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As filed with the Securities and Exchange Commission on August 10, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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EXODUS COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 4813 77-0403076
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
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2831 Mission College Boulevard
Santa Clara, CA 95054
(408) 346-2200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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Adam W. Wegner
Senior Vice President, Legal and Corporate Affairs, General Counsel and
Secretary
2831 Mission College Boulevard
Santa Clara, CA 95054
(408) 346-2200
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
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Copies to:
Horace L. Nash, Esq.
Robert A. Freedman, Esq.
Kimberly A. Chance, Esq.
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
(650) 494-0600
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Approximate date of commencement of proposed sale of the securities to the
public: As promptly as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]______________
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================
Proposed
Proposed Maximum
Title of each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered(1) Per Unit(1) Price(1) Fee
=============================================================================================
<S> <C> <C> <C> <C>
11 5/8% Senior Notes due
2010................... $1,000,000,000 100% $1,000,000,000 $264,000
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11 3/8% Senior Notes due (Euro)200,000,000 100% $ 180,380,000 $ 47,621
2008................... ($ 180,380,000)(2)
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</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee, pursuant to Rule 457(f) under the Securities Act of 1933,
as amended.
(2) Euro amounts have been translated into U.S. Dollars at Euro 1 = $0.9019,
which was the noon buying rate in New York City for cable transfers in Euro
as certified for custom purposes by the Federal Reserve Bank of New York on
August 8, 2000.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
================================================================================
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PROSPECTUS
Exodus Communications, Inc.
Exchange Offer For $1,000,000,000 11 5/8% Senior Notes Due 2010
and (Euro)200,000,000 11 3/8% Senior Notes Due 2008
Terms of Exchange Offer
Exchange Offer
We will exchange new notes that are registered under the Securities Act for
old notes that were sold on July 6, 2000.
All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged.
We will receive no proceeds from the exchange offer.
Exchange Offer Expiration
, 2000 at 5:00 p.m., New York City time (10:00 p.m., London Time).
Old Notes
On July 6, 2000, we issued and sold $1.0 billion 11 5/8% Senior Notes due
2010 and (Euro)200.0 million of 11 3/8% Senior Notes due 2008.
If you tender your old notes in the exchange offer, interest will cease to
accrue before your new notes are issued. If you do not tender in the exchange
offer, your old notes will continue to be subject to the same terms and
restrictions except that we will not be required to register your old notes
under the Securities Act.
Exodus Communications, Inc.
2831 Mission College Boulevard, Santa Clara, California 95054, (408) 346-
2200.
New Notes
The new notes will be identical to the old notes except that the new notes
will be registered under the Securities Act.
. Maturity: The 11 5/8% Senior Notes will mature on July 15, 2010. The 11
3/8% Senior Notes will mature on July 15, 2008.
. Change of Control: You can require us to purchase your notes at 101% of
the principal amount.
. Interest: Interest on the notes will be paid every six months on January
15 and July 15, starting January 15, 2001.
. Redemption by Exodus: The 11 5/8% Senior Notes are redeemable by us any
time on or after July 15, 2005, except that redemptions for a portion of
the notes may be made at any time prior to July 15, 2003 with the cash
proceeds of specified capital stock sales. The 11 3/8% Senior Notes are
not redeemable by us prior to maturity.
. Ranking: The notes will be general unsecured obligations, ranking:
. equally with all our senior unsecured indebtedness;
. senior to all our subordinated indebtedness; and
. junior to all our secured indebtedness and liabilities of our
subsidiaries.
Investment in the notes to be issued in the exchange offer involves risks.
See the risk factors section beginning on page 12.
This prospectus and the accompanying letter of transmittal are first being
mailed to holders of outstanding notes on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes or passed upon the adequacy
or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2000.
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Documents Incorporated by Reference...................................... ii
Prospectus Summary....................................................... 1
Risk Factors............................................................. 12
Disclosure Regarding Forward-Looking Statements.......................... 23
Use of Proceeds.......................................................... 24
Capitalization........................................................... 25
Selected Consolidated Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business................................................................. 38
Management............................................................... 50
Description of Anticipated Credit Facilities............................. 54
Certain Other Indebtedness............................................... 55
The Exchange Offer....................................................... 58
Description of Notes..................................................... 68
Material United States Federal Income Tax Considerations................. 99
Plan of Distribution..................................................... 104
Legal Matters............................................................ 104
Experts.................................................................. 104
Available Information.................................................... 105
Index to Consolidated Financial Statements and Financial Statement
Schedule................................................................ F-1
</TABLE>
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DOCUMENTS INCORPORATED BY REFERENCE
This prospectus incorporates important business and financial information
about Exodus that is not included in or delivered with this prospectus. We are
incorporating by reference in this prospectus the following documents which we
filed with the commission:
. Our annual report on Form 10-K for the year ended December 31, 1999.
. Our quarterly report on Form 10-Q for the quarter ended March 31,
2000.
. Our current reports on Form 8-K filed April 7, 2000, June 21, 2000
and June 30, 2000.
We are also incorporating by reference in this prospectus all reports and
other documents that we file after the date of this prospectus pursuant to
sections 13(a), 13(c), 14 or 15(d) of the Securities and Exchange Act of 1934,
prior to the termination of the offering of securities under this prospectus.
These reports and documents will be incorporated by reference in and considered
to be part of this prospectus as of the date of filing of the reports and
documents.
Any statement contained in this prospectus or in a document which is
incorporated by reference in this prospectus will be modified or superceded for
purposes of this prospectus to the extent that a statement in any document that
we file after the date of this prospectus that also is incorporated by
reference in this prospectus modifies or supercedes the prior statement. Any
statement so modified or superceded will not, except as so modified or
superceded, constitute a part of this prospectus.
This prospectus incorporates by reference documents which are not presented
in this prospectus or delivered to you with it. You may request, and we will
send to you, without charge, copies of these documents, other than exhibits to
these documents. Requests should be directed to:
Exodus Communications, Inc.
2831 Mission College Boulevard
Santa Clara, California 95054
Attn: General Counsel and Secretary
Telephone: (408) 346-2200
In order to assure timely delivery of the requested materials before the
expiration of the exchange offer, any request should be made prior to ,
2000.
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PROSPECTUS SUMMARY
The following summary highlights some information from this prospectus. It
may not contain all of the information that may be important to you. For a more
complete understanding of the exchange offer, we encourage you to read the
entire prospectus and the documents we have referred you to.
Exodus Communications, Inc.
Exodus Communications is a leading provider of complex Internet hosting for
enterprises with mission-critical Internet operations. We offer sophisticated
system and network management solutions, along with professional services, to
provide optimal performance for customers' Web sites. Exodus delivers its
services from geographically distributed, state-of-the-art Internet Data
Centers that are connected through a high performance dedicated and redundant
backbone network. Our tailored solutions are designed to integrate with
existing enterprise systems architectures and to enable customers to outsource
the monitoring, administration and optimization of their equipment,
applications and overall Internet operations. As of March 31, 2000, we had over
2,800 customers under contract and managed over 39,000 customer servers
worldwide. Our customers represent a variety of industries, ranging from
leading Internet companies to major enterprise customers, including Yahoo!, USA
Today.com, weather.com, priceline.com, British Airways and Nordstrom.
Internet usage is growing rapidly and businesses are increasing the breadth
and depth of their Internet product and services offerings. These Internet
operations are mission-critical for Internet-centric businesses and are
becoming increasingly mission-critical for many enterprises. In order to ensure
the quality, reliability, availability and redundancy of these mission-critical
Internet operations, corporate IT departments must make substantial investments
in facilities, personnel, equipment and networks which must be continuously
upgraded to reflect changing technologies and must rapidly scale as the
enterprise grows. This recurring and significant investment is an inefficient
use of resources and, as a result, a significant need exists for outsourcing
arrangements that can increase performance, provide continuous operation of
Internet solutions and reduce Internet operating expenses. We believe a
significant opportunity exists for a highly focused company to provide a
combination of server hosting, Internet connectivity and managed and
professional services that will enable reliable, high performance mission-
critical Internet operations.
Exodus offers an integrated portfolio of solutions that provide customers
with a scalable, secure and high performance platform for the development,
deployment and proactive management of mission-critical Internet operations.
Our server hosting and Internet connectivity services are offered through our
Internet Data Centers and our redundant backbone network of multiple high speed
OC-3 and OC-12 lines, along with our public and private network
interconnections. We continue to upgrade our network in order to accommodate
expected traffic growth. Our managed services include performance monitoring,
site management reports, data backup, content delivery and management services,
security services and professional services. These services provide the
foundation for high performance, availability, scalability and reliability of
customers' mission-critical Internet operations. In addition, we integrate
best-of-breed technologies from leading vendors with our industry expertise and
proprietary technology.
Our objective is to become the leading provider of Internet system and
network management solutions for enterprises with mission-critical Internet
operations. To achieve this objective, we intend to:
. Continue to position Exodus as the leader in this market;
. Focus on enhancing systems and network management, Internet technology
services and professional services;
. Accelerate our global expansion;
. Leverage our expertise to address new market opportunities; and
. Continue to establish strategic relationships for distribution and
technology.
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We began offering server hosting and Internet connectivity services in late
1995, opened our first dedicated Internet Data Center in August 1996, and
introduced managed services in 1997 and professional services in 1998. We
currently operate 22 Internet Data Centers located in Atlanta, Austin, Boston,
Chicago, Frankfurt, Los Angeles, New York, Seattle, Silicon Valley, Washington,
D.C., London, Tokyo and Toronto.
We expanded our solutions and services by acquiring providers of Internet
technologies--Arca Systems, American Information Systems, Cohesive Technology
Solutions, Service Metrics, Global OnLine Japan, and KeyLabs, Inc. In October
1998, we purchased Arca Systems, a provider of advanced network and system
security consulting services. In February 1999, to accelerate our launch into
the Chicago metropolitan area, we acquired American Information Systems, a
regional provider of co-location, Web hosting and professional services. In
July 1999, we acquired Cohesive Technology Solutions, a technology professional
services organization with expertise in networking, Web applications and
technology solutions. In November 1999, we acquired Service Metrics, an
Internet monitoring applications and services company. In December 1999, we
acquired Global OnLine Japan, an Internet solutions provider, through which we
offer complex Web hosting and a range of managed and professional services in
the Japanese market. Finally, in February 2000, we acquired KeyLabs, Inc., a
provider of e-business testing services and in April 2000, we completed an
equity investment in Mirror Image Internet, Inc., a provider of content
distribution services.
Recent Events
Stock Split. On March 3, 2000, we announced a two-for-one stock split of our
common stock in the form of a stock dividend, paid June 20, 2000 to
stockholders of record on June 7, 2000. Share and per share information in this
prospectus reflects this stock split.
Annual Meeting. At our June 6, 2000 Annual Meeting, our stockholders
approved an increase to the authorized number of shares of our common stock
from 300,000,000 to 1,500,000,000. In addition, our stockholders approved an
increase in the number of shares reserved under our 1998 Equity Incentive Plan
from 40,000,000 to 58,000,000, an increase in the number of shares reserved
under our 1998 Employee Stock Purchase Plan from 9,600,000 to 13,200,000 and
that the number of shares reserved for issuance under our 1998 Employee Stock
Purchase Plan will be increased each year by an amount equal to 1% of the total
number of shares outstanding.
New Directors. On June 7, 2000, we announced that L. William Krause, Dirk A.
Stuurop and Laura D'Andrea Tyson joined our board of directors.
New President and Chief Operating Officer. On June 7, 2000, we announced
that Don Casey joined us as our President and Chief Operating Officer and that
Ellen Hancock was appointed Chairman of the Board. In April 2000, Morris
Taradalsky joined us as our Executive Vice President, Engineering.
Issuance of New Debt. On July 6, 2000, we issued $1.0 billion aggregate
principal amount of 11 5/8% Senior Notes due 2010 and (Euro)200.0 million
aggregate principal amount of 11 3/8% Senior Notes due 2008. The 11 5/8% Senior
Notes and the 11 3/8% Senior Notes were sold at 100% face value. The 11 5/8%
Senior Notes are currently eligible to trade on The Portal Market. We do not
intend to have the 11 3/8% Senior Notes listed on any stock exchange. The 11
5/8% Senior Notes and the 11 3/8% Senior Notes are governed by separate
indentures.
New Trustee. We expect Chase Manhattan Bank, the current trustee on the
indentures governing the 11 5/8% Senior Notes and the 11 3/8% Senior Notes, to
resign as trustee on these indentures and all of our other indentures, and we
expect to replace Chase with HSBC Bank USA as trustee on these indentures and
all of our other indentures. Chase Manhattan Bank will continue to act as
security registrar and to maintain an office or
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agency where the notes may be surrendered for registration or transfer. In
addition, the Chase Manhattan Bank London will remain as transfer agent and
paying agent.
Summary of Second Quarter Financial Results. On July 19, 2000 we announced
our financial results for the second quarter of 2000. Revenues for the quarter
ended June 30, 2000 were $179.6 million compared to $42.6 million in the same
quarter in 1999. Net loss for the quarter ended June 30, 2000 was $51.3
million, or $0.12 per share, compared to $22.6 million, or $0.07 per share, for
the same quarter in 1999. EBITDA (profit before net interest expense, income
taxes, depreciation, amortization and other non-cash charges) for the quarter
ended June 30, 2000 was $8.6 million compared to EBITDA loss $8.7 million for
the same quarter in 1999.
Revenues for the six months ended June 30, 2000 were $313.7 million compared
to $72.7 million for the same period in 1999. Net loss for the six months ended
June 30, 2000 was $109.6 million, or $0.28 per share, compare to $45.9 or $0.14
per share, for the same period in 1999. EBITDA profit for the six months ended
June 30, 2000 was $10.3 million compared to EBITDA loss of $20.5 million for
the same period in 1999.
Anticipated Credit Facilities
We expect to enter into a credit facility with a syndicate of banks under
which, subject to our compliance with our existing indentures and with
financial covenants and the satisfaction of customary borrowing conditions, we
will be permitted to borrow up to $600.0 million. This bank credit facility
will include a revolving credit facility in the aggregate amount of $225.0
million and two term loan facilities in the aggregate amount of $375.0 million.
We expect that Chase Securities, Inc. will act as sole book manager and joint-
lead arranger, Goldman Sachs Credit Partners L.P. will act as joint-lead
arranger and co-documentation agent, Merrill Lynch, Pierce, Fenner & Smith
Incorporated will act as syndication agent, Morgan Stanley Senior Funding, Inc.
will act as co-documentation agent, and the Chase Manhattan Bank will act as
administrative and collateral agent for the facilities.
Our obligations under the credit facilities will be guaranteed by each of
our existing and future wholly-owned U.S. subsidiaries. We expect the credit
facilities and the guarantees by our wholly-owned U.S. subsidiaries to be
secured, to the extent permitted by our existing indentures, by substantially
all of our assets and substantially all of the assets and stock of our wholly-
owned U.S. subsidiaries.
The specific terms of each facility are subject to change as we negotiate
final loan documents. We cannot provide any assurance as to whether, or on what
terms, we will obtain these credit facilities. See "Description of Anticipated
Credit Facilities."
New Shelf Registration Statement
In June 2000, we filed a registration statement with the Securities and
Exchange Commission to register the offer and sale of up to $2.0 billion of our
debt and equity securities in one or more public offerings over the next two
years. We expect the registration statement to provide flexibility and
efficiency in accessing the public securities markets. While we have no
intention of conducting any particular public offering under that registration
statement at this time, we expect that we would use the net proceeds of any
offerings under that registration statement to fund the expansion of our
operations and for general corporate purposes, or to finance the acquisition of
assets or businesses to be used in our business of providing sophisticated
system and network management solutions for enterprises with mission-critical
Internet operations.
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Our principal executive offices are located at 2831 Mission College Blvd.,
Santa Clara, California 95054. Our telephone number is (408) 346-2200.
Exodus Communications, Exodus, CyberCabinet, CyberRack, Multipath Site,
Multipath Net, SystemHealth Monitoring and Virtual Data Center are trade names
and trademarks of Exodus. This prospectus also includes trade names and
trademarks of other companies, including Unicenter and Unicenter TNG(TM), which
are trademarks of Computer Associates International, Inc.
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The Exchange Offer
Securities Offered.......... $1.0 billion aggregate principal amount of 11
5/8% Senior Notes due 2010 and (Euro)200.0
million aggregate principal amount of 11 3/8%
Senior Notes due 2008. The terms of the new notes
and the old notes are identical except for
transfer restrictions and registration rights
relating to the old notes that will not be
applicable to the new notes. The old notes and
the new notes are collectively referred to as the
notes.
Issuance of Old Notes....... $1.0 billion aggregate principal amount of 11
5/8% Senior Notes due 2010 and (Euro)200.0
million aggregate principal amount of 11 3/8%
Senior Notes due 2008 were issued on July 6, 2000
to Goldman, Sachs & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, Chase Securities Inc., Donaldson,
Lufkin & Jenrette Securities Corporation,
FleetBoston Robertson Stephens Inc. and Thomas
Weisel Partners LLC, which placed the old notes
with qualified institutional buyers and to buyers
in offshore transactions in reliance on
Regulation S under the Securities Act.
The Exchange Offer.......... We are offering to exchange $1,000 principal
amount of new dollar notes for each $1,000
principal amount of old dollar notes. Old dollar
notes may only be exchanged in $1,000 principal
amount increments. There are $1.0 billion
aggregate principal amount of old dollar notes
outstanding.
We are also offering to exchange (Euro)1,000
principal amount of new euro notes for each
(Euro)1,000 principal amount of old euro notes.
Old euro notes may only be exchanged in
(Euro)1,000 principal amount increments. There
are (Euro)200.0 million aggregate principal
amount of old euro notes outstanding.
Conditions to the Exchange
Offer....................... The exchange offer is not conditioned upon any
minimum principal amount of old notes being
tendered for exchange. However, the exchange
offer is subject to customary conditions, which
may be waived by us. See "The Exchange Offer--
Conditions to the Exchange Offer."
Procedures for Tendering.... If you want to tender your old dollar notes in
the exchange offer, you must complete and sign
the letter of transmittal for dollar notes
according to the instructions contained in this
prospectus and the letter of transmittal for
dollar notes. If you want to tender your old euro
notes in the exchange offer, you must complete
and sign the letter of transmittal for euro notes
according to the instructions contained in this
prospectus and the letter of transmittal for euro
notes. You must then mail, fax or hand deliver
the applicable letter of transmittal, together
with any other required documents, to the
applicable exchange agent, either with the old
notes to be tendered or in compliance with the
specified procedures for guaranteed delivery of
old notes. You should allow sufficient time to
ensure
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timely delivery. Some brokers, dealers,
commercial banks, trust companies and other
nominees may also effect tenders by book-entry
transfer. If you own old notes registered in the
name of a broker, dealer, commercial bank, trust
company or other nominee, you are urged to
contact that person promptly if you wish to
tender old notes in the exchange offer. Letters
of transmittal and certificates representing the
old notes should not be sent to Exodus. These
documents should be sent only to the applicable
exchange agent. Questions regarding how to tender
and requests for information should also be
directed to the exchange agent.
If you hold old dollar notes through The
Depositary Trust Company or old euro notes
through Euroclear or Cedelbank and wish to accept
the exchange offer, you must do so pursuant to
the book-entry transfer facility's procedures for
book-entry transfer (or other applicable
procedures), all in accordance with this
prospectus and the applicable letter of
transmittal. See "The Exchange Offer Procedures
for Tendering Old Notes."
Expiration Date; The exchange offer will expire on the earlier of
Withdrawal.................. 5:00 p.m., New York City time (10:00 p.m., London
time) on , 2000 or the date when all old
notes have been tendered, or a later date and
time to which it may be extended. However, it may
not be extended beyond , 2000. We will accept
for exchange any and all old notes that are
validly tendered in the exchange offer prior to
5:00 p.m., New York City time (10:00 p.m., London
time), on the expiration date. The tender of old
notes may be withdrawn at any time prior to the
expiration date. Any old note not accepted for
exchange for any reason will be returned without
expense to the tendering holder as promptly as
practicable after the expiration or termination
of the exchange offer. The new notes issued in
the exchange offer will be delivered promptly
following the expiration date. See "The Exchange
Offer--Terms of the Exchange Offer; Period for
Tendering Old Notes" and "--Withdrawals of
Tenders."
Guaranteed Delivery If you wish to tender your old notes and (1) your
Procedures.................. old notes are not immediately available or (2)
you cannot deliver your old notes together with
the applicable letter of transmittal to the
applicable exchange agent prior to the expiration
date, you may tender your old notes according to
the guaranteed delivery procedures contained in
the applicable letter of transmittal. See "The
Exchange Offer--Procedures for Tendering Old
Notes--Guaranteed Delivery Procedures."
Tax Considerations.......... For U.S. federal income tax purposes, the
exchange of old notes for new notes should not be
considered a sale or exchange or otherwise a
taxable event to the holders of notes. See
"Material United States Federal Income Tax
Considerations."
Use of Proceeds............. We will receive no proceeds from the exchange
offer.
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Appraisal Rights............ Holders of old notes will not have dissenters'
rights or appraisal rights in connection with the
exchange offer.
Exchange Agent.............. Chase Manhattan Bank & Trust Company, National
Association is serving as exchange agent in
connection with the exchange offer for the old
dollar notes, and Chase Manhattan Bank London is
serving as exchange agent in connection with the
exchange offer for the old euro notes.
Resales of New Notes........ Based on an interpretation by the Securities and
Exchange Commission set forth in no-action
letters issued to third parties, we believe that
you may resell or otherwise transfer new notes
issued in the exchange offer in exchange for old
notes without restrictions under the federal
securities laws. However, there are exceptions to
this general statement. You may not freely
transfer the new notes if:
. you are an affiliate of Exodus;
. you did not acquire the new notes in the
ordinary course of your business;
. you have engaged in, intend to engage in, or
have an arrangement or understanding with any
person to participate in the distribution of
the new notes; or
. you are a broker-dealer who acquired the old
notes directly from us.
Any holder subject to any of the exceptions above
and each participating broker-dealer that
receives new notes for its own account in the
exchange offer in exchange for old notes that
were acquired as a result of market making, must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with the resale of the new notes.
Consequences of Not
Exchanging the Old Notes.... If you do not tender your old notes or your old
notes are not properly tendered, the existing
transfer restrictions will continue to apply. The
old dollar notes are currently eligible for sale
pursuant to Rule 144A through The Portal Market
and the old euro notes are in the process of
being listed on the Luxembourg Stock Exchange.
Application is expected to be made for listing
the new euro notes on the Luxembourg Stock
Exchange. We cannot assure you that we will be
successful in these listings or of when the
listings will be complete. Because we anticipate
that most holders will elect to exchange old
notes for new notes due to the absence of
restrictions on the resale of new notes under the
Securities Act in most cases, we anticipate that
the liquidity of the market for any old notes
remaining after the consummation of the exchange
offer will be substantially limited. See "Risk
Factors--There could be negative consequences to
you if you do not exchange your old notes for new
notes" and "The Exchange Offer--Consequences of
Failure to Exchange Old Notes."
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Summary Description of the New Notes
The terms of the new notes and the old notes are identical in all respects,
except that the terms of the new notes do not include the transfer restrictions
and registration rights relating to the old notes. The old notes and the new
notes are referred to collectively as the notes.
The new notes will bear interest from the most recent date to which interest
has been paid on the old notes. Accordingly, registered holders of new notes on
the relevant record date for the first interest payment date following the
completion of the exchange offer will receive interest accruing from the most
recent date on which interest has been paid. Old notes accepted for exchange
will cease to accrue interest from and after the date of completion of the
exchange offer. Holders of old notes whose old notes are accepted for exchange
will not receive any payment in respect of interest on the old notes otherwise
payable on any interest payment date that occurs on or after completion of the
exchange offer.
Notes Offered............... $1.0 billion aggregate principal amount of 11
5/8% Senior Notes due 2010, which we will also
refer to as dollar notes.
(Euro)200.0 million aggregate principal amount of
11 3/8 Senior Notes due 2008, which we will also
refer to as euro notes.
The euro notes and the dollar notes will each be
a separate class of securities and will be
entitled to vote as separate classes on all
matters.
Maturity Date............... The dollar notes will mature July 15, 2010. The
euro notes will mature July 15, 2008.
Interest Payment Dates...... Interest on the notes will be paid every six
months on January 15 and July 15 of each year,
starting January 15, 2001.
Optional Redemption......... Except as described in this prospectus, the
dollar notes will not be redeemable at our option
prior to July 15, 2005. The dollar notes will be
subject to redemption, at our option, in whole or
in part, at any time on or after July 15, 2005
and prior to maturity, but excluding the
redemption date, upon not less than 30 days' nor
more than 60 days' notice at the redemption
prices set forth in this prospectus plus accrued
and unpaid interest and liquidated damages (as
described below), if any.
In addition, at any time prior to July 15, 2003,
we may redeem up to 35% of the aggregate
outstanding principal amount of the dollar notes
with the net cash proceeds of one or more sales
of capital stock (as described below), other than
disqualified stock, at a redemption price equal
to 111.625% of the aggregate principal amount,
plus accrued and unpaid interest and liquidated
damages, if any, to the date of redemption;
provided that at least 65% of the original
principal amount of the dollar notes remains
outstanding immediately following the redemption.
In order to effect the redemption, we must mail a
notice of redemption no later than 45 days after
the related sale of capital stock and must
consummate
8
<PAGE>
the redemption within 60 days after the closing
of the sale of capital stock.
The euro notes are not redeemable at our option
at any time prior to maturity.
Change of Control........... In the event of a change of control (as described
below), each holder will have the right to
require that we purchase the notes at a price
equal to 101% of the principal amount, plus
accrued and unpaid interest, and liquidated
damages, if any, to the date of purchase. See
"Risk Factors--We may not be able to effect
repurchase of the notes upon a Change of Control
in accordance with the terms of the indentures."
Ranking..................... The notes will be senior unsecured indebtedness
ranking equally with our existing and future
senior unsecured obligations and senior in right
of payment to all of our subordinated
indebtedness. The notes will be effectively
subordinated to all secured indebtedness and to
any liabilities of any of our subsidiaries,
including trade payables. As of March 31, 2000,
we had approximately $103.8 million of secured
indebtedness and outstanding liabilities of our
subsidiaries. In addition, the notes rank equally
with our $275.0 million of 11 1/4% Senior Notes
due 2008 and $375.0 million and (Euro)125.0
million of 10 3/4% Senior Notes due 2009 and are
senior in right of payment to our $72.3 million
of 5% Convertible Subordinated Notes due March
15, 2006 and our $500.0 million of 4 3/4%
Convertible Subordinated Notes due July 15, 2008.
See "Risk Factors--Our substantial leverage and
debt service obligations adversely affect our
cash flow."
Restrictive Covenants....... The indentures governing the notes contain
covenants that, among other things, limit our
ability to incur specific types of debt, pay
dividends, make distributions, make specific
types of investments or other restricted
payments, sell assets, enter into specified
transactions with affiliates, incur liens, engage
in mergers and consolidations and allow
restricted subsidiaries (as defined) to issue
capital stock and make guarantees. See
"Description of Notes."
9
<PAGE>
Summary Consolidated Financial Information
The following summary consolidated financial information should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The summary consolidated
financial information for each of the years in the three-year period ended
December 31, 1999 is derived from our consolidated financial statements that
have been audited by KPMG LLP, independent auditors. The summary consolidated
financial information as of March 31, 2000 and for the three months ended March
31, 1999 and March 31, 2000 is derived from our unaudited condensed
consolidated financial statements for these periods. Historical results are not
necessarily indicative of results to be expected in the future.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- ---------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues........... $ 12,408 $ 52,745 $ 242,140 $ 30,110 $ 134,142
Operating loss........... (24,792) (57,573) (97,216) (17,738) (29,632)
Net loss................. (25,298) (67,316) (130,323) (23,232) (58,350)
Cumulative dividends and
accretion on redeemable
convertible preferred
stock................... (1,413) (2,014) -- -- --
Net loss attributable to
common stockholders..... (26,711) (69,330) (130,323) (23,232) (58,350)
Basic and diluted net
loss per share.......... $ (0.87) $ (0.28) $ (0.39) $ (0.07) $ (0.16)
Shares used in computing
basic and diluted net
loss per share.......... 30,856 251,616 335,848 326,472 366,038
Consolidated Statement of
Cash Flows Data:
Net cash used for
operating activities.... $(15,518) $(47,312) $ (46,726) $(16,291) $ (21,138)
Net cash used for
investing activities.... (23,864) (92,757) (390,614) (44,572) (160,535)
Net cash provided by
financing activities.... 45,937 285,814 1,296,745 234,077 34,546
Depreciation and
amortization............ 3,429 13,024 50,881 5,700 30,573
Capital expenditures..... 22,489 44,564 283,468 34,846 144,228
Other Data:
EBITDA(1)................ $(20,274) $(41,945) $ (44,738) $(11,801) $ 1,729
Deficiency of earnings
available to cover fixed
charges(1).............. (25,298) (67,316) (130,323) (23,232) (58,350)
</TABLE>
<TABLE>
<CAPTION>
At March 31, 2000
----------------------
As
Actual Adjusted(2)
---------- -----------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.............................. $ 863,448 2,018,634
Restricted cash equivalents and investments............ 41,482 41,482
Working capital........................................ 777,079 1,932,265
Total assets........................................... 1,827,182 3,016,062
Current portion of equipment loans, line of credit
facilities and capital lease obligations.............. 32,225 32,225
Equipment loans, line of credit facilities and capital
lease obligations, less current portion............... 48,231 48,231
Senior notes(3)........................................ 770,481 1,959,361
Convertible subordinated notes(4)...................... 572,337 572,337
Total stockholders' equity............................. 231,524 231,524
</TABLE>
--------
(1) "EBITDA" represents earnings (loss) before net interest expense, income
taxes, depreciation, amortization, including amortization of deferred stock
compensation, and other noncash charges, including fixed asset write-offs.
EBITDA should not be used as an alternative to operating loss or net cash
provided by (used for) operating activities, investing activities or
financing activities, each as measured under generally accepted accounting
principles. In addition, EBITDA may not be comparable to other similarly
titled information from other companies. However, our management believes
that EBITDA is an additional meaningful measure of performance and
liquidity. With respect to the captions entitled "Deficiency of earnings
available to cover fixed charges," earnings consist of income (loss) before
provision for income taxes plus fixed charges. Fixed charges consist of
interest charges and amortization of debt expense and discount or premium
related to indebtedness, whether expensed or capitalized and the portion of
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<PAGE>
rental expense that we believe to be representative of interest. The "EBITDA"
and "Deficiency of earnings available to cover fixed charges" data is
unaudited.
(2) As adjusted to reflect the sale of $1.0 billion principal amount of our 11
5/8% Senior Notes due 2010 and (Euro)200.0 million principal amount of our
11 3/8% Senior Notes due 2008 and application of the net proceeds
therefrom. For purposes of this table, the translation of euros into
dollars has been made at $0.9444 per euro, which represents the Noon Buying
Rate on June 28, 2000. See "Use of Proceeds" and "Capitalization".
(3) Represents $275.0 million aggregate principal amount of our 11 1/4% Senior
Notes due 2008 (the "11 1/4% Senior Notes") and a related $375,000 premium
and $375.0 million and (Euro)125.0 million aggregate principal amount of
our 10 3/4% Senior Notes due 2009 (the "10 3/4% Senior Notes").
(4) Represents $72.3 million aggregate principal amount of our 5% Convertible
Subordinated Notes due March 15, 2006 (the "5% Convertible Subordinated
Notes") and $500.0 million aggregate principal amount of our 4 3/4%
Convertible Subordinated Notes due July 15, 2008 (the "4 3/4% Convertible
Subordinated Notes"). Subsequent to March 31, 2000, $100,000 principal
amount of our 5% Convertible Subordinated Notes was converted into shares
of our Common Stock.
11
<PAGE>
RISK FACTORS
Holders of old notes should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
prospectus before tendering their old notes in the exchange offer. The risk
factors set forth in this prospectus, other than "Risk Factors--There could be
negative consequences to you if you do not exchange your old notes for new
notes," are generally applicable to the old notes as well as the new notes.
There could be negative consequences to you if you do not exchange your old
notes for new notes
Any old notes tendered and exchanged in the exchange offer will reduce the
aggregate principal amount of old notes outstanding. We anticipate that most
holders will elect to exchange their old notes for new notes because in doing
so they will eliminate most restrictions on the resale of new notes. As a
result, we anticipate that the liquidity of the market for any old notes
remaining outstanding after the exchange offer may be substantially limited.
Following the consummation of the exchange offer, holders who did not tender
their old notes generally will not have any further registration rights under
the registration rights agreement, and these old notes will continue to be
subject to restrictions on transfer. The old dollar notes are currently
eligible for sale under Rule 144A through The Portal Market, and the old euro
notes are in the process of being listed on the Luxembourg Stock Exchange.
Application is expected to be made for listing the new euro notes on the
Luxembourg Stock Exchange. We cannot assure you that we will be successful in
these listings or of when the listings will be complete.
As a result of making the exchange offer, we will have fulfilled our
obligations under the registration rights agreement. Holders who do not tender
their old notes generally will not have any further registration rights or
rights to receive the liquidated damages specified in the registration rights
agreement for our failure to register the new notes.
The old notes that are not exchanged for new notes will remain restricted
securities. Accordingly, the old notes may be resold only:
. to us or one of our subsidiaries;
. to a qualified institutional buyer;
. to an institutional accredited investor;
. to a party outside the United States under Regulation S under the
Securities Act;
. under an exemption from registration provided by Rule 144 under the
Securities Act; or
. under an effective registration statement.
Our short operating history and heavy losses make our business difficult to
evaluate
Our limited operating history makes evaluating our business operations and
our prospects difficult. We began offering server hosting and Internet
connectivity services in 1995, 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.
12
<PAGE>
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;
. 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;
. 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;
. customer discounts and credits;
. the mix of services we sell;
. the timing and success of marketing efforts and service introductions by
us and our competitors;
. the introduction by third parties of new Internet and networking
technologies;
. changes in our pricing policies and our competitors' pricing policies;
. fluctuations in bandwidth used by customers; and
. delays in obtaining 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 with 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 22 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
13
<PAGE>
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 or purchases of real
estate, 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. If we fail
to generate sufficient cash flows or to raise sufficient funds we may need to
delay or abandon some or all of our development and expansion plans or
otherwise forego market opportunities, making it difficult for us to generate
additional revenue and to respond to competitive pressures.
In general, it takes us at least six months to select the appropriate
location for a new Internet Data Center, construct the necessary facilities,
install equipment and telecommunications infrastructure and hire operations and
sales personnel. Expenditures commence well before the Internet Data Center
opens, and it takes an extended period for us to approach break-even capacity
utilization. As a result, we expect that individual Internet Data Centers will
experience losses for in excess of one year from the time they are opened. We
incur further expenses from sales personnel hired to test market our services
in markets where there is no Internet Data Center. Growth in the 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.
Because we compete with much larger companies and there are few barriers to
entry of new competitors, we are always at risk that we will lose business to
existing and new competitors
Our market is intensely competitive. There are few barriers to entry, and we
expect to face additional competition from existing competitors and new market
entrants. Many companies have already announced that they intend to begin to
provide services, or they will expand their service offerings, in ways that are
competitive with our services. The principal competitive factors in our 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;
. 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.
14
<PAGE>
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 Internet Service Providers;
. global, regional and local telecommunications companies and Regional
Bell Operating Companies; and
. Information Technology outsourcing firms.
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, they 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, some of these
competitors have entered into and are likely to 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 consolidate in the near future, which could result in increased
competition, including price 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 economies of
scale to offset our 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 will 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
11 5/8% Senior Notes, 11 3/8% Senior Notes, 10 3/4% Senior Notes, 11 1/4%
Senior Notes, 4 3/4% Convertible Subordinated 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, the notes and our other debt when due. As of March 31, 2000, we had
debt of approximately $1.4 billion, which does not include the issuance of our
11 5/8% Senior Notes and our 11 3/8% Senior Notes in July 2000. We also have
the right to issue $100.0 million of additional 10 3/4% Senior Notes on or
prior to December 8, 2000, $100.0 million of additional 11 5/8% Senior Notes
before the maturity date of those notes and (Euro)100.0 million of additional
11 3/8% Senior Notes before the respective maturity dates of those notes.
Furthermore, we expect to enter into secured credit facilities for up to $600.0
million, and the notes would be effectively subordinated to any borrowings
under the credit facilities. 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.
15
<PAGE>
Our substantial leverage could have significant negative consequences,
including:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;
. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
. placing us at a possible competitive disadvantage compared to
competitors with less leverage or better access to capital resources.
We are subject to restrictive covenants in our note indentures that limit our
flexibility in managing our business
The notes, our other existing 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. Our anticipated secured bank credit
facility is likely to have additional restrictive covenants. 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 we expect to continue to experience, 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 acquisitions, which could harm
our operating results
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 its 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
16
<PAGE>
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.
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 and services are an
increasingly significant portion of our offerings. 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 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.
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.
17
<PAGE>
We depend on network interconnections provided by third parties who may raise
their fees or deny access
We rely on a number of public and private network interconnections to allow
our customers to connect to other networks. If the networks with which we
interconnect were to discontinue their interconnections, our ability to
exchange traffic would be significantly constrained. Furthermore, our business
will be harmed if these networks do not add more bandwidth to accommodate
increased 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 which we
previously maintained interconnections unilaterally terminated their
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 2000, we opened
two additional Internet Data Centers 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, 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
18
<PAGE>
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 we have taken, we cannot assure that unauthorized
access, computer viruses, accidental or intentional actions and other
disruptions will not occur. Recently, numerous computer viruses have circulated
through the world. Our network and our customer sites are potentially
vulnerable to these viruses, which could harm our results of operations. Our
Internet Data Centers have experienced, and in the future may 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 with routers and switches, including
previously unknown software and firmware bugs, 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
considered enacting Internet laws regarding children's privacy, copyrights,
taxation and the transmission of sexually explicit material. The European Union
also enacted its own privacy regulations. The law of the Internet, however,
remains largely unsettled, even in areas where there has been some legislative
action. It may take years to determine whether and how existing laws such as
those
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<PAGE>
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 of the Internet by ISPs and other
organizations with links to the Internet. Any perceived degradation in the
performance of the Internet
20
<PAGE>
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.
The notes are effectively subordinated to our secured indebtedness and the
liabilities of our subsidiaries
The notes are effectively subordinated to our secured debt, including our
anticipated credit facilities, to the extent of the value of the assets
securing the debt. The notes are also effectively subordinated to all
liabilities, including trade payables and lease obligations, of our
subsidiaries. Any right we may have to receive assets of any of our
subsidiaries upon liquidation or reorganization will be effectively
subordinated to the claims of that subsidiary's creditors, including trade
creditors. As of March 31, 2000, we had approximately $80.5 million of
outstanding secured debt and our subsidiaries had approximately $23.3 million
of liabilities. In addition, we also expect to enter into secured credit
facilities for up to $600.0 million, and the notes will be effectively
subordinated to any borrowings under the credit facilities. The indentures
governing the notes contain limitations on our ability and the ability of our
subsidiaries to incur additional debt, excluding outstanding secured debt.
However, these limitations are subject to a number of exceptions, and there can
be no assurances that we will not incur significant additional debt in the
future, including debt to which the holders of the notes would be effectively
subordinated. See "Description of Notes--Covenants--Limitation on Debt."
Our management has broad discretion in the allocation of the proceeds of the
offering of the old notes
We expect to use the net proceeds from the sale of the old notes primarily
to finance the purchase or other acquisition of assets or businesses to be used
in the System and Network Management Business (as defined in the indentures
governing the notes). Our management retains broad discretion in allocating the
proceeds from the sale of the notes. The failure of management to apply the
funds effectively could harm our business. See "Use of Proceeds."
We may not be able to effect repurchase of the notes upon a Change of Control
in accordance with the terms of the Indentures
Upon the occurrence of a Change of Control (as defined elsewhere in this
prospectus), we may be required to purchase all or a portion of the notes at a
purchase price equal to 101% of the principal amount, plus accrued and unpaid
interest, if any, to the date of purchase. Prior to commencing such an offer to
purchase, we may be required to (1) repay in full all of our indebtedness,
including the anticipated secured credit facilities that would prohibit the
repurchase of the notes or (2) obtain any consent required to make the
repurchases. If we are
21
<PAGE>
unable to repay all of this indebtedness or are unable to obtain the necessary
consents, we will be unable to offer to purchase the notes. That failure would
constitute an event of default under the Indentures. We may not have sufficient
funds available at the time of any Change of Control to repurchase the notes.
The events that require a repurchase upon a Change of Control under the
Indentures may also constitute events of default under any of our indebtedness.
See "Description of Notes--Repurchase at the Option of Holders."
You may find it difficult to sell your notes
The old dollar notes are eligible for trading in The Portal Market. The old
euro notes are in the process of being listed on the Luxembourg Stock Exchange.
There is no existing trading market for the new notes, although we expect to
apply to list the new euro notes on the Luxembourg Stock Exchange. We cannot
assure you that we will be successful in these listings or of when the listings
will be complete. Accordingly, we cannot be sure that any market for the new
notes will develop, that the holders of the new notes will be able to sell
their notes or the prices at which any sales will be made. If a market for the
notes were to develop, the notes could trade at prices that may be higher or
lower than the exchange tender price of the old notes, as our previously
registered notes do. Prevailing market prices from time to time will depend on
many factors, including then existing interest rates, our operating results and
cash flow and the market for similar securities.
In addition, the liquidity of, and trading markets for, the new notes may be
adversely affected by declines in the market for high-yield securities
generally. A decline may aversely affect liquidity and trading markets
independent of our financial performance or prospects.
22
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). When used in this prospectus, the
words "anticipate," "believe," "estimate," "will," "may," "intend" and "expect"
and similar expressions identify certain of such forward-looking statements.
Although we believe that our plans, intentions and expectations reflected in
such forward-looking statements are reasonable, we can give no assurance that
such plans, intentions or expectations will be achieved. Forward-looking
statements in this prospectus include, but are not limited to, those relating
to the expansion of our network through the opening of additional Internet Data
Centers and the timing of openings, the upgrading of our telecommunications
infrastructure, our planned introduction of various new products and services,
the possibility of acquiring complementary businesses, products, services and
technologies and our ability to make required payments on our current and
future debt instruments. Actual results, performance or achievements could
differ materially from those contemplated, expressed or implied by the forward-
looking statements contained in this prospectus. Important factors that could
cause actual results to differ materially from our forward-looking statements
are set forth in this prospectus, including under the heading "Risk Factors".
These factors are not intended to represent a complete list of the general or
specific factors that may affect us. It should be recognized that other
factors, including general economic factors and business strategies, may be
significant, presently or in the future, and the factors set forth herein may
affect us to a greater extent than indicated. All forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements set forth herein. Except as
required by law, we undertake no obligation to update any forward-looking
statement, whether as a result of new information, future events or otherwise.
