Company, National Association as the Exchange
Agent (the "Exchange Agent") as its agent and attorney-in-fact (with full
knowledge that the Exchange Agent is also acting as agent of the Company in
connection with the Exchange Offer) with respect to the tendered Old Notes, with
full power of substitution (such power of attorney being deemed to be an
irrevocable power coupled with an interest), subject only to the right of
withdrawal described in the Prospectus, to (i) deliver Certificates for Old
Notes to the Company together with all accompanying evidences of transfer and
authenticity to, or upon the order of, the Company, upon receipt by the Exchange
Agent, as the undersigned's agent, of the New Notes to be issued in exchange for
such Old Notes, (ii) present Certificates for such Old Notes for transfer, and
to transfer the Old Notes on the books of the Company, and (iii) receive for the
account of the Company all benefits and otherwise exercise all rights of
beneficial ownership of such Old Notes, all in accordance with the terms and
conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS
FULL POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE OLD
NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE
COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND
CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE OLD
NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES. THE
UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS
DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE TO
COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE OLD NOTES TENDERED HEREBY,
AND THE UNDERSIGNED WILL COMPLY WITH ITS OBLIGATIONS UNDER THE REGISTRATION
RIGHTS AGREEMENT. THE UNDERSIGNED HAS READ AND AGREES TO ALL OF THE TERMS OF THE
EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Old Notes
tendered hereby should be printed in Box 1 below, if they are not already set
forth below, as they appear on the Certificates representing such Old Notes. The
Certificate number(s) and the Old Notes that the undersigned wishes to tender
should be indicated in the appropriate box below.
If any tendered Old Notes are not exchanged pursuant to the Exchange Offer
for any reason, or if Certificates are submitted for more Old Notes than are
tendered or accepted for exchange, Certificates for such nonexchanged or
nontendered Old Notes will be returned (or, in the case of Old Notes tendered by
book-entry transfer, such Old Notes will be credited to an account maintained at
DTC), without expense to the tendering holder, promptly following the expiration
or termination of the Exchange Offer.
The undersigned understands that tenders of Old Notes pursuant to any one
of the procedures described in "The Exchange Offer--Procedures for Tendering Old
Notes" in the Prospectus and in the instructions hereto will,
3
<PAGE>
upon the Company's acceptance for exchange of such tendered Old Notes,
constitute a binding agreement between the undersigned and the Company upon the
terms and subject to the conditions of the Exchange Offer. The undersigned
recognizes that, under certain circumstances set forth in the Prospectus, the
Company may not be required to accept for exchange any of the Old Notes tendered
hereby.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions" below (Box 7), the undersigned hereby directs that the New Notes
be issued in the name(s) of the undersigned or, in the case of a book-entry
transfer of Old Notes, that such New Notes be credited to the account indicated
below maintained at DTC. If applicable, substitute Certificates representing Old
Notes not exchanged or not accepted for exchange will be issued to the
undersigned or, in the case of a book-entry transfer of Old Notes, will be
credited to the account indicated below maintained at DTC. Similarly, unless
otherwise indicated under "Special Delivery Instructions" (Box 8), please
deliver New Notes to the undersigned at the address shown below the
undersigned's signature.
