<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-23795
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EXODUS COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0403076
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2831 Mission College Boulevard, Santa Clara, CA 95054
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(Address of principal executive offices)
(Zip Code)
(408) 346-2200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_______
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The number of shares outstanding of the issuer's common stock, par value $0.001,
as of May 5, 2000 was 206,179,713 shares.
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<PAGE>
EXODUS COMMUNICATIONS, INC.
INDEX
-----
<TABLE>
<CAPTION>
PART I. Financial Information Page No.
--------------------- --------
<S> <C>
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets - March 31, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations - Three-Month
Periods ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -Three-Month
Periods ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II. Other Information
-----------------
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXODUS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 863,448 $1,015,960
Accounts receivable, net 90,252 61,916
Prepaid expenses and other current assets 27,988 15,331
---------- ----------
Total current assets 981,688 1,093,207
Property and equipment, net 504,014 368,239
Restricted cash equivalents and investments 41,482 35,390
Goodwill and other intangible assets 200,587 156,002
Other assets 99,411 90,052
---------- ----------
$1,827,182 $1,742,890
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of equipment loans and line of credit
facilities $ 8,806 $ 6,897
Current portion of capital lease obligations 23,419 17,162
Accounts payable 77,821 60,203
Accrued expenses 62,192 42,457
Accrued interest payable 32,371 23,829
---------- ----------
Total current liabilities 204,609 150,548
Equipment loans and line of credit facilities, less current 5,857 8,353
portion
Capital lease obligations, less current portion 42,374 40,343
Convertible subordinated notes 572,337 749,800
Senior notes 770,481 776,231
---------- ----------
Total liabilities 1,595,658 1,725,275
---------- ----------
Stockholders' equity:
Common stock 202 178
Additional paid-in capital 514,845 247,983
Deferred stock compensation (2,589) (2,894)
Accumulated deficit (286,566) (228,216)
Accumulated other comprehensive income 5,632 564
---------- ----------
Total stockholders' equity 231,524 17,615
---------- ----------
$1,827,182 $1,742,890
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------- --------
<S> <C> <C>
Revenues $134,142 $ 30,110
Cost of revenues 94,661 28,268
-------- --------
Gross profit 39,481 1,842
-------- --------
Operating expenses:
Marketing and sales 30,881 10,747
General and administrative 26,612 6,677
Product development 3,851 1,543
Amortization of goodwill and
intangible assets 7,769 613
-------- --------
Total operating expenses 69,113 19,580
-------- --------
Operating loss (29,632) (17,738)
Interest and other income (expense):
Interest and other income 13,144 2,859
Interest and other expense (41,862) (8,353)
-------- --------
Total interest and other expense, net (28,718) (5,494)
-------- --------
Net loss $(58,350) $(23,232)
======== ========
Basic and diluted net loss per share $ (0.32) $ (0.14)
======== ========
Shares used in computing basic and
diluted net loss per share 183,019 163,236
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss ($58,350) ($23,232)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 30,573 5,700
Loss on disposal of property and equipment 645 -
Remeasurement gain on Euro denominated senior notes (402) -
Amortization of deferred stock compensation 788 189
Amortization of debt issuance costs 542 332
Interest accretion on restricted cash equivalents (59) (1,088)
Changes in operating assets and liabilities:
Accounts receivable (26,508) (4,098)
Prepaid expenses and other assets (12,672) (5,334)
Accounts payable 17,086 15,073
Accrued expenses 18,677 781
Accrued interest payable 8,542 (4,614)
---------- ----------
Net cash used for operating activities (21,138) (16,291)
---------- ----------
Cash flows from investing activities
Capital expenditures (144,228) (34,846)
Businesses acquired, net of cash received (3,745) (19,990)
Release of restricted cash equivalents and investments 14,770 10,410
Increase in restricted cash equivalents and investment (20,803) -
Purchases of available-for-sale securities (5,500) -
Other assets (1,029) (146)
---------- ----------
Net cash used for investing activities (160,535) (44,572)
---------- ----------
Cash flows from financing activities
Proceeds from issuance of common stock, net 38,863 3,819
Payments on capital lease obligations (3,401) (1,441)
Proceeds from equipment loans and line of credit facilities 705 -
Payments on equipment loans and line of credit facilities (1,621) (10,551)
Proceeds from convertible notes, net of offering costs - 242,250
---------- ----------
Net cash provided by financing activities 34,546 234,077
---------- ----------
Net increase (decrease) in cash and cash equivalents (147,127) 173,214
Effects of exchange rates on cash and cash equivalents (5,385) -
Cash and cash equivalents at beginning of period 1,015,960 156,015
---------- ----------
Cash and cash equivalents at end of period $ 863,448 $ 329,229
========== ==========
Supplemental disclosure of cash flow information:
Cash paid-interest $ 27,001 $ 13,405
========== ==========
Non cash investing and financing activities:
Assets recorded under capital leases $ 11,664 $ 3,626
========== ==========
Unrealized gain on available-for-sale securities $ 5,105 $ -
========== ==========
Deferred compensation on grants of stock options $ 483 $ -
========== ==========
Conversion of convertible subordinated notes into common stock $ 177,463 $ -
========== ==========
Issuance of common stock and assumption of stock options in connection
with acquisition $ 50,077 $ -
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
Company's financial position as of March 31, 2000 and the results of its
operations and cash flows for the three-month periods ended March 31, 2000 and
1999. These financial statements should be read in conjunction with the
Company's audited consolidated financial statements as of December 31, 1999 and
1998 and for each of the years in the three-year period ended December 31, 1999,
including notes thereto, included in the Company's 1999 Annual Report on Form
10-K. Operating results for the three-month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
NOTE 2 - NET LOSS PER SHARE
Basic and diluted net loss per share has been computed by dividing the net
loss 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>
Three-Month Period Ended
March 31,
--------------------------
2000 1999
------------ ---------
<S> <C> <C>
Shares issuable under stock options 51,171 41,471
Shares issuable pursuant to warrants to purchase common and
redeemable convertible preferred stock 493 532
Shares of redeemable convertible preferred stock and convertible
preferred stock on an "as if converted basis" basis -- 3,714
Shares of convertible subordinated notes on an "as if converted"
basis 13,436 21,893
</TABLE>
The weighted-average exercise prices of stock options was $23.37 and $3.44
for options outstanding as of March 31, 2000 and 1999, respectively. The
weighted-average exercise price of warrants to purchase common and redeemable
convertible preferred stock as of March 31, 2000 and 1999, was $1.82 and $1.79,
respectively.
NOTE 3 - REVENUE RECOGNITION
The Company's revenues consist of (i) monthly fees from customer use of
Internet Data Center sites, network services, managed services, and professional
services and use of equipment and software provided by the Company, (ii)
revenues from sales or rentals 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 sales 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.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<PAGE>
<TABLE>
<CAPTION> March 31, December 31,
2000 1999
------------------- -------------------
<S> <C> <C>
Data centers and related equipment $453,206 $332,092
Furniture, fixtures, computer equipment and other 62,516 55,790
Construction in progress 66,856 35,663
------------------- -------------------
582,578 423,545
Less accumulated depreciation and amortization 78,564 55,306
------------------- -------------------
504,014 $368,239
=================== ===================
</TABLE>
Computer and other equipment and certain data center infrastructure are
recorded under capital leases that aggregated $82,617,000 and $70,953,000 as of
March 31, 2000 and December 31, 1999, respectively. Accumulated amortization on
the assets recorded under capital leases aggregated $26,934,000 and $23,853,000
as of March 31, 2000 and December 31, 1999, respectively.
NOTE 5 - ACQUISITIONS
On July 27, 1999, the Company completed its acquisition of Cohesive
Technology Solutions, Inc. ("Cohesive"). Pursuant to the exchange ratios applied
in the acquisition, the Company issued 1,600,796 shares of Exodus common stock
and paid approximately $50,000,000 in cash and assumed options to purchase a
total of 408,712 shares of Exodus common stock for a total purchase price of
approximately $112,000,000. The acquisition was accounted for as a purchase with
the results of Cohesive's operations included from the acquisition date.