23
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the new notes offered
in the exchange offer. In consideration for issuing the new notes, we will
receive in exchange old notes in like principal amount, the terms of which are
identical in all respects to the new notes except for transfer restrictions and
registration rights. The old notes surrendered in exchange for new notes will
be retired and cancelled and cannot be reissued. Accordingly, issuance of the
new notes will not result in any increase in our indebtedness.
The net proceeds from the sale of the old notes, after deducting the
underwriting discounts and offering expenses, was approximately $1.155 billion.
The net proceeds will be used in the System and Network Management Business (as
defined in the indentures governing the notes), such as Internet Data Centers.
In the ordinary course of business, we evaluate potential acquisitions of
businesses, products, services and technologies. Except as disclosed in this
prospectus, we have no present understandings, commitments or agreements with
respect to any acquisition of any businesses, products, services or
technologies. Pending these uses, we have invested the net proceeds in
investment-grade, short-term, interest-bearing securities. See "Risk Factors--
Our management has broad discretion in the allocation of the proceeds of the
offering of the old notes."
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<PAGE>
CAPITALIZATION
The following table sets forth our unaudited capitalization as of March 31,
2000 on an actual basis and on an as adjusted basis to reflect the receipt of
the estimated net proceeds from the sale of the old notes and the application
of the net proceeds therefrom.
<TABLE>
<CAPTION>
March 31, 2000
----------------------
As
Actual Adjusted
---------- ----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents.............................. $ 863,448 $2,018,634
---------- ----------
Restricted cash equivalents and investments............ $ 41,482 $ 41,482
---------- ----------
Current portion of equipment loans, line of credit
facilities and capital lease obligations(1)........... $ 32,225 $ 32,225
---------- ----------
Long-term debt (excluding current portion)(1):
Bank borrowings(2)................................... -- --
Equipment loans and line of credit facility.......... 5,857 5,857
Capital lease obligations............................ 42,374 42,374
Senior notes(3)(4)................................... 770,481 1,959,361
Convertible subordinated notes(5).................... 572,337 572,337
---------- ----------
Total long-term debt............................... 1,391,049 2,579,929
Stockholders' equity(6):
Preferred stock, $0.001 par value: 5,000,000 shares
authorized, no shares issued or outstanding......... -- --
Common stock, $0.001 par value: 1,500,000,000 shares
authorized, 401,933,296 shares issued and
outstanding......................................... 402 402
Additional paid-in capital........................... 514,645 514,645
Deferred stock compensation.......................... (2,589) (2,589)
Accumulated deficit.................................. (286,566) (286,566)
Accumulated other comprehensive income............... 5,632 5,632
---------- ----------
Total stockholders' equity......................... 231,524 231,524
---------- ----------
Total capitalization............................. $1,622,573 $2,811,453
========== ==========
</TABLE>
--------
(1) See notes 4 and 6 of notes to consolidated financial statements.
(2) See note 4 of notes to consolidated financial statements. Does not include
potential borrowings under the anticipated credit facilities.
(3) Represents $275.0 million aggregate principal amount of our 11 1/4% Senior
Notes and a related $375,000 premium and $375.0 million and (Euro)125.0
million aggregate principal amount of our 10 3/4% Senior Notes.
(4) For purposes of this table, the translation of euros into dollars has been
made at $0.9444 per euro, which represents the Noon Buying Rate on June 28,
2000.
(5) Represents $72.3 million aggregate principal amount of our 5% Convertible
Subordinated Notes and $500.0 million aggregate principal amount of our 4
3/4% Convertible Subordinated Notes. Subsequent to March 31, 2000, an
additional $100,000 principal amount of our 5% Convertible Subordinated
Notes was converted into shares of our common stock.
(6) Does not include (i) 102,342,362 shares of common stock issuable upon the
exercise of stock options outstanding under our stock option plans as of
March 31, 2000 with a weighted average per share exercise price of $11.69,
(ii) 17,376,818 shares of common stock available for future grant as of
March 31, 2000 under our stock and option plans or (iii) 986,664 shares of
common stock issuable upon the exercise of warrants outstanding as of March
31, 2000 with a weighted average per share exercise price of $0.91. See
note 1 of notes to consolidated financial statements. Also does not include
an increase of 18,000,000 shares to our 1998 Equity Incentive Plan and an
increase of 3,600,000 shares to our 1998 Employee Stock Purchase Plan
approved by our stockholders in June 2000.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement
of operations data and the consolidated statement of cash flows data for each
of the years in the three-year period ended December 31, 1999, and the
consolidated balance sheet data as of December 31, 1998 and 1999, are derived
from our consolidated financial statements that have been audited by KPMG LLP,
independent auditors, and are included elsewhere in this prospectus. The
consolidated statement of operations data and the consolidated statement of
cash flows data for the three-month periods ended March 31, 1999 and March 31,
2000 and the consolidated balance sheet data as of March 31, 2000 are derived
from unaudited condensed consolidated financial statements included elsewhere
in this prospectus. The consolidated statement of operations data and the
consolidated statement of cash flows data for the years ended December 31, 1995
and 1996 and the consolidated balance sheet data as of December 31, 1995, 1996
and 1997 are derived from consolidated financial statements that have been
audited by KPMG LLP that are not included in this prospectus. The unaudited
condensed consolidated financial statements have been prepared on substantially
the same basis as the audited consolidated financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for these periods. Historical results are not necessarily indicative
of the results to be expected in the future.
In the following tables and in this document, "EBITDA" represents earnings
(loss) before net interest expense, income taxes, depreciation, amortization
(including amortization of deferred stock compensation) and other noncash
charges, including fixed asset write-offs. EBITDA should not be used as an
alternative to operating loss or net cash provided by (used for) operating
activities, investing activities or financing activities, each as measured
under generally accepted accounting principles. In addition, EBITDA may not be
comparable to other similarly titled information from other companies. However,
our management believes that EBITDA is an additional meaningful measure of
performance and liquidity. With respect to the captions entitled "Deficiency of
earnings available to cover fixed charges" and "Ratio of earnings to fixed
charges," earnings consist of income (loss) before provision for income taxes
plus fixed charges. Fixed charges consist of interest charges and amortization
of debt expense and discount or premium related to indebtedness, whether
expensed or capitalized, and that portion of rental expense we believe to be
representative of interest. The "EBITDA" and "Deficiency of earnings available
to cover fixed charges" data is unaudited.
26
<PAGE>
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------------------------ -------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- -------- -------- ---------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $ 1,408 $ 3,130 $ 12,408 $ 52,745 $ 242,140 $ 30,110 $ 134,142
Cost of revenues........ 1,128 2,990 16,868 61,578 197,231 28,268 94,661
------- ------- -------- -------- ---------- -------- ---------
Gross profit............ 280 140 (4,460) (8,833) 44,909 1,842 39,481
Operating expenses:
Marketing and sales.... 1,056 2,734 12,702 29,034 75,809 10,747 30,881
General and
administrative........ 427 1,056 5,983 16,058 42,951 6,677 26,612
Product development.... 70 444 1,647 3,507 8,869 1,543 3,851
Amortization of
goodwill and
intangible assets..... -- -- -- 141 9,438 613 7,769
Merger costs........... -- -- -- -- 5,058 -- --
------- ------- -------- -------- ---------- -------- ---------
Total operating
expenses.............. 1,553 4,234 20,332 48,740 142,125 19,580 69,113
------- ------- -------- -------- ---------- -------- ---------
Operating loss......... (1,273) (4,094) (24,792) (57,573) (97,216) (17,738) (29,632)
Interest and other
income (expense):
Interest and other
income................ -- 68 193 7,157 15,928 2,859 13,144
Interest and other
expense............... (38) (107) (699) (16,900) (49,035) (8,353) (41,862)
------- ------- -------- -------- ---------- -------- ---------
Total interest and
other expense, net.... (38) (39) (506) (9,743) (33,107) (5,494) (28,718)
------- ------- -------- -------- ---------- -------- ---------
Net loss............... (1,311) (4,133) (25,298) (67,316) (130,323) (23,232) (58,350)
Cumulative dividends
and accretion on
redeemable convertible
preferred stock....... -- -- (1,413) (2,014) -- -- --
------- ------- -------- -------- ---------- -------- ---------
Net loss attributable to
common stockholders.... $(1,311) $(4,133) $(26,711) $(69,330) $ (130,323) $(23,232) $ (58,350)
======= ======= ======== ======== ========== ======== =========
Basic and diluted net
loss per share......... $ (0.06) $ (0.13) $ (0.87) $ (0.28) $ (0.39) $ (0.07) $ (0.16)
======= ======= ======== ======== ========== ======== =========
Shares used in computing
basic and diluted net
loss per share......... 21,048 30,624 30,856 251,616 335,848 326,472 366,038
======= ======= ======== ======== ========== ======== =========
Consolidated Statement
of Cash Flows Data:
Net cash used for
operating activities... $ (461) $(3,116) $(15,518) $(47,312) $ (46,726) $(16,291) $ (21,138)
Net cash used for
investing activities... (69) (3,877) (23,864) (92,757) (390,614) (44,572) (160,535)
Net cash provided by
financing activities... 692 10,545 45,937 285,814 1,296,745 234,077 34,546
Depreciation and
amortization........... 65 461 3,429 13,024 50,881 5,700 30,573
Capital expenditures.... 69 3,499 22,489 44,564 283,468 34,846 144,228
Other Data:
EBITDA.................. $(1,208) $(3,633) $(20,274) $(41,945) $ (44,738) $(11,801) $ 1,729
Deficiency of earnings
available to cover
fixed charges.......... (1,311) (4,133) (25,298) (67,316) (130,323) (23,232) (58,350)
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------- March 31,
1995 1996 1997 1998 1999 2000
------- ------- -------- -------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 163 $ 3,715 $ 10,270 $156,015 $1,015,960 $ 863,448
Restricted cash
equivalents and
investments............ -- 378 1,753 45,614 35,390 41,482
Working capital
(deficiency)........... (1,170) 1,892 (3,707) 124,636 942,659 777,079
Total assets............ 840 8,289 40,973 298,798 1,742,890 1,827,182
Equipment loans, line of
credit facilities,
capital lease
obligations,
convertible
subordinated notes and
senior notes, less
current portion........ 141 1,449 15,135 227,284 1,574,727 1,391,049
Total stockholders'
equity (deficit)....... (1,140) (5,234) (30,600) 24,277 17,615 231,524
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements. Factors that may cause such a difference
include those set forth under "Risk Factors".
Overview
As a leading provider of services for companies with complex Internet
businesses, we offer 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 additional North American
Internet Data Centers in the metropolitan areas of New York (March 1997 and
September 1999), Silicon Valley (August 1997, June 1998, June 1999 and June
2000), 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 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 "Risk Factors--Our substantial leverage and debt service
obligations adversely affect our cash flow" and "--Liquidity and Capital
Resources" below.
On July 1, 1998, we issued $200.0 million of 11 1/4% Senior Notes due 2008
for aggregate net proceeds of approximately $193.4 million (net of discounts to
the initial purchasers and offering expenses). Interest is payable semiannually
on January 1 and July 1 each year. On June 22, 1999, we issued an additional
$75.0 million of Senior Notes due 2008 at 100.5% 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 $375.0 million and
(Euro)125.0 million of 10 3/4% Senior Notes due 2009 for aggregate net proceeds
of approximately $486.0 million (net of offering expenses). Interest is payable
semiannually on June 15 and December 15 of each year.
On March 3, 1999, we issued $250.0 million of 5% Convertible Subordinated
Notes due March 15, 2006 for aggregate net proceeds of approximately $242.1
million (net of offering expenses). The Convertible Notes are convertible into
our common stock at a conversion rate of 175.1408 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 $500.0 million of
4 3/4% Convertible Subordinated Notes due July 15, 2008 for aggregate net
proceeds of
28
<PAGE>
approximately $485.0 million (net of offering expenses). These Convertible
Notes are convertible into our common stock at a conversion rate of 28.4068
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.
On February 11, 2000, we acquired KeyLabs, a provider of e-business testing
services based in Utah. We issued approximately 786,000 shares of Exodus common
stock in exchange for all outstanding shares of KeyLabs common stock and
reserved approximately 202,000 shares of common stock for issuance upon the
exercise of KeyLabs options we assumed pursuant to the agreement, for total
consideration valued at approximately $50.0 million. 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 $48.2 million and was
attributed primarily to goodwill ($46.1 million), customer lists ($1.5 million)
and assembled workforce ($620,000). These amounts are being amortized on a
straight-line basis over periods ranging from 3 to 5 years.
In April 2000, we invested 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 7,516,536 shares of our common stock. Those shares
were registered for resale in May 2000. 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.
In July 2000 we issued $1.0 billion of our 11 5/8% Senior Notes due 2010 and
(Euro)200.0 million of our 11 3/8% Senior Notes due 2008, for aggregate net
proceeds of approximately $1.155 billion (net of offering expenses). Interest
is payable semiannually on January 15 and July 15 of each year.
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. In
addition, we intend to make services an increasingly significant portion of our
offerings. As a result, we expect to make investments in expanding our business
rapidly into new geographic regions which, while potentially increasing our
revenues in the long term, will lead to significant losses for the foreseeable
future. See "Risk Factors--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 business operations and our prospects
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 "Risk Factors--Our short operating
history and heavy losses make our business difficult to evaluate."
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Results of Operations for the Years Ended December 31, 1997, 1998 and 1999 and
the Three Months Ended March 31, 1999 and 2000
The following table sets forth certain statement of operations data as a
percentage of total revenues for the years ended December 31, 1997, 1998 and
1999 and for the three-month periods ended March 31, 1999 and 2000. The
information for the years ended December 31, 1997, 1998 and 1999 has been
derived from our audited consolidated financial statements included in this
prospectus. This information should be read in conjunction with the
consolidated financial statements and related notes included in this
prospectus. The information for the three-month periods ended March 31, 1999
and 2000 have been derived from our unaudited condensed consolidated financial
statements included in this prospectus which, in management's opinion, have
been prepared on substantially the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information for the periods presented. These operating results are not
indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
Three Months
Years Ended Ended March
December 31, 31,
----------------------- -------------
1997 1998 1999 1999 2000
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................... 135.9 116.8 81.4 93.9 70.6
------ ------ ----- ----- -----
Gross profit....................... (35.9) (16.8) 18.6 6.1 29.4
Operating expenses:
Marketing and sales................ 102.4 55.0 31.3 35.7 23.0
General and administrative......... 48.2 30.4 17.7 22.2 19.8
Product development................ 13.3 6.6 3.7 5.1 2.9
Amortization of goodwill and
intangible assets................. -- 0.3 3.9 2.0 5.8
Merger costs....................... -- -- 2.1 -- --
------ ------ ----- ----- -----
Total operating expenses......... 163.9 92.3 58.7 65.0 51.5
------ ------ ----- ----- -----
Operating loss................... (199.8) (109.1) (40.1) (58.9) (22.1)
Interest and other income (expense):
Interest and other income.......... 1.6 13.6 6.6 9.5 9.8
Interest and other expense......... (5.7) (32.0) (20.3) (27.7) (31.2)
------ ------ ----- ----- -----
Total interest and other expense,
net............................. (4.1) (18.4) (13.7) (18.2) (21.4)
------ ------ ----- ----- -----
Net loss......................... (203.9)% (127.5)% (53.8)% (77.1)% (43.5)%
====== ====== ===== ===== =====
</TABLE>
Revenues
Our revenues consist of (1) monthly fees for 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 revenues are
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. Revenues from sales or rentals of
third-party equipment were less than 10% of total revenues for the years ended
December 31, 1997, 1998 and 1999.
Our revenues increased 325% from $12.4 million in 1997 to $52.7 million in
1998 and increased an additional 359% to $242.1 million in 1999. This growth in
service revenues was primarily the result of opening our Internet Data Centers,
increases in the number of new customers, increases in revenues from existing
customers, and increases in revenues arising from our managed service and
professional service offerings.
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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' fees, costs of 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 265% from $16.9 million in 1997 to $61.6 million
in 1998 and increased an additional 220% to $197.2 million in 1999. Our cost of
revenues as a percentage of revenues decreased from 136% in 1997 to 117% in
1998 and declined to 81% in 1999. The year-to-year increases in cost of
revenues in absolute dollars were primarily the result of higher costs
associated with hiring additional employees and consultants, including
professional services employees hired in connection with our business
combinations, 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 year-
to-year 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.
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.
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 129% from $12.7 million in 1997
to $29.0 million in 1998 and increased an additional 161% to $75.8 million in
1999. Our marketing and sales expenses as a percentage of revenues decreased
from 102% in 1997 to 55% in 1998 and to 31% in 1999. The year-to-year increases
in marketing and sales expenses in absolute dollars were primarily the result
of increased compensation and related expenses associated with hiring
additional marketing and sales personnel, including employees hired in
connection with our business combinations, and increased expenses related to
branding campaigns for expanding marketing programs in connection with our
expansion of our operations. These expanded operations
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include the number and scope of our Internet system and network management
solutions. The year-to-year 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.
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 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 information
technology equipment and travel expenses.
Our general and administrative expenses increased 168% from $6.0 million in
1997 to $16.1 million in 1998 and increased an additional 167% to $43.0 million
in 1999. Our general and administrative expenses as a percentage of revenues
decreased from 48% in 1997 to 30% in 1998 and to 18% in 1999. The year-to-year
increases in general and administrative expenses in absolute dollars were
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, costs for consultants and
professional services providers, increased recruiting expenses, higher
depreciation and increased rent and related expenses due to entering into
additional operating leases. The decrease in general and administrative
expenses as a percentage of revenues was primarily due to revenues growing
faster than general and administrative 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 113% from $1.6 million in 1997 to
$3.5 million in 1998 and increased an additional 153% to $8.9 million in 1999.
Our product development expenses as a percentage of revenues decreased from 13%
in 1997 to 7% in 1998 and to 4% in 1999. The year-to-year increases in product
development expenses in absolute dollars were primarily the result of the
hiring of additional product development personnel to support our expanded
service offerings. The year-to-year decrease in product
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<PAGE>
development expenses as a percentage of revenues resulted from revenues growing
faster than product development expenses.
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 in October 1998, AIS 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 $141,000 in 1998 and $9.4 million in 1999.
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.
Merger Costs
Merger costs generally comprise one-time charges related to our acquisitions
of complementary businesses. In 1999, we incurred approximately $5.1 million in
merger costs related to the acquisitions of Service Metrics in November 1999
and Cohesive in July 1999.
Interest and Other Expense, Net
Our net interest and other expense increased from $506,000 in 1997 to $9.7
million in 1998 and to $33.1 million in 1999. The increase in net interest
expense from 1997 to 1998 was primarily the result of interest expenses
associated with our increasing additional indebtedness, including the $200.0
million of 11 1/4% Senior Notes which were issued July 1, 1998, substantially
increased borrowings as we entered into equipment loans and lease agreements to
finance the construction of our Internet Data Centers, and working capital
lines of credit to finance working capital for our operations offset in part by
increased interest income related to the additional cash raised in the $200.0
million Senior Notes financing. The increase in net interest expenses from 1998
to 1999 was primarily due to the $250.0 million of 5% Convertible Subordinated
Notes issued March 3, 1999, the $75.0 million of 11 1/4% Senior Notes issued
June 22, 1999, the $375.0 million and (Euro)125.0 million 10 3/4% Senior Note
financing and the $500 million 4 3/4% Convertible Note financing which occurred
on December 8, 1999 and increased borrowings as we entered into equipment loans
and lease agreements to finance the construction of our Internet Data Centers.
Interest expense for 1999 was partially offset by increased interest income in
1999 as a result of cash raised in our $200.0 million and $75.0 million Senior
Notes financings and our $250.0 million Convertible Note financing, along with
our $375.0 million and (Euro)125.0 million 10 3/4 Senior Note financing and our
$500.0 million 4 3/4% Convertible Note financing which occurred on December 8,
1999.
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
$250.0 million of 5% Convertible Subordinated Notes issued and March 3, 1999,
the $75.0 million 11 1/4% Senior Notes issued June 22, 1999, the $375.0 million
(Euro)125.0 million 10 3/4% Senior Note financing and the $500.0 million 4 3/4%
Convertible Subordinated Note financing which occurred on
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<PAGE>
December 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 our 5% Convertible Subordinated Notes converted
the notes into approximately 28,000,000 shares of our common stock. We 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. Furthermore,
holders of an additional approximate $18.0 million principal amount of our 5%
Convertible Subordinated Notes due March 15, 2006 converted the notes into
approximately 3,200,000 shares of our common stock. We did not make any
payments in connection with these conversions. The increase in interest expense
was partially offset by increased interest and other income as a result of cash
raised in our sales of senior notes and convertible notes. 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. For example, we
expect to enter into a secured bank credit facility in the amount of up to
$600.0 million which will cause borrowing expenses to increase each year the
facility can be fully utilized.
EBITDA
Our earnings before net interest and other expense, income taxes,
depreciation, amortization (including amortization of deferred stock
compensation) and other non-cash charges, including fixed asset write-offs
("EBITDA") was $(20.3) million in 1997, $(41.9) million in 1998 and $(44.7)
million in 1999. The year-to-year increases in the level of EBITDA losses were
primarily due to increased expenditures needed to support our growth in
operations, including salaries and benefits for additional employees, network
costs, rent, utilities and other costs related to the increase in the number of
our Internet Data Centers as well as increased marketing and sales expenses,
general and administrative expenses, consulting fees and professional services.
EBITDA was $1.7 million for the three month period ended March 31, 2000
compared to $(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 increased
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, in July 2000, we issued $1.0 billion of our 11 5/8%
Senior Notes and (Euro)200.0 million of our 11 3/8% Senior Notes. We also have
the right to issue up to $100.0 million of additional 10 3/4% Senior Notes on
or prior to December 8, 2000, up to $100.0 million of additional 11 5/8% Senior
Notes prior to the maturity date of those notes and (Euro)100.0 million of
addition 11 3/8% Senior Notes prior to the maturity of those notes. 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. See notes 4 and 6 of notes to Consolidated
Financial Statements. Furthermore, we expect to enter into secured credit
facilities, under which we will be permitted to borrow up to $600.0 million.
However, there can be no assurance as to whether, or on what terms, we will
obtain the credit facilities.
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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 million which
was primarily due to the net proceeds from our issuance of $250.0 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 $30.0 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, the proceeds from the notes, borrowings under the anticipated secured
credit facilities, existing and future equipment loans and lease lines of
credit, and issuances of additional debt, equity 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 "Risk Factors--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
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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 Commission released Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements, as amended by SAB Nos.
101A and 101B, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the Commission. 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
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. We adopted this Interpretation on 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.
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.
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 a privately-held company
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.
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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)125.0 million of 10 3/4% Senior Notes due 2009
and (Euro)200.0 million of 11 3/8% Senior Notes due 2008, which have periodic
interest payments due in Euros on June 15 and December 15, and January 15 and
July 15, respectively, of each year commencing on June 15, 2000 and January 15,
2001, respectively. Furthermore, exchange rate volatility may negatively impact
our financial results. We intend to assess the need to utilize financial
instruments to hedge currency exposures on an ongoing basis.
37
<PAGE>
BUSINESS
The Company
Exodus Communications is a leading provider of complex Internet hosting for
enterprises with mission-critical Internet operations. We offer sophisticated
system and network management solutions, along with professional services to
provide optimal performance for customers' Web sites. Exodus delivers its
services from geographically distributed, state-of-the-art Internet Data
Centers that are connected through a high-performance dedicated and redundant
backbone network. Our tailored solutions are designed to integrate with
existing enterprise systems architectures and to enable customers to outsource
the monitoring, administration and optimization of their equipment,
applications and overall Internet operations. As of March 31, 2000, we had over
2,800 customers under contract and managed over 39,000 customer servers
worldwide. Our customers represent a variety of industries, ranging from
leading Internet companies to major enterprise customers, including Yahoo!, USA
TODAY.com, weather.com, priceline.com, British Airways and Nordstrom.
Internet usage is growing rapidly and businesses are increasing the breadth
and depth of their Internet product and services offerings. These Internet
operations are mission-critical for Internet-centric businesses and are
becoming increasingly mission-critical for many enterprises. In order to ensure
the quality, reliability, availability and redundancy of these mission-critical
Internet operations, corporate IT departments must make substantial investments
in facilities, personnel, equipment and networks which must be continuously
upgraded to reflect changing technologies and must rapidly scale as the
enterprise grows. This recurring and significant investment is an inefficient
use of resources and, as a result, a significant need exists for outsourcing
arrangements that can increase performance, provide continuous operation of
Internet solutions and reduce Internet operating expenses. We believe a
significant opportunity exists for a highly focused company to provide a
combination of server hosting, Internet connectivity and managed and
professional services that will enable reliable, high performance mission-
critical Internet operations.
Exodus offers an integrated portfolio of solutions that provide customers
with a scalable, secure and high-performance platform for the development,
deployment and proactive management of mission-critical Internet operations.
Our server hosting and Internet connectivity services are offered through our
Internet Data Centers and our redundant backbone network of multiple high speed
OC-3 and OC-12 lines, along with our public and private network
interconnections. We continue to upgrade our network in order to accommodate
expected traffic growth. Our managed services include performance monitoring,
site management reports, data backup, content delivery and management services,
security services and professional services. These services provide the
foundation for high performance, availability, scalability and reliability of
customers' mission-critical Internet operations. In addition, we integrate
best-of-breed technologies from leading vendors with our industry expertise and
proprietary technology.
Our objective is to become the leading provider of Internet system and
network management solutions for enterprises with mission-critical Internet
operations. To achieve this objective, we intend to:
. Continue to position Exodus as the leader in this market
. Focus on enhancing systems and network management, Internet technology
services and professional services
. Accelerate our global expansion
. Leverage our expertise to address new market opportunities
. Continue to establish strategic relationships for distribution and
technology
We began offering server hosting and Internet connectivity services in late
1995, opened our first dedicated Internet Data Center in August 1996, and
introduced managed services in 1997 and professional services in 1998. We
currently operate 22 Internet Data Centers located in Atlanta, Austin, Boston,
Chicago, Frankfurt, Los Angeles, New York, Seattle, Silicon Valley, Washington,
D.C., London, Tokyo and Toronto.
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<PAGE>
We expanded our solutions and services by acquiring providers of Internet
technologies--Arca Systems, American Information Systems, Cohesive Technology
Solutions, Service Metrics, Global OnLine Japan, and KeyLabs, Inc. In October
1998, we purchased Arca Systems, a provider of advanced network and system
security consulting services. In February 1999, to accelerate our launch into
the Chicago metropolitan area, we acquired American Information Systems, a
regional provider of co-location, Web hosting and professional services. In
July 1999, we acquired Cohesive Technology Solutions, a technology professional
services organization with expertise in networking, Web applications and
technology solutions. In November 1999, we acquired Service Metrics, an
Internet monitoring applications and services company. In December 1999, we
acquired Global OnLine Japan, an Internet solutions provider, through which we
offer complex Web hosting and a range of managed and professional services in
the Japanese market. Finally, in February 2000, we acquired KeyLabs, Inc., a
provider of e-business testing services, and in April 2000, we completed an
equity investment in Mirror Image, Inc., a provider of content distribution
services.
Services
Exodus' Internet solutions and services are designed to provide enterprises
with the high-performance, scalability and expertise they need to optimize
their mission-critical Internet operations. We create tailored solutions for
our customers based on their unique business and technical requirements, and
modify the services as the customers' needs evolve. Our service offerings
include server hosting from within Internet Data Centers, network services,
managed services and professional services, including advanced, proprietary
security technologies.
Internet Data Centers--Server Hosting Facilities
We deliver our services from geographically distributed, state-of-the-art
Internet Data Centers with uninterruptible power supply and back-up generators,
fire suppression, raised floors, HVAC, separate cooling zones, 24x7 operations
and high levels of physical security. In these facilities, we support leading
Internet hardware and software systems vendor platforms, including those from
Compaq Computer Corporation, Dell Computer Corporation, Hewlett-Packard
Company, International Business Machines Corporation, Microsoft Corporation,
Silicon Graphics, Inc. and Sun Microsystems, Inc, as well as network vendor
platforms including those from F5 Networks, Inc., Alteon Web Systems,
ArrowPoint Communications, Inc., Cisco Systems, Inc., Foundry Networks, AXENT
Technologies, Inc. and Check Point Software Technologies, Ltd. This multi-
vendor flexibility enables the customer to retain complete control over the
technical solution and to integrate Internet operations with existing IT
technical architecture. Because mission-critical Internet operations are
complex and constantly changing and often require immediate hardware and
software upgrades to maintain targeted service levels, customers have unlimited
24x7 access to the Internet Data Centers. Additional space and electrical power
can be added as needed, ensuring that the customer has access to additional
server hosting services.
Based upon their technical requirements, customers can select from shared
rack facilities within common cage areas, highly secure cabinets, enclosed cage
facilities or vaults. Our server hosting facilities generally include dedicated
electrical power circuits to ensure that each customer's electrical power
requirements are met.
The following chart summarizes the key features of our current server
hosting services:
<TABLE>
<CAPTION>
Service Description Benefits
------- ----------- --------
<S> <C> <C>
CyberRack . 19 "or 23" half or full rack . Entry-level service, providing
economical solution for
customers who do not need
dedicated environments
. Secured environment that is
shared by multiple customers
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Service Description Benefits
------- ----------- --------
<S> <C> <C>
CyberCabinet . Dedicated, locked cabinet, 19" or 23" . A single rack with the
security of a dedicated
environment, including
dedicated power circuits
Virtual Data . Dedicated, locked 7' x 8' cage . Flexibility in designing and
Center or customized to order configuring Internet servers,
including space for multiple
racks and other customer
computing products
.Dedicated power circuits
ExodusVault . Dedicated, enclosed 8' x 8' or . Additional security for
8' x 12' vault or customized sensitive Internet
to order transactions as required by
financial institutions and on-
line merchants
.Biometric identification for
entry and exit, motion and
temperature detectors,
cameras, high impact glass,
and secured data and
electrical lines
. Dedicated power circuits
</TABLE>
Network Services--Internet Connectivity
Exodus connects its Internet Data Centers through a high-performance,
dedicated and redundant backbone network with multiple high speed OC-3 and OC-
12 lines, along with our extensive public and private network interconnections.
Our Network Services are designed to deliver the scalability, high availability
and performance required for high-volume, mission-critical Internet operations.
Since our customers' mission-critical Internet operations often experience
network traffic spikes due to promotions or events, we have a policy of
providing sufficient excess network capacity for our customers.
To meet customers' requirements of near 100% availability, our network is
designed to minimize the likelihood of any single point of failure. Each
Internet Data Center has multiple physical fiber paths into the facility. We
maintain multiple network links from multiple vendors into each Internet Data
Center and regularly check that our fiber backbone is traversing physically
separated paths. Customers may also enhance their Internet site's availability
by physically duplicating their site at multiple Internet Data Centers, and
synchronizing applications and content through our private fiber backbone
network. This network architecture optimizes the availability of a customer's
site, even in the event of a link failure. To ensure maximum scalability,
reliability and performance, we provide customers with scalable bandwidth
services ranging from Ethernet (10 megabits per second) connections to Gigabit
Ethernet (1,000 megabits per second) connections.
Our network services are also designed to consistently deliver low-latency
and peak network performance. During the first quarter of 2000, our peak
Internet exchange rate was 8.7 gigabits per second volume of traffic. Our
backbone engineering personnel continuously monitor traffic patterns and
congestion points throughout our network and at our interconnection points, and
dynamically reroute traffic flows to optimize end-user response times. We also
provide peak network performance by maintaining a large number of direct public
and private network interconnections. Our network includes interconnections
with over 300 ISPs worldwide.
Managed Services
We provide managed services to our customers, including detailed monitoring,
reporting and management tools to control their hardware, network, software and
application environments. Through our system and network management framework,
a customer can manage mission-critical Internet operations housed at our
Internet Data Centers as well as at their own site. We believe this framework
provides an important advantage
40
<PAGE>
to enterprises seeking to outsource a portion of their Internet operations and
to link the management of the outsourced operations with in-house operations.
Our proactive service methodology focuses on identifying and resolving
potential problems before they affect an Internet site's availability or
performance. Our sophisticated Internet system and network management solutions
enable us to identify and to begin to resolve hardware, software, network and
application problems, frequently before the customer is even aware that a
problem exists.
The following chart summarizes the key features of our current managed
services:
<TABLE>
<CAPTION>
Service Description Benefits
------- ----------- --------
<C> <S> <C>
Managed Monitoring . A package of 24x7 monitoring . Real time monitoring,
Services (MMS) and management solutions for notification and reporting for
system and database server and database alarms and
applications problems to identify potential
problems proactively
. Maximizes availability of
customers' mission-critical
Internet operations by
identifying potential problems
proactively
. Offload problem resolution to
Exodus (optional)
Site Management Reports . Bandwidth usage reports, . Assists in capacity planning
graphic and the Internet on an and tabular statistics
hourly, daily and semi-monthly delivered to customers via
basis management of network
resources
Internet Disaster Recovery . Tape management services to . Maximizes the availability of
restore sites after a system customers' applications;
failure provides additional redundancy
. Distributed load balancing in the event of Internet site
services to seamlessly re- failure
route user traffic to an
alternate site in the event of
a failure
. Exodus acts as value-added
reseller of Cisco and F5 Labs,
Inc. products, primarily
routers, hubs and switching
equipment, in connection with
server hosting services
Exodus Data Vault . Fully-managed on site back-up . Maintains regular data back-up
and restore services provided and fast network restore
in partnership with Sun capability for mission-
Microsystems, utilizing critical Internet sites
Veritas NetBackup solution and
DLT tape storage technology
Exodus MultiPath Net . Intelligent routing services . Maximizes availability and
that geographically distribute performance for Internet sites
end-user requests located across multiple
.Provides sophisticated Internet Data Centers
Internet site redundancy .Optimizes end-user response
time
Exodus MultiPath Site . Site requests intelligently . Increases availability and
balanced across multiple performance for multi-server,
servers located within a mission-critical Internet
single Internet Data Center sites
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Service Description Benefits
------- ----------- --------
<C> <S> <C>
Managed Firewall Service . Fully managed firewall . Enhances site security
perimeter security solution .24x7 proactive monitoring
Vulnerability Scanning . Automated testing for web site . Provides notification of
weaknesses potential security
vulnerabilities
Intrusion Detection . Detection and notification of . Allows customers to react
hacker attacks quickly when their site is
being attacked
Exodus ReadyCache Content . Deployment of Inktomi's . Improves Web site access
Distribution Service network caching technology performance
through our network of . Provides customers with the
Internet Data Centers that cost-effective option to
facilitates the distribution geographically distribute
of customer content worldwide their content, thereby
enabling them to reach a wider
range of their Internet end-
users
Exodus Gigabit Ethernet . Gigabit Ethernet bandwidth . Performance increases
service provides access to the . Easier to scale bandwidth
Internet via the Exodus . Redundant Internet
network to customer's co- connections available
location facility
We offer Web site performance monitoring and measurement services that
empower our customers to make informed Web site decisions and strengthen
branding. The following chart summarizes the key features of our current Web
site performance monitoring and measurement services:
<CAPTION>
Service Description Benefits
------- ----------- --------
<C> <S> <C>
SM-Web . Measures the end-user . Provides end-to-end time
perspective of Web site performance measurements for
performance from a globally diagnosis, analysis, and
distributed network of data reporting of site performance
collection agents problems
. Reports performance trends
for up to 13 months, enabling
peak period performance
monitoring and seasonality
analysis
. Supports pager and e-mail
notification of performance
degradation based upon
customer defined thresholds
for proactive repair
. Gives customers an
understanding of the end-user
performance experience on
their site, providing guidance
for improvements
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Service Description Benefits
------- ----------- --------
<C> <S> <C>
SM-Scenario . Measures the end-user . Provides performance
perspective of Web site measurement data for all URLs
transaction process (trades, involved in a site process or
purchases, etc.) performance transaction
from a globally distributed . Identifies poor performing
network of data collection URLs and process flow sequence
agents. SM-Scenario emulates errors
an end-user sequence of . Enables Web site problem
actions, executes the process identification and site
steps, and captures the performance and process
performance of each URL optimization
invoked . Helps customers ensure an
efficient and effective
process for end-user
transactions
SM-Webpoint . Provides a real-time . Gives customers real-time
measurement Web site performance of statistics from
performance from any point in a globally distributed network
the data collection agent of data collection agents for
network site diagnostics and repair
. Provides detailed statistics
for each object on the
measured URL identifying
specific elements causing
performance degradation
. Helps customers analyze and
troubleshoot end-user
complaints and trouble tickets
on site performance
SM-Sourcetracker . Isolates the performance . Gives customers an ability to
measurements of specific measure delivery of specific
objects on a Web page. page elements from third party
Designed primarily to measure providers
URLs that are dynamically . Enables accurate measurements
delivered and presented on a of Service Level Agreements
site (for example, ad banners, (SLAs) from providers of
content, scripts) specific page elements
</TABLE>
Professional Services
We also offer a comprehensive portfolio of professional services. We assist
our customers in planning their strategies for managing their complex mission-
critical Internet operations, transitioning operations to our Internet Data
Centers and managing various aspects of their Internet operations. We also
provide solutions in network, systems and information technology, Web site and
data storage consulting and security. These services can be layered to allow
customers to outsource an increasing portion of the management of their
Internet operations. The acquisition of KeyLabs enables us to offer an end-to-
end Web hosting solution that addresses the architectural design, deployment
readiness and optimization of sites, along with ongoing performance management
provided by Service Metrics. We plan to leverage KeyLabs' expertise in stress
and load testing services to help customers anticipate, identify and resolve
performance issues with their e-commerce sites before they go live.
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<PAGE>
Customers
We have established a diversified base of customers in a wide range of
industries, including finance, entertainment, high technology, education,
healthcare and publishing. As of March 31, 2000, we had over 2,800 customers
under contract. The following is a representative list of our Internet Data
Center customers. None of these customers individually represented in excess of
10% of revenues in 1999 or in the first three months of 2000.
<TABLE>
<CAPTION>
Internet-centric
Enterprise Customers Customers
-------------------- ---------------------
<S> <C>
British Airways Yahoo!
NORDSTROM.com Priceline.com
Weather.com AmericanGreetings.com
USATODAY.com Excite, Inc.
Merrill Lynch & Co., Inc. Iwon.com
Albertson's, Inc. Lycos, Inc.
Franklin Templeton Corporation ZDTV
CompUSA, Inc. pcOrder.com
MSNBC uBid.com
Handspring, Inc. Quote.com
National Public Radio
</TABLE>
Sales and Marketing
Our sales and marketing objective is to achieve broad market penetration
within our target market of enterprises that depend upon the Internet for
mission-critical operations. As of March 31, 2000, we employed 513 persons
engaged in sales and marketing.
We sell our services to enterprises directly through our sales force and
indirectly through our channel partners. We are actively seeking to increase
our sales and distribution capabilities and coverage in the United States and
to expand internationally as new Internet Data Centers are installed throughout
Europe and Asia Pacific. Currently, most of our sales are derived through the
efforts of our direct sales force.
Sales Force
Our sales force is organized into four distinct groups, consisting of field
sales, strategic accounts, channel sales and telesales, each of which is
further divided into geographical regions throughout the United States, Europe,
and Asia Pacific. Systems engineers and project managers support our sales
force, providing pre- and post-sales support to ensure that customers' services
are implemented properly and efficiently.
Exodus Alliance Program
The Exodus Alliance Program, called "Partnering for Success", includes
relationships with more than 700 technology companies, including Compaq
Computer Corporation, Microsoft Corporation, Inktomi Corporation, Andersen
Consulting, marchFIRST, Inc., Oracle Corporation, Sun Microsystems, Inc. and
Cisco Systems, Inc. The various levels of alliance program partner
participation are summarized below:
. Global Alliance Partners are market-makers in their respective industry
and include such companies as Microsoft, Compaq and Cisco. Through
product promotions and bundled solutions, Global Alliance Partners can
offer their customers new value-added services and greater pricing
incentives. Global Alliance Partners make marketing and sales
commitments to Exodus and offer a global model for sales engagement
between the companies.
. Alliance Partners market our services, and receive a monthly residual
income for opportunities introduced to us. Alliance Partners are
typically larger regional or national systems integrators, Web
developers, hardware and software resellers, consulting organizations
and ISPs.
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<PAGE>
. Alliance Agents play a sales representative role for us, and receive a
one-time payment, based on the monthly recurring charges from
opportunities brought into us. They are typically consultants,
independent Web developers, content developers, developers of small- to
medium-sized applications and regional value added resellers.
. Resellers market co-branded Exodus services. They commit to certain
volume levels to resell as part of their application or niche-focused
service offering to their customer base.
Marketing
Our marketing organization is responsible for product marketing management,
public relations and marketing communications. Product marketing management
includes defining the product roadmap and bringing to market the portfolio of
services and programs that will address customer needs. These activities
include product strategy and definition, pricing, competitive analysis, product
launches, channel program management and product lifecycle management. Public
relations focuses on cultivating industry analyst and media relationships with
the goal of securing broad media coverage and public recognition of our
leadership position in the market for Internet system and network management
solutions. We stimulate service demand and brand awareness for Exodus through a
broad range of marketing communications, public relations and advertising
efforts, as well as through our Web site, www.exodus.net.
Customer Service
We offer superior customer service by understanding the technical
requirements and business objectives of our customers and by fulfilling their
needs proactively on an individual basis. Working closely with our customers,
we optimize the performance of our customers' Internet operations, take actions
intended to avoid downtime, resolve problems that may arise, and make
appropriate adjustments in services as customer needs change over time. To
enhance our customer service delivery and increase operating efficiencies 24x7,
we operate a Global Response Center, which handles inbound calls, monitoring,
and problem resolution for our Internet Data Centers. Partnering with our
customers, we also solicit feedback to ensure that we continue to offer the
highest quality of service. We use advanced software tools to aid in customer
monitoring and service efforts. Many of our customer service personnel have
been specifically trained and certified by the vendors of our software tools,
including Sun Microsystems, Inc., Microsoft Corporation, Oracle Corporation,
Computer Associates and Cisco Systems.
In coordination with the Sales Project Managers (PM's), we also provide
customer service and technical support during the installation phase, including
a transition team. Our customer service continues after installation, through
Customer Relationship Representatives (CRR's) who are responsible for resolving
customer problems.
In addition, we provide system integration services between the customer's
Internet site and legacy systems. After installation, primary customer support
is coordinated through our Global Response Center and supported by each
Internet Data Center's Network Control Center. These centers are operated 24x7
by engineers who monitor site and network operations, and activate teams to
solve problems that arise. To solve complex problems, we draw on the collective
expertise at all of our Internet Data Centers, creating a global engineering
pool. Our customer service personnel also are available to assist customers
whose operations require specialized procedures.