BY TENDERING OLD NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (i) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE COMPANY, (ii) ANY NEW NOTES TO BE RECEIVED BY THE UNDERSIGNED
ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS, (iii) THE UNDERSIGNED
HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN A
DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF NEW NOTES TO BE
RECEIVED IN THE EXCHANGE OFFER, AND (iv) IF THE UNDERSIGNED IS NOT A BROKER-
DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND DOES NOT INTEND TO ENGAGE IN, A
DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF SUCH NEW NOTES. BY
TENDERING OLD NOTES PURSUANT TO THE EXCHANGE OFFER AND EXECUTING THIS LETTER OF
TRANSMITTAL, A HOLDER OF OLD NOTES WHICH IS A BROKER-DEALER REPRESENTS AND
AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY THE STAFF OF THE
DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE COMMISSION TO
THIRD PARTIES, THAT SUCH OLD NOTES WERE ACQUIRED BY SUCH BROKER-DEALER FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES
(SUCH A BROKER-DEALER WHICH IS TENDERING OLD NOTES IS HEREIN REFERRED TO AS A
"PARTICIPATING BROKER-DEALER") AND IT WILL DELIVER THE PROSPECTUS (AS AMENDED OR
SUPPLEMENTED FROM TIME TO TIME) MEETING THE REQUIREMENTS OF THE SECURITIES ACT
IN CONNECTION WITH ANY RESALE OF SUCH NEW NOTES (PROVIDED THAT, BY SO
ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH PARTICIPATING BROKER-DEALER
WILL NOT BE DEEMED TO ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF
THE SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM TIME
TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER IN CONNECTION WITH RESALES
OF NEW NOTES RECEIVED IN EXCHANGE FOR OLD NOTES, WHERE SUCH OLD NOTES WERE
ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF
MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES, FOR A PERIOD ENDING 180
DAYS AFTER THE EXCHANGE OFFER HAS BEEN COMPLETED, OR IF EARLIER, WHEN ALL SUCH
PARTICIPATING BROKER-DEALERS NO LONGER OWN ANY TRANSFER RESTRICTED SECURITIES.
IN THAT REGARD, EACH PARTICIPATING BROKER-DEALER, BY TENDERING SUCH OLD NOTES
AND EXECUTING THIS LETTER OF TRANSMITTAL, AGREES THAT, UPON RECEIPT OF NOTICE
FROM THE COMPANY OF THE OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF ANY FACT
WHICH MAKES ANY STATEMENT CONTAINED OR INCORPORATED BY REFERENCE IN THE
PROSPECTUS UNTRUE IN ANY MATERIAL RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT
TO STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED
THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT
MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS SPECIFIED IN THE
REGISTRATION RIGHTS AGREEMENT, SUCH PARTICIPATING BROKER- DEALER WILL SUSPEND
THE SALE OF NEW NOTES PURSUANT TO THE PROSPECTUS UNTIL THE COMPANY HAS AMENDED
OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH MISSTATEMENT OR OMISSION AND HAS
FURNISHED COPIES OF
4
<PAGE>
THE AMENDED OR SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE
COMPANY HAS GIVEN NOTICE THAT THE SALE OF THE NEW NOTES MAY BE RESUMED, AS THE
CASE MAY BE.
Each New Note will bear interest from the most recent date to which
interest has been paid or duly provided for on the Old Note surrendered in
exchange for such New Note or, if no such interest has been paid or duly
provided for on such Old Note, from July 1, 1999. Holders of the Old Notes whose
Old Notes are accepted for exchange will not receive accrued interest on such
Old Notes for any period from and after the last Interest Payment Date to which
interest has been paid or duly provided for on such Old Notes prior to the
original issue date of the New Notes or, if no such interest has been paid or
duly provided for, will not receive any accrued interest on such Old Notes, and
will be deemed to have waived the right to receive any interest on such Old
Notes accrued from and after such Interest Payment Date or, if no such interest
has been paid or duly provided for, from and after July 1, 1999.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except
pursuant to the withdrawal rights set forth in the Prospectus, this tender is
irrevocable.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING
THE BOXES BELOW AND FOLLOW THE INSTRUCTIONS BEGINNING ON PAGE 10 HEREOF.
ALL TENDERING HOLDERS COMPLETE THIS BOX 1:
BOX 1
DESCRIPTION OF OLD NOTES TENDERED
(ATTACH ADDITIONAL SIGNED PAGES, IF NECESSARY)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
IF BLANK, PLEASE
PRINT NAME(S) AND
ADDRESS(ES) OF
REGISTERED
HOLDER(S), EXACTLY
AS NAME(S) CERTIFICATE PRINCIPAL AMOUNT
APPEAR(S) ON OLD NUMBER(S) OF OLD PRINCIPAL AMOUNT OF OLD NOTES
NOTE CERTIFICATE(S): NOTES* OF OLD NOTES TENDERED**
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL PRINCIPAL TOTAL PRINCIPAL
AMOUNT AMOUNT TENDERED
- --------------------------------------------------------------------------------------------------------------------------------
$ $
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders.