On December 17, 1999, the Company acquired 85% of the common stock of
Global Online Japan Co., Ltd. ("GOL") of Tokyo, Japan. The Company issued
415,296 shares of Exodus common stock and paid approximately $12,000,000 in cash
for a total purchase price of approximately $36,000,000. As the Company has a
majority share of 85% in GOL, the Company has consolidated GOL's results of
operation with its results of operations. The acquisition was accounted for as a
purchase with the results of GOL's operations included from the acquisition
date.
On February 11, 2000, the Company completed its acquisition of KeyLabs,
Inc. ("KeyLabs"), a provider of e-business testing services based in Utah. The
Company issued approximately 393,000 shares of Exodus common stock in exchange
for all outstanding shares of KeyLabs common stock and reserved approximately
101,000 shares of common stock for issuance upon the exercise of KeyLabs options
the Company assumed pursuant to the agreement, for total consideration valued at
approximately $50,000,000. The transaction was accounted for as a purchase with
the results of KeyLabs' operations included from the acquisition date. The
excess of the purchase price over the fair value of tangible net assets acquired
amounted to approximately $48,210,000 and was attributed primarily to goodwill
($46,140,000), customer lists ($1,450,000) and assembled workforce ($620,000).
These amounts are being amortized on a straight-line basis over periods ranging
from 3 to 5 years.
The summary table below, prepared on an unaudited pro forma basis, reflects
the condensed consolidated results of operations for the three-month periods
ended March 31, 2000 and 1999, assuming Cohesive, GOL and KeyLabs had been
acquired as of January 1, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Revenues $135,291 $ 45,520
Net loss $(59,491) $(31,332)
Basic and diluted net loss per share $ (0.32) $ (0.19)
Shares used in pro forma per share computation 183,192 165,645
</TABLE>
<PAGE>
The pro forma results are not necessarily indicative of what would have occurred
if the acquisitions had been in effect for the periods presented. In addition,
they are not intended to be a projection of future results and do not reflect
any synergies that might be achieved from combined operations.
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Goodwill $168,235 $117,950
Customer lists 37,629 37,007
Workforce in place 12,071 10,624
------------- -------------
217,935 165,581
Less accumulated amortization 17,348 9,579
------------- -------------
$200,587 $156,002
============= =============
</TABLE>
Goodwill and onther intangible assets are being amortized on a straight-
line basis over periods generally ranging from 2 to 8 years.
NOTE 7 - CONVERTIBLE SUBORDINATED NOTES AND LINE OF CREDIT FACILITIES
In March 2000, holders of an aggregate principal amount of approximately
$160.0 million of the Company's 5% Convertible Subordinated Notes due March 15,
2006 converted the notes into approximately 14,000,000 shares of the Company's
common stock. The Company made aggregate payments of approximately $3,200,000
to the holders in connection with these conversions, which is included in
interest expense for the three month period ended March 31, 2000, in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 84,
Induced Conversion of Convertible Debt. Also, holders of an additional
approximate $18.0 million principal amount of the Company's 5% convertible
subordinated notes due March 15, 2006 converted the notes into approximately
1,600,000 shares of the Company's common stock. The Company did not make any
payments in connection with these conversions.
In March 2000, the Company entered into an agreement to increase its
existing $10,000,000 line of credit with a financial institution to $20,000,000.
This line of credit will expire in December 2000 and is to be used solely as a
letter of credit facility.
NOTE 8 - COMPREHENSIVE LOSS
The components of comprehensive loss are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Net loss $(58,350) $(23,232)
Unrealized gain on available-for-sale securities 5,105 --
Foreign currency translation loss (37) --
-------------- --------------
Comprehensive loss $(53,282) $(23,232)
============== ==============
</TABLE>
Accumulated other comprehensive income consists of unrealized gains or
losses on available-for-sale securities and cumulative translation
adjustments. There was no significant tax effect on the components of
comprehensive loss for the three months ended March 31, 2000 and 1999.
NOTE 9 - SEGMENT INFORMATION
<PAGE>
The Company operates a number of Internet Data Centers throughout the North
America and three internationally. 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 Internet Data Center provides the same Internet
related services to a similar type of customer who may locate its servers in
multiple Internet Data Centers. As a result, the Company believes these Internet
Data Centers represent one reportable segment under the aggregation criteria of
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. Internet Data Center operations primarily include services such as
server infrastructure support, Internet connectivity, and managed services.
With the acquisition of Cohesive on July 27, 1999, management began
reviewing financial information and business performance and allocating
resources based on both Internet Data Center operations and professional
services, given Cohesive's expertise in networking, Internet-based applications
and technology solutions. As a result, the Company identified professional
services as an additional reportable segment. Professional services primarily
include services such as network design and development, Internet-based and
application development, and information technology strategy.
Financial information for the Company's reportable segments is presented
below:
Three Months Ended March 31,
------------------------------
2000 1999
-------- --------
Revenues:
Internet Data Centers $109,886 $ 28,509
Professional services 24,256 1,601
-------- --------
Total revenues $134,142 $ 30,110
======== ========
Operating profit (loss):
Internet Data Centers $ 17,567 $ 4,050
Professional services 3,029 (569)
Corporate areas (50,228) (21,219)
-------- -------
Total operating loss $(29,632) $(17,738)
======== =======
March 31, December 31,
2000 1999
---------- ------------
Total assets:
Internet Data Centers $ 438,298 $ 314,452
Professional services 3,946 3,068
Corporate assets 1,384,938 1,425,370
---------- ----------
Total assets $1,827,182 $1,742,890
========== ==========
NOTE 10 - STOCK SPLIT
On March 3, 2000, the Company announced that its Board of Directors
approved a two-for-one stock split, which is to be effected in the form of a
stock dividend. The split is subject to stockholder approval of an increase in
the Company's authorized shares of common stock. Subject to this approval, the
record date for the stock split will be June 7, 2000, and thereafter, on or
about June 20, 2000, each stockholder of record will receive one additional
share for each share held. Share and per share information in these financial
statements does not reflect this stock split.
<PAGE>
NOTE 11 - SUBSEQUENT EVENT
In April 2000, the Company closed its investment in the common stock of
Mirror Image Internet, Inc. ("Mirror Image"), a provider of content distribution
services. $75.0 million of the investment was paid in cash, with the balance of
the consideration consisting of 3,758,268 shares of the Company's common stock.
The total value of the investment on the closing date was approximately $385.1
million.
In April 2000, the Company entered into an agreement to increase its
existing $20,000,000 line of credit facility with a financial institution to
$30,000,000. This line of credit will expire in December 2000 and is to be used
solely for letters of credit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. Forward-looking statements are identified by words such
as "believes," "anticipates," "expects," "intends," "will," "may," and other
similar expressions. In addition, any statements which refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. In addition, the section labeled "Factors Affecting
Future Results" consists primarily of forward-looking statements. We undertake
no obligation to revise forward-looking statements. Readers are urged to review
and consider carefully the various disclosures made by us in this report and in
our other reports filed with the Securities and Exchange Commission, including
our 1999 Annual Report on Form 10-K, that advise interested parties of risks and
uncertainties that may affect our business. These risks and uncertainties
include: difficulties in achieving timely expansion of our network and opening
of additional Internet Data Centers, difficulties in executing our current
business plan, including the integration of acquired companies, retaining
customers and attracting new customers, and difficulties in developing and
deploying new services. Our actual results may differ materially from any
forward-looking statements due to such risks and uncertainties.
Overview
As a leading provider of services for companies with complex Internet
businesses, Exodus offers a wide range of capabilities, from sophisticated
Managed and Professional services to state-of-the-art facilities to one of the
most technologically advanced global networks in the world.
We are the successor to a Maryland corporation that was formed in August
1992 to provide computer-consulting services. We began offering server hosting
and Internet connectivity services in late 1995, opened our first dedicated
Internet Data Center in August 1996 and introduced Managed Services in 1997 and
Professional Services in 1998. We have derived most of our revenues from
customers for whom we provide these services. Many of our Internet Data Center
customers initially purchase a subset of our service offerings to address
specific departmental or enterprise Internet computing needs, and many of these
customers purchase additional services as the scale and complexity of their
Internet operations increase. We sell our services under contracts that
typically have minimum terms of one year. Customers pay monthly fees for the
services utilized, as well as one-time fees for installation, certain
professional services and for equipment they purchase from us.