We employ network engineers and systems administrators who work with
customers to design and maintain their Internet operations. Our network
engineers and system administrators are trained specialists who support Windows
NT, Solaris, Linux and other UNIX platforms. They are also trained to support
Cisco and other routers and switches. They also serve as the next level of
support for customer issues that cannot be resolved by the Global Response
Center. We also employ a group of network engineers who are accountable for
designing and operating the dynamic network that connects our Internet Data
Centers to each other and the
45
<PAGE>
Internet. This group constantly monitors the network design and effectiveness
to optimize performance for customers, rerouting traffic as conditions
require.
Our contracts with customers generally cover the provision of services by
us for a one-year period and may contain, among other things, various service
level warranties. These service agreements entered into prior to August 1997
typically included service level warranties which provided that, if we failed
to provide Internet Data Center services to a customer for more than 24
consecutive hours, a customer's account would be credited for the charges the
customer paid for services it did not receive during period affected. Between
August 1997 and July 1998, our service agreements typically included service
level warranties which provided that, if we fail to provide Internet Data
Center services to a customer for more than two consecutive hours, the
customer's account would be credited for one day of service and, if for more
than eight consecutive hours, one week of service, with each customer limited
to one credit per month. Since July 1998, our service agreements have
typically included service level warranties which provide that, if we fail to
provide Internet Data Center services to a customer for more than 15 minutes,
the customer's account would be credited for one day of service, up to a
maximum of seven days in any month. In addition, we provide additional credits
for packet loss and transmission latency. Certain customers have received more
favorable terms than those described above.
As of March 31, 2000, we employed 552 persons dedicated to customer service
and network engineering.
Network Design
Comprising the Exodus Network is a global backbone, high performance
network architecture and industry-leading public and private interconnect
arrangements. Our high performance, dedicated, and redundant backbone network
connects all of our Internet Data Centers using multiple high-speed OC-3, and
OC-12 lines which significantly reduces the risk of a single point of failure.
Our high-performance IP network is designed to provide the highest possible
availability and reliability for our customers' Internet operations. The
network comprises our Internet Data Centers that are interconnected by a high-
performance backbone network and that are connected to the Internet through
public and private interconnections. Within each Internet Data Center, a
virtual LAN environment provides redundant, high-speed internal connectivity.
Our Internet Data Centers are located near most of the major Internet
exchange points ("IXPs") and are connected to their local IXPs by multiple OC-
3 and OC-12 lines, provisioned by local exchange carriers, such as Teleport
Communications Group Inc., MFS Communications Company, Inc., Brooks Fiber
Properties, Inc. and the Regional Bell Operating Companies. These links to the
local exchange points, combined with private exchanges with ISPs, connect the
customers' traffic to the Internet.
In order to provide a high level of redundancy, performance and capacity,
along with real-time content replication or caching across our Internet Data
Centers, we have multiple OC-3 and OC-12 lines. We engineer our backbone with
a geographically diverse fiber path to provide high availability, even in the
event of a link failure. We regularly upgrade our network in order to
accommodate expected traffic growth. For customers with servers located at
multiple Internet Data Centers, we provide dynamic response time and load
balancing technologies for optimal routing of traffic.
Within each Internet Data Center, we deploy a virtual LAN environment to
increase reliability and performance and to provide customers with redundant
connectivity to our backbone and the Internet. We place OC-3 and OC-12 lines
on different routers to avoid any single points of failure. We also use a
combination of public and private interconnections to achieve fast and
reliable delivery of content. We have private and public interconnections with
more than 300 ISPs. We also have a presence at each of the major U.S. IXPs.
We will continue to work with ISPs to establish direct private
interconnections at each of our Internet Data Centers, thus enhancing content
delivery. Our broad combination of public and private interconnections
46
<PAGE>
provides customers with the reliability and redundancy that they need to ensure
their content reaches its intended destination. We seek to provide significant
unutilized network capacity for our LAN, WAN and public and private
interconnections to allow for spikes in demand or line outages.
Product Development
Our product development group is responsible for evaluating and integrating
best-of-breed technologies to enhance our service offerings that support the
customers' mission-critical Internet operations. We are also developing
proprietary technologies that will be integrated with these best-of-breed
technologies. We believe that establishing relationships with technology
leaders enable us to leverage these enterprises' research and development
expertise. These relationships enable us to gain quicker access to innovative
technologies and thus provide more creative value-added solutions for our
customers. As of March 31, 2000, we employed 110 persons in product
development.
We incurred product development expenses of $1.6 million in 1997, $3.5
million in 1998, $8.9 million in 1999 and $3.9 million in the first three
months of 2000.
Competition
Our market is intensely competitive. There are few substantial barriers to
entry, and we expect to face additional competition from existing competitors
and new market entrants in the future. Many companies have announced that they
intend to begin providing or greatly expanding their service offerings to be
competitive with our services. The principal competitive factors in this market
include:
. ability to deliver services when requested by the customer
. Internet system engineering and other technical expertise
. customer service
. network capability, reliability, quality of service and scalability
. variety of services offered
. access to network resources, including circuits, equipment and
interconnection capacity to other networks
. broad geographic presence
. price
. ability to maintain and expand distribution channels
. brand name recognition
. timing of introductions of new services
. network security
. 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 Internet Service Providers
. global, regional and local telecommunications companies and Regional
Bell Operating Companies
. Information Technology outsourcing firms
. other technology services and products companies
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<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 the Internet system and network management
solutions, including reduced communications costs, which could reduce the
overall costs of their services relative to ours. We may not be able to offset
the effects of any price reductions. In addition, we believe our market is
likely to encounter consolidation in the near future, which could result in
increased price and other competition.
Employees
As of March 31, 2000, Exodus had 2,097 employees, including 513 employees in
sales and marketing, 110 employees in product development, 552 employees in
customer service and network engineering, 599 employees in professional
services, and 323 employees in finance and administration. We believe that our
future success will depend in part on our continued ability to attract, hire
and retain qualified personnel. The competition for personnel is intense, and
there can be no assurance that we will be able to identify, attract and retain
personnel in the future. None of our employees is represented by a labor union,
and management believes that our employee relations are good. See "Risk
Factors--We must manage growth effectively by expanding operating and financial
procedures, controls or our business will be harmed" and "Risk Factors--Our
future success depends on our key personnel."
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<PAGE>
Properties
Our executive offices are located in Santa Clara, California and consist of
approximately 150,000 square feet that are leased pursuant to an agreement that
expires in 2008. We lease the facilities for our current Internet Data Centers
in the following metropolitan areas and specific cities, which cover an
aggregate of approximately 1,900,000 gross square feet and expire in the years
indicated below:
<TABLE>
<CAPTION>
Lease
Metropolitan Area City and State Expiration
----------------- ------------------ ----------
<S> <C> <C>
Silicon Valley................................. Santa Clara, CA 2009
Santa Clara, CA 2008
Santa Clara, CA 2009
Santa Clara, CA 2009
Santa Clara, CA 2009
New York....................................... Jersey City, NJ 2007
Weehawken, NJ 2011
Seattle........................................ Seattle, WA 2007
Seattle, WA 2009
Los Angeles.................................... Irvine, CA 2007
El Segundo, CA 2005
Washington, D.C. .............................. Herndon, VA 2004
Sterling, VA 2009
Boston......................................... Waltham, MA 2011
Waltham, MA 2011
Chicago........................................ Oak Brook, IL 2010
London......................................... Park Royal, UK 2023
Austin......................................... Austin, TX 2011
Atlanta........................................ Lithia Springs, GA 2011
Tokyo.......................................... Tokyo, Japan 2011
Toronto........................................ Toronto, Canada 2013
Frankfurt...................................... Frankfurt, Germany 2010
</TABLE>
Legal Proceedings
From time to time, we may be involved in litigation relating to claims
arising out of our operations. As of the date of this offering circular, we are
not subject to any material legal proceedings.
49
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ellen M. Hancock........ 57 Chief Executive Officer and Director
Don Casey............... 54 President and Chief Operating Officer
Beverly Brown........... 55 Executive Vice President, Chief Marketing Officer
R. Marshall Case........ 42 Executive Vice President, Finance and Chief
Financial Officer
Herbert Dollahite....... 48 Executive Vice President, Customer Services
and Support and Quality
Morris Taradalsky....... 54 Executive Vice President, Engineering
Sam S. Mohamad.......... 41 President of Worldwide Sales and International
Field Operations
William R. Yeack........ 42 Executive Vice President, Professional Services
Adam W. Wegner.......... 34 Senior Vice President, Legal and Corporate Affairs,
General Counsel and Secretary
John R. Dougery(1)...... 60 Director
Mark Dubovoy(2)......... 53 Director
Max D. Hopper(2)(4)..... 65 Director
L. William Krause(2).... 58 Director
Daniel C. Lynch(3)...... 58 Director
Thadeus J.
Mocarski(3)(4)......... 38 Director
Naomi O. Seligman(1).... 67 Director
Dirk A. Stuurop(1)(3)... 52 Director
Laura D'Andrea
Tyson(4)............... 53 Director
</TABLE>
--------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Finance Committee
(4) Member of the Corporate Governance Committee
Each director will hold office until the next Annual Meeting of Stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal. Each officer serves at the discretion of the Board of
Directors.
Ellen M. Hancock has served as our Chief Executive Officer since September
1998 and has been a director since April 1998. She also served as our President
from March 1998 to June 2000 and as the acting Vice President, Marketing of
Exodus from July 1998 to October 1998. From July 1996 to July 1997, she served
as Executive Vice President for Research and Development and Chief Technology
Officer of Apple Computer, Inc. From September 1995 to May 1996, Mrs. Hancock
served as an Executive Vice President and Chief Operating Officer of National
Semiconductor Corporation. From 1966 to February 1995, she served in various
staff, managerial and executive positions at International Business Machines
Corporation, most recently as Senior Vice President and Group Executive. Ms.
Hancock is a director of Colgate-Palmolive Company and Aetna Inc. She holds a
B.A. degree in mathematics from The College of New Rochelle and an M.A. degree
in mathematics from Fordham University.
Don Casey has served as our President and Chief Operating Officer since June
2000. Previously, Mr. Casey held a number of senior executive positions at Wang
Laboratories, Inc. from 1991 to 1999, including President, until it was sold to
Getronics in May 1999. In his last assignment as Chief Technology Officer and
50
<PAGE>
President of U.S. Services, he was responsible for Wang's network outsourcing
strategy as well as its commercial business in the United States. Prior to
Wang, he was with Lotus Development Corporation as Vice President of its
Spreadsheet Division from 1990 to 1991. In 1988, Mr. Casey joined Apple
Computer, Inc. as Vice President, Networking and Communications. He was later
named Vice President, Multimedia and Networking, reporting to the CEO of Apple
Computer, Inc. Mr. Casey joined Apple after spending 21 years with IBM from
1967 to 1988, where he held a number of executive positions including Vice
President of the Networking Software and Networking Hardware Divisions. Mr.
Casey holds a B.S. degree in mathematics from Saint Francis College in New York
City, New York.
Beverly Brown has served as our Executive Vice President, Chief Marketing
Officer since October 1999. From June 1996 to October 1999, she served as
President and Chief Executive Officer of DataMan Software, Inc. From February
1994 to May 1996, she served as an Executive Vice President for Praxis
International, Inc., where she was responsible for sales, marketing, business
development and professional services. From December 1992 to January 1994, Ms.
Brown served as Vice President, Marketing for the INGRES business unit of The
ASK Group. Ms. Brown is also a director of SEEC, Inc. She holds a B.S. degree
in chemistry/biology from LadyCliff College.
R. Marshall Case has served as our Executive Vice President, Finance and
Chief Financial Officer since January 2000. From February 1998 until January
2000, he served as Executive Vice President and Chief Financial Officer of
Auspex Systems, Inc. From September 1997 until February 1998, he served as Vice
President Finance and Administration of Viking Freight Inc., a division of FDX.
From November 1995 until September 1997, he served as Vice President Financial
Planning and Analysis of Amdahl Corporation. Mr. Case previously served as
Executive Vice President, Martin Marietta Overseas Corporation and held a
variety of increasingly responsible financial management positions while at
General Electric Corporation for 12 years. Mr. Case holds a B.S. in Accounting
from the State University of New York.
Herbert Dollahite has served as our Executive Vice President, Customer
Services and Support and Quality since November 1998, and served as our Vice
President, Quality from June 1998 to November 1998. From August 1994 to June
1998, he served as Senior Engineer/Scientist II, Senior Manager, Central
Quality, Director, Integration Quality, and Senior Director, Global Quality
Engineering of Apple Computer, Inc. Dr. Dollahite holds a B.S. degree in
Engineering from Cornell University, an M.B.A. degree from University of
Virginia and a Ph.D. degree in Computer Science from the University of Alabama-
Huntsville.
Morris Taradalsky has served as our Executive Vice President, Engineering
since April 2000. Mr. Taradalsky served as Executive Vice President and General
Manager, Enterprise Division, at NetObjects, Inc., a provider of e-business
software and solutions, from April 1997 until April 2000. From 1994 to 1997,
Mr. Taradalsky served as Chief Executive Officer of MicroNet Technology, Inc.,
a privately held storage systems supplier. From 1988 to 1994, Mr. Taradalsky
was employed at Apple Computer, Inc. where he was General Manager of the Apple
Business Systems Division. Prior to joining Apple Computer, Mr. Taradalsky was
employed by IBM for 18 years in a number of positions, including Vice President
and General Manager, Santa Teresa Laboratory. Mr. Taradalsky received a
Bachelor's Degree in Mathematics from Pennsylvania State University.
Sam S. Mohamad has served as our President of Worldwide Sales and
International Field Operations since June 2000. He previously served as our
Executive Vice President, Worldwide Sales from December 1998 to June 2000 and
as our Vice President, Worldwide Sales from February 1997 to December 1998.
From March 1996 to January 1997, he served as Vice President of Sales and
Marketing of Genuity, Inc., a provider of data center products and services.
From 1987 to February 1996, Mr. Mohamad held various positions at Oracle
Corporation, most recently as Vice President of Direct Sales and Marketing.
William R. Yeack has served as our Executive Vice President, professional
services since August 1999. Mr. Yeack has served as General Manager, North
America and Corporate Vice President of Marketing for Synon, Inc. from 1996 to
August 1999. From 1994 to 1996, Mr. Yeack was President of Tandem Services
Company and Director of Tandem Computers. Mr. Yeack holds B.S.B.A. and M.B.A.
degrees from Ohio State University.
51
<PAGE>
Adam W. Wegner has served as our Senior Vice President, Legal and Corporate
Affairs since February 2000 and our General Counsel and Secretary since July
1997 and served as our Vice President from October 1998 until January 2000.
From January 1995 until July 1997, he was an attorney with the law firm of
Fenwick & West LLP. Mr. Wegner holds a B.A. degree in political science from
the University of Pennsylvania and a J.D. degree from the Georgetown University
Law Center.
John R. Dougery has served as a director of Exodus since February 1996. He
has been President of Dougery Ventures, a venture capital firm, since January
1998. From 1981 to December 1997, he was a general partner of Dougery & Wilder,
a venture capital firm. Mr. Dougery is a director of Printronix, Inc. Mr.
Dougery holds a B.A. degree in mathematics from the University of California,
Berkeley and an M.B.A. degree from Stanford University.
Mark Dubovoy has served as a director of Exodus since October 1996. He was a
founder and has served as a general partner of LeapFrog Ventures, a venture
capital partnership, since November 1999. He also was a founder and has served
as a general partner of Information Technology Ventures, a venture capital
partnership, since September 1994. From 1991 to 1994, he was a general partner
of Grace/Horn Ventures, a venture capital partnership. Mr. Dubovoy is a
director of iPrint.com, inc. Mr. Dubovoy holds a B.S. degree in physics from
the National University of Mexico and M.A. and Ph.D. degrees in physics from
the University of California, Berkeley.
Max D. Hopper has served as a director of Exodus since January 1998. Mr.
Hopper has been the Chief Executive Officer of Max D. Hopper Associates, Inc.,
an information services management consulting firm, since 1995. From 1985 to
January 1995, he served in various positions at American Airlines, a subsidiary
of AMR Corporation, most recently as Senior Vice President, Information Systems
and Chairman of the SABRE Group. Mr. Hopper is also a director of Gartner
Group, Inc., US Data Corporation, Accrue Software, Inc., Metrocall, Inc.,
Payless Cashways, Inc. and United Stationers, Inc. He holds a B.S. degree in
mathematics from the University of Houston.
L. William Krause has served as a director of Exodus since June 2000. He has
served as President of LWK Ventures, a private investment company, since
November 1998. From October 1991 to November 1998, Mr. Krause served as
President and Chief Executive Officer of Storm Technology, Inc., a digital
imaging company which filed for protection under federal bankruptcy laws in
November 1998. He served as President and Chief Executive Officer of 3Com
Corporation, a global data networking company, from 1981 to 1990, and as its
Chairman from 1987 until 1993. From 1967 to 1981, Mr. Krause served in various
marketing and general management positions at Hewlett-Packard Company. Mr.
Krause is a director of Pinnacle Systems, Inc., Ramp Networks, Inc. and Sybase,
Inc. He holds a B.S.E.E. degree from the Citadel.
Daniel C. Lynch has served as director of Exodus since January 1998. Mr.
Lynch has been the owner of Lynch Enterprises, a venture capital firm, since
August 1993. From April 1994 to August 1996, he was a director of UUNet
Technologies, Inc., an Internet service provider. From 1991 to August 1993, he
was the Chairman of the Board of Interop, a conference and trade show company,
which he founded and which is now a division of ZD Comdex Forums. Mr. Lynch is
a director and founder of Cybercash, Inc., which he founded, and Covad
Communications Group. He holds a B.S. degree in mathematics from Loyola
Marymount University and an M.A. degree in mathematics from the University of
California, Los Angeles.
Thadeus J. Mocarski has served as a director of Exodus since June 1997.
Since 1994, Mr. Mocarski has been an officer of various entities affiliated
with Fleet Equity Partners, a private equity firm, most recently as Managing
Director. Prior to joining Fleet Equity Partners, Mr. Mocarski was an attorney
with the law firm of Edwards & Angell. Mr. Mocarski holds a B.A. degree in
economics and government from Colby College and a J.D. degree from the
Washington College of Law.
Naomi O. Seligman has served as a director of Exodus since July 1999. She
was a founder of Cassius Advisors, a management consultancy, where she has been
a senior partner since September 1999. Prior to that,
52
<PAGE>
Ms. Seligman had been a senior partner of the Research Board, a private-sector
research institute, from 1971 to 1999. Ms. Seligman is a director of the Dun &
Bradstreet Corporation, Ventro Corporation, Martha Stewart Living Omnimedia,
Inc. and Sun Microsystems, Inc. She holds a B.A. degree in economics from
Vassar College and an M.B.A. degree from the London School of Economics.
Dirk A. Stuurop has served as a director of Exodus since June 2000. He has
served as President of Stuurop & Company, a private strategic advisory firm,
since October 1999. From 1982 to May 1999, Mr. Stuurop served in various
investment banking positions at Merrill Lynch & Company, most recently as
Chairman, Global Financial Institutions. Mr. Stuurop is a director of
Philadelphia Consolidated Holding Corporation. He holds an M.S. degree in
economics from the University of Groningen (The Netherlands) and an M.B.A. from
the Wharton School of the University of Pennsylvania.
Laura D'Andrea Tyson has served as a director of Exodus since June 2000. Dr.
Tyson is Dean of the Walter A. Haas School of Business, a position she assumed
in July 1998. Previously, she was professor of the Class of 1939 Chair in
Economics and Business Administration at the University of California,
Berkeley, a position she held from January 1997 to July 1998. Prior to this
position, Dr. Tyson served in the first Clinton Administration as Chairman of
the President's National Economic Council from March 1995 to December 1996 and
16th Chairman of the White House Council of Economic Advisers from January 1993
to March 1995. Prior to joining the Administration, Dr. Tyson was professor of
Economics and Business Administration, Director of the Institute of
International Studies, and Research Director of the Berkeley Roundtable on the
International Economy at the University of California, Berkeley from July 1979
to January 1993. Dr. Tyson holds a B.A. degree from Smith College and a Ph.D.
degree in economics from the Massachusetts Institute of Technology. Dr. Tyson
is the author of numerous articles on economics, economic policy and
international competition. She is a director of Eastman Kodak Company, Fox
Entertainment Company, Human Genome Sciences, Inc., Morgan Stanley Dean Witter
and SBC Communications.
53
<PAGE>
DESCRIPTION OF ANTICIPATED CREDIT FACILITIES
We expect to enter into a credit facility with a syndicate of banks
providing for revolving credit borrowings of up to $225.0 million and term
facilities of up to $375.0 million. We expect one tranche of the term credit
facility to provide for borrowings of up to $225.0 million, of which an amount
to be determined will be available initially and the balance will be available
in multiple drawings within a specified period after entering into the term
credit facility. The other tranche of the term facility is to provide for one
borrowing of up to $150.0 million to be drawn at the closing of the facilities.
A portion of the revolving facility to be determined will be available in
foreign currencies and up to $100.0 million of this facility will be available,
at our option, in the form of letters of credit. In addition, we may establish
additional facilities for purchase money financings of telecommunications
assets subject to our compliance with the covenants to be contained in the
credit agreement for the facilities. We expect that Chase Securities Inc. will
act as sole book manager and joint-lead arranger, Goldman Sachs Credit Partners
L.P. will act as joint-lead arranger and co-documentation agent, Merrill Lynch,
Pierce, Fenner & Smith Incorporated will act as syndication agent, Morgan
Stanley Senior Funding, Inc. will act as co-documentation agent, and the Chase
Manhattan Bank will act as administrative and collateral agent for the
facilities.
The credit facilities are subject to the satisfaction of material conditions
precedent and the specific terms of each facility are subject to change as we
negotiate final loan documents. We cannot provide any assurance as to whether,
or on what terms, we will obtain these credit facilities.
Our obligations under the credit facilities will be guaranteed by each of
our existing and future wholly-owned U.S. subsidiaries.
We expect the facilities and the guarantees by our wholly-owned U.S.
subsidiaries to be secured, to the extent permitted by our existing indentures,
by a first priority security interest on substantially all of our assets and
substantially all the assets and stock of our existing and future wholly-owned
U.S. subsidiaries, subject to exceptions.
The revolving facility will allow for borrowings of revolving credit loans
from time to time until the fifth anniversary of the establishment of the
facilities. The tranches under the term credit facilities will mature five
years and seven years, respectively, after the establishment of the facilities
and will amortize on a quarterly basis commencing on a date and in annual
amounts to be agreed upon by us and the bank syndicate. The proceeds of the
revolving facility may be used for our working capital and general corporate
needs, while the proceeds of the term facilities must be used to purchase or
construct telecommunications assets, including real estate. Our ability to
borrow under these facilities will be subject to, among other things,
compliance with covenants, including financial ratios, and customary borrowing
conditions. In addition, aggregate outstanding borrowings will be limited to
specified amounts in order to ensure compliance with the indentures governing
our outstanding senior debt.
Loans under the revolving facility and the delayed-draw tranche of the term
facility will bear interest, at our option, at the London interbank offered
rate for eurodollar deposits for the relevant interest period, or Adjusted
LIBOR, plus a specified margin, or at the higher of Chase Manhattan's prime
rate and the Federal funds effective rate plus 1/2 of 1%, or Alternate Base
Rate, plus a specified margin. The interest rate under the other tranche of the
term facility will, at our option, be Adjusted LIBOR plus a specified margin or
Alternate Base Rate plus a specified margin.
We expect the credit agreement governing the facilities to contain
affirmative and negative covenants, including provisions that will restrict our
ability and the ability of our subsidiaries to incur additional indebtedness,
to incur liens, to make investments, to engage in sales of assets, to incur
capital expenditures and to make restricted payments. We also expect the credit
agreement governing the facilities to require that Exodus and its subsidiaries
maintain financial ratios. The credit agreement governing the facilities will
contain customary events of default.
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<PAGE>
CERTAIN OTHER INDEBTEDNESS
The 10 3/4% Senior Notes
In December 1999, we issued an aggregate of $375.0 million and (Euro)125.0
million of 10 3/4% Senior Notes pursuant to an indenture between us and Chase
Manhattan Bank and Trust Company, National Association, as trustee (the "10
3/4% Senior Notes Indenture"). The 10 3/4% Senior Notes are unsecured
obligations, and mature on December 15, 2009. Interest on the 10 3/4% Senior
Notes accrues at the rate of 10 3/4% per annum, payable semi-annually on June
15 and December 15 of each year.
The 10 3/4% Senior Notes will be redeemable at our option, in whole or in
part, at any time or from time to time, on or after December 15, 2004 at the
redemption prices set forth in the 10 3/4% Senior Notes Indenture. In addition,
at any time prior to December 15, 2002, we may redeem up to 35% of the
aggregate principal amount of the 10 3/4% Senior Notes with the net proceeds of
one or more sales of certain types of our stock at a redemption price of
110.75%, plus accrued and unpaid interest, if any, to the redemption date;
provided that at least 65% of the original principal amount of the 10 3/4%
Senior Notes initially issued remain outstanding. Upon a Change of Control, as
defined in the 10 3/4% Senior Notes Indenture, we would be required to make an
offer to purchase the 10 3/4% Senior Notes at a purchase price equal to 101% of
the principal amount, plus accrued and unpaid interest, if any. The definition
of Change in Control in the 10 3/4% Senior Notes Indenture is substantially
similar to the definition of Change of Control in the indentures governing the
notes.
The debt evidenced by the 10 3/4% Senior Notes ranks equally in right of
payment with all of our existing and future unsubordinated unsecured debt,
including the notes offered by this prospectus, and senior in right of payment
to all of our existing and future subordinated debt, including our 4 3/4%
Convertible Subordinated Notes and our 5% Convertible Subordinated Notes.
The 10 3/4% Senior Notes Indenture restricts, among other things, our
ability to incur additional debt and the use of proceeds of such additional
debt, pay dividends or make certain other restricted payments, incur certain
liens to secure debt, or engage in merger transactions. There are significant
"carve-outs" and exceptions to these covenants.
The 11 1/4% Senior Notes
In July 1998 and July 1999, we issued an aggregate of $275.0 million of 11
1/4% Senior Notes pursuant to an indenture between us and Chase Manhattan Bank
and Trust Company, National Association, as trustee (the "11 1/4% Senior Notes
Indenture"). The 11 1/4% Senior Notes are unsecured obligations, and mature on
July 1, 2008. Interest on the 11 1/4% Senior Notes accrues at the rate of 11
1/4% per annum, payable semi-annually on January 1 and July 1 of each year. We
have placed in escrow enough cash to meet the requirement of the first four
interest payments due on the 11 1/4% Senior Notes.
The 11 1/4% Senior Notes will be redeemable at our option, in whole or in
part, at any time or from time to time, on or after July 1, 2003 at the
redemption prices set forth in the 11 1/4% Senior Notes Indenture. In addition,
at any time prior to July 1, 2001, we may redeem up to 35% of the aggregate
principal amount of the 11 1/4% Senior Notes with the net proceeds of one or
more sales of certain types of our stock at a redemption price of 111.25%, plus
accrued and unpaid interest, if any, to the redemption date; provided that at
least 65% of the original principal amount of the 11 1/4% Senior Notes
initially issued remain outstanding. Upon a Change of Control, as defined in
the 11 1/4% Senior Notes Indenture, we would be required to make an offer to
purchase the 11 1/4% Senior Notes at a purchase price equal to 101% of the
principal amount, plus accrued and unpaid interest, if any. The definition of
Change of Control in the 11 1/4% Senior Note Indenture is substantially similar
to the definition of Change of Control in the indentures governing the notes.
The debt evidenced by the 11 1/4% Senior Notes ranks equally in right of
payment with all of our existing and future unsubordinated unsecured debt,
including our 10 3/4% Senior Notes and the notes offered by this prospectus,
and senior in right of payment to all of our existing and future subordinated
debt, including the 4 3/4% Convertible Subordinated Notes and our 5%
Convertible Subordinated Notes.
55
<PAGE>
The 11 1/4% Senior Notes Indenture restricts, among other things, our
ability to incur additional debt and the use of proceeds of such additional
debt, pay dividends or make certain other restricted payments, incur certain
liens to secure debt, or engage in merger transactions. There are significant
"carve-outs" and exceptions to these covenants.
The 5% Convertible Subordinated Notes
In March 1999, we issued $250.0 million of 5% Convertible Subordinated Notes
due 2006 pursuant to an indenture between us and Chase Manhattan Bank and Trust
Company, National Association, as trustee (the "5% Convertible Subordinated
Notes Indenture"). The 5% Convertible Subordinated Notes are convertible into
our common stock at a conversion rate of 175.1408 shares per $1,000 in
principal amount of 5% Convertible Subordinated Notes. The 5% Convertible
Subordinated Notes are unsecured obligations, and mature on March 15, 2006.
Interest on the 5% Convertible Subordinated Notes accrues at the rate of 5% per
annum, payable semi-annually on March 15 and September 15 of each year. As of
March 31, 2000, $72.3 million in principal amount of the 5% Convertible
Subordinated Notes were outstanding. Subsequent to March 31, 2000, an
additional $100,000 of principal amount of the 5% Convertible Subordinated
Notes were converted into our common stock.
The 5% Convertible Subordinated Notes will be redeemable at our option, in
whole or in part, at any time or from time to time, on or after March 20, 2001,
at the redemption prices set forth in the 5% Convertible Subordinated Notes
Indenture; provided, however, that the 5% Convertible Subordinated Notes will
not be redeemable at our option on or after March 20, 2001 and before January
20, 2003 unless the last reported bid price for our common stock equals or
exceeds 140% of the conversion price for at least 20 trading days within a
period of 30 consecutive trading days ending within five trading days of the
call for redemption. Upon a Change of Control, as defined in the 5% Convertible
Subordinated Notes Indenture, we would be required to make an offer to purchase
the 5% Convertible Subordinated Notes at a purchase price equal to 100% of the
principal amount, plus accrued and unpaid interest, if any. The definition of
Change of Control in the 5% Convertible Subordinated Notes Indenture differs in
a number of respects from the definition of Change of Control in the indentures
governing the notes.
The debt evidenced by the 5% Convertible Subordinated Notes is subordinated
in right of payment to all of our existing and future senior indebtedness
including our 10 3/4% Senior Notes, our 11 1/4% Senior Notes and the notes and
ranks equally in right of payment to all of our existing and future
subordinated debt, including our 4 3/4% Convertible Subordinated Notes. The
indentures governing the notes provide that the notes are "Designated Senior
Indebtedness" as defined in the 5% Convertible Subordinated Indenture. This
designation provides certain additional rights to the holders of the notes.
The 4 3/4% Convertible Subordinated Notes
In December 1999, we issued $500.0 million of 4 3/4% Convertible
Subordinated Notes pursuant to an indenture between us and Chase Manhattan Bank
and Trust Company, National Association, as trustee (the "4 3/4% Convertible
Subordinated Notes Indenture"). The 4 3/4% Convertible Subordinated Notes are
convertible into our common stock at a conversion rate of 28.4068 shares per
$1,000 in principal amount of 4 3/4% Convertible Subordinated Notes. The 4 3/4%
Convertible Subordinated Notes are unsecured obligations, and mature on July
15, 2008. Interest on the 4 3/4% Convertible Subordinated Notes accrues at the
rate of 4 3/4% per annum, payable semi-annually on January 15 and July 15 of
each year, beginning July 15, 2000. As of March 31, 2000, $500.0 million in
principal amount of the 4 3/4% Convertible Subordinated Notes were outstanding.
The 4 3/4% Convertible Subordinated Notes will be redeemable at our option,
in whole or in part, at any time or from time to time, on or after January 20,
2002, at the redemption prices set for in the 4 3/4% Convertible Subordinated
Notes Indenture; provided, however, that the 4 3/4% Convertible Subordinated
Notes will not be redeemable at our option on or after January 20, 2002 and
before January 15, 2004 unless the last reported bid price for the common stock
equals or exceeds 140% of the conversion price for at least 20 trading
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<PAGE>
days within a period of 30 consecutive trading days ending within five trading
days of the call for redemption. Upon a Change of Control, as defined in the 4
3/4% Convertible Subordinated Notes Indenture, we would be required to make an
offer to purchase the 4 3/4% Convertible Subordinated Notes at a purchase price
equal to 100% of the principal amount, plus accrued and unpaid interest, if
any. The definition of Change of Control in the 4 3/4% Convertible Subordinated
Notes Indenture differs in a number of respects from the definition of Change
of Control in the indentures governing the notes.
The debt evidenced by the 4 3/4% Convertible Subordinated Notes is
subordinated in right of payment to all of our existing and future senior
indebtedness including our 10 3/4% Senior Notes, our 11 1/4% Senior Notes and
the notes and ranks equally in right of payment to all of our existing and
future subordinated indebtedness, including our 5% Convertible Subordinated
Notes. The indentures governing the notes provide that the notes are
"Designated Senior Indebtedness" as defined in the 4 3/4% Convertible Notes
Indenture. This designation provides certain additional rights to the holders
of the notes.
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<PAGE>
THE EXCHANGE OFFER
Terms of the Exchange Offer; Period for Tendering Old Notes
On July 6, 2000 we sold the old notes to Goldman, Sachs & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated,
Chase Securities Inc., Donaldson Lufkin & Jenrette Securities Corporation,
FleetBoston Robertson Stephens, Inc. and Thomas Weisel Partners LLC (the
"Purchasers") pursuant to a purchase agreement dated June 28, 2000 between us
and the Purchasers. As set forth in this prospectus and in the accompanying
letters of transmittal, we will accept for exchange any and all old notes that
are properly tendered on or prior to the expiration date and not withdrawn as
permitted below. The term "expiration date" means 5:00 p.m., New York City time
(10:00 p.m., London time) on , 2000; provided, however, that if we extend
the period of time for which the exchange offer is open, the term "expiration
date" means the latest time and date to which the exchange offer is extended.
As of the date of this prospectus, $1.0 billion aggregate principal amount
of the old dollar notes and (Euro)200.0 million aggregate principal amount of
the old euro notes are outstanding. This prospectus, together with the letters
of transmittal, is first being sent on or about the date set forth on the cover
page to all holders of old notes at the addresses set forth in the security
register maintained by the trustee or other applicable registrar. Our
obligation to accept old notes for exchange is subject to conditions as set
forth under "--Conditions to the Exchange Offer" below.
We expressly reserve the right, at any time or from time to time, to extend
the period of time during which the exchange offer is open, and thereby delay
acceptance for exchange of any old notes, by mailing written notice of an
extension to the holders of old notes as described below. During any extension,
all old notes previously tendered will remain subject to the exchange offer and
may be accepted for exchange by us. Any old notes not accepted for exchange for
any reason will be returned without expense to the tendering holder as promptly
as practicable after the expiration or termination of the exchange offer.
Old dollar notes tendered in the exchange offer must be $1,000 in principal
amount or any integral multiple of $1,000, and old euro notes tendered in the
exchange offer must be (Euro)1,000 in principal amount or any integral multiple
of (Euro)1,000.
We will mail written notice of any extension, amendment, non-acceptance or
termination to the holders of the old notes as promptly as practicable. This
notice will be mailed to the holders of record of the old notes no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled expiration date of other event giving rise to the notice requirement.
Registration Covenant; Exchange Offer
Under our registration rights agreements with the Purchasers, we agreed to
file with the Commission the exchange offer registration statement on the
appropriate form under the Securities Act with respect to the new notes. Upon
the effectiveness of the exchange offer registration statement, we will offer
to the holders of the old notes who are able to make required representations
the opportunity to exchange their old notes for new notes. Alternatively, we
will file with the Commission a shelf registration statement to cover resales
of transfer restricted securities (as defined below) by the holders of old
notes who satisfy specific conditions relating to the provision of information
in connection with the shelf registration statement if:
. we are not permitted to consummate the exchange offer because it is not
permitted by applicable law or Commission policy; or
. any holder of old notes notifies us prior to the 20th day following
consummation of the exchange offer that:
. it is prohibited by law or Commission policy from participating in
the exchange offer;
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. it may not resell the old notes acquired by it in the exchange offer
to the public without delivering a prospectus and the prospectus
contained in the exchange offer registration statement is not
appropriate or available for resales; or
. it is a broker-dealer and owns old notes acquired directly from us
or one of our affiliates.
We will use our best efforts to cause the applicable registration statement
to be declared effective as promptly as possible by the Commission.
"Transfer restricted securities" means each old note until the earliest of:
. the date on which the old note has been exchanged by a person other than
a broker-dealer for a new note in the exchange offer;
. following the exchange by a broker-dealer in the exchange offer of an
old note for a new note, the date on which the new note is sold to a
purchaser who received from the broker-dealer, on or prior to the date
of the sale, a copy of the prospectus contained in the exchange offer
registration statement;
. the date on which the old note has been effectively registered under the
Securities Act and disposed of in accordance with the shelf registration
statement; or
. the date on which the old note is distributed to the public pursuant to
Rule 144 under the Securities Act.
The registration rights agreements provide that:
. we will file an exchange offer registration statement with the
Commission on or prior to 60 days after July 6, 2000, which is the date
of the original issuance of the old notes;
. we will use our best efforts to have the exchange offer registration
statement declared effective by the Commission on or prior to 150 days
after July 6, 2000;
. unless the exchange offer would not be permitted by applicable law or
Commission policy, we will commence the exchange offer and use our best
efforts to issue, on or prior to 30 business days after the date on
which the exchange offer registration statement was declared effective
by the Commission, new notes in exchange for all old notes tendered in
the exchange offer; and
. if obligated to file the shelf registration statement, we will use our
best efforts to file the shelf registration statement with the
Commission on or prior to 45 days after the filing obligations arises,
but in no event less than 60 days after July 6, 2000, and to cause the
shelf registration to be declared effective by the Commission on or
prior to 90 days after this obligation arises, but in no event less than
150 days after July 6, 2000.
If a registration default (as defined below) occurs, we will pay liquidated
damages to each holder of transfer restricted securities, with respect to the
first 90-day period immediately following the occurrence of the first
registration default in and amount equal to $0.05 (or (Euro)0.05) per week the
registration default continues per $1,000 (or (Euro)1,000) principal amount of
transfer restricted securities held by the holder. The amount of the liquidated
damages will increase by an additional $0.05 (or (Euro)0.05) per week that the
registration default continues per $1,000 (or (Euro)1,000) principal amount of
transfer restricted securities with respect to each subsequent 90-day period
until all registration defaults have been cured, up to a maximum amount of
liquidated damages for all registration defaults of $0.25 (or (Euro)0.25) per
week per $1,000 (or (Euro)1,000) principal amount of transfer restricted
securities. On each interest payment date we will pay all accrued liquidated
damages to the holders of the old notes by wire transfer of immediately
available funds or by federal funds check and to holders of certificated
securities by wire transfer to the accounts specified by them or by mailing
checks to their registered addresses if no accounts have been specified.
Following the cure of all registration defaults, accrual of liquidated damages
will cease.
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A "registration default" means the occurrence of one of the following
events:
. we fail to file any of the registration statements required by the
registration rights agreements on or before the date specified for the
filing;
. any of the registration statements is not declared effective by the
Commission on or prior to the date specified for the effectiveness;
. we fail to complete the exchange offer within 30 business days of the
date of effectiveness of the exchange offer registration statement; or
. the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales (except in specified circumstances) of
transfer restricted securities during the period specified in the
registration rights agreements.
This summary of the provisions of the registration rights agreements is not
complete and is subject to, and is qualified by reference to, all provisions of
the registration rights agreements. A copy of this agreement is filed as an
exhibit to the registration statement of which this prospectus is a part.
Interest on Exchange Notes
Each new note will bear interest from the most recent date to which interest
has been paid or duly provided for on the old note surrendered in exchange for
a new note, or, if no interest has been paid or duly provided for on the old
note, from July 6, 2000, the date of issuance of the old notes. holders of the
old notes whose old notes are accepted for exchange will not receive accrued
interest on the old notes for any period from and after the last interest
payment date to which interest has been paid or duly provided for on the old
notes prior to the original issue date of the new notes, or, if no interest has
been paid or duly provided for, will not receive any accrued interest on the
old notes. These holders will be deemed to have waived the right to receive any
interest on the old notes accrued from and after that interest payment date,
or, if no interest has been paid or fully provided for, from and after July 6,
2000. Interest on the notes is payable semi-annually in arrears on each January
15 and July 15.
Procedures for Tendering Old Notes
To tender in the exchange offer, a holder must complete, sign and date the
applicable letter of transmittal, or a facsimile of the applicable letter of
transmittal, have the signatures guaranteed if required by the applicable
letter of transmittal, and mail or otherwise deliver the applicable letter of
transmittal or a facsimile, together with the old notes and any other required
documents, to the applicable exchange agent. The applicable exchange agent must
receive these documents at the address set forth below prior to 5:00 p.m., New
York City time (10:00 p.m., London time) on the expiration date. Delivery of
the old notes may be made by book-entry transfer in accordance with the
procedures described below. Confirmation of book-entry transfers must be
received by the applicable exchange agent prior to the expiration date.
By executing a letter of transmittal, each holder will make the
representations set forth below in the fourth paragraph under the heading "--
Resale of New Notes."
The tender by a holder and the acceptance by us will constitute an agreement
between the holder and us in accordance with the terms subject to the
conditions set forth in this prospectus and in the applicable letter of
transmittal.
The method of delivery of old notes and the applicable letter of transmittal
and all other required documents to the applicable exchange agent is at the
election and risk of the holder. Instead of delivery by mail, it is recommended
that holders use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the applicable exchange
agent before the expiration date. No
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letter of transmittal or notes should be sent to us. Holders may request their
brokers, dealers, commercial banks, trust companies or nominees to effect the
above transactions for them.
Any beneficial owner whose old notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an eligible institution (as defined below) unless
the old notes tendered:
. are signed by the registered holder, unless the holder has completed the
box entitled "special exchange instructions" or "special delivery
instructions" on the applicable letter of transmittal; or
. are tendered for the account of an eligible institution.
In the event that signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, the guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States, or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act (an "eligible institution").
If a letter of transmittal is signed by a person other than the registered
holder of any old notes listed on the letter of transmittal, the old notes must
be endorsed or accompanied by a properly completed bond power, signed by the
registered holder s the registered holder's name appears on the old notes, with
the signature guaranteed by an eligible institution.
If a letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or other acting in a fiduciary or representative capacity, the
persons should so indicate when signing. Unless waived by us, evidenced
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal.
All questions as to the validity, form, eligibility, including time or
receipt, acceptance of tendered old notes and withdrawal of tendered old notes
will be determined by us in our sole discretion. This determination will be
final and binding. We reserve the absolute right to reject any and all old
notes that are not properly tendered or any old notes our acceptance of which
would, in the opinion of our counsel, be unlawful. We also reserve the right to
waive any defects, irregularities or conditions of tender as to particular old
notes. Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the letters of transmittal, will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of old notes must be cured within the time period we
determine. Although we intend to notify holders of defects or irregularities
with respect to tenders of old notes, none of Exodus, the exchange agents or
any other person will incur any liability for failure to give this
notification. Tenders of old notes will not be deemed to have been made until
defects or irregularities have been cured or waived. Any old notes received by
the exchange agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned by the
applicable exchange agent to the tendering holders, unless otherwise provided
in applicable letter of transmittal, as soon as practicable following the
expiration date.