** Old Notes may be tendered in whole or in part in denominations of $1,000 and
integral multiples thereof. All Old Notes held shall be deemed tendered
unless a lesser number is specified in this column. See Instruction 4.
5
<PAGE>
BOX 2
BOOK-ENTRY TRANSFER
(SEE INSTRUCTION 1 BELOW)
[_] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE
THE FOLLOWING:
Name of Tendering Institution _________________________________________________
DTC Account Number _________________________________________________
Transaction Code Number _________________________________________________
BOX 3
NOTICE OF GUARANTEED DELIVERY
(SEE INSTRUCTION 1 BELOW)
[_] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s) ___________________________________________________
Window Ticket Number (if any) __________________________________________________
Date of Execution of Notice of Guaranteed Delivery _____________________________
Name of Institution which Guaranteed Delivery __________________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer: ___________________
Name of Tendering Institution __________________________________________________
DTC Account Number _____________________________________________________________
Transaction Code Number ________________________________________________________
BOX 4
RETURN OF NON-EXCHANGED OLD NOTES TENDERED BY BOOK-ENTRY TRANSFER
(SEE INSTRUCTIONS 4 AND 6 BELOW)
[_] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OLD NOTES
ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE.
6
<PAGE>
BOX 5
PARTICIPATING BROKER-DEALER
[_] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE TEN ADDITIONAL COPIES OF
THE PROSPECTUS AND TEN COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name: __________________________________________________________________________
Address: _______________________________________________________________________
BOX 6
TENDERING HOLDER SIGNATURE
Holder(s) Sign Here ___________________________________________________________
(SEE INSTRUCTIONS 2, 5 AND 6 BELOW)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 IN BOX 9 BELOW)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Old Notes hereby tendered or on a security position
listing, or by a person(s) authorized to become the registered holder(s) by
endorsements and documents transmitted herewith (including such opinions of
counsel, certifications and other information as may be required by the Company
or the Trustee for the Old Notes to comply with the restrictions on transfer
applicable to the Old Notes). If signature is by an attorney-in-fact, executor,
administrator, trustee, guardian, officer of a corporation or another acting in
a fiduciary capacity or representative capacity, please set forth the signer's
full title. See Instruction 5 below.
________________________________
(Signature(s) of Holder(s))
Date ________________, 1999
Name(s) ________________________________________________________________________
(Please Print)
Address ________________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number _________________________________________________
(Tax Identification or Social Security Number(s)) ______________________________
7
<PAGE>
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1, 2 AND 5 BELOW)
____________________________________
Authorized Signature
Name ___________________________________________________________________________
(Please Print)
Date __________________, 1999
Capacity or Title ______________________________________________________________
Name of Firm ___________________________________________________________________
Address ________________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number__________________________________________________
<TABLE>
<CAPTION>
BOX 7 BOX 8
- -----------------------------------------------------------------------------------------------------------------
SPECIAL EXCHANGE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6 BELOW) (SEE INSTRUCTIONS 1, 5 AND 6 BELOW)
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
To be completed ONLY if the New Notes are to be To be completed ONLY if New Notes are to be sent to
issued in the name of someone other than the registered someone other than the registered holder of the Old Notes
holder of the Old Notes whose name(s) appear(s) above. whose name(s) appear(s) above, or to such registered holder(s)
at an address other than that shown above.
Issue New Notes to: Mail New Notes to:
Name _________________________________________ Name _______________________________________
(Please Print) (Please Print)
Address _______________________________________ Address _____________________________________
(Include Zip Code) (Include Zip Code)
________________________________________________ ______________________________________________
(Tax Identification or Social Security Number) (Tax Identification or Social Security Number)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
BOX 9
SUBSTITUTE FORM W-9
TO BE COMPLETED BY ALL TENDERING SECURITYHOLDERS
(SEE INSTRUCTION 9 BELOW)
SIGN THIS SUBSTITUTE FORM W-9 IN ADDITION TO THE SIGNATURE(S) REQUIRED IN BOX 6
<TABLE>
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PAYER'S NAME: CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION
<S> <C> <C>
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SUBSTITUTE PART I -- Please provide your TIN (either your social TIN: __________________________
FORM W-9 security number or employer identification number) in the
box to the right and certify by signing and dating below.