We opened our first Internet Data Center in the Silicon Valley metropolitan
area in August 1996. Since that time, we have opened 17 additional North
American Internet Data Centers in the metropolitan areas of New York (March 1997
and September 1999), Silicon Valley (August 1997, June 1998 and June 1999),
Seattle (September 1997 and June 1999), Los Angeles (October 1997 and September
1999), Washington, D.C. (December 1997 and May 1999), Boston (July 1998 and
December 1999), Chicago (April 1999), Austin, Texas (November 1999), Atlanta
(December 1999) and Toronto, Canada (April 2000). In addition, we opened our
first Internet Data Center outside of the United States in London in June
<PAGE>
1999. In December 1999, we acquired Global OnLine Japan Co., Ltd. of Tokyo,
Japan, which has an Internet Data Center located in Tokyo. We relocated this
Internet Data Center to a new facility in Tokyo in March 2000. In April 2000, we
opened an Internet Data Center in Frankfurt, Germany. The building of Internet
Data Centers has required us to obtain substantial equity and debt financing.
See "Factors Affecting Future Results--Our substantial leverage and debt service
obligations adversely affect our cash flow" and "--Liquidity and Capital
Resources" below.
On February 11, 2000, we acquired KeyLabs, a provider of e-business testing
services based in Utah. We issued approximately 393,000 shares of Exodus common
stock in exchange for all outstanding shares of KeyLabs common stock and
reserved approximately 101,000 shares of common stock for issuance upon the
exercise of KeyLabs options we assumed pursuant to the agreement, for total
consideration valued at approximately $50,000,000. The transaction was accounted
for as a purchase with the results of KeyLabs' operations included from the
acquisition date. The excess of the purchase price over the fair value of
tangible net assets acquired amounted to approximately $48,210,000 and was
attributed primarily to goodwill ($46,140,000), customer lists ($1,450,000) and
assembled workforce ($620,000). These amounts are being amortized on a
straight-line basis over periods ranging from 3 to 5 years.
On June 22, 1999, we issued an additional $75,000,000 of Senior Notes due
2008 at 100.50% plus accrued interest, if any, from June 22, 1999, for aggregate
net proceeds of approximately $73.2 million (net of offering expenses). Interest
is payable semi-annually on January 1 and July 1 of each year. On December 8,
1999, we issued $375,000,000 and Euro 125,000,000 of 10 3/4% Senior Notes due
2009 for aggregate net proceeds of approximately $486 million (net of offering
expenses). Interest is payable semiannually on June 15 and December 15 of each
year.
On March 3, 1999, we issued $250,000,000 of 5% Convertible Subordinated
Notes due March 15, 2006 for aggregate net proceeds of approximately $242
million (net of offering expenses). The convertible notes are convertible into
our common stock at a conversion rate of 87.5704 shares per $1,000 principal
amount of convertible notes, subject to adjustment in certain events and at each
holder's option. Interest on the convertible notes is payable on March 15 and
September 15 of each year. On December 8, 1999, we issued $500,000,000 of 4 3/4%
Convertible Subordinated Notes due July 15, 2008 for aggregate net proceeds of
approximately $485 million (net of offering expenses). These convertible notes
are convertible into our common stock at a conversion rate of 14.2034 shares per
$1,000 principal amount of the notes, subject to adjustment in certain
circumstances. Interest is payable on January 15 and July 15 of each year.
In March 2000, we entered into a definitive agreement to make an investment
in the comon stock of Mirror Image Internet, Inc. ("Mirror Image"), a provider
of content distribution services. $75.0 million of the investment will be paid
in cash, with the balance of the consideration consisting of 3,758,268 shares
of our common stock. Those shares were registered for resale in May 2000. The
agreement closed in April 2000 and the total value of the investment on the
closing date was approximately $385.1 million. We also entered into a
commercial agreement to offer Mirror Image's content distribution services and
to deploy Mirror Image Content Access Point architecture throughout our
Internet Data Center network.
We intend to expand domestically and internationally. Prior to building an
Internet Data Center in a new geographic region, we employ various means to
evaluate the market opportunity in a given location, including market research
on Internet usage statistics, the pre-selling of services into the proposed
market and analysis of specific financial criteria. We typically require at
least six months to select the appropriate location for an Internet Data Center,
construct the necessary facilities, install equipment and telecommunications
infrastructure, and hire the operations and sales personnel needed to conduct
business at that site. Expenditures related to an Internet Data Center commence
well before the Internet Data Center opens, and it takes an extended period to
approach break-even capacity utilization at each site. As a result, we expect
that individual Internet Data Centers will experience losses for in excess of
one year from the time they are opened. We experience further losses from sales
personnel hired to test market our services in markets where there is no, and
may never be an Internet Data Center. As a result, we expect to make investments
in expanding our business rapidly into new geographic regions which, while
potentially
<PAGE>
increasing our revenues in the long term, will lead to significant
losses for the foreseeable future. See "Factors Affecting Future Results--Our
rapid expansion produces a significant strain on our business and requires us to
expend substantial resources".
Since we began to offer server hosting and Internet connectivity services
in 1995, we have experienced operating losses and negative cash flows from
operations in each fiscal quarter and year. As of March 31, 2000, we had an
accumulated deficit of approximately $286.6 million. The revenue and income
potential of our business and market is unproven, and our limited operating
history makes an evaluation of our prospects and us difficult. We intend to
invest in new Internet Data Centers and other sites, product development, and
sales and marketing programs. We therefore believe that we will continue to
experience net losses on a quarterly and annual basis for the foreseeable
future. As a company in the new and rapidly evolving market for Internet system
and network management solutions, we encounter risks, expenses and difficulties
that affect our business and prospects. There can be no assurance that we will
achieve profitability on a quarterly or an annual basis or that we will sustain
profitability. See "Factors Affecting Future Results--Our short operating
history and heavy losses make our business difficult to evaluate."
Results of Operations
The following table sets forth certain statement of operations data as a
percentage of total revenues for the three month periods ended March 31, 2000
and 1999. This information has been derived from our unaudited condensed
consolidated financial statements which, in management's opinion, have been
prepared on substantially the same basis as the audited financial statements
included in our 1999 Annual Report on Form 10-K 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 condensed consolidated
financial statements and accompanying Notes included in this Form 10-Q. The
operating results in any quarter are not necessarily indicative of the results
to be expected for any future period.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
------- -------
<S> <C> <C>
Revenues
Cost of revenue 100% 100%
Gross profit 71% 94%
------- -------
29% 6%
------- -------
Operating expenses:
Marketing and sales 23% 36%
General and administrative 20% 22%
Product development 3% 5%
Amortization of goodwill and intangible assets 5% 2%
------- -------
Total operating expenses 51% 65%
------- -------
Operating loss (22%) (59%)
Interest and other income (expense):
Interest and other income 10% 10%
Interest and other expense (31%) (28%)
------- -------
Total interest and other expense, net 21% 18%
------- -------
Net loss (43%) (77%)
======= =======
</TABLE>
<PAGE>
Revenues
Our revenues consist of (1) monthly fees from customer use of Internet Data
Center sites, network services, managed services, and professional services and
use of equipment and software provided by us, (2) revenues from sales or rentals
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
sales 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 revenues increased 346% to $134.1 million for the three month period
ended March 31, 2000 from $30.1 million in the same respective period of the
prior year. Revenues generated by Internet Data Centers increased to $109.9
million for the three month period ended March 31, 2000 from $28.5 million in
the same respective period of the prior year. This growth in revenues was
primarily the result of opening new Internet Data Centers, expanding existing
Internet Data Centers, increases in the number of new customers and increases
in revenues from existing customers. In addition, revenues generated by
professional services increased to $24.3 million for the three month period
ended March 31, 2000 from $1.6 million in the same respective period of the
prior year which was primarily due to increases in revenues arising from
increases in the number of customers and revenues generated from the
acquisition of Cohesive in July 1999.