Book-Entry Delivery Procedures
Promptly after the date of this prospectus, the exchange agent for the old
dollar notes will establish accounts with respect to the old dollar notes at
DTC, and the exchange agent for the old euro notes will establish accounts with
respect to the old euro notes at each of Euroclear and Cedelbank (DTC,
Euroclear and Cedelbank are collectively referred to as the "book-entry
transfer facilities" and, individually as a "book-entry transfer facility") for
purposes of the exchange offer. Any financial institution that is a participant
in the applicable book-entry transfer facility's systems may make book-entry
delivery of the old notes by causing the applicable book-entry transfer
facility to transfer old notes into the applicable exchange agent's account at
the
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book-entry transfer facility in accordance with the book-entry transfer
facility's procedures for transfers. Timely book-entry delivery of old notes
pursuant to the exchange offer, however, requires receipt of a book-entry
confirmation prior to the expiration date. In addition, to receive new notes
for tendered old notes, the applicable letter of transmittal, or a mutually
signed facsimile, together with any required signature guarantees and any other
required documents, or an agent's message in connection with a book-entry
transfer, must, in any case, be delivered or transmitted to and received by the
applicable exchange agent at its address set forth under "--Exchange Agent"
below prior to the expiration date. Alternatively, the guaranteed delivery
procedures described below must be complied with. Tender will not be considered
made until the documents are received by the applicable exchange agent.
Delivery of documents to any of the book-entry transfer facilities does not
constitute delivery to the exchange agent.
Tender of Existing Notes Held Through Book-Entry Transfer Facilities
The exchange agents and each of the book-entry transfer facilities have
confirmed that the exchange offer is eligible for each of the book-entry
transfer facility's Automated Tender Offer Program, or ATOP. Accordingly,
participants in the applicable book-entry transfer facility's ATOP may, in lieu
of physically completing and signing the applicable letter of transmittal and
delivering it to the applicable exchange agent, electronically transmit their
acceptance of the exchange offer by causing the book-entry transfer facility to
transfer old notes to the applicable exchange agent in accordance with the
book-entry transfer facility's ATOP procedures for transfer. The book-entry
transfer facility will then send an agent's message to the applicable exchange
agent.
The term "agent's message" means a message transmitted by a book-entry
transfer facility, received by exchange agent and forming party of the book-
entry confirmation, which states that:
. the book-entry transfer facility has received an expressed
acknowledgement from a participant in its ATOP that is tendering old
notes which are the subject of the book-entry conformation;
. the participant has received and agrees to be bound by the terms of the
applicable letter of transmittal or, in the case of an agent's message
relating to guaranteed delivery, the participant has received and agrees
to be bound by the applicable notice of guaranteed delivery; and
. we may enforce the agreement against the participant.
Guaranteed Delivery Procedure
Holders who wish to tender their old notes and (1) whose old notes are not
immediately available, (2) who cannot deliver their old notes, the applicable
letter of transmittal or any other required documents to the applicable
exchange agent or (3) who cannot complete the procedures for book-entry
transfer, prior to the expiration date, may effect a tender if:
. the tender is made through an eligible institution;
. prior to the expiration date, the applicable agent receives from the
eligible institution a properly completed and duly executed notice of
guaranteed delivery by facsimile transmission, mail or hand delivery;
. setting forth the name and address of the holder;
. setting forth the certificate number(s) of the old notes and the
principal amount of old notes tendered, stating that the tender is
being made; and
. guaranteeing that, within three New York Stock Exchange trading days
after the expiration date, the applicable letter of transmittal or
facsimile together with the certificate(s) representing the old
notes or a book-entry confirmation of the old notes into the
applicable exchange agent's account at the applicable book-entry
transfer facility and any other documents required by the applicable
letter of transmittal, will be deposited by the eligible institution
with the applicable exchange agent; and
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. a properly completed and executed letter of transmittal for facsimile,
as well as the certificate(s) representing all tendered old notes in
proper form for transfer or a book-entry confirmation transfer of the
old notes into the applicable exchange agent's account at the applicable
book-entry transfer facility and all other documents required by the
applicable letter of transmittal, are received by the applicable
exchange agent within New York Stock Exchange trading days after the
expiration date.
Upon request to the applicable exchange agent, a notice of guaranteed
delivery will be sent to holders who wish to tender their old notes according
to the guaranteed delivery procedures set forth above.
Withdrawals of Tenders
Except as otherwise provided in this prospectus, tenders of old notes may be
withdrawn at any time prior to 5:00 p.m., New York City time (10:00 p.m.,
London time), on the expiration date.
To withdraw a tender of old notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the applicable
exchange agent at the address set forth below prior to 5:00 p.m., New York City
time (10:00 p.m., London time), on the expiration date. Any notice of
withdrawal must:
. specify the name of the person having deposited the old notes to be
withdrawn (the "depositor");
. identify the old notes to be withdrawn, including the certificates
number(s) and principal amount of the old notes, or, in the case of old
notes transferred by book-entry transfer, the name and number of the
account at the applicable book-entry transfer facility to be credited;
. be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the old notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee or other applicable
registrar register transfer of the old notes into the name of the person
withdrawing the tender; and
. specify the name in which any of the old notes are to be registered, if
different from that of the depositor.
All questions as to the validity, form and eligibility, including time or
receipt, of the notices will be determined by us. Our determination will be
final and binding on all parties. Any old notes so withdrawn will be deemed not
to have been validly tendered for purposes of the exchange offer and no new
notes will be issued in exchange unless the old notes so withdrawn are validly
retendered. Any old notes which have been tendered but which are not accepted
for exchange will be returned to their holder without cost to the holder as
soon as practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn old notes may be retendered by following one
of the procedures described above under "--Procedures for Tendering Old Notes"
at any time prior to the expiration date.
Conditions to the Exchange Offer
Notwithstanding any other terms of the exchange offer, we will not be
required to accept for exchange, or exchange new notes for, any old notes, and
may terminate the exchange offer before the acceptance of the old notes if, in
our sole judgment, the exchange offer would violate any law, statute, rule or
regulation or an interpretation thereof of the Staff of the Commission. If we
determine in our sole discretion that this condition is not satisfied, we may:
. refuse to accept any old notes and return all tendered old notes to the
tendering holders;
. extend the exchange offer and retain all old notes tendered prior to the
expiration date, subject, however, to the rights of holders to withdraw
the old notes (see "--Withdrawals of Tender"); or
. waive the unsatisfied conditions with respect to the exchange offer and
accept all validly tendered old notes which have not been withdrawn. If
the waiver constitutes a material change to the
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exchange offer, we will promptly disclose the waiver by means of a
prospectus supplement that will be distributed to the registered holders,
and we will extend the exchange offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, if the exchange offer would otherwise
expire during that five to ten business-day period.
Exchange Agents
Chase Manhattan Bank & Trust Company, National Association has been
appointed as the exchange agent for the exchange offer of the old dollar
notes. Chase Manhattan Bank London has been appointed as the exchange agent
for the exchange offer of the euro notes. All executed letters of transmittal
should be directed to the applicable exchange agent at the address set forth
below. Questions and requests for assistance, requests for additional copies
of this prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery should be directed to the applicable exchange agent,
addressed as follows:
If to the Chase Manhattan Bank & Trust Company, National Association:
By mail or by hand:
Chase Manhattan Bank & Trust Company, National Association, Exchange Agent
Suite 2725
101 California Street
San Francisco, California 94111
By Facsimile:
(415) 693-8850
Confirm Facsimile by Telephone:
(415) 954-9581
If to Chase Manhattan Bank London:
By mail or by hand:
The Chase Manhattan Bank
Trinity Tower
9 Thomas More Street
London E1 9YT
By Facsimile:
44 171 777 5410
Confirm Facsimile by Telephone:
44 171 777 5418
Delivery of a letter of transmittal to an address other than that for the
applicable exchange agent as set forth above or transmission of instructions
via facsimile other than as set forth above does not constitute a valid
delivery of a letter of transmittal.
Fees and Expenses
We will not make any payment to brokers, dealers or other soliciting
acceptances of the exchange offer.
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Transfer Taxes
Holders who tender their old notes for exchange generally will not be
obligated to pay any transfer tax in connection with the exchange. However,
holders who instruct us to register new notes in the name of a person other
than the registered tendering holders, or request that old notes not tendered
or not accepted in the exchange offer be returned to a person other than the
registered tendering holder, will be responsible for the payment of any
applicable transfer tax.
Accounting Treatment
The new notes will be recorded at the same carrying value as the old notes.
This is the aggregate principal amount of the old notes, as reflected in our
accounting records on the date of exchange. Accordingly, no gain or loss for
accounting purposes will be recognized in connection with the exchange offer.
The expenses of the exchange offer will be amortized over the term of the new
notes.
Appraisal Rights
Holders of old notes will not have dissenters' rights or appraisal rights in
connection with the exchange offer.
Resale of New Notes
The new notes are being offered to satisfy our obligations contained in the
registration rights agreements. We are making the exchange offer in reliance on
the position of the Staff of the Commission as set forth in the Exxon Capital
No-Action Letter, the Morgan Stanley No-Action Letter, the Shearman & Sterling
No-Action Letter, and other interpretive letters addressed to third parties in
other transactions. However, we have not sought our own interpretive letter
addressing these matters and there can be no assurance that the Staff would
make a similar determination with respect to the exchange offer as it has in
those interpretive letters to third parties. Based on these interpretations by
the Staff, and subject to the two immediately following sentences, we believe
that new notes issued pursuant to this exchange offer in exchange for old notes
may be offered for resale, resold and otherwise transferred by holders, other
than a holder who is a broker-dealer, without further compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that:
. the new notes are acquired in the ordinary course of the holder's
business; and
. the holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution within the meaning of
the Securities Act of the new notes.
However, any holder who
. is an "affiliate" of us, within the meaning of Rule 405 under the
Securities Act
. does not acquire new notes in the ordinary course of its business
. intends to participate in the exchange offer for the purpose of
distributing new notes or
. is a broker-dealer who purchased old notes directly from us,
will not be able to rely on the interpretations of the Staff set forth in the
above-mentioned interpretive letters, will not be permitted or entitled to
tender old notes in the exchange offer, and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any sale or other transfer of old notes unless the sale is made pursuant to an
exemption from those requirements.
In addition, as described below, if any broker-dealer holds old notes
acquired for its own account as a result of market-making or other trading
activities and exchanges the old notes for new notes (a "participating broker-
dealer"), the participating broker-dealer may be deemed to be a statutory
"underwriter" within the meaning of the Securities Act and must deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resales of new notes. See "Plan of Distribution."
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Each holder who wishes to exchange old notes for new notes in the exchange
offer will be required to represent that:
. it is not an affiliate of us;
. any new notes to be received by it are being acquired in the ordinary
course of its business; and
. it has no arrangement or understanding with any person to participate in
a distribution, within the meaning of the Securities Act, of new notes.
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must:
. acknowledge that it acquired the old notes for its own account as a
result of market-making activities or other trading activities, and not
directly from us, and
. must agree that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of new notes.
The letters of transmittal state that by so acknowledging and by delivering
a prospectus, a participating broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. Based on the
position taken by the Staff in the interpretive letters referred to above, we
believe that participating broker-dealers may fulfill their prospectus delivery
requirements with respect to the new notes received upon exchange of old notes
with a prospectus meeting the requirements of the Securities Act, which may be
the prospectus prepared for an exchange offer so long as it contains a
description of the plan of distribution with respect to the resale of new
notes. Accordingly, this prospectus, as it may be amended or supplemented from
time to time, may be used by a participating broker-dealer during the period
referred to below in connection with the resales of new notes received in
exchange for old notes where the old notes were acquired by the participating
broker-dealer for its own account as a result of market-making or other trading
activities.
Subject to provisions set forth in the registration rights agreements, we
shall use our best efforts to:
. keep the exchange offer registration statement continuously effective,
supplemented and amended to the extent necessary to ensure that it is
available for sales of new notes by participating broker-dealers; and
. ensure that the exchange offer registration statement conforms with the
requirements of the Securities Act and the policies, rules and
regulations of the Commission as announced from time to time, for a
period ending upon the earlier of 180 days after the exchange offer has
been completed or at the time the participating broker-dealers no longer
own any transfer restricted securities. See "Plan of Distribution."
Any participating broker-dealer who is an affiliate of us may not rely on
the interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
Each participating broker-dealer who surrenders old notes pursuant to the
exchange offer will be deemed to have agreed, by execution of a letter of
transmittal, that, upon receipt of notice from us of the occurrence of any
event or the discovery of any fact which makes any statement contained or
incorporated by reference in this prospectus untrue in any material respect or
which causes this prospectus to omit to state a material fact necessary in
order to make the statements contained or incorporated by reference herein, in
light of the circumstances under which they were made, not misleading or of the
occurrence of other events specified in the registration rights agreements, the
participating broker-dealer will suspend the sale of new notes pursuant to this
prospectus until we have amended or supplemented this prospectus to correct the
misstatement or omission and have furnished copies of the amended or
supplemented prospectus to the participating broker-dealer or we have given
notice that the sale of the new notes may be resumed, as the case may be.
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Consequences of Failure to Exchange Old Notes
Any old notes tendered and exchanged in the exchange offer will reduce the
aggregate principal amount of old notes outstanding. Following the consummation
of the exchange offer, holders who did not tender their old notes generally
will not have any further registration rights under the registration rights
agreements, and these old notes will continue to be subject to restrictions on
transfer. Accordingly, the liquidity of the market for the old notes could be
adversely affected. The old dollar notes are currently eligible for sale under
Rule 144A through the Portal Market and the old euro notes are in the process
of being listed on the Luxembourg Stock Exchange. Application is expected to be
made for listing the new euro notes on the Luxembourg Stock Exchange. We cannot
assure you that we will be successful in these listings or of when the listings
will be complete. Because we anticipate that most holders will elect to
exchange their old notes for new notes due to the absence of most restrictions
on the resale of new notes, anticipate that the liquidity of the market for any
old notes remaining outstanding after the exchange offer may be substantially
limited.
As a result of the making of the exchange offer, we will have fulfilled our
obligations under the registration rights agreements, and holders who do not
tender their old notes generally will not have any further registration rights
or rights to receive liquidated damages specified in the registration rights
agreements for our failure to register the new notes.
The old notes that are not exchanged for new notes will remain restricted
securities. Accordingly, the old notes may be resold only:
. to us or one of our subsidiaries;
. to a qualified institutional buyer;
. to an institutional accredited investor;
. to a party outside the United States under Regulation S under the
Securities Act;
. under an exemption from registration provided by Rule 144 under the
Securities Act; or
. under an effective registration statement.
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DESCRIPTION OF NOTES
General
You can find the definitions of certain terms used in this description under
the subheading "Certain Definitions".
The old notes were and the new notes will be issued under two indentures
dated July 6, 2000 (the "Indentures") between us and Chase Manhattan Bank and
Trust Company, National Association, as trustee. The term "notes" refers to the
old notes and the new notes. The statements under this caption relating to the
notes and the Indentures are summaries and are not intended to be complete. In
addition, they are subject to, and are qualified by the actual provisions of
the Indentures. The Indentures are by their terms subject to and governed by
the Trust Indenture Act of 1939. If we make reference to particular provisions
of the Indentures or to defined terms not defined in this prospectus, the
provisions or defined terms are incorporated by reference to this prospectus.
You may obtain copies of the indentures and the registration rights agreements
referred to below are available for review at the corporate office of the
trustee or from us upon request.
The notes are our senior unsecured obligations and:
. rank equally in right of payment with our existing and future senior
unsecured debt, including $275.0 million in principal amount of our 11
1/4% Senior Notes and $375.0 million and (Euro) 125.0 million in
principal amount of our 10 3/4% Senior Notes;
. are senior in right of payment to all of our subordinated debt,
including $72.3 million in remaining principal amount of our 5%
Convertible Subordinated Notes, $500.0 million in remaining principal
amount of our 4 3/4% Convertible Subordinated Notes; and
. are effectively subordinated to all of our secured debt (including the
anticipated credit facilities), to the extent of the value of the assets
securing such debt, and to any liabilities of any of our subsidiaries,
including trade payables.
Any right we have to receive assets of our Subsidiaries upon liquidation or
reorganization will be effectively subordinated to the claims of that
Subsidiary's creditors (including trade creditors) except to the extent that we
are recognized as a creditor of such Subsidiary, in which case our claims would
still be subordinate to any security in the assets of such Subsidiary and any
debt of such Subsidiary senior to that held by us. See "Risk Factors--The notes
are effectively subordinated to our secured indebtedness and the liabilities of
our subsidiaries".
Assuming that we had completed the offering of the old notes as of March 31,
2000:
. approximately $770.5 million of debt outstanding ranks equally in right
of payment with the notes;
. approximately $572.3 million of debt outstanding is subordinate in right
of payment to the notes; and
. approximately $103.8 million of outstanding secured debt and liabilities
of our subsidiaries, including trade payables, effectively ranks senior
to the notes.
The Indentures limit our ability and the ability of our subsidiaries to
incur additional debt. However, these limitations are subject to a number of
exceptions. We may incur and our subsidiaries may incur significant additional
debt in the future, including indebtedness to which the holders of the notes
would be effectively subordinated.
Under certain circumstances, we will be able to designate current or future
subsidiaries as unrestricted subsidiaries. Unrestricted subsidiaries will not
be subject to many of the restrictive covenants set forth in the Indentures.
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The notes will not be entitled to any security and will not be entitled to
the benefit of any guarantees except under the circumstances described under
"--Covenants--Limitation on Guarantees of Issuer Debt by Restricted
Subsidiaries".
The euro notes and the dollar notes will each be a separate class of
securities and will be entitled to vote as a separate class on all matters.
Principal, Interest and Maturity
The dollar notes will mature on July 15, 2010. The euro notes will mature on
July 15, 2008. The redemption price at maturity will be 100% of face value of
the notes. The dollar notes will be limited to $1.0 billion ($1.1 billion,
including dollar denominated Additional Notes) and the euro notes will be
limited to (Euro) 200.0 million ((Euro) 300.0 million, including euro
denominated Additional Notes). Each note will bear interest at the rate set
forth on the cover page of this prospectus from July 6, 2000 or from the most
recent interest payment date to which interest has been paid, payable
semiannually on January 15 and July 15 of each year, commencing January 15,
2001. We will make each interest payment to the person in whose name the note
(or any predecessor note) is registered at the close of business on the January
1 and July 1 immediately preceding such interest payment date. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
We have agreed to file and cause to become effective a registration
statement relating to an exchange offer for the old notes, or, in lieu thereof,
to file and cause to become effective a resale shelf registration for the old
notes. If such exchange offer or shelf registration statement is not filed or
is not declared effective, or if such exchange offer is not consummated, within
the time periods set forth herein, special interest ("Liquidated Damages") will
accrue and be payable on the old notes. See "--Registration Covenant; Exchange
Offer" below.
Principal of, premium, if any, and interest on the euro notes will be
payable in euros, and the euro notes will be exchangeable and transferable, at
the corporate trust office or agency of the euro paying agents maintained in
the City of New York and in Luxembourg for such purposes. Principal of,
premium, if any, and interest on the dollar notes will be payable in U.S.
Dollars, and the dollar notes will be exchangeable and transferable, at the
corporate trust office or agency of the dollar paying agents maintained in the
City of New York and in Luxembourg for such purposes. We may, at our option,
pay interest on the notes by check mailed to the address of the person entitled
thereto as it appears in the Note Register.
Payments of principal on any Definitive Registered Notes will be made
against presentation and surrender (or, in the case of a partial payment,
endorsement) of such notes at the office of the relevant paying agent. Payments
in respect of dollar notes will be made by dollar check drawn on, or by
transfer from a dollar account maintained by us, and payments in respect of
euro notes will be made by euro check drawn on, or by transfer from a euro
account maintained by us.
You will not pay a service charge for any registration of transfer or
exchange of notes. We may, however, require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
We intend to have the euro notes admitted for listing on the Luxembourg
Stock Exchange, although we cannot assure you that the euro notes will be
admitted for listing. As long as the notes remain listed on the Luxembourg
Stock Exchange, we will maintain a transfer agent and paying agent in
Luxembourg, and if that agent changes, a publication will be made in
Luxembourg.
Issuance of Additional Notes
We will have the right to issue dollar and euro denominated Additional Notes
upon written notice to the trustee. The aggregate principal amount of dollar
denominated Additional Notes is not to exceed $100.0 million and euro
denominated Additional Notes is not to exceed (Euro) 100.0 million.
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Form, Denomination, Book-Entry Procedures and Transfer
The notes will be issued only in registered form. The notes will initially
be issued in the form of global notes. The global notes, and any notes issued
in exchange thereof, including beneficial interests in the Restricted Global
Notes, will be subject to certain restrictions on transfer set forth therein
and in the Indentures. euro notes sold to qualified institutional buyers
pursuant to Rule 144A of the Securities Act will initially be represented by
one global note (the "Euro U.S. Global Note") and euro notes sold outside the
United States pursuant to Regulation S under the Securities Act will initially
be represented by one global note (the "Euro International Global Note" and,
together with the Euro U.S. Global Note, the "Euro Global Notes"). We expect to
deposit Euro International global notes with The Chase Manhattan Bank, London,
a common depositary for Euroclear and Clearstream Banking, and the Euro U.S.
Global Note with The Chase Manhattan Bank, London, a depositary for Euroclear.
Investors may hold their interests in the Euro International Global Notes
directly through Euroclear or Clearstream Banking or indirectly through
organizations which are participants in Euroclear or Clearstream Banking and
the Euro U.S. Global Note through Euroclear or indirectly through organizations
which are participants in Euroclear.
Dollar notes sold to qualified institutional buyers pursuant to Rule 144A of
the Securities Act will initially be represented by one or more global notes
(the "Dollar U.S. Global Note") and dollar notes sold outside the United States
pursuant to Regulation S under the Securities Act will initially be represented
by one or more global notes (the "Dollar International Global Note" and,
together with the Dollar U.S. Global Note, the "Dollar Global Notes"). The
Dollar Global Notes will be deposited with the trustee as custodian for DTC
(together with Euroclear and Clearstream Banking, the "Depositaries") and
registered in the name of Cede & Co., as nominee of DTC. Prior to August 15,
2000, interests in the Dollar International Global Note may be held only
through Euroclear or Clearstream Banking. Investors may hold their interests in
the Dollar International Global Notes directly through Euroclear or Clearstream
Banking, or indirectly through organizations which are participants in such
systems. Euroclear and Clearstream Banking will hold such interests in the
Dollar International Global Note in their respective names on the books of DTC
on behalf of their participants. Beginning August 15, 2000, ownership interests
in the Dollar International Global Notes may also be held through organizations
other than Clearstream Banking or Euroclear that are participants in DTC.
Dollar Book-Entry Interests will be shown on, and transfers thereof will be
effected only through, records maintained in book-entry form by DTC and its
participants.
Book-entry interests in the dollar notes are held by DTC (the "Dollar Book-
Entry Interests") and book-entry interests in the euro notes are held by
Euroclear or Clearstream Banking in the case of euro notes sold outside of the
U.S. in reliance on Regulation S and Euroclear in the case of euro notes sold
within the U.S. to qualified institutional buyers (the "Euro Book-Entry
Interests" and, collectively with the Dollar Book-Entry Interests, the "Book-
Entry Interests"). Book-Entry Interests will not be held in definitive form.
Instead, DTC, Euroclear and/or Clearstream Banking will credit on their
respective book-entry registration and transfer systems a participant's account
with the interest beneficially owned by such participant. The laws of some
jurisdictions, including some states of the United States, may require that
certain purchasers of securities take physical delivery of such securities in
definitive form. The foregoing limitations may impair the ability to own,
transfer or pledge Book-Entry Interests. While the notes are in global form,
holders of Book-Entry Interests will not be considered the owners or "holders"
of notes for any purpose, including with respect to the giving of any
directions, instructions or approvals to the trustee under the Indentures.
Owners of Book-Entry Interests may receive notes in definitive registered
form ("Definitive Registered Notes") in the following specified circumstances:
. a depositary for the global notes has notified us that it is
unwilling or unable to continue as depositary or is principally
located in the U.S. and has ceased to be a clearing agency
registered under the Securities Exchange Act of 1934, and in either
case we fail to appoint a successor depositary within 120 days of
notice; or
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. we execute and deliver to the trustee an order stating that we elect
to cause the issuance of the notes in certified form and that all
global notes shall be exchanged in whole for notes that are not
global notes; or
. there shall have occurred and be continuing an event of default.
Global notes can only be exchanged in whole into Definitive Registered
Notes.
In such an event, the Registrar for the notes will issue Definitive
Registered Notes, registered in the name or names and issued in any approved
denominations, requested by or on behalf of DTC, Euroclear and/or Clearstream
Banking, as applicable, in accordance with their respective customary
procedures and based upon directions received from participants reflecting the
beneficial ownership of Book-Entry Interests, and will bear the restrictive
legend currently set forth on the Dollar Global Notes and the Euro Global
Notes, unless that legend is not required by the Indentures or applicable law.
Principal of, premium, if any, and interest on any Definitive Registered Notes
will be payable at the corporate trust office or agency of the relevant Paying
Agent maintained in New York City or Luxembourg for such purpose.
If Definitive Registered Notes are issued and such euro notes are listed on
the Luxembourg Stock Exchange, transfers of such euro notes will have to be
cleared through a clearing system or a method approved by the rules and
regulations of the Luxembourg Stock Exchange in order to continue to be listed
on the Luxembourg Stock Exchange.
To the extent permitted by law, we, the trustee and any registrar shall be
entitled to treat the registered holder of any note as the absolute owner
thereof.
Holders of the Book-Entry Interests may incur fees normally payable in
respect of the maintenance and operation of accounts in DTC, Euroclear and/or
Clearstream Banking.
Neither we, the trustee nor any registrar of notes, will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of Book-Entry Interests or for maintaining,
supervising or reviewing any records of DTC, Euroclear or Clearstream Banking
relating to the notes.
The global notes may be transferred only to a successor to the relevant
Depositary.
Book-Entry Interests in the notes will be subject to certain restrictions on
transfer and certification requirements.
All transfers of Book-Entry Interests between participants in DTC,
participants in Euroclear or participants in Clearstream Banking will be
effected by DTC, Euroclear or Clearstream Banking pursuant to customary
procedures and subject to the applicable rules and procedures established by
DTC, Euroclear or Clearstream Banking and their respective participants.
Subject to the foregoing, a Book-Entry Interest in one of the global notes
may be transferred to a person who takes delivery thereof in the form of a
Book-Entry Interest in another of the global notes of the same currency by
means of an instruction originated through DTC, Euroclear or Clearstream
Banking, as applicable. Any Book-Entry Interest that is so transferred will,
upon transfer, cease to be a Book-Entry Interest in the first-mentioned Global
note and become a Book-Entry Interest in the other Global note and will
thereafter be subject to all transfer restrictions, if any, and other
procedures applicable to Book-Entry Interests in such other Global note for as
long as it remains such a Book-Entry Interest. In connection with such
transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount at maturity of the first-mentioned Global note and a
corresponding increase in the principal amount at maturity of the other Global
note, as applicable. The Indentures contain limits on the ability of holders to
transfer interests from Dollar U.S. Global Notes to Dollar International Global
Notes and from Euro U.S. Global Notes to Euro International Global Notes.
Euro notes issued as Definitive Registered Notes may be transferred, upon
surrender for registration of transfer of the note at the office or agency
maintained for such purpose in New York City, London or Luxembourg, in whole or
in part, in denominations of (Euro)1,000 in principal amount or integral
multiples thereof,
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and dollar notes issued as Definitive Registered Notes may be transferred, upon
surrender for registration of transfer of the note at the office or agency
maintained for such purpose in New York City, in whole or in part, in
denominations of $1,000 in principal amount or integral multiples thereof.
Optional Redemption
The euro notes are not redeemable at our option at any time prior to
maturity. The dollar notes are subject to redemption, at our option, in whole
or in part, at any time on or after July 15, 2005 and prior to maturity, upon
not less than 30 nor more than 60 days' notice. The notice must be mailed to
each holder of dollar notes to be redeemed at the holder's address appearing in
the Note Register. The dollar notes are redeemable in amounts of $1,000 or an
integral multiple of $1,000. Redemption would be made at the following
Redemption Prices, expressed as percentages of the principal amount if redeemed
during the 12-month period beginning July 15 of the years indicated below.
Holders will also receive accrued and unpaid interest and Liquidated Damages,
if any, to but excluding the Redemption Date, subject to the right of holders
of record on the immediately preceding Record Date to receive interest due on
an Interest Payment Date that is on or prior to the Redemption Date.
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2005.............................................................. 105.813%
2006.............................................................. 103.875%
2007.............................................................. 101.938%
2008 and thereafter............................................... 100.000%
</TABLE>
In addition, at any time prior to July 15, 2003, we may redeem up to 35% of
the aggregate outstanding principal amount of the dollar notes with the Net
Cash Proceeds of one or more sales of Capital Stock, other than Disqualified
Stock, at a redemption price equal to 111.625% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon and Liquidated
Damages, if any, to the date of redemption. However, at least 65% of the
original principal amount of the dollar notes must remain outstanding
immediately following the redemption. In order to effect the foregoing
redemption, we must mail a notice of redemption no later than 45 days after the
related sale of Capital Stock and must consummate the redemption within 60 days
of the closing of the sale of Capital Stock.
If less than all the dollar notes are to be redeemed, selection of dollar
notes for redemption will be made by the trustee, in compliance with the
requirements of the principal national securities exchange, if any, on which
the dollar notes are listed, or, if the dollar notes are not so listed, on a
pro rata basis, by lot or in such manner as it shall deem fair and appropriate.
However, after the redemption in part, all dollar notes must be in amounts of
$1,000 or integral multiples thereof. Notices of redemption may not be
conditional. If any dollar note is to be redeemed in part only, the notice of
redemption that relates to the dollar note must state the portion of the
principal amount thereof to be redeemed. A new dollar note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the
holder thereof upon cancellation of the original dollar note. Dollar notes
called for redemption become due on the date fixed for redemption. On and after
the redemption date, interest ceases to accrue on dollar notes or portions of
them called for redemption and, unless we default in the payment of the
redemption price, dollar notes or portions of them called for redemption will
no longer be deemed outstanding.
To the extent that the euro notes may be listed on the Luxembourg Stock
Exchange and the rules of the Luxembourg Stock Exchange so require, we will,
once in each year in which there has been a partial redemption of any of the
euro notes, cause to be published in a leading daily newspaper of general
circulation in Luxembourg, which is expected to be the Luxembourg Wort, a
notice specifying the aggregate principal amount of euro notes outstanding and
a list of the euro notes drawn for redemption but not surrendered.
Sinking Fund
The notes will not be entitled to the benefit of any sinking fund.
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Repurchase at the Option of Holders
Change of Control
If a Change of Control shall occur at any time, then each holder of notes
shall have the right to require that we purchase the holder's notes at a
purchase price in cash, in an amount equal to 101% of the principal amount of
the notes or portion thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase. The holders may require that we
purchase their notes in whole or in part in integral multiples of $1,000, or
(Euro) 1,000, as the case may be. Any purchase would be made pursuant to the
Offer to Purchase and in accordance with the other procedures set forth in the
Indentures. Within 30 days following the Change of Control, we will mail an
Offer to Purchase to each holder describing the transaction or transactions
that constitute the Change of Control and offering to purchase notes on the
date specified in the Offer to Purchase. We will comply with the requirements
of Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent the laws and regulations are applicable in
connection with the purchase of the notes pursuant to the Offer to Purchase.
The terms of agreements governing Permitted Senior Bank Debt, including the
anticipated credit facilities, will likely restrict our ability to prepay debt,
including the notes, and also to provide that certain change of control events
with respect to us would constitute an event of default thereunder. In the
event a Change of Control occurs at a time when we are prohibited from
purchasing the notes, we could seek the consent of our lenders to the purchase
of notes or could attempt to refinance the borrowings that contain the
prohibition. If we do not obtain the a consent or repay the borrowings, we will
remain prohibited from purchasing notes. In such case, our failure to purchase
tendered notes would constitute an Event of Default under the Indentures, which
would, in turn, likely constitute a default under the terms of agreements
governing the Permitted Senior Bank Debt. See "Risk Factors--We may not be able
to effect repurchase of the notes upon Change of Control in accordance with
terms of the Indentures".
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indentures are applicable. Except as
described above with respect to a Change of Control, the Indentures do not
contain provisions that permit the holders of the notes to require that the
Issuer repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.
We will not be required to make an Offer to Purchase upon a Change of
Control if a third party:
. makes the Offer to Purchase in the manner, at the times and otherwise in
compliance with the requirements set forth in the Indentures applicable
to the Offer to Purchase; and
. purchases all notes validly tendered and not withdrawn under the Offer
to Purchase.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Issuer and its Subsidiaries taken as a whole. There is no
precise established definition of the phrase "substantially all" under
applicable law. Accordingly, the ability of a holder of notes to require us to
repurchase the notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of our assets and the assets of our
Subsidiaries taken as a whole to another person or group may be uncertain.
Covenants
Each Indenture contains, among others, the following covenants:
Limitation on Debt
We will not, and will not permit any of our Restricted Subsidiaries to,
Incur any Debt, other than the notes and Debt existing on the Closing Date;
provided that we may Incur Debt if, after giving effect to the Incurrence of
the Debt and the receipt and application of the proceeds therefrom, the
Consolidated Debt to EBITDA Ratio would be greater than zero and less than 6:1.
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However, the following Debt may be Incurred, each item to be given
independent effect:
(1) Permitted Senior Bank Debt;
(2) Debt owed:
. to us evidenced by a promissory note; or
. to any Restricted Subsidiary; provided that any event which results
in any Restricted Subsidiary ceasing to be a Restricted Subsidiary
or any subsequent transfer of the Debt, other than to the Issuer or
another Restricted Subsidiary, shall be deemed, in each case, to
constitute the Incurrence of the Debt not permitted by this clause
(2);
(3) our Debt or the Debt of any Restricted Subsidiary:
. in respect of performance, surety or appeal bonds or letters of
credit in the ordinary course of business;
. under Permitted Interest Rate or Currency Protection Agreements; or
. arising under, or arising from, agreements providing for
indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds
or performance bonds securing any obligations of the Issuer Incurred
in connection with the disposition of any business, assets, other
than Guarantees of Debt Incurred by any person acquiring all or any
portion of the business, assets or Restricted Subsidiary for the
purpose of financing the acquisition, in a principal amount not to
exceed the gross proceeds actually received by us or any Restricted
Subsidiary in connection with the disposition;
(4) Debt which is exchanged for or the proceeds of which are used to
refinance or refund, or any extension or renewal of (each a
"refinancing"):
. the notes;
. Debt incurred pursuant to clauses (3), (5), (6), (8) and (9) of this
paragraph and this clause (4), in each case in an aggregate
principal amount not to exceed the principal amount of the Debt so
refinanced (together with any accrued interest and any premium and
other payment required to be made with respect to the Debt being
refinanced or refunded, and any fees, costs, expenses, underwriting
discounts or commissions and other payments paid or payable with
respect to the Debt incurred pursuant to this clause (4)); provided,
however, that:
. Debt, the proceeds of which are used to refinance the notes, or Debt
which is equal with or subordinate in right of payment to the notes,
shall only be permitted if (x) in the case of any refinancing of the
notes or Debt which is equal to the notes, the refinancing Debt is
Incurred by us and made equal to the notes or subordinated to the
notes, and (y) in the case of any refinancing of Debt which is
subordinated to the notes, the refinancing Debt is Incurred by us
and is subordinated to the notes in a manner that is at least as
favorable to the holders as that of the Debt refinanced;
. the refinancing Debt by its terms, or by the terms of any agreement
or instrument pursuant to which the Debt is issued, does not have a
final maturity prior to the final maturity of the Debt being
refinanced and has an Average Life longer than the Average Life of
the Debt being refinanced; and
. in the case of any refinancing of Debt Incurred by us, the
refinancing of Debt may be Incurred only by us, and in the case of
any refinancing of Debt Incurred by a Restricted Subsidiary, the
refinancing Debt may be Incurred only by the Restricted Subsidiary
or by us;
(5) our Acquisition Debt or the Acquisition Debt of any Restricted
Subsidiary;
(6) the new notes issued in the Exchange Offer and Additional Notes issued
under the Indentures;
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(7) our Debt not to exceed, at any time outstanding, two times the Net Cash
Proceeds received by us after the original issuance date of the notes
from the issuance and sale of our Capital Stock, other than
Disqualified Stock, to a person that is not our Subsidiary, to the
extent that the Net Cash Proceeds have not been used pursuant to clause
(4) of the first paragraph or clauses (3), (4) or (6) of the second
paragraph of the "Limitation on Restricted Payments" covenant described
below to make a Restricted Payment; provided that the Debt does not
have a final maturity prior to the final maturity of the notes and has
an Average Life longer than the Average Life of the notes;
(8) our Existing Debt;
(9) our Debt or the Debt of any Restricted Subsidiary Incurred to finance
the purchase or other acquisition of any property, inventory, asset or
business directly or indirectly, by us or any Restricted Subsidiary
used in, or to be used in, the System and Network Management Business;
(10) our Subordinated Debt not to exceed $300.0 million in principal
outstanding at any time; and
(11) our other Debt or other Debt of any Restricted Subsidiary not to
exceed $50.0 million at any one time outstanding.
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the types of Debt
described in the above clauses, or is permitted in part under the first
paragraph of this covenant and in part under one or more of the above clauses,
we, in our sole discretion, shall classify, and from time to time may
reclassify, the item of Debt.
For purposes of determining any particular amount of Debt under this
covenant, Guarantees, Liens or obligations with respect to letters of credit
supporting Debt otherwise included in the determination of the particular
amount shall not be included.
Limitation on Guarantees of Issuer Debt by Restricted Subsidiaries
We may not permit any Restricted Subsidiary, directly or indirectly, to
Guarantee, assume or in any other manner become liable for the payment of any
of our Debt, other than our Debt:
. Incurred pursuant to clauses (1), (3), (5), (9) or (11) of the second
paragraph of "Limitations on Debt;" or
. refinanced pursuant to clause (4) of the second paragraph of "Limitation
on Debt" of Debt originally incurred under clause (3), (5) or (9) of the
second paragraph of "Limitation on Debt") that is equal with or
subordinate in right of payment to the notes unless:
. the Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture providing for a Guarantee of payment of the
notes by the Restricted Subsidiary; and, with respect to any
Guarantee of our Debt that is subordinate in right of payment to the
notes, the Guarantee shall be subordinated to the Restricted
Subsidiary's Guarantee with respect to the notes at least to the
same extent as the Debt is subordinated to the notes, and
. the Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against
us or any other Restricted Subsidiary as a result of any payment by
the Restricted Subsidiary under its Guarantee until the notes have
been paid in full.
However, any Guarantee by a Restricted Subsidiary may provide by its terms
that it shall be automatically and unconditionally released and discharged
upon:
. any sale, exchange or transfer, to any person who is not one of our
Affiliates, of all of our Capital Stock and the Capital Stock of each
Restricted Subsidiary in, or all or substantially all of the assets of,
the Restricted Subsidiary, which sale, exchange or transfer is not
prohibited by the applicable Indenture; or
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. the release or discharge of the Guarantee which resulted in the
creation of the Restricted Subsidiary's Guarantee with respect to
the notes, except a discharge or release by or as a result of
payment under the Guarantee.
Limitation on Restricted Payments
We will not, and will not permit any Restricted Subsidiary directly or
indirectly to:
(1) declare or pay any dividend or make any distribution on or with respect
to its Capital Stock to persons other than us or any of our Restricted
Subsidiaries, other than:
. dividends or distributions payable solely in shares of its Capital
Stock, other than Disqualified Stock, or in options, warrants or
other rights to acquire shares of Capital Stock;
. pro rata dividends or distributions on Common Stock of Restricted
Subsidiaries held by minority stockholders; or
. dividends in respect of Disqualified Stock;
(2) purchase, redeem, retire or otherwise acquire for value any shares of
our Capital Stock or the Capital Stock of an Unrestricted Subsidiary
including options, warrants or other rights to acquire the shares of
Capital Stock, held by any person, or any shares of Capital Stock of a
Restricted Subsidiary, including options, warrants or other rights to
acquire the shares of Capital Stock, held by any person other than us
or one of our Wholly Owned Restricted Subsidiaries;
(3) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of our Debt that is subordinated in right of
payment to the notes; or
(4) make any Investment, other than a Permitted Investment, in any person,
(the payments or any other actions described in clauses (1) through (4)
above being collectively "Restricted Payments") if, at the time of, and
after giving effect to, the proposed Restricted Payment:
. Default or Event of Default shall have occurred and be continuing;
. we could not Incur at least $1.00 of Debt under the first paragraph
of the "Limitation on Debt" covenant; or
. the aggregate amount of all Restricted Payments, the amount, if
other than in cash, to be determined in good faith by the board of
directors, whose determination shall be conclusive and evidenced by
a board resolution, made after the Closing Date shall exceed the sum
of:
. cumulative Consolidated EBITDA since the date of the original
issuance of the notes through the last day of the last full fiscal
quarter ending immediately preceding the date of the Restricted
Payment for which quarterly or annual financial statements are
available; minus
. 1.5 times our cumulative Consolidated Interest Expense since the
date of original issuance of the notes through the last day of the
last full fiscal quarter ending immediately preceding the date of
the Restricted Payment for which quarterly or annual financial
statements are available, plus
. the aggregate Net Cash Proceeds received by us after the Closing
Date from the issuance and sale permitted by the Indenture of our
Capital Stock, other than Disqualified Stock, to a person who is not
one of our Subsidiaries, including an issuance or sale permitted by
our respective Indenture of Debt for cash subsequent to the original
issuance date of the notes upon the conversion of the Debt into our
Capital Stock, other than Disqualified Stock, or from the issuance
to a person who is not one of our Subsidiaries of any options,
warrants or other rights to acquire our Capital Stock, in each case,
exclusive of any Disqualified Stock or any options, warrants or
other rights that are redeemable at the option of the holder, or are
required to be redeemed, prior to the stated final maturity date of
the dollar notes or euro notes, as the case may be, in each case
except to the extent the Net Cash Proceeds are used to Incur Debt
pursuant to clause (7) of the second paragraph under the "Limitation
on Debt" covenant, plus
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. an amount equal to the net reduction in Investments, other than
reductions in Permitted Investments, in any person resulting from
payments of interest on Debt, dividends, repayments of loans or
advances, or other transfers of assets, in each case to us or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale of
any the Investment except, in each case, to the extent any the
payment or proceeds are included in the calculation of Consolidated
EBITDA, or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries, not to exceed, in each case, the amount of
Investments previously made by us or any Restricted Subsidiary in
the person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(1) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, the payment would
comply with the foregoing paragraph;
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Debt that is subordinated in right of payment
to the notes including premium, if any, and accrued and unpaid
interest, with the proceeds of, Debt Incurred under clause (4) of the
second paragraph of the "Limitation on Debt" covenant;
(3) the repurchase, redemption or other acquisition of our Capital Stock or
the Capital Stock of one of our Subsidiaries, or options, warrants or
other rights to acquire the Capital Stock, in exchange for, including
upon exercise of a conversion right, or out of the proceeds of a
capital contribution or a substantially concurrent offering of, shares
of our Capital Stock, other than Disqualified Stock, or options,
warrants or other rights to acquire the Capital Stock;
(4) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of our Debt which
is subordinated in right of payment to the notes in exchange for, or
out of the proceeds of, a capital contribution or a substantially
concurrent offering of, shares of our Capital Stock, other than
Disqualified Stock, or options, warrants or other rights to acquire the
Capital Stock;
(5) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation,
merger or transfer of assets that complies with the provisions of the
respective Indenture applicable to mergers, consolidations and
transfers of all or substantially all of our property and assets, and
payments of cash in lieu of fractional shares;
(6) Investments in any person; provided that the aggregate amount of
Investments made pursuant to this clause (6) does not exceed the sum
of:
. $50.0 million, plus
. the amount of Net Cash Proceeds received by us after the original
issuance date of the notes from the sale of our Capital Stock, other
than Disqualified Stock, to a person who is not one of our
Subsidiaries, except to the extent the Net Cash Proceeds are used to
Incur Debt pursuant to clause (7) of the second paragraph of the
"Limitation on Debt" covenant or to make Restricted Payments
pursuant to clause (4) of the first paragraph, or clauses (3) or (4)
of this paragraph, of this "Limitation on Restricted Payments"
covenant, plus
. the net reduction in Investments made pursuant to this clause (6)
resulting from distributions on or repayments of the Investments or
from the Net Cash Proceeds from the sale of any the Investments,
except in each case to the extent any the payment or proceeds is
included in the calculation of Consolidated EBITDA, or from the
person becoming a Restricted Subsidiary; provided that the net
reduction in any Investment shall not exceed the amount of the
Investment;
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(7) Investments acquired in exchange for our Capital Stock, other than
Disqualified Stock;
(8) the purchase, redemption or other acquisition or retirement of our
Common Stock or any option or other right to acquire shares of our
Common Stock:
. if the Common Stock, option or other right was issued pursuant to a
plan or arrangement approved by our board of directors, and the
purchase, redemption or other acquisition or retirement occurs in
accordance with the terms of the plan or arrangement, from our former
employees and the former employees of our Subsidiaries or their
estates or is from our employee and the price paid by us to the
employee is equal to the exercise or purchase price paid by the
employee; and
. from our employees or the employees of our Subsidiaries in an amount
not to exceed $5.0 million in any fiscal year; provided that amounts
not paid for any the purchase, redemption or other acquisition or
retirement in any fiscal year may be accumulated and paid in any
subsequent fiscal year;
(9) additional Restricted Payments not to exceed $50.0 million in the
aggregate; or
(10) the acquisition of our Capital Stock by us in connection with the
cashless exercise of any options, warrants or similar rights issued by
us.