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DEPARTMENT OF THE TREASURY PART II -- Awaiting TIN [_]
INTERNAL REVENUE SERVICE SIGN THIS FORM AND THE CERTIFICATION OF AWAITING TAXPAYER IDENTIFICATION NUMBER BELOW.
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PART III -- EXEMPT [_]
See enclosed Guidelines for additional information and SIGN THIS FORM.
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PAYER'S REQUEST FOR TAXPAYER Certification -- Under penalties of perjury, I certify that:
IDENTIFICATION NUMBER (TIN) (1) The number shown on this form is my correct taxpayer identification number (or I am waiting
AND CERTIFICATION for a number to be issued to me); and
(2) I am not subject to backup withholding because (i) I am exempt from backup withholding, or
(ii) I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup
withholding as a result of a failure to report all interest or dividends, or (iii) the IRS has
notified me that I am no longer subject to backup withholding.
(3) Any other information provided on this form is true and correct.
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Certification Instructions -- You must cross out item (iii) in Part (2) above if you have been
notified by the IRS that you are subject to backup withholding because of underreporting interest
or dividends on your tax return and you are no longer subject to backup withholding.
Signature: _______________________________________ Date: ________________
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9
<PAGE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART 2 OF THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of payment, 31%
of all payments made to me on account of the New Notes shall be retained until I
provide a taxpayer identification number to the Exchange Agent and that, if I do
not provide my taxpayer identification number within 60 days, such retained
amounts shall be remitted to the Internal Revenue Service as backup withholding
and 31% of all reportable payments made to me thereafter will be withheld and
remitted to the Internal Revenue Service until I provide a taxpayer
identification number.
Signature: ___________________________________________
Date: ________________________________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
FOR ADDITIONAL INFORMATION.
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
GENERAL
Please do not send Certificates for Old Notes directly to the Company. Your
Existing Note Certificates, together with your signed and completed Letter of
Transmittal and any required supporting documents should be mailed in the
enclosed addressed envelope, or otherwise delivered, to the Exchange Agent, at
either of the addresses indicated on the first page hereof. THE METHOD OF
DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER AND THE
DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT.
IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED
DELIVERY PROCEDURES
This Letter of Transmittal is to be completed if either (a) Certificates
are to be forwarded herewith or (b) tenders are to be made pursuant to the
procedures for tender by book-entry transfer set forth in "The Exchange Offer --
Procedures for Tendering Old Notes" in the Prospectus. Certificates, or timely
confirmation of a book-entry transfer of such Old Notes into the Exchange
Agent's account at DTC, as well as this Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, and any other documents required by this Letter of Transmittal, must
be received by the Exchange Agent at its address set forth herein on or prior to
5:00 p.m., New York City time, on the Expiration Date. Old Notes may be tendered
in whole or in part in the principal amount of $1,000 and integral multiples of
$1,000.
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<PAGE>
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter of
Transmittal and all other required documents to the Exchange Agent on or prior
to the Expiration Date or (iii) who cannot complete the procedures for delivery
by book-entry transfer on a timely basis, may tender their Old Notes by properly
completing and duly executing a Notice of Guaranteed Delivery pursuant to the
guaranteed delivery procedures set forth in "The Exchange Offer -- Procedures
for Tendering Old Notes" in the Prospectus and by completing Box 3 hereof.