Cost of Revenues
Our cost of revenues is comprised of the costs for salaries and benefits
for our customer service and operations personnel (customer service personnel,
network engineers and professional services personnel), depreciation and
amortization, rent, consultants' fee, our network and local telecommunications
circuits, interconnections to other networks, repairs and utilities related to
our Internet Data Centers and other sites and costs of third-party equipment
sold or rented to customers.
Cost of revenues increased 235% to $94.7 million for the three month period
ended March 31, 2000 from $28.3 million in the same respective period of the
prior year. Our cost of revenues as a percentage of revenues decreased to 71%
for the three month period ended March 31, 2000 from 94% for the same respective
period of the prior year. The increase in cost of revenues in absolute
dollars was primarily the result of increased costs associated with hiring
additional employees and consultants, including professional services
employees hired in connection with our business combinations, increased
traffic on our network and to other networks, increased depreciation due to
capital expenditures related to the buildout and expansion of Internet Data
Centers, increased rent, and increased utilities and other costs related to
the opening and expanding of Internet Data Centers. The decrease in cost of
revenues as a percentage of revenues primarily resulted from revenues from new
and existing Internet Data Centers increasing faster than related costs of
revenues. We expect that cost of revenues will continue to increase in
absolute dollars.
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 187% to $30.9 million for the
three month period ended March 31, 2000 from $10.7 million in the same
respective period of the prior year. Our marketing and sales expenses as a
percentage of revenues decreased to 23% for the three month period ended March
31, 2000 from 36% for the same respective period of the prior year. The increase
in marketing and sales expenses in absolute dollars was primarily the result of
increased compensation and related expenses
<PAGE>
associated with hiring additional marketing and sales personnel, including
employees hired in connection with our business combinations, increased rent,
and increased advertising expenses. The decrease in marketing and sales
expenses as a percentage of revenues was primarily due to revenues growing
faster than marketing and sales expenses over that time period. We expect that
marketing and sales expenses will continue to increase in absolute dollars.
General and Administrative
Our general and administrative expenses are primarily comprised of salaries
and benefits for our administrative and management information systems security
personnel, consulting fees, recruiting fees, depreciation on IT equipment and
travel expenses.
Our general and administrative expenses increased 299% to $26.6 million for
the three month period ended March 31, 2000 from $6.7 million in the same
respective period of the prior year. Our general and administrative expenses as
a percentage of revenues decreased to 20% for the three month period ended March
31, 2000 from 22% for the same respective period of the prior year. The
increase in general and administrative expenses in absolute dollars was
primarily the result of increased compensation expenses associated with
additional hiring of general and administrative personnel, including employees
hired in connection with our business combinations, bad debt expenses, costs for
consultants and professional services providers, higher depreciation and
increased recruiting expenses. The decrease in general and administrative
expenses as a percentage of revenues was primarily due to revenues growing
faster than general and administrative expenses. We expect that general and
administrative expense will continue to increase in absolute dollars.
Product Development
Our product development expenses consist primarily of salaries and benefits
for our product development personnel and fees paid to consultants.
Our product development expenses increased 150% to $3.9 million for the
three month period ended March 31, 2000 from $1.5 million in the same respective
period of the prior year. Our product development expenses as a percentage of
revenues decreased to 3% for the three month period ended March 31, 2000 from
5% for the same respective period of the prior year. The increase in product
development expenses in absolute dollars was primarily the result of increased
compensation expenses associated with the hiring of additional product
development personnel to develop our expanded service offerings. The decrease in
product development expenses as a percentage of revenues resulted from revenues
growing faster than product development expenses. We expect that product
development expenses will continue to increase in absolute dollars.
Amortization of Goodwill and Intangible Assets
As part of our strategy to grow through acquisitions of complementary
businesses, we acquired the assets of Arca Systems, Inc. in October 1998,
American Information Systems, Inc. in February 1999, Cohesive in July 1999, GOL
in December 1999 and KeyLabs in February 2000. In connection with those
acquisitions, we have recorded intangible assets related to goodwill, customer
lists and workforce in place. Amortization related to those intangibles was
approximately $7.8 million and $613,000 for the three month periods ended March
31, 2000 and 1999, respectively. These intangibles are being amortized on a
straight-line basis over periods generally ranging from 2 to 8 years. We expect
amortization related to goodwill and other intangible assets will continue to
increase in absolute dollars.
Interest and other expense, net
Our net interest and other expense increased to $28.7 million for the three
month period ended March 31, 2000 from $5.5 million for the same period of the
prior year. The increase in interest and other expense was primarily due to
the $250 million of 5% convertible subordinated notes issued March 3, 1999, the
$75 million 11 1/4% senior notes issued June 22, 1999, the $375 million and
Euro 125 million 10 3/4% senior note financing and the $500 million 4 3/4%
convertible note financing which occurred on December
<PAGE>
8, 1999 and increased borrowings as we entered into equipment loans and lease
agreements to finance the construction of our Internet Data Centers. In
addition, in March 2000, holders of an aggregate principal amount of
approximately $160.0 million of the Company's 5% Convertible Subordinated
Notes due March 15, 2006 converted the notes into approximately 14,000,000
shares of the Company's common stock. The Company made aggregate payments of
approximately $3.2 million to the holders in connection with these conversions
which is included in interest expense for the three month period ended March 31,
2000, in accordance with SFAS 84. The increase in interest expense was partially
offset by increased interest and other income as a result of cash raised in our
$75 million senior notes financing, along with our $375 million and Euro 125
million 10 3/4% senior note financing and our $500 million 4 3/4% convertible
note financing which occurred on December 8, 1999. We expect that net interest
and other expense will continue to increase as we enter into additional
equipment leases and loans, obtain additional borrowings and long term debt and
experience reduced interest income as a result of the decline in our cash
reserves to fund working capital and other uses.
EBITDA
Our earnings before net interest and other expense, income taxes,
depreciation, amortization (including amortization of deferred stock
compensation) and other noncash charges ("EBITDA") was $1.7 million for the
three month period ended March 31, 2000 compared to an EBITDA loss of $11.8
million for the same period of the prior year. The increase in the level of
EBITDA was primarily due to increased revenues from new and existing customers,
as well as increases in revenues from our managed services and professional
service offerings. The increase in revenue was partially offset by related
increases in the costs of those revenues as well as operating expenses.
Although EBITDA should not be used as an alternative to operating loss or
net cash provided by (used for) operating activities, investing activities or
financing activities, each as measured under generally accepted accounting
principles, our management believes that EBITDA is an additional meaningful
measure of performance.
Liquidity and Capital Resources
From inception through March 31, 2000, we have financed our operations
primarily through private sales of preferred stock, our initial public offering
of common stock in March 1998, our senior notes offerings in July 1998, June
1999 and December 1999, our convertible subordinated notes offerings in March
1999 and December 1999, and through various types of equipment loans and lease
lines and working capital lines of credit. At March 31, 2000, our principal
source of liquidity was approximately $863.4 million in cash and cash
equivalents. In addition, due to our senior notes offering in December 1999, we
also have the right to issue up to $100.0 million of additional senior notes on
or prior to December 15, 2000. As of March 31, 2000, our outstanding bank
borrowings, equipment loans and lines of credit facilities, capital lease
obligations and senior and convertible notes were approximately $1.4 billion.
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 three months ended March 31, 2000 was $21.1
million, primarily due to net losses and increases in accounts receivable and
prepaid expenses and other assets, offset in part by depreciation and
amortization and increases in accounts payable, accrued expenses and accrued
interest payable. This compares to net cash used for operating activities for
the three months ended March 31, 1999 of $16.3 million which was primarily due
to net losses, an increase in accounts receivable and prepaid expenses and
other assets and a decrease in accrued interest payable, offset in part by
depreciation and amortization and an increase in accounts payable.
Net cash used for investing activities for the three months ended March 31,
2000 was $160.5 million primarily due to capital expenditures for the
continued construction of Internet Data Centers and an increase in restricted
cash equivalents and investments, offset in part by a release of restricted
cash equivalents and investments. This compares to net cash used for investing
activities for the three months ended March 31, 1999 of $44.6 million which
was due to capital expenditures for the construction of Internet Data Centers
and the acquisition of AIS, offset in part by a release of restricted cash
equivalents and investments.