Each Restricted Payment permitted pursuant to the preceding paragraph,
other than the Restricted Payment referred to in clause (2) thereof and an
exchange of Capital Stock for Capital Stock or Debt referred to in clause (3)
or (4) thereof, and the Net Cash Proceeds from any issuance of Capital Stock
referred to in clauses (3), (4) and (6), shall be included in calculating
whether the conditions of the third clause of clause (4) of the first
paragraph of this "Limitation on Restricted Payments" covenant have been met
with respect to any subsequent Restricted Payments. In the event the proceeds
of an issuance of our Capital Stock are used for the redemption, repurchase or
other acquisition of the notes, or Debt that is equal with the notes, then the
Net Cash Proceeds of the issuance shall be included in the third clause of
clause (4) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent the proceeds are not used for the redemption,
repurchase or other acquisition of Debt.
Limitation on Asset Sales
We will not, and will not permit any Restricted Subsidiary to, consummate
an Asset Sale unless:
. we or the Restricted Subsidiary, as the case may be, receives
consideration at the time of the Asset Sale at least equal to the fair
market value of the assets sold or otherwise disposed of (as evidenced
by a resolution of the board of directors); and
. at least 75% of the consideration received by us or the Restricted
Subsidiary, as the case may be, from the Asset Sale shall be cash or
other Qualified Consideration.
We or any Restricted Subsidiary may, within 365 days of the Asset Sale,
invest the Net Cash Proceeds:
. in property or assets used, or to be used, in the System and Network
Management Business, or in a company engaged primarily in the System and
Network Management Business, if and to the extent otherwise permitted
under the Indentures; or
. to repay our Secured Debt or the Secured Debt of any Restricted
Subsidiary.
The amount of the Net Cash Proceeds not used or invested within 365 days of
the Asset Sale in the manner described in the foregoing clauses shall
constitute "Excess Proceeds".
In the event that Excess Proceeds exceed $10.0 million, we shall make an
Offer to Purchase that amount of notes equal to the amount of Excess Proceeds
at a price equal to 100% of the principal amount of the notes
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to be purchased, plus accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of purchase and, to the extent required by the
terms of the notes, our other Debt that is equal with the notes or Debt of a
Restricted Subsidiary. Each Offer to Purchase shall be mailed within 30 days
following the date that we shall become obligated to purchase notes with any
Excess Proceeds. Following the completion of an Offer to Purchase, the amount
of Excess Proceeds shall be deemed to be reset at zero and, to the extent there
are any remaining Excess Proceeds we may use the Excess Proceeds for any use
which is not otherwise prohibited by the Indentures.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent the laws
and regulations are applicable in connection with the purchase of notes
pursuant to the Offer to Purchase.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
We may not, and may not permit any Restricted Subsidiary to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any Restricted Subsidiary to:
. pay dividends, in cash or otherwise, or make any other distributions in
respect of its Capital Stock owned by us or any other Restricted
Subsidiary or pay any Debt or other obligation owed to us or any other
Restricted Subsidiary;
. make loans or advances to us or any other Restricted Subsidiary; or
. transfer any of its property or assets to us or any other Restricted
Subsidiary.
However, we may, and may permit any Restricted Subsidiary to, suffer to
exist any the encumbrance or restriction:
. pursuant to any agreement in effect on the date of original issuance of
the notes, and any amendments, extensions, refinancings, renewals or
replacements of agreements, provided that the amendments, encumbrances
and restrictions in any extensions, refinancings, renewals or
replacements are no less favorable in any material respect to the
holders, than those encumbrances or restrictions that are then in effect
and that are being extended, refinanced, renewed or replaced;
. existing under or by reason of applicable law;
. existing in connection with any Permitted Senior Bank Debt or any Debt
incurred pursuant to clause (5) of the second paragraph of "Limitations
on Debt";
. pursuant to an agreement existing prior to the date on which the person
became a Restricted Subsidiary and not Incurred in anticipation of
becoming a Restricted Subsidiary, which encumbrance or restriction is
not applicable to any person, or the properties or assets of any person,
other than the person so acquired;
. pursuant to an agreement entered into in connection with Debt Incurred
under clause (4) of the second paragraph of the "Limitation on Debt"
covenant; provided, however, that the provisions contained in the
agreement related to the encumbrance or restriction are no more
restrictive in any material respect than the provisions contained in the
agreement the subject of the refinancing the clause (4) of the second
paragraph of the "Limitation on Debt" covenant;
. restrictions contained in any agreement relating to a Lien of a
Restricted Subsidiary or us otherwise permitted under the Indentures,
but only to the extent the restrictions restrict the transfer of the
property subject to the Lien;
. customary nonassignment provisions entered into in the ordinary course
of business in leases, licenses and other contracts to the extent the
provisions restrict the transfer, sublicensing or any the license or
subletting of any the lease or the assignment of rights under any the
contract;
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. any restriction with respect to a Restricted Subsidiary imposed pursuant
to an agreement which has been entered into for the sale or disposition
of all or substantially all of the Capital Stock or assets of the
Restricted Subsidiary; provided that consummation of the transaction
would not result in an Event of Default or an event that, with the
passing of time or the giving of notice or both, would constitute an
Event of Default, that the restriction terminates if the transaction is
closed or abandoned and that the closing or abandonment of the
transaction occurs within one year of the date the agreement was entered
into;
. any restriction imposed pursuant to contracts for the sale of assets
with respect to the transfer of the assets to be sold pursuant to the
contract;
. arising or agreed to in the ordinary course of business, not relating to
any Debt, and that do not, individually, or in the aggregate, detract
from the value of our property or assets or any Restricted Subsidiary in
any manner material to us or any Restricted Subsidiary; or
. the encumbrance or restriction is contained in the terms of any
agreement pursuant to which the Debt was issued if:
. the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant
contained in the Debt or agreement;
. the encumbrance or restriction is not materially more
disadvantageous to the holders of the notes than is customary in
comparable financings; and
. We determine that any the encumbrance or restriction will not
materially affect our ability to make principal or interest payments
on the notes.
Limitation on Liens
We may not, and may not permit any Restricted Subsidiary to, Incur or suffer
to exist any Lien, on or with respect to any property or assets now owned or
hereafter acquired to secure any Debt without making, or causing the Restricted
Subsidiary to make, effective provision for securing the notes:
. equally and ratably with the Debt as to the property or assets for so
long as the Debt will be so secured; or
. in the event the Debt is our Debt which is subordinate in right of
payment to the notes, prior to this Debt as to the property or assets
for so long as the Debt will be so secured.
The foregoing restrictions shall not apply to:
. Liens in existence on the date of original issuance of the notes;
. Liens securing only the notes and any Lien in favor of the trustee for
the benefit of the holders arising under the provisions in the
applicable Indenture;
. Liens granted by a Restricted Subsidiary in favor of us or any
Restricted Subsidiary;
. Liens to secure Debt incurred under Senior Credit Facilities, provided
that the Debt was permitted to be incurred pursuant to clause (1) of the
second paragraph of the "Limitation on Debt" covenant;
. Liens securing Purchase Money Secured Debt;
. Liens on property existing immediately prior to the time of acquisition
thereof, and not Incurred in anticipation of the financing of the
acquisition;
. Liens on property of a person existing at the time the person becomes a
Restricted Subsidiary and not incurred in anticipation of becoming a
Restricted Subsidiary;
. any interest in or title of a lessor to any property subject to a
Capital Lease Obligation which is permitted under the Indentures; or
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. Liens to secure Debt Incurred pursuant to clause (4) of the second
paragraph of the "Limitation on Debt" covenant; provided that the Lien
does not extend to any property other than the property securing the
Debt being refinanced pursuant to clause (4) of the second paragraph of
the "Limitation on Debt" covenant.
Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries
We will not sell, and will not permit any Restricted Subsidiary, directly or
indirectly, to issue or sell, any shares of Capital Stock of a Restricted
Subsidiary, including options, warrants or other rights to purchase shares of
the Capital Stock, except:
. to us or a Wholly Owned Restricted Subsidiary;
. issuances of director's qualifying shares or sales to foreign nationals
of shares of Capital Stock of foreign Restricted Subsidiaries, to the
extent required by applicable law;
. if, immediately after giving effect to the issuance or sale, the
Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in the person remaining after giving effect to the
issuance or sale would have been permitted to be made under the
"Limitation on Restricted Payments" covenant if made on the date of the
issuance or sale; or
. issuances or sales of Common Stock of a Restricted Subsidiary.
Transactions with Affiliates and Related Persons
We may not, and may not permit any Restricted Subsidiary to, enter into any
transaction, or series of related transactions, not in the ordinary course of
business with our Affiliates or Related Persons, other than us or a Wholly
Owned Restricted Subsidiary, involving aggregate consideration in excess of
$5.0 million, including any Investment, either directly or indirectly, unless
the transaction is on terms no less favorable to us or the Restricted
Subsidiary than those that could be obtained in a comparable arm's-length
transaction with an entity that is not an Affiliate or Related Person and is in
our best interests or the best interests of the Restricted Subsidiary. For any
transaction, or series of related transactions, that involves less than or
equal to $10.0 million, our Chief Executive Officer, President or Chief
Operating Officer shall determine that the transaction satisfies the above
criteria and shall evidence a determination by an Officer's Certificate filed
with the trustee. For any transaction that involves in excess of $10.0 million:
. a majority of the disinterested members of the board of directors shall
determine that the transaction satisfies the above criteria; or
. we shall obtain a written opinion of a nationally recognized investment
banking or appraisal firm stating that the transaction is fair to us or
the Restricted Subsidiary.
The limitation does not apply, and shall not apply, to:
. any transaction solely between us and any Restricted Subsidiary or
solely between any Restricted Subsidiaries;
. the payment of reasonable and customary regular fees to our directors
who are not our employees;
. any payments or other transactions pursuant to any tax-sharing agreement
between us and any other person with which we file a consolidated tax
return or with which we are part of a consolidated group for tax
purposes;
. licensing or sublicensing or the use of any intellectual property by us
or any one of our Restricted Subsidiaries or any Restricted Subsidiary;
. any transaction entered into for the purpose of granting or altering
registration rights with respect to any of our Capital Stock;
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. any Restricted Payments not prohibited by the "Limitation on Restricted
Payments" covenant; or
. compensation, severance and employee benefit arrangements with our or
any Restricted Subsidiary's officers, directors or employees, including
under any stock option or stock incentive plan, in the ordinary course
of business.
Limitation on Sale-Leaseback Transactions
We will not, and will not permit any Restricted Subsidiary to, enter into
any sale-leaseback transaction involving any of our assets or properties,
whether now owned or hereafter acquired, whereby we or a Restricted Subsidiary
sell or transfer the assets or properties and then or thereafter lease the
assets or properties or any part thereof or any other assets or properties that
we or the Restricted Subsidiary, as the case may be, intend to use for
substantially the same purpose or purposes as the assets or properties sold or
transferred.
The above restriction does not apply to any sale-leaseback transaction if:
. the lease is for a period, including renewal rights, of not in excess of
three years;
. the sale-leaseback transaction is consummated within 180 days after the
purchase of the assets subject to the transaction;
. the transaction is solely between us and any Wholly Owned Restricted
Subsidiary or solely between Wholly Owned Restricted Subsidiaries; or
. we or the Restricted Subsidiary, within 12 months after the sale or
transfer of any assets or properties is completed, applies an amount no
less than the Net Cash Proceeds received from the sale in accordance
with clause (A) or (B) of "--Limitation on Asset Sales".
Provision of Financial Information
Whether or not we are required to be subject to Section 13(a) or 15(d) of
the Exchange Act, we shall file with the Commission the annual reports,
quarterly reports and other documents which we would have been required to file
with the Commission pursuant to the Section 13(a) or 15(d) or any successor
provision thereto if we were so required, the documents to be filed with the
Commission on or prior to the respective dates (each a "Required Filing Date",
collectively, the "Required Filing Dates") by which we would have been required
so to file the documents if we were so required. We shall also in any event:
. within 15 days of each Required Filing Date (1) transmit by mail to all
holders, as their names and addresses appear in the Note Register,
without cost to the holders, and (2) file with the trustee, copies of
the annual reports, quarterly reports and other documents which we file
with the Commission pursuant to the Section 13(a) or 15(d) or any
successor provision thereto or would have been required to file with the
Commission pursuant to the Section 13(a) or 15(d) or any successor
provisions thereto if we were required to be subject to the Sections;
and
. if filing the documents by us with the Commission is not permitted under
the Exchange Act, promptly upon written request supply copies of the
documents to any prospective holder.
Unrestricted Subsidiaries
We may designate any of our Subsidiaries to be an "Unrestricted Subsidiary"
as provided below in which event the Subsidiary and each other person that is
then, or thereafter becomes, a Subsidiary of the Subsidiary will be deemed to
be an Unrestricted Subsidiary. "Unrestricted Subsidiary" means:
. any Subsidiary designated as the by the board of directors as set forth
below where (1) no default with respect to any Debt of the Subsidiary or
any Subsidiary of the Subsidiary, including any right which the holders
thereof may have to take enforcement action against the Subsidiary,
would permit, upon notice, lapse of time or both, any holder of any
other Debt in a principal amount in excess of
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$10.0 million of us and our Subsidiaries, other than another
Unrestricted Subsidiary, to declare a default on the other Debt or cause
the payment thereof to be accelerated or payable prior to its final
scheduled maturity and (2) we could make a Restricted Payment in an
amount equal to the greater of the fair market value and book value of
the Subsidiary pursuant to "Limitation on Restricted Payments" and the
amount is thereafter treated as a Restricted Payment for the purpose of
calculating the aggregate amount available for Restricted Payments
thereunder; and
. any Subsidiary of an Unrestricted Subsidiary.
The board of directors may not designate a Subsidiary to be an Unrestricted
Subsidiary if the Subsidiary owns any Capital Stock of, or owns or holds any
Lien on any property of, any of our Subsidiaries which is not a Subsidiary of
the Subsidiary to be so designated or otherwise an Unrestricted Subsidiary. The
board of directors may designate any Unrestricted Subsidiary a Restricted
Subsidiary and shall be deemed to have made the designation if at the time the
condition set forth in the item listed under the definition of "Unrestricted
Subsidiary" shall cease to be true.
Mergers, Consolidations and Certain Sales of Assets
We may not, in a single transaction or a series of related transactions, (1)
consolidate or merge with or into any other person or permit any other person
to consolidate or merge with or into us or (2) directly or indirectly transfer,
sell, lease or otherwise dispose of all or substantially all of its assets,
unless:
. in a transaction in which we do not survive or in which we sell, lease
or otherwise dispose of all or substantially all of our assets, the
successor entity to us shall be organized and validly existing under the
laws of the United States of America, any State thereof or the District
of Columbia, and shall expressly assume, by a supplemental Indenture
executed and delivered to the trustee in form satisfactory to the
trustee, all of our obligations under the applicable Indenture;
. immediately before and after giving effect to the transaction and
treating any Debt which becomes our obligation or an obligation of a
Restricted Subsidiary as a result of the transaction as having been
Incurred by us or the Restricted Subsidiary at the time of the
transaction, no Event of Default or event that with the passing of time
or the giving of notice, or both, would constitute an Event of Default
shall have occurred and be continuing;
. except in the case of any the consolidation or merger of us with or
into, or any transfer, sale, lease or other disposition of assets to, a
Wholly Owned Restricted Subsidiary, immediately after giving effect to
the transaction, our Consolidated Net Worth, or other successor entity
to us, is equal to or greater than ours immediately prior to the
transaction; and
. except in the case of any consolidation or merger of us with or into, or
any transfer, sale, lease or other disposition of assets to, a Wholly
Owned Restricted Subsidiary, immediately after giving effect to the
transaction and treating any Debt which becomes our obligation or the
obligation of a Restricted Subsidiary as a result of the transaction as
having been Incurred by us or the Restricted Subsidiary at the time of
the transaction, we, including any successor entity to us, could Incur
at least $1.00 of additional Debt pursuant to the provisions of the
applicable Indenture described in the first paragraph under "Limitation
on Debt" above.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
respective Indentures. Reference is made to the respective Indenture for the
full definition of all the terms, as well as any other terms used herein for
which no definition is provided.
"Acquisition Debt" means Debt of a person existing at the time the person
becomes a Restricted Subsidiary or assumed in connection with an Asset
Acquisition, and not Incurred in connection with, or in anticipation of, the
person becoming a Restricted Subsidiary or the Asset Acquisition.
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"Additional Notes" means dollar notes or euro notes issued by us after the
date of the original issuance of the notes subject to the terms and conditions
of the applicable Indenture in an aggregate principal amount not to exceed
$100.0 million or (Euro)100.0 million, as the case may be, and any notes of
like terms and tenor issued in exchange therefor.
"Affiliate" of any person means any other person directly or indirectly
controlling or controlled by or under direct or indirect common control with
the person. For the purposes of this definition, "control" when used with
respect to any person means the power to direct the management and policies of
the person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means an acquisition by us or any of our Restricted
Subsidiaries of the property and assets of any person other than us or any of
our Restricted Subsidiaries that constitute substantially all of a division or
line of business of the person; provided that the property and assets acquired
are to be used in the System and Network Management Business.
"Asset Sale" by any person means any transfer, conveyance, sale, lease,
license or other disposition by the person or any of its Restricted
Subsidiaries, including a consolidation or merger or other sale of any the
Restricted Subsidiary with, into or to another person in a transaction in which
the Restricted Subsidiary ceases to be a Restricted Subsidiary, (collectively a
"transfer") of:
. shares of Capital Stock, other than directors' qualifying shares, or
other ownership interests of a Restricted Subsidiary of the person;
. all or substantially all of the assets of the person or any of its
Restricted Subsidiaries; or
. any other property, assets or rights, including intellectual property
rights, of the person or any of its Restricted Subsidiaries outside of
the ordinary course of business; provided that "Asset Sale" shall not
include:
. any transfer of all or substantially all of our assets in a transaction
that is made in compliance with the requirements of provisions of the
Indenture described under "--Mergers, Consolidations and Certain Sales
of Assets;"
. any transfer by us to any Wholly Owned Restricted Subsidiary or by any
Wholly Owned Restricted Subsidiary to any other Wholly Owned Subsidiary
or to us in a manner that does not otherwise violate the terms of the
applicable Indenture;
. transfers made in compliance with the requirements of provisions of the
applicable Indenture described under "Limitation on Restricted
Payments;"
. transfers constituting the granting of a Permitted Lien;
. exchanges of equipment used in the System and Network Management
Business for other equipment to be used in the System and Network
Management Business; provided any the exchange for equipment with a fair
market value in excess of $2.0 million must be approved by our board of
directors; and
. transfers of assets, property or other rights, including intellectual
property rights, with a fair market value of less than $2.0 million.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (1) the sum of the products of (a)
the number of years from the date of determination to the dates of each
successive scheduled principal payment of the debt security and (b) the amount
of the principal payment, by (2) the sum of all the principal payments.
"Capital Lease Obligation" of any person means the obligation to pay rent or
other payment amounts under a lease of, or other Debt arrangements conveying
the right to use, real or personal property of the person
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which is required to be classified and accounted for as a capital lease or a
liability on the face of a balance sheet of the person in accordance with GAAP.
The principal amount of the obligation shall be the capitalized amount thereof
that would appear on the face of a balance sheet of the person in accordance
with GAAP.
"Capital Stock" of any person means any and all shares, interests,
participations or other equivalents, however designated, of corporate stock or
other equity participations, including partnership interests, whether general
or limited, of the person.
"Cash Equivalents" means:
. securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof,
provided that the full faith and credit of the United States is pledged
in support thereof, having maturities of six months from the date of
acquisition;
. certificates of deposit with maturities of not more than six months or
less from the date of acquisition, bankers' acceptances with maturities
not exceeding six months and overnight bank deposits, in each case with
any domestic commercial bank having capital and surplus in excess of
$500.0 million and a Thompson Bank Watch Rating of "B" or better;
. repurchase obligations with a term of not more than seven days for
underlying securities of the types described in the first two clauses
above entered into with any financial institution meeting the
qualifications specified in the second clause above;
. commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group and in each
case maturing within six months after the date of acquisition; and
. money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in the foregoing clauses of this
definition.
"Change of Control" means the occurrence of one or more of the following
events:
. any sale, lease, exchange or other transfer, in one transaction or a
series of related transactions, of all or substantially all of our
assets and the assets of our Subsidiaries, taken as a whole, to any
person or group of related persons, as defined in Section 13(d) of the
Exchange Act (a "Group");
. the approval by the holders of our Capital Stock of any plan or proposal
for our liquidation or dissolution, whether or not otherwise in
compliance with the provisions of the applicable Indenture;
. any person or Group shall become the owner, directly or indirectly,
beneficially or of record, of shares representing more than 50% of the
aggregate ordinary voting power represented by our issued and
outstanding Voting Stock or any successor to all or substantially all of
its assets; or
. during any period of two consecutive years, individuals who at the
beginning of the period constituted our board of directors, together
with any new directors whose election to the board of directors or whose
nomination for election by our stockholders was approved by a vote of a
majority of the directors then still in office who were either directors
at the beginning of the period or whose election or nomination for
election was previously so approved) cease for any reason to constitute
a majority of the board of directors then in office.
"Common Stock" of any person means Capital Stock of the person that does not
rank prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of the
person, to shares of Capital Stock of any other class of the person.
"Consolidated Debt to EBITDA Ratio" means the ratio of:
. the total consolidated Debt as of the date of calculation (the
"Determination Date") to
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. four times the Consolidated EBITDA for the latest fiscal quarter for
which financial information is available immediately preceding the
Determination Date (the "Measurement Period").
For purposes of calculating Consolidated EBITDA for the Measurement Period
immediately prior to the relevant Determination Date:
. any person that is a Restricted Subsidiary on the Determination Date, or
would become a Restricted Subsidiary on the Determination Date in
connection with the transaction that requires the determination of the
Consolidated EBITDA, will be deemed to have been a Restricted Subsidiary
at all times during the Measurement Period;
. any person that is not a Restricted Subsidiary on the Determination
Date, or would cease to be a Restricted Subsidiary on the Determination
Date in connection with the transaction that requires the determination
of the Consolidated EBITDA, will be deemed not to have been a Restricted
Subsidiary at any time during the Measurement Period, and
. if we or any Restricted Subsidiary shall have in any manner (1) acquired
(through an acquisition or the commencement of activities constituting
the operating business) or (2) disposed of by an Asset Sale or the
termination or discontinuance of activities constituting the operating
business any operating business during the Measurement Period or after
the end of the period and on or prior to the Determination Date, the
calculation will be made on a pro forma basis in accordance with GAAP as
if, in the case of an acquisition or the commencement of activities
constituting the operating business, all the transactions had been
consummated prior to the first day of the Measurement Period, it being
understood that in calculating Consolidated EBITDA the exclusions set
forth in the definition of Consolidated Net Income shall apply to any
person acquired as if it were a Restricted Subsidiary.
"Consolidated EBITDA" means, with respect to any period, Consolidated Net
Income for the period increased, without duplication, to the extent deducted in
calculating the Consolidated Net Income, by:
. Consolidated Income Tax Expense for the period;
. Consolidated Interest Expense for the period without regard to the
proviso therein; and
. depreciation, amortization and any other non-cash items for the period,
less any non-cash items to the extent they increase Consolidated Net
Income, including the partial or entire reversal of reserves taken in
prior periods, for the period, for us and any Restricted Subsidiary,
including, without limitation, amortization of capitalized debt issuance
costs for the period,
all of the foregoing determined on a consolidated basis for us and our
Restricted Subsidiaries in accordance with GAAP; provided that, if any
Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated
EBITDA shall be reduced, to the extent not otherwise reduced in accordance with
GAAP, by an amount equal to:
. the amount of Consolidated EBITDA attributable to the Restricted
Subsidiary multiplied by
. the percentage ownership interest in the Restricted Subsidiary not owned
on the last day of the period by us or any of our Restricted
Subsidiaries.
"Consolidated Income Tax Expense" for any period means the consolidated
provision for our income taxes and the income taxes of our Restricted
Subsidiaries for the period calculated on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means for any period the consolidated
interest expense included in our consolidated income statement and the
consolidated income statement of our Restricted Subsidiaries, without deduction
of interest income, for a period calculated on a consolidated basis in
accordance with GAAP, including without limitation or duplication, or, to the
extent not so included, with the addition of:
. the amortization of Debt discounts;
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. any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities;
. fees, net of any amounts received, with respect to any Interest Rate or
Currency Protection Agreement;
. interest on Debt guaranteed by us and our Restricted Subsidiaries, to
the extent paid by us or any Restricted Subsidiary; and
. the portion of any Capital Lease Obligation allocable to interest
expense; provided that, if any Restricted Subsidiary is not a Wholly
Owned Restricted Subsidiary, Consolidated Interest Expense shall be
reduced, to the extent not otherwise reduced in accordance with GAAP, by
an amount equal to:
. the amount of Consolidated Interest Expense attributable to the
Restricted Subsidiary multiplied by
. the percentage ownership interest in the Restricted Subsidiary not
owned on the last day of the period by us or any of our Restricted
Subsidiaries.
"Consolidated Net Income" for any period means our consolidated net income
or loss and the consolidated net income or loss of our Restricted Subsidiaries
for the period determined on a consolidated basis in accordance with GAAP;
provided that there shall be excluded therefrom:
. the net income or loss of any person acquired by us or any of our
Restricted Subsidiaries in a pooling-of-interests transaction for any
period prior to the date of the transaction;
. the net income or loss of any person that is not our Restricted
Subsidiary except to the extent of the amount of dividends or other
distributions actually paid to us or our Restricted Subsidiary by the
person during the period;
. gains or losses on Asset Sales by us or our Restricted Subsidiaries;
. all extraordinary gains and extraordinary losses;
. the cumulative effect of changes in accounting principles; and
. the tax effect of any of the items described in the foregoing clauses
above.
"Consolidated Net Worth" of any person means the consolidated stockholders'
equity of the person, determined on a consolidated basis in accordance with
GAAP, less amounts attributable to Disqualified Stock of the person; provided
that, with respect to us, adjustments following the date of the applicable
Indenture to our accounting books and records in accordance with Accounting
Principles Board Opinions Nos. 16 and 17, or successor opinions thereto, or
otherwise resulting from the acquisition of control of us by another person
shall not be given effect.
"Debt" means, without duplication, with respect to any person, whether
recourse is to all or a portion of the assets of the person and whether or not
contingent:
. every obligation of the person for money borrowed;
. every obligation of the person evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
. every reimbursement obligation of the person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the
account of the person, including reimbursement obligations with respect
thereto, but excluding obligations with respect to trade letters of
credit securing obligations entered into in the ordinary course of
business to the extent the letters of credit are not drawn upon or, if
drawn upon, to the extent the drawing is reimbursed no later than the
third Business Day following receipt by the person of a demand for
reimbursement;
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. every obligation of the person issued or assumed as the deferred
purchase price of property or services, including securities repurchase
agreements;
. every Capital Lease Obligation of the person;
. all Disqualified Stock issued by the person;
. if the person is a Restricted Subsidiary, all Preferred Stock issued by
the person;
. every obligation under Interest Rate or Currency Protection Agreements
of the person; and
. every obligation of the type referred to in the foregoing clauses of
another person and all dividends of another person the payment of which,
in either case, the person has Guaranteed or is responsible or liable,
directly or indirectly, as obligor, Guarantor or otherwise.
The "amount" or "principal amount" of Debt at any time of determination as
used herein represented by:
. any contingent Debt, shall be the maximum principal amount thereof;
. any Debt issued at a price that is less than the principal amount at
maturity thereof, shall be the amount of the liability in respect
thereof determined in accordance with GAAP;
. any Disqualified Stock, shall be the maximum fixed redemption or
repurchase price in respect thereof; and
. any Preferred Stock, shall be the maximum voluntary or involuntary
liquidation preference plus accrued and unpaid dividends in respect
thereof, in each case as of the time of determination.
In no event shall "Debt" include any trade payable or accrued expenses
arising in the ordinary course of business.
"Disqualified Stock" of any person means any Capital Stock of the person
that by its terms, or by the terms of any security into which it is
convertible, or for which it is exchangeable, at the option of the holder
thereof, or otherwise matures or is required to be redeemed, pursuant to any
sinking fund obligation or otherwise, but other than as a result of the death
or disability of the holder thereof or the termination of the employment with
us of the holder thereof, or is convertible into or exchangeable for Debt or
is redeemable at the option of the holder thereof, in whole or in part, at any
time prior to the final maturity of the dollar notes or euro notes, as the
case may be; provided, however, that any Capital Stock which would not
constitute Disqualified Stock but for provisions thereof giving holders
thereof the right to require us or a Restricted Subsidiary to repurchase or
redeem the Capital Stock upon the occurrence of an "asset sale" or a "change
of control" occurring prior to the final maturity date of the notes shall not
constitute Disqualified Stock if the provisions applicable to the Capital
Stock are no more favorable to the holders of the stock than the corresponding
provisions applicable to the notes contained in the Indentures and the
provisions applicable to the Capital Stock specifically provide that we and
our Restricted Subsidiaries will not repurchase or redeem any the stock
pursuant to the provisions prior to the repurchase of the notes as are
required to be repurchased pursuant to the Indentures upon an Asset Sale or a
Change of Control.
"Excess Proceeds" has the meaning ascribed thereto under the "Limitation on
Asset Sales" covenant.
"Existing Debt" shall mean our Debt and the Debt of our Restricted
Subsidiaries in existence on the Closing Date.
"GAAP" means generally accepted accounting principles in the United States
which are in effect on the date of original issuance of the notes,
consistently applied.
"Guarantee" by any person means any obligation, contingent or otherwise, of
the person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other person (the "primary obligor") in any manner, whether
directly or indirectly, and including, without limitation, any obligation of
the person to:
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. purchase or pay, or advance or supply funds for the purchase or payment
of, the Debt or to purchase, or to advance or supply funds for the
purchase of, any security for the payment of the Debt;
. purchase property, securities or services for the purpose of assuring
the holder of the Debt of the payment of the Debt, or
. maintain working capital, equity capital or other financial statement
condition or liquidity of the primary obligor so as to enable the
primary obligor to pay the Debt, and "Guaranteed," "Guaranteeing" and
"Guarantor" shall have meanings correlative to the foregoing; provided,
however, that the Guaranty by any person shall not include endorsements
by the person for collection or deposit, in either case, in the ordinary
course of business.
"Incur" means, with respect to any Debt or other obligation of any person,
to create, issue, incur, by conversion, exchange or otherwise, assume,
Guarantee or otherwise become liable in respect of the Debt or other obligation
including by acquisition of Restricted Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any the Debt or other obligation on
the balance sheet of the person, and "Incurrence," "Incurred," "Incurrable" and
"Incurring" shall have meanings correlative to the foregoing; provided,
however, that a change in GAAP that results in an obligation of the person that
exists at the time becoming Debt shall not be deemed an Incurrence of the Debt.
"Interest Rate or Currency Protection Agreement" of any person means any
forward contract, futures contract, swap, option or other financial agreement
or arrangement, including, without limitation, caps, floors, collars and
similar agreements, relating to, or the value of which is dependent upon,
interest rates or currency exchange rates or indices.
"Internal Revenue Code" means the Internal Revenue Code of 1986 and any
successor thereto.
"Investment" by any person means any direct or indirect loan, advance or
other extension of credit or capital contribution, by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise, to, or purchase or acquisition of
Capital Stock, bonds, notes, debentures or other securities or evidence of Debt
issued by, any other person, including any payment on a Guarantee of any
obligation of other person.
"Material Restricted Subsidiary" means, at any date of determination, any
Restricted Subsidiary that represents more than 10% of our total consolidated
assets at the end of the most recent fiscal quarter for which financial
information is available, or more than 10% of our consolidated net sales or
consolidated operating income for the most recent four quarters for which
financial information is available.
"Net Cash Proceeds" means:
. with respect to any Asset Sale by any person, cash or Cash Equivalents
received, including by way of sale or discounting of a note, installment
receivable or other receivable, but excluding any other consideration
received in the form of assumption of Debt or other obligations relating
to the properties or assets, therefrom by the person, net of:
. all legal, title and recording tax expenses, commissions and other
fees and expenses Incurred and all federal, state, foreign and local
taxes required to be accrued as a liability as a consequence of the
Asset Sale;
. all payments made by the person or its Restricted Subsidiaries on
any Debt which is secured by the assets in accordance with the terms
of any Lien upon or with respect to the assets or which must by the
terms of the Lien, or in order to obtain a necessary consent to the
Asset Sale or by applicable law, be repaid out of the proceeds from
the Asset Sale;
. all distributions and other payments made to minority interest
holders in Restricted Subsidiaries of the person or joint ventures
as a result of the Asset Sale; and
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. appropriate amounts to be provided by the person or any Restricted
Subsidiary thereof, as the case may be, as a reserve in accordance
with GAAP against any liabilities associated with the assets and
retained by the person or any Restricted Subsidiary thereof, as the
case may be, after the Asset Sale, including, without limitation,
liabilities under any indemnification obligations and severance and
other employee termination costs associated with the Asset Sale, in
each case as determined by the board of directors, in its reasonable
good faith judgment evidenced by a resolution of the board of
directors filed with the trustee; provided, however, that any
reduction in the reserve within twelve months following the
consummation of the Asset Sale will be treated for all purposes of
the applicable Indenture and the notes as a new Asset Sale at the
time of the reduction with Net Cash Proceeds equal to the amount of
the reduction; and
. with respect to the issuance or sale of Capital Stock, or options,
warrants or rights to purchase Capital Stock, or debt securities or
Disqualified Stock that has been converted into or exchanged for Capital
Stock, the proceeds of the issuance or sale in the form of cash or Cash
Equivalents, including payments in respect of deferred payment
obligations, net of attorney's fees, accountant's fees and brokerage,
consultation, underwriting and other fees and expenses actually incurred
in connection with the issuance or sale, conversion or exchange and net
of any Consolidated Interest Expense attributable to any debt securities
paid to the holders thereof prior to the conversion or exchange and net
of taxes paid or payable as a result thereof.
"new dollar notes" shall mean new notes that are dollar notes.
"new euro notes" shall mean new notes that are euro notes.
"new notes" shall mean notes issued in exchange for any notes in connection
with an Exchange Offer pursuant to Registration Rights Agreements.
"Note Register" shall mean the note registry maintained by any registrar
with respect to any of the notes.
"Offer to Purchase" means a written offer (the "Offer") sent by us by first
class mail, postage prepaid, to each holder at his address appearing in the
Note Register on the date of the Offer offering to purchase up to the
principal amount of notes specified in the Offer at the purchase price
specified in the Offer, as determined pursuant to the applicable Indenture.
Unless otherwise required by applicable law, the Offer shall specify an
expiration date (the "Offer Expiration Date") of the Offer to Purchase which
shall be, subject to any contrary requirements of applicable law, not less
than 30 days or more than 60 days after the date of the Offer and a settlement
date (the "Purchase Date") for purchase of notes within five Business Days
after the Offer Expiration Date. We shall notify the trustee at least 15
Business Days, or the shorter period as is acceptable to the trustee, prior to
the mailing of the Offer of our obligation to make an Offer to Purchase, and
the Offer shall be mailed by us or, at our request, by the trustee in our name
and at our expense. The Offer shall contain information concerning our
business and our Restricted Subsidiaries which we in good faith believe will
enable the holders to make an informed decision with respect to the Offer to
Purchase, which at a minimum will include:
. the most recent annual and quarterly financial statements and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" contained in the documents required to be filed with the
trustee pursuant to the applicable Indenture, which requirements may be
satisfied by delivery of the documents together with the Offer;
. a description of material developments in our business subsequent to the
date of the latest of the financial statements referred to in the
foregoing clause, including a description of the events requiring us to
make the Offer to Purchase;
. if applicable, appropriate pro forma financial information concerning
the Offer to Purchase and the events requiring us to make the Offer to
Purchase; and
. any other information required by applicable law to be included therein.
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The Offer shall contain all instructions and materials necessary to enable
the holders to tender notes pursuant to the Offer to Purchase. The Offer shall
also state:
. the section of the applicable Indenture pursuant to which the Offer to
Purchase is being made;
. the Offer Expiration Date and the Purchase Date;
. the aggregate principal amount of the outstanding notes offered to be
purchased by us pursuant to the Offer to Purchase, including, if less
than 100%, the manner by which the has been determined pursuant to the
Section of the Indenture requiring the Offer to Purchase (the "Purchase
Amount");
. the purchase price to be paid by us for each $1,000 (or (Euro) 1,000)
aggregate principal amount of notes, as the case may be, accepted for
payment, as specified pursuant to the applicable Indenture (the
"Purchase Price");
. that the holder may tender all or any portion of the notes registered in
the name of the holder and that any portion of a note tendered must be
tendered in an integral of $1,000, or (Euro) 1,000, principal amount, as
the case may be;
. the place or places where notes are to be surrendered for tender
pursuant to the Offer to Purchase;
. that interest on any notes not tendered or tendered but not purchased by
us pursuant to the Offer to Purchase will continue to accrue;
. that on the Purchase Date the Purchase Price will become due and payable
upon each note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after
the Purchase Date;
. that each holder electing to tender a note pursuant to the Offer to
Purchase will be required to surrender the note at the place or places
specified in the Offer prior to the close of business on the Offer
Expiration Date, the note being, if we or the trustee so requires, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to us and the trustee duly executed by, the holder thereof
or his attorney duly authorized in writing;
. that holders will be entitled to withdraw all or any portion of notes
tendered if we, or their Paying Agent, receives, not later than the
close of business on the Offer Expiration Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the holder,
the principal amount of the note the holder tendered, the certificate
number of the note the holder tendered and a statement that the holder
is withdrawing all or a portion of his tender;
. that (1) if notes in an aggregate principal amount less than or equal to
the Purchase Amount are duly tendered and not withdrawn pursuant to the
Offer to Purchase, we shall purchase all the notes and (2) if notes in
an aggregate principal amount in excess of the Purchase Amount are
tendered and not withdrawn pursuant to the Offer to Purchase, we shall
purchase notes having an aggregate principal amount equal to the
Purchase Amount on a pro rata basis, with the adjustments as may be
deemed appropriate so that only notes in denominations of $1,000, or
(Euro) 1,000, as the case may be, or integral multiples thereof shall be
purchased; and
. that in the case of any holder whose note is purchased only in part, we
shall execute, and the trustee shall authenticate and deliver to the
holder of the note without service charge, a new note or notes, as the
case may be, of any authorized denomination as requested by, the holder,
in an aggregate principal amount equal to and in exchange for the
unpurchased portion of the note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with
the Offer for the Offer to Purchase.
"Permitted Interest Rate or Currency Protection Agreement" of any person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions that is designed to protect the person against
fluctuations in interest rates or currency exchange rates with respect to Debt
Incurred and which shall have a notional amount no greater than the payments
due with respect to the Debt being hedged thereby and not for purposes of
speculation.
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"Permitted Investment" means:
. an Investment in us or a Wholly Owned Restricted Subsidiary or a person
which will, upon the making of the Investment, become a Wholly Owned
Restricted Subsidiary or be merged or consolidated with or into or
transfer or convey all or substantially all its assets to, us or a
Wholly Owned Restricted Subsidiary; provided that the person's primary
business or the assets to be transferred or conveyed are related,
ancillary or complementary to the System and Network Management
Business;
. Cash Equivalents;
. payroll, travel, relocation and similar advances to cover matters that
are expected at the time of the advances ultimately to be treated as
expenses in accordance with GAAP;
. stock, obligations or securities received (1) in satisfaction of
judgments or (2) in connection with the sale or disposition of a person,
assets or business;
. Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and worker's compensation, performance and
other similar deposits;
. Permitted Interest Rate or Currency Agreements;
. Strategic Investments;
. loans or advances to our officers or employees or officers or employees
of any Restricted Subsidiary, other than loans or advances made pursuant
to the next clause below, that do not in the aggregate exceed $10.0
million at any time outstanding;
. accounts receivable in the ordinary course of business, and Investments
obtained in exchange or settlement of accounts receivable for which we
have determined that collection is not likely; and
. loans or advances to persons who own Debt or Capital Stock, other than
any of our Affiliates or any Restricted Subsidiary, of any person if the
loans or advances are made as part of, or in connection with, a
transaction pursuant to which the person becomes our Restricted
Subsidiary or any other Restricted Subsidiary or substantially all of
the assets of the person are acquired by us or any Restricted
Subsidiary, in an aggregate amount not to exceed 20% of the total
consideration paid in connection with the acquisition.