Pursuant to such procedures: (i) such tender must be made by or through an
Eligible Institution (as defined below); (ii) a properly completed and duly
executed Notice of Guaranteed Delivery, substantially in the form made available
by the Company, must be received by the Exchange Agent on or prior to the
Expiration Date; and (iii) the Certificates (or a book-entry confirmation (as
defined in the Prospectus)) representing all tendered Old Notes, in proper form
for transfer, together with a Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guarantees and
any other documents required by this Letter of Transmittal, must be received by
the Exchange Agent within three New York Stock Exchange trading days after the
date of execution of such Notice of Guaranteed Delivery, all as provided in "The
Exchange Offer -- Procedures for Tendering Old Notes" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Old Notes to be
properly tendered pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior to the Expiration
Date. As used herein, "Eligible Institution" means a firm or other entity
identified in Rule 17Ad-15 under the Exchange Act as "an eligible guarantor
institution," including (as such terms are defined therein) (i) a bank; (ii) a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
association that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchanges Medallion Program.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2. GUARANTEE OF SIGNATURES
No signature guarantee on this Letter of Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder
(which term, for purposes of this document, shall include any participant
in DTC whose name appears on a security position listing as the owner of
the Old Notes) of Old Notes tendered herewith, unless such holder(s) has
completed either the box entitled "Special Exchange Instructions" (Box 7)
or the box entitled "Special Delivery Instructions" (Box 8) above, or
(ii) such Old Notes are tendered for the account of a firm that is an
Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal (Box 6). See Instruction 5.
3. INADEQUATE SPACE
If the space provided in the box captioned "Description of Old Notes" is
inadequate, the Certificate number(s) and/or the principal amount of Old Notes
and any other required information should be listed on a separate signed
schedule which should be attached to this Letter of Transmittal.
11
<PAGE>
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS
Tenders of Old Notes will be accepted only in the principal amount of
$1,000 and integral multiples thereof. If less than all the Old Notes evidenced
by any Certificate submitted are to be tendered, fill in the principal amount of
Old Notes which are to be tendered in Box 1 under the column "Principal Amount
of Old Notes Tendered". In such case, new Certificate(s) for the remainder of
the Old Notes that were evidenced by your Existing Certificate(s) will only be
sent to the holder of the Old Notes, promptly after the Expiration Date. All Old
Notes represented by Certificates delivered to the Exchange Agent will be deemed
to have been tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date. In order for a withdrawal to be
effective on or prior to that time, a written, telegraphic, telex or facsimile
transmission of such notice of withdrawal must be timely received by the
Exchange Agent at its address set forth above or in the Prospectus on or prior
to the Expiration Date. Any such notice of withdrawal must specify the name of
the person who tendered the Old Notes to be withdrawn, the aggregate principal
amount of Old Notes to be withdrawn, and (if Certificates for such Old Notes
have been tendered) the name of the registered holder of the Old Notes as set
forth on the Certificate for the Old Notes, if different from that of the person
who tendered such Old Notes. If Certificates for the Old Notes have been
delivered or otherwise identified to the Exchange Agent, then prior to the
physical release of such Certificates for the Old Notes, the tendering holder
must submit the serial numbers shown on the particular Certificates for the Old
Notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Old Notes tendered
for the account of an Eligible Institution. If Old Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in "The Exchange
Offer -- Procedures for Tendering Old Notes," the notice of withdrawal must
specify the name and number of the account at DTC to be credited with the
withdrawal of Old Notes, in which case a notice of withdrawal will be effective
if delivered to the Exchange Agent by written, telegraphic, telex or facsimile
transmission. Withdrawals of tenders of Old Notes may not be rescinded. Old
Notes properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be retendered at any subsequent time on or prior to the
Expiration Date by following any of the procedures described in the Prospectus
under "The Exchange Offer -- Procedures for Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliates or assigns of the Company, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give such notification. Any Old Notes which have been tendered but
which are withdrawn will be returned to the holder thereof without cost to such
holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS
If this Letter of Transmittal is signed by the registered holder(s) of the
Old Notes tendered hereby, the signature(s) must correspond exactly with the
name(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different name(s) on several
Certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company, must
submit proper evidence satisfactory to the Company, in its sole discretion, of
such persons' authority to so act.