Net cash provided by financing activities for the three months ended March
31, 2000 was approximately $34.5 million, primarily due to the proceeds from our
issuance of common stock. This compares to net cash provided by financing
activities for the three months ended March 31, 1999 of $234.1
<PAGE>
million which was primarily due to the proceeds from our issuance of $250
million of convertible subordinated notes, offset in part by payments on
equipment loans and line of credit facilities.
As of March 31, 2000, we had commitments under capital leases and under
noncancellable operating leases of $65.8 million and $534.5 million,
respectively, through 2016. In addition, in August 1999 we entered into
capacity purchase agreements with Global Crossing USA, Inc. The agreements
provide for a total potential outlay of approximately $105.0 million for fiber
capacity and related maintenance covering approximately 25 years. As of March
31, 2000, we had expended $24.0 million.
We intend to make significant expenditures during the next 12 months
primarily for property and equipment, in particular equipment and construction
needed for existing and future Internet Data Centers, as well as office
equipment, computers and telephones. We have a $30 million line of credit
facility with a financial institution that is used for letters of credits
required to obtain facilities for operating activities. We expect to finance
capital expenditures primarily through the remaining net proceeds from our
10 3/4% senior notes and 4 3/4% convertible subordinated notes issued in
December 1999, existing and future equipment loans and lease lines of credit,
and issuances of additional debt and other financing activities. We believe our
currently estimated working capital and capital expenditure requirements over
the next 12 months can be met with existing cash and cash equivalents and
investments, cash from sales of services and proceeds from existing and future
debt financings and existing and future equipment financing lines of credit.
We may enter into additional equipment loans and capital leases. We may also
seek to raise additional funds through public or private financing, strategic
relationships or other arrangements. There can be no assurance that we will be
successful in generating sufficient cash flows from operations or raising
capital in sufficient amounts on terms acceptable to us. See "Factors
Affecting Future Results--Our rapid expansion produces a significant strain on
our business and requires us to expend substantial resources."
Recent Accounting Pronouncements
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes methods for accounting for derivative financial instruments and
hedging activities related to those instruments, as well as other hedging
activities. Because we do not currently hold any derivative instruments and do
not engage in hedging activities, we expect that the adoption of SFAS No. 133
will not have a material impact on our financial position, results of operations
or cash flows. We will be required to adopt SFAS No. 133 for the year ending
December 31, 2001.
Revenue Recognition
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, as amended by SAB No. 101A, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. We do not expect the adoption of SAB 101 to have a
material effect on our consolidated financial position or results of operations.
In March 2000, the Emerging Issues Task Force ("EITF") published their
consensus on EITF Issue No. 00-3, Application of AICPA Statement of Position
97-2, Software Revenue Recognition, to Arrangements That Include the Right to
Use Software Stored on Another Entity's Hardware. EITF Issue No. 00-3 outlines
the accounting criteria for hosting arrangements. We do not expect the adoption
of EITF Issue No. 00-3 to have a material effect on our consolidated financial
position or results of operations.
Stock-Based Compensation
<PAGE>
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. This Interpretation clarifies the application of Opinion 25
for certain issues including: (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. In general, this Interpretation is effective July 1, 2000. We do
not expect the adoption of Interpretation No. 44 to have a material effect on
our consolidated financial position or results of operations.
Factors Affecting Future Results
Our short operating history and heavy losses make our business difficult to
evaluate
Our limited operating history makes evaluating our business operations and
our prospects difficult. We began offering server hosting and Internet
connectivity services in 1995, opened our first dedicated Internet Data Center
in August 1996 and introduced managed services in 1997 and professional services
in 1998. Due to our short operating history, our business model is still
evolving. We have incurred operating losses and negative cash flows each fiscal
quarter and year since 1995. Our accumulated deficit was approximately $286.6
million at March 31, 2000. We anticipate continuing to make significant
investments in new Internet Data Centers and network infrastructure, product
development, sales and marketing programs and personnel. We believe that we will
continue to experience net losses on a quarterly and annual basis for the
foreseeable future. We may also use significant amounts of cash and/or equity to
acquire complementary businesses, products, services or technologies. Although
we have experienced significant growth in revenues in recent periods, this
growth rate is not necessarily indicative of future operating results. It is
possible that we may never achieve profitability on a quarterly or an annual
basis.
Our operating results have fluctuated widely and we expect this to continue
We have experienced significant fluctuations in our results of operations
on a quarterly and an annual basis. We expect to continue to experience
significant fluctuations due to a variety of factors, many of which are outside
of our control, including:
. demand for and market acceptance of our services;
. reliable continuity of service and network availability;
. the ability to increase bandwidth as necessary, both on our network and
at our interconnection points with other networks;
. costs related to the acquisition of network capacity and arrangements
for interconnections with third-party networks;
. customer retention and satisfaction;
. capacity utilization of our Internet Data Centers;
. the timing, magnitude and integration of acquisitions of complementary
businesses and assets;
. the timing of customer installations;
. the provision of customer discounts and credits;
. the mix of services sold by us;
<PAGE>
. 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 timing of expansion of existing Internet Data Centers and completion
of new Internet Data Centers, including obtaining necessary permits and
adequate public utility power;
. the introduction by third parties of new Internet and networking
technologies;
. changes in our pricing policies and those of our competitors;
. fluctuations in bandwidth used by customers; and
. licenses and permits required to construct facilities, deploy networking
infrastructure or operate in the United States and foreign countries.
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to telecommunications, depreciation,
substantial interest expenses, real estate and personnel. Therefore, our results
of operations are particularly sensitive to fluctuations in revenues.
Furthermore, if we were to become unable to continue leveraging third-party
products in our services offerings, our product development costs could increase
significantly. Finally, many of our customers are emerging growth companies
which may have negative cash flows, and there is the possibility that we will
not be able to collect receivables on a timely basis.
Our rapid expansion produces a significant strain on our business and requires
us to expend substantial resources
The expansion of our network through the opening of additional Internet
Data Centers in geographically diverse locations is one of our key strategies.
We currently have 21 Internet Data Centers located in the following metropolitan
areas: Atlanta, Austin, Boston, Chicago, Frankfurt, London, Los Angeles, New
York, Seattle, Silicon Valley, Tokyo, Toronto and Washington, D.C. To expand
successfully, we must be able to assess markets, locate and secure new Internet
Data Center sites, install telecommunications circuits and equipment and
Internet Data Center facilities, and establish additional interconnections with
Internet service providers. To manage this expansion effectively, we must
continue to improve our operational and financial systems and expand, train and
manage our employee base. Our inability to establish additional Internet Data
Centers or effectively manage our expansion would have a material adverse effect
upon our business.
We expect to expend substantial resources for leases and/or the purchase of
real estate, significant improvements of facilities, purchase of complementary
businesses, assets and equipment, implementation of multiple telecommunications
connections and hiring of network, administrative, customer support and sales
and marketing personnel with the establishment of each new Internet Data Center.
Moreover, we expect to make additional significant investments in sales and
marketing and the development of new services as part of our expansion strategy.
The failure to generate sufficient cash flows or to raise sufficient funds may
require us to delay or abandon some or all of our development and expansion
plans or otherwise forego market opportunities, making it difficult for us to
generate additional revenue and to respond to competitive pressures.
In general, it takes us at least six months to select the appropriate
location for a new Internet Data Center, construct the necessary facilities,
install equipment and telecommunications infrastructure and hire operations and
sales personnel. Expenditures commence well before the Internet Data Center
opens, and it takes an extended period for us to approach break-even capacity
utilization. As a result, we expect that individual Internet Data Centers will
experience losses for in excess of one year from the time they are
<PAGE>
opened. We incur further expenses from sales personnel hired to test market our
services in markets where there is no Internet Data Center. Growth in the number
of our Internet Data Centers is likely to increase the amount and duration of
losses. In addition, if we do not attract customers to new Internet Data Centers
in a timely manner, or at all, our business would be materially adversely
affected.