"Permitted Lien" means any Lien on our assets or the assets of any
Restricted Subsidiary permitted under the "Limitation on Liens" covenant.
"Permitted Senior Bank Debt" means Debt Incurred by us or any Restricted
Subsidiary pursuant to Senior Credit Facilities; provided that the aggregate
principal amount of all Permitted Senior Bank Debt, at any one time
outstanding, shall not exceed $750.0 million.
"Preferred Stock" of any person means Capital Stock of the person of any
class or classes, however designated, that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of the person, to shares of Capital
Stock of any other class of the person.
"Purchase Money Secured Debt" of any person means Debt of the person secured
by a Lien on real or personal property of the person which Debt:
. constitutes all or a part of the purchase price or construction cost of
the property; or
. is Incurred prior to, at the time of or within 180 days after the
acquisition or substantial completion of the property for the purpose of
financing all or any part of the purchase price or construction cost
thereof; provided, however, that:
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. the Debt so incurred does not exceed 100% of the purchase price or
construction cost of the property and related expenses;
. the Lien does not extend to or cover any property other than the item of
property and any improvements on the item and proceeds thereof;
. the purchase price or construction cost for the property is or should be
included in "addition to property, plant and equipment" in accordance
with GAAP; and
. the purchase or construction of the property is not part of any
acquisition of a person or business unit or line of business.
"Qualified Consideration" shall mean:
. cash;
. Cash Equivalents;
. assets that are used or useful in the System and Network Management
Business;
. any securities or other obligations that are converted into or exchanged
for cash or Cash Equivalents within six months after the Asset Sale; or
. our liabilities or the liabilities of a Restricted Subsidiary assumed by
the transferee, or its designee, the that we or the Restricted
Subsidiary have no further liability therefor, the amount of the
liability to be determined in accordance with GAAP.
"Related Person" of any person means any other person directly or indirectly
owning:
. 5% or more of the outstanding Common Stock of the person, or, in the
case of a person that is not a corporation, 5% or more of the equity
interest in the person; or
. 5% or more of the combined voting power of the Voting Stock of the
person.
"Restricted Subsidiary" means any of our Subsidiaries, whether existing on
or after the date of the Indentures, unless the Subsidiary is an Unrestricted
Subsidiary.
"Secured Debt" means Permitted Senior Bank Debt, Purchase Money Secured Debt
and other Debt secured by a Permitted Lien.
"Senior Credit Facilities" means one or more senior commercial term loan
and/or revolving credit facilities, including any letter of credit subfacility,
entered into by us or any Restricted Subsidiary principally with commercial
banks and/or other financial institutions typically party to commercial loan
agreements, and any replacement, extension, renewal, refinancing or refunding
thereof.
"Strategic Investment" means an Investment in any person, other than our
Unrestricted Subsidiary, whose primary business is related, ancillary or
complementary to the System and Network Management Business, and the Investment
is determined by our board of directors to promote or significantly benefit our
businesses and our Restricted Subsidiaries on the date of the Investment.
"Subordinated Debt" means our Debt as to which the payment of principal of,
and premium, if any, and interest and other payment obligations in respect of
the Debt shall be subordinate to the prior payment in full of the notes to at
least the following extent:
. no payments of principal of, or premium, if any, or interest on, or
otherwise due in respect of the Debt, may be permitted for so long as
any default in the payment of principal, or premium, if any, or interest
on the notes exists;
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. in the event that any other default that with the passing of time or
the giving of notice, or both, would constitute an Event of Default
with respect to the notes, upon notice by 25% or more in principal
amount of the notes to the trustee, the trustee shall have the right
to give notice to us and the holders of the Debt, or trustees or
agents therefor, of a payment blockage, and thereafter no payments
of principal of, or premium, if any, or interest on or otherwise due
in respect of the Debt may be made for a period of 179 days from the
date of the notice; and
. the Debt may not:
. provide for payments of principal of the Debt at the maturity
thereof or by way of a sinking fund applicable thereto or by way
of any mandatory redemption, defeasance, retirement or repurchase
thereof by us, including any redemption, retirement or repurchase
which is contingent upon events or circumstances, but excluding
any retirement required by virtue of acceleration of the Debt
upon an event of default thereunder, in each case prior to the
final maturity date of the notes; or
. permit redemption or other retirement, including pursuant to an
offer to purchase made by us, of other Debt at the option of the
holder thereof prior to the final maturity date of the notes,
other than a redemption or other retirement at the option of the
holder of the Debt, including pursuant to an offer to purchase
made by us, which is conditioned upon a change of control of us
pursuant to provisions substantially similar to those described
under "Change of Control," and which shall provide that the Debt
will not be repurchased pursuant to the provisions prior to our
repurchase of the notes required to be repurchased by us pursuant
to the provisions described under "Change of Control"); provided,
however, that any Debt which would constitute Subordinated Debt
but for provisions thereof giving holders thereof the right to
require us or a Restricted Subsidiary to repurchase or redeem the
Subordinated Debt upon the occurrence of an asset sale occurring
prior to the final maturity of the notes shall constitute
Subordinated Debt if the provisions applicable to the
Subordinated Debt are no more favorable to the holders of the
Debt than the provisions applicable to the notes contained in the
covenant described under "Limitation on Asset Sales" and the
provisions applicable to the Debt specifically provide that we
and our Restricted Subsidiaries will not repurchase or redeem any
of the Debt pursuant to the provisions prior to the repurchase of
the notes as are required to be repurchased pursuant to the
covenant described under "Limitation on Asset Sales".
"Subsidiary" of any person means:
. a corporation more than 50% of the combined voting power of the
outstanding Voting Stock of which is owned, directly or indirectly,
by the person or by one or more other Subsidiaries of the person or
by the person and one or more Restricted Subsidiaries thereof; or
. any other person, other than a corporation, in which the person, or
one or more other Subsidiaries of the person or the person and one
or more other Subsidiaries thereof, directly or indirectly, has the
power to direct the policies, management and affairs thereof.
"System and Network Management Business" means:
. server and other hardware hosting;
. connectivity, data networking, telecommunications or content for
computer or data networks or systems;
. management of computer or data networks or systems;
. technology services, equipment sales or leasing or software
licensing for computer or data networks or systems, including
Internet Protocol and any successor protocol(s) based networks; and
. businesses reasonably related, complementary or incidental thereto.
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"Unrestricted Subsidiaries" has the meaning ascribed thereto under the
"Unrestricted Subsidiaries" covenant.
"U.S. Government Securities" means securities that are direct obligations of
the United States of America, direct obligations of the Federal Home Loan
Mortgage Corporation, direct obligations of the Federal National Mortgage
Association, securities which the timely payment of whose principal and
interest is unconditionally guaranteed by the full faith and credit of the
United States of America, trust receipts or other evidence of a direct claim
upon the instruments described above and money market mutual funds that invest
solely in the securities.
"Voting Stock" of any person means Capital Stock of the person which
ordinarily has voting power for the election of directors, or persons
performing similar functions, at the person, whether at all times or only so
long as no senior class of securities has the voting power by reason of any
contingency.
"Wholly Owned Restricted Subsidiary" of any person means a Restricted
Subsidiary of the person all of the outstanding Capital Stock or other
ownership interests of which, other than directors' qualifying shares, shall at
the time be owned by the person or by one or more Wholly Owned Restricted
Subsidiaries of the person or by the person and one or more Wholly Owned
Restricted Subsidiaries of the person.
Events of Default
The following will be Events of Default under the Indentures:
. failure to pay principal of, or premium, if any, on, any dollar note or
euro note, as the case may be, when due, upon acceleration, optional or
mandatory redemption, if any, required repurchase or otherwise;
. failure to pay interest on any dollar note or euro note, as the case may
be, when due, and the default continues for a period of 30 days;
. default in the payment of principal and interest on any dollar note or
euro note, as the case may be, required to be purchased pursuant to an
Offer to Purchase as described under "Change of Control" and "Asset
Sales" when due and payable;
. failure to perform or comply with the provisions described under
"Merger, Consolidation and Certain Sales of Assets";
. failure to perform any other of our covenants or agreements under the
Indenture or the dollar note or euro note, as the case may be, and the
failure continues for 60 days after written notice to us by the trustee
or holders of at least 25% in aggregate principal amount of the
outstanding dollar notes or euro notes, as the case may be;
. (1) any default by us or any Material Restricted Subsidiary in the
payment of the principal, premium, if any, or interest has occurred with
respect to amounts in excess of $10.0 million under any agreement,
indenture or instrument evidencing Debt when the same shall become due
and payable in full and the default shall have continued after any
applicable grace period and shall not have been cured or waived and, if
not already matured at its final maturity in accordance with its terms,
the holders of the Debt shall have the right to accelerate the Debt, or
(2) any event of default as defined in any of our agreements, indentures
or instruments or any Restricted Subsidiary evidencing Debt in excess of
$10.0 million shall have occurred and the Debt thereunder, if not
already matured at its final maturity in accordance with its terms,
shall have been accelerated;
. the rendering of a final judgment or judgments against us or any
Material Restricted Subsidiary in an amount in excess of $10.0 million
which remains undischarged or unstayed for a period of 60 days after the
date on which the right to appeal has expired; and
. certain events of bankruptcy, insolvency or reorganization affecting us
or any Material Restricted Subsidiary.
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Subject to the provisions of the Indentures relating to the duties of the
trustee in case an Event of Default shall occur and be continuing, the trustee
will be under no obligation to exercise any of its rights or powers under the
Indentures at the request or direction of any of the holders, unless the
holders shall have offered to the trustee reasonable indemnity. Subject to the
provisions for the indemnification of the trustee, the holders of a majority in
aggregate principal amount of the outstanding euro notes or dollar notes, as
the case may be, will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee.
If an Event of Default, other than an event of bankruptcy, insolvency or
reorganization affecting us or a Material Restricted Subsidiary, shall occur
and be continuing, either the trustee or the holders of at least 25% in
aggregate principal amount of the outstanding euro notes or dollar notes, as
the case may be, may accelerate the maturity of all notes; provided, however,
that after the acceleration, but before a judgment or decree based on
acceleration, the holders of a majority in aggregate principal amount of
outstanding euro notes or dollar notes, as the case may be, may, under certain
circumstances, rescind and annul the acceleration if all Events of Default,
other than the nonpayment of accelerated principal, have been cured or waived
as provided in the applicable Indenture. In the event of bankruptcy, insolvency
or reorganization affecting us or a Material Restricted Subsidiary, the
principal of and any accrued interest on the euro notes or dollar notes, as the
case may be, then outstanding will ipso facto become immediately due and
payable without any declaration or other act on the part of the trustee or any
holder. For information as to waiver of defaults, see "Modification and
Waiver".
No holder of any euro notes or dollar notes, as the case may be, will have
any right to institute any proceeding with respect to the applicable Indenture
or for any remedy thereunder, unless the holder shall have previously given to
the trustee written notice of a continuing Event of Default and unless also the
holders of at least 25% in aggregate principal amount of the outstanding euro
notes or dollar notes, as the case may be, shall have made written request, and
offered reasonable indemnity, to the trustee to institute the proceeding as
trustee, and the trustee shall not have received from the holders of a majority
in aggregate principal amount of the outstanding euro notes or dollar notes, as
the case may be, a direction inconsistent with the request and shall have
failed to institute the proceeding within 60 days. However, these limitations
do not apply to a suit instituted by a holder of euro notes or dollar notes, as
the case may be, for enforcement of payment of the principal of and premium, if
any, or interest on the note on or after the respective due dates expressed in
the note.
We are required to furnish to the trustee annually a statement as to the
performance by us of our obligations under the Indentures and as to any default
in the performance.
Satisfaction and Discharge of the Indentures
Any Indenture will cease to be of further effect as to all outstanding notes
thereunder, except as to:
. rights of registration of transfer and exchange and our right of
optional redemption, if any;
. substitution of apparently mutilated, defaced, destroyed, lost or stolen
notes;
. rights of holders to receive payment of principal and interest on the
notes;
. rights, obligations and immunities of the trustee under the Indenture;
and
. rights of the holders of the notes as beneficiaries of the applicable
Indenture with respect to any property deposited with the trustee
payable to all or any of them, if:
. we will have paid or caused to be paid the principal of and interest
on the notes as and when the same will have become due and payable;
or
. all outstanding euro notes or dollar notes, as the case may be,
except lost, stolen or destroyed notes which have been replaced or
paid, have been delivered to the trustee for cancellation.
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Defeasance
At our option, if applicable:
. we will be discharged from any and all obligations in respect of the
outstanding euro notes or dollar notes, as the case may be; or
. we may omit to comply with certain restrictive covenants, and this
omission shall not be deemed to be an Event of Default under the
applicable Indenture, the euro notes or dollar notes, as the case may
be, in either case (1) or (2) upon irrevocable deposit with the trustee,
in trust, of money and/or U.S. government obligations which will provide
money in an amount sufficient, in the opinion of a nationally recognized
firm of independent certified public accountants, to pay the principal
of and premium, if any, and each installment of interest if any, on the
outstanding dollar notes or euro notes, as the case may be.
With respect to clause (2), the obligations under the Indentures other than
with respect to the covenants and the Events of Default other than the Events
of Default relating to the covenants above shall remain in full force and
effect. A trust may only be established if, among other things:
. with respect to clause (1), we have received from, or there has been
published by, the Internal Revenue Service a ruling or there has been a
change in law, which in the Opinion of Counsel provides that holders of
the dollar notes or euro notes, as the case may be, will not recognize
gain or loss for U.S. federal income tax purposes as a result of the
deposit, defeasance and discharge and will be subject to U.S. federal
income tax on the same amount, in the same manner and at the same times
as would have been the case if the deposit, defeasance and discharge had
not occurred; or, with respect to clause (2), we have delivered to the
trustee an Opinion of Counsel to the effect that the holders of the
dollar notes or euro notes, as the case may be, will not recognize gain
or loss for U.S. federal income tax purposes as a result of the deposit
and defeasance and will be subject to U.S. federal income tax on the
same amount, in the same manner and at the same times as would have been
the case if the deposit and defeasance had not occurred;
. the deposit, defeasance and discharge will not result in a breach or
violation of, or constitute a default under, any agreement or instrument
to which we or any Restricted Subsidiary are a party or by which we and
any Restricted Subsidiary are bound;
. no Event of Default or event that with the passing of time or the giving
of notice, or both, shall constitute an Event of Default, shall have
occurred and be continuing;
. we have delivered to the trustee an Opinion of Counsel to the effect
that the deposit shall not cause the trustee or the trust so created to
be subject to the Investment Issuer Act of 1940; and
. certain other customary conditions precedent are satisfied.
Modification and Waiver
Modifications and amendments of either Indenture may be made by us and the
trustee with the consent of the holders of a majority in aggregate principal
amount of the outstanding dollar notes or euro notes, as the case may be;
provided, however, that no the modification or amendment may, without the
consent of the holder of all outstanding dollar notes or euro notes, as the
case may be, affected thereby:
. change the stated maturity of the principal of, or any installment of
interest on, any dollar note or euro note, as the case may be;
. reduce the principal amount of, or premium or interest on, any dollar
note or euro note, as the case may be;
. change the place or currency of payment of principal of, or premium or
interest on, any dollar note or euro note, as the case may be;
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. impair the right to institute suit for the enforcement of any payment on
or with respect to any dollar note or euro note, as the case may be;
. reduce the above-stated percentage of outstanding dollar notes or euro
notes, as the case may be, necessary to modify or amend the Indenture;
. reduce the percentage of aggregate principal amount of outstanding
dollar notes or euro notes, as the case may be, necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of
certain defaults;
. modify any provisions of the Indenture relating to the modification and
amendment of the Indenture or the waiver of past defaults or covenants,
except as otherwise specified; or
. following the mailing of any Offer to Purchase, modify any Offer to
Purchase for the notes required under the "Limitation on Asset Sales"
and the "Change of Control" covenants contained in the Indenture in a
manner materially adverse to the holders thereof.
However, without the consent of any holder, we and the trustee may amend or
supplement either Indenture or the dollar notes or euro notes, as the case may
be, to cure any ambiguity, defect or inconsistency; provided that the action
does not adversely affect the interests of the holders of the dollar notes or
euro notes, as the case may be, in any material respect, to provide for the
assumption of our obligations to holders of dollar notes or euro notes, as the
case may be, in the case of a merger or consolidation, to secure the dollar
notes or euro notes, as the case may be, to add to our covenants for the
benefits of the holders or to comply with requirements of the Commission in
order to effect or maintain the qualification of the Indenture under the Trust
Indenture Act.
The holders of a majority in aggregate principal amount of the outstanding
dollar notes or euro notes, as the case may be, on behalf of all holders of the
notes, may waive compliance by us with certain restrictive provisions of the
applicable Indenture. Subject to certain rights of the trustee, as provided in
the applicable Indenture, the holders of a majority in aggregate principal
amount of the outstanding dollar notes or euro notes, as the case may be, on
behalf of all holders of the notes, may waive any past default under the
applicable Indenture, except a default in the payment of principal, premium or
interest or a default arising from failure to purchase any dollar notes or euro
notes, as the case may be, tendered pursuant to an Offer to Purchase.
Governing Law
The Indentures and the notes are, and the new notes will be, governed by the
laws of the State of New York.
The Trustee
The Indentures provide that, except during the continuance of an Event of
Default, the trustee will perform only the duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the trustee will
exercise the rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise as a prudent person would
exercise under the circumstances in the conduct of the persons own affairs.
The Indentures and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the trustee, should it
become our creditor, to obtain payment of claims in certain cases or to realize
on certain property received by it in respect of any the claim as security or
otherwise. The trustee is permitted to engage in other transactions with us or
any Affiliate, provided, however, that if it acquires any conflicting interest,
as defined in the Indentures or in the Trust Indenture Act, it must eliminate
the conflict or resign.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain U.S. federal income tax
considerations relevant to holders of the notes including material U.S. federal
income tax consequences of the exchange of the old notes for new notes pursuant
to the exchange offer. This discussion is based upon the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury Regulations, Internal Revenue
Service ("IRS") rulings and judicial decisions now in effect, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. There can be no assurance that the IRS will not challenge one
or more of the tax consequences described herein, and we have not obtained, nor
do we intend to obtain, a ruling from the IRS with respect to the U.S. federal
income tax, state tax, local tax, foreign tax or other tax consequences of
acquiring or holding notes. This discussion does not purport to deal with all
aspects of U.S. federal income taxation that may be relevant to a particular
holder in light of the holder's circumstances (for example, persons subject to
the alternative minimum tax provisions of the Code). Also, it is not intended
to be wholly applicable to all categories of investors, some of which (such as
dealers in securities, banks, insurance companies, tax-exempt (employment,
charitable or other) organizations, and persons holding notes as part of a
hedging or conversion transaction or straddle or persons deemed to sell notes
under the constructive sale provisions of the Code) may be subject to special
rules. The discussion also does not discuss any aspect of state, local or
foreign law, or U.S. federal estate and gift tax law as applicable to U.S.
holders (as defined below). In addition, this discussion is limited to original
purchasers of notes who acquire the notes at their original issue price within
the meaning of Section 1273 of the Code, and who will hold the notes as
"capital assets" within the meaning of Section 1221 of the Code.
All prospective purchasers of the notes are advised to consult their own tax
advisors regarding the federal, state, local and foreign tax consequences of
the purchase, ownership and disposition of the notes.
U.S. Holders
As used herein, the term "U.S. holder" means the beneficial holder of a note
that for United States federal income tax purposes is:
. a citizen or resident alien (as defined in Section 7701(b) of the Code)
of the United States;
. a corporation or other entity treated as a corporation formed under the
laws of the United States or any political subdivision thereof;
. an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
. a trust which is subject to the supervision of a court within the United
States and the control of a United States person as described in Section
7701(a)(30) of the Code.
A "Non-U.S. holder" is any holder of a note other than a U.S. holder.
Interest
Interest on the notes will generally be includable in a U.S. holder's gross
income and taxable as ordinary income for U.S. federal income tax purposes at
the time it is paid or accrued in accordance with the U.S. holder's regular
method of accounting.
Sale, Exchange or Redemption
Each U.S. holder generally will recognize capital gain or loss upon the
sale, exchange, redemption or other disposition of the notes measured by the
difference (if any) between:
. the amount of cash and the fair market value of any property received
(except to the extent that the cash or other property is attributable to
the payment of accrued interest not previously included in income, which
amount will be taxable as ordinary income); and
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. the holder's adjusted tax basis in the notes.
Capital gain recognized by an individual U.S. holder generally will be
subject to a maximum United States Federal income tax rate of 20% if the U.S.
holder held the note for more than one year before the disposition. A holder's
initial tax basis in a note will be the amount paid therefor.
The exchange of the old notes for the new notes pursuant to the exchange
offer should not be treated as an "exchange" for federal income tax purposes
because the new notes should not differ materially in either kind or extent
from the old notes and because the exchange will occur by operation of the
terms of the old notes. A U.S. holder's adjusted tax basis in the new notes
should be the same as the holder's adjusted tax basis in the old notes. A U.S.
holder's holding period for the new notes received pursuant to the exchange
offer should include its holding period for the old notes surrendered therefor.
Information Reporting and Backup Withholding
A U.S. holder of notes may be subject to "backup withholding" at a rate of
31% with respect to certain "reportable payments," including interest payments,
and, under certain circumstances, principal payments on the notes and proceeds
from the sale, exchange or redemption of the notes. These backup withholding
rules apply if the U.S. holder, among other things:
. fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of perjury
within a reasonable time after the request therefor;
. furnishes a TIN as to which the IRS provides notification that it is an
incorrect TIN;
. fails to report properly interest; or
. under certain circumstances, fails to provide a certified statement,
signed under penalties of perjury, that the TIN furnished is correct and
that the U.S. holder is not subject to backup withholding.
A U.S. holder who does not provide us with its correct TIN also may be
subject to penalties imposed by the IRS. Any amount withheld from a payment to
a U.S. holder under the backup withholding rules is creditable against the U.S.
holder's federal income tax liability, provided that the required information
is furnished to the IRS. Backup withholding will not apply, however, with
respect to payments made to certain holders, including corporations, tax-exempt
organizations and certain foreign persons, provided their exemptions from
backup withholding are properly established.
We will report to the U.S. holders of notes and to the IRS the amount of any
"reportable payments" for each calendar year and the amount of tax withheld, if
any, with respect to the payments.
U.S. Holders of Euro Notes
In addition to the information described above regarding U.S. holders, the
following applies to U.S. holders who hold euro notes.
Interest
The interest on the euro notes generally will be taxable to a U.S. holder as
ordinary income at the time that it is paid or accrued, in accordance with the
holder's method of accounting for federal income tax purposes.
Interest paid on a euro note will be includable in income by a U.S. holder
in an amount equal to the U.S. dollar value of the payment, regardless of
whether the payment is in fact converted to U.S. dollars at that time. If the
U.S. holder uses the cash method of accounting for tax purposes, the U.S.
dollar value of the payment is determined using the spot rate at the time the
payment is received. If a U.S. holder uses the accrual method of
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accounting for tax purposes, the U.S. dollar value of the payment is determined
using the average exchange rate during the relevant accrual period (or partial
accrual period with respect to interest paid in a subsequent taxable year) or,
if elected, the spot rate (a) on the last day of the relevant accrual period
(or partial accrual period) or (b) on the payment date, if the date is within
five business days of the last day of the accrual period or taxable year. Any
differences in the exchange rate between the rate at which interest on a euro
note is included in income and the spot rate on the payment (or disposition)
date for interest will result in exchange gain or loss with respect to the
related amount of interest, and will generally be treated as ordinary income or
loss for U.S. federal income tax purposes. The U.S. dollar value of interest
accrued or received, adjusted for any exchange gain or loss with respect to the
amount accrued, generally will be a U.S. holder's tax basis in the euros
received as interest on a euro note.
Sale, Exchange and Redemption of Senior Euro Notes
The cost of a euro note to a U.S. holder will be the U.S. dollar value of
the euro purchase price translated at the spot rate for the date of purchase
(or, in some cases, the settlement date). The conversion of U.S. dollars into
euros and the immediate use of those euros to purchase a euro note generally
will not result in a taxable gain or loss for a U.S. holder. A U.S. holder will
have a tax basis in any euro received on the sale, exchange or retirement of a
euro note equal to the U.S. dollar value of the euro on the date of receipt or
when the euro note is disposed of or deemed disposed of.
Upon the sale, exchange, retirement or repayment of a euro note, a U.S.
holder will also recognize exchange gain or loss to the extent that the rate of
exchange on the date of retirement or disposition differs from the rate of
exchange on the date the euro note was acquired, or deemed acquired. Exchange
gain or loss is recognized, however, only to the extent of total gain or loss
on the transaction. For purposes of determining the total gain or loss on the
transaction, a U.S. holder's tax basis in a euro note will generally equal the
U.S. dollar cost of the euro note. Exchange gain or loss recognized by a U.S.
holder will generally be treated as ordinary income or loss.
Any gain realized by a U.S. holder on the sale, exchange or redemption of a
euro note generally will be treated as U.S. source income for U.S. foreign tax
credit purposes. Generally a loss realized upon the a sale, exchange,
redemption or other disposition of a euro note will be allocated to U.S. source
income.
Non-U.S. holders
The following discussion is limited to certain U.S. federal income tax
consequences relevant to a Non-U.S. holder. Non-U.S. holders should consult
their own tax advisors concerning the state, local, foreign and other tax
consequences of the purchase, ownership and disposition of the notes.
For purposes of U.S. federal income tax on interest discussed below, a Non-
U.S. holder (as defined above) includes a non-resident fiduciary of an estate
or trust. For purposes of the following discussion, interest and gain on the
sale, exchange or other disposition of a note will be considered to be "U.S.
trade or business income" if the income or gain is:
. effectively connected with the conduct of a trade or business within the
U.S. of the Non-U.S. holder; or
. in the case of certain residents of certain countries which have an
income tax treaty in force with the U.S., attributable to a permanent
establishment (or, in the case of an individual, a fixed base) in the
United States as the terms are defined in the applicable treaty.
Interest
Generally any interest paid to a Non-U.S. holder of a note that is not U.S.
trade or business income will not be subject to U.S. federal income tax if the
interest qualifies as "portfolio interest". Generally interest on the notes
will qualify as portfolio interest if:
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. the Non-U.S. holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of Exodus
entitled to vote and is not a "controlled foreign corporation" with
respect to which Exodus is a "related person" within the meaning of the
appropriate provisions of the Code;
. the Non-U.S. holder, under penalty of perjury, in general certifies that
the Non-U.S. holder is not a U.S. person on a Form W-8 and the
certificate provides the Non-U.S. holder's name and address;
. the Non-U.S. holder is not a bank receiving interest on an extension of
credit made pursuant to a loan agreement made in the ordinary course of
its trade or business; and
. the notes are in registered form.
The gross amount of payments of interest to a Non-U.S. holder that do not
qualify for the portfolio interest exemption and that are not U.S. trade or
business income will be subject to U.S. federal income tax at the rate of 30%,
unless a U.S. income tax treaty applies to reduce or eliminate the tax.
Interest payments that are considered as U.S. trade or business income will be
taxed at regular U.S. income tax rates rather than the 30% gross rate. In the
case of a Non-U.S. holder that is a corporation, the U.S. trade or business
income may also be subject to the branch profits tax (which is generally
imposed on a foreign corporation on the actual or deemed repatriation from the
United States of earnings and profits attributable to U.S. trade or business
income) at a 30% rate unless a U.S. income tax treaty applies to reduce or
eliminate the tax. To claim the benefit of a tax treaty or to claim exemption
from withholding because the income is U.S. trade or business income, the Non-
U.S. holder must provide a properly executed IRS Form 1001 or IRS Form 4224 (or
the successor forms as the IRS designates), as applicable, prior to the payment
of interest. Under U.S. Treasury Regulations that will generally be effective
on and after January 1, 2001 (the "Withholding Regulations"), Forms 1001 and
4224 will be replaced by a new requirement to provide a properly executed Form
W-8. Under the Withholding Regulations, a Non-U.S. holder may under certain
circumstances be required to obtain a U.S. taxpayer identification number and
make certain certifications to Exodus. Special procedures are provided in the
Withholding Regulations for payments through qualified intermediaries.
Prospective investors should consult their tax advisors regarding the effect,
if any, of the Withholding Regulations.
Sale, Exchange or Redemption of Notes
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. holder on the sale, exchange or
redemption of a note generally will not be subject to U.S. federal income tax,
unless:
. the gain is U.S. trade or business income;
. subject to certain exceptions, the Non-U.S. holder is an individual who
holds the note as a capital asset and is present in the United States
for 183 days or more in the taxable year of the disposition; or
. the Non-U.S. holder is subject to tax pursuant to the provisions of U.S.
tax law applicable to certain U.S. expatriates (including certain former
citizens or residents of the United States).
The exchange of the old notes for the new notes pursuant to the exchange
offer should not be treated as an "exchange" for federal income tax purposes
because the new notes should not differ materially in either kind or extent
from the old notes and because the exchange will occur by operation of the
terms of the old notes. A U.S. holder's adjusted tax basis in the new notes
should be the same as the holder's adjusted tax basis in the old notes. A U.S.
holder's holding period for the new notes received pursuant to the exchange
offer should include its holding period for the old notes surrendered therefor.
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Information Reporting and Backup Withholding
We must report annually to the IRS and to each Non-U.S. holder any interest
that is subject to withholding, or that is exempt from U.S. withholding tax
pursuant to a tax treaty, or interest that is exempt from U.S. tax under the
portfolio interest exception or because it is U.S. trade or business income.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities of the
country in which the Non-U.S. holder resides. Under certain circumstances,
Exodus will have to report to the IRS payments of principal.
Generally, information reporting and backup withholding of United States
federal income tax at a rate of 31% may apply to payments made by Exodus or any
agent thereof to Non-U.S. holders if the payee fails to make the appropriate
certification that the holder is a non-U.S. person or if Exodus or its paying
agent has actual knowledge that the payee is a United States person.
The payment of the proceeds from the disposition of notes to or through a
United States office of a United States or foreign broker will be subject to
information reporting and backup withholding unless the owner provides
certification as to its Non-U.S. holder status under penalty of perjury or
otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a U.S. person or that the conditions of any
other exemption are not, in fact, satisfied. The proceeds of the disposition by
a Non-U.S. holder of the notes to or through a foreign office of a broker will
generally not be subject to backup withholding. However, if the broker is a
U.S. person, a controlled foreign corporation for United States tax purposes,
or a foreign person 50% or more of whose gross income from all sources for
certain periods is effectively connected with a United States trade or
business, information reporting will apply unless the broker has documentary
evidence in its files of the Non-U.S. holder's foreign status and has no actual
knowledge to the contrary or unless the Non-U.S. holder otherwise establishes
an exemption. Both backup withholding and information reporting will apply to
the proceeds of the dispositions if the broker has actual knowledge that the
payee is a U.S. holder. The Withholding Regulations alter the foregoing rules
in certain respects. Prospective investors should consult their tax advisors
regarding the effect, if any, of the Withholding Regulations.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. holder will be allowed as a refund or a credit against the Non-U.S.
holder's U.S. federal income tax liability, provided that the requisite
procedures for claiming the refund or credit are followed.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO PARTICULAR
U.S. FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES TO IT OF
PURCHASING, HOLDING AND DISPOSING OF THE NOTES OF THE COMPANY, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY
PROPOSED CHANGES IN APPLICABLE LAWS.
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PLAN OF DISTRIBUTION
We will receive no proceeds in connection with the exchange offer.
Each broker-dealer that receives new notes for its own account in connection
with the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of new notes. This prospectus, as it may be amended
or supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes where the old
notes were acquired as a result of market-making activities or other trading
activities. We have agreed that for a period ending upon the earlier of (1) 180
days after the exchange offer has been completed and (2) the date on which
broker-dealers no longer own any Transfer Restricted Securities, we will make
available and provide promptly upon reasonable request this prospectus as
amended or supplemented, in a form meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale.
New notes received by broker-dealers for their own account in the exchange
offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the new notes or a combination of these methods of resale, at market prices
prevailing at the time of resale, at prices related to prevailing market prices
or negotiated prices. Any resale may be made directly to purchasers or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any broker-dealer and/or the purchasers of any new notes. Any
broker-dealer that resells new notes that were received by it for its own
account in the exchange offer and any broker or dealer that participates in a
distribution of new notes may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any profit on any the resale of new notes
and any commissions or concessions received by these persons may be deemed to
be underwriting compensation under the Securities Act. The letter of
transmittal states that by acknowledging that it will deliver, and by
delivering, a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. We have agreed to
indemnify broker-dealers against various liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
The validity of the notes offered by this prospectus will be passed upon on
behalf of Exodus by Fenwick & West LLP, Palo Alto, California, and Winthrop,
Stimson, Putnam & Roberts, New York City, New York.
EXPERTS
Our consolidated financial statements and related financial statement
schedule as of December 31, 1998 and 1999, and for each of the years in the
three-year period ended December 31, 1999, have been included in this
prospectus in reliance upon the report of KPMG LLP, independent auditors,
appearing elsewhere in this prospectus, and upon the authority of said firm as
experts in auditing and accounting.
104
<PAGE>
AVAILABLE INFORMATION
We are currently subject to the informational requirements of the Exchange
Act, and in accordance with the Exchange Act we file reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at:
<TABLE>
<S> <C> <C>
Room 1024 Suite 1400 13th Floor
450 Fifth Street, N.W. Northwest Atrium Center Seven World Trade Center
Judiciary Plaza 500 West Madison Street New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
</TABLE>
Copies of material can be obtained at prescribed rates from the Public
Reference Room of the Commission at:
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission. The address of the site is
http://www.sec.gov. Our common stock is quoted for trading on the Nasdaq
National Market and reports, proxy statements and other information concerning
us also may be inspected at the offices of the National Association of
Securities Dealers at:
9513 Key West Avenue
Rockville, Maryland 20850
105
<PAGE>
EXODUS COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' (Deficit) Equity and
Comprehensive Loss...................................................... F-6
Consolidated Statements of Cash Flows.................................... F-8
Notes to Consolidated Financial Statements............................... F-9
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts........................... S-1
</TABLE>
F-1
<PAGE>
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Exodus Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Exodus
Communications, Inc. and subsidiaries (the Company) as of December 31, 1998 and
1999, and the related consolidated statements of operations, stockholders'
(deficit) equity and comprehensive loss and cash flows for each of the years in
the three-year period ended December 31, 1999. In connection with our audits of
the consolidated financial statements, we have also audited the financial
statement schedule as listed in the index on page F-1. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Exodus
Communications, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Mountain View, California
January 25, 2000, except
as to Note 9, which is as
of June 20, 2000
F-2
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1998 1999 2000
-------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $156,015 $1,015,960 $ 863,448
Accounts receivable, net of allowance for
doubtful accounts of $1,821, $7,577 and
$13,208 as of December 31, 1998 and 1999,
and March 31, 2000, respectively........... 9,653 61,916 90,252
Prepaid expenses and other current assets... 6,205 15,331 27,988
-------- ---------- ----------
Total current assets...................... 171,873 1,093,207 981,688
-------- ---------- ----------
Property and equipment, net.................. 68,572 368,239 504,014
Restricted cash equivalents and investments.. 45,614 35,390 41,482
Goodwill and other intangible assets......... 4,898 156,002 200,587
Other assets................................. 7,841 90,052 99,411
-------- ---------- ----------
$298,798 $1,742,890 $1,827,182
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment loans and line
of credit facilities....................... $ 14,367 $ 6,897 $ 8,806
Current portion of capital lease
obligations................................ 5,223 17,162 23,419
Accounts payable............................ 9,208 60,203 77,821
Accrued expenses............................ 6,876 42,457 62,192
Accrued interest payable.................... 11,563 23,829 32,371
-------- ---------- ----------
Total current liabilities................. 47,237 150,548 204,609
Equipment loans and line of credit
facilities, less current portion............ 15,695 8,353 5,857
Capital lease obligations, less current
portion..................................... 11,589 40,343 42,374
Senior notes................................. 200,000 776,231 770,481
Convertible subordinated notes............... -- 749,800 572,337
-------- ---------- ----------
Total liabilities......................... 274,521 1,725,275 1,595,658
-------- ---------- ----------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock of Service
Metrics, Inc.: 3,106,316 shares, no shares
and no shares issued and outstanding as of
December 31, 1998 and 1999, and March 31,
2000, respectively; aggregate liquidation
preference of $6,000, $0 and $0 as of
December 31, 1998 and 1999, and March 31,
2000, respectively......................... 5,961 -- --
Common stock, $0.001 par value: 50,000,000,
300,000,000 and 300,000,000 shares
authorized as of December 31, 1998 and
1999 and March 31, 2000, respectively;
323,341,924, 355,828,752 and 401,933,296
shares issued and outstanding as of
December 31, 1998 and 1999, and March 31,
2000, respectively......................... 323 356 402
Additional paid-in capital................... 116,966 247,805 514,645
Deferred stock compensation.................. (1,080) (2,894) (2,589)
Accumulated deficit.......................... (97,893) (228,216) (286,566)
Accumulated other comprehensive income....... -- 564 5,632
-------- ---------- ----------
Total stockholders' equity................ 24,277 17,615 231,524
-------- ---------- ----------
$298,798 $1,742,890 $1,827,182
======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, March 31,
----------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- --------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues.................... $ 12,408 $ 52,745 $ 242,140 $ 30,110 $134,142
Cost of revenues.......... 16,868 61,578 197,231 28,268 94,661
-------- -------- --------- -------- --------
Gross profit.............. (4,460) (8,833) 44,909 1,842 39,481
Operating expenses:
Marketing and sales....... 12,702 29,034 75,809 10,747 30,881
General and
administrative........... 5,983 16,058 42,951 6,677 26,612
Product development....... 1,647 3,507 8,869 1,543 3,851
Amortization of goodwill
and intangible assets.... -- 141 9,438 613 7,769
Merger costs.............. -- -- 5,058 -- --
-------- -------- --------- -------- --------
Total operating
expenses............... 20,332 48,740 142,125 19,580 69,113
-------- -------- --------- -------- --------
Operating loss.......... (24,792) (57,573) (97,216) (17,738) (29,632)
Interest and other income
(expense):
Interest and other
income................... 193 7,157 15,928 2,859 13,144
Interest and other
expense.................. (699) (16,900) (49,035) (8,353) (41,862)
-------- -------- --------- -------- --------
Total interest and other
expense, net........... (506) (9,743) (33,107) (5,494) (28,718)
-------- -------- --------- -------- --------
Net loss................ (25,298) (67,316) (130,323) (23,232) (58,350)
Cumulative dividends and
accretion on redeemable
convertible preferred
stock...................... (1,413) (2,014) -- -- --
-------- -------- --------- -------- --------
Net loss attributable to
common stockholders........ $(26,711) $(69,330) $(130,323) $(23,232) $(58,350)
======== ======== ========= ======== ========
Basic and diluted net loss
per share.................. $ (0.87) $ (0.28) $ (0.39) $ (0.07) $ (0.16)
======== ======== ========= ======== ========
Shares used in computing
basic and diluted net loss
per share.................. 30,856 251,616 335,848 326,472 366,038
======== ======== ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
(This Page Intentionally Left Blank)
F-5
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT)
EQUITY AND COMPREHENSIVE LOSS
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Stock
of Services
Metrics, Inc. Common Stock Additional
---------------- --------------- Paid-In
Shares Amount Shares Amount Capital
------ -------- ------- ------ ----------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996... -- -- 31,136 $ 31 $ 200
Comprehensive loss:
Net loss and comprehensive loss... -- -- -- -- --
Issuance of common stock in
connection with exercise of stock
options and warrants............. -- -- 2,756 3 219
Repurchase of common stock........ -- -- (816) (1) (11)
Repayment of notes receivable from
stockholders..................... -- -- -- -- --
Deferred stock compensation
related to stock option grants... -- -- -- -- 3,482
Amortization of deferred stock
compensation..................... -- -- -- -- --
Accrual of cumulative dividends on
Series C and D redeemable
convertible preferred stock...... -- -- -- -- (750)
Accretion on Series C and D
redeemable convertible preferred
stock............................ -- -- -- -- (663)
------ -------- ------- ---- --------
Balances as of December 31, 1997.. -- -- 33,076 33 2,477
Comprehensive loss:
Net loss and comprehensive loss... -- -- -- -- --
Issuance of common stock in
connection with employee stock
purchase plan and exercise of
stock options and warrants....... -- -- 13,406 13 2,280
Issuance of common stock in
conjunction with initial public
offering, net of offering costs
of $7,062........................ -- -- 82,000 82 69,736
Issuance of common stock to an
officer for cash................. -- -- 800 1 449
Issuance of common stock and
common stock warrants............ -- -- -- -- 786
Issuance of Service Metrics, Inc.
convertible preferred stock...... 3,106 5,961 -- -- --
Issuance of Service Metrics, Inc.
common stock to founders......... -- -- 2,264 2 7
Repayment of notes receivable from
stockholders..................... -- -- -- -- --
Conversion of redeemable
convertible preferred stock into
common stock..................... -- -- 191,796 192 43,245
Amortization of deferred stock
compensation..................... -- -- -- -- --
Accrual of cumulative dividends on
Series C and D redeemable
convertible preferred stock...... -- -- -- -- (462)
Accretion on Series C and D
redeemable convertible preferred
stock............................ -- -- -- -- (1,552)
------ -------- ------- ---- --------
Balance as of December 31, 1998... 3,106 5,961 323,342 323 116,966
Comprehensive loss:
Net loss.......................... -- -- -- -- --
Foreign currency translation
adjustment....................... -- -- -- -- --
Comprehensive loss:
Issuance of common stock in
connection with employee stock
purchase plan and exercise of
stock options and warrants....... -- -- 18,080 18 25,875
Issuance of common stock and
assumption of stock options in
connection with acquisitions..... -- -- 4,030 4 85,927
Issuance of Service Metrics, Inc.