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<PAGE>
When this Letter of Transmittal is signed by the registered owner(s) of the
Old Notes listed and transmitted hereby, no endorsement(s) of Certificate(s) or
separate bond power(s) are required unless New Notes are to be issued in the
name of a person other than the registered holder(s). However, if New Notes are
to be issued in the name of a person other than the registered holder(s),
signature(s) on such Certificate(s) or bond power(s) must be guaranteed by an
Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Old Notes listed, the certificates must be endorsed
or accompanied by appropriate bond powers, signed exactly as the name or names
of the registered owner(s) appear(s) on the Certificates, and also must be
accompanied by such opinions of counsel, certifications and other information as
the Company or the Trustee for the Old Notes may require in accordance with the
restrictions on transfer applicable to the Old Notes. Signatures on such
Certificates or bond powers must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
If New Notes are to be issued in the name of a person other than the signer
of this Letter of Transmittal, or if New Notes are to be sent to someone other
than the signer of this Letter of Transmittal or to an address other than that
shown above, the appropriate boxes on this Letter of Transmittal should be
completed (Box 7 and 8). Certificates for Old Notes not exchanged will be
returned by mail or, if tendered by book-entry transfer, by crediting the
account indicated above maintained at DTC. See Instruction 4.
7. DETERMINATION OF VALIDITY
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Old Notes, which determination shall be
final and binding on all parties. The Company reserves the absolute right to
reject any and all tenders determined by it not to be in proper form or the
acceptance of which, or exchange for, may, in the view of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer set forth
in the Prospectus under "The Exchange Offer--Certain Conditions to the Exchange
Offer" or any conditions or irregularity in any tender of Old Notes of any
particular holder whether or not similar conditions or irregularities are waived
in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender of Old Notes will be deemed to have been validly
made until all irregularities with respect to such tender have been cured or
waived. Neither the Company, any affiliates or assigns of the Company, the
Exchange Agent, nor any other person shall be under any duty to give
notification of any irregularities in tenders or incur any liability for failure
to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES
Questions and requests for assistance may be directed to the Exchange Agent
at its address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange Agent.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9
For U.S. Federal income tax purposes, holders are required, unless an
exemption applies, to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on Substitute Form W-9 of this Letter of
Transmittal (Box 9) and certify, under penalties of perjury, that such number is
correct and he or she is not subject to backup withholding. If the Exchange
Agent is not provided with the correct TIN, the Internal Revenue Service (the
"IRS") may subject the holder or other payee to a $50 penalty. In addition,
payments to such holders or other payees with respect to Old Notes exchanged
pursuant to the Exchange Offer, or with respect to New Notes following the
Exchange Offer, may be subject to 31% backup withholding.
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The box in Part 2 of the Substitute Form W-9 (Box 9) may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Part 2 is checked, the
holder or other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below Substitute Form W-9 in order to avoid backup
withholding. Notwithstanding that the box in Part 2 is checked and the
Certificate of Awaiting Taxpayer Identification Number is completed, the
Exchange Agent will withhold 31% of all payments made prior to the time a
properly certified TIN is provided to the Exchange Agent.
The holder is required to give the Exchange Agent the TIN (i.e., social
security number or employer identification number) of the registered owner of
the Old Notes or of the last transferee appearing on the transfers attached to,
or endorsed on, the Old Notes. If the Old Notes are registered in more than one
name or are not in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below and check the box in Part 3 of
Box 9 for "exempt", to avoid possible erroneous backup withholding. A foreign
person may qualify as an exempt recipient by submitting a properly completed IRS
Form W-8, signed under penalties of perjury, attesting to that holder's exempt
status. Please consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather,
the U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
10. LOST, DESTROYED OR STOLEN CERTIFICATES
If any Certificate(s) representing Old Notes have been lost, destroyed or
stolen, the holder should promptly notify the Exchange Agent. The holder will
then be instructed as to the steps that must be taken in order to replace the
Certificate(s). This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen
Certificate(s) have been followed.