We compete with much larger companies and there are few barriers to entry, and
if we cannot compete effectively, we will lose business
Our market is intensely competitive. There are few substantial barriers to
entry, and we expect to face additional competition from existing competitors
and new market entrants in the future. Many companies have announced that they
intend to begin providing and/or greatly expand their service offerings that are
competitive with our services. The principal competitive factors in this market
include:
. the ability to deliver services when requested by the customer;
. Internet system engineering and other expertise;
. customer service;
. network capability, reliability, quality of service and scalability;
. the variety of services offered;
. access to network resources, including circuits, equipment and
interconnection capacity to other networks;
. broad geographic presence;
. price;
. the ability to maintain and expand distribution channels;
. brand name;
. the timing of introductions of new services;
. network security; and
. financial resources.
There can be no assurance that we will have the resources or expertise to
compete successfully in the future. Our current and potential competitors in the
market include:
. providers of server hosting services;
. national, foreign and regional ISPs;
. global, regional and local telecommunications companies and Regional
Bell Operating companies;
. IT outsourcing firms; and
. other technology services and products companies.
<PAGE>
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 prices and other competition.
Our market is new and our services may not be generally accepted by enterprises
looking to outsource their mission-critical Internet operations, which could
harm our operating results
The market for Internet system and network management solutions has only
recently begun to develop, is evolving rapidly and is characterized by an
increasing number of market entrants. This market may not prove to be viable or,
if it becomes viable, may not continue to grow. We currently incur costs greater
than our revenues. If we cannot retain or grow our customer base, we will not be
able to increase our sales and revenues or create economics of scale to offset
our fixed and operating costs. 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 and delivery.
Our substantial leverage and debt service obligations adversely affect our cash
flow
We have substantial amounts of outstanding indebtedness, primarily from our
10 3/4% senior notes, 4 3/4% convertible subordinated notes, 11 1/4% senior
notes, and our 5% convertible subordinated notes. There is the possibility that
we may be unable to generate cash sufficient to pay the principal of, interest
on and other amounts due in respect of, our debt when due. As of March 31, 2000,
we had debt of approximately $1.4 billion. We also have the right to issue
additional 10 3/4% senior notes on or prior to December 15, 2000 in an
aggregate principal amount not to exceed $100.0 million. In addition, we expect
to add additional equipment loans and lease lines to finance capital
expenditures for our Internet Data Centers and to obtain additional long term
debt, working capital lines of credit and lease lines. We cannot be certain that
any financing arrangements will be available.
Our substantial leverage could have significant negative consequences,
including:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;
. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
<PAGE>
. placing us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.
We are subject to restrictive covenants in our note indentures that limit our
flexibility in managing our business
Our senior notes and convertible subordinated notes contain various
restrictions on our ability to incur debt, pay dividends or make other
restricted payments, sell assets, enter into affiliate transactions and take
other actions. Furthermore, our existing financing arrangements are, and future
financing arrangements are likely to be, secured by substantially all of our
assets. The existing financing arrangements require, and future financing
arrangements are likely to require, that we maintain specific financial ratios
and comply with covenants restricting our ability to incur debt, pay dividends
or make other restricted payments, sell assets, enter into affiliate
transactions or take other actions.
In addition, a number of instruments evidencing our debt restrict the
manner in which the funds raised in our debt financings and debt incurred in the
future may be used.
We must manage growth effectively by expanding operating and financial
procedures, controls and systems or our business will be harmed
We are experiencing, and expect to continue experiencing, rapid growth with
respect to the building of our Internet Data Centers and network infrastructure,
acquisitions of assets and companies, expansion of our service offerings,
geographic expansion, expansion of our customer base and increases in the number
of employees. This growth has placed, and we expect it to continue to place, a
significant strain on our financial, management, operational and other
resources, including our ability to ensure customer satisfaction. This expansion
also requires significant time commitment from our senior management and places
a significant strain on their ability to manage the existing business. In
addition, we are required to manage multiple relationships with a growing number
of third parties as we seek to complement our service offerings. Our ability to
manage our growth effectively will require us to continue to expand operating
and financial procedures and controls, to replace or upgrade our operational,
financial and management information systems and to attract, train, motivate and
retain key employees. We have recently hired many key employees and officers,
and as a result, our entire management team has worked together for only a brief
time. In addition, we intend to hire additional senior management personnel to
support our growth and expansion of our business. If our executives are unable
to manage growth effectively, our business could be materially adversely
affected.
We may experience difficulty in integrating our recent acquisitions which could
harm our operating results
In October 1998 we acquired the assets of Arca, in February 1999 we
acquired AIS, in July 1999 we acquired Cohesive, in November 1999 we merged with
SMI, and in December 1999 we acquired GOL. Furthermore, in February 2000, we
completed our acquisition of KeyLabs and in April 2000, we completed our equity
investment in Mirror Image. We continue to expend resources integrating
Cohesive, SMI, and KeyLabs and the personnel hired in connection with
acquisitions. As we acquire additional companies, we will incur additional
expenses.
We believe that our future growth depends, in part, upon the acquisition of
complementary businesses, products, services or technologies. After purchasing a
company, we could have difficulty in assimilating that company's technology,
personnel and operations. In addition, the key personnel of the acquired company
may decide not to work for us. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses. In
addition, future acquisitions by us may require us to issue stock that could
dilute the ownership of our then existing stockholders, incur additional debt or
assume liabilities, result in large one-time write-offs or create goodwill or
other intangible assets that could result in amortization expenses.
<PAGE>
System failures could lead to significant costs
We must protect our network infrastructure, our equipment, and customers'
equipment against damage from human error, physical or electronic security
breaches, power loss and other facility failures, fire, earthquake, flood,
telecommunications failure, sabotage, vandalism and similar events. Despite
precautions we have taken, a natural disaster or other unanticipated problems at
one or more of our Internet Data Centers could result in interruptions in our
services or significant damage to customer equipment. In addition, failure of
any of our telecommunications providers, such as MCI WorldCom, Qwest
Communications Corporation and Global Crossing, to provide consistent data
communications capacity, and local exchange carriers to provide interconnection
agreements, could result in interruptions in our services. Any damage to or
failure of our systems or service providers could result in reductions in, or
terminations of, services supplied to our customers, which could have a material
adverse effect on our business. In the past, we have experienced interruptions
in specific circuits within our network resulting from events outside our
control, temporary loss of power, and failure of networking equipment, all of
which led to short-term degradation in the level of performance of our network
or temporary unavailability of our services. We attempt to limit exposure to
system downtime by contract by giving customers a credit of free service for a
short period of time for disruptions. However, customers may demand additional
remedies. If we incur significant service level commitment obligations in
connection with system downtime, our liability insurance may not be adequate to
cover those expenses.
Customer satisfaction with our services is critical to our success
Our customers demand a very high level of service. Our customer contracts
generally provide a limited service level commitment related to the continuous
availability of service on a 24 hours per day, seven-days-per-week basis. This
commitment is generally limited to a credit consisting of free service for a
short period of time for disruptions in Internet transmission services. If we
incur significant service level commitment obligations in connection with system
downtime, our liability insurance may not be adequate to cover these expenses.
As customers outsource more mission-critical operations to us, we are subject to
increased liability claims and customer dissatisfaction if our systems fail or
our customers otherwise become unsatisfied.
Our ability to expand our network is unproven and will require substantial
financial, operational and management resources
To satisfy customer requirements, we must continue to expand and adapt our
network infrastructure. We are dependent on MCI WorldCom, Qwest, Global Crossing
and other telecommunications providers for our network capacity. The expansion
and adaptation of our telecommunications infrastructure will require substantial
financial, operational and management resources as we negotiate
telecommunications capacity with network infrastructure suppliers. Due to the
limited deployment of our services to date, our ability to connect and manage a
substantially larger number of customers at high transmission speeds is unknown.
We have yet to prove our network's ability to be scaled up to higher customer
levels while maintaining superior performance. Furthermore, it may be difficult
for us to increase quickly our network capacity in light of current necessary
lead times within the industry to purchase circuits and other critical items. If
we fail to achieve or maintain high capacity data transmission circuits,
customer demand could diminish because of possible degradation of service. In
addition, as we upgrade our telecommunications infrastructure to increase
bandwidth available to our customers, we expect to encounter equipment or
software incompatibility which may cause delays in implementation.