convertible preferred stock...... 2,065 9,476 -- -- --
Conversion of Service Metrics,
Inc. convertible preferred stock
into common stock................ (5,171) (15,437) 10,342 11 15,426
Deferred stock compensation
related to stock option grants... -- -- -- -- 3,411
Conversion of convertible
subordinated notes into common
stock............................ -- -- 34 -- 200
Amortization of deferred stock
compensation..................... -- -- -- -- --
------ -------- ------- ---- --------
Balances as of December 31, 1999.. -- -- 355,828 356 247,805
Comprehensive Loss:
Net loss (unaudited).............. -- -- -- -- --
Foreign currency translation
adjustment (unaudited)........... -- -- -- -- --
Unrealized gain on certain holding
investments (unaudited).......... -- -- -- -- --
Comprehensive loss (unaudited).... -- -- -- -- --
Issuance of common stock in
connection with employee stock
purchase plan and exercise of
stock options and warrants
(unaudited)...................... -- -- 14,238 14 38,849
Issuance of common stock and
assumption of stock options in
connection with acquisitions
(unaudited)...................... -- -- 786 1 50,077
Deferred compensation related to
stock option grants (unaudited).. -- -- -- -- 483
Conversion of redeemable
convertible subordinated notes
into common stock (unaudited).... -- -- 31,082 31 177,431
Amortization of deferred stock
compensation (unaudited)......... -- -- -- -- --
------ -------- ------- ---- --------
Balances as of March 31, 2000
(unaudited)...................... -- $ -- 401,934 $402 $514,645
====== ======== ======= ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
Notes Accumulated Total
Receivable Deferred Other Stockholders'
from Stock Accumulated Comprehensive (Deficit) Comprehensive
Stockholders Compensation Deficit Income Equity Loss
------------ ------------ ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$(186) $ -- $ (5,279) $ -- $ (5,234)
-- -- (25,298) -- (25,298) (25,298)
========
-- -- -- -- 222
12 -- -- -- --
34 -- -- -- 34
-- (3,482) -- -- --
-- 1,089 -- -- 1,089
-- -- -- -- (750)
-- -- -- -- (663)
----- ------- --------- ------ --------
(140) (2,393) (30,577) -- (30,600)
-- -- (67,316) -- (67,316) (67,316)
========
-- -- -- -- 2,293
-- -- -- -- 69,818
-- -- -- -- 450
-- -- -- -- 786
-- -- -- -- 5,961
-- -- -- -- 9
140 -- -- -- 140
-- -- -- -- 43,437
-- 1,313 -- -- 1,313
-- -- -- -- (462)
-- -- -- -- (1,552)
----- ------- --------- ------ --------
-- (1,080) (97,893) -- 24,277
-- -- (130,323) -- (130,323) (130,323)
-- -- -- 564 564 564
--------
(129,759)
========
-- -- -- -- 25,893
-- -- -- -- 85,931
-- -- -- -- 9,476
-- -- -- -- --
-- (3,411) -- -- --
-- -- -- -- 200
-- 1,597 -- -- 1,597
----- ------- --------- ------ --------
-- (2,894) (228,216) 564 17,615
-- -- (58,350) -- (58,350) (58,350)
-- -- -- (37) (37) (37)
-- -- -- 5,105 5,105 5,105
--------
-- -- -- -- -- (58,282)
========
-- -- -- -- 38,863
-- -- -- -- 50,078
-- (483) -- -- --
-- -- -- -- 177,462
-- 788 -- -- 788
----- ------- --------- ------ --------
$ -- $(2,589) $(286,566) $5,632 $231,524
===== ======= ========= ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------ --------------------
1997 1998 1999 1999 2000
-------- -------- ---------- -------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net loss............... $(25,298) $(67,316) $ (130,323) $(23,232) $ (58,350)
Adjustments to
reconcile net loss to
net cash used for
operating activities:
Depreciation and
amortization.......... 3,429 13,024 50,881 5,700 30,573
Loss on disposal of
property and
equipment............. -- 464 -- -- 645
Noncash common stock
and warrant expense... -- 786 -- -- --
Remeasurement gain on
Euro denominated
Senior Notes.......... -- -- -- -- (402)
Amortization of
deferred stock
compensation.......... 1,089 1,354 1,597 189 788
Amortization of debt
issuance costs........ -- 846 1,668 332 542
Interest accretion on
restricted cash
equivalents........... -- (1,088) (1,365) (1,088) (59)
Changes in operating
assets and
liabilities:
Accounts receivable... (1,316) (8,306) (41,072) (4,098) (26,508)
Prepaid expenses and
other assets......... (748) (4,193) (13,656) (5,334) (12,672)
Accounts payable...... 5,089 2,791 48,436 15,073 17,086
Accrued expenses...... 2,237 2,763 24,842 781 18,677
Accrued interest
payable.............. -- 11,563 12,266 (4,614) 8,542
-------- -------- ---------- -------- ----------
Net cash used for
operating
activities.......... (15,518) (47,312) (46,726) (16,291) (21,138)
-------- -------- ---------- -------- ----------
Cash flows from
investing activities
Capital expenditures... (22,489) (44,564) (283,468) (34,846) (144,228)
Proceeds from sales of
property and
equipment............. -- 245 -- -- --
Businesses acquired,
net of cash received.. -- (5,654) (77,676) (19,990) (3,745)
Release of restricted
cash equivalents and
investments........... -- -- 25,045 10,410 14,770
Increase in restricted
cash equivalents and
investments........... (1,375) (42,773) (13,413) -- (20,803)
Purchases of available-
for-sale securities... -- -- -- -- (5,500)
Other assets........... -- (11) (41,102) (146) (1,029)
-------- -------- ---------- -------- ----------
Net cash used for
investing
activities.......... (23,864) (92,757) (390,614) (44,572) (160,535)
-------- -------- ---------- -------- ----------
Cash flows from
financing activities
Proceeds from issuance
of redeemable
convertible preferred
stock and warrants.... 23,320 2,176 -- -- --
Proceeds from issuance
of Service Metrics,
Inc. convertible
preferred stock....... -- 5,961 9,477 -- --
Proceeds from issuance
of common stock, net.. 222 72,530 25,916 3,819 38,863
Proceeds from issuance
of bridge financing
convertible notes..... 3,975 -- -- -- --
Payment of notes
receivable from
stockholders.......... 34 140 -- -- --
Bank borrowings, net... 3,000 (3,000) -- -- --
Proceeds from sale-
leaseback
transactions.......... 932 4,035 1,523 -- --
Payments on capital
leases obligations.... (720) (3,020) (11,256) (1,441) (3,401)
Proceeds from equipment
loans and line of
credit facilities..... 16,480 18,611 -- -- 705
Payments on equipment
loans and line of
credit facilities..... (1,306) (5,019) (15,601) (10,551) (1,621)
Proceeds from senior
notes, net of
discounts and offering
costs................. -- 193,400 559,332 -- --
Proceeds from
convertible notes, net
of offering costs..... -- -- 727,354 242,250 --
-------- -------- ---------- -------- ----------
Net cash provided by
financing
activities.......... 45,937 285,814 1,296,745 234,077 34,546
-------- -------- ---------- -------- ----------
Net increase (decrease)
in cash and cash
equivalents............ 6,555 145,745 859,405 173,214 (147,127)
Effects of exchange
rates on cash and cash
equivalents............ -- -- 540 -- (5,385)
Cash and cash
equivalents at
beginning of period.... 3,715 10,270 156,015 156,015 1,015,960
-------- -------- ---------- -------- ----------
Cash and cash
equivalents at end of
period................. $ 10,270 $156,015 $1,015,960 $329,229 $ 863,448
======== ======== ========== ======== ==========
Supplemental disclosure
of cash flow
information:
Cash paid-interest..... $ 699 $ 4,923 $ 36,955 $ 13,405 $ 27,001
======== ======== ========== ======== ==========
Non cash investing and
financing activities:
Assets recorded under
capital leases........ $ 2,700 $ 12,001 $ 50,425 $ 3,626 $ 11,664
======== ======== ========== ======== ==========
Cumulative dividends
and accretion on
Series C and D
redeemable convertible
preferred stock....... $ 1,413 $ 2,014 $ -- $ -- $ --
======== ======== ========== ======== ==========
Unrealized gain on
available-for-sale
securities............ $ -- $ -- $ -- $ -- $ 5,105
======== ======== ========== ======== ==========
Deferred compensation
on grants of stock
options............... $ 3,482 $ -- $ 3,411 $ -- $ 483
======== ======== ========== ======== ==========
Warrants issued for
financing
commitments........... $ 730 $ -- $ -- $ -- $ --
======== ======== ========== ======== ==========
Conversion of bridge
financing convertible
notes to redeemable
convertible preferred
stock................. $ 3,975 $ -- $ -- $ -- $ --
======== ======== ========== ======== ==========
Conversion of
redeemable convertible
preferred stock to
common stock.......... $ -- $ 43,437 $ -- $ -- $ --
======== ======== ========== ======== ==========
Conversion of
convertible
subordinated notes
into common stock..... $ -- $ -- $ 200 $ -- $ 177,462
======== ======== ========== ======== ==========
Conversion of Service
Metrics, Inc.
convertible preferred
stock to common
stock................. $ -- $ -- $ 15,437 $ -- $ --
======== ======== ========== ======== ==========
Issuance of common
stock and assumption
of stock options in
connection with
acquisition........... $ -- $ -- $ 85,931 $ -- $ 50,078
======== ======== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
(1) Summary of the Company and Significant Accounting Policies
The Company
Exodus Communications, Inc. is a leading provider of complex Internet
hosting for enterprises with mission-critical Internet operations. The Company
offers sophisticated system and network management solutions, along with
technology professional services to provide optimal performance for customers'
Web sites.
Basis of Presentation
The consolidated financial statements include the accounts of Exodus and its
majority-owned subsidiaries ("Exodus" or the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The equity and net loss attributable to minority shareholder interests that
related to the Company's subsidiaries are included in the consolidated balance
sheets and consolidated statements of operations, respectively, and were not
material as of December 31, 1999.
In November 1999, the Company acquired all outstanding shares of Service
Metrics, Inc. ("SMI") common stock (see note 2). The merger was accounted for
as a pooling of interests. Accordingly, the consolidated financial statements
have been restated for all periods presented as if SMI and the Company had
always been combined. In recording the pooling-of-interests combination, the
Company's consolidated statement of operations for the year ended December 31,
1998, has been combined with SMI's statement of operations for the period from
May 19, 1998 ("inception") through December 31, 1998. The Company's
consolidated statements of operations for the year ended December 31, 1999,
have been combined with SMI's statements of operations for that same period.
The consolidated balance sheets of the Company as of December 31, 1998 and
1999, have been combined with the balance sheets of Service Metrics as of the
same dates.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated interim financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, the accompanying
unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the Company's financial position as of March 31, 2000 and
the results of its operations and its cash flows for the three-month periods
ended March 31, 1999 and 2000.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company's revenues consist of (i) monthly fees from customer use of
Internet Data Center sites, network services, managed services, and
professional services and use of equipment and software provided by
F-9
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
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
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. Revenues from sales or rentals of third-
party equipment were less than 10% of total revenues for the years ended
December 31, 1997, 1998 and 1999.
Cash Equivalents and Investments
Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less. As of December 31, 1999, cash equivalents
consisted principally of money market funds at several financial institutions.
The Company classifies its investments as "held-to-maturity." As of December
31, 1999, the investments consisted of U.S. Treasury notes and are recorded at
amortized cost, which approximates fair value.
The components of restricted cash equivalents and investments are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
--------------- March 31,
1998 1999 2000
------- ------- ---------
<S> <C> <C> <C>
United States Treasury notes:
Due within one year............................ $10,733 $13,674 $14,648
Due after one year through two years........... 20,594 -- --
Money market funds............................... 11,049 15,745 --
Cash collateral related to leases................ 3,238 5,971 26,834
------- ------- -------
Total restricted cash equivalents and
investments..................................... $45,614 $35,390 $41,482
======= ======= =======
</TABLE>
See notes 4 and 6 for additional information regarding restricted cash
equivalents and investments.
Financial Instruments and Concentration of Credit Risk
The carrying value of the Company's cash and cash equivalents, investments,
accounts receivable, equipment loans and line of credit facilities, and capital
lease obligations approximate fair value. The carrying value of the Company's
Convertible Subordinated Notes and Senior Notes approximated fair value as of
December 31, 1998. The fair values of the Company's Convertible Subordinated
Notes and Senior Notes based on quoted market prices as of December 31, 1999
were $2,630,794,000 and $795,638,000, respectively.
Financial instruments that potentially expose the Company to a concentration
of credit risk principally consist of cash and cash equivalents, investments
and accounts receivable. The Company's customer base is composed of businesses
primarily throughout the United States and also in Europe and Asia Pacific. The
Company performs ongoing credit evaluations of its customers and maintains
reserves for potential losses.
F-10
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over their respective estimated useful lives, which are generally three
to five years. Equipment recorded under capital leases and leasehold
improvements are amortized using the straight-line method over the shorter of
the respective lease term or estimated useful life of the asset.
Software Development Costs
The Company capitalizes software development costs incurred to develop
certain of the Company's collaborative system management services that are
included in the Company's co-location services in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed. Costs are
capitalized after technological feasibility is achieved; generally upon the
development of a working model. To date, software development costs
capitalizable under SFAS No. 86 have not been material.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be recovered.
Stock-Based Compensation
The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans. Expense associated with stock-based
compensation is being amortized consistent with the method described in
Financial Accounting Standards Board (FASB) Interpretation No. 28 over the
vesting period of the individual options.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company evaluates its long-lived assets, including goodwill and certain
identifiable intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets or intangibles
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If the assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are comprised primarily of amounts
recorded in business acquisitions and are included in goodwill and other
intangible assets on the accompanying consolidated balance sheets. The goodwill
and other intangible amounts related to the acquisitions are being amortized on
a straight-line basis over periods ranging from 2 to 10 years (see note 2).
F-11
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
Debt Finance Costs
In connection with its financing arrangements (see note 4), the Company
incurs certain direct, incremental costs from third parties who perform
services that assist in the closing of the related transactions. These costs
are included in other assets on the balance sheet (see note 3) and amortized
using the effective interest method over the term of the financing.
Net Loss Per Share
Basic and diluted net loss per share has been computed by dividing the net
loss attributable to holders of common stock by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per
share does not include the effect of the following common equivalent shares as
the effect of their inclusion is antidilutive during each period (in
thousands):
<TABLE>
<CAPTION>
Three Month
Year Ended December Period Ended
31, March 31,
---------------------- --------------
1997 1998 1999 1999 2000
------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options...... 27,344 77,188 124,394 82,942 102,342
Shares issuable pursuant to warrants to
purchase common and redeemable
convertible preferred stock............. 45,008 2,896 1,014 1,064 986
Shares of redeemable convertible
preferred stock and convertible
preferred stock on an "as if converted"
basis................................... 545,872 6,212 -- 7,428 --
Shares of convertible subordinated notes
on an "as if converted" basis........... -- -- 57,954 43,786 26,872
</TABLE>
Comprehensive Loss
Accumulated other comprehensive income, as presented in the accompanying
balance sheets, consists solely of cumulative translation adjustments.
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 Commission released Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements, as amended by SAB Nos.
101A and 101B, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the Commission.
F-12
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
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
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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
(2) Business Combinations
Purchase Transactions
On October 2, 1998, the Company purchased substantially all of the assets,
including customer agreements, and assumed certain liabilities of Arca Systems,
Inc. ("Arca"), a wholly owned subsidiary of Cyberguard Corporation. Arca, which
has been in business for more than 10 years, is a provider of advanced network
and system security consulting services and designs and develops security
technology solutions for complex and sensitive information systems. Arca
operates as a wholly owned subsidiary of the Company. Total consideration paid,
including direct acquisition costs, aggregated approximately $5,800,000. The
acquisition was accounted for as a purchase and the results of Arca's
operations have been included from the acquisition date. The excess of the
purchase price over the fair value of tangible net assets acquired amounted to
approximately $5,000,000 and was attributed primarily to workforce in place
($2,500,000) and goodwill ($2,400,000). These amounts are being amortized on a
straight-line basis over periods ranging from 2 to 10 years.
On February 1, 1999, the Company purchased all of the capital stock of
American Information Systems, Inc ("AIS"). AIS provides co-location services as
well as professional services. Total consideration paid, including direct
acquisition costs, aggregated approximately $20,500,000. The acquisition was
accounted for as a purchase with the results of AIS' operations included from
the acquisition date. The excess of the purchase price over the fair value of
tangible net assets acquired amounted to approximately $18,700,000 and was
F-13
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
attributed primarily to goodwill ($15,000,000), customer lists ($3,200,000) and
assembled workforce ($500,000). These amounts are being amortized on a
straight-line basis over periods ranging from 5 to 7 years.
On July 27, 1999, the Company completed its acquisition of Cohesive
Technology Solutions, Inc. ("Cohesive"). Cohesive offers a variety of services
including network design and development, Internet-based and application
development and information technology strategy and project management.
Pursuant to the exchange ratios applied in the acquisition, the Company issued
3,201,592 shares of Exodus common stock and paid approximately $50,000,000 in
cash and assumed options to purchase a total of 817,424 shares of Exodus common
stock for a total purchase price of approximately $112,000,000. Of the cash
consideration, $10,000,000 was deposited in an escrow account to secure and
collateralize the indemnification obligations of Cohesive stockholders to
Exodus and certain affiliates of Exodus. The acquisition was accounted for as a
purchase with the results of Cohesive's operations included from the
acquisition date. The excess of the purchase price over the fair value of
tangible net assets acquired amounted to approximately $107,900,000 and was
attributed primarily to goodwill ($69,300,000), customer lists ($32,300,000)
and workforce in place ($6,300,000). These amounts are being amortized on a
straight-line basis over periods ranging from 5 to 8 years.
In connection with the Cohesive purchase, the Company, in August 1999,
announced plans to consolidate seven professional services practice offices of
Cohesive. The Company determined that the consolidation of these offices would
maximize efficiencies of the combined entity. As such, the Company recorded a
restructuring charge of $923,000 in 1999, which is included in merger costs in
the consolidated statement of operations for the year ended December 31, 1999.
This charge includes approximately $689,000 for lease termination and other
related office closure costs and $234,000 in severance and other employee
benefits. As of December 31, 1999, the remaining restructuring reserve balance
was approximately $550,000. The Company expects to complete the restructuring
activities in the third quarter of fiscal year 2000.
On December 17, 1999, the Company acquired 85% of the common stock of Global
Online Japan co., Ltd. ("GOL") of Tokyo, Japan. GOL operates its own nation-
wide backbone network and provides such services as web design, e-commerce
solutions, co-location, and system integration. The Company issued 830,592
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 for the year ended December 31, 1999.
The acquisition was accounted for using the purchase method of accounting with
the results of GOL's operations included from the acquisition date. The excess
of the purchase price over the fair value of tangible net assets acquired
amounted to approximately $33,800,000 and was attributed primarily to goodwill
($31,300,000), customer lists ($1,300,000) and workforce in place ($1,200,000).
These amounts are being amortized on a straight-line basis over periods ranging
from 3 to 5 years.
On February 11, 2000, the Company competed its acquisition of KeyLabs, Inc.
("KeyLabs"), a provider of e-business testing services based in Utah. The
Company issued approximately 786,000 shares of Exodus common stock in exchange
for all outstanding shares of KeyLabs common stock and reserved approximately
202,000 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
F-14
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
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, combines
the Company's consolidated results of operations with Arca's, AIS', Cohesive's
and KeyLabs' results of operations as if each company had been acquired as of
January 1, 1997 (in thousands, except per share data). GOL's March 31 fiscal
year end differs from the Company's December 31 fiscal year end. As such,
fiscal years 1997 and 1998 presented in the table below include GOL's results
of operations for the period from April 1, 1997 through March 31, 1998 and from
April 1, 1998 though March 31, 1999, respectively. For fiscal year 1999,
information presented in the table below includes GOL's results of operations
from April 1, 1999 through December 17, 1999, the date of acquisition.
<TABLE>
<CAPTION>
Three Months
Ended
Years Ended December 31, March 31,
----------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 48,691 $115,192 $ 285,907 $ 45,520 $135,291
Net loss................ $(30,577) $(94,591) $(147,038) $(31,332) $(59,491)
Basic and diluted net
loss per share......... $ (0.86) $ (0.37) $ (0.43) $ (0.09) $ (0.16)
Shares used in pro forma
per share computation.. 35,672 256,432 339,892 331,290 366,384
</TABLE>
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.
Pooling Transaction
As discussed in note 1, the Company completed its merger with SMI on
November 23, 1999. The merger was accounted for as a pooling of interests. In
connection with the merger, the Company incurred one-time expenses of
approximately $4,100,000, which are included in merger costs in the
consolidated statement of operations for the year ended December 31, 1999. SMI
is a leading provider of Internet monitoring applications and services that
measure the consistency, availability and performance of Web sites. Under the
terms of the agreement, the former shareholders and option holders of SMI
common stock received shares and options of Exodus common stock at the rate of
approximately 0.504 shares of Exodus common stock for each share of SMI common
stock. The Company issued a total of approximately 12,600,000 shares of Exodus
common stock in exchange for all outstanding shares of SMI common stock and
reserved approximately 1,500,000 shares of common stock for issuance upon the
exercise of SMI options the Company assumed pursuant to the agreement. The
table below summarizes the components of the combined results of operations for
the years ended December 31, 1998 and 1999. SMI's results of operations for the
year ended December 31, 1999, included its results for the period from January
1, 1999 through November 23, 1999, the date the merger was consummated. As SMI
was incorporated in May 1998, consolidated results of operations for the year
ended December 31, 1997, consists solely of Exodus' historical results of
operations.
F-15
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Net revenues:
Exodus................................................ $ 52,738 $ 241,172
Service Metrics....................................... 7 968
-------- ---------
52,745 242,140
======== =========
Net loss:
Exodus................................................ (66,442) (122,582)
Service Metrics....................................... (874) (7,741)
-------- ---------
(67,316) (130,323)
======== =========
</TABLE>
(3) Financial Statement Components
Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------- March
1998 1999 31, 2000
------- -------- --------
<S> <C> <C> <C>
Data centers and related equipment............... $43,959 $332,092 $453,206
Furniture, fixtures, computer equipment and
other........................................... 33,179 55,790 62,516
Construction in progress......................... 8,497 35,663 66,856
------- -------- --------
85,635 423,545 582,578
Less accumulated depreciation and amortization... 17,063 55,306 78,564
------- -------- --------
$68,572 $368,239 $504,014
======= ======== ========
</TABLE>
Computer and other equipment and certain data center infrastructure are
recorded under capital leases that aggregated $20,528,000, $70,953,000 and
$82,617,000 as of December 31, 1998 and 1999 and March 31, 2000, respectively.
Accumulated amortization on the assets recorded under capital leases aggregated
$4,452,000, $23,853,000 and $26,934,000 as of December 31, 1998 and 1999, and
March 31, 2000, respectively.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------- March
1998 1999 31, 2000
------ -------- --------
<S> <C> <C> <C>
Goodwill........................................... $2,389 $117,950 $168,235
Customer lists..................................... 150 37,007 37,629
Workforce in place................................. 2,500 10,624 12,071
------ -------- --------
5,039 165,581 217,935
Less accumulated amortization...................... 141 9,579 17,348
------ -------- --------
$4,898 $156,002 $200,587
====== ======== ========
</TABLE>
F-16
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
Other Assets
Other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------- March 31,
1998 1999 2000
------ ------- ---------
<S> <C> <C> <C>
Debt issuance costs (see note 4).................... $5,504 $44,726 $38,936
Telecommunication agreements........................ -- 25,633 30,007
Other............................................... 2,337 19,693 30,468
------ ------- -------
$7,841 $90,052 $99,411
====== ======= =======
</TABLE>
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------- March 31,
1998 1999 2000
------ ------- ---------
<S> <C> <C> <C>
Accrued payroll and related expenses................ $3,549 $11,725 $37,036
Other............................................... 3,327 30,732 25,126
------ ------- -------
$6,876 $42,457 $62,192
====== ======= =======
</TABLE>
(4) Bank Borrowings and Debt
Senior Notes
On July 1, 1998, the Company issued $200,000,000 of 11 1/4% Senior Notes
("Original Senior Notes") due 2008 for aggregate net proceeds of approximately
$193,400,000 (net of discounts to the initial purchasers and offering
expenses). Interest is payable semiannually on January 1 and July 1 of each
year commencing January 1, 1999. The Company was required to initially deposit
approximately $42,400,000 with an escrow agent to be used to pay the first four
semiannual interest payments when due. Interest payments of $11,250,000 were
made in January and July 1999 and January 2000. As of December 31, 1999,
restricted cash and equivalents included approximately $21,100,000 for the
remaining two interest payments. Subject to significant exceptions, the
Original Senior Notes indenture restricts, among other things, the Company's
ability to incur additional indebtedness and the use of proceeds therefrom, pay
dividends, make certain other restricted payments, incur certain liens to
secure indebtedness or engage in merger transactions.
On June 22, 1999, the Company issued an additional $75,000,000 of 11 1/4%
Senior Notes due 2008 ("Additional Senior Notes") at 100.50% plus accrued
interest, if any, from June 22, 1999, for aggregate net proceeds of
approximately $73,200,000 (net of offering expenses). The Company issued the
Additional Senior Notes under the indenture dated July 1, 1998 under which it
previously issued the Original Senior Notes discussed above. The Additional
Senior Notes will be subject to substantially the same terms and conditions as
the Original Senior Notes. Interest is payable semi-annually on January 1 and
July 1 of each year commencing July 1, 1999. Concurrent with the closing of the
offering, the Company deposited approximately $8,400,000 with an escrow agent
that would be sufficient to pay when due the first three interest payments. An
interest payment of approximately $211,000 was made in July 1999 representing
interest from June 22, 1999 to July 1, 1999 and one for approximately
$4,200,000 was made in January, 2000. As of December 31, 1999, restricted cash
and equivalents included approximately $8,200,000 for the remaining two
interest payments.
F-17
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
On December 8, 1999, the Company issued $375,000,000 and Euro 125,000,000 of
10 3/4% Senior Notes due 2009 (collectively, the "10 3/4% Senior Notes"), for
aggregate net proceeds of approximately $486,000,000 (net of offering
expenses). Interest is payable semiannually on June 15 and December 15 of each
year commencing June 15, 2000. Subject to significant exceptions, the 10 3/4%
Senior Notes indenture restricts, among other things, the Company's ability to
incur additional indebtedness, pay dividends, make certain investments, create
liens or sell assets, enter into certain transactions with affiliates, and
enter into certain business combinations.
Convertible Subordinated Notes
On March 3, 1999, the Company issued $250,000,000 of 5% Convertible
Subordinated Notes due March 15, 2006 (the "Convertible Notes") for aggregate
net proceeds of approximately $242,100,000 (net of offering expenses). Proceeds
from the sale of the Convertible Notes may be used only for limited purposes.
Proceeds in the amount of $48,500,000 may be used for general corporate
purposes. The remaining $193,600,000 may be used only to finance the purchase
of assets or other businesses to be used in the Company's business. The
Convertible Notes are convertible into the Company's common stock at a
conversion rate of 175.1408 shares per $1,000 principal amount of Convertible
Notes, subject to adjustment in certain events and at each holder's option. The
Convertible Notes will not be subject to redemption prior to March 20, 2001,
and generally will be redeemable on or after that date at the option of the
Company, at the redemption prices set forth in the indenture to the Convertible
Notes ("Convertible Notes Indenture"), subject to certain provisions. In the
event of a Change in Control (as defined in the Convertible Notes Indenture),
each holder of the Convertible Notes has the right, subject to certain
conditions and restrictions, to require the Company to repurchase all or any
part of the holder's Convertible Notes at a repurchase price of 100% of the
principal amount, plus accrued interest of the Convertible Notes being
repurchased. Interest on the Convertible Notes is payable on March 15 and
September 15 of each year, commencing on September 15, 1999. Accordingly, the
Company made its first interest payment in the amount of approximately
$6,700,000 on September 15, 1999. The Convertible Notes are unsecured
obligations of the Company and are subordinated to all existing and future
Senior Indebtedness (as defined in the Convertible Notes Indenture) and
effectively subordinated to all indebtedness and other liabilities of the
Company's subsidiaries.
On December 8, 1999, the Company issued $500,000,000 of 4 3/4% Convertible
Subordinated Notes due July 15, 2008 (the "4 3/4% Notes") for aggregate net
proceeds of approximately $485,000,000 (net of offering expenses). Proceeds
from the sale of the 4 3/4% Notes may be used only for limited purposes.
Proceeds in the amount of $291,750,000 may be used for general corporate
purposes. The remaining $193,250,000 may be used only to finance the purchase
of assets or other businesses to be used in the Company's business. The 4 3/4%
Notes are convertible into the Company's common stock at a conversion rate of
28.4068 shares per $1,000 principal amount of the 4 3/4% notes, subject to
adjustment in certain circumstances. The 4 3/4% Notes will not be subject to
redemption at the option of the Company prior to January 20, 2002, and
generally will be redeemable on or after that date at the option of the
Company, at the redemption prices set forth in the indenture to the 4 3/4%
notes (the "4 3/4% Notes Indenture"). However, the 4 3/4% Notes will not be
redeemable at the Company's option following January 20, 2002 and before
January 15, 2004 unless the closing price of the common stock is at least 140%
of the conversion price for at least 20 trading days within a period of 30
consecutive days ending within five trading days of the call for redemption. In
the event of a Change in Control (as defined in the 4 3/4% Notes Indenture),
each holder of the 4 3/4% Notes has the right, subject to certain conditions
and restrictions, to require the Company to repurchase the 4 3/4% Notes, in
whole or in part, at a repurchase price of 100% of the principal amount, plus
accrued interest to the repurchase date. Interest on the
F-18
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
4 3/4% Notes is payable on January 15 and July 15 of each year, commencing on
July 15, 2000. The 4 3/4% Notes are unsecured obligations of the Company and
are subordinated to all existing and future Senior Indebtedness (as defined in
the 4 3/4% Notes Indenture) and effectively subordinated to all indebtedness
and other liabilities of the Company's subsidiaries.
Equipment Loans and Line of Credit Facilities
The Company has various equipment loans and line of credit facilities with
payments due currently through August 2002 and effective interest rates ranging
from 12.8% to 16.4%. As of December 31, 1999, aggregate maturities for
outstanding equipment loans and line of credit facilities for fiscal 2000, 2001
and 2002 were $7,342,000, $5,943,000 and $2,410,000, respectively.
On July 22, 1999, the Company amended its revolving line of credit agreement
with a financial institution, increasing the total commitment amount from
$7,000,000 to $10,000,000. Pursuant to the terms of the new amendment, the line
of credit can be used for working capital requirements, foreign exchange
forward contracts, and letters of credit. The amount available for working
capital borrowings is limited to $4,000,000. In addition, total foreign
exchange contracts at any one time cannot exceed 10 times the amount of the
foreign exchange sublimit, which is a maximum of $1,000,000. The line of credit
will expire in July 2000 and is subject to certain covenants.
In March 2000, the Company entered into an agreement to increase its
existing $10,000,000 line of credit 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.
(5) Convertible Preferred Stock and Stockholders' (Deficit) Equity
Convertible Preferred Stock of Service Metrics, Inc.
In May 1998, SMI issued 540,936 shares of Series A convertible preferred
stock for approximately $1,000,000 in cash. In December 1998, SMI issued
1,012,222 shares of Series B convertible preferred stock for approximately
$5,000,000 in cash. In January 1999, SMI issued an additional 303,667 shares of
Series B convertible preferred stock for approximately $1,500,000 in cash. In
July 1999, SMI issued 728,953 shares of Series C convertible preferred stock
for approximately $8,000,000 in cash.
The Series A, B, and C convertible preferred stock ("SMI Preferred Stock")
was convertible, at the option of the holder, into common stock of SMI based on
formulas specified in the preferred stock agreements. The SMI Preferred Stock
would automatically convert into common stock upon the closing of an initial
public offering of SMI, where the net cash proceeds were at least $15,000,000
and the public offering price would be at least $2.50 per share. The holders of
the SMI Preferred Stock were entitled to receive dividends at the rate of $0.16
for Series A, $0.48 for Series B, and $1.10 for Series C, when and if declared
by the Board of Directors. These dividends were noncumulative. Holders of the
SMI preferred stock were entitled to vote upon any matter submitted to the
stockholders for a vote and have one vote for each full share of common stock
into which their SMI Preferred Stock would be converted at the date of the
vote. The SMI Preferred Stock had liquidation privileges generally equal to the
SMI Preferred Stock purchase price per share plus any declared but unpaid
dividends and was in preference to shares of common stock.
F-19
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
In connection with the merger between Exodus and SMI on November 23, 1999,
all of the SMI preferred shareholders converted their SMI Preferred Stock into
SMI common stock which was converted into Exodus Common Stock based on a
specified exchange ratio (see note 2), as adjusted for the December 1999 stock
split.
Initial Public Offering
On March 24, 1998, the Company completed its initial public offering ("IPO")
of 82,000,000 shares of its common stock. Net proceeds to the Company, after
deducting underwriting discounts and commissions and offering expenses,
aggregated approximately $69,800,000. At the closing of the IPO, all redeemable
convertible preferred stock was converted to common stock and all warrants to
purchase redeemable convertible preferred stock were converted to warrants to
purchase common stock on a one-for-three basis. In connection with the IPO,
certain warrant holders exercised their warrants to purchase redeemable
convertible preferred stock (which converted into common stock), which resulted
in additional proceeds of $1,842,000.
Stock Purchase and Stock Option Plans
During 1995, the Company adopted a Stock Purchase Plan under which 5,866,672
shares of common stock were authorized. Awards totaling 1,717,888 shares of
common stock were granted to individuals through 1996, at a price of $0.02 per
share, the estimated fair value of the shares on the date of the award. No
awards were granted during the years ended December 31, 1997, 1998 and 1999.
Generally, the shares are subject to a 50-month vesting period. As of December
31, 1999, 2,668 shares remained unvested. Unvested shares are subject to
repurchase, at the Company's option, at the original purchase price upon a
participant's termination. Of the shares granted, 740,816 had been repurchased
by the Company through December 31, 1999.
In January 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved a total of 9,600,000 shares of the Company's
common stock for issuance thereunder. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions at a purchase
price of 85% of the lower of the fair market value of the common stock on the
first day of the offering period or on the last day of the purchase period.
During 1998 and 1999, 873,056 and 1,998,400 shares were issued under the
Purchase Plan, respectively, at a weighted-average purchase price of $0.84 and
$1.33 per share, respectively.
In January 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan"), which served as the successor to the Company's 1995 Stock Option
Plan (the "1995 Plan"). Options granted under the 1995 Plan before its
termination continue to remain outstanding in accordance with their terms, but
no further options may be granted under the 1995 Plan. Options granted under
the 1995 Plan were granted with exercise prices not less than fair market value
at the date of grant as determined by the Board of Directors, generally vested
12% after 6 months from the date of grant and 2% per month thereafter, and
generally are exercisable for a term of 10 years after the date of grant. Under
the 1997 Plan, the Company reserved 35,200,000 shares of its common stock for
issuance to employees and consultants to be granted as either incentive or
nonqualified stock options. Options granted under the 1997 Plan generally vest
12% after 6 months from the date of grant and 2% per month thereafter and are
generally exercisable for a term of 10 years after the date of grant.
In January 1998, the Company adopted the 1998 Equity Incentive Plan (the
"1998 Plan"). On the effective date of the Company's IPO, the 1998 Plan became
effective as the successor to the 1997 Plan. The Company has reserved
24,000,000 shares of common stock for issuance under the 1998 Plan in addition
to the shares that remain from the 1997 Plan. The 1998 Plan permits the grant
of either incentive or nonqualified
F-20
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
stock options. Options granted under the 1998 Plan will have a maximum term of
10 years and generally will vest over 50 months. The 1998 Plan will terminate
in January 2008.
On June 2, 1999, the Company's stockholders approved an amendment to the
Company's 1998 Equity Incentive Plan to increase the number of shares of common
stock reserved for issuance thereunder by 16,000,000 shares, from 24,000,000
shares to 40,000,000 shares.
In January 1998, the Company adopted the 1998 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 3,200,000 shares of the
Company's common stock for issuance thereunder. Each nonemployee director who
is or becomes a member of the Board of Directors on or after the effective date
of the Company's IPO, with certain limited exceptions, will initially be
granted an option for 40,000 shares of the Company's common stock and,
thereafter, an option to purchase an additional 10,000 shares of the Company's
common stock annually. Initial options granted under the Directors Plan will
vest as to 33 1/3% of the shares on each annual anniversary of the date of
grant. Annual grants will vest 25% on each annual anniversary of the date of
grant. The exercise price of the options granted under the Directors Plan will
be at the fair market value of the Company's common stock on the date of grant.
In January 1998, the Company granted stock options to purchase 5,333,344
shares of common stock to an officer of the Company, of which half have an
exercise price of $0.57 per share and vest 100% after 3 years and half have an
exercise price of $1.13 per share and vest 100% after 5 years. The stock
options accelerate and become fully vested if the Company is acquired or sells
all or substantially all of its assets or upon other certain events. In
November 1999, an event occurred which lead to the acceleration of the vesting
for all of these options and they became fully vested.
In March 1998, the Company granted a stock option to an officer of the
Company to purchase 11,551,696 shares of common stock with an exercise price of
$0.57 per share (fair market value on the date of grant) that vests as to 12%
of such shares in September 1998 and vests as to an additional 2% per month
thereafter.
In January 1999, the Company adopted the 1999 Stock Option Plan (the "1999
Plan"). Under the 1999 Plan, the Company has reserved 48,000,000 shares of
common stock to be granted as nonqualified stock options. Such grant will be
made to employees and consultants, and will be used for acquisitions. Options
granted under the 1999 Plan generally will vest over 50 months and are
generally exercisable for a term of 10 years from the date of grant.
Service Metrics, Inc. Stock Option Plan
In July 1998, the SMI Board of Directors adopted the 1998 Stock Option Plan.
Under the Plan, officers, employees and certain other individuals could be
granted options and rights to purchase shares of common stock. Options granted
could be either incentive stock options or non-statutory stock options. SMI had
reserved 512,624 shares of common stock for issuance of stock options. However,
in connection with the merger between Exodus and SMI on November 23, 1999, all
of the SMI stock options were assumed by Exodus and converted into Exodus stock
options based on a specified exchange ratio.
Warrants
Prior to its IPO, the Company issued approximately 3,200,000 warrants to
purchase common stock and redeemable convertible preferred stock, with exercise
prices ranging from $0.15 to $2.85 per share, in
F-21
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
conjunction with various financing arrangements. The fair value of the warrants
was calculated using the Black-Scholes option pricing model. The fair value,
when material, is being charged to expense over the term of the respective
financing arrangement.
In March 1998, in connection with a strategic alliance, the Company issued
warrants to purchase an aggregate of 960,000 shares of the Company's common
stock at a price of $0.94 per share. The fair value of these warrants was
determined to be $525,000. This amount was recorded as marketing and sales
expense in the accompanying consolidated statement of operations for the year
ended December 31, 1998.
As of December 31, 1998 and 1999, the Company had outstanding warrants to
purchase 2,897,360 and 1,013,328 shares of common stock, respectively, with
weighted average exercise prices of $0.62 and $0.92, respectively.
Fair Value Disclosures
The Company uses the intrinsic value method in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for any of its stock options because the exercise price of each
option equaled or exceeded the fair value of the underlying common stock as of
the grant date for each stock option, except for stock options granted by the
Company from March 1997 through December 1997 and stock options granted by SMI
from January 1999 to September 1999. With respect to the stock options granted
by the Company from March to December 1997, the Company recorded deferred stock
compensation of $3,482,000 for the difference at the grant date between the
exercise price and the fair value of the common stock underlying the options.
With respect to the stock options granted by SMI from January 1999 to September
1999, the Company has recorded total deferred stock compensation of $3,411,000.
These amounts are being amortized consistent with the method described in FASB
Interpretation No. 28 over the vesting period of the individual options,
generally 48 to 50 months. Had compensation cost been determined in accordance
with SFAS No. 123 for all of the Company's and SMI's stock-based compensation
plans, net loss attributable to holders of common stock and net loss per share
would have been changed to the amounts indicated below (in thousands, except
per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported............................... $(26,711) $(69,330) $(130,323)
Pro forma................................. $(26,711) $(77,009) $(222,660)
Basic and diluted net loss per share:
As reported............................... $ (0.87) $ (0.28) $ (0.39)
Pro forma................................. $ (0.87) $ (0.31) $ (0.66)
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the minimum value method prior to the IPO and the Black-Scholes option pricing
model after the IPO, with no expected dividends and the following weighted-
average assumptions:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected life (years)...................................... 2.59 3.09 2.95
Risk-free interest rate.................................... 5.81% 4.98% 5.83%
Volatility................................................. -- 80% 80%
</TABLE>
F-22
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
The fair value of purchase rights granted under the Purchase Plan is
estimated on the date of grant using the Black-Scholes option pricing model
with no expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
Expected life (years)........................................ 1.33 1.34
Risk-free interest rate...................................... 5.26% 5.55%
Volatility................................................... 80% 80%
</TABLE>
The weighted-average fair value of purchase rights granted under the
Purchase Plan during 1998 and 1999 was $0.63 per share and $6.73 per share,
respectively.
A summary of the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 4,672,528 $0.02 27,348,576 $0.05 77,179,756 $ 1.13
Granted................. 25,788,800 0.06 63,188,748 1.42 52,963,134 15.57
Forfeited............... (1,693,760) 0.04 (4,623,504) 0.52 (5,383,340) 7.86
Exercised............... (1,418,992) 0.02 (8,734,064) 0.17 (14,453,020) 1.61
---------- ---------- -----------
Outstanding at end of
year................... 27,348,576 0.05 77,179,756 1.13 110,306,530 7.71
========== ========== ===========
Exercisable at end of
year................... 3,583,200 0.03 6,153,440 0.31 20,767,128 1.57
========== ========== ===========
Weighted average fair
value of options
granted during the year
at market.............. 5,332,272 0.01 57,121,600 0.79 51,644,010 15.84
Weighted average fair
value of options
granted during the year
at less than market.... 20,456,528 0.15 733,828 0.39 176,208 15.24
Weighted average fair
value of options
granted during the year
at greater than
market................. -- -- 5,333,344 0.27 1,142,916 3.14
</TABLE>
F-23
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31,
1999 and 2000 is unaudited)
The following table summarizes information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- --------------------
Weighted
Average
Remaining Weighted- Weighted-
Contractual Average Average
Number of Life Exercise Number of Exercise
Range of Exercise Prices Shares (in years) Price Shares Price
------------------------ ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$0.02 to 0.57........... 29,610,938 7.93 $ 0.31 11,455,936 $ 0.30
$0.94 to 2.50........... 33,194,940 8.74 1.89 7,132,574 1.70
$3.43 to 14.21.......... 17,760,570 9.22 7.22 1,972,172 6.90
$15.07 to 36.13......... 29,740,082 9.71 21.87 206,446 16.96
----------- ----------
110,306,530 8.86 7.71 20,767,128 1.57
=========== ==========
</TABLE>
Stockholder Rights Plan
In January 1999, the Company adopted a Stockholder Rights Plan ("the Rights
Plan"). The Rights Plan is designed to protect the long-term value of the
Company for its stockholders during any future unsolicited acquisition
attempt. In connection with the Rights Plan, the Company declared a dividend
of one preferred share purchase right for each share of the Company's common
stock outstanding on February 11, 1999 ("Record Date") and further directed
the issuance of one such right with respect to each share of the Company's
common stock that is issued after the Record Date, except in certain
circumstances.