11. SECURITY TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith. If, however, New Notes are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes in connection with the Exchange
Offer, then the amount of any such transfer tax (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
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GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN--The Taxpayer Identification Number for most individuals is their
social security number. Refer to the following chart to determine the
appropriate number:
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FOR THIS TYPE OF GIVE THE SOCIAL SECURITY FOR THIS TYPE OF ACCOUNT: GIVE THE EMPLOYER
ACCOUNT NUMBER OF -- IDENTIFICATION NUMBER
OF --
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<S> <C> <C> <C>
1. individual The individual 6. Sole proprietorship The owner /(3)/
2. Two or more individuals The actual owner of the account or, 7. A valid trust, estate or Legal entity /(4)/
(joint account) if combined funds, the first pension trust
individual on the account /(1)/
3. Custodian account of a The minor /(2)/ 8. Corporate The corporation
minor (Uniform Gift to
Minors Act)
4a. The usual revocable The grantor-trustee /(1)/ 9. Association, club, The organization
savings trust (grantor religious, charitable,
is also trustee) educational or other tax-
exempt organization
b. So-called trust account The actual owner /(1)/ 10. Partnership The partnership
that is not a legal or valid
trust under State law
5. Sole proprietorship The owner /(3)/ 11. A broker or registered The broker or nominee
nominee
12. Account with the Department The public entity
of Agriculture
</TABLE>
_____________________
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. You may also enter your business name or "doing
business as" name. You may use either your Social Security number or your
employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will be
onsidered to be that of the first name listed.
B. EXEMPT PAYEES -- The following lists exempt payees. If you are exempt,
you must nonetheless complete the form and provide your TIN in order to
establish that you are exempt. Check the box in Part 3 of the form, sign and
date the form.
For this purpose, Exempt Payees include: (1) A corporation; (2) An
organization exempt from tax under section 501(a), or an individual retirement
plan (IRA) or a custodial account under section 403(b)(7); (3) The United States
or any of its agencies or instrumentalities; (4) A state, the District of
Columbia, a possession of the United States, or any of their political
subdivisions or instrumentalities; (5) A foreign government or any of its
political subdivisions, agencies or instrumentalities; (6) An international
organization or any of its agencies or instrumentalities; (7) A foreign central
bank of issue; (8) A dealer in securities or commodities required to register in
the U.S. or a possession of the U.S.; (9) A real estate investment trust; (10)
An entity or person registered at all times during the tax year under the
Investment Company Act of 1940; (11) A common trust fund operated by a bank
under section 584(a); (12) A financial institution.
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C. OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, application for a Social Security Number, or Form SS-
4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
D. PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payers who must report the
payments to the IRS. The IRS uses the numbers for identification purposes.
Payers must be given the numbers whether or not payees are required to file tax
returns. Payers must generally withhold 31% of taxable interest, dividend, and
certain other payments to a payee who does not furnish a taxpayer identification
number. Certain penalties may also apply.
E. PENALTIES
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If
you fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments. If you
fail to include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an under-
payment attributable to that failure unless there is clear and convincing
evidence to the contrary.
(3) Civil Penalty for False Information with Respect to Withholding.
If you make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information. Falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
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EXHIBIT 99.02
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
11 1/4% SENIOR NOTES DUE 2008
OF
EXODUS COMMUNICATIONS, INC.