We depend on network interconnections provided by third parties who may raise
their fees or deny access
<PAGE>
We rely on a number of public and private network interconnections to allow
our customers to connect to other networks. If the networks with which we
interconnect were to discontinue their interconnections, our ability to exchange
traffic would be significantly constrained. Furthermore, our business will be
harmed if these networks do not add more bandwidth to accommodate increased
traffic. Many of the companies with which we maintain interconnections are our
competitors. Some of these networks require that we pay them fees for the right
to maintain interconnections. There is nothing to prevent any networks, many of
which are significantly larger than we are, from increasing fees or denying
access. In early 2000, one network with whom we previously maintained
interconnections unilaterally terminated the interconnections. In the future,
other networks could refuse to continue to interconnect directly with us, might
impose significant costs on us or limit our customers' access to their networks.
In this event, we may not be able on a cost-effective basis to access
alternative networks to exchange our customers' traffic. In addition, we may not
be able to pass through to our customers any additional costs of utilizing these
networks. In these cases, our business could be harmed.
Difficulties presented by international economic, political, legal, accounting
and business factors could harm our business in international markets
A component of our strategy is to expand into international markets. We
opened our first Internet Data Center outside of the United States in the London
metropolitan area in June 1999 and acquired an Internet Data Center in Tokyo
through our acquisition of GOL in December 1999. In April, we opened two
additional Internet Data Center in Frankfurt and Toronto. Furthermore, we plan
to open additional international Internet Data Centers by the end of 2000. In
order to expand our international operations, we may enter into joint ventures
or outsourcing agreements with third parties, acquire rights to high-bandwidth
transmission capability, acquire complementary businesses or operations, or
establish and maintain new operations outside of the United States. Thus, we
may depend on third parties to be successful in our international operations.
In addition, the rate of development and adoption of the Internet has been
slower outside of the United States, and the cost of bandwidth has been higher,
which may adversely affect our ability to expand operations and may increase our
cost of operations internationally. The risks inherent in conducting business
internationally include:
. unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers;
. challenges in staffing and managing foreign operations;
. differences in technology standards;
. employment laws and practices in foreign countries;
. longer payment cycles and problems in collecting accounts receivable;
. political instability;
. fluctuations in currency exchange rates and imposition of currency
exchange controls; and
. potentially adverse tax consequences.
We might not be successful in our attempts to keep up with rapid technological
change and evolving industry standards
Our future success will depend on our ability to offer services that
incorporate leading technology and address the increasingly sophisticated and
varied needs of our current and prospective customers. Our market is
characterized by rapidly changing and unproven technology, evolving industry
standards,
<PAGE>
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. Any 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 conform
timely to new standards. Our failure to conform to a prevailing standard, or the
failure of a common standard to emerge, could have a material adverse effect on
our business.
System security risks could disrupt our services
The ability to provide secure transmissions of confidential information
over networks accessible to the public is a significant barrier to electronic
commerce and communications. A portion of our services rely on encryption and
authentication technology licensed from third parties. Despite a variety of
network security measures taken by us, we cannot assure that unauthorized
access, computer viruses, accidental or intentional actions and other
disruptions will not occur. Our Internet Data Centers have experienced and may
in the future experience delays or interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees of Exodus or others. Furthermore, inappropriate use of the network by
third parties could also jeopardize the security of confidential information,
such as customer and Exodus passwords as well as credit card and bank account
numbers, stored in our computer systems or those of our customers. As a result,
we could become liable to others and lose existing or potential customers. The
costs required to eliminate computer viruses and alleviate other security
problems could be prohibitively expensive. In addition, the efforts to address
these problems could result in interruptions, delays or cessation of service to
our customers.
We depend on third-party equipment and software suppliers
We depend on vendors to supply key components of our telecommunications
infrastructure and system and network management solutions. Some of the
telecommunications services and networking equipment is available only from sole
or limited sources. For instance, the routers, switches and modems we use are
currently supplied primarily by Cisco Systems, Inc. We typically purchase or
lease all of our components under purchase orders placed from time to time. We
do not carry significant inventories of components and have no guaranteed supply
arrangements with vendors. If we are unable to obtain required products or
services on a timely basis and at an acceptable cost, our business would be
harmed. In addition, if our sole or limited source suppliers do not provide
products or components that comply with evolving Internet and telecommunications
standards or that interoperate with other products or components we use, our
business would be harmed. For example, we have experienced performance problems,
including previously unknown software and firmware bugs, with routers and
switches that have caused temporary disruptions in and impairment of network
performance.
Government regulation and legal uncertainties may harm our business
Laws and regulations directly applicable to communications and commerce
over the Internet are becoming more prevalent. The United States Congress has
recently considered enacting Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union also recently enacted its own privacy regulations. The law of the
Internet, however, remains largely unsettled, even in areas where there has been
some legislative action. It may take years to
<PAGE>
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 many
states in the United States and in many foreign countries, and we facilitate the
activities of our customers in these jurisdictions. As a result we may be
required to qualify to do business, or be subject to taxation, or be subject to
other laws and regulations, in these jurisdictions even if we do not have a
physical presence or employees or property in these jurisdictions. The
application of these multiple sets of laws and regulations is uncertain, but we
could find that Exodus is subject to regulation, taxation, enforcement or other
liability in unexpected ways, which could materially adversely affect our
business.
We could be held liable for the information disseminated through our network
The law relating to the liability of online services companies and Internet
access providers for information and commerce carried on or disseminated through
their networks is currently unsettled. The Child Online Protection Act of 1998
imposes criminal penalties and civil liability on anyone engaged in the business
of selling or transferring material that is harmful to minors, by means of the
World Wide Web, without restricting access to this type of material by underage
persons. Numerous states have adopted or are currently considering similar types
of legislation. The imposition upon us and other Internet network providers of
potential liability for information carried on or disseminated through systems
could require us to implement measures to reduce exposure to liability, which
may require the expenditure of substantial resources, or to discontinue various
service or product offerings. Further, the costs of defending against any claims
and potential adverse outcomes of these claims could have a material adverse
effect on our business. While we carry professional liability insurance, it may
not be adequate to compensate or may not cover us in the event we become liable
for information carried on or disseminated through our networks.
Some businesses, organizations and individuals have in the past sent
unsolicited commercial e-mail messages through our network or advertising sites
hosted at our facilities to a massive number of people. This practice, known as
"spamming," has led to some complaints against us. In addition, some ISPs and
other online services companies could deny network access to us if we allow
undesired content or spamming to be transmitted through our networks. Although
we prohibit customers by contract from spamming, we cannot be sure that
customers will not engage in this practice, which could have a material adverse
effect on our business.
Our future success depends on our key personnel
Our success depends in significant part upon the continued services of our
key technical, sales and senior management personnel. Any officer or employee
can terminate his or her relationship at any time. If we lose the services of
one or more of our key employees or are unable to attract additional qualified
personnel, our business would be adversely affected. We do not carry key-person
life insurance for any of our employees.
If the Internet and Internet infrastructure development do not continue to grow,
our business will be harmed
Our success depends in large part on continued growth in the use of the
Internet. Critical issues concerning the commercial use of the Internet,
including security, reliability, cost, ease of access, quality of service and
necessary increases in bandwidth availability, remain unresolved and are likely
to affect the development of the market for our services. In addition, the rate
of development and adoption of the Internet has been slower outside of the
United States and the cost of bandwidth has 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
<PAGE>
of the Internet by ISPs and other organizations with links to the Internet. Any
perceived degradation in the performance of the Internet as a whole could
undermine the benefits of our services. Consequently, the emergence and growth
of the market for our services is dependent on improvements being made to the
entire Internet infrastructure to alleviate overloading and congestion.
We face risks associated with protection and enforcement of intellectual
property rights
We rely on a combination of copyright, patent trademark, service mark and
trade secret laws and contractual restrictions to establish and protect
proprietary rights in our products and services. We have very little patented
technology that would preclude or inhibit competitors from entering our market.