On June 2, 1999, stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized number of
shares of common stock issuable by the Company from 200,000,000 to
600,000,000.
Stock Splits
On April 12, 1999, August 12, 1999 and December 14, 1999, the Company
completed two-for-one stock splits accomplished in the form of stock
dividends. Share and per share amounts in the accompanying consolidated
financial statements reflect these two-for-one stock splits retroactively.
(6) Commitments and Contingencies
Leases
The Company has entered into a number of operating leases for its
facilities. The leases expire from 1999 through 2010. As of December 31, 1999,
the Company had collateralized letters of credit aggregating $5,971,000 for
these leases. The related funds are included in restricted cash equivalents
and investments on the accompanying consolidated balance sheet. The Company
also leases certain data center infrastructure and equipment under capital
leases. Certain of these capital leases were entered into as sales-leaseback
transactions. No gain or loss was recorded in any such transaction due to the
short holding period from the time the assets were purchased until the time of
the sale-leaseback. Future minimum lease payments as of December 31, 1999 are
as follows (in thousands):
F-24
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
<S> <C> <C>
2000....................................................... $25,083 $ 22,879
2001....................................................... 23,938 32,467
2002....................................................... 18,215 37,120
2003....................................................... 161 37,567
2004....................................................... -- 38,542
Thereafter................................................. -- 220,662
------- --------
Total minimum lease payments............................... 67,397 $389,237
========
Less amount representing imputed interest.................. 9,892
-------
Present value of minimum lease payments.................... 57,505
Less current portion....................................... 17,162
-------
Capital lease obligations, less current portion............ $40,343
=======
</TABLE>
The Company's rent expense was $1,764,000, $5,583,000, $18,981,000 for the
years ended December 31, 1997, 1998, and 1999, respectively.
Telecommunications Agreements
In September 1997, the Company entered into an agreement to obtain
telecommunications services for a period of 60 months with a minimum commitment
of $230,000 per month. In January 1999, this original agreement was replaced
with a new agreement for a period of 60 months with a minimum commitment of
$1,000,000 per month.
In July 1998, the Company entered into an agreement to obtain
telecommunications services for a period of 36 months with a minimum commitment
of approximately $500,000 per month.
In August 1999 the Company entered into capacity purchase agreements. The
agreements provide for a total potential outlay of up to $105,000,000 for fiber
capacity and related maintenance covering approximately 25 years. To date, the
Company has paid approximately $19,000,000 related to these agreements, which
is included in other assets in the accompanying consolidated balance sheet as
of December 31, 1999.
Royalty Agreement
In April 1997, the Company entered into an agreement with a software company
under which the Company licensed certain software for a royalty based on 1% of
the Company's gross revenues. Royalty expenses related to this agreement have
not been significant to date. In March 1999, this agreement was replaced with a
new agreement that obligates the Company to make certain future payments for
the use of the software license. These payments are not expected to have a
material effect on the consolidated financial statements.
Contingencies
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes that it has adequate legal defenses
and that the ultimate outcome of these actions will not have a material effect
on the Company's consolidated financial position and results of operations.
F-25
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
(7) Income Taxes
The following reconciles the expected corporate federal income tax expense
(benefit) (computed by multiplying the Company's income before taxes by 34%) to
the Company's income tax expense for the years ended December 31, 1997, 1998
and 1999 (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Expected income tax benefit................... $(8,602) $(22,895) $(44,310)
Permanent differences......................... 15 81 6,493
Foreign tax rate difference................... -- -- 305
Net operating loss, temporary differences and
tax credits not benefited.................... 8,587 22,814 37,512
------- -------- --------
Actual income tax expense (benefit)......... $ -- $ -- $ --
======= ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1998 and
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 32,280 $ 65,802
Disqualifying disposition............................ 2,857 63,761
Difference between book and tax depreciation......... 2,284 7,858
Reserves and accruals................................ 1,234 3,352
Research and experimentation credit carryforwards.... 548 1,565
Deferred compensation................................ 957 964
Difference between book and tax amortization......... -- 152
Other................................................ 6 1,097
-------- ---------
Total gross deferred tax assets.................... 40,166 144,551
Less valuation allowance............................. (40,166) (144,551)
-------- ---------
Net deferred tax assets............................ -- 16,970
Deferred tax liabilities............................. -- (16,970)
-------- ---------
$ -- $ --
======== =========
</TABLE>
The Company's deferred tax liabilities resulted from its acquisitions of AIS
and Cohesive during the year ended December 31, 1999, due to a difference in
the financial statement and tax basis of net assets acquired.
The Company has a net operating loss carryforward for federal and California
purposes at December 31, 1999, of $168,225,000 and $80,453,000, respectively.
The difference between the federal and California net operating loss
carryforward is due to the 50% limitation of net operating loss carryforwards
for California purposes. The federal net operating loss carryforwards will
expire from 2010 through 2019. The California net operating loss carryforwards
will expire from 2000 through 2004. The Company believes it will realize
deferred tax assets to the extent of deferred tax liabilities.
The net change in the total valuation allowance was an increase of
$28,458,000 and $87,415,000 for the years ended December 31, 1998 and 1999,
respectively.
F-26
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
The Company also has research credit carryforwards for federal and
California income tax return purposes of approximately $1,057,416 and $586,636,
respectively, available to reduce future income taxes. The federal research
credit carryforwards expire in years 2010 through, 2019. The California
research credit carryforward carries forward indefinitely until utilized.
Gross deferred tax assets as of December 31, 1999, include approximately
$63,761,000 relating to the exercise of stock options, which will be credited
to equity if and when realized.
Federal and California tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift in the
ownership of the Company, which constitutes an "ownership change" as defined by
Internal Revenue Code Section 382. The Company has not determined if an
ownership change, as defined, has occurred. The Company plans to compute exact
limitations upon realization of taxable earnings and associated potential
utilization of the net operating loss carryforwards.
(8) Segment Information
The Company operates a number of Internet Data Centers throughout the United
States and two 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 data center provides the same Internet related
services to a similar type of customer who may locate its servers in multiple
Internet Data Centers. As a result, the Company believes these Internet Data
Centers represent one reportable segment under the aggregation criteria of SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
Internet Data Center operations primarily include services such as server
infrastructure support, Internet connectivity, and managed services.
With the acquisition of Cohesive on July 27, 1999, management began
reviewing financial information and business performance and allocating
resources based on both Internet Data Center operations and by professional
services, given Cohesive's expertise in networking, Internet-based applications
and technology solutions. As a result, the Company identified professional
services as an additional reportable segment. Professional services primarily
include services such as network design and development, Internet-based and
application development, and information technology strategy. For the year
ended December 31, 1999, the professional services segment's results of
operations presented below include amortization of intangible assets and
restructuring charges incurred as a result of the Cohesive acquisition.
Financial information for the Company's reportable segments is presented
below:
<TABLE>
<CAPTION>
Three Months
Ended
Years Ended December 31, March 31,
----------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Internet Data Centers.. $ 12,408 $ 52,263 $ 199,563 $ 28,509 $109,886
Professional services.. -- 482 42,577 1,601 24,256
-------- -------- --------- -------- --------
Total revenues....... $ 12,408 $ 52,745 $ 242,140 $ 30,110 $134,142
======== ======== ========= ======== ========
Operating profit (loss):
Internet Data Centers.. $ (1,243) $ (1,492) $ 39,407 $ 4,050 $ 17,567
Professional services.. -- (351) 3,242 (569) 3,029
Corporate areas........ (23,549) (55,730) (139,865) (21,219) (50,228)
-------- -------- --------- -------- --------
Total operating
loss................ $(24,792) $(57,573) $ (97,216) $(17,738) $(29,632)
======== ======== ========= ======== ========
</TABLE>
F-27
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and 1999 and March 31, 1999 and 2000
(Information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited)
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1998 1999 2000
-------- ---------- ----------
<S> <C> <C> <C>
Total assets:
Internet Data Centers....................... $ 52,725 $ 314,452 $ 438,298
Professional services....................... 212 3,068 3,946
Corporate assets............................ 245,861 1,425,370 1,384,938
-------- ---------- ----------
Total assets.............................. $298,798 $1,742,890 $1,827,182
======== ========== ==========
</TABLE>
Revenues generated and assets located outside of the United States are not
significant for the years ended December 31, 1997, 1998 and 1999.
(9) Stock Split
On June 20, 2000, the Company completed a two-for-one stock split
accomplished in the form of a stock dividend. Share and per share amounts in
the accompanying consolidated financial statements reflect this two-for-one
stock split retroactively.
(10) Subsequent Events (Unaudited)
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 7,516,536 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.
On June 6, 2000, the Company's stockholders approved an increase to the
authorized number of shares of the Company's common stock from 300,000,000 to
1,500,000,000. In addition, the stockholders approved an
increase in the number of shares reserved under the 1998 Equity Incentive Plan
from 40,000,000 to 58,000,000, an increase in the number of shares reserved
under the 1998 Employee Stock Purchase Plan from 9,600,000 to 13,200,000 and
that the number of shares reserved for issuance under the 1998 Employee Stock
Purchase Plan will be increased each year by an amount equal to 1% of the total
number of shares outstanding.
On July 6, 2000, the Company issued $1.0 billion aggregate principal amount
of 11 5/8% Senior Notes due 2010 and (Euro)200.0 million aggregate principal
amount of 11 3/8% Senior Notes due 2008. The 11 5/8% Senior Notes and the 11
3/8% Senior Notes were sold at 100% face value. The 11 5/8% Senior Notes are
currently eligible to trade on The Portal Market. The Company does not intend
to have the 11 3/8% Senior Notes listed on any stock exchange. The 11 5/8%
Senior Notes and the 11 3/8% Senior Notes are governed by separate indentures.
F-28
<PAGE>
EXODUS COMMUNICATIONS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance
Beginning at End
of Year Additions Deductions of Year
---------- --------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1997.......... $ 15 $ 742 $ (66) $ 691
Year ended December 31, 1998.......... 691 1,410 (280) 1,821
Year ended December 31, 1999.......... 1,821 6,911 (1,155) 7,577
</TABLE>
S-1
<PAGE>
$1,000,000,000
11 5/8% Senior Notes due 2010
(Euro)200,000,000
11 3/8% Senior Notes due 2008
EXODUS COMMUNICATIONS, INC.
Exchange Offer For All Outstanding
11 5/8% Senior Notes due 2010
and
11 3/8% Senior Notes due 2008
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the Bylaws of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and executive officers to the fullest extent permitted
by the Delaware General Corporation Law; (ii) the Registrant may, in its
discretion, indemnify other officers, employees and agents as set forth in the
Delaware General Corporation Law; (iii) upon receipt of an undertaking to repay
such advances if indemnification is determined to be unavailable, the
Registrant is required to advance expenses, as incurred, to its directors and
executive officers to the fullest extent permitted by the Delaware General
Corporation Law in connection with a proceeding (except if a determination is
reasonably and promptly made by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to the proceeding or, in
certain circumstances, by independent legal counsel in a written opinion that
the facts known to the decision-making party demonstrate clearly and
convincingly that such person acted in bad faith or in a manner that such
person did not believe to be in, or not opposed to, the best interests of the
corporation); (iv) the rights conferred in the Bylaws are not exclusive and the
Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees and agents; (v) the Registrant may not
retroactively amend the Bylaw provisions relating to indemnity; and (vi) to the
fullest extent permitted by the Delaware General Corporation Law, a director or
executive officer will be deemed to have acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the Registrant and, with respect to any criminal action or proceeding, to have
had no reasonable cause to believe that his or her conduct was unlawful if his
or her action is based on the records or books of account of the corporation or
on information supplied to him or her by officers of the corporation in the
course of their duties or on the advice of legal counsel for the corporation or
on information or records given or reports made to the corporation by
independent certified public accountants or appraisers or other experts.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers. The indemnification agreements
provide that directors and executive officers will be indemnified and held
harmless to the fullest possible extent permitted by law including against all
expenses (including attorneys' fees), judgments, fines and settlement amounts
paid or reasonably incurred by them in any action, suit or proceeding,
including any derivative action by or in the right of the Registrant, on
account of their services as directors, officers, employees or agents of the
Registrant or as directors, officers, employees or agents of any other company
or enterprise when they are serving in such capacities at the request of the
Registrant. The Registrant will not be obligated pursuant to the agreements to
indemnify or advance expenses to an indemnified party with respect to
proceedings or claims (i) initiated or brought voluntarily by the indemnified
party and not by way of defense, except with respect to a proceeding to
establish or enforce a right to indemnify under the indemnification agreements
or any other agreement or insurance policy or under the Registrant's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
indemnification, or authorized by the Board of Directors or as otherwise
required under Delaware statute or law, regardless of whether the indemnified
party is ultimately determined to be entitled to such indemnification, (ii) for
expenses and the payment of profits arising from the purchase and sale by the
indemnified paved and the relative fault of the Registrant and the director or
executive officer. No contribution is allowed to a person found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act of 1933) from any person who was not found guilty of such
fraudulent misrepresentation.
II-1
<PAGE>
The indemnification agreement requires a director or executive officer to
reimburse the Registrant for all expenses advanced only to the extent it is
ultimately determined that the director or executive officer is not entitled,
under Delaware law, the Bylaws, the indemnification agreement or otherwise, to
be indemnified for such expenses. The form of indemnification agreement
provides that it is not exclusive of any rights a director or executive officer
may have under the Certificate of Incorporation, Bylaws, other agreements, any
majority-in-interest vote of the stockholders or vote of disinterested
directors, Delaware law or otherwise.
The indemnification provision in the Bylaws, and the form of indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's executive officers and directors for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act").
As authorized by the Registrant's Bylaws, the Registrant, with approval by
the Board, expects to purchase director and officer liability insurance.
In addition, Mr. Mocarski is indemnified in certain circumstances by Fleet
Financial Group, Inc.
See also the undertakings set out in response to Item 22.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Document Exhibit Number
-------- --------------
<S> <C>
Registrant's Restated Certificate of Incorporation............... 3.01
Registrant's Bylaws.............................................. 3.03
Form of Indemnification Agreement................................ 10.08
</TABLE>
Item 21. Exhibits and Financial Statement Schedules [To be updated]
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
2.01 Agreement and Plan of Merger between Fouress, Inc. and Registrant
dated April 26, 1995. (Incorporated by reference to Exhibit 2.01 from
the Registrant's Registration Statement on Form S-1 (file No. 333-
44469), as amended, declared effective by the Securities and Exchange
Commission on March 18, 1998 (the "Form S-1").
2.02 Form of Agreement and Plan of Merger by and between Registrant and
Exodus. (Incorporated by reference from Exhibit 2.02 to the Form S-1).
2.03 Agreement and Plan of Reorganization by and among Registrant, Cohesive
Technology Solutions, Inc. and Marley Acquisition Corp. dated April
22, 1999. (Incorporated by reference from Exhibit 2.03 to the
Registrant's Registration Statement on Form S-4 (File No. 333-79655)
declared effective by the SEC on June 28, 1999 (the "June 1999 Form S-
4")).
2.04 Amendment to Agreement and Plan of Reorganization by and among
Registrant, Cohesive Technology Solutions, Inc. and Marley Acquisition
Corp. dated May 28, 1999. (Incorporated by reference from Exhibit 2.04
to the June 1999 Form S-4).
2.05 Agreement and Plan of Reorganization dated January 7, 2000 between
Registrant and KeyLabs, Inc. (Incorporated by reference from Exhibit
2.01 to the Registrant's Registration Statement on Form S-3 filed with
the SEC on April 10, 2000).
2.06 Common Stock Purchase Agreement dated as of March 22, 2000 among
Registrant, Mirror Image Internet, Inc. and Xcelera.com Inc.
(Incorporated by reference from Exhibit 2.01 to the Registrant's
Current Report on Form 8-K filed with the SEC on April 7, 2000 (the
"April 2000 8-K")).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
2.07 Common Stock Purchase Agreement dated as of March 22, 2000 between
Registrant and Xcelera.com Inc. (Incorporated by reference from
Exhibit 2.02 to the April 2000 8-K).
3.01 Registrant's Restated Certificate of Incorporation. (Incorporated by
reference from Exhibit 4.01 to Registrant's Registration Statement on
Form S-8 (file no. 333-38980) filed with the SEC on June 9, 2000 (the
"June 2000 Form S-8")).
3.02 Certificate of Designations specifying the terms of the Series A
Junior Participating Preferred Stock of Registrant, as filed with the
Delaware Secretary of State on January 28, 1999. (Incorporated by
reference from Exhibit 3.02 to Registrant's Registration Statement on
Form 8-A filed with the Commission on January 29, 1999 (the "1999 Form
8-A")).
3.03 Registrant's Bylaws. (Incorporated by reference from Exhibit 3.06 to
the Form S-1).
4.01 Form of Specimen Certificate for Registrant's Common Stock.
(Incorporated by reference from Exhibit 4.01 to the Form S-1).
4.02 Form of 11 1/4% Senior Note due 2008 from 1998 Senior Note offering.
(Incorporated by reference from Exhibit 4.02 to Registrant's
Registration Statement on Form S-4 (file No. 333-62413) declared
effective by the SEC on November 9, 1998 (the "November 1998 Form S-
4")).
4.03 Indenture between Exodus Communications, Inc. as Issuer and Chase
Manhattan Bank and Trust Company, National Association, as Trustee
dated July 1, 1998 related to the Registrant's 11 1/4% Senior Notes
due 2008. (Incorporated by reference from Exhibit 10.30 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998 (the "June 1998 Form 10 Q")).
4.04 Rights Agreement dated January 27, 1999 between Registrant and
BankBoston, N.A., as Rights Agent. (Incorporated by reference from
Exhibit 4.04 to the 1999 Form 8-A).
4.05 Form of note for Registrant's 5% Convertible Subordinated Notes.
(Incorporated by reference from Exhibit 4.05 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
(the "March 1999 Form 10-Q").
4.06 Indenture between Registrant as Issuer and Chase Manhattan Bank and
Trust Company, National Association as Trustee dated March 1, 1999.
(Incorporated by reference from Exhibit 4.06 to the March 1999 Form
10-Q).
4.07 Supplemental Indenture dated June 22, 1999 amending Indenture between
Registrant and Chase Manhattan Bank and Trust Company, National
Association, as Trustee dated July 1, 1998. (Incorporated by reference
from Exhibit 10.66 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 (the "June 1999 Form 10-Q").
4.08 Form of 11 1/4% Senior Note from 1999 Senior Note offering.
(Incorporated by reference from Exhibit 10.67 to the June 1999 Form
10-Q).
4.09 Form of note for Registrant's 4 3/4% Convertible Subordinated Notes
due July 15, 2008. (Incorporated by reference to Exhibit 4.04 to the
Registrant's Registration Statement on Form S-3 filed with the SEC on
February 2, 2000 (the "4 3/4% notes Form S-3")).
4.10 Indenture between Registrant, as Issuer, and Chase Manhattan Bank and
Trust Company, National Association, as Trustee, dated December 1,
1999 related to the Registrant's 4 3/4% Convertible Subordinated Notes
due July 15, 2008. (Incorporated by reference to Exhibit 4.05 to the 4
3/4% notes Form S-3).
4.11 Form of note for Registrant's 10 3/4% Senior Notes due 2009.
(Incorporated by reference to Exhibit 4.11 to the Registrant's
Registration Statement on Form S-4 filed with the SEC on February 1,
2000 (the "10 3/4% notes Form S-4")).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
4.12 Form of note for Registrant's 10 3/4% Senior Notes due 2009.
(Incorporated by reference to Exhibit 4.12 to 10 3/4% notes Form S-4).
4.13 Indenture between Registrant, as Issuer, and Chase Manhattan Bank and
Trust Company, National Association, as trustee, dated December 1,
1999 related to the Registrant's 10 3/4% Senior Notes due 2009.
(Incorporated by reference to Exhibit 4.13 to 10 3/4% notes Form S-4).
4.14 Amendment to Rights Agreement dated October 20, 1999 between
Registrant and BankBoston, N.A. (Incorporated by reference from
Exhibit 4.05 to the 1999 Form 8- A).
4.15+ Form of note for Registrant's 11 5/8% Senior Notes due 2010.
4.16+ Form of note for Registrant's 11 3/8% Senior Notes due 2008.
4.17 Indenture between Registrant, as Issuer, and Chase Manhattan Bank and
Trust Company, National Association, as trustee, dated July 6, 2000
related to the Registrant's 11 5/8% Senior Notes due 2010.
4.18 Indenture between Registrant, as Issuer, and Chase Manhattan Bank and
Trust Company, National Association, as trustee, dated July 6, 2000
related to the Registrant's 11 3/8% Senior Notes due 2008.
5.01+ Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
5.02+ Opinion of Winthrop, Stimson, Putnam & Roberts regarding legality of
the securities being registered.
10.01 Amended and Restated Investors Rights Agreement, dated as of June 25,
1997 between the Registrant and certain investors, as amended December
15, 1997. (Incorporated by reference from Exhibit 10.01 to the Form S-
1).
10.02 Registrant's 1995 Stock Option Plan and related forms of agreements.
(Incorporated by reference from Exhibit 10.02 to the Form S-1).
10.03 Registrant's 1995 Stock Purchase Plan and related forms of agreements.
(Incorporated by reference from Exhibit 10.03 to the Form S-1).
10.04 Registrant's 1997 Equity Incentive Plan and related forms of
agreements. (Incorporated by reference from Exhibit 10.04 to the Form
S-1).
10.05 Registrant's 1998 Equity Incentive Plan and related forms of
agreements, as amended June 2, 1999. (Incorporated by reference from
Exhibit 4.03 to the July 1999 Form S-8).
10.06 Registrant's 1998 Directors Stock Option Plan and related forms of
agreements. (Incorporated by reference from Exhibit 10.06 to the Form
S-1).
10.07 Registrant's 1998 Employee Stock Purchase Plan. (Incorporated by
reference from Exhibit 10.07 to the Form S-1).
10.08 Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers, as amended. (Incorporated by
reference from Exhibit 10.08 to the Form S-1).
10.09 Facility Lease between Washcop Associates Limited Partnership and the
Registrant dated April 18, 1996. (Incorporated by reference from
Exhibit 10.09 to the Form S-1).
10.10 Facility Lease between Cal-Harbor II & III Urban Renewal Associates
and Registrant dated December 30, 1996, as amended April 29, 1997 and
January 27, 1998. (Incorporated by reference from Exhibit 10.10 to the
Form S-1).
10.11 Facility Lease between McCandless-San Tomas N. 2 and Registrant dated
April 18, 1997. (Incorporated by reference from Exhibit 10.11 to the
Form S-1).
10.12 Facility Lease between Sabey Corporation and Registrant dated April
24, 1997. (Incorporated by reference from Exhibit 10.12 to the Form S-
1).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.13 Facility Lease between The Manufacturers Life Insurance Company and
Registrant dated June 27, 1997. (Incorporated by reference from
Exhibit 10.13 to the Form S-1).
10.14 Facility Lease between JBG/Spring Park Limited Partnership and
Registrant dated June 30, 1997. (Incorporated by reference from
Exhibit 10.14 to the Form S-1).
10.15 [Reserved].
10.16 Software License and Marketing Agreement between Computer Associates
International, Inc. and the Registrant dated April 1997. (Incorporated
by reference from Exhibit 10.16 to the Form S-1).
10.17 Form of Executive Employment Policy to be entered into between the
Registrant and certain officers. (Incorporated by reference from
Exhibit 10.17 to the Form S-1).
10.18 Equipment Lease Line of Credit between Transamerica Business Credit
Corporation and Registrant dated August 28, 1997. (Incorporated by
reference from Exhibit 10.18 to the Form S-1).
10.19 Loan and Security Agreement between Silicon Valley Bank and Registrant
dated June 14, 1996, as amended on March 25, 1997, June 13, 1997,
November 24, 1997 and December 8, 1997. (Incorporated by reference
from Exhibit 10.19 to the Form S-1).
10.20 Loan and Security Agreement among MMC/GATX Partnership No. 1,
Transamerica Business Credit Corporation and Registrant dated December
31, 1997. (Incorporated by reference from Exhibit 10.20 to the Form S-
1).
10.21 Equipment Lease Line of Credit between Venture Lending & Leasing II,
Inc. and Registrant dated December 23, 1997. (Incorporated by
reference from Exhibit 10.21 to the Form S-1).
10.22 Equipment Lease Line of Credit Commitment ("Commitment Letter")
between Finova Technology Finance, Inc. ("Finova") and Registrant
dated December 17, 1997; Master Lease Agreement ("Master Lease")
between Finova and Registrant dated December 19, 1997; and
Modification to Commitment Letter and Master Lease between Finova and
Registrant dated February 6, 1998. (Incorporated by reference from
Exhibit 10.22 to the Form S-1).
10.23 Sublease Agreement dated January 12, 1998 between Amdahl Corporation
and Registrant. (Incorporated by reference from Exhibit 10.23 to the
Form S-1).
10.24 Nonqualified Stock Option Agreements between Registrant and K.B.
Chandrasekhar dated January 27, 1998. (Incorporated by reference from
Exhibit 10.24 to the Form S-1).
10.25 Form of Nonqualified Stock Option Agreement between Registrant and
Ellen M. Hancock dated March 10, 1998. (Incorporated by reference from
Exhibit 10.25 to the Form S-1).
10.26 Form of Agreement used to sell stock to certain directors and an
officer of the Registrant. (Incorporated by reference from Exhibit
10.26 to the Form S-1).
10.27 Facility Lease between 600 Winter Street, L.L.C. and Registrant, dated
as of December 23, 1997. (Incorporated by reference from Exhibit 10.27
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 (the "March 1998 Form 10-Q"). Certain exhibits to
this agreement have been omitted from this filing and will be
furnished supplementally to the Securities and Exchange Commission
upon request.
10.28 Amendment to Loan and Security Agreement between Silicon Valley Bank
and Registrant dated June 14, 1996. (Incorporated by reference from
Exhibit 10.28 to the March 1998 Form 10-Q).
10.29 First Amendment to Loan and Security Agreement, dated as of February
20, 1998, by and between the Registrant and MMC/GATX Partnership No. 1
and Transamerica Business Credit Corporation. (Incorporated by
reference from Exhibit 10.29 to the amendment on Form 10-Q/A amending
the March 1998 Form 10-Q).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.30 Exchange and Registration Rights Agreement among Exodus
Communications, Inc., Goldman, Sachs & Co., Donaldson Lufkin &
Jenrette Securities Corporation, BT Alex. Brown Incorporated and
NationsBanc Montgomery Securities LLC dated July 1, 1998.
(Incorporated by reference from Exhibit 10.31 to the June 1998 Form
10-Q).
10.31 Escrow Agreement among Chase Manhattan Bank and Trust Company,
National Association, as escrow agent, Chase Manhattan Bank and Trust
Company, National Association, as trustee, and Exodus Communications,
Inc., dated July 1, 1998. (Incorporated by reference from Exhibit
10.32 to the June 1998 Form 10-Q).
10.32 Purchase Agreement among Exodus Communications, Inc., Goldman, Sachs &
Co., Donaldson Lufkin & Jenrette Securities Corporation, BT Alex.
Brown Incorporated and NationsBanc Montgomery Securities LLC, dated
June 26, 1998. (Incorporated by reference from Exhibit 10.33 to the
June 1998 Form 10-Q).
10.33 Form of Notice of Debt Offering and Waiver of Registration Rights
among the Company and certain holders of stock of the Company.
(Incorporated by reference from Exhibit 10.34 to the June 1998 Form
10-Q).
10.34 Amended and Restated Master Loan and Security Agreement between Exodus
Communications, Inc. and Transamerica Business Credit Corporation
dated June 30, 1998. (Incorporated by reference from Exhibit 10.35 to
the June 1998 Form 10-Q).
10.35 Agreement between Cisco Systems Capital Corporation and Exodus
Communications, Inc., dated June 1, 1998. (Incorporated by reference
from Exhibit 10.36 to the June 1998 Form 10-Q).
10.36* Qwest Communications Private Line Service Agreement Business Services,
between Qwest Communications Corporation and the Registrant, dated as
of July 17, 1998. (Incorporated by reference from Exhibit 10.37 to the
June 1998 Form 10-Q).
10.37 Consent and Second Amendment to the Second Amended and Restated
Investors' Rights Agreement. (Incorporated by reference from Exhibit
10.37 to the November 1998 Form S-4).
10.38 Lease Agreement dated August 31, 1998 between Reynolds Metals
Development Company and Registrant. (Incorporated by reference from
Exhibit 10.38 to the November 1998 Form S-4).
10.39 Building Lease dated September 22, 1998 between Centerpoint Properties
Trust and Registrant. (Incorporated by reference from Exhibit 10.39 to
the November 1998 Form S-4).
10.40 Sublease Agreement dated September 4, 1998 between S3, Incorporated
and Registrant. (Incorporated by reference from Exhibit 10.40 to the
Form S-4).
10.41 Registrant's 1999 Stock Option Plan and related forms of agreements.
(Incorporated by reference to Exhibit 4.04 to Registrant's
Registration Statement on Form S-8 (File No. 333-72525), filed with
the SEC on February 17, 1999 (the "February 1999 Form S-8")).
10.42 Form of Non-Plan Stock Option Agreement for option granted to James J.
McInerney. (Incorporated by reference to Exhibit 4.06 to the February
1999 Form S-8).
10.43 Form of Non-Plan Stock Option Agreement for option granted to Susan R.
Farber. (Incorporated by reference from Exhibit 4.07 to the February
1999 Form S-8).
10.44 Offer Letter dated September 30, 1998 between Registrant and Susan
Farber. (Incorporated by reference from Exhibit 10.44 to Annual Report
on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-
K")).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.45 Agreement for Lease dated December 24, 1998 among Helios (Park Royal)
Limited, Lloyds Bank PLC, Exodus Internet Limited, and Registrant.
Certain exhibits to this agreement have been omitted from this filing
and will be furnished supplementally to the Securities and Exchange
Commission upon request. (Incorporated by reference from Exhibit 10.45
to the 1998 Form 10-K).
10.46 First Amendment to Lease Agreement dated January 1999 between Washcop
Associated Limited Partnership and Registrant. (Incorporated by
reference from Exhibit 10.46 to the 1998 Form 10-K).
10.47 First Amendment of Lease dated December 4, 1998 between David A. Sabey
and Sandra L. Sabey and Registrant. (Incorporated by reference from
Exhibit 10.47 to the 1998 Form 10-K).
10.48* Worldcom Data Services (Revenue Plan) effective February 1, 1999
between Worldcom Technologies, Inc. and Registrant. (Incorporated by
reference from Exhibit 10.48 to the March 1999 Form 10-Q).
10.49 Building Lease dated January 29, 1999 between Registrant and G&I
Walsh. (Incorporated by reference from Exhibit 10.49 to the March 1999
Form 10-Q).
10.50 Building Lease dated January 29, 1999 between Registrant and Talus
Corporation. (Incorporated by reference from Exhibit 10.50 to the
March 1999 Form 10-Q).
10.51* Capacity Sales Agreement effective February 23, 1999 between MFS
Cableco (Bermuda) Limited and Registrant. (Incorporated by reference
from Exhibit 10.51 to the March 1999 Form 10-Q).
10.52 Building Lease dated March 26, 1999 between Registrant and Lincoln-
RECP CM-ES OPCO, LLC. (Incorporated by reference from Exhibit 10.52 to
the March 1999 Form 10-Q).
10.53 First Amendment to Lease Agreement dated April 4, 1999 between
Registrant and Amdahl Corporation. (Incorporated by reference from
Exhibit 10.53 to the March 1999 Form 10-Q).
10.54 Purchase Agreement dated February 25, 1999 among Registrant, Goldman,
Sachs & Co., BancBoston Robertson Stephens Inc., BT Alex. Brown
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation and
Hambrecht & Quist LLC. (Incorporated by reference from Exhibit 10.54
to the March 1999 Form 10-Q).
10.55 Registration Rights Agreement dated March 1, 1999 among Registrant,
Goldman, Sachs & Co., BancBoston Robertson Stephens Inc., BT Alex.
Brown Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and Hambrecht & Quist LLC. (Incorporated by reference from
Exhibit 10.55 to the March 1999 Form 10-Q).
10.56* Worldcom Capacity Access Service Agreement effective March 1, 1999
between Worldcom Technologies, Inc. and Registrant. (Incorporated by
reference from Exhibit 10.56 to the March 1999 Form 10-Q).
10.57 Agreement to lease dated June 18, 1999 and associated exhibits between
Helios Limited, Lloyds Bank PLC, Exodus Internet Limited and
Registrant. (Incorporated by reference from Exhibit 10.57 to the June
1999 Form 10-Q).
10.58 Building lease dated June 8, 1999 between Talus and Registrant.
(Incorporated by reference from Exhibit 10.58 to the June 1999 Form
10-Q).
10.59 Building lease dated June 4, 1999 between G&I Walsh and Registrant.
(Incorporated by reference from Exhibit 10.59 to the June 1999 Form
10-Q).
10.60 Building lease dated June 30, 1999 between Cameron Road Corporate
Park, Ltd. and Registrant. (Incorporated by reference from Exhibit
10.60 to the June 1999 Form 10-Q).
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.61 Building lease dated June 7, 1999 between 100 TCD Associates Limited
Partnership and TW Conroy 2 LLC and Registrant. (Incorporated by
reference from Exhibit 10.61 to the June 1999 Form 10-Q).
10.62 Building lease dated April 30, 1999 between Reynolds Metals
Development Company and Registrant. (Incorporated by reference from
Exhibit 10.62 to the June 1999 Form 10-Q).
10.63 Loan modification agreement dated May 6, 1999 between Silicon Valley
Bank and Registrant. (Incorporated by reference from Exhibit 10.63 to
the June 1999 Form 10-Q).
10.64 Purchase agreement dated June 17, 1999 between Goldman, Sachs & Co.
and Registrant. (Incorporated by reference from Exhibit 10.64 to the
June 1999 Form 10-Q).
10.65 Exchange and registration rights agreement dated June 22, 1999 among
Goldman, Sachs & Co. and Registrant. (Incorporated by reference from
Exhibit 10.65 to the June 1999 Form 10-Q).
10.66 [Reserved].
10.67 [Reserved].
10.68* Capacity Purchase Agreement between Exodus and Global Crossing USA,
Inc. dated August 27, 1999. (Incorporated by reference from Exhibit
10.68 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999 (the "September 1999 Form 10-Q")).
10.69 Service Metrics, Inc. 1998 Stock Option Plan. (Incorporated by
reference from Exhibit 4.06 to Registrant's Registration Statement on
Form S-8 (file no. 333-92745) filed with the SEC on December 14,
1999).
10.70 Purchase Agreement among the Registrant and Goldman Sachs & Co.,
Donaldson, Lufkin & Jenrette Securities Corporation and Morgan Stanley
& Co. Incorporated dated December 2, 1999 related to the Registrant's
4 3/4% Convertible Subordinated Notes due July 15, 2008. (Incorporated
by reference from Exhibit 4.06 to the 4 3/4% notes Form S-3).
10.71 Registration Rights Agreement among the Registrant and Goldman Sachs &
Co., Donaldson, Lufkin & Jenrette Securities Corporation and Morgan
Stanley & Co. Incorporated dated December 1, 1999 related to the
Registrant's 4 3/4% Convertible Subordinated Notes due July 15, 2008.
(Incorporated by reference from Exhibit 4.07 to the 4 3/4% notes Form
S-3).
10.72 Purchase Agreement among Registrant, Goldman, Sachs & Co., Donaldson,
Lufkin & Jenrette Securities Corporation, BancBoston Robertson
Stephens Inc., PaineWebber Incorporated and Morgan Stanley & Co.
Incorporated dated December 2, 1999 related to the Registrant's 10
3/4% Senior Notes due 2009. (Incorporated by reference to Exhibit
10.72 to the 10 3/4% notes Form S-4).
10.73 Exchange and Registration Rights Agreement among Registrant, Goldman,
Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation,
BancBoston Robertson Stephens Inc., PaineWebber Incorporated and
Morgan Stanley & Co. Incorporated dated December 1, 1999 related to
the Registrant's 10 3/4% Senior Notes due 2009. (Incorporated by
reference to Exhibit 10.73 to the 10 3/4% notes Form S-4).
10.74 Registration Rights Agreement dated April 21, 2000 between Registrant,
Mirror Image Internet, Inc. and Xcelera.com Inc. (Incorporated by
referred from Exhibit 4.01 to the Registrants Registration Statement
on Form S-3 filed with the SEC on May 5, 2000).
10.75 Purchase Agreement among Registrant, Goldman, Sachs & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, Chase Securities Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, FleetBoston Robertson Stephens Inc. and Thomas
Weisel Partners LLC, dated June 28, 2000 related to the Registrant's
11 5/8% Senior Notes due 2010 and 11 3/8% Senior Notes due 2008.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.76 Exchange and Registration Rights Agreement among Registrant, Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley & Co. Incorporated, Chase Securities Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, FleetBoston Robertson
Stephens Inc. and Thomas Weisel Partners LLC, dated July 6, 2000
related to the Registrant's 11 5/8% Senior Notes due 2010.
10.77 Exchange and Registration Rights Agreement among Registrant, Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley & Co. Incorporated, Chase Securities Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, FleetBoston Robertson
Stephens Inc. and Thomas Weisel Partners LLC, dated July 6, 2000
related to the Registrant's 11 3/8% Senior Notes due 2008.
12.01+ Statement regarding Computation of Ratios.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of Winthrop, Stimson, Putnam & Roberts (included in Exhibit
5.02).
23.03 Consent of KPMG LLP, independent auditors.
24.01 Power of Attorney. (See page II-11).
25.01+ Statement of Eligibility of Trustee related to the Registrant's 11
5/8% Senior Notes due 2010.
25.02+ Statement of Eligibility of Trustee related to the Registrant's 11
3/8% Senior Notes due 2008.
27.01+ Financial Data Schedule.
99.01+ Form of Letter of Transmittal for dollar notes.
99.02+ Form of Letter of Transmittal for euro notes.
99.03+ Form of Notice of Guaranteed Delivery for dollar notes.
99.04+ Form of Notice of Guaranteed Delivery for euro notes.
</TABLE>
--------
* Confidential treatment has been granted for certain portions of this document
pursuant to an application for confidential treatment sent to the Securities
and Exchange Commission. Such portions have been redacted and marked with a
triple asterisk. The non-redacted version of this document has been sent to
the Securities and Exchange Commission.
+ To be filed by amendment.
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any
II-9
<PAGE>
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(e) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this registration
statement shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on the 9th day of August, 2000.
Exodus Communications, Inc.
/s/ Ellen M. Hancock
By: _________________________________
Ellen M. Hancock
Chairman and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Ellen M.
Hancock and R. Marshall Case, jointly and severally, his or her true and lawful
attorneys-in-fact, each with the power of substitution, for him or her in any
and all capacities, to sign amendments to this registration statement on Form
S-4, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact, or his or her
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Principal Executive Officer:
/s/ Ellen M. Hancock Chairman and Chief August 9, 2000
______________________________________ Executive Officer
Ellen M. Hancock
Principal Financial Officer and
Principal Accounting Officer:
/s/ R. Marshall Case Executive Vice President, August 9, 2000
______________________________________ Finance and Chief
R. Marshall Case Financial Officer
Additional Directors:
/s/ Mark Dubovoy Director August 9, 2000
____________________________________
Mark Dubovoy
/s/ John R. Dougery Director August 9, 2000
______________________________________
John R. Dougery
/s/ Max D. Hopper Director August 9, 2000
______________________________________
Max D. Hopper
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ L. William Krause Director August 9, 2000
______________________________________
L. William Krause
/s/ Daniel C. Lynch Director August 9, 2000
______________________________________
Daniel C. Lynch
/s/ Thadeus J. Morcarski Director August 9, 2000
______________________________________
Thadeus J. Morcarski
/s/ Naomi O. Seligman Director August 9, 2000
______________________________________
Naomi O. Seligman
/s/ Dirk A. Stuurop Director August 9, 2000
______________________________________
Dirk A. Stuurop
/s/ Laura D'Andrea Tyson Director August 9, 2000
______________________________________
Laura D'Andrea Tyson
</TABLE>
II-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
4.15+ Form of note for Registrant's 11 5/8% Senior Notes due 2010.
4.16+ Form of note for Registrant's 11 3/8% Senior Notes due 2008.
4.17 Indenture between Registrant, as Issuer, and Chase Manhattan Bank and
Trust Company, National Association, as trustee, dated July 6, 2000
related to the Registrant's 11 5/8% Senior Notes due 2010.
4.18 Indenture between Registrant, as Issuer, and Chase Manhattan Bank and
Trust Company, National Association, as trustee, dated July 6, 2000
related to the Registrant's 11 3/8% Senior Notes due 2008.
5.01+ Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
5.02+ Opinion of Winthrop, Stimson, Putnam & Roberts regarding legality of
the securities being registered.
10.75 Purchase Agreement among Registrant, Goldman, Sachs & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, Chase Securities Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, FleetBoston Robertson Stephens Inc. and Thomas
Weisel Partners LLC, dated June 28, 2000 related to the Registrant's
11 5/8 Senior Notes due 2010 and 11 3/8% Senior Notes due 2008.
10.76 Exchange and Registration Rights Agreement among Registrant, Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley & Co. Incorporated, Chase Securities Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, FleetBoston Robertson
Stephens Inc. and Thomas Weisel Partners LLC, dated July 6, 2000
related to the Registrant's 11 5/8% Senior Notes due 2010.
10.77 Exchange and Registration Rights Agreement among Registrant, Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley & Co. Incorporated, Chase Securities Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, FleetBoston Robertson
Stephens Inc. and Thomas Weisel Partners LLC, dated July 6, 2000
related to the Registrant's 11 3/8% Senior Notes due 2008.
12.01+ Statement regarding Computation of Ratios
21.01 Subsidiaries of Registrant
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of Winthrop, Stimson, Putnam & Roberts (included in Exhibit
5.02).
23.03 Consent of KPMG LLP, independent auditors.
24.01 Power of Attorney. (See page II-11).
25.01+ Statement of Eligibility of Trustee related to the Registrant's 11
5/8% Senior Notes due 2010.
25.02+ Statement of Eligibility of Trustee related to the Registrant's 11
3/8% Senior Notes due 2008.
27.01+ Financial Data Schedule.
99.01+ Form of Letter of Transmittal for dollar notes.
99.02+ Form of Letter of Transmittal for euro notes.
99.03+ Form of Notice of Guaranteed Delivery for dollar notes.
99.04+ Form of Notice of Guaranteed Delivery for euro notes.
</TABLE>
--------
+ To be filed by amendment.