THIS NOTICE OF GUARANTEED DELIVERY, OR ONE SUBSTANTIALLY EQUIVALENT TO THIS
FORM, MUST BE USED TO ACCEPT THE EXCHANGE OFFER (AS DEFINED BELOW) IF (I)
CERTIFICATES FOR THE COMPANY'S (AS DEFINED BELOW) 11 1/4% SENIOR NOTES DUE 2008
(THE "OLD NOTES") ARE NOT IMMEDIATELY AVAILABLE, (II) THE OLD NOTES, THE LETTER
OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS CANNOT BE DELIVERED TO CHASE
MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION (THE "EXCHANGE AGENT") ON
OR PRIOR TO THE EXPIRATION DATE (AS DEFINED IN THE PROSPECTUS REFERRED TO BELOW)
OR (III) THE PROCEDURES FOR DELIVERY BY BOOK- ENTRY TRANSFER CANNOT BE COMPLETED
ON A TIMELY BASIS. THIS NOTICE OF GUARANTEED DELIVERY MAY BE DELIVERED BY HAND,
OVERNIGHT COURIER OR MAIL, OR TRANSMITTED BY FACSIMILE TRANSMISSION, TO THE
EXCHANGE AGENT. SEE "THE EXCHANGE OFFER--PROCEDURES FOR TENDERING OLD NOTES" IN
THE PROSPECTUS.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION
BY MAIL, OVERNIGHT DELIVERY OR HAND:
CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION
101 CALIFORNIA STREET, SUITE 2725
SAN FRANCISCO, CA 94111
ATTN: CECIL BOBEY
TRUST DEPARTMENT
(EXODUS COMMUNICATIONS, INC., 11 1/4% SENIOR NOTES DUE 2008)
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
415-954-9581
FACSIMILE TRANSMISSIONS:
415-693-8850
<PAGE>
IN ADDITION, IN ORDER TO UTILIZE THE GUARANTEED DELIVERY PROCEDURE TO
TENDER OLD NOTES PURSUANT TO THE EXCHANGE OFFER, A COMPLETED, SIGNED AND DATED
LETER OF TRANSMITTAL RELATING TO THE OLD NOTES (OR FACSIMILE THEREOF) MUST ALSO
BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
CAPITALIZED TERMS NOT DEFINED HEREIN HAVE THE MEANINGS ASSIGNED TO THEM IN THE
PROSPECTUS.
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
Ladies and Gentlemen:
The undersigned hereby tenders to Exodus Communications, Inc., a Delaware
corporation (the "Company"), upon the terms and subject to the conditions set
forth in the prospectus dated ____________, 1999 (as the same may be amended or
supplemented from time to time, the "Prospectus") and the related Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of which
is hereby acknowledged, the aggregate principal amount of Old Notes set forth
below pursuant to the guaranteed delivery procedures set forth in the Prospectus
under the caption "The Exchange Offer--Procedures for Tendering Old Notes."
DESCRIPTION OF OLD NOTES TENDERED
Name(s), Address(es) and Area Code(s) and Telephone Number(s) of
Registered Holder(s):
_______________________________________________________________________________
_______________________________________________________________________________
Certificate Number(s) (if available):
__________________________________________
Aggregate Principal Amount Tendered: $
__________________________________________
Signature(s):
__________________________________________________________________
_______________________________________________________________________________
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<PAGE>
If Old Notes will be tendered by book-entry transfer, please provide the
following information:
Name of Tendering Institution:
_________________________________________________
DTC Account Number:
____________________________________________________________
Date:
__________________________________________________________________________
Transaction Code Number:
________________________________________________________
THE GUARANTEE BELOW MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein) (i) a bank; (ii) a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
association that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchanges Medallion Program (each of the foregoing being referred to as an
"Eligible Institution"), hereby guarantees to deliver to the Exchange Agent, at
its address set forth above, either the Old Notes tendered hereby in proper form
for transfer, or confirmation of the book-entry transfer of such Old Notes to
the Exchange Agent's account at The Depository Trust Company ("DTC"), pursuant
to the procedures for book-entry transfer set forth in the Prospectus, in either
case together with one or more properly completed and duly executed Letter(s) of
Transmittal (or facsimile thereof) and any other required documents within three
New York Stock Exchange trading days after the date of execution of this Notice
of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Old Notes tendered hereby to the Exchange Agent within the
time period set forth above and that failure to do so could result in a
financial loss to the undersigned.
Name of Firm: Authorized Signature:
__________________________________ __________________________________
Address: Name (Please Print):
__________________________________ __________________________________
Capacity or Title:
__________________________________ __________________________________
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<PAGE>
__________________________________ _________________________________
__________________________________ _________________________________
Area Code and Telephone Number: Date:
__________________________________ _________________________________
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY.
ACTUAL SURRENDER OF OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A
PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS.
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
the Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange of Old Notes for New Notes made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the securities to which it relates. This
Prospectus does not constitute an offer to sell or the solicitation of an offer
to buy such securities in any circumstances in which such offer or solicitation
is unlawful.
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