Although we have entered into confidentiality agreements with our employees,
contractors, suppliers, distributors and appropriate customers to limit access
to and disclosure of our proprietary information, these may prove insufficient
to prevent misappropriation of our technology or to deter independent third-
party development of similar technologies. In addition, the laws of various
foreign countries may not protect our products, services or intellectual
property rights to the same extent as do the laws of the United States.
In addition to licensing technologies from third parties, we are developing
and acquiring additional proprietary intellectual property. Third parties may
try to claim that our products or services infringe their intellectual property.
We expect that participants in our markets will be increasingly subject to
infringement claims. Any claim, whether meritorious or not, could be time
consuming, result in costly litigation, cause product installation delays or
require us to enter into royalty or licensing agreements. These royalty or
licensing agreements might not be available on terms acceptable to us or at all.
Potential risks related to the Year 2000 problem might harm our business
In many of our recent filings with the Commission, we discussed the nature
and progress of our plans to become year 2000 compliant. In late 1999, we
completed our remediation and testing of systems. As a result of those planning
and implementation efforts, we experienced no significant disruptions in mission
critical information technology systems and other internal operating systems.
Costs directly associated with our year 2000 compliance efforts were not
material, amounting to less than $1.0 million. We are not aware of any material
problems with our products or services or internal operating systems resulting
from year 2000 issues, and we have not received notice of any material year 2000
compliance issues from our external vendors. However, it remains possible that
year 2000 problems associated with our systems or our vendors' products may
still arise or that we could receive notice of year 2000 problems that have
arisen with our vendors' products.
Our stock price has been volatile in the past and is likely to continue to be
volatile
The market price of our common stock has been volatile in the past and is
likely to continue to be volatile. In addition, the securities markets in
general, and Internet stocks in particular, have experienced significant price
volatility and accordingly the trading price of our common stock has been and is
likely to continue to be affected by this activity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio which principally consists of money market funds
with original maturities of 90 days or less. Current yields on these
instruments, categorized as cash equivalents, range from approximately 5.50% to
6.00%. We do not use derivative financial instruments in our investment
portfolio. We place our investments with high quality issuers, and, by policy,
limit the amount of risk by investing primarily in money market funds, debt
instruments of the U.S. government and its agencies, and certificates of
deposits. 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.
<PAGE>
Investment Risk
We invest in equity instruments of privately-held companies for business and
strategic purposes. These investments are included in other assets and are
accounted for under the cost method when ownership is less than 20% and we do
not have the ability to exercise significant influence over operations. For
these investments in privately-held companies, our policy is to regularly review
the assumptions underlying the operating performance and cash flow forecasts in
assessing the carrying values. We identify and record impairment losses on long-
lived assets when events and circumstances indicate that such assets might be
impaired. To date, no such impairment has been recorded. Since our initial
investment, one of these investments in privately-held companies has become a
marketable equity security upon the investee completing an initial public
offering. Such an investment is subject to significant fluctuations in fair
market value due to the volatility of the stock market, and is included in other
assets.
Foreign Currency Risk
Our international business is subject to risks typical of an international
business, including, but not limited to differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors.
We are exposed to foreign exchange rate fluctuations on the financial
results of foreign subsidiaries that are translated into U.S. dollars upon
consolidation and on our Euro 125 million of 10 3/4% Senior Notes due 2009,
which have periodic interest payments due in Euros on June 15 and December 15
of each year commencing on June 15, 2000. Furthermore, exchange rate
volatility may negatively impact our financial results.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sales of Unregistered Securities
On February 11, 2000, we completed our acquisition of KeyLabs, Inc., a
provider of e-business testing services based in Utah. The sales and issuance
of the common stock was exempt from registration as a transaction not
involving any public offering, in compliance with Regulation D of the
Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Description of Exhibit
10.17 Amended Executive Employment Policy
27.01 Financial Data Schedule
b. Reports on Form 8-K
We did not file any reports on Form 8-K during the quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Exodus Communications, Inc.
By: /s/ Ellen M. Hancock May 11, 2000
Ellen M. Hancock
President, Chief Executive Officer and Director
By: /s/ R. Marshall Case May 11, 2000
R. Marshall Case
Executive Vice President, Finance and Chief Financial Officer
<PAGE>
Exhibit 10.17
EXECUTIVE EMPLOYMENT POLICY
---------------------------
It is the policy of Exodus Communications, Inc. to administer the following
guidelines with respect to the employment of its Executives.
Executives
- ----------
An employee will be considered an Executive for purposes of this policy if they
are presented a copy of this document, execute it and return it to the Company.
It is the intention of this policy that employees with the following titles will
be covered by this policy: CEO, President, COO, CFO, Vice President (excluding
Regional Sales Vice Presidents) and certain other executive positions. A list
of "Executives" actually covered by this policy will be maintained by the
Company.
Stock Vesting in Connection with a Change of Control
- ----------------------------------------------------
Immediately prior to a change of control the Executive shall become vested in
fifty percent of his then remaining unvested stock option shares.
Termination in Connection with a Change of Control
- --------------------------------------------------
In the event of a Termination resulting from or related to the change of control
of the Company, the Executive's then effective base salary and medical benefits
will continue in accordance with the following:
1. CEO for 18 months,
2. CFO, COO or Executive Vice Presidents for 12 months, or
3. Vice Presidents for 6 months.
A resignation by an Executive within sixty days after the occurrence or
threatened occurrence of one or more of the following events shall be considered
a "termination" under this section:
1. A material reduction in the Executive's job title or
responsibilities;
2. Any reduction in the Executive's base salary or any material
reduction in benefits or target annual compensation; or
3. A directive that the Executive relocate to an office located more
than a thirty mile radius from the Executive's office immediately
prior to the Change of Control.
<PAGE>
Change of Control
- -----------------
A Change of Control means the occurrence of any of the following events: (i) a
merger or consolidation involving the Company in which the shareholders of the
Company immediately prior to such merger or consolidation own less than fifty
percent of the voting power of the surviving corporation; (ii) the sale of all
or substantially all, of the assets of the Company; or (iii) any person or group
(as defined in the Securities Exchange Act of 1934, as amended) becoming the
beneficial owner (within the meaning of Rule 13d-3 of the Securities Exchange
Act of 1934, as amended), directly or indirectly, of securities representing
more than fifty percent of the voting power of the Company then outstanding.
Termination for Any Other Reason
- --------------------------------
In the event of an Involuntary Termination other than as stated above, and not
for "cause," the Executive's then effective base salary and medical benefits
will continue in accordance with the following:
1. CEO for 12 months,
2. CFO, COO or Executive Vice Presidents for 6 months, or
3. Vice Presidents for 3 months.
In addition, Employee's stock options shall continue to vest during this same
period.
Voluntary Termination
- ---------------------
An Executive that voluntarily terminates the employment relationship does not
receive any compensation, stock or benefits under this policy.
Termination for Cause
- ---------------------
An Executive that is terminated for "cause" does not receive any compensation,
stock or benefits under this policy.
Termination for "cause" means any termination of employment by the Company due
to gross misconduct, criminal behavior, breach of security or misrepresentation.
Agreement Not to Compete
- ------------------------
<PAGE>
In consideration of the compensation, stock and benefits provided under this
policy, and only for the duration of time covered by those payments, the
Executive shall not manage, operate, control, participate in the management,
operation or control of or be employed by any other person or entity which is
engaged in providing services which are directly competitive with the services
offered by the Company.
Release
- -------
Prior to any benefits being provided under this policy the Executive, at the
time of termination, must execute a Release.
In addition, the compensation, stock and benefits provided under this policy are
subject to cancellation in the event that the Executive takes any action or
engages in any conduct that is defamatory towards the Company.
Acknowledgement
- ---------------
I acknowledge that I have read this policy and there is no other agreement
between me and the Company addressing these issues. I agree that any deviations
to this policy must be approved by the Board of Directors.
________________________________________________
Executive's Signature
______________________________________________
Executive's Name
______________________________________________
Date
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INOFRMATION EXTRACTED FROM THE EXODUS
COMMUNICATIONS, INC. FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND IS
QUALIFIED IN THIS ENTIRETY BY REFERNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-START> JAN-01-2000
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<ALLOWANCES> 13,208
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<INTEREST-EXPENSE> 41,862
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